<PAGE>
SCHEDULE 14A INFORMATION
PROXY STATEMENT PURSUANT TO SECTION 14(A) OF THE SECURITIES EXCHANGE ACT OF
1934
Filed by the Registrant [X]
Filed by a Party other than the Registrant [ ]
Check the appropriate box:
[ ] Preliminary Proxy Statement
[X] Definitive Proxy Statement
[ ] Definitive Additional Materials
[ ] Soliciting Material Pursuant to
Rule 14a-11(c) or Rule 14a-12
[ ] Confidential, For Use of the Commission
Only (as permitted by Rule 14a-6(e)(2))
SFX BROADCASTING, INC.
(Name of Registrant as Specified in Its Charter)
(Name of Person(s) Filing Proxy Statement, if Other Than the Registrant)
Payment of Filing Fee (Check the appropriate box):
[ ] No fee required.
[ ] Fee computed on table below per Exchange Act Rules 14a-6(i)(1)
and 0-11.
[X] Fee paid previously with preliminary materials.
[ ] Check box if any part of the fee is offset as provided by Exchange Act
Rule 0-11(a)(2) and identify the filing for which the offsetting fee
was paid previously. Identify the previous filing by registration
statement number, or the form or schedule and the date of its filing.
(1) Amount previously paid:
(2) Form, Schedule or Registration Statement No.:
(3) Filing Party:
(4) Date Filed:
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[SFX BROADCASTING, INC. LOGO]
650 MADISON AVENUE
NEW YORK, NEW YORK 10022
FEBRUARY 13, 1998
To Our Stockholders:
On behalf of the Board of Directors of SFX Broadcasting, Inc. ("SFX"), I
cordially invite you to attend a Special Meeting of Stockholders of SFX (the
"Special Meeting") to be held at 10:00 a.m., local time, on Thursday, March
26, 1998, at the offices of Baker & McKenzie, 805 Third Avenue, 23rd Floor,
New York, New York 10022.
At the Special Meeting, you will be asked to approve the sale of SFX in a
merger transaction valuing SFX at approximately $2.0 billion, representing
21.7 times and 19.1 times SFX's actual and pro forma broadcast cash flow,
respectively, for the 12 months ending September 30, 1997. This transaction
will result in a cash payment of $75.00 per share of Class A Common Stock.
SFX's valuation in the merger excludes the value of its concert and live
entertainment business, which is planned to be spun off to our stockholders
at or before the consummation of the merger (the "Spin-Off"). In addition to
the cash payment of $75.00 per share of Class A Common Stock, the holders on
the record date for the Spin-Off of shares of SFX's common stock, Series D
preferred stock and interests in the director deferred stock ownership plan
will receive in the Spin-Off shares of stock in SFX Entertainment, Inc. ("SFX
Entertainment"), which owns all of SFX's assets in the concert and live
entertainment business (comprised principally of promotion and production of
live entertainment events, most significantly for concert and other music
performances in venues owned or leased by SFX Entertainment and in
third-party venues). This transaction culminates SFX's implementation of its
strategic plan to exploit the changing regulatory environment (which allowed
companies to own more radio stations) by acquiring stations at attractive
prices and to enhance its radio stations' financial performance.
When SFX completed its initial public offering of common stock in 1993, it
became one of only a few publicly traded companies solely devoted to owning
and operating radio stations. Capitalizing on the changing regulatory
environment, which significantly liberalized the number of stations that
could be owned both nationally and in individual markets, management embarked
on an expansion strategy, growing from a company that owned or operated 10
stations in 6 markets when it completed its initial public offering in 1993
to a company that currently owns or programs 82 stations in 19 markets.
During this period, acquisition prices expressed as a multiple of broadcast
cash flow, which had initially ranged as low as 10, increased considerably.
SFX continued to grow, despite the escalating acquisition prices, by
identifying markets and radio stations with significant growth potential and
by employing management's expertise in operating radio stations to improve
financial performance. Management developed and assembled clusters of radio
stations that, when combined in contiguous regions, could justify the
increased acquisition prices the market demanded. However, over time,
identifying acquisition opportunities and successfully employing this
strategy became increasingly difficult. As these developments continued, SFX
continued to be willing to consider the option of maximizing stockholder
value on a shorter time horizon through the sale or merger of SFX under
appropriate circumstances, should opportunities develop.
<PAGE>
In late 1996, SFX began to explore opportunities in other
entertainment-related industries in which management could employ its
expertise and in which significant growth opportunities may exist. As a
result, SFX began investing in the concert and live entertainment industry in
early 1997 with the acquisition of three businesses. Management believes that
this industry offers attractive acquisition opportunities because it, like
the radio industry in 1993, is highly fragmented and consists of mostly local
or regional companies. SFX Entertainment has agreed to purchase five
additional businesses that operate in the concert and live entertainment
industry for an aggregate consideration of approximately $428.1 million in
cash (including the repayment of $75.3 million in debt) and approximately 4.2
million shares of SFX Entertainment's common stock; we anticipate being able
to close these acquisitions during the first quarter of 1998. We also believe
that the concert and live entertainment industry is not yet well understood
by, or well represented in, the public markets. By distributing shares of SFX
Entertainment to SFX's stockholders, we will create the first publicly held
company solely devoted to the concert and live entertainment business, which
we believe will have advantages over many of its smaller, privately held
competitors in negotiating and consummating acquisitions. SFX Entertainment
has obtained partial financing for its pending acquisitions through a recent
private placement of $350.0 million in debt securities, and anticipates
obtaining the additional funds needed from borrowings under a $300.0 million
senior credit facility. The Merger and Spin-Off provide our stockholders with
the opportunity to realize substantial value in the radio business, while
continuing their participation in developing the concert and live
entertainment business. SFX currently anticipates consummating the Spin-Off
regardless of the consummation of the merger or the pending acquisitions or
the entering into of the senior credit facility. Annex D to the Proxy
Statement is a prospectus of SFX Entertainment, which further describes its
businesses and management.
At the Special Meeting, you will be specifically asked, among other
things, to approve the Agreement and Plan of Merger, dated as of August 24,
1997, as amended on February 9, 1998 (the "Merger Agreement"), among SBI
Holding Corporation ("Buyer"), SBI Radio Acquisition Corporation ("Buyer
Sub") and SFX, as well as the merger (the "Merger") of Buyer Sub into SFX
("Proposal 1"). Pursuant to the Merger, SFX will become a wholly-owned
subsidiary of Buyer, and, among other things, each share (other than shares
held by stockholders who perfect their statutory appraisal rights) of SFX's
(a) Class A Common Stock will convert into the right to receive $75.00, (b)
Class B Common Stock will convert into the right to receive $97.50 and (c)
6-1/2% Series D Cumulative Convertible Exchangeable Preferred Stock ("Series
D Preferred Stock") will convert into the right to receive an amount
(currently $82.40) equal to the product of (i) $75.00 and (ii) the number of
shares of Class A Common Stock into which that share would convert
immediately prior to the consummation of the Merger; in each case, subject to
increase under certain circumstances.
Lehman Brothers, financial adviser to the Board of Directors and the
committee of its independent members (the "Independent Committee"), has
rendered an opinion to the Board of Directors and the Independent Committee
that, as of August 24, 1997, the consideration to be offered to the holders
of Class A Common Stock in the Merger and the Spin-Off (or certain
alternative dispositions of SFX Entertainment), taken together, is fair from
a financial point of view to those holders. This opinion was subsequently
confirmed on February 13, 1998.
In connection with the Merger, you will also be asked at the Special
Meeting to approve amendments to SFX's Certificate of Incorporation to permit
the holders of Class B Common Stock (Michael G. Ferrel, SFX's Chief Executive
Officer, and me) to receive in the Merger a consideration per share that is
greater than the consideration per share to be received by the holders of the
Class A Common Stock ("Proposal 2"). As holders of the Class B Common Stock,
which has 10 votes per share on most matters (as compared to 1 vote per share
of Class A Common Stock), Mr. Ferrel and I possess approximately 53.2% of the
voting power of all outstanding shares of SFX's common stock. Buyer was
willing to pay a premium for the Class B Common Stock because the vote of our
shares is necessary to consummate the transaction and because, as Class B
stockholders, we could effectively block any competing offer. In connection
with the premium, I have agreed to vote the shares of SFX stock beneficially
held by me in favor of the Merger and certain amendments to SFX's Certificate
of Incorporation described herein and, under certain circumstances, against
any competing offer for 1 year after the termination of the Merger
ii
<PAGE>
Agreement. I have also agreed to forfeit, under certain circumstances, any
future increase in the merger consideration pursuant to the Merger Agreement,
or any additional consideration to be received in any acquisition transaction
that may be entered into if the Merger is not consummated. You should also be
aware that Mr. Ferrel and I have also relinquished certain contractual
change-of-control payments.
In addition, you will be asked at the Special Meeting to approve
amendments to SFX's Certificate of Incorporation to allow the holders of
Class B Common Stock to receive in the Spin-Off shares of SFX Entertainment's
Class B common stock, which will have 10-for-1 voting rights, similar to the
Class B Common Stock ("Proposal 3"). The issuance of SFX Entertainment's
Class B common stock in the Spin-Off is intended to preserve the relative
voting rights in SFX Entertainment of the holders of Class A Common Stock and
the holders of Class B Common Stock. We believe that approving this amendment
will allow us to preserve the majority of our existing senior management team
for SFX Entertainment. Approval of this amendment is necessary to complete
the Spin-Off as currently contemplated. If Proposal 3 is approved, we
anticipate consummating the Spin-Off, regardless of whether Proposal 2 is
approved and regardless of whether the Merger occurs.
As of the record date for the Special Meeting, I may be deemed to
beneficially own approximately 1.6% of the outstanding shares of the Class A
Common Stock and 97.8% of the outstanding shares of the Class B Common Stock
(excluding options and warrants to acquire shares), which represent
approximately 11.1% of the outstanding shares of SFX's common stock and
approximately 52.0% of those shares' combined voting power.
The affirmative vote of the holders of a majority of the voting power of
all outstanding shares of SFX's common stock, voting together as a single
class (with each share of Class A Common Stock entitled to 1 vote and each
share of Class B Common Stock entitled to 10 votes), is required to approve
the Merger Agreement and the Merger (Proposal 1). Accordingly, I (voting
alone) possess the voting power necessary to approve the Merger Agreement and
the Merger. However, the consummation of the Merger is conditioned on, among
other things, the approval of Proposal 2. The approval of Proposal 3 is
necessary to permit the Spin-Off, as currently contemplated, and the
consummation of the Spin-Off (or an alternate transaction to dispose of SFX
Entertainment) is a waivable condition to the obligation of Buyer to
consummate the Merger. For approval of each of Proposals 2 and 3, in addition
to the affirmative vote of the holders of the voting power of all outstanding
shares of SFX's common stock, voting together as a single class, the
affirmative votes of the holders of a majority of the voting power of all
outstanding shares of Class A Common Stock and Series D Preferred Stock, each
voting as a separate class, are also required. I do not control these
separate class votes. EVEN IF PROPOSAL 1 IS APPROVED, THE MERGER WILL NOT BE
CONSUMMATED UNLESS PROPOSAL 2 IS APPROVED BY THE SEPARATE CLASS VOTES OF THE
HOLDERS OF CLASS A COMMON STOCK AND SERIES D PREFERRED STOCK. ACCORDINGLY, TO
ENSURE THAT THE MERGER WILL BE CONSUMMATED AND THAT YOU WILL BE ABLE TO
RECEIVE, AMONG OTHER THINGS, $75.00 PER SHARE OF CLASS A COMMON STOCK AND
APPROXIMATELY $82.40 PER SHARE OF SERIES D PREFERRED STOCK, YOU ARE URGED TO
VOTE IN FAVOR OF PROPOSAL 2. TO ENSURE THAT THE SPIN-OFF WILL BE CONSUMMATED
AS CURRENTLY CONTEMPLATED, YOU ARE URGED TO VOTE IN FAVOR OF PROPOSAL 3.
YOUR BOARD OF DIRECTORS AND THE INDEPENDENT COMMITTEE HAVE UNANIMOUSLY
APPROVED THE MERGER AGREEMENT AND THE TRANSACTIONS CONTEMPLATED THEREBY AND
DETERMINED THAT THEY ARE FAIR TO AND IN THE BEST INTERESTS OF THE HOLDERS OF
CLASS A COMMON STOCK. YOUR BOARD OF DIRECTORS AND THE INDEPENDENT COMMITTEE
UNANIMOUSLY RECOMMEND THAT SFX'S STOCKHOLDERS VOTE FOR APPROVAL OF THE MERGER
AGREEMENT AND THE MERGER AND FOR THE AMENDMENTS TO SFX'S CERTIFICATE OF
INCORPORATION CONTAINED IN PROPOSALS 2 AND 3.
SFX has obtained consents under certain indentures and the certificate of
designations of its Series E preferred stock that were required to consummate
the Spin-Off and to permit SFX Entertainment to finance its pending
acquisitions. On January 7, 1998, SFX sent to holders of Class A Common Stock
an information statement (and on January 28, 1998, SFX sent those holders a
supplement to the information statement), which contained information with
respect to the granting of consents to amend the certificate of designations
of SFX's Series E preferred stock.
iii
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Details of the proposed Merger, the other matters scheduled to be
considered at the Special Meeting and other information about SFX appear in
the accompanying Proxy Statement. Please give this material your careful
attention.
Whether or not you plan to attend the Special Meeting, please complete,
sign and date the accompanying proxy card and return it in the enclosed
prepaid envelope. If you attend the Special Meeting, you may vote in person
even if you have previously returned your proxy card. Your prompt cooperation
will be greatly appreciated.
Sincerely
/s/ Robert F.X. Sillerman
--------------------------------
Robert F.X. Sillerman
Executive Chairman
iv
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[SFX BROADCASTING, INC. LOGO]
NOTICE OF SPECIAL MEETING OF STOCKHOLDERS
TO BE HELD MARCH 26, 1998
To the stockholders of SFX Broadcasting, Inc.:
NOTICE IS HEREBY GIVEN that a Special Meeting of Stockholders of SFX
Broadcasting, Inc., a Delaware corporation ("SFX"), will be held at 10:00
a.m., local time, on Thursday, March 26, 1998, at the offices of Baker &
McKenzie, 805 Third Avenue, 23rd Floor, New York, New York 10022, for the
following purposes:
1. To approve and adopt the Agreement and Plan of Merger, dated as of
August 24, 1997, as amended on February 9, 1998 (the "Merger
Agreement"), among SBI Holdings Corporation, a Delaware corporation
("Buyer"), SBI Radio Acquisition Corporation, a Delaware
corporation and a wholly-owned subsidiary of Buyer ("Buyer Sub"),
and SFX, as well as the merger of Buyer Sub with and into SFX (the
"Merger"). Pursuant to the Merger, SFX will become a wholly-owned
subsidiary of Buyer and, among other things, holders of SFX's Class
A Common Stock will receive $75.00 per share and holders of SFX's
Series D Preferred Stock will receive $82.40 per share, subject to
adjustment in certain circumstances. The Merger Agreement is
described in, and attached as Annex A to, the accompanying Proxy
Statement.
2. To approve and adopt amendments to SFX's Restated Certificate of
Incorporation permitting the holders of shares of Class B Common
Stock to receive a higher consideration per share in the Merger and
related transactions than the holders of shares of Class A Common
Stock, as set forth in the Merger Agreement. The amendments are
described and set forth in the accompanying Proxy Statement.
3. To approve and adopt amendments to the SFX's Restated Certificate
of Incorporation providing that the holders of shares of Class A
Common Stock will receive shares of Class A common stock of SFX
Entertainment, Inc. (a subsidiary that engages in the business of
promotion and production of live entertainment events, most
significantly for concert and other music performances in venues
owned or leased by SFX Entertainment and in third-party venues) in
connection with SFX's proposed spin-off of the shares of that
subsidiary (the "Spin-Off"), and that the holders of shares of
Class B Common Stock will receive shares of Class B common stock of
the subsidiary (with similar voting rights to SFX's Class B Common
Stock). The amendments are described and set forth in the
accompanying Proxy Statement.
4. To transact any other business that may properly come before the
Special Meeting and any adjournments or postponements thereof.
In order to effectuate the Merger, proposal 1 must be approved. Even if
proposal 1 is approved, the Merger will not be consummated unless proposal 2
is approved. In addition, the approval of proposal 3 is necessary to permit
the Spin-Off, as currently contemplated, and the consummation of the Spin-Off
(or an alternate transaction to dispose of SFX Entertainment) is a waivable
condition to the obligation of Buyer to consummate the Merger.
<PAGE>
Only holders of record of shares of Class A Common Stock, Class B Common
Stock and 6-1/2% Series D Cumulative Convertible Exchangeable Preferred Stock
of SFX on February 10, 1998, will be entitled to notice of and to vote at the
Special Meeting and any adjournments or postponements thereof.
By Order of the Board of
Directors
/s/ Howard J. Tytel
---------------------------------
Howard J. Tytel
Secretary
New York, New York
February 13, 1998
All stockholders are cordially invited to attend the Special Meeting. To
ensure your representation at the Special Meeting, however, you are urged to
mark, sign, date and return the enclosed proxy in the accompanying envelope,
whether or not you expect to attend the Special Meeting. No postage is
required if mailed in the United States. Any stockholder attending the
Special Meeting may vote in person even if that stockholder has returned a
proxy.
YOUR VOTE IS IMPORTANT.
WE HAVE SENT WHITE PROXY CARDS TO HOLDERS OF CLASS A COMMON STOCK
AND BLUE PROXY CARDS TO HOLDERS OF SERIES D PREFERRED STOCK.
TO VOTE YOUR SHARES, PLEASE MARK, SIGN, DATE AND RETURN THE
ENCLOSED PROXY PROMPTLY IN THE ENCLOSED RETURN ENVELOPE.
PLEASE DO NOT SEND US YOUR SFX STOCK CERTIFICATES.
ii
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[SFX BROADCASTING, INC. LOGO]
PROXY STATEMENT
SPECIAL MEETING OF STOCKHOLDERS
TO BE HELD MARCH 26, 1998
This Proxy Statement (the "Proxy Statement") is being furnished to
stockholders of SFX Broadcasting, Inc., a Delaware corporation ("SFX"), in
connection with the solicitation of proxies by SFX's Board of Directors for
use at a Special Meeting of Stockholders (the "Special Meeting") to be held
at the offices of Baker & McKenzie, 805 Third Avenue, 23rd Floor, New York,
New York 10022 on Thursday, March 26, 1998 at 10:00 a.m., local time, or at
any adjournments or postponements thereof, for the purposes set forth in the
accompanying Notice of Special Meeting of Stockholders. This Proxy Statement
and the related proxy card(s) are first being mailed to SFX's stockholders on
or about February 17, 1998. White proxy cards have been sent to holders of
SFX's Class A Common Stock, par value $.01 per share (the "Class A Common
Stock"), and blue proxy cards have been sent to holders of SFX's 6-1/2%
Series D Cumulative Convertible Exchangeable Preferred Stock, par value $.01
per share (the "Series D Preferred Stock").
At the Special Meeting, the holders of record on February 10, 1998 (the
"Record Date") of shares of Class A Common Stock, Class B Common Stock, par
value $.01 per share (the "Class B Common Stock" and, together with the Class
A Common Stock, the "Common Stock"), and Series D Preferred Stock (together
with the Class A Common Stock and the Class B Common Stock, the "Voting
Stock") (for proposals 2 and 3 below only) will be asked:
1. to approve and adopt the Agreement and Plan of Merger, dated as of
August 24, 1997, as amended on February 9, 1998 (the "Merger
Agreement"), among SBI Holdings Corporation, a Delaware corporation
("Buyer"), SBI Radio Acquisition Corporation, a Delaware
corporation and a wholly-owned subsidiary of Buyer ("Buyer Sub"),
and SFX, and the merger of Buyer Sub with and into SFX (the
"Merger"), whereby SFX will become a wholly-owned subsidiary of
Buyer ("Proposal 1");
2. to approve and adopt amendments to SFX's Restated Certificate of
Incorporation (the "Certificate of Incorporation") to allow the
holders of shares of Class B Common Stock to receive a higher
consideration per share in the Merger and related transactions than
the holders of shares of Class A Common Stock, as set forth in the
Merger Agreement ("Proposal 2");
3. to approve and adopt amendments to the Certificate of Incorporation
to permit holders of shares of Class A Common Stock to receive
shares of Class A common stock of SFX Entertainment, Inc. (a
subsidiary that engages in the business of promotion and production
of live entertainment events, most significantly for concert and
other music performances in venues owned or leased by SFX
Entertainment and in third-party venues) in connection with SFX's
proposed spin-off of the shares of that subsidiary (the
"Spin-Off"), and to permit holders of shares of Class B Common
Stock to receive shares of Class B common stock of the subsidiary
(with voting rights similar to SFX's Class B Common Stock)
("Proposal 3"); and
4. to transact any other business that may properly come before the
Special Meeting or any adjournments or postponements thereof.
(cover page continued)
SEE "CERTAIN CONSIDERATIONS" ON PAGE 18 OF THIS PROXY STATEMENT FOR A
DISCUSSION OF CERTAIN MATTERS WITH RESPECT TO THE MERGER, AND SEE "RISK
FACTORS" ON PAGE D-14 OF THE PROSPECTUS OF SFX ENTERTAINMENT, INC. ATTACHED
AS ANNEX D FOR A DISCUSSION OF CERTAIN MATTERS CONCERNING THE OWNERSHIP OF
SFX ENTERTAINMENT, INC. COMMON STOCK TO BE RECEIVED IN THE SPIN-OFF.
<PAGE>
When a Certificate of Merger is filed with the Secretary of State of the
State of Delaware or as otherwise specified in the Certificate of Merger (the
"Effective Time"), Buyer Sub will merge with and into SFX, with SFX as the
surviving corporation (the "Surviving Corporation"). At the Effective Time,
each outstanding share (except for shares of holders who exercise dissenters'
appraisal rights) of SFX's (a) Class A Common Stock will convert into the
right to receive $75.00 (subject to increase under certain circumstances
described below) (the "Class A Merger Consideration"), (b) Class B Common
Stock will convert into the right to receive $97.50 (subject to increase
under certain circumstances described below) (the "Class B Merger
Consideration"), (c) Series D Preferred Stock will convert into the right to
receive an amount equal to the product of (i) the Class A Merger
Consideration and (ii) the number of shares of Class A Common Stock into
which that share would be convertible immediately prior to the Effective
Time, and (d) Series C Redeemable Convertible Preferred Stock, par value $.01
per share (the "Series C Preferred Stock"), will convert into the right to
receive $1,000 plus any accrued but unpaid dividends. Each such amount will
be payable in cash, without interest. Each issued and outstanding share of
SFX's 12 5/8% Series E Cumulative Exchangeable Preferred Stock, par value
$.01 per share (the "Series E Preferred Stock" and, together with the Series
C Preferred Stock and the Series D Preferred Stock, the "Preferred Stock"),
will continue to be outstanding after the Effective Time in accordance with
its terms.
SFX has contributed its operations relating to promotion and production of
live entertainment events to SFX Entertainment, Inc., a newly-formed
wholly-owned subsidiary of SFX ("SFX Entertainment"), and has agreed to
distribute in the Spin-Off all of the outstanding shares of common stock of
SFX Entertainment to holders of Common Stock, holders of Series D Preferred
Stock, holders of certain warrants to purchase Class A Common Stock and
participants in SFX's director deferred stock ownership plan. SFX anticipates
that these holders (other than holders of SFX's Class B Common Stock) will
receive shares of SFX Entertainment's Class A common stock in the Spin-Off,
and that, if Proposal 3 is approved by the stockholders, holders of SFX's
Class B Common Stock will receive shares of SFX Entertainment's Class B
common stock in the Spin-Off. In connection with the Merger, SFX will pay to
SFX Entertainment any positive Working Capital (as defined in "The
Spin-Off--The Distribution Agreement--Working Capital") of SFX;
alternatively, SFX Entertainment will pay to SFX any negative Working
Capital. Additionally, SFX's management believes that the concert and live
entertainment industry offers significant opportunities for SFX
Entertainment, and SFX Entertainment has agreed to acquire five additional
live entertainment-related businesses for an aggregate consideration of
approximately $428.1 million in cash (including the repayment of $75.3
million in debt) and approximately 4.2 million shares of SFX Entertainment's
Class A common stock. SFX Entertainment has obtained partial financing for
these acquisitions through a $350.0 million private placement of debt, and
anticipates obtaining the additional funds needed from borrowings under a
proposed $300.0 million senior credit facility (collectively, the
"Financing"). However, there can be no assurance that SFX Entertainment will
be able to obtain the proposed senior credit facility on advantageous terms,
or at all. SFX currently anticipates consummating the Spin-Off regardless of
the closing of the Merger or SFX Entertainment's pending acquisitions or
entering into the proposed credit facility. See "The Spin-Off" and Annex D.
The Merger and the Spin-Off will be taxable transactions to SFX's
stockholders for federal income tax purposes. See "Certain Federal Income Tax
Consequences."
A conformed copy of the Merger Agreement is included as Annex A to this
Proxy Statement. The summaries of portions of the Merger Agreement set forth
in this Proxy Statement do not purport to be complete; they are subject to,
and are qualified in their entirety by reference to, the text of the Merger
Agreement.
The Board of Directors of SFX (the "Board of Directors" or the "Board")
and a committee of the independent directors of the Board (the "Independent
Committee") have unanimously approved the Merger Agreement and the
transactions contemplated thereby and determined that they are fair to and in
the best interests of the holders of Class A Common Stock. The Board of
Directors and the Independent Committee unanimously recommend that SFX's
stockholders approve the Merger Agreement and the Merger and the amendments
to the Certificate of Incorporation contained in Proposals 2 and 3. Lehman
Brothers acted as financial adviser to the Board of Directors and the
Independent Committee in connection with the proposed transaction. Lehman
Brothers has rendered an opinion to the Board of Directors and the
Independent Committee that, as of August 24, 1997, the consideration to be
offered to the holders of Class A Common Stock in the Merger and the Spin-Off
(or certain alternate dispositions of SFX Entertainment), taken together, is
fair from a financial point of view to those holders. Lehman Brothers
subsequently confirmed this opinion on February 13, 1998. A copy of the
opinion of Lehman Brothers is attached hereto as Annex B. The opinion sets
forth the assumptions made by, matters considered by and scope of review of
Lehman Brothers and should be read in its entirety.
ii
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The affirmative vote of the holders of a majority of the voting power of
all outstanding shares of the Common Stock, voting together as a single class
(with each share of Class A Common Stock entitled to 1 vote and each share of
Class B Common Stock entitled to 10 votes) is required to approve the Merger
Agreement and the Merger (Proposal 1). The consummation of the Merger is also
conditioned on, among other things, the approval of Proposal 2, which will
require the affirmative vote of the holders of a majority of the voting power
of all outstanding shares of the Common Stock, voting together as a single
class, and the affirmative votes of the holders of a majority of the voting
power of all outstanding shares of Class A Common Stock and Series D
Preferred Stock, each voting as a separate class. The approval of Proposal 3
is necessary to permit the Spin-Off, as currently contemplated, and the
consummation of the Spin-Off (or an alternate transaction to dispose of SFX
Entertainment) is a waivable condition to the obligation of Buyer to
consummate the Merger. The approval of Proposal 3 will require the
affirmative vote of the holders of a majority of the voting power of all
outstanding shares of the Common Stock, voting together as a single class,
and the affirmative votes of the holders of a majority of the voting power of
all outstanding shares of Class A Common Stock and Series D Preferred Stock,
each voting as a separate class.
Robert F.X. Sillerman, the Executive Chairman and a Director of SFX, may
be deemed to beneficially own as of the Record Date approximately 1.6% of the
outstanding shares of Class A Common Stock and 97.8% of the outstanding
shares of Class B Common Stock (excluding options and warrants to acquire
shares), which represent approximately 11.1% of the outstanding shares of
Common Stock and approximately 52.0% of the combined voting power of the
outstanding Common Stock. Accordingly, Mr. Sillerman is generally able to
control the outcome of the vote on all matters that require the approval of a
majority of the combined voting power of all outstanding shares of the Common
Stock, voting together as a single class; as a result, he will be able to
control the outcome of the stockholder vote on Proposal 1. He has agreed to
vote in favor of Proposals 1, 2 and 3. See "Proposal 1: The Merger--Sillerman
Stockholder Agreement." EVEN IF PROPOSAL 1 IS APPROVED, THE MERGER WILL NOT
BE CONSUMMATED UNLESS PROPOSAL 2 IS APPROVED BY THE SEPARATE CLASS VOTES OF
THE HOLDERS OF CLASS A COMMON STOCK AND SERIES D PREFERRED STOCK. IN
ADDITION, THE APPROVAL OF PROPOSAL 3 IS NECESSARY TO PERMIT THE SPIN-OFF, AS
CURRENTLY CONTEMPLATED, AND THE CONSUMMATION OF THE SPIN-OFF (OR AN ALTERNATE
TRANSACTION TO DISPOSE OF SFX ENTERTAINMENT) IS A WAIVABLE CONDITION TO THE
OBLIGATION OF BUYER TO CONSUMMATE THE MERGER; APPROVAL OF PROPOSAL 3 WILL
REQUIRE APPROVAL BY THE SEPARATE CLASS VOTES OF THE HOLDERS OF CLASS A COMMON
STOCK AND SERIES D PREFERRED STOCK. MR. SILLERMAN DOES NOT CONTROL THE
OUTCOME OF THE REQUIRED SEPARATE CLASS VOTES ON PROPOSALS 2 AND 3.
Stockholders who do not vote in favor of Proposal 1 and who otherwise
comply with the provisions of Section 262 of the General Corporation Law of
the State of Delaware (the "DGCL") will, under certain circumstances if the
Merger is consummated, have the right to dissent and to demand appraisal of
the fair market value of their shares. A copy of Section 262 is attached to
this Proxy Statement as Annex C. See "Proposal 1: The Merger--Rights of
Dissenting Stockholders" for a description of the procedures required to
exercise dissenters' rights properly.
This Proxy Statement contains or incorporates by reference information
about SFX and SFX Entertainment as of the date hereof. See "Available
Information" and "Incorporation of Certain Documents by Reference." For more
information regarding SFX Entertainment, see the SFX Entertainment prospectus
attached as Annex D to this Proxy Statement. Although it is possible that the
Merger and the Spin-Off may not occur for several months after the Special
Meeting, and that the information regarding SFX and SFX Entertainment will
change materially from that contained or incorporated by reference herein,
SFX's stockholders will not be entitled to another vote on the proposals
contained herein.
The enclosed proxy is solicited on behalf of the Board of Directors. The
execution of a proxy does not preclude your right to vote in person if you
desire to do so. You may revoke or change your proxy at any time prior to its
use at the Special Meeting by giving SFX a written direction to revoke your
proxy, giving SFX a new proxy or attending the Special Meeting and voting in
person. See "The Special Meeting."
iii
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TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
--------
<S> <C>
SUMMARY...................................... 4
Matters to Be Considered.................... 4
Parties to the Merger Agreement............. 4
The Special Meeting......................... 5
Sillerman Stockholder Agreement............. 6
The Merger.................................. 7
The Spin-Off................................ 10
Certain Federal Income Tax Consequences .... 12
Certain Legal Proceedings................... 12
Certain Considerations...................... 12
Summary Consolidated Financial Data of SFX . 13
Summary Consolidated Financial Data of SFX
Entertainment.............................. 16
CERTAIN CONSIDERATIONS....................... 18
Risks Related to Buyer's Ability to Obtain
Financing.................................. 18
Limited Remedy for Breach by Buyer.......... 18
Litigation Related to the Merger............ 18
Termination Fee If Stockholders Do Not
Approve the Merger and the Amendments ..... 18
Sillerman Stockholder Agreement............. 18
Changes in SFX and SFX Entertainment ....... 18
Consideration to Be Received in the Merger . 19
Interests of Certain Persons in the Merger . 19
Risks Related to SFX Entertainment.......... 20
Risks Related to a Continuing Interest in
SFX........................................ 20
THE SPECIAL MEETING.......................... 21
Date, Time and Place; Matters to Be
Considered................................. 21
Record Date; Quorum; Voting at the Special
Meeting.................................... 21
Voting of Proxies........................... 22
Revocation of Proxies....................... 22
Proxy Solicitation.......................... 23
PROPOSAL 1: THE MERGER....................... 24
Background of the Merger.................... 24
Reasons for the Merger; Recommendations of
the Board of Directors..................... 29
Opinion of Lehman Brothers.................. 30
Sillerman Stockholder Agreement............. 35
Interests of Certain Persons in the Merger . 36
Bonus Payments and Loan Forgiveness ........ 41
Effective Time.............................. 41
Certain Effects of the Merger............... 42
Regulatory Matters.......................... 42
Source and Amount of Funds.................. 43
Rights of Dissenting Stockholders........... 43
Accounting Treatment........................ 45
Certain Legal Proceedings................... 45
THE MERGER AGREEMENT......................... 46
The Merger.................................. 46
Warrants and Options........................ 47
Provisions Regarding the Spin-Off or an
Alternate Transaction...................... 47
Repayment of Certain Indebtedness........... 48
Representations and Warranties.............. 48
Covenants................................... 48
Closing Extension and Adjustment to Merger
Consideration.............................. 49
No Solicitation............................. 49
Conditions.................................. 50
Termination; Fees and Expenses; Letter of
Credit..................................... 50
THE SPIN-OFF................................. 52
Business of SFX Entertainment............... 52
Anticipated Structure of the Spin-Off ...... 54
The Distribution Agreement.................. 55
The Tax Sharing Agreement................... 61
The Employee Benefits Agreement............. 61
CERTAIN FEDERAL INCOME TAX CONSEQUENCES ..... 62
PROPOSAL 2: AMENDMENTS
TO CERTIFICATE OF INCORPORATION REGARDING
THE MERGER CONSIDERATION.................... 64
2
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PAGE
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PROPOSAL 3: AMENDMENTS
TO CERTIFICATE OF INCORPORATION REGARDING
THE SPIN-OFF................................ 66
SELECTED CONSOLIDATED FINANCIAL DATA OF SFX . 69
SELECTED CONSOLIDATED FINANCIAL DATA OF
SFX ENTERTAINMENT........................... 72
UNAUDITED PRO FORMA CONDENSED COMBINED
FINANCIAL STATEMENTS........................ 74
PRINCIPAL STOCKHOLDERS....................... 112
Possible Change in Control.................. 113
MARKET PRICES AND DIVIDEND POLICY............ 114
FORWARD-LOOKING STATEMENTS................... 115
INDEPENDENT AUDITORS......................... 115
OTHER MATTERS................................ 115
AVAILABLE INFORMATION........................ 115
INCORPORATION OF CERTAIN DOCUMENTS BY
REFERENCE................................... 115
STOCKHOLDER PROPOSALS........................ 116
ANNEX A--Merger Agreement
ANNEX B--Opinion of Lehman Brothers ........
ANNEX C--Section 262 of the DGCL
ANNEX D--Prospectus of SFX Entertainment
ANNEX E--Form of Amended and Restated
Certificate of Incorporation of SFX
Entertainment
ANNEX F--Form of Distribution Agreement
</TABLE>
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SUMMARY
The following summary does not purport to be complete. It is qualified in
its entirety by, and should be read in conjunction with, the more detailed
information and financial statements, including the notes thereto, contained
elsewhere in this Proxy Statement, including the Annexes attached hereto, and
the other documents referred to and incorporated by reference herein.
Stockholders are urged to read this Proxy Statement, including the Annexes
hereto, and the documents referred to herein in their entirety.
MATTERS TO BE CONSIDERED
At the Special Meeting, SFX's stockholders will consider, among other
things, Proposal 1, which proposes the approval and adoption of the Merger
Agreement and the Merger. Pursuant to the Merger, SFX will become a
wholly-owned subsidiary of Buyer and, among other things, each issued and
outstanding share (except for shares held by persons who exercise dissenters'
appraisal rights) of SFX's (a) Class A Common Stock will convert into the
right to receive $75.00, (b) Class B Common Stock will convert into the right
to receive $97.50, (c) Series D Preferred Stock will convert into the right
to receive an amount equal to the product of (i) $75.00 and (ii) the number
of shares of Class A Common Stock into which each share of Series D Preferred
Stock would have been convertible immediately prior to the Effective Time,
and (d) Series C Preferred Stock will convert into the right to receive
$1,000, plus any accrued but unpaid dividends. All such amounts will be
payable in cash, without interest. The consideration to be received by
holders of Class A Common Stock, Class B Common Stock and Series D Preferred
Stock is subject to increase in certain circumstances. Each issued and
outstanding share of Series E Preferred Stock will continue to be outstanding
after the Effective Time as 12 5/8% Series E Cumulative Exchangeable
Preferred Stock of the Surviving Corporation.
At the Special Meeting, SFX's stockholders will also be asked to approve
two proposals relating to the approval and adoption of amendments to the
Certificate of Incorporation. The amendments contained in Proposal 2 allow
the holders of shares of Class B Common Stock to receive a higher
consideration per share in the Merger and related transactions than the
holders of shares of Class A Common Stock, as set forth in the Merger
Agreement. The amendments contained in Proposal 3 permit the holders of
shares of Class A Common Stock to receive shares of Class A common stock of
SFX Entertainment in connection with the Spin-Off, and the holders of shares
of Class B Common Stock to receive shares of Class B common stock of SFX
Entertainment (with similar voting rights to the Class B Common Stock) in
connection with the Spin-Off. SFX's stockholders will also be asked to
transact any other business that may properly come before the Special Meeting
and any adjournments or postponements thereof.
PARTIES TO THE MERGER AGREEMENT
The parties to the Merger Agreement are SFX, Buyer and Buyer Sub.
SFX Broadcasting, Inc. SFX was incorporated in Delaware in 1992
principally to acquire and operate radio stations. At the time of SFX's
initial public offering in late 1993, SFX owned and operated or provided
programming to 10 radio stations operating in 6 markets. During the past four
years, SFX has significantly expanded its radio station operations. SFX is
currently one of the largest radio station groups in the country and owns or
operates, provides programming to or sells advertising on behalf of 82 radio
stations operating in 19 markets. SFX's radio stations are diverse in terms
of format and geographic markets and are organized into five contiguous
regional clusters designed to maximize market penetration. SFX has recently
agreed to acquire and dispose of certain additional radio stations, and, upon
consummation of SFX's pending acquisitions and dispositions, SFX will own or
operate, provide programming to or sell advertising on behalf of 73 radio
stations (55 FM and 18 AM stations) operating in 19 markets. In addition to
owning and operating radio stations, SFX (through its wholly-owned subsidiary
SFX Entertainment) has become a significant operator of venues for, and
promoter of, music concerts and other live entertainment events through a
series of completed acquisitions of venue operators and concert promoters.
See "Available Information." SFX's principal executive office is located at
650 Madison Avenue, New York, New York 10022, and its telephone number is
(212) 838-3100.
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SBI Holdings Corporation. Buyer, a Delaware corporation, was recently
formed by Radio Broadcasting Partners, L.P. to effect the transactions
contemplated by the Merger Agreement and related agreements. Buyer is
currently controlled by Thomas O. Hicks, a principal of Hicks, Muse, Tate &
Furst Incorporated ("Hicks Muse"). Buyer has not conducted any substantial
business activities to date other than the creation of Buyer Sub and entering
into, and performing its obligations under, the Merger Agreement and related
agreements. The total cash cost to Buyer of the Merger and related repayment
of debt will be approximately $1.44 billion (assuming that holders of certain
notes and Series E Preferred Stock do not accept any required
change-of-control repurchase offer after the SFX Merger). Buyer will be
required to obtain financing in order to make such payments, but Buyer has
not yet determined how it will obtain its financing. See "Certain
Considerations--Risks Related to Buyer's Ability to Obtain Financing." The
mailing address of Buyer's principal executive office is 200 Crescent Court,
Suite 1600, Dallas, Texas 75201 and its telephone number is (214) 740-7300.
SBI Radio Acquisition Corporation. Buyer Sub, a Delaware corporation, was
recently formed by Buyer to effect the transactions contemplated by the
Merger Agreement and related agreements. At the Effective Time, Buyer Sub
will be merged with and into SFX, with SFX continuing as the surviving
corporation and a wholly-owned subsidiary of Buyer. Buyer Sub has not
conducted any substantial business activities to date other than entering
into, and performing its obligations under, the Merger Agreement and related
agreements. The mailing address of Buyer Sub's principal executive office is
200 Crescent Court, Suite 1600, Dallas, Texas 75201 and its telephone number
is (214) 740-7300.
THE SPECIAL MEETING
The Special Meeting
The Special Meeting will be held at 10:00 a.m., local time, on Thursday,
March 26, 1998, at the offices of Baker & McKenzie, 805 Third Avenue, 23rd
Floor, New York, New York 10022.
Purpose of the Special Meeting
At the Special Meeting, the stockholders of SFX will be asked to (a)
approve and adopt the Merger Agreement and the Merger, (b) approve two
proposals concerning amendments to the Certificate of Incorporation and (c)
transact any other business that may properly come before the Special Meeting
or any adjournments or postponements thereof. THE BOARD OF DIRECTORS
UNANIMOUSLY RECOMMENDS THAT THE STOCKHOLDERS OF SFX VOTE FOR EACH OF THE
FOREGOING PROPOSALS.
Record Date; Shares Outstanding; Quorum
The Board of Directors has fixed the close of business on February 10,
1998 as the Record Date for the determination of the stockholders of record
entitled to notice of, and to vote at, the Special Meeting and any
adjournments or postponements thereof. Only holders of record of shares of
Voting Stock will be entitled to vote at the Special Meeting. As of the
Record Date, there were issued and outstanding 9,517,663 shares of Class A
Common Stock, 1,047,037 shares of Class B Common Stock and 2,990,000 shares
of Series D Preferred Stock. The presence in person or by proxy of holders of
a majority of the combined voting power of the shares of Common Stock will
constitute a quorum at the Special Meeting for purposes of Proposal 1. The
presence in person or by proxy of holders of a majority of the combined
voting power of the outstanding shares of Common Stock and of the outstanding
shares of each of the Class A Common Stock and the Series D Preferred Stock
will be necessary to constitute a quorum for purposes of Proposals 2 and 3.
See "The Special Meeting--Record Date; Quorum; Voting at the Special
Meeting."
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Votes Per Share
Each share of Class A Common Stock will be entitled to 1 vote and each
share of Class B Common Stock will be entitled to 10 votes, voting together
as a class, in all matters to be voted upon at the Special Meeting or any
adjournments or postponements thereof. In addition, each share of Class A
Common Stock will be entitled to 1 vote in the class vote of the Class A
Common Stock with respect to Proposals 2 and 3, and each share of Series D
Preferred Stock will be entitled to 1 vote in the class vote of the Series D
Preferred Stock with respect to Proposals 2 and 3. See "The Special
Meeting--Record Date; Quorum; Voting at the Special Meeting."
Votes Required
The affirmative vote of the holders of a majority of the voting power of
all outstanding shares of the Common Stock, voting together as a single class
(with each share of Class A Common Stock entitled to 1 vote and each share of
Class B Common Stock entitled to 10 votes) is required to approve the Merger
Agreement and the Merger (Proposal 1). The consummation of the Merger is also
conditioned on, among other things, the approval of Proposal 2, which will
require the affirmative vote of the holders of a majority of the voting power
of all outstanding shares of the Common Stock, voting together as a single
class, and the affirmative votes of the holders of a majority of the voting
power of all outstanding shares of Class A Common Stock and Series D
Preferred Stock, each voting as a separate class. In addition, the approval
of Proposal 3 is necessary to permit the Spin-Off, as currently contemplated,
which will require the affirmative vote of the holders of a majority of the
voting power of all outstanding shares of the Common Stock, voting together
as a single class, and the affirmative votes of the holders of a majority of
the voting power of all outstanding shares of Class A Common Stock and Series
D Preferred Stock, each voting as a separate class. The consummation of the
Spin-Off (or an alternate transaction to dispose of SFX Entertainment) is a
waivable condition to the obligation of Buyer to consummate the Merger.
Robert F.X. Sillerman, the Executive Chairman and a Director of SFX, may
be deemed to beneficially own as of the Record Date approximately 1.6% of the
outstanding shares of Class A Common Stock and 97.8% of the outstanding
shares of Class B Common Stock (excluding options and warrants to acquire
shares), which represent approximately 11.1% of the outstanding shares of
Common Stock and approximately 52.0% of the combined voting power of the
outstanding Common Stock. Accordingly, Mr. Sillerman is generally able to
control the outcome of the vote on all matters that require the approval of a
majority of the combined voting power of all outstanding shares of the Common
Stock; as a result, he will be able to control the outcome of the stockholder
vote on Proposal 1. He has agreed to vote in favor of Proposals 1, 2 and 3.
Even if Proposal 1 is approved, the Merger will not be consummated unless
Proposal 2 is approved by the separate class votes of the holders of Class A
Common Stock and Series D Preferred Stock. In addition, the Spin-Off, as
currently contemplated, will not be consummated unless Proposal 3 is approved
by the separate class votes of the holders of Class A Common Stock and Series
D Preferred Stock, and the consummation of the Spin-Off (or an alternate
transaction to dispose of SFX Entertainment) is a waivable condition to the
obligation of Buyer to consummate the Merger. Mr. Sillerman does not control
the outcome of the required separate class votes on Proposals 2 and 3. See
"Proposal 1: The Merger--Sillerman Stockholder Agreement." See "Principal
Stockholders" for a description of the voting power held by SFX's directors
and executive officers.
Although it is possible that the Merger and the Spin-Off may not occur for
a period of several months subsequent to the Special Meeting, and that the
information regarding SFX and SFX Entertainment will change materially from
that contained or incorporated by reference herein, SFX's stockholders will
not be entitled to another vote on the proposals contained herein.
SILLERMAN STOCKHOLDER AGREEMENT
Mr. Sillerman has entered into an agreement to vote his shares in favor of
Proposals 1, 2 and 3. Pursuant to the agreement, he also agreed to vote his
shares against any other acquisition proposal
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involving SFX and against certain changes in the Board of Directors, in SFX's
capitalization and in the Certificate of Incorporation for a period of 1 year
after the termination of the Merger Agreement (unless the Merger Agreement is
terminated under certain circumstances that would allow SFX to request the
release of the $100.0 million letter of credit deposited into escrow by Buyer
upon execution of the Merger Agreement). In addition, Mr. Sillerman has
agreed not to sell or transfer his shares of Common Stock in connection with
any acquisition proposal involving SFX (other than the Merger) prior to the
first to occur of the Effective Time or the first anniversary of the
termination (in certain circumstances) of the Merger Agreement. If the Merger
Agreement is terminated (in certain circumstances) and SFX receives another
acquisition proposal within 1 year thereafter, then Mr. Sillerman must pay to
Buyer the difference between the total consideration he receives pursuant to
the other acquisition proposal and the total consideration to be received by
him upon the consummation of the Merger and the related transactions.
Similarly, if Buyer increases the consideration in the Merger, then Mr.
Sillerman must waive or repay to Buyer, except in certain specified
circumstances, any portion of the increase to be received by him. This
agreement was requested by Buyer as a condition to Buyer's willingness to
enter into the Merger Agreement. See "Proposal 1: The Merger--Sillerman
Stockholder Agreement."
Mr. Sillerman's control of the Class B Common Stock, his voting
obligations, and his previously described obligation to pay to Buyer any
increased future consideration to be received by him in the Merger or in a
competing transaction are likely to delay or impede third parties' efforts to
acquire SFX if the Merger Agreement is terminated and may similarly impede
any future increase in the consideration offered in the Merger. See "Certain
Considerations--Sillerman Stockholder Agreement."
THE MERGER
Recommendations of the Independent Committee and the Board; Reasons for the
Merger
The Board of Directors appointed 3 members of the Board to comprise the
Independent Committee to evaluate the terms of the Merger and other
acquisition proposals involving SFX. Each of these members was elected to the
Board of Directors by the holders of the Class A Common Stock (excluding
shares of Class A Common Stock held by Mr. Sillerman) and is considered an
"independent director" for purposes of the rules of the National Association
of Securities Dealers, Inc. and the Certificate of Incorporation.
The Board of Directors and the Independent Committee have unanimously
approved the Merger Agreement and the transactions contemplated thereby,
determined that they are fair to and in the best interests of the holders of
Class A Common Stock. The Board of Directors and the Independent Committee
unanimously recommend that SFX's stockholders approve and adopt the Merger
Agreement and the Merger and the amendments to the Certificate of
Incorporation contained in Proposals 2 and 3. The Independent Committee and
the Board, in reaching their conclusions, considered a number of factors. See
"Proposal 1: The Merger--Background of the Merger" and "--Reasons for the
Merger; Recommendations of the Board of Directors."
Opinion of Lehman Brothers
Lehman Brothers was retained by the Board of Directors and the Independent
Committee to act as their financial adviser in connection with the proposed
transaction. Lehman Brothers has rendered an opinion to the Board of
Directors and the Independent Committee that, as of August 24, 1997, the
consideration to be offered to the holders of Class A Common Stock in the
Merger and the Spin-Off (or certain alternative dispositions of SFX
Entertainment), taken together, is fair from a financial point of view to
those holders. This opinion was subsequently confirmed on February 13, 1998.
A copy of the opinion of Lehman Brothers is attached to this Proxy Statement
as Annex B. The opinion sets forth the assumptions made and matters
considered by, and scope of review of, Lehman Brothers and should be read in
its entirety. See "Proposal 1: The Merger--Opinion of Lehman Brothers."
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Interests of Certain Persons in the Merger
In considering the recommendation of the Independent Committee and the
Board of Directors that the stockholders vote for approval of the Merger
Agreement and the Merger and Proposals 2 and 3, stockholders should be aware
that the members of the Board of Directors and management have interests in
the Merger and the related transactions that differ from, and are in addition
to, the interests of the stockholders of SFX generally, and which may present
them with potential conflicts of interest in connection with the Merger. The
interests of SFX's directors (other than members of the Independent
Committee) and management include: receipt of disparate Merger consideration
for Class B Common Stock; receipt in the Spin-Off of differing shares of SFX
Entertainment common stock; payments under the Consulting and Non-Competition
Agreement (as defined herein); change-of-control payments and options;
receipt of cash and SFX Entertainment stock for warrants, options and stock
appreciation rights; indemnification and release of officers and directors;
and continued employment by or involvement with SFX Entertainment after the
Spin-Off. In addition, the Independent Committee members will receive, among
other things, compensation for serving on the Independent Committee and the
acceleration of certain payments pursuant to SFX's director deferred stock
ownership plan. See "Proposal 1: The Merger--Interests of Certain Persons in
the Merger."
Effective Time
The Merger will be effective as of the date and time of filing of a
Certificate of Merger with the Secretary of State of the State of Delaware in
accordance with the provisions of the DGCL or as otherwise provided in the
Certificate of Merger. Subject to the satisfaction or waiver of the closing
conditions set forth in the Merger Agreement, the Merger will be consummated
(the "Closing") on the earlier of (a) May 31, 1998 (subject to extension as
provided in the Merger Agreement, in which event the Class A Merger
Consideration and the Class B Merger Consideration will be increased under
certain circumstances) or (b) any other date specified by Buyer at least 5
business days in advance (but no earlier than 15 business days after the
stockholder approval of Proposals 1 and 2, so long as that approval is
obtained by April 24, 1998). See "Proposal 1: The Merger--Effective Time" and
"The Merger Agreement--Closing Extension and Adjustment to Merger
Consideration."
Surrender of Stock Certificates; Payment for Shares
Promptly after the Effective Time, a transmittal form will be mailed to
each record holder of shares of Common Stock and Preferred Stock (other than
the Series E Preferred Stock). The transmittal form will set forth the
procedure for surrendering to a bank or trust company mutually acceptable to
SFX Buyer and SFX (the "Paying Agent") certificates previously representing
stock of SFX. In order to receive the consideration to which the holder will
be entitled as a result of the Merger, the holder will be required, following
the Effective Time, to surrender the holder's stock certificate(s), together
with a duly executed and properly completed transmittal form (and any other
required documents), to the Paying Agent. STOCKHOLDERS SHOULD NOT SEND IN
THEIR STOCK CERTIFICATES UNTIL THEY RECEIVE A TRANSMITTAL FORM. Thereafter,
the holder will receive as promptly as practicable, in exchange for the
surrendered certificate(s), cash in an amount equal to: (a) $75.00 per share
of Class A Common Stock (subject to increase under certain circumstances),
(b) $97.50 per share of Class B Common Stock (subject to increase under
certain circumstances), (c) $1,000, plus any accrued but unpaid dividends,
per share of Series C Preferred Stock, and (d) for each share of Series D
Preferred Stock, the product of (i) the Class A Merger Consideration and (ii)
the number of shares of Class A Common Stock into which such share could be
converted immediately prior to the Effective Time. No interest will be paid
on the cash payable upon surrender of the certificate(s). See "The Merger
Agreement--The Merger."
Conditions to the Merger
The parties' obligations to consummate the Merger are subject to
satisfying or waiving certain conditions, including obtaining stockholder
approval of Proposals 1 and 2, obtaining the consent of the
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Federal Communications Commission (the "FCC") to the transfer of control of
station licenses in the Merger (the "FCC Consent"), the expiration or
termination of the waiting period under the Hart-Scott-Rodino Antitrust
Improvements Act of 1976, as amended (the "HSR Act"), and having no
injunction or other legal restraint on the Merger. Buyer's and Buyer Sub's
obligations to consummate the Merger are subject to the satisfaction or
waiver of certain additional conditions, including, among others, the
accuracy of SFX's representations and warranties in the Merger Agreement,
SFX's performance of its obligations under the Merger Agreement and the
consummation of the Spin-Off or an alternate transaction. SFX's obligations
to consummate the Merger are subject to the satisfaction or waiver of certain
additional conditions. See "The Merger Agreement--Conditions."
No Solicitation
Until the Merger Agreement terminates, it prohibits SFX, its subsidiaries
and their representatives from (a) soliciting, initiating or encouraging the
submission of any proposal for a merger, consolidation or other business
combination involving SFX or any offer to acquire more than 25% of the voting
power or a substantial portion of the assets of SFX and its subsidiaries (a
"Takeover Proposal"), or (b) participating in any discussions or negotiations
regarding, or furnishing any information in connection with, any Takeover
Proposal. If, however, before obtaining stockholder approval, the Board of
Directors determines in good faith, based on the advice of outside counsel,
that it must do so in order to comply with its fiduciary duties to SFX's
stockholders, then SFX and its representatives may, in response to an
unsolicited Takeover Proposal meeting certain criteria, furnish information
with respect to SFX pursuant to a confidentiality agreement and participate
in negotiations regarding the proposal. The Merger Agreement requires SFX to
keep Buyer fully informed of the status and details of any Takeover Proposal.
See "The Merger Agreement--No Solicitation."
Termination; Fees and Expenses; Letter of Credit
The Merger Agreement may be terminated:
(a) By the mutual written consent of SFX, Buyer and Buyer Sub.
(b) By either SFX or Buyer if SFX's stockholders do not approve the
Merger Agreement, the Merger and the amendments to the Certificate of
Incorporation contained in Proposal 2 at the Special Meeting (or an
adjournment thereof) or if no stockholder vote is held before the
Termination Date (as defined in "The Merger Agreement--Closing
Extension and Adjustment to Merger Consideration") (unless the Merger
is permanently enjoined or prohibited). If the Merger Agreement is
terminated as set forth in this paragraph, SFX must pay Buyer a
termination fee of $25.0 million (and an additional $25.0 million if,
within 1 year of the termination, either SFX enters into a Takeover
Proposal or 50% of the capital stock of SFX is acquired in a tender
offer) and must reimburse Buyer for its reasonable out-of-pocket
expenses (not to exceed $2.5 million).
(c) By either SFX or Buyer if the Merger is not consummated on or before
the Termination Date. See "The Merger Agreement--Closing Extension
and Adjustment to Merger Consideration."
(d) By either SFX or Buyer if the Merger is permanently prohibited or
enjoined. If the prohibition or injunction arises from litigation
involving SFX and its stockholders and the Merger Agreement is
terminated as set forth in this paragraph, then SFX must pay Buyer
$10.0 million (and an additional $40.0 million if, within 1 year of
the termination, either SFX enters into a Takeover Proposal or 50% of
the capital stock of SFX is acquired in a tender offer) and must
reimburse Buyer for its reasonable out-of-pocket expenses (not to
exceed $10.0 million).
(e) By Buyer if (i) SFX breaches any representation or warranty contained
in the Merger Agreement, unless the breach has no material adverse
effect on SFX, or (ii) SFX fails to
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perform its obligations under the Merger Agreement. However, Buyer
may not terminate if the breach or failure to perform is cured within
30 days after notice thereof.
(f) By SFX if (i) Buyer or Buyer Sub breaches any representation or
warranty contained in the Merger Agreement, unless the breach has no
material adverse effect on Buyer's ability to perform its obligations
under the Merger Agreement, or (ii) Buyer and Buyer Sub fail to
perform their obligations under the Merger Agreement. However, SFX
may not terminate if the breach or failure to perform is cured within
30 days after notice.
(g) By SFX if (i) before obtaining stockholder approval of the Merger
Agreement, the Merger and Proposal 2, the Board of Directors
determines, in certain circumstances, to terminate the Merger
Agreement in order for SFX to enter into an agreement relating to a
Superior Proposal (as defined in the Merger Agreement), (ii) SFX
notifies Buyer of the Superior Proposal, and (iii) Buyer does not
offer to revise the terms of the Merger or the Board of Directors
determines in good faith, after receiving advice from its financial
adviser, that the Superior Proposal is superior to Buyer's revised
offer. If the Merger Agreement is terminated as set forth in this
paragraph, SFX must pay Buyer a termination fee of $50.0 million and
must reimburse Buyer for its reasonable out-of-pocket expenses (not
to exceed $2.5 million).
(h) By Buyer if (i) a tender or exchange offer for 50% or more of the
capital stock of SFX is commenced and the Board of Directors fails to
recommend that SFX's stockholders not tender their shares, or (ii) a
Takeover Proposal is announced and the Board of Directors fails to
reaffirm its recommendation of the Merger. If the Merger Agreement is
terminated as set forth in this paragraph, SFX must pay Buyer a
termination fee of $50.0 million and must reimburse Buyer for its
reasonable out-of-pocket expenses (not to exceed $2.5 million).
Buyer has placed into escrow an irrevocable letter of credit for $100.0
million. The escrowed letter of credit (or its proceeds) must be released to
SFX if the Merger Agreement is terminated in certain events, and will be
SFX's sole remedy for that termination or any breach of the Merger Agreement
by Buyer or Buyer Sub. See "The Merger Agreement--Termination; Fees and
Expenses; Letter of Credit."
Rights of Dissenting Stockholders
Under Delaware law, stockholders who properly file demands for appraisal
prior to the stockholder vote on the Merger Agreement have the right to
obtain, upon the consummation of the Merger, a cash payment for the "fair
value" of their shares (excluding any element of value arising from the
accomplishment or expectation of the Merger). However, no holder of Common
Stock who votes in favor of the Merger will be entitled to exercise these
rights. In order to exercise these rights, a stockholder must comply with all
of the procedural requirements of Section 262 of the DGCL, which is described
in "Proposal 1: The Merger--Rights of Dissenting Stockholders" and which is
attached to this Proxy Statement as Annex C. The "fair value" would be
determined in judicial proceedings, the result of which cannot be predicted.
Failure to take any of the steps required under Section 262 may result in a
loss of dissenters' rights. See "Proposal 1: The Merger--Rights of Dissenting
Stockholders" and Annex C. The stockholders' appraisal rights do not apply to
Proposals 2 and 3.
THE SPIN-OFF
The Merger Agreement requires SFX to consummate the Spin-Off or an
alternative transaction prior to the Closing. If Proposal 3 is approved at
the Special Meeting, SFX Entertainment (a newly-formed subsidiary of SFX
containing SFX's operations relating to promotion and production of live
entertainment events, most significantly for concert and other music
performances in venues owned or leased by SFX Entertainment and in
third-party venues) (a) will amend and restate its certificate of
incorporation to, among other things, increase its authorized capital stock
and (b) will issue to SFX, in exchange for the issued and outstanding shares
of stock of SFX Entertainment then held by SFX, the number of shares of SFX
Entertainment's common stock necessary to consummate the Spin-Off. SFX will
then consummate
10
<PAGE>
the Spin-Off by distributing shares of SFX Entertainment as a dividend to
holders of Class A Common Stock, Class B Common Stock, Series D Preferred
Stock, certain warrants to purchase Common Stock and interests under SFX's
director deferred stock ownership plan. The Spin-Off is subject to a number
of terms and conditions, including the approval of Proposal 3.
At the time of consummation of the Merger, SFX Entertainment must pay SFX
any net negative Working Capital. Alternatively, SFX must pay to SFX
Entertainment any net positive Working Capital. Therefore, the capitalization
of SFX Entertainment will depend, to a large extent, on the operating results
of SFX through the date of the Merger. As of September 30, 1997, SFX
estimates that Working Capital to be received by SFX Entertainment would have
been approximately $2.1 million, and that approximately $135.5 million of
additional assets and $34.1 million of liabilities would have been
apportioned to SFX Entertainment. The amount of Working Capital will decrease
by at least $2.1 million pursuant to certain adjustments required by the
Merger Agreement. The actual amount of Working Capital as of the closing of
the Merger may differ substantially from the amount as of September 30, 1997,
and will be a function of, among other things, the operating results of SFX
through the date of the Merger, the actual cost of consummating the Merger
and the related transactions and other obligations of SFX, including the
payment of dividends and interest on SFX's debt. In addition, at the time of
the Spin-Off, SFX Entertainment must repay sums advanced to SFX Entertainment
by SFX for certain acquisitions or capital expenditures subsequent to the
date of the Merger Agreement and which have not been repaid. As of January
31, 1998, SFX had advanced approximately $8.0 million to SFX Entertainment
for use in connection with certain acquisitions and capital expenditures. SFX
Entertainment intends to repay these amounts from the proceeds of the
Financing. SFX may advance additional amounts to SFX Entertainment for these
purposes before the consummation of the Spin-Off. See "The Spin-Off."
If the Spin-Off is not permitted to occur due to certain legal or
contractual impediments, SFX may dispose of SFX Entertainment in another
manner. If SFX does not dispose of SFX Entertainment, whether through the
Spin-Off or otherwise, then Buyer may elect whether to consummate the Merger
(by increasing the Class A and Class B Merger Considerations by an aggregate
of $42.5 million) or to terminate the Merger Agreement. SFX's management
believes that SFX Entertainment has a value substantially in excess of $42.5
million (which would represent an increase of approximately $2.73 in each of
the Class A and Class B Merger Considerations) and expects to consummate the
Spin-Off or otherwise dispose of SFX Entertainment prior to the Closing. In
addition, even if the Merger does not occur for any reason, SFX intends to
consummate the Spin-Off. Although the approval of Proposal 3 is necessary in
order to enable SFX to consummate the Spin-Off as currently contemplated,
stockholder approval of the Spin-Off is not required, and your approval of
the Spin-Off is not being sought. See "The Spin-Off."
SFX Entertainment has agreed to acquire five live entertainment-related
businesses: PACE Entertainment Corporation ("PACE"); The Contemporary Group
("Contemporary"); BG Presents, Inc. ("BGP"); SJS Entertainment Corporation,
The Network Magazine Group and certain related companies (collectively,
"Network"); and Concert/Southern Promotions ("Concert/Southern"). The
aggregate consideration of these acquisitions is approximately $428.1 million
in cash (including the repayment of $75.3 million in debt) and approximately
4.2 million shares of SFX Entertainment's common stock. SFX Entertainment has
obtained partial financing for these acquisitions through a $350.0 million
private placement of debt, and anticipates obtaining the additional funds
needed from borrowings under a proposed $300.0 million senior credit
facility. There can be no assurance that any or all of these acquisitions
will be consummated, prior to the Spin-Off or otherwise. See "The Spin-Off."
Prior to the date of this Proxy Statement, SFX obtained the written
consent in lieu of a meeting of majorities of the voting power of the holders
of Series E Preferred Stock (voting as a separate class) and Class A Common
Stock and Class B Common Stock (voting together) with respect to an amendment
to SFX's Certificate of Incorporation required to, among other things, permit
the Spin-Off and the Financing. Simultaneously, SFX obtained the written
consent of majorities of the holders of its 10-3/4% Senior Subordinated Notes
due 2006 (the "2006 Notes") to an amendment to the indenture governing those
notes, in order to, among other things, permit the Spin-Off and the
Financing. In connection with
11
<PAGE>
obtaining these consents, SFX paid to the holders of Series E Preferred Stock
an aggregate of $5.1 million and to the holders of 2006 Notes an aggregate of
$10.1 million. SFX did not pay any consideration to the holders of Common
Stock for their consent. On January 7, 1998, SFX sent to holders of Class A
Common Stock an information statement (and on January 28, 1998, SFX sent
those holders a supplement to the information statement), which contained
information with respect to the granting of consents to amend the certificate
of designations of the Series E Preferred Stock.
For more information about the Spin-Off and SFX Entertainment, see the SFX
Entertainment prospectus attached as Annex D to this Proxy Statement.
CERTAIN FEDERAL INCOME TAX CONSEQUENCES
In general, the receipt of cash by a stockholder pursuant to the Merger or
the exercise of appraisal rights, and the receipt of stock in the Spin-Off,
will be taxable events for the stockholder for federal income tax purposes
and may also be taxable events under applicable local, state and foreign tax
laws. The tax consequences for a particular stockholder will depend upon the
facts and circumstances applicable to that stockholder. Accordingly, each
stockholder should consult the holder's own tax adviser with respect to the
federal, state, local or foreign tax consequences of the Merger. See "Certain
Federal Income Tax Consequences."
CERTAIN LEGAL PROCEEDINGS
On August 29, 1997, two lawsuits were commenced against SFX and its
directors in the Court of Chancery of the State of Delaware (New Castle
County). The plaintiffs in the lawsuits are Harbor Finance Partners (C.A. No.
15891) and Steven Lieberman (C.A. No. 15901). The complaints are identical
and allege that the consideration to be paid as a result of the merger to the
holders of Class A Common Stock is unfair and that the individual defendants
have breached their fiduciary duties. Both complaints seek to have the
actions certified as class actions and seek to enjoin the merger, or, in the
alternative, monetary damages. The defendants have filed answers denying the
allegations, and discovery has commenced. In November 1997, the lawsuits were
consolidated in one action entitled In Re SFX Broadcasting, Inc. Shareholders
Litigation (C.A. No. 15891). SFX and its directors will defend the
consolidated lawsuits vigorously.
CERTAIN CONSIDERATIONS
In determining whether to vote in favor of Proposals 1, 2 and 3,
stockholders should consider the matters set forth under "Certain
Considerations," among others.
12
<PAGE>
SUMMARY CONSOLIDATED FINANCIAL DATA OF SFX
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
The Summary Consolidated Financial Data of SFX includes the historical
financial statements of Capstar Communications, Inc., a predecessor of SFX
("Capstar"), and the historical financial statements of SFX since its
formation on February 26, 1992. The financial information presented below
should be read in conjunction with the information set forth in "Unaudited
Pro Forma Condensed Combined Financial Statements" and the notes thereto and
the financial statements and the notes of SFX incorporated by reference in
this Proxy Statement. The financial information has been derived from the
audited and unaudited financial statements of SFX and the entities acquired
or to be acquired by SFX since January 1, 1996. The pro forma summary data as
of September 30, 1997 and for the year ended December 31, 1996 and the nine
months ended September 30, 1997 are derived from the unaudited pro forma
condensed combined financial statements which, in the opinion of the
management, reflect all adjustments necessary for a fair presentation of the
transactions for which such pro forma financial information is given.
Operating results for the nine months ended September 30, 1997, are not
necessarily indicative of the results that may be achieved for the fiscal
year ending December 31, 1997. The historical consolidated financial results
for SFX are not comparable from year to year because of the acquisition and
disposition of various business operations during the periods covered.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------------------------------------------------
PRO FORMA
FOR THE RECENT PRO FORMA
AND PENDING FOR THE
TRANSACTIONS(8) SPIN-OFF(9)
(UNAUDITED) (UNAUDITED)
1992 1993 1994 1995 1996 1996 1996
-------- --------- ------- -------- --------- -------------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net broadcasting revenue........................ $15,003 $ 34,233 $55,556 $ 76,830 $ 143,061 $ 272,694 $272,694
Concert promotion revenue....................... -- -- -- -- -- 552,365 --
Station and other operating expenses............ 9,624 21,555 33,956 51,039 92,816 184,267 184,267
Concert promotion operating expenses............ -- -- -- -- -- 505,537 --
Depreciation, amortization, duopoly integration
costs and acquisition related costs(1) ........ 3,208 4,475 5,873 9,137 17,311 85,451 47,656
Corporate expenses.............................. 769 1,808 2,964 3,797 6,313 8,000 5,000
Non-recurring charges including adjustments to
broadcast rights agreement(2)(3)(4)(5) ........ -- 13,980 -- 5,000 28,994 25,662 25,662
-------- --------- ------- -------- --------- -------------- ---------
Operating income (loss)......................... 1,402 (7,585) 12,763 7,857 (2,373) 16,142 10,109
Other expense (income).......................... -- (17) 121 (650) (2,117) (4,588) (2,756)
Equity (income) loss from investments ......... -- -- -- -- -- (3,402) --
Interest expense................................ 3,610 7,351 9,332 12,903 34,897 115,920 71,613
-------- --------- ------- -------- --------- -------------- ---------
Income (loss) before income taxes,
extraordinary item and cumulative effect of a
change in accounting principle................. (2,208) (14,919) 3,310 (4,396) (35,153) (91,788) (58,748)
Income tax expense (benefit).................... -- 1,015 1,474 -- 480 3,500 2,000
Extraordinary loss on debt retirement........... -- 1,665 -- -- 15,219 -- --
Cumulative effect of a change in accounting
principle...................................... -- 182 -- -- -- -- --
-------- --------- ------- -------- --------- -------------- ---------
Net income (loss)............................... (2,208) (17,781) 1,836 (4,396) (50,852) (95,288) (60,748)
Redeemable preferred stock dividends and
accretion(6)................................... 385 557 348 291 6,061 41,424 38,124
-------- --------- ------- -------- --------- -------------- ---------
Net income (loss) applicable to common stock ... $(2,593) $(18,338) $ 1,488 $ (4,687)$ (56,913) $(136,712) $(98,872)
======== ========= ======= ======== ========= ============== =========
Net income (loss) per share..................... $ (2.20) $ (7.08) $ 0.26 $ (0.71)$ (7.52) $ (8.63) $ (6.24)
======== ========= ======= ======== ========= ============== =========
Weighted average common shares outstanding ..... 1,179 2,589 5,792 6,596 7,564 15,840 15,840
OTHER OPERATING DATA: (7)
Broadcast Cash Flow............................. $ 5,379 $ 12,678 $21,600 $ 25,791 $ 50,245 $ 88,427 $ 88,427
Concert Cash Flow............................... -- -- -- -- -- 46,828 --
EBITDA.......................................... 4,610 10,870 18,636 21,994 43,932 127,255 83,427
CASH FLOW FROM:
Operating Activities............................ 1,171 76 1,174 499 (13,447) -- --
Investing Activities............................ (115) (47,221) (6,184) (25,697) (470,513) -- --
Financing Activities............................ (495) 66,122 (2,083) 33,897 502,668 -- --
</TABLE>
13
<PAGE>
(RESTUBBED TABLE CONTINUED FROM ABOVE)
<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30,
-------------------------------------------------------
PRO FORMA
FOR THE RECENT PRO FORMA
AND PENDING FOR THE
ACTUAL ACTUAL TRANSACTIONS(8) SPIN-OFF(9)
(UNAUDITED)(UNAUDITED) (UNAUDITED) (UNAUDITED)
1996 1997 1997 1997
--------- --------- -------------- ---------
<S> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net broadcasting revenue........................ $ 92,840 $ 188,984 $222,731 $222,731
Concert promotion revenue....................... -- 75,740 500,843 --
Station and other operating expenses............ 61,448 115,871 142,934 142,934
Concert promotion operating expenses............ -- 63,394 440,266 --
Depreciation, amortization, duopoly integration
costs and acquisition related costs(1) ........ 10,663 31,429 61,677 33,299
Corporate expenses.............................. 4,475 6,849 8,698 5,891
Non-recurring charges including adjustments to
broadcast rights agreement(2)(3)(4)(5) ........ 27,489 17,995 17,995 17,995
--------- --------- -------------- ---------
Operating income (loss)......................... (11,235) 29,186 52,004 22,612
Other expense (income).......................... (3,320) (2,692) (3,261) (2,482)
Equity (income) loss from investments ......... -- -- (5,653) --
Interest expense................................ 22,169 46,438 86,741 53,555
--------- --------- -------------- ---------
Income (loss) before income taxes,
extraordinary item and cumulative effect of a
change in accounting principle................. (30,084) (14,560) (25,823) (28,461)
Income tax expense (benefit).................... -- 845 4,500 1,000
Extraordinary loss on debt retirement........... 15,219 -- -- --
Cumulative effect of a change in accounting
principle...................................... -- -- -- --
--------- --------- -------------- ---------
Net income (loss)............................... (45,303) (15,405) (30,323) (29,461)
Redeemable preferred stock dividends and
accretion(6)................................... 3,551 27,723 31,381 28,906
--------- --------- -------------- ---------
Net income (loss) applicable to common stock ... $ (48,854) $ (43,128) $(61,704) $(58,367)
========= ========= ============== =========
Net income (loss) per share..................... $ (6.61) $ (4.61) $ (3.89) $ (3.68)
========= ========= ============== =========
Weighted average common shares outstanding ..... 7,394 9,364 15,840 15,840
OTHER OPERATING DATA: (7)
Broadcast Cash Flow............................. $ 31,392 $ 73,113 $ 79,797 $ 79,797
Concert Cash Flow............................... -- 12,346 60,577 --
EBITDA.......................................... 26,917 78,610 131,676 73,906
CASH FLOW FROM:
Operating Activities............................ (18,773) (3,418) -- --
Investing Activities............................ (442,797) (492,300) -- --
Financing Activities............................ 489,816 485,309 -- --
</TABLE>
13
<PAGE>
SUMMARY CONSOLIDATED FINANCIAL DATA OF SFX
(IN THOUSANDS)
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------------------------------
1992 1993 1994 1995 1996
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Current assets ............. $ 4,515 $ 31,273 $ 28,367 $ 30,949 $ 88,689
Total assets................ 36,127 152,871 145,808 187,337 859,327
Long-term debt ............. 39,011 81,627 81,516 81,850 481,460
Temporary equity (12) ..... -- -- -- -- --
Redeemable Preferred Stock:
Series A Preferred Stock . 3,892 917 -- -- --
Series B Preferred Stock . -- 2,784 2,466 1,735 917
Series C Preferred Stock . -- -- -- 1,550 1,636
Series D Preferred Stock . -- -- -- -- 149,500
Series E Preferred Stock . -- -- -- -- --
Stockholders' equity
(deficiency) .............. (9,411) 48,598 48,856 83,061 94,517
</TABLE>
(RESTUBBED TABLE CONTINUED FROM ABOVE)
<TABLE>
<CAPTION>
SEPTEMBER 30, 1997
-----------------------------------------
PRO FORMA FOR PRO FORMA
THE PENDING FOR THE
ACTUAL TRANSACTIONS(10) SPIN-OFF(11)
(UNAUDITED) (UNAUDITED) (UNAUDITED)
----------- -------------- ------------
<S> <C> <C> <C>
BALANCE SHEET DATA:
Current assets ............. $ 140,689 $ 245,826 $ 128,500
Total assets................ 1,392,887 2,016,632 1,243,018
Long-term debt ............. 784,255 1,230,323 731,501
Temporary equity (12) ..... -- 16,500 --
Redeemable Preferred Stock:
Series A Preferred Stock . -- -- --
Series B Preferred Stock . 998 998 998
Series C Preferred Stock . 1,703 1,703 1,703
Series D Preferred Stock . 149,500 149,500 149,500
Series E Preferred Stock . 215,636 215,636 215,636
Stockholders' equity
(deficiency) .............. 69,554 134,215 (9,008)
</TABLE>
- ------------
(1) Includes $1,380,000, $1,137,000 and $565,000 of duopoly integration
costs incurred during the years ended December 31, 1995 and 1996 and
the nine months ended September 30, 1997, respectively.
(2) In 1993, non-recurring charges related to the valuation of common stock
issued to SFX's founders at SFX's initial public offering in September
1993 and certain pooling costs related to the merger of Capstar with
and into a subsidiary of SFX.
(3) In 1995, a $5.0 million charge was incurred with respect to the
diminished value of a contract to broadcast the Texas Rangers.
(4) In 1996, the non-recurring charges represent the repurchase of stock
from and the forgiveness of a loan to SFX's former president, a reserve
of a loan and the issuance of warrants to a related party, the purchase
of an officer's options and a charge related to the termination of a
broadcast rights agreement.
(5) In 1997, the non-recurring and unusual charges, represent amounts
related to the pending Spin-Off and Merger, consisting of $11.6 million
of executive bonuses, the establishment of a reserve for a loan from
SFX's Executive Chairman of $2.6 million and $3.8 million of legal and
professional fees associated with the pending transaction.
(6) Includes dividends on preferred stock which SFX redeemed in 1993,
accretion on outstanding redeemable preferred stock, dividends on the
Series D Preferred Stock, dividends on the Series E Preferred Stock and
accretion on the Fifth Year Put Option issued to the PACE Sellers in
connection with the PACE Acquisition (see Note 12 below).
(7) "Broadcast Cash Flow" means net revenues less station operating
expenses. "Concert Cash Flow" means concert revenues less concert
costs. "EBITDA" means net income (loss) before (i) extraordinary items,
(ii) provisions for income taxes, (iii) interest (income) expense, (iv)
other (income) expense, (v) cumulative effects of changes in accounting
principles, (vi) depreciation, amortization, duopoly integration costs
and acquisition related costs, and (vii) non-recurring charges. The
difference between Broadcast Cash Flow and EBITDA is that EBITDA
reflects the impact of corporate expenses. Although Broadcast Cash Flow
and EBITDA are not measures of performance calculated in accordance
with GAAP, SFX believes that Broadcast Cash Flow and EBITDA are
accepted by the broadcasting industry as generally recognized measures
of performance and are used by analysts who report publicly on the
performance of broadcasting companies. Nevertheless, these measures
should not be considered in isolation or as a substitute for operating
income, net income, net cash provided by operating activities or any
other measure for determining SFX's operating performance or liquidity
which is calculated in accordance with GAAP.
14
<PAGE>
(8) The unaudited pro forma Statement of Operations Data for the Recent and
Pending Transactions for the nine months ended September 30, 1997, and
the year ended December 31, 1996, are presented as if SFX had completed
the Recent and Pending Transactions as of January 1, 1996. The terms
"Recent Transactions" and "Pending Transactions" are defined in the
Glossary to the Unaudited Pro Forma Condensed Combined Financial
Statements.
(9) The unaudited pro forma Statement of Operations for the Spin-Off for
the nine months ended September 30, 1997, and the year ended December
31, 1996 are presented as if SFX had completed the sale of SFX as
defined in the Glossary to the Unaudited Pro Forma Condensed Combined
Financial Statements.
(10) The unaudited pro forma Balance Sheet Data at September 30, 1997, is
presented as if SFX had completed the Pending Transactions as of
September 30, 1997. The term "Pending Transactions" is defined in the
Glossary to the Unaudited Pro Forma Condensed Combined Financial
Statements.
(11) The unaudited pro forma Balance Sheet Data at September 30, 1997, is
presented as if SFX had completed the Spin-Off as of September 30,
1997.
(12) The PACE Agreement provides that each PACE Seller (as defined) shall
have an option (a "Fifth Year Put Option"), exercisable during a period
beginning on the fifth anniversary of the closing of the PACE
Acquisition and ending 90 days thereafter, to require SFX Entertainment
to purchase up to one-third of SFX Entertainment's Class A Common Stock
received by such PACE Seller (representing 500,000 shares in the
aggregate) for a cash purchase price of $33.00 per share. With certain
limited exceptions, the Fifth Year Put Option rights are not assignable
by the PACE Sellers. The maximum amount payable under all Fifth Year
Put Options ($16,500,000) has been presented as temporary equity on the
pro forma balance sheet.
15
<PAGE>
SUMMARY CONSOLIDATED FINANCIAL DATA OF SFX ENTERTAINMENT
(in thousands, except per share amounts)
The Summary Consolidated Financial Data of SFX Entertainment includes the
historical financial statements of Delsener/Slater and affiliated companies,
the predecessor of SFX Entertainment, for each of the five years ended
December 31, 1996 and the nine months ended September 30, 1996, and the
historical financial statements of SFX Entertainment for the nine months
ended September 30, 1997. The statement of operations data with respect to
Delsener/Slater for the years ended December 31, 1992 and 1993, and the
balance sheet data as of December 31, 1993 and 1994 is unaudited. The
financial information presented below should be read in conjunction with the
information set forth in "Unaudited Pro Forma Condensed Combined Financial
Statements" and the notes thereto and the historical financial statements and
the notes thereto of SFX Entertainment, the Recent Acquisitions and the
Pending Acquisitions included herein (including in Annex D). The financial
information has been derived from the audited and unaudited financial
statements of SFX Entertainment, the Recent Acquisitions and the Pending
Acquisitions. The pro forma summary data as of September 30, 1997 and for the
year ended December 31, 1996 and the nine months ended September 30, 1997 are
derived from the unaudited pro forma condensed combined financial statements,
which, in the opinion of management, reflect all adjustments necessary for a
fair presentation of the transactions for which such pro forma financial
information is given. Operating results for the nine months ended September
30, 1997 are not necessarily indicative of the results that may be achieved
for the fiscal year ending December 31, 1997.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------------------------------------
PREDECESSOR (ACTUAL)
----------------------------------------------------
1996 (1)
PRO FORMA
1992 1993 1994 1995 1996 (UNAUDITED)
--------- --------- --------- --------- --------- -----------
<S> <C> <C> <C> <C> <C> <C>
STATEMENT OF
OPERATIONS DATA:
Revenue................ $38,017 $46,526 $92,785 $47,566 $50,362 $552,365
Operating expenses .... 36,631 45,635 90,598 47,178 50,687 505,537
Depreciation &
amortization.......... 758 762 755 750 747 37,795
Corporate
expenses (2).......... -- -- -- -- -- 3,000
--------- --------- --------- --------- --------- -----------
Operating income
(loss)................ 628 129 1,432 (362) (1,072) 6,033
Interest expense....... (171) (148) (144) (144) (60) (44,307)
Other income, net .... 74 85 138 178 198 1,832
Equity income (loss)
from investments ..... -- -- (9) 488 525 3,402
--------- --------- --------- --------- --------- -----------
Income (loss) before
income taxes.......... 531 66 1,417 160 (409) (33,040)
Income tax (provision)
benefit............... (32) (57) (5) (13) (106) (1,500)
--------- --------- --------- --------- --------- -----------
Net income (loss)...... $ 499 $ 9 $ 1,412 $ 147 $ (515) (34,540)
========= ========= ========= ========= ========= ===========
Accretion on temporary
equity (3)............ (3,300)
-----------
Net loss applicable to
common shares ........ $(37,840)
===========
Net loss
per common share...... $ (1.90)
===========
Weighted average
common shares
outstanding (4)....... 20,400
===========
OTHER OPERATING DATA:
EBITDA (5)............. $ -- $ -- $ 2,187 $ 388 $ (325) $ 43,828
========= ========= ========= ========= ========= ===========
Cash flow from:
Operating activities . $ -- $ -- $ 2,959 $ (453) $ 4,214 $ --
Investing activities . -- -- 0 0 (435) --
Financing activities . -- -- (477) (216) (1,431) --
Ratio of earnings to
fixed charges (6)..... 4.1x 1.4x 11.3x 2.1x -- --
</TABLE>
16
<PAGE>
(RESTUBBED TABLE CONTINUED FROM ABOVE)
<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30,
--------------------------------------
PREDECESSOR
-------------
1997 (1)
1996 1997 PRO FORMA
ACTUAL ACTUAL (UNAUDITED)
------------- ---------- -----------
<S> <C> <C> <C>
STATEMENT OF
OPERATIONS DATA:
Revenue................ $41,609 $ 74,396 $500,843
Operating expenses .... 42,930 63,045 440,266
Depreciation &
amortization.......... 744 4,041 28,378
Corporate
expenses (2).......... -- 1,307 2,807
------------- ---------- -----------
Operating income
(loss)................ (2,065) 6,003 29,392
Interest expense....... (60) (956) (33,186)
Other income, net .... 143 213 779
Equity income (loss)
from investments ..... 525 1,344 5,653
------------- ---------- -----------
Income (loss) before
income taxes.......... (1,457) 6,604 2,638
Income tax (provision)
benefit............... (80) (2,952) (3,500)
------------- ---------- -----------
Net income (loss)...... $(1,537) $ 3,652 (862)
============= ========== ===========
Accretion on temporary
equity (3)............ (2,475)
============= -----------
Net loss applicable to
common shares ........ $ (3,337)
============= ===========
Net loss
per common share...... $ (.17)
============= ===========
Weighted average
common shares
outstanding (4)....... 20,400
============= ===========
OTHER OPERATING DATA:
EBITDA (5)............. $(1,321) $ 10,044 $ 57,770
============= ========== ===========
Cash flow from:
Operating activities . $ 2,761 $ 789 $ --
Investing activities . 0 (71,997) --
Financing activities . 684 78,302 --
Ratio of earnings to
fixed charges (6)..... -- 8.4x 1.0x
</TABLE>
16
<PAGE>
SUMMARY CONSOLIDATED FINANCIAL DATA OF SFX ENTERTAINMENT
(in thousands)
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------------------
PREDECESSOR (ACTUAL)
-------------------------------------
1993 1994 1995 1996
-------- -------- -------- --------
<S> <C> <C> <C> <C>
BALANCE SHEET DATA(7):
Current assets.............. $1,823 $4,453 $3,022 $6,191
Property and equipment,
net........................ 4,484 3,728 2,978 2,231
Intangible assets, net ..... -- -- -- --
Total assets................ 6,420 8,222 6,037 8,879
Current liabilities......... 4,356 3,423 3,138 7,973
Long-term debt, including
current portion............ -- 1,830 -- --
Temporary equity(3)......... -- -- -- --
Stockholders' equity........ 6,420 2,969 2,900 907
</TABLE>
(RESTUBBED TABLE CONTINUED FROM ABOVE)
<TABLE>
<CAPTION>
SEPTEMBER 30, 1997
-----------------------
PRO FORMA
ACTUAL (UNAUDITED)(8)
<S> <C> <C>
BALANCE SHEET DATA(7):
Current assets.............. $ 12,189 $117,326
Property and equipment,
net........................ 55,882 185,371
Intangible assets, net ..... 59,721 429.060
Total assets................ 135,470 773,614
Current liabilities......... 11,333 89,619
Long-term debt, including
current portion............ 16,453 498,822
Temporary equity(3)......... -- 16,500
Stockholders' equity........ 101,378 143,223(9)
</TABLE>
- ------------
(1) The Unaudited Pro Forma Statement of Operations Data for the year ended
December 31, 1996 and the nine months ended September 30, 1997 are
presented as if SFX Entertainment had completed the Recent
Acquisitions, the Financing, the Pending Acquisitions, the Spin-Off and
the Merger as of January 1, 1996. There can be no assurance that any of
the Financing, the Pending Acquisitions, the Spin-Off and the Merger
will be consummated on the terms assumed in preparing such pro forma
data or at all. See "Risk Factors--Changes in SFX and SFX
Entertainment."
(2) Pro forma corporate expenses are reduced by $3,000,000 and $1,693,000
for fees earned from Triathlon Broadcasting Company ("Triathlon") for
the year ended December 31, 1996 and for the nine months ended
September 30, 1997, respectively. The right to receive such fees in the
future is to be assigned to SFX Entertainment by SFX in connection with
the Spin-Off. Future fees may vary, above the minimum fee of $500,000,
depending upon the level of acquisition and financing activities of
Triathlon.
(3) The PACE Acquisition agreement provides that each PACE seller shall
have an option (a "Fifth Year Put Option"), exercisable during a period
beginning on the fifth anniversary of the closing of the PACE
Acquisition and ending 90 days thereafter, to require SFX Entertainment
to purchase up to one-third of the SFX Entertainment's Class A common
stock received by that PACE seller (representing 500,000 shares in the
aggregate) for a cash purchase price of $33.00 per share. With certain
limited exceptions, the Fifth Year Put Option rights are not assignable
by the sellers. The maximum amount payable under all Fifth Year Put
Options ($16,500,000) has been presented as temporary equity on the pro
forma balance sheet.
(4) Includes 500,000 shares of SFX Entertainment's Class A common stock to
be issued to the PACE sellers in connection with the Fifth Year Put
Option; these shares are not included in calculating the net loss per
common share.
(5) "EBITDA" is defined as earnings before interest, taxes, other income,
net, equity income (loss) from investments and depreciation and
amortization. Although EBITDA is not a measure of performance
calculated in accordance with GAAP, SFX Entertainment believes that
EBITDA is accepted by the entertainment industry as a generally
recognized measure of performance and is used by analysts who report
publicly on the performance of entertainment companies. Nevertheless,
this measure should not be considered in isolation or as a substitute
for operating income, net income, net cash provided by operating
activities or any other measure for determining SFX Entertainment's
operating performance or liquidity which is calculated in accordance
with GAAP.
There are other adjustments that could effect EBITDA but have not been
reflected herein. Had such adjustments been made, EBITDA as so adjusted
("Adjusted EBITDA") on a pro forma basis would have been approximately
$58,200,000 for the year ended December 31, 1996 and $67,300,000 for
the nine months ended September 30, 1997. These adjustments include the
elimination of non-recurring charges including a litigation settlement
recovered by PACE and Pavilion of $6,000,000 and $0, expected cost
savings in connection with the Pending Acquisitions associated with the
elimination of duplicative staffing and general and administrative
expenses of $5,000,000 and $3,800,000 and include SFX Entertainment's
pro rata share of equity income from investments of $3,400,000 and
$5,700,000, for the year ended December 31, 1996 and the nine months
ended September 30, 1997, respectively.
While management believes that such cost savings and the elimination of
non-recurring expenses are achievable, SFX Entertainment's ability to
fully achieve such cost savings and to eliminate the non-recurring
expenses is subject to numerous factors certain of which may be beyond
SFX Entertainment's control.
(6) For purposes of computing the ratio of earnings to fixed charges,
"earnings" consists of earnings before income taxes and fixed charges.
"Fixed charges" consists of interest on all indebtedness. Earnings were
insufficient to cover fixed charges by $393,000 for the year ended
December 31, 1996, $1,605,000 for the nine months ended September 30,
1996 and $32,420,000 on a pro forma basis for the year ended December
31, 1996.
(7) The required 1992 balance sheet data for Delsener/Slater has not been
included herein due to the difficulty in preparing an accurate balance
sheet as of that date coupled with management's belief that such
information would not be of substantial use to a potential investor.
The difficulty in preparing an accurate fiscal balance sheet is due to
the fact that (i) Delsener/Slater was not audited at such time, (ii)
Delsener/Slater included a number of companies with different year
ends, and (iii) the unaudited balance sheets of Delsener/Slater and its
related entities were not prepared in strict accordance with the GAAP
reporting requirements as such entities were privately held. The lack
of usefulness of the information is due to the fact that (i)
Delsener/Slater is the predecessor of SFX Entertainment and therefore
its accounts were adjusted to a new basis upon its acquisition by SFX;
(ii) the balance sheet is principally comprised of cash, leasehold
improvements and accruals for bonuses to the prior owners and would not
include the operating lease for the Jones Beach Amphitheater, which
management believes is Delsener/Slater's most significant operating
agreement; and (iii) the balance sheet of Delsener/Slater as of
December 31 in any year contains a low level of assets relative to
operating income, as the concert business is seasonal (with most
concerts occurring in the summer), and the promotion business does not
require large amounts of capital investment.
(8) The Unaudited Pro Forma Balance Sheet Data at September 30, 1997 is
presented as if SFX Entertainment had completed the Financing, the
Pending Acquisitions, the Spin-Off and the Merger as of September 30,
1997.
(9) Retained earnings on a pro forma basis for the Financing, the Pending
Acquisitions, the Spin-Off and the Merger have not been adjusted for
future charges to earnings which will result from the issuance of stock
and options granted to certain executive officers and other employees
of SFX Entertainment.
17
<PAGE>
CERTAIN CONSIDERATIONS
In considering whether to approve and adopt the Merger Agreement and the
Merger and whether to approve the proposed amendments to the Certificate of
Incorporation, stockholders should consider the following matters.
Risks Related to Buyer's Ability to Obtain Financing. Buyer will require
financing in order to consummate the Merger. Buyer has not yet determined how
it will obtain its financing, and there can be no assurance that Buyer will
be able to obtain financing. If Buyer is unable to consummate the Merger
because of its inability to obtain financing, it will be in breach of the
Merger Agreement; however, SFX's remedy against Buyer in such a circumstance
will be limited. See "--Limited Remedy for Breach by Buyer."
Limited Remedy for Breach by Buyer. If Buyer or Buyer Sub breaches its
obligations under the Merger Agreement, SFX's sole remedy for the breach will
be Buyer's $100.0 million letter of credit. This amount may be significantly
less than SFX's actual damages arising out of the breach, and there can be no
assurance that SFX will be able at that time to procure another bidder that
will offer to SFX's stockholders consideration similar to that set forth in
the Merger Agreement. See "--Risks Related to Buyer's Ability to Obtain
Financing."
Litigation Related to the Merger. SFX and its directors are defendants in
a lawsuit that alleges that the consideration to be paid as a result of the
Merger to the holders of Class A Common Stock is unfair and that the
individual defendants have breached their fiduciary duties. The complaints
seek to have the actions certified as class actions and seek to enjoin the
Merger, or, in the alternative, to obtain monetary damages. SFX and its
directors will defend the lawsuit vigorously. See "Proposal 1: The
Merger--Regulatory Matters--HSR Act Matters" and "--Certain Legal
Proceedings."
Termination Fee If Stockholders Do Not Approve the Merger and the
Amendments. If the Merger Agreement is terminated because SFX's stockholders
do not approve either Proposal 1 or Proposal 2 at the Special Meeting or an
adjournment thereof, SFX is obligated to pay Buyer a termination fee of $25.0
million and to reimburse Buyer for its reasonable out-of-pocket expenses
incurred in connection with the transactions contemplated by the Merger
Agreement (not to exceed $2.5 million). If the Merger Agreement is so
terminated, and within 1 year of the date of termination SFX enters into a
Takeover Proposal or 50% of the capital stock of SFX is acquired in a tender
offer, then SFX will be obligated to pay Buyer an additional fee of $25.0
million. Termination fees are also payable if the Merger Agreement is
terminated under certain other circumstances at the time of the consummation
of a Takeover Proposal or tender offer. See "The Merger
Agreement--Termination; Fees and Expenses; Letter of Credit."
Sillerman Stockholder Agreement. If the Merger Agreement is terminated
under certain circumstances, then Mr. Sillerman will be required pursuant to
the Stockholder Agreement (as defined herein), for a period of 1 year after
the termination date, to vote all shares of Common Stock which he owns (a)
against any acquisition proposal involving SFX (other than the Merger) and
(b) to the extent that any of the following could reasonably be expected to
impede or interfere with the Merger, or are intended to lead to an
alternative acquisition proposal, against any change in a majority of the
Board of Directors of SFX, any change in the present capitalization of SFX or
any change to the Certificate of Incorporation. As of the Record Date, Mr.
Sillerman may be deemed to have 52.0% of the combined voting power of the
outstanding shares of Common Stock (excluding options and warrants to
purchase shares). In view of Mr. Sillerman's control of the Class B Common
Stock, his voting obligations, together with his agreement to forfeit (under
certain circumstances) any future increase in the merger consideration
pursuant to the Merger Agreement or any additional consideration to be
received in any other acquisition transaction, are likely to delay or impede
third parties' efforts to acquire SFX for 1 year if the Merger Agreement is
terminated and may similarly impede any future increase in the consideration
offered in the Merger. See "Proposal 1: The Merger--Sillerman Stockholder
Agreement."
Changes in SFX and SFX Entertainment. The Merger and the Spin-Off may not
occur for a period of several months subsequent to the Special Meeting, and
the information regarding SFX and SFX Entertainment is likely to change
materially from that contained or incorporated by reference herein. The
18
<PAGE>
FCC Consent and/or the expiration or termination of the HSR Act waiting
period may materially delay the consummation of the Merger. Among other
things, any or all of the acquisitions contemplated by SFX Entertainment, and
the related anticipated Financing, may fail to occur as anticipated. Even if
the Merger does not occur for any reason, SFX intends to consummate the
Spin-Off. However, it is possible that SFX may consummate the Merger but not
the Spin-Off, and may dispose of SFX Entertainment through an alternate
transaction or through a sale to Buyer for an aggregate consideration of
$42.5 million. See "The Merger Agreement--Provisions Regarding the Spin-Off
or an Alternate Transaction," "The Spin-Off" and Annex D. However,
consummation of an alternate disposition of SFX Entertainment may be
difficult, since it could constitute a change of control under the
instruments governing the Financing. In addition, management believes that
the value of SFX Entertainment substantially exceeds $42.5 million. Although
the Board of Directors and the Independent Committee have obtained an opinion
of Lehman Brothers as to the fairness, from a financial point of view, to the
holders of Class A Common Stock of the consideration to be offered to those
holders in the Merger and the Spin-Off (or an alternate disposition of SFX
Entertainment), taken together, Lehman Brothers was not requested to render
an opinion to address the fairness of the Merger to those holders if the
Spin-Off or an alternate disposition of SFX Entertainment does not occur. See
"Proposal 1: The Merger--Opinion of Lehman Brothers." Regardless of any
changes in the information regarding SFX and SFX Entertainment, and
regardless of any future alteration in SFX's plans to consummate the
Spin-Off, SFX's stockholders will not be entitled to another vote on the
proposals contained herein.
Consideration to Be Received in the Merger. Assuming Proposal 2 is
approved, the Class B Merger Consideration is $97.50 (subject to increase
under certain circumstances), and the Class A Merger Consideration is $75.00
(subject to increase under certain circumstances). Robert F.X. Sillerman, the
Executive Chairman and Chairman of the Board of Directors, and Michael G.
Ferrel, the President, Chief Executive Officer and a Director of SFX, hold
1,024,168 and 22,869 shares, respectively, of the outstanding shares of Class
B Common Stock, representing all of the outstanding shares of that class.
Buyer was willing to pay a premium for the Class B Common Stock because the
vote of those shares is necessary to consummate the transaction and because,
as Class B stockholders, Messrs. Sillerman and Ferrel could effectively block
any competing offer. In conjunction therewith, Mr. Sillerman agreed to vote
for the Merger and against any competing transaction pursuant to the
Stockholder Agreement, and agreed to forfeit future increases in the merger
consideration to be received by him. Although the Board of Directors and the
Independent Committee received an opinion from Lehman Brothers that, as of
August 24, 1997, the consideration to be offered to the holders of Class A
Common Stock in the Merger and the Spin-Off (or certain dispositions of SFX
Entertainment), taken together, is fair from a financial point of view to
those holders, Lehman Brothers' opinion does not address the fairness of the
consideration to be offered to the holders of Class B Common Stock. The
aggregate premium to be paid to Messrs. Sillerman and Ferrel in the Merger
is $23.6 million. See "Proposal 1: The Merger--Background of the Merger;
- -- Opinion of Lehman Brothers" and "Proposal 2: Amendments to Certificate of
Incorporation Regarding the Merger Consideration."
Interests of Certain Persons in the Merger. In considering the
recommendation of the Independent Committee and the Board of Directors that
the stockholders vote for the approval of the Merger Agreement and the Merger
and Proposals 2 and 3, stockholders should be aware that the members of the
Board of Directors and management have certain interests in the Merger and
the related transactions that differ from, and are in addition to, the
interests of the stockholders of SFX generally, and which may present them
with potential conflicts of interest in connection with the Merger. The
interests of SFX's Directors (other than members of the Independent
Committee) and management include: disparate consideration to be paid in the
Merger to holders of Class B Common Stock; differing shares of SFX
Entertainment common stock to be received in the Spin-Off; payments received
in conjunction with the Consulting and Non-Competition Agreement (as defined
herein); receipt of change-of-control payments and options; receipt of cash
and shares of SFX Entertainment stock for options, stock appreciation rights
and warrants; indemnification and release of officers and directors; and
continued employment by or involvement with SFX Entertainment after the
Spin-Off. In addition, the members of the Independent Committee will receive,
among other things, compensation for serving on the Independent Committee and
the acceleration of certain payments pursuant to SFX's director deferred
stock ownership plan. See "Proposal 1: The Merger--Interests of Certain
Persons in the Merger."
19
<PAGE>
Risks Related to SFX Entertainment. An investment in SFX Entertainment
common stock involves certain risks. See "Risk Factors" in the SFX
Entertainment prospectus attached as Annex D. Stockholders are urged to read
the SFX Entertainment prospectus in its entirety.
Risks Related to a Continuing Interest in SFX. If the Merger is not
consummated, stockholders should be aware that SFX's continuing operations
will involve a number of risks including potential inability to consummate
and integrate acquisitions and dispositions; extensive regulation of radio
broadcasting; substantial leverage; potential inability to service
obligations; limitations on ability to pay dividends; historical losses;
holding company structure and dependence upon subsidiaries' operations;
change of control obligations; need for additional funds; a competitive radio
broadcasting industry; dependence on economic factors; control by management;
potential conflicts of interest; transactions with affiliates; reliance on
key personnel; and restrictions on transfer of capital stock to aliens. In
addition, if the Spin-Off occurs but the Merger is not consummated, then the
senior management of SFX may become employed by SFX Entertainment, in which
case SFX would be required to seek a new management team. See "Available
Information."
20
<PAGE>
THE SPECIAL MEETING
DATE, TIME AND PLACE; MATTERS TO BE CONSIDERED
This Proxy Statement is being furnished to the holders of Voting Stock in
connection with the solicitation of proxies by the Board of Directors for use
at the Special Meeting and any adjournments or postponements thereof. The
Special Meeting will be held at 10:00 a.m., local time, on Thursday, March
26, 1998, at the offices of Baker & McKenzie, 805 Third Avenue, 23rd Floor,
New York, New York 10022. At the Special Meeting, the holders of Voting Stock
will be asked to (a) approve and adopt the Merger Agreement and the Merger,
(b) approve two amendments to the Certificate of Incorporation and (c)
transact any other business that may properly come before the Special Meeting
or any adjournments or postponements thereof.
THE BOARD OF DIRECTORS AND THE INDEPENDENT COMMITTEE HAVE UNANIMOUSLY
APPROVED THE MERGER AGREEMENT AND THE TRANSACTIONS CONTEMPLATED THEREBY,
DETERMINED THAT THEY ARE FAIR TO AND IN THE BEST INTERESTS OF THE HOLDERS OF
CLASS A COMMON STOCK. THE BOARD OF DIRECTORS AND THE INDEPENDENT COMMITTEE
UNANIMOUSLY RECOMMEND THAT SFX'S STOCKHOLDERS APPROVE AND ADOPT THE MERGER
AGREEMENT AND THE MERGER, AND UNANIMOUSLY APPROVED AND RECOMMEND FOR ADOPTION
TO SFX'S STOCKHOLDERS THE AMENDMENTS TO THE CERTIFICATE OF INCORPORATION
CONTAINED IN PROPOSALS 2 AND 3.
RECORD DATE; QUORUM; VOTING AT THE SPECIAL MEETING
The Board of Directors has fixed the close of business on February 10,
1998 as the Record Date for determining the holders of Voting Stock entitled
to notice of and to vote at the Special Meeting. As of the Record Date, there
were issued and outstanding 9,517,663 shares of Class A Common Stock,
1,047,037 shares of Class B Common Stock and 2,990,000 shares of Series D
Preferred Stock. In addition, as of the Record Date there were no shares of
Class C Common Stock, par value $.01 per share ("Class C Common Stock"), no
shares of Series B Redeemable Preferred Stock, 2,000 shares of Series C
Preferred Stock and 2,392,032 shares of Series E Preferred Stock issued and
outstanding, none of which are entitled to vote at the Special Meeting.
A quorum is necessary in order for a vote on the proposals presented at
the Special Meeting. The presence in person or by proxy of the holders of
record of a majority of the combined voting power of the outstanding shares
of Common Stock is necessary for there to be a quorum for purposes of voting
on Proposal 1. The presence in person or by proxy of the holders of record of
a majority of the combined voting power of the outstanding shares of Common
Stock and of the outstanding shares of each of the Class A Common Stock and
the Series D Preferred Stock is necessary for there to be a quorum for
purposes of voting on Proposals 2 and 3.
Abstentions (i.e., votes withheld by stockholders who are present and
entitled to vote) and broker non-votes (i.e., shares held by a broker for its
customers that are not voted because the broker does not receive instructions
from the customer or because the broker does not have discretionary voting
power with respect to the item under consideration) will be counted as
present for purposes of determining whether there is a quorum for the
transaction of business.
The affirmative vote of the holders of a majority of the voting power of
all outstanding shares of the Common Stock, voting together as a single class
(with each share of Class A Common Stock entitled to 1 vote and each share of
Class B Common Stock entitled to 10 votes) is required to approve the Merger
Agreement and the Merger (Proposal 1). The consummation of the Merger is also
conditioned on, among other things, the approval of Proposal 2, which will
require the affirmative vote of the holders of a majority of the voting power
of all outstanding shares of the Common Stock, voting together as a single
class, and the affirmative votes of the holders of a majority of the voting
power of all outstanding shares of Class A Common Stock and Series D
Preferred Stock, each voting as a separate class. In addition, the approval
of Proposal 3 is necessary to permit the Spin-Off, as currently contemplated,
which will require the affirmative vote of the holders of a majority of the
voting power of all outstanding shares of the Common Stock, voting together
as a single class, and the affirmative votes of the holders of a majority of
the voting power of all outstanding shares of Class A Common Stock and Series
D Preferred Stock, each voting as a separate class.
21
<PAGE>
Abstentions and broker non-votes will have the effect of votes against
Proposals 1, 2 and 3.
SFX will appoint one or more inspectors, who may be employees of SFX, to
determine, among other things, the number of shares of Voting Stock
represented at the Special Meeting and the validity of the proxies submitted
for voting at the Special Meeting. SFX has retained ChaseMellon Shareholder
Services, LLC, its transfer agent for the Common Stock, as proxy tabulator to
assist the inspectors in the performance of their duties. ChaseMellon
Shareholder Services, LLC can be reached at 600 Willow Tree Road, Leonia, New
Jersey 07605, phone no. (201) 296-4124, facsimile no. 201-296-4142 Attention:
Norma Cianfaglione.
Robert F.X. Sillerman, the Executive Chairman and a Director of SFX, may
be deemed to beneficially own as of the Record Date approximately 1.6% of the
outstanding shares of Class A Common Stock and 97.8% of the outstanding
shares of Class B Common Stock (excluding options and warrants to acquire
shares), which represent approximately 11.1% of the outstanding shares of
Common Stock and approximately 52.0% of the combined voting power of the
outstanding Common Stock. The directors and officers of SFX (including Mr.
Sillerman) may be deemed to beneficially own as of the Record Date
approximately 2.0% of the outstanding shares of Class A Common Stock and 100%
of the outstanding shares of Class B Common Stock (excluding options and
warrants to acquire shares), which represent approximately 11.7% of the
outstanding shares of Common Stock and approximately 53.3% of the combined
voting power of the outstanding Common Stock. Accordingly, Mr. Sillerman is
generally able to control the outcome of the vote on all matters that require
the approval of a majority of the combined voting power of all outstanding
shares of the Common Stock; as a result, he will be able to control the
outcome of the stockholder vote on Proposal 1. He has agreed to vote in favor
of Proposals 1, 2 and 3. See "Proposal 1: The Merger--Sillerman Stockholder
Agreement." EVEN IF PROPOSAL 1 IS APPROVED, THE MERGER WILL NOT BE
CONSUMMATED UNLESS PROPOSAL 2 IS APPROVED BY THE SEPARATE CLASS VOTES OF THE
HOLDERS OF CLASS A COMMON STOCK AND SERIES D PREFERRED STOCK. IN ADDITION,
THE SPIN-OFF, AS CURRENTLY CONTEMPLATED, WILL NOT OCCUR UNLESS PROPOSAL 3 IS
APPROVED BY THE SEPARATE CLASS VOTES OF THE HOLDERS OF CLASS A COMMON STOCK
AND SERIES D PREFERRED STOCK. MR. SILLERMAN DOES NOT CONTROL THE OUTCOME OF
THE REQUIRED SEPARATE CLASS VOTES ON PROPOSALS 2 AND 3.
VOTING OF PROXIES
All shares of Voting Stock that are entitled to vote and are represented
at the Special Meeting by properly executed proxies received prior to or at
the Special Meeting, and not duly and timely revoked, will be voted at the
Special Meeting in accordance with the instructions indicated on the proxies.
If no instructions are indicated, the proxies will be voted FOR approval and
adoption of the Merger Agreement and the Merger and FOR approval of each of
the amendments to the Certificate of Incorporation.
If any other matters are properly presented for consideration at the
Special Meeting, including, among other things, consideration of a motion to
adjourn or postpone the Special Meeting to another time and/or place
(including, without limitation, for the purpose of soliciting additional
proxies), then Robert F.X. Sillerman and Michael G. Ferrel (the persons named
in the enclosed forms of proxies and acting thereunder) will have discretion
to vote on these matters in accordance with their best judgment.
REVOCATION OF PROXIES
A stockholder may revoke a proxy given pursuant to this solicitation at
any time before the proxy is voted by submitting a written revocation to the
tabulation agent (ChaseMellon Shareholder Services, L.L.C.) by returning a
subsequently dated proxy to the proxy tabulator or to the Secretary of SFX,
by filing an instrument in writing with the Secretary of SFX revoking the
proxy, or by voting in person at the Annual Meeting. Attendance at the Annual
Meeting will not in and of itself revoke a proxy.
Stockholders of record who are entitled to revoke their proxy may do so
via facsimile at the numbers set forth above in "--Record Date; Quorum;
Voting at the Special Meeting." Any beneficial owner whose shares are
registered in the name of a broker, dealer, commercial bank, trust company or
other nominee and who wishes to revoke should contact the registered holder
promptly and instruct the registered holder to revoke on his behalf. There
can be no assurance that the registered holder will have sufficient time
prior to the Special Meeting to deliver a revocation upon instruction by the
beneficial owner.
22
<PAGE>
PROXY SOLICITATION
SFX will pay its own expenses incurred in connection with this Proxy
Statement and the Special Meeting, including the disbursements of legal
counsel and accountants. In addition to solicitation by mail, proxies may be
solicited by directors, officers and employees of SFX in person or by
telephone, facsimile or other means of communication. The directors, officers
and employees will not be additionally compensated, but will be reimbursed
for reasonable out-of-pocket expenses, in connection with their solicitation.
SFX has retained Georgeson & Company, Inc., at an estimated cost of $10,000,
to assist in its solicitation of proxies from brokers, nominees, institutions
and individuals. Georgeson & Company, Inc. can be reached at (212) 440-9800.
Arrangements will also be made with custodians, nominees and fiduciaries for
forwarding of proxy solicitation materials to beneficial owners of shares
held of record by the custodians, nominees and fiduciaries, and SFX will
reimburse the custodians, nominees and fiduciaries for reasonable expenses
incurred in connection therewith.
STOCKHOLDERS SHOULD NOT SEND ANY STOCK CERTIFICATES WITH THEIR PROXY
CARDS.
23
<PAGE>
PROPOSAL 1: THE MERGER
BACKGROUND OF THE MERGER
SFX was formed in 1992 by Robert F. X. Sillerman and others to acquire,
own and operate radio stations. SFX's strategy was to exploit the changing
regulatory environment (which allowed companies to own more radio stations)
by acquiring stations at attractive prices and by enhancing its stations'
financial performance. When SFX sold its shares to the public in October 1993
at a price of $15.00 per share, it became one of only a few publicly traded
companies solely devoted to owning and operating radio stations.
At the end of 1993, SFX owned or operated eleven radio stations in six
markets. At that time, the radio industry was highly fragmented and consisted
principally of local and regional privately-held companies. Capitalizing on
the changing regulatory environment which significantly liberalized the
number of stations that could be owned both nationally and locally,
management embarked on an expansion strategy. Management sought to acquire
radio stations in major and medium-sized markets at prices expressed as a
multiple of broadcast cash flow that it believed were attractive. In 1993
this multiple was approximately 10. Management employed its operational
experience, developed over many years in the radio business, to increase
advertising revenues and control costs.
Although SFX has always been committed to its strategic plan of acquiring
and developing radio stations as an independent company, from time to time
management received indications of interest from potential acquirors and
merger partners. As previously publicly disclosed, in early 1995, Hicks Muse,
an affiliate of Buyer and of Thomas O. Hicks (the brother of R. Steven Hicks,
who was then the President and a director of SFX, and who continued as such
until he resigned in 1996 to become President of Capstar Broadcasting
Corporation, an affiliate of Hicks Muse) proposed to acquire SFX for $26.00
per share in cash. Concluding that SFX's best interests would be served by
remaining independent and implementing its acquisition strategy, the Board of
Directors unanimously rejected the offer. Following this decision, an
individual purporting to be a stockholder brought a lawsuit alleging breach
of fiduciary duty and seeking class action certification. The lawsuit, which
management believed to be frivolous, was subsequently withdrawn.
In anticipation of further deregulation in the radio industry, SFX
accelerated its acquisition program in late 1995 and early 1996. As a result,
SFX was able to capitalize on the enactment in February 1996 of the
Telecommunications Act of 1996, which further relaxed the regulatory limits
on the number of stations that could be owned nationally and locally. In the
ten-month period beginning July 1996, SFX acquired 67 stations operating in
19 markets. This rapid expansion was financed by raising over $800.0 million
in the capital markets by selling debt and preferred stock and through bank
borrowings. Nevertheless, in management's view the SFX stock traded at a low
multiple of broadcast cash flow, compared to other radio broadcasting
companies.
SFX's acquisition strategy focused on acquiring clusters of stations in
each of its principal markets, which were grouped and managed regionally.
This approach allowed management to increase revenues by targeting
regionally-based advertisers and capturing a larger share of their
advertising budgets, while eliminating duplicative operating costs. Once
stations were acquired, SFX was able to implement its regional cluster
strategy to increase revenues while controlling costs, and thereby increase
its broadcast cash flow. For example, on a pro forma basis, assuming all
stations were owned and operated for the nine months ended September 30,
1997, broadcast cash flow increased 22% over the comparable period in 1996.
However, as the consolidation in the radio industry continued in 1996,
acquisition prices increased considerably and it had become increasingly
difficult to identify acquisitions that met SFX's investment criteria. SFX
continued to actively and aggressively bid on radio station acquisitions. It
was often outbid by larger broadcasting companies, particularly with respect
to radio stations in the largest markets and large groups of radio stations.
So that acquisitions would be accretive, management adhered to its policy of
acquiring stations only at a multiple of broadcast cash flow (after giving
effect to potential revenue enhancements and cost savings) that did not
exceed the multiple of broadcast cash flow at which the SFX stock traded.
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In late 1996, reacting to these developments in the radio industry, SFX
began exploring acquisition opportunities in other entertainment-related
industries in which management could employ its expertise and in which
significant growth opportunities may exist and which were related to the
radio industry. Management believed that the live entertainment industry
presented opportunities to make acquisitions at attractive multiples of cash
flow, particularly as compared to the broadcast cash flow multiples at which
the SFX stock traded. As a result, SFX began investing in the concert and
live entertainment promotion and venue operation industry in early 1997,
while at the same time it continued to pursue radio station acquisitions and
tax-free exchanges of radio stations that would be likely to increase SFX's
broadcast cash flow.
In early 1997, management continued to believe that SFX stock was among
the most undervalued in the radio broadcasting industry. Management
attributed the low valuation to the public market's failure to recognize and
fairly value the performance of its regional clusters of stations in
medium-sized markets and to concerns relating to SFX's higher than average
leverage ratio. Although management believed that, over time, through
increasing broadcast cash flow from operations and through selling additional
equity when market conditions warranted, SFX's leverage ratio would decrease
and its stock would be more fully valued, SFX continued to operate at a
disadvantage to other radio broadcasting companies or other companies whose
securities traded at higher multiples of broadcast cash flow. While, in the
past, management had received unsolicited indications of interest from
prospective acquirors, the number of inquiries increased in early 1997. Based
on the foregoing reasons, the Board determined that such inquiries should be
actively pursued, particularly if a sale or merger would result in unlocking
the increased stockholder value inherent in SFX.
The Board and management concluded that, due to the size of SFX, the
universe of potential acquirors or merger partners was comprised almost
exclusively of companies that already had a substantial radio broadcasting
presence. Management of SFX was already in regular contact with these
companies in connection with negotiating acquisitions and exchanges of radio
stations. The Board determined that the best way to proceed was to have SFX's
management engage in direct discussions with these other companies.
Management began actively exploring potential opportunities through a number
of informal discussions in May 1997.
Interest in SFX increased in early July, when a number of potential
acquirors approached SFX's management. During this period, SFX held several
discussions with Jacor Communications ("Jacor"). Jacor indicated to SFX that
it would be interested in purchasing SFX at a price per share in the high
$50s to low $60s. Attempts by SFX to negotiate a higher price with Jacor were
unsuccessful. In addition, management held several informal discussions with
representatives of American Radio Systems ("American Radio") regarding a
possible cash or stock deal. On July 22, 1997, management met with
representatives of American Radio who proposed a price per share in the low
to mid-$60s which would be paid eighty percent in the common stock of
American Radio and twenty percent in cash. Management also continued to have
informal discussions with several other potential acquirors during this
period, including CBS Radio, Inc. ("CBS"), Clear Channel Communications
("Clear Channel") and Hicks Muse.
On July 24, 1997, management held a regularly-scheduled conference call
with analysts in which management discussed SFX's second quarter financial
results. On this conference call, in response to an inquiry resulting from
rumors, management stated that it would be disingenuous to say that no bidder
had expressed an interest in pursuing a transaction with SFX. These
developments were widely reported on July 28, in the featured column of
"Heard on the Street" in The Wall Street Journal. The publicity increased the
potential acquirors' interest in SFX.
Towards the end of July, talks with CBS and Hicks Muse had culminated in
per share cash proposals of $75 and $73.50, respectively. Both offers were
conditioned on the prior sale of SFX's concert and live entertainment
promotion and venue operation business. The CBS offer contemplated that such
business would be sold to management or a third party for approximately $107
million and the Hicks Muse offer contemplated that such business would be
sold for approximately $75 million. SFX provided both CBS and Hicks Muse with
substantially similar draft merger agreements at this time as a basis for
further discussions.
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Management reported the results of these discussions to the Board of
Directors at a meeting on July 31, 1997. Various members of the Board of
Directors expressed concern that potential purchasers seemed unwilling to
provide adequate "collar" protection on stock offers and commented that
all-cash offers seemed more attractive than others. Accordingly, management
was instructed to pursue higher cash proposals at increased total value
levels.
At its July 31 meeting, the Board considered a number of issues related to
potential offers, including that (a) Mr. Sillerman, through his holdings of
Class B Common Stock, had more than 50% of the combined voting power of SFX's
common stock and, depending on the structure of a transaction, may have the
power, acting alone, to approve or block a given transaction or to block any
competing offer, (b) it would be likely that a bidder would require Mr.
Sillerman to "lock up" the voting power of his shares and to forfeit any
potential future increase in consideration from the transaction or a
competing transaction under certain circumstances, (c) it would be likely
that Mr. Sillerman would be required to agree not to compete with the
acquiror, and (d) SFX's concert promotion business might not be fairly valued
by potential acquirors interested only in the radio business. The Board
determined that, since management was considering whether to acquire the
concert and live entertainment promotion and venue operation business, it
would be desirable to establish the Independent Committee.
The Independent Committee, consisting of Edward F. Dugan, Paul Kramer and
James F. O'Grady, Jr., was convened. None of those individuals is or was an
officer or employee of SFX, and each had been elected to the Board by the
holders of the Class A Common Stock (excluding any shares of Class A Common
Stock held by Mr. Sillerman or his affiliates). The Independent Committee was
authorized to make a recommendation to the Board as to the fairness to the
holders of Class A Common Stock of any transaction under consideration and,
in connection therewith, was authorized to engage its own independent legal
counsel and financial advisers, if deemed necessary to assist it in the
exercise of its authority. For various reasons, including Mr. Sillerman's
virtual blocking position and management's expertise in negotiating
transactions of this nature, the Board authorized management to negotiate on
behalf of SFX and instructed management to keep the Independent Committee
apprised of the status of the negotiations and to present to the Independent
Committee the transaction alternatives that provided the maximum
consideration to the holders of Class A Common Stock. The Board recognized,
however, that only the Board, upon the recommendation of the Independent
Committee, could commit SFX to a transaction. The Board and Independent
Committee also recognized that it would be desirable to require that any
transaction be subject to the approval of the holders of Class A Common
Stock, voting as a separate class, but acknowledged that acquirors would
resist such a requirement, due to the added uncertainty that would result.
On August 1, the Independent Committee met with representatives of Lehman
Brothers and at the conclusion of such meeting determined that Lehman
Brothers should act as financial adviser to the Independent Committee as well
as the Board. After considering several law firms, on August 5, the
Independent Committee met with representatives of, and retained the law firm
of, Morgan, Lewis & Bockius LLP as its special legal counsel. Morgan, Lewis &
Bockius LLP had never represented SFX or any of its affiliates, but was
familiar with SFX through its representation of two investment banking firms
which had been involved in transactions with SFX or its affiliates. During
August 1997, management continued to discuss proposals with CBS, Hicks Muse,
American Radio, Clear Channel and Jacor Communications. Management requested
American Radio to restructure its initial proposal as an all-cash offer.
American Radio indicated that it would be unwilling to make an all-cash
offer.
Clear Channel, after several weeks of negotiations, had increased its
stock-for-stock bid to between 1.1 and 1.15 shares of Clear Channel's common
stock for each share of SFX Common Stock. Based on the then current market
value of Clear Channel's common stock, the exchange would have provided a
value of between approximately $66 and $69 per share to SFX's common
stockholders. The proposal also required, as a condition precedent, that
management or a third party purchase the concert and live entertainment
promotion and venue operation business for approximately $75 million.
Management also requested Clear Channel to restructure its proposal as an
all-cash offer and Clear Channel indicated its unwillingness to make such an
offer.
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Between August 15th and August 18th, management held several discussions
with representatives of Hicks Muse. Such discussions resulted in an offer by
Hicks Muse containing substantially similar principal terms to those
contained in the Merger Agreement. Hicks Muse agreed to pay $75 per share in
cash for the SFX Class A Common Stock and $97.50 per share for the SFX Class
B Common Stock. In addition, Hicks Muse agreed to allow SFX to spin-off its
concert and live entertainment promotion and venue operation business
pro-rata to its stockholders. Assuming that the value of the entertainment
business was equal to the aggregate value paid by SFX less the debt related
to the entertainment business, management believed that the value of the
entertainment business to be received by the SFX stockholders was at least
$5.50 per share on a fully diluted basis.
On August 19, 1997, CBS increased its bid to $76 per share but maintained
its requirement that the concert business be disposed of for $107 million. As
the proposal was structured, CBS (and not SFX's stockholders) would realize
any additional consideration, above the per share offering price, as a result
of the sale of the concert business.
During this time, management regularly briefed the Independent Committee
on the content of these discussions. Certain of these potential acquirors
executed a confidentiality agreement and conducted due diligence during this
period. Management, through Star Media Group Inc. (a media broker) and Lehman
Brothers, contacted other potential acquirors to inquire as to their interest
in exploring a transaction.
By the middle of the week of August 18, 1997, management and the Board
were of the view that Hicks Muse's proposal was superior to the other
proposals which SFX had received because (a) it offered the highest value to
the holders of the Class A Common Stock, (b) it would permit SFX to spin off
the concert business to its stockholders, thereby providing additional
consideration to the stockholders and allowing the stockholders to
participate in the opportunities available in that business, and (c) Hicks
Muse was willing to permit the transaction to be structured in a manner that
would allow the holders of Class A Common Stock to effectively have a
separate class vote on the transaction.
During the remainder of the week, management continued to negotiate the
terms of the transaction with Hicks Muse, including the scope of
representations and warranties, the merger consideration, the conditions to
consummation of the transaction, including applicable regulatory approval,
the termination provisions and the fees payable upon such termination and the
terms of the Spin-Off, including the working capital adjustments. Hicks Muse
requested Mr. Sillerman to enter into a "lock up" agreement by which Mr.
Sillerman would agree to vote in favor of the transaction and against any
competing offer and to forfeit, under certain circumstances, any future
increase in the merger consideration pursuant to the Merger Agreement or any
additional consideration to be received in any other acquisition transaction.
In connection with its request, Hicks Muse indicated that it was willing to
pay a premium for the Class B Common Stock because such shares possessed
substantial combined voting power of SFX which was necessary to consummate
the transaction and could effectively block any competing offer and to induce
Mr. Sillerman to agree to "lock-up" his shares.
Hicks Muse also requested that Mr. Sillerman agree not to compete in the
radio broadcasting industry with Hicks Muse and SFX for a period of five
years and that Mr. Sillerman agree to provide consulting services to SFX for
a two year period.
The Independent Committee and the Board met on August 21 and August 22,
along with legal counsel for the Independent Committee and representatives of
Lehman Brothers. At such meetings, the status of the transaction was
discussed and the agreements were reviewed. Additionally, representatives of
Lehman Brothers made an oral presentation regarding the consideration to be
paid to the holders of Class A Common Stock and the reasonableness of the
other components of the transaction, including the premium on the Class B
Common Stock and the aggregate $25 million payment to be made to Mr.
Sillerman pursuant to a non-compete and consulting agreement. On August 22,
1997, Lehman Brothers rendered its oral fairness opinion which was
subsequently confirmed in writing on August 24, 1997 that, as of those dates,
respectively, the consideration to be offered to holders of Class A Common
Stock in the Merger and Spin-Off (or certain alternative dispositions of SFX
Entertainment), taken together, is fair from a financial point of view to
those holders.
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Upon further deliberations, the Independent Committee on August 22
unanimously determined to recommend to the full Board that the Merger
Agreement and the transactions contemplated thereby were fair to and in the
best interests of the holders of the Class A Common Stock, and the
Independent Committee resolved to recommend that SFX's stockholders approve
the Merger Agreement and the transactions contemplated therein, including the
proposed amendments to the Certificate of Incorporation of SFX.
The Independent Committee met separately as a committee and together with
its legal counsel and financial advisers numerous times between July 31, 1997
and August 22, 1997. In making its recommendation to the Board on the
fairness of the proposed Merger Agreement and the transactions contemplated
thereby as a whole to the Class A stockholders, the Independent Committee,
consulted with its legal and financial advisers and considered, among other
factors that the Independent Committee deemed relevant, the following:
(a) The extensive history of SFX's negotiations with prospective
purchasers, culminating in the proposal from Hicks Muse.
(b) The terms of the proposed Merger Agreement and related transaction
documents.
(c) The analysis and reports prepared by Lehman Brothers, its financial
adviser, including Lehman Brothers' analysis of the proposed
transaction, its review of the value of SFX's concert business, its
review of the value of SFX's Class A Common Stock and Class B Common
Stock and its review of the value of other companies with securities
with similar attributes in similar transactions.
(d) The relinquishment of contractual change of control payments in the
form of options by Messrs. Sillerman and Ferrel (see "--Interests of
Certain Persons in the Merger").
(e) The opinion of Lehman Brothers that the consideration to be offered
to the holders of Class A Common Stock in the Merger and the
Spin-Off, taken together, is fair from a financial point of view to
those holders.
(f) The terms of the non-competition covenant proposed to be entered into
by Mr. Sillerman.
(g) The interests of Hicks Muse underlying Hicks Muse's demand that Mr.
Sillerman agree to non-competition covenants and the opportunities
which would be lost by him if he entered into such covenants.
(h) The substantial values which could be realized by SFX's Class A
stockholders from the proposed transaction.
(i) The additional consideration proposed to be paid by Hicks Muse to
SFX's Class B stockholders.
(j) The terms, rationale and potential effects of the proposed lock-up
arrangements demanded by Hicks Muse.
(k) The current business conditions affecting companies in the media
business generally and the radio broadcasting business specifically,
including recently completed acquisitions, proposed consolidations
and recent announcements of other similar companies deciding to
pursue strategic alternatives.
After receiving the recommendation of the Independent Committee and upon
further deliberation, the Board unanimously approved and adopted the Merger
Agreement and recommended that the stockholders approve the Merger. The
parties continued to finalize the documents during August 23 and 24, and the
Merger Agreement and the related documents were executed on August 25, 1997
as of August 24, 1997.
On February 9, 1998, the parties to the Merger Agreement entered into an
amendment to the Merger Agreement, which contained certain minor and
technical amendments and amendments to the Working Capital calculation.
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Prior to the date of this Proxy Statement, SFX obtained the written
consent in lieu of a meeting of majorities of the voting power of the holders
of Series E Preferred Stock (voting as a separate class) and Class A Common
Stock and Class B Common Stock (voting together) with respect to an amendment
to SFX's Certificate of Incorporation required to, among other things, permit
the Spin-Off and the Financing. Simultaneously, SFX obtained the written
consent of majorities of the holders of the 2006 Notes and the 2000 Notes to
an amendment to the indentures governing those notes, in order to, among
other things, permit the Spin-Off and the Financing. In connection with
obtaining these consents, SFX paid to the holders of Series E Preferred Stock
an aggregate of $5.1 million and to the holders of 2006 Notes an aggregate of
$10.1 million. SFX did not pay any consideration to the holders of Common
Stock for their consent. On January 7, 1998, SFX sent to holders of Class A
Common Stock an information statement (which was supplemented on January 28,
1998), which contained information with respect to the granting of consents
to amend the certificate of designations of the Series E Preferred Stock.
On February 11, 1998, SFX Entertainment consummated the private placement
of $350.0 million of its 9 1/8% Senior Subordinated Notes due 2008.
REASONS FOR THE MERGER; RECOMMENDATIONS OF THE BOARD OF DIRECTORS
The Board believes that the terms of the Merger Agreement and the
transactions contemplated thereby are fair to, and in the best interests of,
the holders of the Class A Common Stock. Accordingly, the Board has
unanimously approved the Merger Agreement and the transactions contemplated
thereby and has recommended that SFX's stockholders approve the same and the
related amendments to SFX's Certificate of Incorporation. In addition to the
factors considered by the Independent Committee discussed above under
"--Background of the Merger," in reaching its conclusion to approve the
Merger and the related transactions, the Board consulted with SFX's
management as well as SFX's financial and legal advisers, and considered a
number of factors, including the following:
(a) The Board's familiarity with the radio broadcast industry generally,
its awareness of the trend toward consolidation in the radio
broadcast industry and its review and analysis of SFX's existing
business, financial condition, results of operations and prospects
and the competitive environment facing SFX.
(b) The recent consolidation in the radio industry which has made it
increasingly difficult for SFX to identify and consummate
acquisitions that meet SFX's investment criteria.
(c) The value of the Class A Merger Consideration to be received by the
holders of the Class A Common Stock in the Merger. The Board
considered the historical market prices and trading information with
respect to the Class A Common Stock, the price per share offered by
Buyer, the certainty of the value provided by the cash consideration
and the fact that such price represents a significant premium over
the market prices at which the Class A Common Stock had previously
traded, including (but not limited to) the fact that the $75 cash
consideration per Class A share represented a premium of 168% from
the $28 trading price in April 1997, when management had received the
initial indications of interest. As detailed above under
"--Background of the Merger," the Board noted that the consideration
to be received in the Merger was the result of an extensive and
exhaustive process that resulted in discussions with a number of
potential acquirors and the ultimate selection of Buyer's proposal.
(d) The prospects of continuing to operate SFX, both with and without
regard to the Spin-Off, the value to the Class A stockholders of such
alternatives and the timing and likelihood of achieving additional
value from these alternatives, considering the possibility that SFX's
future performance might not lead to a stock price having a higher
present value than the Class A Merger Consideration in the
foreseeable future.
(e) The Spin-Off, if consummated, will enable the holders of Common Stock
to retain a continuing interest in the venue operation and concert
promotion industry and management's view that such industry offers
attractive opportunities.
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(f) The presentation of Lehman Brothers and Lehman Brothers' oral and
written opinion to the Independent Committee and the Board that the
consideration to be offered to the holders of the Class A Common
Stock in the Merger and the Spin-Off (or certain dispositions of SFX
Entertainment), taken together, is fair, from a financial point of
view, to those holders as described in "--Opinion of Lehman Brothers."
(g) The terms and conditions of the Merger Agreement, including the lack
of any financing contingency on the part of Buyer and the $100.0
million letter of credit placed in escrow to secure the performance
of Buyer.
(h) The approval of the holders of the Class A Common Stock, voting as a
separate class, is necessary to amend SFX's Certificate of
Incorporation in order to consummate the Merger.
The discussion contained herein of the information and factors considered
by the Board and the Independent Committee is not intended to be exhaustive.
In view of the wide variety of factors considered in connection with its
evaluation of the proposed Merger, the Board and the Independent Committee
did not find it practicable to, and did not, quantify or otherwise attempt to
assign relative weights to any of the factors discussed herein. In addition,
individual members of the Board and the Independent Committee may have given
different weights to different factors. For a discussion of the interests of
certain members of SFX's Board in the Merger, which interests were considered
by the Board and the Independent Committee, see "--Interests of Certain
Persons in the Merger."
YOUR BOARD OF DIRECTORS AND THE INDEPENDENT COMMITTEE HAVE UNANIMOUSLY
DETERMINED THAT THE MERGER AGREEMENT AND THE TRANSACTIONS CONTEMPLATED
THEREBY ARE FAIR TO AND IN THE BEST INTEREST OF THE HOLDERS OF CLASS A COMMON
STOCK AND RECOMMEND THAT YOU VOTE FOR THE PROPOSAL TO APPROVE THE MERGER
AGREEMENT AND FOR THE AMENDMENTS TO SFX'S CERTIFICATE OF INCORPORATION.
OPINION OF LEHMAN BROTHERS
Lehman Brothers has acted as financial adviser to the Board of Directors
and the Independent Committee in connection with the Merger.
As part of its role as financial adviser to SFX, on August 22, 1997,
Lehman Brothers delivered its oral opinion (which it subsequently confirmed
in writing in an opinion dated August 24, 1997) (the "Fairness Opinion") to
the Board of Directors of SFX and the Independent Committee thereof to the
effect that, as of those dates, and based on the assumptions made, procedures
followed and matters considered, as set forth in the opinion, the
consideration to be offered to the holders of Class A Common Stock in the
Merger and the Spin-Off (or an alternate disposition of SFX Entertainment, as
permitted under the Merger Agreement), taken together, is fair from a
financial point of view to those holders. On February 13, 1998, Lehman
Brothers confirmed the Fairness Opinion.
A COPY OF THE FAIRNESS OPINION IS ATTACHED TO THIS PROXY STATEMENT AS
ANNEX C. SFX'S STOCKHOLDERS ARE ENCOURAGED TO READ THE FAIRNESS OPINION IN
ITS ENTIRETY FOR A DISCUSSION OF THE ASSUMPTIONS MADE, PROCEDURES FOLLOWED
AND MATTERS CONSIDERED BY LEHMAN BROTHERS. THE SUMMARY OF THE FAIRNESS
OPINION SET FORTH IN THIS PROXY STATEMENT IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO THE FULL TEXT OF THE OPINION.
No limitations were imposed by SFX on the scope of Lehman Brothers'
investigation or the procedures to be followed by Lehman Brothers in
rendering its opinion, except that SFX did not authorize Lehman Brothers to
broadly solicit, and Lehman Brothers did not so broadly solicit, proposals
from third parties with respect to the purchase of all or a part of SFX.
Lehman Brothers was not requested to and did not make any recommendation to
the Board of Directors of SFX as to the form or amount of the consideration
to be offered to the holders of the Class A Common Stock in the Merger, which
was determined through arm's-length negotiations between the parties. In
arriving at its opinion, Lehman Brothers did not ascribe a specific range of
value to SFX, but rather made its determination as to the fairness, from a
financial point of view, of the consideration to be offered to the holders of
the Class A Common Stock on the basis of the financial and comparative
analysis described below. Lehman Brothers' opinion is for the use and benefit
of the Board of Directors of SFX and the Independent Committee and was
rendered to the Board and the Independent Committee in connection with their
consideration of the
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Merger. Lehman Brothers' opinion is not intended to be and does not
constitute a recommendation to any stockholder of SFX as to whether to accept
the consideration offered in the Merger. Lehman Brothers was not requested to
opine as to, and its opinion does not address, SFX's underlying business
decision to proceed with or effect the Merger. In addition, the Fairness
Opinion does not address the fairness of the premium to be received by
holders of Class B Common Stock in the Merger.
In arriving at its opinion, Lehman Brothers reviewed and analyzed: (a) the
Merger Agreement and the specific terms of the Merger and the Spin-Off (the
"Proposed Transaction"); (b) publicly available information concerning SFX
that Lehman Brothers believes to be relevant to its analysis, including SFX's
(i) annual report and Form 10-K for the year ended December 31, 1996; (ii)
proxy statement dated April 18, 1997; (iii) Forms 10-Q for the quarters ended
March 31, June 30, and September 30, 1997; and (iv) Forms 8-K and 8-K/A filed
since December 31, 1996; (c) financial and operating information with respect
to the business, operations and prospects of SFX (including SFX's concert
promotion business (the "Entertainment Business")) furnished to Lehman
Brothers by SFX, including station by station projections for 1997 and 1998
and projections for the Entertainment Business for 1997 and 1998; (d) a
trading history of the Common Stock from August 19, 1996 to August 22, 1997
and a comparison of that trading history with those of other companies that
Lehman Brothers deemed relevant; (e) a comparison of the historical financial
results and present financial condition of SFX and the Entertainment Business
with those of other companies that Lehman Brothers deemed relevant; (f) the
results of the efforts of SFX and, to a limited extent, Lehman Brothers and
Star Media Group to solicit indications of interest from third parties with
respect to a purchase of SFX; and (g) a comparison of the financial terms of
the Proposed Transaction with the financial terms of certain other
transactions that Lehman Brothers deemed relevant. In addition, Lehman
Brothers has had discussions with the management of SFX concerning its
business, operations, assets, financial condition and prospects and has
undertaken other studies, analyses and investigations as it deemed
appropriate.
In arriving at its opinion, Lehman Brothers has assumed and relied upon
the accuracy and completeness of the financial and other information used by
it without assuming any responsibility for independent verification of the
information and has further relied upon the assurances of management of SFX
that they are not aware of any facts or circumstances that would make the
information inaccurate or misleading. With respect to the financial
projections of SFX, upon advice of SFX, Lehman Brothers has assumed that the
projections have been reasonably prepared on a basis reflecting the best
currently available estimates and judgments of the management of SFX as to
the future financial performance of SFX and that SFX will perform
substantially in accordance with the projections. In arriving at its opinion,
Lehman Brothers has conducted only a limited physical inspection of the
properties and facilities of SFX and has not made or obtained any evaluations
or appraisals of the assets or liabilities of SFX. The Fairness Opinion
necessarily is based upon market, economic and other conditions as they exist
on, and can be evaluated as of, the date of its opinion.
In addition, Lehman Brothers has not been requested to opine as to, and
its opinion does not in any manner address, the price at which shares of
common stock of the company which will hold the Entertainment Business (the
"SFX Entertainment Common Stock") will actually trade following the
consummation of the Spin-Off. The process by which securities trading markets
establish a market price for any security is complex, involving the
interaction of numerous factors, and market prices will fluctuate with
changes in, among other things, the financial condition, business and
prospects of the issuer and comparable companies and economic and financial
market conditions. In addition, trading in shares of the SFX Entertainment
Common Stock will likely be characterized by a period of redistribution among
SFX's stockholders who receive shares in the Spin-Off (especially in light of
the taxable nature of the Spin-Off), which may temporarily depress the market
price of these shares during the period. See "Certain Federal Income Tax
Consequences." Accordingly, the Fairness Opinion should not be viewed as
providing any indication or prediction of the market value of the shares of
the SFX Entertainment Common Stock to be received by a stockholder pursuant
to the Merger. See Annex D.
In connection with the preparation and delivery of its opinion to SFX's
Board of Directors, Lehman Brothers performed a variety of financial and
comparative analyses, as described below. The preparation of a fairness
opinion involves various determinations as to the most appropriate and
relevant methods of
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financial and comparative analysis and the application of those methods to
the particular circumstances and, therefore, such an opinion is not readily
susceptible to summary description. Furthermore, in arriving at its opinion,
Lehman Brothers did not attribute any particular weight to any analysis or
factor considered by it, but rather made qualitative judgments as to the
significance and relevance of each analysis and factor. Accordingly, Lehman
Brothers believes that its analyses must be considered as a whole and that
considering any portion of its analyses and factors, without considering all
analyses and factors, could create a misleading or incomplete view of the
process underlying its opinion. In its analyses, Lehman Brothers made
numerous assumptions with respect to industry performance, general business
and economic conditions and other matters, many of which are beyond the
control of SFX. Any estimates contained in these analyses are not necessarily
indicative of actual values or predictive of future results or values, which
may be significantly more or less favorable than as set forth therein. In
addition, analyses relating to the value of businesses do not purport to be
appraisals or to reflect the prices at which businesses actually may be sold.
Valuation of SFX
Comparable Acquisition Transaction Analysis. Lehman Brothers reviewed
certain publicly available information regarding 18 selected business
combinations involving radio broadcasting companies since February 1996.
Lehman Brothers reviewed the prices paid in these transactions in terms of
the Unlevered Market Capitalization (which is comprised of each company's
equity market capitalization and total debt less cash) as a multiple of
operating cash flow ("OCF") and broadcasting cash flow ("BCF") and compared
the multiples to the multiples of the financial results for SFX's radio
broadcasting business (the "SFX Radio Business") implied by the Merger
consideration. The 18 pending and completed business combinations reviewed in
this analysis (collectively, the "Acquisition Transaction Comparables") and
the dates the acquisitions were announced were: the acquisition of Heritage
Media's radio business by Sinclair Broadcast Group (July 1997); the sale of
certain of Paxson's radio stations to Clear Channel Communications (June
1997); the acquisition of Gulfstar by Capstar (May 1997); the acquisition of
Patterson by Capstar (April 1997); the acquisition of Gannett's radio
properties by Chancellor & Evergreen (April 1997); the acquisition of
Viacom's radio properties by Chancellor & Evergreen (February 1997); the
acquisition of Secret Communications by SFX (October 1996); the acquisition
of Regent Communications by Jacor Communications (October 1996); the
acquisition of Colfax Communications by Chancellor Broadcasting (August
1996); the acquisition of EZ Communications by American Radio Systems (August
1996); the acquisition of Infinity Broadcasting by Westinghouse (June 1996);
the investment in Heftel Broadcasting by Clear Channel Communications (June
1996); the acquisition of New City Communications by Cox Enterprises (May
1996); the acquisition of Radio Equity Partners by Clear Channel
Communications (May 1996); the acquisition of River City Broadcasting by
Sinclair Broadcast Group (April 1996); the acquisition of Multi-Market Radio,
Inc. ("MMR") by SFX (April 1996); the acquisition of U.S. Radio by Clear
Channel Communications (March 1996) and the acquisition of Citicasters by
Jacor Communications (February 1996). Lehman Brothers compared the multiples
of the Merger consideration to SFX's projected 1997 and 1998 OCF to the
multiples of acquisition year and forward year OCF in the above transactions
and determined that the projected 1997 and 1998 OCF multiples in the Merger,
18.4x and 14.8x respectively, represent premiums of 31% and 10%,
respectively, to the mean of the corresponding multiples in the transactions
considered (14.0x and 13.5x, respectively). Lehman Brothers calculated the
implied value of the SFX Radio Business by selecting the ranges of multiples
of 1997 and 1998 projected BCF, derived from Lehman Brothers' analysis of
multiples of Unlevered Market Capitalization to 1997 and 1998 cash flow for
the Acquisition Transaction Comparables, and applying these multiple ranges
to the combined projected BCF of all of SFX's cash flow generating radio
stations. Non-cash flow generating stations were assigned "stick" values
based on discussions with SFX's Management and Lehman Brothers' industry
knowledge. For this analysis, Lehman Brothers used a multiple range of 14.0x
- -16.0x 1997 projected BCF and 12.0x -14.0x 1998 projected BCF for the cash
flow generating radio broadcasting stations; the non cash flow generating
stations in San Diego (KPLN), Houston (KQUE/KKPN), Dallas (KTXQ/KRRW) and
Richmond (WVGO/WKLR/WBZU/WMXB) were assigned stick values of $30 million, $45
million, $70 million and $38 million respectively; the Entertainment Business
was valued at $101 million, the midpoint of Lehman Brothers' Discounted Cash
Flow valuation range. See "--Discounted Cash Flow Analysis." Using this
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methodology, Lehman Brothers arrived at an implied value of SFX ranging
between $1.843 billion and $2.155 billion, which translates to $62.23 to
$81.85 equity value per share on a fully diluted basis (assuming the exercise
of all outstanding options and conversion of all outstanding shares of Series
D Preferred Stock).
Discounted Cash Flow Analysis. Lehman Brothers performed a discounted cash
flow analysis of both the SFX Radio Business and the Entertainment Business
to arrive at a combined discounted cash flow valuation of the entire company.
Lehman Brothers utilized estimates of projected financial performance
prepared by SFX's management for the years 1997 and 1998 and for the year
1999 through the year 2007 based on assumptions provided by SFX's management.
Utilizing these projections, Lehman Brothers calculated a range of values
based upon the sum of the discounted net present value of (a) the projected
stream of respective after-tax unlevered free cash flows for the SFX Radio
Business and the Entertainment Business to the year 2007, and (b) the
projected respective terminal values of the SFX Radio Business and the
Entertainment Business at that year based upon a range of multiples of
projected OCF. Lehman Brothers determined the range of discount rates of 11%
to 13% for the SFX Radio Business and 13% to 15% for SFX's Entertainment
Business, based on weighted average cost of capital analyses for comparable
radio broadcasting and concert promotion companies. Lehman Brothers selected
terminal multiples of OCF ranging from 8.0x to 10.0x for the SFX Radio
Business and 7.0x to 8.0x for SFX's Entertainment Business. Using this
methodology, the value of the SFX Radio Business was determined to be between
$1.815 billion and $2.096 billion ($61.84 to $79.45 equity value per share on
a fully diluted basis), the value of SFX's Entertainment Business was
determined to be between $90.8 million and $112.6 million ($4.37 to $5.75
equity value per share on a fully diluted basis), and the combined value of
SFX was determined to be between $1.905 billion and $2.209 billion ($66.21 to
$85.20 equity value per share on a fully diluted basis).
Premiums Paid Analysis. Lehman Brothers performed a valuation based on the
premiums over the target's trading stock price paid in 19 acquisitions of
public media and telecommunications companies since October 1994 involving
cash consideration ranging from $500 million to $3.0 billion. Lehman Brothers
focused on the premium of the acquisition price to the stock's trading price
1 day prior to the announcement of the acquisition, 1 week prior to the
announcement of the acquisition, 4 weeks prior to the announcement of the
acquisition and 8 weeks prior to the announcement of the acquisition. Because
the trading prices of the Class A Common Stock rose so significantly due to
takeover rumors between the 8th and the 4th week prior to the announcement of
the Merger Agreement, Lehman Brothers believed that the 8-week premium was
the most appropriate premium to apply to this transaction. Lehman Brothers
calculated an implied valuation of SFX, based on the premium to target's
stock price 8 weeks before the acquisition announcement in the 19 comparable
transactions. The transactions considered and the dates such transactions
were announced were the acquisition of Telco Communications by Excel
Communications (June 6, 1997); the acquisition of CommNet Cellular by
Blackstone Capital Partners (May 28, 1997); the acquisition of Palmer
Wireless by Price Communications (May 23, 1997); the acquisition of BBN by
GTE (May 6, 1997); the acquisition of International Family Entertainment by
Fox Kids Worldwide (News Corp) (April 23, 1997); the acquisition of National
Education Corp. by Harcourt General (April 21, 1997); the acquisition of
Heritage Media by News Corp. (March 17, 1997); the acquisition of Providence
Journal by A. H. Belo (September 26, 1996); the acquisition of Home Shopping
Network (Liberty Media) by Silver King Communications (August 26, 1996); the
acquisition of EZ Communications by American Radio Systems (August 5, 1996);
the acquisition of New World Communications Group (Mafco) by News Corp.,
(July 17, 1996); the acquisition of Renaissance Communications Corp. by
Tribune (July 1, 1996); the acquisition of UUNet Technologies Inc. by MFS
Communications (April 30, 1996); the acquisition of Cellular Communications
Inc. by AirTouch (April 8, 1996); the acquisition of Citicasters (American
Financial Group) by Jacor (Zell/Chillmark) (February 13, 1996); the
acquisition of Cellular Communications Inc. by AirTouch (November 1, 1995);
the acquisition of Wallace Computer Services by Moor Corp. (July 28, 1995);
the acquisition of ALC Communications Corp. by Frontier Corp. (April 10,
1995) and the acquisition of Park Communications Inc. by an investor group
(October 26, 1994). Using the mean and median premiums (52.1% and 42.9%) to
the target's stock price 8 weeks before the acquisition announcement produces
a valuation of SFX between $1.802 billion and $1.863 billion ($59.66 and
$63.50 per share on a fully diluted basis).
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Comparable Public Company Analysis. Lehman Brothers compared certain
publicly available financial and operating data and projected financial
performance (reflecting a composite of research analysts' estimates) of
selected publicly traded radio broadcasting companies with similar financial
and operating data and projected financial performance of SFX (as estimated
by the management of SFX). The selected radio broadcasting companies reviewed
in this analysis (collectively, the "SFX Broadcasting Comparable Group") were
American Radio Systems, Chancellor Broadcasting, Clear Channel
Communications, Cox Radio, Emmis Broadcasting, Evergreen & Chancellor &
Viacom--Pro Forma, Evergreen Media, Heftel Broadcasting, Jacor and Saga
Communications. Lehman Brothers analyzed, among other things, the ratios of
Unlevered Market Capitalization to projected radio OCF and BCF for 1997 and
1998, as well as operating and financial performance data and the capital
structures of the SFX Broadcasting Comparable Group. Lehman Brothers then
compared the results of its analyses for the SFX Broadcasting Comparable
Group to the corresponding results for SFX. Lehman Brothers calculated the
implied value of SFX by applying the mean multiples of 1997 and 1998
projected OCF and BCF, derived from Lehman Brothers' analysis of multiples of
Unlevered Market Capitalization for the SFX Broadcasting Comparable Group to
the projected 1997 and 1998 OCF and BCF of SFX. Lehman Brothers calculated,
using this methodology, an implied value for SFX between $1.740 billion and
$1.940 billion, corresponding to $56.02 to $63.35 equity value per share on a
fully diluted basis.
Valuation of Entertainment Business
Historical Acquisition Price. Lehman Brothers reviewed the prices paid by
SFX in acquiring the separate businesses that comprise SFX's Entertainment
Business. The transactions considered included: the acquisition of
Delsener/Slater by SFX (closed January 1997) for $22.9 million, the
acquisition of the Meadows Music Theater (closed March 1997) for $24.3
million and the acquisition of Sunshine Promotions (closed June 1997) for
$65.0 million. The total price paid by SFX for the Entertainment Business,
including cash, stock, deferred payments, assumed debt and working capital,
was $112.3 million ($5.70 per share on a fully diluted basis).
Spin-Off Analysis. Lehman Brothers performed an analysis of the value of
SFX's Entertainment Business after the proposed Spin-Off, in order to
evaluate the value of the spun-off entity to holders of the Class A Common
Stock. The analysis applied a 25% public market discount to the equity value
of SFX's Entertainment Business derived from the discounted cash flow
analysis. See "--Valuation of SFX--Discounted Cash Flow Analysis." The value
of SFX's Entertainment Business, derived via this methodology, was determined
to be between $83.3 million to $95.3 million ($3.72 to $4.67 per share on a
fully diluted basis).
Engagement of Lehman Brothers
Lehman Brothers is an internationally recognized investment banking firm
and, as part of its investment banking activities, is regularly engaged in
the evaluation of businesses and their securities in connection with mergers
and acquisitions, negotiated underwritings, competitive bids, secondary
distributions of listed and unlisted securities, private placements and
valuations for corporate and other purposes. The Board of Directors and the
Independent Committee selected Lehman Brothers because of its expertise,
reputation and familiarity with SFX in particular and the media and
telecommunications industry in general, and because its investment banking
professionals have substantial experience in transactions similar to the
Merger.
As compensation for its services in connection with the Merger, SFX will
pay Lehman Brothers a fee of $2.0 million, of which $500,000 has already been
received by Lehman Brothers and $1.5 million will be payable upon the
Closing. SFX has also agreed to reimburse Lehman Brothers for its reasonable
expenses (including, without limitation, professional and legal fees and
disbursements) incurred in connection with its engagement, and to indemnify
Lehman Brothers and certain related persons against certain liabilities in
connection with its engagement, including certain liabilities under the
federal securities laws.
Lehman Brothers is acting as financial adviser to the Board of Directors
and the Independent Committee in connection with the Merger. Lehman Brothers
also acted as financial adviser to SFX Entertainment with respect to its
private placement of debt securities and as solicitation agent for SFX's
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consent solicitation. Lehman Brothers anticipates acting as a lender for SFX
Entertainment's proposed senior credit facility. Lehman Brothers has also
performed various investment banking services for SFX in the past, for which
it has received customary fees. On May 22, 1996, Lehman Brothers served as a
co-manager in SFX's concurrent offering of $450.0 million of Senior
Subordinated Notes and $149.5 million of Series D Preferred Stock. In
November 1996, Lehman Brothers participated as a co-agent in SFX's $225.0
million bank credit facility. In January 1997, Lehman Brothers co-managed the
offering of $225.0 million of Series E Preferred Stock. In the ordinary
course of its business, Lehman Brothers actively trades in the debt and
equity securities of SFX for its own account and for the accounts of its
customers and, accordingly, may at any time hold a long or short position in
these securities.
SILLERMAN STOCKHOLDER AGREEMENT
Concurrently with the execution of the Merger Agreement and as a condition
of the willingness of Buyer to enter into the Merger Agreement, Robert F.X.
Sillerman, SFX's Executive Chairman, entered into a Stockholder Agreement,
dated as of August 24, 1997 (the "Stockholder Agreement"), with Buyer, Buyer
Sub and SFX. Mr. Sillerman may be deemed to beneficially own as of the Record
Date approximately 1.6% of the outstanding shares of Class A Common Stock and
97.8% of the outstanding shares of Class B Common Stock (excluding options
and warrants to acquire shares), which represent approximately 11.1% of the
outstanding shares of Common Stock and approximately 52.0% of the combined
voting power of the outstanding Common Stock.
Pursuant to and subject to the terms and conditions of the Stockholder
Agreement, Mr. Sillerman is required to vote all shares of Class A Common
Stock and Class B Common Stock which he owns (a) in favor of the Merger
Agreement and the Merger (Proposal 1) and the amendments to the Certificate
of Incorporation contained in Proposals 2 and 3, (b) against any acquisition
proposal involving SFX (other than the Merger), and (c) to the extent that
any of the following could reasonably be expected to impede or interfere with
the Merger or are intended to lead to an alternative acquisition proposal,
any change in a majority of the Board of Directors of SFX, any change in the
present capitalization of SFX or any change to the Certificate of
Incorporation.
Pursuant to the Stockholder Agreement, if Mr. Sillerman sells or transfers
his shares of Class A Common Stock and Class B Common Stock in connection
with the consummation of an acquisition proposal (other than the Merger)
involving SFX that is in existence on or that has been made prior to the
first anniversary of the termination of the Merger Agreement, then he is
required to pay to Buyer the difference between the total consideration
received by him upon the consummation of the other acquisition and any other
transactions contemplated thereby and the total consideration to be received
by him upon the consummation of the Merger and the transactions contemplated
thereby.
If the consideration currently provided for in the Merger Agreement is
increased, then the Stockholder Agreement requires Mr. Sillerman to (a) pay
to Buyer, except in certain specified circumstances, any increase in the
total consideration received by him upon the consummation of the Merger and
the other transactions contemplated thereby or (b) waive the right of him and
his affiliates to receive that difference.
Mr. Sillerman has agreed in the Stockholder Agreement that he will not
offer, sell, transfer, tender, pledge, encumber, assign or otherwise dispose
of any of the shares of Class A Common Stock or Class B Common Stock (and any
securities convertible into or exercisable or exchangeable for any of these
shares) that he owns or grant any proxy or power of attorney with respect
thereto, except that he may pledge or encumber his securities in connection
with a bona fide lending transaction in certain circumstances.
Mr. Sillerman's obligation to vote as described terminates upon the
earlier of the consummation of the Merger or the first anniversary of the
termination of the Merger Agreement, except that, if (a) the Merger Agreement
is terminated because (i) the Merger is not consummated on or before the
Termination Date (as defined herein), as it may be extended, (ii) of the
issuance of a final and nonappealable order, injunction, decree or ruling
permanently enjoining, restraining or otherwise prohibiting the Merger
(except for such an order, decree, ruling or other action arising from claims
or
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litigation involving SFX and its stockholders) or (iii) of a material uncured
breach by Buyer of any representation, warranty, covenant or other agreement
contained in the Merger Agreement and (b) SFX is entitled to request a
release of the letter of credit deposited into escrow by Buyer upon the
execution of the Merger Agreement, then the Stockholder Agreement, including
the obligation to vote against any acquisition proposal involving SFX, will
be void and of no further force or effect. See "The Merger
Agreement--Termination; Fees and Expenses; Letter of Credit."
If the Merger Agreement is terminated other than as described above, Mr.
Sillerman will remain obligated for 1 year after such termination to vote
against acquisition proposals and against the previously described changes in
SFX's Board of Directors, capitalization or Certificate of Incorporation. In
view of Mr. Sillerman's control of the Class B Common Stock, his voting
obligations, together with his previously described obligation to pay to
Buyer any increased future consideration to be received by him in the Merger
or in a competing transaction, are likely to delay or impede third parties'
efforts to acquire SFX if the Merger Agreement is terminated and may
similarly impede any future increase in the consideration offered in the
Merger during the 1-year period.
INTERESTS OF CERTAIN PERSONS IN THE MERGER
In considering the recommendation of the Independent Committee and the
Board of Directors that the stockholders vote for the approval of the Merger
Agreement and the Merger and Proposals 2 and 3, stockholders should be aware
that the members of the Board of Directors and management have certain
interests in the Merger and the related transactions that differ from, and
are in addition to, the interests of the stockholders of SFX generally, and
which may present them with potential conflicts of interest. In addition, the
members of the Independent Committee will receive, among other things,
compensation for serving on the Independent Committee.
Consideration to Be Received in the Merger
Assuming Proposal 2 is approved, the Class B Merger Consideration is
$97.50 (subject to increase under certain circumstances), and the Class A
Merger Consideration is $75.00 (subject to increase under certain
circumstances). Robert F.X. Sillerman, the Executive Chairman and Chairman of
the Board of Directors of SFX, and Michael G. Ferrel, the President, Chief
Executive Officer and a Director of SFX, hold 1,024,168 and 22,869 shares,
respectively, of the outstanding shares of Class B Common Stock, representing
all of the outstanding shares of that class. The aggregate premium to be paid
to the holders of Class B Common Stock (Messrs. Sillerman and Ferrel) in the
Merger is $23.6 million. Buyer was willing to pay a premium for the Class B
Common Stock because the vote of those shares is necessary to consummate the
transaction and because, as Class B stockholders, Messrs. Sillerman and
Ferrel could effectively block any competing offer. In conjunction therewith,
Mr. Sillerman agreed to vote for the Merger and against any competing
transaction pursuant to the Stockholder Agreement. Although the Board of
Directors and the Independent Committee received an opinion from Lehman
Brothers that, as of February 13, 1998, the consideration to be offered to
the holders of Class A Common Stock in the Merger and the Spin-Off (or
certain alternative dispositions of SFX Entertainment), taken together, is
fair from a financial point of view to those holders, Lehman Brothers'
opinion does not address the fairness of the consideration to be offered to
the holders of Class B Common Stock. See "--Background of the Merger,"
"--Opinion of Lehman Brothers" and "Proposal 2: Amendments to Certificate of
Incorporation Regarding the Merger Consideration."
Common Stock to Be Received in the Spin-Off
In the Spin-Off, the holders of Class A Common Stock, Series D Preferred
Stock, certain warrants to purchase common stock and interests in SFX's
director deferred stock ownership plan will receive shares of SFX
Entertainment Class A common stock, whereas, assuming Proposal 3 is approved,
Messrs. Sillerman and Ferrel, as the holders of the Class B Common Stock
(which is entitled to 10 votes per share on most matters), will receive SFX
Entertainment Class B common stock. The SFX Entertainment Class A common
stock and Class B common stock will have similar rights and privileges,
except that the SFX Entertainment Class B common stock will differ as to
voting rights roughly to the extent the Class A Common Stock and Class B
Common Stock presently differ. See the proposed
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Certificate of Incorporation of SFX Entertainment, attached as Annex E to
this Proxy Statement, for a complete description of the SFX Entertainment
Class A common stock and Class B common stock. The issuance of SFX
Entertainment Class B common stock in the Spin-Off is intended to preserve
Messrs. Sillerman's and Ferrel's relative voting power after the Spin-Off.
Mr. Sillerman is anticipated to be deemed to beneficially own approximately
45.7% of the combined voting power of SFX Entertainment after the Spin-Off,
assuming Proposal 3 is approved. Similarly, Messrs. Sillerman and Ferrel are
anticipated to be deemed to beneficially own approximately 51.0% of the
combined voting power of SFX Entertainment after the Spin-Off, assuming
Proposal 3 is approved. Accordingly, Messrs. Sillerman and Ferrel will be
able to control the outcome of the votes of the stockholders of SFX
Entertainment on most matters. Messrs. Sillerman and Ferrel serve as officers
and directors of SFX Entertainment, and it is anticipated that they will
enter into employment agreements with SFX Entertainment prior to the
Spin-Off, effective upon consummation of the Merger. However, if Proposal 3
is not approved, there can be no assurance that they will enter into any such
agreements or continue to serve in any such capacity, in which event SFX
intends to pursue alternative means of disposing of SFX Entertainment. See
"The Merger Agreement--Provisions Regarding the Spin-Off or an Alternate
Transaction," "The Spin-Off," "Proposal 3: Amendments to Certificate of
Incorporation Regarding the Spin-Off" and Annexes D and E.
Sillerman Consulting and Non-Competition Agreement and Stockholder Agreement
Concurrently with the execution of the Merger Agreement and as a condition
of the willingness of Buyer to enter into the Merger Agreement, Mr. Sillerman
entered into a Consulting, Non-Compete and Termination Agreement (the
"Consulting and Non-Competition Agreement"), dated August 24, 1997, with
Buyer and SFX. Pursuant to and subject to the terms of the Consulting and
Non-Competition Agreement, Mr. Sillerman tendered his resignation as an
officer and director of SFX, effective as of the Effective Time, and agreed
that his employment agreement with SFX would be terminated as of that time.
Mr. Sillerman agreed to release SFX, effective as of the Effective Time, from
all claims he may have then against SFX, whether arising out of his
employment agreement or otherwise, with certain specified exceptions,
including (a) the right to receive the Class A Merger Consideration and the
Class B Merger Consideration in respect of his shares of Class A Common Stock
and Class B Common Stock, (b) the right to exercise the options and warrants
issued by SFX to him and to receive in respect thereof the consideration
provided for in the Merger Agreement, (c) the right to receive options
pursuant to his employment agreement to purchase 25,000 shares of Class A
Common Stock, at a per share exercise price equal to the lowest per share
exercise price of any other options held by Mr. Sillerman, upon the
termination of his employment following a change of control of SFX, and (d)
the right to receive options pursuant to his employment agreement to purchase
300,000 shares of Class A Common Stock, at a per share exercise price equal
to the exercise price of the last stock option granted prior to termination,
upon the termination of his employment without cause.
Pursuant to the Consulting and Non-Competition Agreement, SFX will retain
Mr. Sillerman as an adviser and consultant concerning the management and
operation of SFX for a period of 2 years after the Effective Time. These
advisory and consulting services must not unreasonably interfere with Mr.
Sillerman's full-time employment, nor will Mr. Sillerman be required to
provide more than 250 hours of advisory and consulting services in any
calendar year. Mr. Sillerman further agreed in the Consulting and
Non-Competition Agreement not to disclose confidential information of SFX,
except as necessary in connection with the rendering of advisory and
financial services to SFX, for a period of 5 years after the Effective Time.
In the Consulting and Non-Competition Agreement, Mr. Sillerman agreed
that, for a period of 5 years commencing at the Effective Time, he would not
engage in, manage or operate any entity (or be connected as a stockholder,
director, officer, employee or agent of any entity) that engages in the
business of owning, operating or providing services to radio stations in
certain markets. The foregoing agreement does not prevent Mr. Sillerman from
owning up to 10% of a publicly traded company or from providing services to,
or owning securities in, (a) Triathlon Broadcasting Company ("Triathlon") and
The Marquee Group, Inc. ("Marquee"), two publicly traded companies in which
Mr. Sillerman has a substantial ownership interest and, in the case of
Marquee, in which he serves as the Chairman of the board of directors, or (b)
SFX Entertainment.
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In the Consulting and Non-Competition Agreement, SFX agreed to pay Mr.
Sillerman, at the Effective Time, $2.0 million for his agreement to provide
consulting services to SFX and $23.0 million for his agreement not to compete
with SFX.
Mr. Sillerman has also entered into the Stockholder Agreement, in his
capacity as a stockholder of SFX, pursuant to which he has agreed to, among
other things, vote his shares of Common Stock in favor of the Merger
Agreement and the Merger (Proposal 1) and the amendments to the Certificate
of Incorporation contained in Proposals 2 and 3 and against any acquisition
proposals regarding SFX (other than the Merger). See "--Sillerman Stockholder
Agreement."
Change of Control Arrangements
Pursuant to Messrs. Sillerman's and Ferrel's employment agreements with
SFX dated January 1, 1997 and November 22, 1996, respectively, each of them
is entitled to receive cash payments aggregating approximately $3.3 million
and $1.5 million, respectively, if his employment agreement is terminated
following a change of control of SFX. SFX Entertainment is obligated pursuant
to the Distribution Agreement to pay these amounts. In addition, if their
employment agreements are so terminated, Messrs. Sillerman and Ferrel are
entitled to receive options ("Change of Control Options") to purchase 650,000
shares of Class A Common Stock (300,000 of which would be at an exercise
price of $28.00 per share and 350,000 of which would be at an exercise price
of $8.38 per share) and 100,000 shares of Class A Common Stock (at an
exercise price of $13.75 per share), respectively. As part of the merger
negotiations, Messrs. Sillerman and Ferrel agreed to amend their employment
agreements to reduce the number of Change of Control Options that they would
otherwise be entitled to receive to 325,000 shares (300,000 of which would
remain at an exercise price of $28.00 per share and 25,000 of which would be
at an exercise price of $8.38 per share, for an aggregate cash value based on
the Class A Merger Consideration of approximately $15.8 million) and 70,000
shares (at an exercise price of $13.75 per share, for an aggregate cash value
based on the Class A Merger Consideration of approximately $4.3 million),
respectively. The value of the Change of Control Options relinquished by
Messrs. Sillerman and Ferrel (based solely on the Class A Merger
Consideration) was approximately $21.7 million and $1.8 million,
respectively. See "--Background of the Merger."
In addition, pursuant to SFX's director deferred stock ownership plan and
as partial consideration for their services as directors, each member of the
Independent Committee receives an annual fee of $20,000, payable in shares of
Class A Common Stock to a bookkeeping account maintained for that director.
Upon a change of control of SFX, such as the Merger, each of these directors'
bookkeeping accounts will be credited with the number of shares payable to
him for the calendar year, and he will be entitled to receive a cash payment
equal to the product of (a) the Class A Merger Consideration multiplied by
(b) the number of shares of Class A Common Stock held in his bookkeeping
account. As of the date of this Proxy Statement, 922 shares of Class A Common
Stock had been credited to each of these directors' accounts. Upon
consummation of the Merger, an additional $20,000 in shares will be deposited
in each director's account for the 1998 calendar year. Upon consummation of
the Merger, each of these directors will be entitled to receive the cash
value of his account, determined as set forth above. The plan also provides
that, if there is a change in the capitalization of SFX (such as the
Spin-Off), an appropriate adjustment will be made to the number and kind of
shares held in the directors' accounts. On January 15, 1998, the committee
overseeing the plan determined that the adjustment occasioned by the Spin-Off
would consist of the issuance to each plan participant of one share of SFX
Entertainment's Class A common stock per share of Class A Common Stock held
in that participant's account on the Spin-Off record date.
Stock Options, Stock Appreciation Rights and SCMC Warrants
The Merger Agreement provides that, at the Effective Time, holders of
outstanding options granted under SFX's stock option plans and holders of
stock appreciation rights ("SARs") will receive a cash payment for each
option or SAR held. The holders of options and SARs will receive the benefit
of this payment, whether or not their options or SARs have vested, and their
options and SARs will be canceled. The payment will be equal to the
difference between the Class A Merger Consideration and the per share
exercise price or base price of the option or SAR. As of the Record Date,
SFX's directors and executive officers held options and warrants to purchase
an aggregate of 870,685 shares of Class A Common Stock (of which options and
warrants to purchase 819,904 shares were exercisable within 60 days of
February 10, 1998) at a weighted average exercise price of $21.64 and SARs
(all of which are vested) relating to an
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aggregate of 29,000 shares of Class A Common Stock at a weighted average base
price of $26.15. Accordingly, these directors and executive officers will
receive an aggregate cash payment of approximately $15.9 million upon
exercise of their options and SARs.
In addition, in August 1997, the Board of Directors approved amendments to
certain warrants representing the right to purchase an aggregate of 600,000
shares of Class A Common Stock (the "SCMC Warrants") which had previously
been issued to Sillerman Communications Management Corporation, an entity
controlled by Mr. Sillerman ("SCMC"). The amendments memorialize the Board's
original intent at the time of issuance of the SCMC Warrants that SCMC
receive stock dividends paid prior to the exercise of the SCMC Warrants,
including the aggregate number of shares of SFX Entertainment Class A common
stock that it would have received if it had exercised the SCMC Warrants
immediately prior to the record date for the Spin-Off. See "--Background of
the Merger."
The board of directors of SFX Entertainment has approved the grant of
shares of SFX Entertainment's Class A common stock to holders as of the
Spin-Off record date of the stock options or SARs of SFX, whether or not
vested. These grants were approved by the SFX Entertainment board to allow
holders of these options and SARs to participate in the Spin-Off in a manner
similar to holders of Class A Common Stock. Additionally, many of the option
and SAR holders will become officers, directors or employees of SFX
Entertainment. Assuming no exercise of the underlying options and SARs before
the record date for the Spin-Off, these grants will result in the issuance of
an aggregate of approximately 793,633 shares of SFX Entertainment's Class A
common stock. Among those receiving shares will be all members of SFX's board
of directors.
Fees to Independent Committee
In connection with the Merger, Paul Kramer, James F. O'Grady and Edward
Dugan served as members of the Independent Committee, which evaluated the
fairness of the terms of the Merger and other acquisition proposals involving
SFX to the holders of Class A Common Stock. Each Independent Committee member
will receive a fee of $25,000 for serving as a member of the Independent
Committee. The fee was payable regardless of whether any proposal relating to
the acquisition of SFX, including the Merger, was approved by the Independent
Committee, the Board of Directors or the stockholders of SFX. On January 15,
1997, the Board of Directors approved the payment of an additional fee of
$25,000 to the Independent Committee in recognition of the substantial amount
of time and effort that the Independent Committee devoted to the evaluation of
the Merger and other acquisition proposals.
Directors' and Officers' Indemnification and Release
In the Merger Agreement, Buyer and the Surviving Corporation have agreed
to indemnify and hold harmless (to the fullest extent permitted by the DGCL)
the present and former directors, officers and employees of SFX and its
subsidiaries against all amounts paid in connection with any actual or
threatened legal suit based in whole or part on the fact that such person was
a director, officer or employee of SFX or any of its subsidiaries and
pertaining to any matter existing, or arising out of acts or omissions
occurring, at or prior to the Effective Time. The Merger Agreement also
obligates Buyer to maintain SFX's directors' and officers' liability
insurance covering the directors and officers of SFX on the date of the
Merger Agreement for at least 6 years after the Effective Time, but Buyer is
not required to pay annual premiums more than twice SFX's last annual
premium. See "The Merger Agreement--Covenants."
In addition, at the Effective Time, SFX and its subsidiaries (other than
SFX Entertainment and its subsidiaries) will release executive officers and
directors of SFX from all claims by SFX or its subsidiaries (other than SFX
Entertainment and its subsidiaries), except for claims arising from or
attributable to the transactions contemplated by the Merger Agreement or any
related document, or otherwise asserted prior to the Effective Time.
Concurrently with the execution of the Merger Agreement, Mr. Sillerman
waived his right to receive indemnification after the Effective Time with
respect to claims or damages relating to the Merger Agreement and the
transactions contemplated thereby from SFX, its subsidiaries, Buyer and Buyer
Sub, except to the extent that SFX can be reimbursed under the terms of its
directors' and officers' liability
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insurance for any such indemnification amounts. It is anticipated that, after
the Spin-Off, SFX Entertainment will agree to indemnify Mr. Sillerman (to the
extent permitted by law) for any such claims or damages. In addition,
pursuant to Mr. Sillerman's existing employment agreement with SFX (which
will be assumed by SFX Entertainment pursuant to the Merger Agreement), SFX
Entertainment will be obligated to indemnify Mr. Sillerman for one-half of
the cost of any excise tax assessed against him for any change-of-control
payments made to him by SFX in connection with the Merger.
Management and Board of Directors of SFX Entertainment
SFX anticipates that, upon completion of the Spin-Off, substantially all
of SFX's senior management will manage the business of SFX Entertainment.
Therefore, for any time period between the Spin-Off and the Merger, those
members of management will be simultaneously managing the businesses of both
SFX and SFX Entertainment.
Prior to the consummation of the Spin-Off, all of SFX's executive officers
are anticipated to enter into five year employment agreements with SFX
Entertainment, which will be effective upon consummation of the Merger. These
agreements are anticipated to provide for annual base salaries of $500,000,
$350,000, $325,000, $300,000 and $235,000 for Messrs. Sillerman, Ferrel,
Armstrong, Tytel and Benson, respectively. The agreements will also provide
for annual bonuses in the discretion of SFX Entertainment's board, as well as
other benefits and payments to be mutually agreed upon. In connection with
entering into the employment agreements, the SFX Entertainment board of
directors, upon review and recommendation of its compensation committee, has
approved restricted stock awards of 500,000 shares and 150,000 shares of SFX
Entertainment Class B common stock to Messrs. Sillerman and Ferrel,
respectively, and of 100,000 shares, 80,000 shares and 10,000 shares to
Messrs. Armstrong, Tytel and Benson, respectively. In addition, the SFX
Entertainment board of directors has also approved the issuance of stock
options, effective upon consummation of the Spin-Off, exercisable for
120,000, 50,000, 40,000, 25,000 and 10,000 shares of SFX Entertainment Class
A common stock to Messrs. Sillerman, Ferrel, Armstrong, Tytel and Benson,
respectively. The options will vest over five years and will have an exercise
price of $5.50 per share.
After the Spin-Off and before consummation of the Merger, these executive
officers will continue to devote such time as they deem necessary to conduct
the operations of SFX Entertainment consistent with their obligations to SFX.
If the Merger Agreement is terminated for any reason, these executive
officers will continue to perform services to both SFX and SFX Entertainment
until SFX is able to hire suitable replacements. SFX Entertainment and
Messrs. Sillerman and Ferrel have reached agreements in principle that those
individuals will serve as officers and directors of SFX Entertainment;
however, if Proposal 3 is not approved, there can be no assurance that they
will serve in any such capacity, in which event SFX intends to pursue
alternative means of disposing of SFX Entertainment. See "The Merger
Agreement--Provisions Regarding the Spin-Off or an Alternate Transaction,"
"The Spin-Off" and "Proposal 3: Amendments to Certificate of Incorporation
Regarding the Spin-Off."
Pursuant to the terms of the Merger Agreement, at the Effective Time, SFX
Entertainment will assume all obligations under any employment agreement or
arrangement (whether written or oral) between SFX or any of its subsidiaries
and any employee of SFX Entertainment (including Messrs. Sillerman and
Ferrel), other than obligations relating to Messrs. Sillerman's and Ferrel's
Change of Control Options and other than existing rights to indemnification.
These assumed obligations include the obligation to pay an aggregate of
approximately $4.5 million to Messrs. Sillerman and Ferrel upon termination
of their employment with SFX. See "--Change of Control Arrangements."
In addition, all of SFX's directors are anticipated to be directors of SFX
Entertainment subsequent to the Spin-Off. If the Merger Agreement is
terminated, Messrs. Dugan, Kramer and O'Grady have indicated that they will
promptly resign from their positions as directors of SFX Entertainment, and
the board of directors of SFX Entertainment will appoint three different
Class A Directors, to serve until the next annual meeting of the stockholders
of SFX Entertainment.
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, The Sillerman Companies, Inc.
("TSC"), MMR, Triathlon, Marquee, SFX Entertain-
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ment and SFX. In consideration for certain services provided by Mr. Tytel in
connection with those ventures, Mr. Tytel has received from Mr. Sillerman
either a minority equity interest in the businesses (with Mr. Sillerman
retaining the right to control the voting and disposition of Mr. Tytel's
interest) or cash fees in an amount mutually agreed upon. Although Mr. Tytel
has not been compensated directly by SFX (except for ordinary fees paid to
him in his capacity as a director), he receives compensation from TSC and
SCMC, companies controlled by Mr. Sillerman, as well as from Mr. Sillerman
personally, with respect to the services he provides to various entities
affiliated with Mr. Sillerman, including SFX. In 1997, these cash fees
aggregated approximately $5.0 million, a portion of which were paid from the
proceeds of payments made by SFX to Mr. Sillerman or entities controlled by
Mr. Sillerman and the proceeds from Mr. Sillerman's exercise for tax purposes
of options granted to him by SFX and subsequent sale of the underlying
shares. See "--Bonus Payments and Loan Forgiveness." It is anticipated that,
in connection with the consummation of the Merger and certain related
transactions, Mr. Tytel will receive shares of SFX Entertainment and cash
fees from TSC, SCMC and Mr. Sillerman personally in an amount to be
determined in the future. See "--Consideration to Be Received in the Merger,"
"--Sillerman Consulting and Non-Competition Agreement and Stockholder
Agreement" and "--Change of Control Arrangements." It is also anticipated
that Mr. Tytel will enter into an employment agreement directly with SFX
Entertainment that will be effective at the time of consummation of the
Merger. See "--Management and Board of Directors of SFX Entertainment."
BONUS PAYMENTS AND LOAN FORGIVENESS
On July 31, 1997, the Board of Directors approved the payment of a $1.0
million bonus to Mr. Ferrel and requested that the Compensation Committee
consider the reasonableness and fairness of the payment of a $10.0 million
bonus and the forgiveness of a $2.5 million loan (along with accrued but
unpaid interest thereon of approximately $100,000) previously made by the
Company to Mr. Sillerman. The Board authorized the Compensation Committee to
retain an independent, nationally recognized compensation consulting firm to
assist in its evaluation of the reasonableness and fairness of Mr.
Sillerman's bonus payment and loan forgiveness.
After interviewing a number of compensation consulting firms with
expertise in executive compensation, on August 18, 1997, the Compensation
Committee retained the firm of William M. Mercer Incorporated ("Mercer") to
undertake a study of the reasonableness of the amount of bonus and loan
forgiveness to be granted to Mr. Sillerman. The Compensation Committee held
several meetings with Mercer, and Mercer subsequently delivered a report and
opinion to the Compensation Committee that concluded that paying amounts
equal to the bonus and loan forgiveness would seem reasonable within the
broad market of executive compensation. In reaching their conclusion, Mercer
(a) performed a study of total compensation since 1993 of the top executives
at 10 public radio broadcasting companies, as compared to Mr. Sillerman's
compensation, (b) analyzed various financial indicators of these companies
versus SFX, both in terms of financial performance and stock price
performance, through July 31, 1997 and (c) reviewed the value to SFX of Mr.
Sillerman's services in the investment banking area in 12 transactions where
no fee was paid to any broker or investment banking firm. Based upon the
Mercer report and opinion, the Compensation Committee concluded that Mr.
Sillerman's bonus and loan forgiveness were reasonable and approved the bonus
and loan forgiveness.
The Board of Directors approved the payment of the $10.0 million bonus to
Mr. Sillerman and approved in principle the forgiveness of his $2.5 million
loan. The Company has paid Messrs. Sillerman's and Ferrel's bonuses, and Mr.
Sillerman's loan has been forgiven.
EFFECTIVE TIME
The Merger will be effective as of the date and time of filing of a
Certificate of Merger with the Secretary of State of the State of Delaware in
accordance with the provisions of the DGCL, or as otherwise provided in the
Certificate of Merger. Subject to the satisfaction or waiver of the closing
conditions set forth in the Merger Agreement, the Merger will be consummated
(the "Closing") on the earlier of (a) May 31, 1998 (subject to extension as
provided in the Merger Agreement) or (b) any other date specified by Buyer at
least any other date specified by Buyer at least 5 business days in advance
(but
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no earlier than 15 business days after the stockholder approval of Proposals
1 and 2, so long as that approval is obtained by April 24, 1998). See "The
Merger Agreement--Closing Extension and Adjustment to Merger Consideration."
The Merger may not occur for a period of several months subsequent to the
Special Meeting, and the information regarding SFX and SFX Entertainment is
likely to change materially from that contained or incorporated by reference
herein. Regardless of any changes in the information regarding SFX and SFX
Entertainment, SFX's stockholders will not be entitled to another vote on the
proposals contained herein.
CERTAIN EFFECTS OF THE MERGER
If the Merger is consummated, SFX's stockholders (other than holders of
Series E Preferred Stock) will not have an opportunity to continue their
equity interest in SFX's radio operations and, therefore, will not share in
future earnings and growth, if any, of those operations. If the Merger is
consummated, public trading of the shares of Class A Common Stock and the
Class B Warrants of SFX (the only publicly traded securities of SFX) will
cease, the shares of Class A Common Stock and the Class B Warrants of SFX
will cease to be quoted on The Nasdaq Stock Market Inc.'s National Market
System (the "Nasdaq National Market"), and the registration of the shares of
Class A Common Stock and the Class B Warrants of SFX under the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), will be terminated. As
a result, the Surviving Corporation will be relieved of the duty to file
informational reports under the Exchange Act.
For information concerning the federal income tax consequences of the
Merger, see "Federal Income Tax Consequences."
REGULATORY MATTERS
FCC Matters
The obligations of each of SFX, Buyer and Buyer Sub to consummate the
Merger are conditioned upon the FCC granting its consent to the transfer of
control in connection with the Merger of the FCC licenses held by SFX's radio
stations. On September 23, 1997, SFX, certain of its subsidiaries that hold
FCC licenses and Buyer applied with the FCC for the approval of transfer of
control of the licenses.
In the transfer of control application filed with the FCC, Buyer requested
waivers of the FCC's one-to-a-market rule in certain markets in order to
consummate the Merger, and acknowledged that consummation of the Merger would
result in Buyer's principals' owning more radio stations in certain markets
than currently permitted by FCC rules, absent divestitures of one or more
stations in those markets. SFX cannot predict whether the FCC will approve
the transfer of control of SFX's FCC licenses in sufficient time for the
Merger to be consummated in a timely manner, or at all.
HSR Act Matters
The Merger is also subject to antitrust review by the Department of
Justice (the "DOJ") and the Federal Trade Commission (the "FTC"). Under the
HSR Act, certain transactions, including the Merger, may not be consummated
until the parties have filed a notice with the DOJ and the FTC and certain
waiting period requirements have been satisfied. On September 23, 1997, SFX
and Buyer filed their respective Premerger Notification and Report Forms
pursuant to the HSR Act. The DOJ has requested additional information from
SFX concerning two cities in which SFX and Capstar Broadcasting Partners,
Inc. (an affiliate of Buyer) operate radio broadcasting stations. The DOJ is
apparently investigating whether, in these two cities (Jackson, Mississippi,
and Greenville, South Carolina), combining the companies may substantially
lessen competition for the sale of radio advertising. At any time before the
Effective Time, the DOJ, which is the primary agency that exercises antitrust
enforcement jurisdiction in the radio broadcasting industry, could take
action under the antitrust laws seeking to enjoin the Merger. SFX understands
that the Buyer has initiated separate transactions to address competitive
issues expressed by the DOJ in these two cities, and SFX believes that the
competitive circumstances in these cities can be satisfactorily addressed or
restructured and are not likely to prevent consummation of the Merger. In
addition, a state Attorney General in any state in which the combined
companies will operate radio stations could take an enforcement action to
enjoin consummation of the Merger.
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Additionally, the DOJ will likely attribute common control to all radio
stations owned by any entity associated with Hicks, Muse, Tate & Furst Equity
Fund III, L.P. ("Hicks Muse III"), which owns a controlling equity interest
in Buyer. A limited partnership associated with Hicks Muse III has a minority
equity interest in Chancellor Media Corporation ("Chancellor"). Chancellor
owns radio stations in two cities (Houston, Texas, and Pittsburgh,
Pennsylvania) where SFX operates radio stations. The DOJ is apparently
investigating whether in these two cities the relationship between the
combined companies and Chancellor may substantially lessen competition for
the sale of radio advertising. A lengthy investigation by the DOJ could delay
consummation of the Merger.
SFX and Chancellor are currently involved in a transaction in which SFX
would exchange its stations on Long Island, New York, for Chancellor's
stations in Jacksonville, Florida (the "Long Island Exchange"). SFX is
currently programming Chancellor's stations in Jacksonville, and Chancellor
is currently programming SFX's stations on Long Island, pursuant to a local
marketing agreement ("LMA"). On November 6, 1997, the DOJ filed a complaint
in federal district court seeking to enjoin the Long Island Exchange and to
terminate the LMA. The DOJ alleges that the Long Island Exchange will lessen
competition for the sale of radio advertising in Suffolk County, Long Island.
The litigation regarding the Long Island Exchange does not address the
Merger, but there can be no assurance that the litigation will not delay the
Merger.
SOURCE AND AMOUNT OF FUNDS
SFX has been advised that Buyer intends to finance its obligations under
the Merger Agreement through one or more financing transactions, which may
include (but are not limited to) the following: borrowings under a senior
bank facility, borrowings under one or more tranches of senior subordinated
debt, the issuance of one or more classes of preferred stock, the issuance of
one or more classes of equity securities and the issuance of rights to
purchase equity securities. As of the date of this Proxy Statement, however,
Buyer does not have any financing commitments in place. Buyer has not yet
determined how it will obtain its financing, and there can be no assurance
that Buyer will be able to obtain financing. Buyer's and Buyer Sub's
obligations under the Merger Agreement are not subject to any conditions
regarding their ability to obtain financing. The total cash cost to Buyer of
the Merger and related repayment of debt will be approximately $1.44 billion
(assuming that holders of certain notes and Series E Preferred Stock do not
accept any required change-of-control repurchase offer after the Merger). See
"Certain Considerations--Risks Related to Buyer's Ability to Obtain
Financing."
RIGHTS OF DISSENTING STOCKHOLDERS
Holders of record of shares of capital stock of SFX who follow the
appropriate procedures will be entitled to appraisal rights under Section 262
of the DGCL in connection with the Merger. The following discussion is not a
complete statement of the law pertaining to appraisal rights under the DGCL
and is qualified in its entirety by the full text of Section 262, which is
reprinted in its entirety as Annex C to this Proxy Statement. Except as set
forth herein, SFX's stockholders will not be entitled to appraisal rights in
connection with the Merger.
Under Section 262, record holders of capital stock of SFX who follow the
procedures set forth in Section 262 will be entitled to have their shares
appraised by the Delaware Court of Chancery and to receive payment of the
"fair value" of their shares, exclusive of any element of value arising from
the accomplishment or expectation of the Merger, together with a fair rate of
interest, as determined by the court. However, no holder of Common Stock who
votes in favor of the Merger will be entitled to exercise these rights.
Under Section 262, where a merger agreement is to be submitted for
approval and adoption at a meeting of stockholders, as in the case of the
Special Meeting, not less than 20 days prior to the meeting, SFX must notify
each of its stockholders of record at the close of business on the Record
Date that appraisal rights are available and include in each such notice a
copy of Section 262. THIS PROXY STATEMENT CONSTITUTES THE REQUIRED NOTICE TO
HOLDERS OF COMMON STOCK AND PREFERRED STOCK. Any stockholder who wishes to
exercise appraisal rights should review the following discussion and Annex C
carefully, because failure to timely and properly comply with the procedures
specified in Section 262 will result in the loss of appraisal rights under
the DGCL.
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A stockholder (including a holder of Preferred Stock) wishing to exercise
appraisal rights must deliver to SFX, before the vote on the approval and
adoption of the Merger Agreement at the Special Meeting, a written demand for
appraisal of the holder's shares of stock. A vote against the Merger will not
satisfy this requirement. In addition, a stockholder wishing to exercise
appraisal rights must hold of record the shares in question on the date the
written demand for appraisal is made and must continue to hold such shares
through the Effective Time.
Only a holder of record of shares of capital stock of SFX is entitled to
assert appraisal rights for the shares registered in that holder's name. A
demand for appraisal should be executed by or on behalf of the holder of
record fully and correctly, as the holder's name appears on the stock
certificates.
If the shares are owned of record in a fiduciary capacity, such as by a
trustee, guardian or custodian, execution of the demand should be made in
that capacity; if the shares are owned of record by more than one person, as
in a joint tenancy or tenancy in common, the demand should be executed by or
on behalf of all joint owners. An authorized agent, including one or more
joint owners, may execute a demand for appraisal on behalf of a holder of
record; however, the agent must identify the record owner or owners and
expressly disclose the fact that, in executing the demand, the agent is agent
for the record owner or owners. A record holder such as a broker who holds
shares as nominee for several beneficial owners may exercise appraisal rights
with respect to the shares held for one or more beneficial owners, while not
exercising appraisal rights with respect to the shares held for other
beneficial owners; in that event, the written demand should set forth the
number of shares as to which appraisal is sought (and, where no number of
shares is expressly mentioned, the demand will be presumed to cover all
shares held in the name of the record owner). Stockholders who hold their
shares in brokerage accounts or other nominee forms and who wish to exercise
appraisal rights are urged to consult with their brokers to determine the
appropriate procedures for the making of a demand for appraisal by the
nominee. All written demands for appraisal of shares should be mailed or
delivered to SFX Broadcasting, Inc., 650 Madison Avenue, New York, New York
10022, Attention: Secretary or Assistant Secretary, so as to be received
before the vote on the approval and adoption of the Merger Agreement at the
Special Meeting.
Stockholders electing to exercise their appraisal rights under Section 262
must not vote for adoption of the Merger Agreement. Accordingly, a vote
against Proposal 1, or an abstention with respect to Proposal 1, will not
prevent a stockholder from exercising appraisal rights, but a vote in favor
of Proposal 1 will prevent the stockholder from exercising appraisal rights.
However, if a stockholder returns a signed proxy but does not specify a vote
against Proposal 1 or a direction to abstain, then the proxy, if not revoked,
will be voted for Proposal 1, which will have the effect of waiving that
stockholder's appraisal rights.
Within 10 days after the Effective Time, SFX, as the Surviving
Corporation, must send a notice as to the effectiveness of the Merger to each
person who has satisfied the appropriate provisions of Section 262. Within
120 days after the Effective Time, but not thereafter, SFX, or any holder of
shares entitled to appraisal rights under Section 262 who has complied with
the foregoing procedures, may file a petition in the Delaware Court of
Chancery demanding a determination of the fair value of such shares. SFX is
not under any obligation, and has no present intention, to file a petition
with respect to the appraisal of the fair value of the shares. Accordingly,
it is the obligation of the stockholders to initiate all necessary action to
perfect their appraisal rights within the time prescribed in Section 262.
Within 120 days after the Effective Time, any record holder of shares who
has complied with the requirements for exercise of appraisal rights will be
entitled, upon written request, to receive from SFX a statement setting forth
the aggregate number of shares of SFX stock with respect to which demands for
appraisal have been received and the aggregate number of holders of such
shares. The statements must be mailed within 10 days after SFX receives a
written request therefor.
If a petition for an appraisal is timely filed, then, after a hearing on
the petition, the Delaware Court of Chancery will determine the holders of
shares entitled to appraisal rights and will appraise the "fair value" of the
shares, exclusive of any element of value arising from the accomplishment or
expectation of the Merger, together with a fair rate of interest, if any, to
be paid upon the amount determined to be the fair value. Holders considering
seeking appraisal should be aware that the fair value of their shares
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as determined under Section 262 could be more than, the same as or less than
the value of the Merger consideration that they would otherwise receive if
they did not seek appraisal of their shares. The Delaware Supreme Court has
stated that "proof of value by any techniques or methods which are generally
considered acceptable in the financial community and otherwise admissible in
court" should be considered in the appraisal proceedings. More specifically,
the Delaware Supreme Court has stated that: "Fair value, in an appraisal
context, measures 'that which has been taken from the shareholder, viz., his
proportionate interest in a going concern.' In the appraisal process the
corporation is valued 'as an entity,' not merely as a collection of assets or
by the sum of the market price of each share of its stock. Moreover, the
corporation must be viewed as an on-going enterprise, occupying a particular
market position in the light of future prospects." In addition, Delaware
courts have decided that the statutory appraisal remedy, depending on factual
circumstances, may or may not be a stockholder's exclusive remedy. The
Delaware Court of Chancery will also determine the amount of interest, if
any, to be paid upon the amounts to be received by persons whose shares have
been appraised. The costs of the action may be determined by the court and
taxed upon the parties as the court deems equitable. The court may also order
that all or a portion of the expenses incurred by any stockholder in
connection with an appraisal (including, reasonable attorneys' fees and the
fees and expenses of experts utilized in the appraisal proceeding, among
others) be charged pro rata against the value of all of the shares entitled
to appraisal.
Any holder of shares who has duly demanded an appraisal in compliance with
Section 262 will not, after the Effective Time, be entitled to vote the
shares subject to the demand for appraisal for any purpose, and will not be
entitled to the payment of dividends or other distributions on those shares
(except dividends or other distributions payable to holders of record of
shares of the same class or series of stock as of a date prior to the
Effective Time).
If any stockholder who demands appraisal of shares under Section 262 fails
to perfect, or effectively withdraws or loses, the right to appraisal
provided in the DGCL, then that holder's shares will be converted into the
appropriate Merger consideration, without interest, in accordance with the
Merger Agreement. A holder of shares will fail to perfect, or will
effectively lose, the right to appraisal if no petition for appraisal is
filed within 120 days after the Effective Time. A holder may withdraw a
demand for appraisal by delivering to SFX a written withdrawal of the demand
for appraisal and acceptance of the Merger, except that any such attempt to
withdraw made more than 60 days after the Effective Time will require the
written approval of SFX.
Failure to follow the steps required by Section 262 for perfecting
appraisal rights may result in the loss of appraisal rights.
The foregoing is a summary of certain of the provisions of Section 262. It
is qualified in its entirety by reference to the full text of Section 262,
which is attached to this Proxy Statement as Annex C.
ACCOUNTING TREATMENT
The Merger will be treated by the Buyer as a "purchase," as that term is
used under generally accepted accounting principles, for accounting and
financial reporting purposes.
CERTAIN LEGAL PROCEEDINGS
On August 29, 1997, two lawsuits were commenced against SFX and its
directors in the Court of Chancery of the State of Delaware (New Castle
County). The plaintiffs in the lawsuits are Harbor Finance Partners (C.A. No.
15891) and Steven Lieberman (C.A. No. 15901). The complaints are identical
and allege that the consideration to be paid as a result of the merger to the
holders of Class A Common Stock is unfair and that the individual defendants
have breached their fiduciary duties. Both complaints seek to have the
actions certified as class actions and seek to enjoin the merger, or, in the
alternative, to obtain monetary damages. The defendants have filed answers
denying the allegations, and discovery has commenced. In November 1997, the
lawsuits were consolidated in one action entitled In Re SFX Broadcasting,
Inc. Shareholders Litigation (C.A. No. 15891). SFX and its directors will
defend the consolidated lawsuits vigorously.
SFX is also a party to certain regulatory proceedings and litigation. See
"--Regulatory Matters."
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THE MERGER AGREEMENT
The following is a summary of the material provisions of the Merger
Agreement, and does not purport to be a complete description of the Merger
Agreement. It is qualified in its entirety by reference to the copy of the
Merger Agreement attached hereto as Annex A, which is incorporated herein by
reference. STOCKHOLDERS ARE URGED TO READ THE MERGER AGREEMENT IN ITS
ENTIRETY FOR A COMPLETE DESCRIPTION OF THE MERGER.
THE MERGER
If SFX's stockholders approve the Merger Agreement, the Merger and the
amendments to the Certificate of Incorporation contained in Proposal 2, and
if the other conditions to the Merger are satisfied or waived, then, at the
Effective Time, Buyer Sub will be merged with and into SFX, with SFX
continuing as the Surviving Corporation and a wholly-owned subsidiary of
Buyer.
Upon the consummation of the Merger, pursuant to the Merger Agreement,
each issued and outstanding share (other than shares held by persons who
exercise dissenters' appraisal rights) of SFX's: (a) Class A Common Stock
will be converted into the right to receive $75.00 in cash (subject to
increase under certain circumstances described below), without interest, (b)
Class B Common Stock will be converted into the right to receive $97.50 in
cash (subject to increase under certain circumstances described below),
without interest, (c) Series C Preferred Stock will be converted in to the
right to receive $1,000, plus any accrued but unpaid dividends, in cash,
without interest, and (d) Series D Preferred Stock will be converted into the
right to receive an amount equal to the product of (i) the Class A Merger
Consideration and (ii) the number of shares of Class A Common Stock into
which each share of Series D Preferred Stock would have been convertible
immediately prior to the Effective Time, in cash, without interest. The Class
A Merger Consideration and the Class B Merger Consideration are subject to
adjustment under the circumstances described below under "--Provisions
Regarding the Spin-Off or an Alternate Transaction," "--Closing Extension and
Adjustment to Merger Consideration" and "The Spin-Off--The Distribution
Agreement--Working Capital."
Each issued and outstanding share of Series E Preferred Stock will
continue to be outstanding after the Effective Time as 12 5/8% Series E
Cumulative Exchangeable Preferred Stock of the Surviving Corporation. In
addition, the 2006 Notes and the 2000 Notes that are outstanding at the
Effective Time will continue to be outstanding after the Effective Time as
debt instruments of the Surviving Corporation.
Stockholders who do not vote in favor of Proposal 1, and who comply with
the provisions of the DGCL regarding the exercise of statutory dissenters'
appraisal rights, have the right to seek a determination and payment of the
fair value of their shares in lieu of the consideration set forth in the
Merger Agreement. See "Proposal 1: The Merger--Rights of Dissenting
Stockholders."
Promptly after the Effective Time, transmittal forms will be mailed to
each holder of record of shares of Common Stock and Preferred Stock (other
than the Series E Preferred Stock). The transmittal forms should be used in
forwarding the holder's stock certificates for surrender and exchange for
cash pursuant to the Merger Agreement. After receipt of a transmittal form,
each holder of certificates formerly representing shares of Common Stock and
Preferred Stock (other than the Series E Preferred Stock) should surrender
the certificates to Chase Mellon Shareholder Services, L.L.C., the Paying
Agent, and will receive from the Paying Agent cash as set forth above.
Instructions specifying other details of the exchange will accompany the
transmittal forms. After the Effective Time, each certificate previously
evidencing shares of Common Stock and Preferred Stock (other than Series E
Preferred Stock) will be deemed for all purposes to evidence only the right
to receive the consideration set forth in the Merger Agreement.
STOCKHOLDERS SHOULD NOT SEND IN THEIR STOCK CERTIFICATES UNTIL THEY
RECEIVE A TRANSMITTAL FORM.
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WARRANTS AND OPTIONS
Each warrant to purchase shares of Class A Common Stock granted by SFX
(including its Class B Warrants) that is outstanding at the Effective Time
will continue to be outstanding after the Effective Time (subject to the
terms and conditions contained in the appropriate warrant agreement) and will
be exercisable for cash and, to the extent described below under "The
Spin-Off," stock of SFX Entertainment. Each option granted by SFX (including
the stock options of MMR assumed by SFX in November 1996 in its acquisition
of MMR), whether or not they are then exercisable, will be canceled at the
Effective Time. Each holder of a canceled option will be entitled to receive,
in consideration for the cancellation, cash equal to the difference between
the Class A Merger Consideration and the per share exercise price of the
canceled option, without interest. See "Proposal 1: The Merger--Interests of
Certain Persons in the Merger--Stock Options, Stock Appreciation Rights, SCMC
Warrants and Deferred Stock Interests."
PROVISIONS REGARDING THE SPIN-OFF OR AN ALTERNATE TRANSACTION
The Merger Agreement also contains various provisions regarding the terms
and conditions of the Spin-Off, an Alternate Transaction or the inclusion of
SFX's live entertainment business in the Merger.
Spin-Off
The Merger Agreement requires Buyer and SFX to in good faith mutually
agree on the definitive documentation necessary to effectuate the Spin-Off
and document the contractual relationship between SFX Entertainment and SFX.
The Merger Agreement requires the Spin-Off documentation to be consistent
with certain principles set forth in the Merger Agreement (including the
payment of Working Capital). Based upon these principles, before the Spin-Off
SFX and SFX Entertainment will enter into a Distribution Agreement (the
"Distribution Agreement"), a form of which is attached as Annex F, a Tax
Sharing Agreement (the "Tax Sharing Agreement") and an Employee Benefits
Agreement (the "Employee Benefits Agreement"). See "The Spin-Off," Annex D
and Annex F.
Alternate Transaction
The Merger Agreement allows SFX to dispose of SFX Concerts, Inc. (formerly
known as Delsener/Slater Enterprises, Inc.) in any manner other than the
Spin-Off, if the Spin-Off would violate applicable law or any material
agreement to which SFX or any of its subsidiaries is a party (an "Alternate
Transaction"). However, the terms of any such Alternate Transaction must not
delay the consummation of the Merger and must not be materially more adverse
to SFX or Buyer than the Spin-Off. Any adverse financial changes resulting
from an Alternate Transaction must be appropriately reflected in Working
Capital. To the extent that any Alternate Transaction results in fixed and
determinable financial benefits to Buyer when compared to the Spin-Off, the
Class A Merger Consideration and Class B Merger Consideration will be
adjusted in an aggregate amount equal to the increase in benefits. See
"Certain Considerations--Changes in SFX and SFX Entertainment."
Inclusion of the Business of SFX Entertainment in the Merger
Buyer and Buyer Sub will not be required to consummate the Merger unless
the Spin-Off or an Alternate Transaction has been or is consummated as well.
However, if neither the Spin-Off nor an Alternate Transaction is consummated
at or prior to the Closing, Buyer may still elect to consummate the Merger,
in which case the Class A Merger Consideration and the Class B Merger
Consideration will be increased by the quotient of $42.5 million divided by
the fully diluted number of shares of Common Stock outstanding immediately
prior to the Effective Time (an increase of approximately $2.73 in each of
the Class A and Class B Merger Consideration). Notwithstanding the foregoing,
if the Spin-Off does not occur prior to the Closing, SFX intends to
consummate an Alternate Transaction, in which the aggregate consideration to
be received would likely exceed $42.5 million, and does not anticipate that
SFX's live entertainment business will be sold to Buyer or that the Class A
Merger Consideration or the Class B Merger Consideration will be so
increased.
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REPAYMENT OF CERTAIN INDEBTEDNESS
Pursuant to the Merger Agreement, at or prior to the Closing, Buyer must
repay all of SFX's indebtedness under SFX's senior credit facility (the
"Credit Agreement") and must release related liens on property or assets
subject to the Spin-Off or an Alternate Transaction. Alternatively, Buyer may
refinance the indebtedness under the Credit Agreement or obtain waivers from
the lenders under the Credit Agreement for the transactions contemplated by
the Merger Agreement, subject to certain restrictions. As of December 31,
1997, SFX had outstanding borrowings of $313.0 million under the Credit
Agreement, which currently bears interest at an annual rate of 8.16%.
REPRESENTATIONS AND WARRANTIES
The Merger Agreement contains various representations and warranties by
SFX relating to, among other things, (a) the organization and good standing
of SFX and its subsidiaries, (b) the capital structure of SFX, (c) the
corporate power and authority of SFX to enter into the Merger Agreement and
the other agreements executed simultaneously therewith and to consummate the
transactions contemplated thereby, (d) the lack of conflict of the
Transaction Documents with (i) the certificate of incorporation or by-laws or
comparable organizational documents of SFX or its subsidiaries or (ii)
agreements of SFX or its subsidiaries or statutes or regulations, (e) the
documents filed with the Securities and Exchange Commission (the "SEC") and
the accuracy of the information contained therein, (f) the absence, since
June 30, 1997, of certain changes, (g) litigation, (h) employee benefits, (i)
taxes, (j) governmental approvals and permits, (k) material contracts, (l)
FCC matters, (m) environmental matters, (n) real property matters and (o)
transactions with affiliates of SFX.
The Merger Agreement contains representations and warranties of Buyer and
Buyer Sub relating to, among other things, (a) the organization and good
standing of Buyer and Buyer Sub, (b) the corporate power and authority of
Buyer and Buyer Sub to enter into the Transaction Documents and to consummate
the transactions contemplated thereby, (c) litigation and (d) the solvency of
the Surviving Corporation immediately after the Effective Time and the
ability of the Surviving Corporation immediately after the Effective Time to
comply with certain financial representations of SFX contained in the
indenture relating to the 2006 Notes and the certificate of designations
relating to the Series E Preferred Stock. In addition, Buyer and Buyer Sub
represented and warranted that Buyer has available, or at the Closing will
have available, sufficient funds to enable Buyer to consummate the
transactions contemplated by the Transaction Documents and acknowledged that
Buyer's and Buyer Sub's obligations under the Merger Agreement are not
subject to any conditions regarding their ability to obtain financing.
COVENANTS
SFX has agreed that, until the Effective Time, it will, and will cause its
subsidiaries to, carry on their businesses in the ordinary and usual course,
and (except as contemplated by the Merger Agreement) it will not, and will
not permit its subsidiaries to, without the consent of Buyer, among other
things, (a) declare or pay dividends or other distributions or sell or
acquire any shares of its capital stock, (b) amend the Certificate of
Incorporation or by-laws of SFX, (c) acquire or sell any assets, (d) incur
indebtedness or make loans, (e) modify or terminate any material contract,
(f) fail to act in the ordinary course of business consistent with past
practices to (i) preserve substantially intact SFX's and each subsidiary's
present business organization, (ii) keep available the services of certain
employees or (iii) preserve its relationships with customers, suppliers and
others, (g) fail to use commercially reasonable efforts to maintain SFX's
assets, (h) merge or consolidate with any other entity or dissolve or
liquidate any material subsidiary, (i) materially increase the compensation
or benefits of any director, officer or employee, (j) pay, discharge or
satisfy certain material claims or liabilities, (k) enter into a local
marketing agreement, joint sales agreement or similar agreement with any
entity other than Buyer, (l) engage in any transaction with any of its
affiliates, other than transactions that do not contain any ongoing
obligations of SFX after the Closing and would not reasonably be expected to
have a material adverse effect on SFX or to materially delay or prevent the
consummation of the transactions contemplated by the Transaction Documents or
(m) authorize, commit or agree to take any of the foregoing transactions.
None of the foregoing prohibitions prohibits the Spin-Off or an Alternate
Transaction.
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Buyer has agreed that, until the Effective Time, it will, and will cause
its subsidiaries to, carry on their businesses in the ordinary and usual
course, unless SFX otherwise agrees in writing or except as otherwise
required by the Merger Agreement.
SFX is obligated to obtain, or use its commercially reasonable efforts to
obtain, prior to the Effective Time, an agreement from holders of options and
SARs issued by SFX. In this agreement, the holders agree to cancel their
options and SARs and will receive in return a per share amount equal to the
Common Stock Merger Consideration less the exercise price per option or base
price per SAR.
SFX is required to cause its outstanding indebtedness as of immediately
prior to the Effective Time to consist only of borrowings under the 2000
Notes, the 2006 Notes and its senior credit facility. As of December 31,
1997, approximately $908,000 of indebtedness must be retired by SFX prior to
the Effective Time.
SFX and Buyer are required to use all reasonable efforts to complete the
Merger, to file an application requesting the FCC Consent for the transfer of
control of SFX's radio stations resulting from the Merger and to file all
documents required under the HSR Act. Without the prior written consent of
Buyer, SFX is prohibited, with certain exceptions, from taking any action
that could impair or delay obtaining the FCC Consent or complying with or
satisfying the terms thereof. The FCC application was filed on September 23,
1997, and has not been granted to date. The filing under the HSR Act was made
on September 23, 1997, and the DOJ has requested additional information from
SFX. See "Proposal 1: The Merger--Regulatory Matters."
The Merger Agreement contains certain additional provisions requiring the
Surviving Corporation to (a) provide certain employee benefits, (b) indemnify
officers, directors and employees and (c) maintain directors' and officers'
liability insurance. See "Proposal 1: The Merger--Interests of Certain
Persons in the Merger--Directors' and Officers' Indemnification and Release."
CLOSING EXTENSION AND ADJUSTMENT TO MERGER CONSIDERATION
The "Termination Date" is May 31, 1998, subject to extension by Buyer for
up to 3 months, in 1-calendar-month intervals; however, if Buyer does so, the
Class A Merger Consideration and the Class B Merger Consideration will each
increase by $1.00 for each calendar month of extension. No increase will be
paid, however, if (a) the FCC Consent or the termination of the HSR Act
waiting period is not obtained after all other conditions to the Merger have
been satisfied, and the Merger is delayed because of (i) acts or omissions by
SFX or its subsidiaries in conducting their respective operations and
activities (other than acts or omissions relating to the number of licenses
or amount of revenues in a particular market), (ii) a breach by SFX of its
obligations under the Merger Agreement or (iii) certain statutory changes or
enactments relating to radio license ownership or (b) the Merger is
restrained by a judicial order, under certain circumstances. Under certain
circumstances, if any judicial order delaying the Merger is lifted, and if
Buyer fails to consummate the Merger within 10 days thereafter, then the
Class A Merger Consideration and the Class B Merger Consideration will be
increased by $2.00 for each calendar month (or partial calendar month)
between the Termination Date and the Closing Date. If any judicial order is
not lifted by August 31, 1998, then either SFX or Buyer may extend the date
of the Closing for an additional 45 days. However, if (a) neither SFX nor
Buyer elect to extend the Closing for an additional 45 days or (b) the
Closing is so extended but the order is not lifted by the end of the 45-day
period, then the Merger Agreement will terminate without any liability or
obligation to the parties other than obligations to split the FCC and HSR Act
filing fees.
NO SOLICITATION
Until the termination of the Merger Agreement, SFX, its subsidiaries and
their representatives are prohibited from soliciting, initiating or
encouraging the submission of any Takeover Proposal, or discussing,
negotiating, or furnishing information regarding any Takeover Proposal.
However, prior to the receipt of stockholder approval of the Merger Agreement
and the Merger and Proposal 2, SFX and its
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<PAGE>
representatives may under certain circumstances, in order to comply with the
fiduciary duties of the Board of Directors, furnish information and negotiate
regarding any unsolicited Takeover Proposal meeting certain criteria. The
Merger Agreement requires SFX to keep Buyer fully informed of the status and
details of any Takeover Proposal.
In addition, neither the Board of Directors nor the Independent Committee
may (a) withdraw or modify, in a manner adverse to Buyer, their approval of
the Merger or (b) approve or recommend any Takeover Proposal. However, this
prohibition does not apply to certain Takeover Proposals which are on more
favorable terms to SFX's stockholders than the Merger, if SFX terminates the
Merger Agreement.
CONDITIONS
The obligations of each party to consummate the Merger are subject to the
satisfaction or waiver of the following conditions: (a) SFX's stockholders
must approve the Merger Agreement, the Merger and the amendments to the
Certificate of Incorporation contained in Proposal 2, (b) the FCC Consent
must be granted, (c) the waiting period under the HSR Act must expire or
terminate and (d) there must be no injunction or other legal restraint on the
Merger.
The obligations of Buyer and Buyer Sub to consummate the Merger are
subject to the satisfaction or waiver of the following additional conditions:
(a) the accuracy of SFX's representations and warranties in the Merger
Agreement, (b) SFX's performance of its obligations pursuant to the Merger
Agreement, (c) the finality of the FCC Consent, (d) obtaining releases of
options and stock appreciation rights from SFX's executive officers and
directors and assumptions by SFX Entertainment of their employment
agreements, (e) consummation of the Spin-Off or an Alternate Transaction and
(f) obtaining material third party consents to the Merger. Buyer's and Buyer
Sub's obligations under the Merger Agreement are not subject to any
conditions regarding their ability to obtain financing. If Buyer waives
condition (e) above, it must pay an additional $42.5 million in Merger
consideration. See "--Provisions Regarding the Spin-Off or an Alternate
Transaction--Inclusion of the Business of SFX Entertainment in the Merger."
The obligations of SFX to consummate the Merger are subject to the
satisfaction or waiver of the following additional conditions: (a) the
accuracy of Buyer's and Buyer Sub's representations and warranties in the
Merger Agreement, (b) Buyer's and Buyer Sub's performance of their
obligations pursuant to the Merger Agreement and (c) if Proposals 1 and 2
(but not 3) are approved, the passage of 45 days since the date of the vote
(but if the 45-day period would end after May 14, 1998, it will be deemed to
end on May 14, 1998).
TERMINATION; FEES AND EXPENSES; LETTER OF CREDIT
The Merger Agreement may be terminated:
(a) By the mutual written consent of SFX, Buyer and Buyer Sub.
(b) By either SFX or Buyer if SFX's stockholders do not approve the Merger
Agreement, the Merger and the amendments to the Certificate of Incorporation
contained in Proposal 2 at the Special Meeting (or an adjournment thereof) or
if no stockholder vote is held before the Termination Date (unless the Merger
is permanently enjoined or prohibited). If the Merger Agreement is terminated
as set forth in this paragraph, SFX must pay Buyer a termination fee of $25.0
million (and an additional $25.0 million if, within 1 year of the
termination, either SFX enters into a Takeover Proposal or 50% of the capital
stock of SFX is acquired in a tender offer) and must reimburse Buyer for its
reasonable out-of-pocket expenses (not to exceed $2.5 million).
(c) By either SFX or Buyer if the Merger is not consummated on or before
the Termination Date. See "--Closing Extension and Adjustment to Merger
Consideration."
(d) By either SFX or Buyer if the Merger is permanently prohibited or
enjoined. If the prohibition or injunction arises from litigation involving
SFX and its stockholders and the Merger Agreement is terminated as set forth
in this paragraph, then SFX must pay Buyer $10.0 million (and an additional
$40.0 million if, within 1 year of the termination, either SFX enters into a
Takeover Proposal or 50% of
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the capital stock of SFX is acquired in a tender offer) and must reimburse
Buyer for its reasonable out-of-pocket expenses (not to exceed $10.0
million).
(e) By Buyer if (i) SFX breaches any representation or warranty contained
in the Merger Agreement, unless the breach has no material adverse effect on
SFX, or (ii) SFX fails to perform its obligations under the Merger Agreement.
However, Buyer may not terminate if the breach or failure to perform is cured
within 30 days after notice thereof.
(f) By SFX if (i) Buyer or Buyer Sub breaches any representation or
warranty contained in the Merger Agreement, unless the breach has no material
adverse effect on Buyer's ability to perform its obligations under the Merger
Agreement, or (ii) Buyer and Buyer Sub fail to perform their obligations
under the Merger Agreement. However, SFX may not terminate if the breach or
failure to perform is cured within 30 days after notice.
(g) By SFX if (i) before obtaining stockholder approval of the Merger
Agreement, the Merger and Proposal 2, the Board of Directors determines, in
certain circumstances, to terminate the Merger Agreement in order for SFX to
enter into an agreement relating to a Superior Proposal (as defined in the
Merger Agreement), (ii) SFX notifies Buyer of the Superior Proposal, and
(iii) within 5 business days from receipt of the notice, Buyer does not offer
to revise the terms of the Merger or the Board of Directors determines in
good faith, after receiving advice from its financial adviser, that the
Superior Proposal is superior to Buyer's revised offer. If the Merger
Agreement is terminated as set forth in this paragraph, SFX must pay Buyer a
termination fee of $50.0 million and must reimburse Buyer for its reasonable
out-of-pocket expenses (not to exceed $2.5 million).
(h) By Buyer if (i) a tender or exchange offer for 50% or more of the
capital stock of SFX is commenced and the Board of Directors fails to
recommend that SFX's stockholders not tender their shares, or (ii) a Takeover
Proposal is announced and the Board of Directors fails to reaffirm its
recommendation of the Merger. If the Merger Agreement is terminated as set
forth in this paragraph, SFX must pay Buyer a termination fee of $50.0
million and must reimburse Buyer for its reasonable out-of-pocket expenses
(not to exceed $2.5 million).
Simultaneously with the execution of the Merger Agreement, Buyer placed
into escrow an irrevocable letter of credit for $100.0 million. The escrowed
amount must be released to SFX if the Merger Agreement is terminated because:
(a) the Merger has not been consummated on or before the Termination Date,
and, as of that date, the FCC Consent is not granted or the applicable
waiting period under the HSR Act has not expired or been terminated, in each
case other than primarily for certain reasons that are outside Buyer's
control; (b) the Merger is permanently prohibited or enjoined (other in
litigation involving SFX and its stockholders); or (c) SFX terminates the
Merger Agreement as described in paragraph (f) above. The release of the
letter of credit to SFX will be its sole remedy if the Merger Agreement is
terminated as discussed above.
If the Merger Agreement is terminated for reasons other than those for
which the Merger Agreement provides liquidated damages, the non-breaching
party will be entitled to recover its damages and expenses from the other
party or parties.
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THE SPIN-OFF
This section of the Proxy Statement describes certain aspects of the
proposed Spin-Off. To the extent that they relate to the Distribution
Agreement, the following descriptions do not purport to be complete and are
qualified in their entirety by reference to the Distribution Agreement, a
form of which is included in this Proxy Statement as Annex F. ALL
STOCKHOLDERS ARE URGED TO READ THE DISTRIBUTION AGREEMENT IN ITS ENTIRETY. In
addition, stockholders are urged to read the SFX Entertainment prospectus
attached as Annex D for a more complete description of SFX Entertainment.
BUSINESS OF SFX ENTERTAINMENT
SFX, through its newly-formed wholly-owned subsidiary, SFX Entertainment,
Inc., is a leading promoter of, and operator of venues for, live
entertainment events, including music concerts. Upon consummation of its
pending acquisitions, SFX Entertainment will be a diversified promoter and
producer of live entertainment, including music concerts, theatrical shows
and specialized motor sports events. In addition, SFX Entertainment's venue
network (currently comprised of 20 venues) will consist of 40 venues
(consisting of amphitheaters, theaters and clubs) either directly owned or
operated under lease or exclusive booking arrangement. During 1997,
approximately 1.4 million people attended approximately 210 events promoted
and/or produced by SFX Entertainment, including approximately 200 music
concerts. During the same year, approximately 25 million people attended
9,100 events promoted and/or produced by SFX Entertainment and the businesses
to be acquired in SFX Entertainment's pending acquisitions, including
approximately 3,880 music concerts, 4,850 theatrical shows and 188
specialized motor sports events.
SFX Entertainment's core business is the promotion and production of live
entertainment events, most significantly for concert and other music
performances in venues owned and/or operated by SFX Entertainment and in
third-party venues. As promoter, SFX Entertainment typically markets events
and tours, sells tickets, rents or otherwise provides event venues and
arranges for local production services (such as stage, set, sound and
lighting). As producer, SFX Entertainment, upon consummation of its pending
acquisitions, will (a) create tours for music concert, theatrical,
specialized motor sports and other events, (b) develop and manage
Broadway-style touring theatrical shows and (c) develop specialized motor
sports and other live entertainment events. In connection with its live
entertainment events, SFX Entertainment also derives related revenue streams,
including from the sale of corporate sponsorships and advertising, the sale
of concessions and the merchandising of a broad range of products. On a pro
forma basis giving effect to SFX Entertainment's pending acquisitions, SFX
Entertainment's music and ancillary businesses would have comprised
approximately 77%, theater would have comprised approximately 17% and
specialized motor sports would have comprised approximately 6% of SFX
Entertainment's total net revenues for the 12 months ended September 30,
1997.
SFX Entertainment was formed as a subsidiary of SFX in 1997. SFX acquired
Delsener/Slater Enterprises, Ltd., a New York-based concert promotion
company, in January 1997. Delsener/Slater Enterprises, Ltd. has long-term
leases or is the exclusive promoter for several of the major concert venues
in the New York City metropolitan area, including the Jones Beach
Amphitheater, a 14,000-seat complex located in Wantagh, New York, and the PNC
Bank Arts Center (formerly known as the Garden State Arts Center), a
17,500-seat complex located in Holmdel, New Jersey. In March 1997,
Delsener/Slater Enterprises, Ltd. acquired a 37-year lease to operate the
Meadows Music Theater, a 25,000-seat indoor/outdoor complex located in
Hartford, Connecticut. In June 1997, SFX acquired Sunshine Promotions, Inc.,
a concert promoter in the Midwest, and certain other related companies. As a
result of the acquisition of Sunshine Promotions, SFX Entertainment owns the
Deer Creek Music Theater, a 21,000-seat complex located in Indianapolis,
Indiana, and the Polaris Amphitheater, a 20,000-seat complex located in
Columbus, Ohio, and has a long-term lease to operate the Murat Centre, a
2,700-seat theater and 2,200-seat ballroom located in Indianapolis, Indiana.
In December 1997, SFX Entertainment agreed to consummate its pending
acquisitions, which consist of the acquisition of the operations of PACE and
Pavilion Partners (collectively, the "PACE Acquisition"), Contemporary (the
"Contemporary Acquisition"), BG Presents, Inc. (the "BGP Acquisition"),
Network (the "Network Acquisition") and Concerts Southern (the "Concerts
Southern Acquisition").
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The aggregate purchase price of these acquisitions is expected to be
approximately $484.3 million, consisting of approximately $352.8 million in
cash, $75.3 million in repaid liabilities and the issuance of approximately
4.2 million shares of SFX Entertainment's Class A common stock with an
attributed negotiated value of $56.2 million. There can be no assurance that
the value attributed by the parties to SFX Entertainment's capital stock will
approximate the actual trading price of the stock. SFX Entertainment has
obtained partial financing for these acquisitions through a $350.0 million
private placement of debt, and anticipates obtaining the additional funds
needed from borrowings under a proposed $300.0 million senior credit
facility. SFX Entertainment anticipates consummating its pending acquisitions
in the first quarter of 1998. However, the timing and completion of the
pending acquisitions are subject to a number of conditions, certain of which
are beyond SFX Entertainment's control (including availability of sufficient
financing) and there can be no assurance that any Pending Acquisitions will
be consummated during that period on the terms described herein, or at all.
SFX Entertainment currently owns and/or operates under lease or exclusive
booking arrangement a total of 9 venues (2 amphitheaters and 2 theaters in
the New York--Northern New Jersey--Long Island market, 1 amphitheater and 1
theater/ballroom in the Indianapolis market, 1 amphitheater in the Columbus
market, 1 amphitheater in the Hartford market and 1 amphitheater in the
Rochester market). The following table summarizes the amphitheaters, theaters
and other venues to be owned and/or operated under lease or exclusive booking
arrangement by SFX Entertainment on a pro forma basis after giving effect to
its pending acquisitions. There can be no assurance that any or all of the
pending acquisitions will be consummated.
<TABLE>
<CAPTION>
NUMBER OF TOTAL
MARKET NUMBER OF THEATERS AND TOTAL SEATING
MARKET RANK(1)AMPHITHEATERS(2) CLUBS(2) VENUES(2) CAPACITY
- ---------------------------------------- -------- -------------- -------------- --------- ---------------
<S> <C> <C> <C> <C> <C>
New York--Northern New Jersey--Long
Island.................................. 1 2 2 4 37,570
Los Angeles--Riverside--Orange County ... 2 2 -- 2 40,500(3)
San Francisco--Oakland--San Jose ........ 5 2 4 6 49,499(4)
Philadelphia--Wilmington--Atlantic City . 6 1 -- 1 25,000
Dallas--Fort Worth....................... 9 1 -- 1 20,100
Houston--Galveston--Brazoria............. 10 1 1 2 15,800
Atlanta.................................. 12 2 2 4 28,250
St. Louis................................ 17 1 2 3 24,100
Phoenix--Mesa............................ 18 1 -- 1 20,000
Pittsburgh............................... 19 1 -- 1 22,500
Kansas City.............................. 24 1 2 3 30,000
Sacramento--Yolo......................... 26 -- 1 1 N/A(4)
Indianapolis............................. 28 1 1 2 23,700
Columbus................................. 30 1 -- 1 20,000
Charlotte--Gastonia--Rock Hill........... 32 1 -- 1 18,000
Hartford................................. 36 1 -- 1 25,000
Rochester................................ 39 1 -- 1 12,700
Nashville................................ 41 1 -- 1 20,100
Oklahoma City............................ 43 1 -- 1 9,000
Raleigh--Durham--Chapel Hill............. 47 1 -- 1 20,000
West Palm Beach--Boca Raton.............. 50 1 -- 1 20,000
Reno..................................... 119 1 -- 1 8,500
-------------- -------------- --------- ---------------
Total .................................. 25 15 40 490,319(3),(4)
</TABLE>
- ------------
(1) Based on the July 1994 population of metropolitan statistical areas as
set forth in the 1996 Statistical Abstracts of the United States.
(2) Does not include venues in the 31 markets where SFX Entertainment sells
subscriptions for touring Broadway-style theatrical shows.
(3) Additional seating of approximately 40,000 is available for certain
events.
(4) Club seating, which cannot be accurately determined because clubs
typically have either open or reserved seating for any given event, is
not reflected.
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For a more complete description of the business of SFX Entertainment, see
its prospectus attached as Annex D.
ANTICIPATED STRUCTURE OF THE SPIN-OFF
Pursuant to the Merger Agreement, SFX has contributed all of the capital
stock of SFX Concerts, Inc. (formerly known as Delsener/Slater Enterprises,
Inc.) to SFX Entertainment, and must, prior to the Closing, distribute pro
rata to the holders of Common Stock, in a taxable transaction, all of the
capital stock owned by SFX in SFX Entertainment. The Spin-Off is a condition
precedent to Buyer's obligation to proceed with the Merger and is being done
to facilitate the Merger (which the Board has determined is in the best
interests of SFX's stockholders), by excluding from the Merger SFX's live
entertainment business (which Buyer did not wish to acquire on terms
acceptable to SFX). See "The Merger Agreement--Provisions Regarding the
Spin-Off or an Alternate Transaction." Even if the Merger does not occur for
any reason, SFX intends to consummate the Spin-Off (or, if necessary, an
Alternate Transaction). However, there can be no assurance that SFX will
effectuate the Spin-Off on the terms described below, or at all.
In the Spin-Off, assuming that Proposal 3 is approved by the stockholders
of SFX, the holders of Class A Common Stock, Series D Preferred Stock,
certain warrants and interests under SFX's director deferred stock ownership
plan will receive SFX Entertainment Class A common stock, having features
similar to the Class A Common Stock, and the holders of Class B Common Stock
will receive SFX Entertainment Class B common stock, having features similar
to the Class B Common Stock. Prior to the Spin-Off, SFX Entertainment will
amend and restate its certificate of incorporation to, among other things,
increase its authorized capital stock and will issue to SFX, in exchange for
the issued and outstanding shares of stock of SFX Entertainment then held by
SFX, the number of shares of SFX Entertainment's common stock necessary to
consummate the Spin-Off. See the proposed Certificate of Incorporation of SFX
Entertainment, attached as Annex E to this Proxy Statement, for a complete
description of the SFX Entertainment Class A common stock and Class B common
stock, and "Proposal 3: Amendments to Certificate of Incorporation Regarding
the Spin-Off." The economic rights of shares of Class A Common Stock and
Class B Common Stock of SFX are identical, but the voting rights differ in
that each share of Class A Common Stock is entitled to 1 vote per share and
each share of Class B Common Stock is generally entitled to 10 votes per
share. For a description of the capital stock of SFX Entertainment, see
"Description of Capital Stock" in Annex D hereto and the proposed certificate
of incorporation of SFX Entertainment set forth as Annex E hereto. The
Spin-Off will be a dividend distribution to the holders at the close of
business on a date to be determined by the Board of Directors (the "Spin-Off
Record Date") of the outstanding shares of Common Stock, Series D Preferred
Stock, certain warrants and interests under SFX's director deferred stock
ownership plan and will be made as follows:
(a) holders of Class A Common Stock will receive 1 share of SFX
Entertainment Class A common stock per share of Class A Common Stock
held;
(b) holders of Class B Common Stock will receive 1 share of SFX
Entertainment Class B common stock per share of Class B Common Stock
held;
(c) holders of Series D Preferred Stock will receive the number of shares
of SFX Entertainment Class A common stock obtained by multiplying the
number of shares of Series D Preferred Stock held by 1.0987 (rounded
down to the next whole share);
(d) SFX will place in escrow an aggregate of approximately 609,858 shares
of SFX Entertainment Class A common stock for delivery to the holders
of the SCMC Warrants and the warrants granted by SFX to the
underwriters of MMR's initial public offering (the "IPO Warrants" and,
together with the SCMC Warrants, the "Warrants") upon exercise of such
Warrants; and
(e) SFX will issue an aggregate of 2,766 shares of SFX Entertainment Class
A common stock to participants in SFX's director deferred stock
ownership plan.
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Fractional shares of SFX Entertainment common stock will not be delivered
in the Spin-Off. If Proposal 3 is approved and the Spin-Off is consummated,
Mr. Sillerman may be deemed to beneficially own approximately 6.9% of the
shares of SFX Entertainment Class A common stock and 89.9% of the shares of
SFX Entertainment Class B common stock, which together will represent
approximately 45.7% of the combined voting power of the SFX Entertainment
common stock.
In connection with the Spin-Off, it is likely that the Merger Agreement
will require either SFX Entertainment to make a payment to SFX, or SFX to
make a payment to SFX Entertainment, in respect of Working Capital (including
repayment of funds provided by SFX to SFX Entertainment). As of September 30,
1997, SFX estimates that Working Capital to be received by SFX Entertainment
would have been approximately $2.1 million (not including downward
adjustments of at least $2.1 million). See "--The Distribution
Agreement--Working Capital."
The receipt of shares of SFX Entertainment common stock in the Spin-Off
will be taxable to the recipients of shares. See "Certain Federal Income Tax
Consequences."
The Spin-Off is subject to further action by the Board of Directors, which
must set the Spin-Off Record Date and declare the dividend effectuating the
Spin-Off. STOCKHOLDER APPROVAL OF THE SPIN-OFF IS NOT REQUIRED, AND YOUR
APPROVAL OF THE SPIN-OFF IS NOT BEING SOUGHT. HOWEVER, PROPOSAL 3 MUST BE
APPROVED IN ORDER TO ALLOW SFX TO CONSUMMATE THE SPIN-OFF, AS CURRENTLY
CONTEMPLATED.
SFX Entertainment has filed an application to list the SFX Entertainment
Class A common stock on the Nasdaq National Market following the Spin-Off
but may seek listing on an exchange. However, there is currently no public
trading market for the SFX Entertainment Class A common stock, and there can
be no assurance that there will be an active market in shares of SFX
Entertainment Class A common stock after the Spin-Off.
The Spin-Off will be accounted for by SFX as a nonmonetary distribution to
stockholders, based on the historical cost of related assets. SFX
Entertainment will also record the Spin-Off at historical cost. See "--The
Tax Sharing Agreement."
It is anticipated that after the effectiveness of the Merger there will be
no substantial continuing business relationships between SFX and SFX
Entertainment, other than relationships that may be entered into from time to
time in the future after arm's-length negotiations between SFX (as controlled
by Buyer) and SFX Entertainment.
THE DISTRIBUTION AGREEMENT
Before the Spin-Off, SFX, SFX Entertainment and Buyer will enter into the
Distribution Agreement, which contains the terms and conditions pursuant to
which SFX and SFX Entertainment propose to separate their businesses. SFX has
agreed that, prior to the Effective Time, SFX will (to the extent requested
by Buyer) cause SFX Entertainment and its subsidiaries to perform their
obligations under the Distribution Agreement. Stockholders are urged to read
the Distribution Agreement, a form of which is attached as Annex F. The terms
and conditions of the Distribution Agreement include the following:
Manner of Effecting the Spin-Off
The Distribution Agreement provides for the distribution of shares of SFX
Entertainment's common stock to the holders of record on the Spin-Off record
date of SFX's common stock, Series D Preferred Stock, interests in SFX's
director deferred stock ownership plan and, upon exercise, certain warrants,
as described in "--Anticipated Structure of the Spin-Off."
Transfer and Assumption of Assets and Obligations
The Distribution Agreement provides that, at the time of the Spin-Off, SFX
Entertainment will assume (a) certain of SFX's leases and employment
agreements, (b) debt and liabilities incurred by SFX Entertainment or its
subsidiaries after the date of the Merger Agreement in connection with
acquisitions and capital expenditures, (c) liabilities under an airplane
lease, (d) liabilities under an agreement pursuant
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to which TSC provides services to Triathlon and (e) any other debt and
liabilities that SFX Entertainment deems appropriate. SFX is obligated to use
its commercially reasonable efforts to release SFX Entertainment and its
subsidiaries from all other debt and accrued liabilities prior to the
Effective Time.
SFX Entertainment will be entitled to all of SFX's accounts receivable
relating to SFX's live entertainment business. SFX will transfer to SFX
Entertainment, prior to the Spin-Off:
o an airplane lease;
o fees payable by Triathlon for services provided by TSC;
o two real estate leases and assets located on the leased property;
o a note receivable relating to the sale of SFX's radio stations
operating in Myrtle Beach;
o the employment agreements of certain employees of SFX; and
o all other assets used primarily by SFX Entertainment.
SFX Entertainment will assume all of SFX's and its subsidiaries' obligations
accruing after the date of the Spin-Off under the above agreements and in
connection with the transfer of assets and employees.
Transferred Employees
If the Spin-Off occurs prior to the closing date of the Merger, SFX's
senior management and certain other employees of SFX will devote as much time
as they deem reasonably necessary to conduct the operations of SFX
Entertainment, while continuing to serve in their present capacities with,
and consistent with their obligations to, SFX. At the time of consummation of
the Merger, SFX Entertainment will assume all obligations arising under any
employment agreement or arrangement between SFX or any of its subsidiaries
and the employees who are transferred to SFX Entertainment other than rights,
if any, under those employment agreements to receive options after a change
of control and all existing rights of indemnification.
Working Capital
Pursuant to the Distribution Agreement (and as required by the Merger
Agreement), SFX Entertainment and SFX have agreed to allocate funds between
them for working capital. If the Spin-Off occurs prior to the consummation of
the Merger, then, immediately after the Spin-Off, SFX's management will
allocate working capital between SFX Entertainment and SFX, and SFX will pay
to SFX Entertainment any positive amount allocated to SFX Entertainment. In
any event, at least five business days before the consummation of the Merger,
SFX must provide SFX Entertainment with a good faith estimate of Working
Capital (as defined below) as of the date of consummation of the Merger (the
"Estimated Working Capital"). If the Estimated Working Capital is a positive
number, then SFX must pay to SFX Entertainment an amount equal to the
Estimated Working Capital at the time of consummation of the Merger. On the
other hand, if the Estimated Working Capital is a negative number, then SFX
Entertainment must pay to SFX an amount equal to the Estimated Working
Capital at the time of consummation of the Merger.
As soon as practicable (and in any event within ninety days) after the
Merger is consummated, SFX must deliver to SFX Entertainment an audited
statement of Working Capital as of the date of consummation of the Merger. If
SFX Entertainment does not object to SFX's Working Capital statement within
fifteen days following delivery thereof, then the Working Capital reflected
on SFX's Working Capital statement will be the "Final Working Capital." If
SFX Entertainment does so object, then the issues in dispute will be
submitted to a major national accounting firm for resolution and to determine
the "Final Working Capital."
On the third business day after the Final Working Capital is determined,
SFX or SFX Entertainment, as the case may be, must pay to the other an amount
equal to the Final Working Capital, less the Estimated Working Capital
previously paid, together with interest on the absolute value of the
difference at an annual rate of 10% beginning on the date of consummation of
the Merger and ending on the date
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of payment of the amount (the "Working Capital Adjustment Amount"). However,
if SFX Entertainment notifies SFX prior to the payment date that it wishes to
have all or any portion of the Final Working Capital (the "Merger
Consideration Adjustment") treated as an adjustment to the consideration
payable in connection with the Merger, then the consideration payable in
connection with the Merger will be increased by an amount equal to the
quotient of the Merger Consideration Adjustment divided by the fully diluted
number of shares of SFX's common stock outstanding immediately prior to the
consummation of the Merger, and SFX must promptly distribute (a) the
appropriate amount to the appropriate holders, immediately prior to the
consummation of the Merger, of SFX's common stock and Series D preferred
stock, (b) upon exercise, the appropriate amount to holders of options,
warrants and unit purchase options of SFX unexercised immediately prior to
the consummation of the Merger and (c) the appropriate amount to holders of
options, warrants and unit purchase options of SFX who exercised their
securities on and after the time of the Closing and prior to the final
payment date. If SFX Entertainment elects to treat any portion of the Final
Working Capital as a Merger Consideration Adjustment, then SFX Entertainment
must pay SFX the difference, if any, between the Merger Consideration
Adjustment and the Working Capital Adjustment Amount so that the aggregate
net amount to be paid or received (as the case may be) by SFX is equal to the
amount that would have been paid or received if the Merger Consideration
Adjustment had not been made.
"Working Capital" means the sum of all current assets of SFX and its
consolidated subsidiaries minus the sum of all current liabilities of SFX and
its consolidated subsidiaries, as of the point in time immediately prior to
the consummation of the Merger, adjusted (without duplication) by:
(a) increasing Working Capital by 50% (up to $1.0 million) of all fees and
expenses incurred by SFX in connection with acquiring consents from
holders of SFX's Series E Preferred Stock and certain of its
outstanding notes in connection with the transactions contemplated by
the Merger Agreement;
(b) increasing (if a positive number) or decreasing (if a negative number)
Working Capital by the product of (A) $75.00 (or any other amount
payable to holders of SFX's Class A common stock) and (B) the
difference between 15,589,083 less the sum of the fully diluted number
of shares of SFX common stock outstanding immediately prior to the
time of consummation of the Merger (excluding up to 250,838 shares of
SFX's common stock subject to a right of repurchase granted by SFX in
connection with an acquisition);
(c) reducing Working Capital by the difference between $84,554,649 less
the sum of (A) the aggregate exercise price of all options, warrants
and unit purchase options of SFX outstanding immediately prior to the
Merger consummation plus (B) the aggregate exercise price of all
warrants underlying unit purchase options of SFX outstanding
immediately prior to the Merger consummation plus (C) the aggregate
base price of all SARs of SFX outstanding immediately prior to the
Merger consummation;
(d) reducing Working Capital by the product of (A) $42 and (B) up to
250,838 shares of SFX's common stock subject to a right of repurchase
by SFX granted in connection with an acquisition;
(e) increasing Working Capital by all permitted radio-related capital
expenditures paid by SFX and its subsidiaries after June 30, 1997 and
immediately prior to the Merger consummation;
(f) decreasing Working Capital by all accrued capital expenditures of SFX
as of immediately prior to the Merger consummation (to the extent not
reflected in current liabilities);
(g) increasing Working Capital by accrued but not yet payable dividends;
(h) except as required by clause (i) below, excluding from Working Capital
any liabilities attributable to indebtedness of SFX;
(i) excluding from Working Capital any liabilities included in clauses (i)
through (iv) of clause (k) below;
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(j) reducing Working Capital by unpaid costs, fees and expenses of SFX
arising out of, based on or that will arise from the transactions
contemplated by the Merger Agreement (other than as a result of
actions taken by Buyer Sub) (including amounts relating to the
termination of any employees, broker fees, legal fees, accounting
fees, advisory fees and fees incurred in connection with third party
consents, waivers and amendments of creditors or holders of SFX's
preferred stock);
(k) reducing Working Capital by the amount of SFX's Excess Debt (as
defined below), if a positive number, or increasing Working Capital
by the amount of the Excess Debt, if a negative number. "Excess
Debt" means, as of immediately prior to the consummation of the
Merger, the difference between the sum of the following and $899.7
million:
(i) the difference between (A) indebtedness of SFX and its subsidiaries,
less (B) the difference between $70.0 million and any amounts (other
than the reimbursement of expenses) actually received by SFX and its
consolidated subsidiaries after August 24, 1997, under agreements
relating to the sale or local marketing arrangement (the local
marketing payments may not exceed $30,000 per month) of its WVGO-FM
and the sale or local marketing arrangement of its Jackson/Biloxi
radio stations, less (C) any indebtedness incurred to finance
acquisitions approved by Buyer of stock of or substantially all of
the assets of radio stations, less (D) interest accrued as of
immediately prior to the consummation of the Merger that is not then
due and payable,
(ii) the aggregate merger consideration payable to holders of SFX's
Series C preferred stock (which SFX anticipates will be $2.0
million),
(iii) the aggregate liquidation preference amount of SFX's Series E
Preferred Stock, and
(iv) environmental costs or liabilities accrued and not paid after June
30, 1997, to the extent they exceed $100,000 in the aggregate; and
(l) reducing Working Capital by the difference between (i) 142,032
times the highest of (A) the average of the last sales price of
Series E Preferred Stock during the 15 business days ending on the
date of consummation of the Merger, or (B) the average of the last
sales price of the Series E Preferred Stock during the 15 business
days preceding February 9, 1998 ($115.08), and (ii) $14,203,200
(the "Series E Adjustment").
Working Capital will not include any asset transferred to SFX
Entertainment or any of its subsidiaries, any liability assumed by SFX
Entertainment or any liability to which none of SFX or any of its
subsidiaries is a party immediately after the consummation of the Merger. Any
computation of Working Capital should assume that the Spin-Off has been
consummated. As of September 30, 1997, Working Capital payable by SFX to SFX
Entertainment would have been approximately $2.1 million (excluding the
Series E Adjustment). The actual amount of Working Capital as of the closing
of the Merger may differ substantially from the amount in existence as of
September 30, 1997, and will be a function of, among other things, the
operating results of SFX through the date of the Merger and the actual cost
of consummating the Merger and the related transactions and other obligations
of SFX, including the payment of dividends and interest on SFX's debt.
Acquisitions and Capital Improvements
SFX and SFX Entertainment have agreed that SFX Entertainment may, from
time to time, (a) acquire additional businesses engaged in the Entertainment
Business or (b) make capital improvements on assets owned or leased by it or
its subsidiaries. In each case, SFX must loan SFX Entertainment the funds
with which to consummate acquisitions and capital improvements. However, all
amounts so borrowed by SFX Entertainment must be repaid on the date of the
Spin-Off. SFX may increase the borrowing availability under its credit
agreement for these purposes, and must use its best efforts to obtain any
required or desirable waivers, consents or modifications under any financing
or other agreement of SFX in connection with the acquisitions or capital
improvements.
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If SFX Entertainment makes such additional acquisitions or capital
improvements, it will be required to obtain financing to repay the amounts
that it borrows from SFX, which financing may take the form of public or
private sales of debt or equity securities, bank credit or other financing.
See "--Working Capital." However, there can be no assurance that SFX
Entertainment will be able to obtain such financing on advantageous terms, or
at all. If SFX Entertainment obtains a loan from SFX and is unable to obtain
financing to repay SFX as of the date of the Spin-Off, SFX will be in breach
of the Merger Agreement.
As of January 31, 1998, SFX had advanced approximately $8.0 million to SFX
Entertainment for use in connection with certain acquisitions and capital
expenditures. SFX Entertainment intends to repay these amounts from the
proceeds of the Financing. SFX may advance additional amounts to SFX
Entertainment for these purposes before the consummation of the Spin-Off.
Release and Indemnification
Pursuant to the Distribution Agreement, SFX has agreed to release SFX
Entertainment and its subsidiaries and affiliates (other than SFX and its
subsidiaries) and all persons who at any time prior to the date of the
Spin-Off were stockholders, directors, agents or employees of SFX
Entertainment or its subsidiaries from any and all claims arising from any
acts or events occurring or failing to occur or any conditions existing on or
before the date of the Spin-Off (other than claims arising from transactions
contemplated by the Distribution Agreement, the Merger Agreement and certain
related agreements). Similarly, SFX Entertainment has agreed to release SFX,
its affiliates (other than SFX Entertainment and its subsidiaries) and all
persons who at any time prior to the date of the Spin-Off were stockholders,
directors, agents or employees of SFX or its subsidiaries from any and all
claims arising from any acts or events occurring or failing to occur or any
conditions existing on or before the date of the Spin-Off (other than claims
arising from transactions contemplated by the Distribution Agreement, the
Merger Agreement and certain related agreements).
The Distribution Agreement requires SFX Entertainment to indemnify, defend
and hold SFX and its subsidiaries (other than SFX Entertainment and its
subsidiaries) and each of its directors, officers, employees and agents
harmless from and against any liabilities (other than income tax liabilities)
to which SFX or any of its subsidiaries (other than SFX Entertainment and its
subsidiaries) may be or become subject that (a) relate to the assets,
business, operations, debts or liabilities of SFX Entertainment and its
subsidiaries(including liabilities to be assumed by SFX Entertainment as
contemplated in the Distribution Agreement), whether arising prior to,
concurrent with or after the Spin-Off or (b) result from a breach by SFX
Entertainment or its subsidiaries of any representation, warranty or covenant
contained in the Distribution Agreement or any related agreements.
The Distribution Agreement requires SFX to indemnify, defend and hold the
SFX Entertainment Group and each of its directors, officers, employees and
agents harmless from and against any liabilities (other than income tax
liabilities) to which the SFX Entertainment Group may be or become subject
that (a) relate to the assets, business, operations, debts or liabilities of
SFX or its subsidiaries (other than the SFX Entertainment Group), whether
arising prior to, concurrent with or after the Spin-Off or (b) result from a
breach by SFX or its subsidiaries (other than SFX Entertainment) of any
representation, warranty or covenant contained in the Distribution Agreement
or any related agreements.
The release and indemnification obligations contained in the Distribution
Agreement will survive the Spin-Off for a period of six years (and thereafter
as to any claims for indemnification asserted prior to the expiration of that
period).
Registration Statement and Consent Solicitation Documents
SFX Entertainment has represented to SFX that SFX Entertainment's
registration statement filed with the SEC with respect to the Spin-Off and
the consent solicitation documents sent to the holders of certain of SFX's
securities did not, at the time they became effective or were mailed, contain
any untrue statement of a material fact or omit to state a material fact
required to be stated in order to make the statements in the registration
statement and the consent solicitation documents, in light of the
circumstances under which they were made, not misleading.
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Related Agreements
SFX and SFX Entertainment have agreed that any tax sharing agreement to
which they are parties must be terminated as of the effective date of the
Spin-Off. In addition, the Distribution Agreement requires SFX and SFX
Entertainment to enter into the Tax Sharing Agreement and Employee Benefits
Agreement (as described below) on or before the date of the Spin-Off.
Use of Names; Intellectual Property
At the closing of the Merger, SFX will assign to SFX Entertainment or its
designee the name "SFX," together with all causes of action and the right to
recover for past infringements of that name. As soon as commercially
practicable, but no later than six months from the consummation of the
Merger, SFX must cease all use of the name "SFX" or other trademarks, trade
names or their identifiers owned by, licensed to, or transferred pursuant to
the Distribution Agreement to SFX Entertainment.
Conditions to the Spin-Off
Pursuant to the Distribution Agreement, the obligations of SFX
Entertainment and SFX to consummate the Spin-Off will be subject to the
fulfillment or waiver of each of the following conditions:
o SFX's board of directors must be satisfied that SFX's surplus (as
defined under Delaware law) would be sufficient to permit the Spin-Off
under Delaware law and must formally approve the Spin-Off;
o SFX Entertainment's registration statement must be declared effective
by the SEC, and no stop order may be issued or pending with respect
thereto;
o the SFX Entertainment Class A common stock must be accepted for listing
or trading, subject to official notice of issuance, on a national
exchange or The Nasdaq Stock Market;
o all necessary third party consents to the Spin-Off must be obtained;
o the necessary stockholder approvals must be obtained to consummate the
Spin-Off as presently contemplated;
o there must not be in effect any temporary restraining order,
preliminary or permanent injunction or other order issued by any court
of competent jurisdiction or other legal restraint or prohibition
preventing the consummation of the Spin-Off;
o SFX Entertainment and SFX must enter into the Tax Sharing Agreement and
the Employee Benefits Agreement (described below); and
o each of the covenants and provisions in the Distribution Agreement
required to be performed or complied with prior to the Spin-Off must be
performed or complied with.
SFX's board of directors is entitled to waive any of the above conditions
prior to the Spin-Off.
Expenses of Spin-Off
Pursuant to the Distribution Agreement, all fees and expenses incurred in
connection with the Spin-Off will be paid by the party incurring them.
Termination of the Merger Agreement
If the Merger Agreement is terminated in accordance with its terms for any
reason, the boards of directors of SFX and SFX Entertainment will each
appoint a committee of independent directors (none of whom will serve on both
boards of directors) to negotiate in good faith with respect to all matters
that they deem necessary to effectuate the separation of the affairs of SFX
and SFX Entertainment, including the employment of employees to be
transferred to SFX Entertainment pursuant to the Distribution Agreement. No
adjustments will be made to the initial allocation of working capital between
SFX and SFX Entertainment if the Merger Agreement is terminated in accordance
with its terms.
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Amendment or Modification
SFX and SFX Entertainment can only amend the Distribution Agreement by
written agreement with the consent of Buyer (which may not be unreasonably
withheld).
Termination
The Distribution Agreement may be terminated and the Spin-Off abandoned at
any time before the date of the Spin-Off by, and in the sole discretion of,
SFX. In the event of such a termination, no party will have any liability to
any other party.
THE TAX SHARING AGREEMENT
Prior to the Spin-Off, SFX and SFX Entertainment will enter into the Tax
Sharing Agreement. Under the Tax Sharing Agreement, SFX Entertainment will
agree to pay to SFX the amount of the tax liability of SFX and SFX
Entertainment combined, to the extent properly attributable to SFX
Entertainment for the period up to and including the Spin-Off, and will
indemnify SFX for any tax adjustment made in subsequent years that relates to
taxes properly attributable to SFX Entertainment during the period prior to
and including the Spin-Off. SFX, in turn, will indemnify SFX Entertainment
for any tax adjustment made in years subsequent to the Spin-Off that relates
to taxes properly attributable to the SFX during the period prior to and
including the Spin-Off. SFX Entertainment also will be responsible for any
taxes of SFX resulting from the Spin-Off, including any income taxes to the
extent that the income taxes result from gain on the distribution that
exceeds the net operating losses of SFX and SFX Entertainment available to
offset gain resulting from the Spin-Off.
THE EMPLOYEE BENEFITS AGREEMENT
Prior to the Spin-Off, SFX and SFX Entertainment will enter into an
Employee Benefits Agreement. Pursuant to the Employee Benefits Agreement, SFX
and SFX Entertainment will agree to take all actions necessary or appropriate
so that, as of the Spin-Off, SFX Entertainment and its subsidiaries will no
longer be participating employers and sponsors of the 401(k), health, group
term life insurance, long term disability insurance and cafeteria plans
maintained by SFX (collectively, the "SFX Employee Benefit Plans"). The
Employee Benefits Agreement will also provide for the treatment of the
benefits under the SFX Employee Benefit Plans of employees being transferred
from SFX to SFX Entertainment or who are otherwise employed by SFX
Entertainment upon the Spin-Off. With respect to employees transferred from
SFX to SFX Entertainment or who are otherwise employed by SFX Entertainment
upon the Spin-Off, SFX will have sole responsibility for retaining and
discharging any claims that are incurred on or prior to the date of their
transfer under SFX Employee Benefit Plans that are not 401(k) plans. On or
prior to the Spin-Off, SFX Entertainment will continue to pay premiums and
contributions under the SFX Employee Benefit Plans in accordance with its
past practices and procedures, except that any premiums and contributions for
the month in which the Spin-Off occurs shall be paid as soon as practicable
after that month and pro-rated. To the extent the account balances under the
401(k) plan maintained by SFX of employees being transferred from SFX to SFX
Entertainment or who are otherwise employed by SFX Entertainment upon the
Spin-Off are not distributed, SFX and SFX Entertainment must take all actions
necessary or appropriate to effect their transfer to a 401(k) plan
established by SFX Entertainment.
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CERTAIN FEDERAL INCOME TAX CONSEQUENCES
The following discussion sets forth certain federal income tax
consequences of the Merger and the Spin-Off applicable to stockholders that
hold their shares as capital assets within the meaning of Section 1221 of the
Internal Revenue Code of 1986, as amended (the "Code"). However, the
discussion does not address all federal income tax considerations that may be
relevant to particular stockholders in light of their specific circumstances,
such as stockholders who are dealers in securities, foreign persons or
stockholders who acquired their shares in connection with stock options or
stock purchase warrants. Each stockholder is urged to consult the holder's
own tax adviser to determine the tax consequences to the holder of the Merger
and the Spin-Off in light of the holder's particular circumstances, including
the applicability and effect of federal, state, local and foreign income and
other tax laws and possible changes in those tax laws (which may have
retroactive effect).
The receipt by an SFX stockholder of cash pursuant to the Merger (or cash
pursuant to the exercise of dissenters' rights of appraisal) will be a
taxable event for the stockholder. A stockholder will generally recognize
capital gain or loss for federal income tax purposes equal to the difference
between (a) the amount of cash received and (b) the tax basis in the shares
of SFX stock surrendered in exchange therefor (generally, the amount paid for
the shares of SFX stock, subject to downward adjustment as described below as
a result of the Spin-Off). The gain or loss will be long-term capital gain or
loss if the stockholder's holding period for the surrendered shares is more
than 1 year at the Effective Time. Under recently enacted legislation,
individuals whose holding period for shares of SFX stock exceeds 18 months
will, in general, be subject to no more than a 20% tax on any gain, while
individuals whose holding period for shares of SFX stock is more than 1 year
but not more than 18 months will, in general, be subject to no more than a
28% tax on any gain. If an SFX stockholder owns more than one block of shares
of SFX stock, the cash received must be allocated ratably among the blocks in
the proportion that the number of shares of SFX stock in a particular block
bears to the total number of shares of SFX stock owned by the stockholder.
Subject to the possible recharacterization discussed below, the receipt of
SFX Entertainment common stock as a result of the Spin-Off should be taxable
to the recipient as a distribution from SFX under Section 301 of the Code.
The amount of the distribution for federal income tax purposes and the basis
for determining gain or loss on a subsequent disposition of the SFX
Entertainment common stock would be the fair market value of the SFX
Entertainment common stock at the time of the Spin-Off, and a stockholder's
holding period for SFX Entertainment common stock received in the Spin-Off
will begin on the day following the Spin-Off.
The receipt of the SFX Entertainment common stock should be taxable to the
holders of shares of SFX stock as a dividend to the extent of SFX's current
or accumulated earnings and profits (determined as of the end of SFX's
taxable year, which will occur on the date of the Merger). Any amount of SFX
Entertainment common stock that exceeds the above-mentioned earnings and
profits of SFX would first be treated as a non-taxable return of capital to
the extent of each stockholder's tax basis in shares of SFX stock, and the
stockholder's tax basis in such stock would be reduced accordingly (but not
below zero). To the extent that the amount of SFX Entertainment common stock
were to exceed the stockholder's tax basis in shares of SFX stock, the excess
would be treated as long-term or short-term capital gain from the sale or
exchange of shares of SFX stock, depending on the period the stockholder held
the SFX shares. Although SFX does not currently have accumulated earnings and
profits, it is possible that there may be earnings and profits for the year
of the Merger, because the Spin-Off might give rise to taxable gain to SFX.
There can be no assurance, therefore, that there will be no current or
accumulated earnings and profits, and thus it is possible that all or a
portion of the value of the SFX Entertainment stock could give rise to
ordinary income.
With respect to corporate stockholders, the portion of the SFX
Entertainment common stock, if any, that is a taxable dividend under the
foregoing rules generally should be eligible for the 70% dividends received
deduction. However, a corporate stockholder's ability to use the dividends
received deduction is subject to several limitations, including those
relating to "debt financed portfolio stock" under Section
62
<PAGE>
246A of the Code and certain holding period requirements. In addition, even
if the dividends received deduction is fully available, a portion of the SFX
Entertainment common stock distribution may constitute an "extraordinary
dividend," which is subject to the provisions of Section 1059 of the Code.
Although, as stated above, the receipt by an SFX stockholder of cash and
SFX Entertainment common stock should be treated as if only the cash payment
was received as payment for the shares of SFX stock while the receipt of SFX
Entertainment common stock is taxable to the recipient as a distribution from
SFX under Section 301 of the Code, and SFX will report the transaction in a
manner consistent with this characterization, it is possible that the
Internal Revenue Service might contend that the transaction should be treated
as an exchange of shares of SFX stock for both cash and SFX Entertainment
common stock. Under this treatment, a stockholder will generally recognize
capital gain or loss for federal income tax purposes equal to the difference
between (a) the fair market value at the Effective Time of the SFX
Entertainment common stock received plus the amount of cash received and (b)
the tax basis in the shares of SFX stock surrendered in exchange therefor
(without adjustment for any portion of the distribution of SFX Entertainment
common stock that would have constituted a return of capital if the
distribution were respected as such). As discussed above, the gain or loss
will be long-term capital gain or loss if the stockholder's holding period
for the surrendered shares is more than 1 year at the Effective Time. Under
this characterization, if SFX has no current or accumulated earnings and
profits for the taxable year that includes the Merger, the amount of capital
gain recognized by stockholders should be the same whether the Spin-Off is
treated as a distribution to stockholders, or as part of the sale price
received as payment for the shares of SFX stock. By contrast, if SFX does
have earnings and profits for that taxable year, such a characterization will
generally decrease the amount of tax payable by an individual (by converting
ordinary income to capital gain) and increase the amount of tax payable by a
corporation (by converting dividend income potentially eligible for a
dividends received deduction to capital gain).
A stockholder may be subject to information reporting and to backup
withholding at a rate of 31% of amounts paid to the stockholder, unless the
stockholder provides proof of an applicable exemption or a correct taxpayer
identification number, and otherwise complies with applicable requirements of
the backup withholding rules.
THE DISCUSSION OF FEDERAL INCOME TAX CONSEQUENCES SET FORTH ABOVE IS BASED
ON EXISTING LAW AS OF THE DATE OF THIS PROXY STATEMENT. STOCKHOLDERS ARE
URGED TO CONSULT THEIR TAX ADVISERS TO DETERMINE THE PARTICULAR TAX
CONSEQUENCES TO THEM OF THE MERGER AND THE SPIN-OFF (INCLUDING THE
APPLICABILITY AND EFFECT OF FEDERAL, STATE, LOCAL, FOREIGN AND OTHER TAX
LAWS).
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<PAGE>
PROPOSAL 2: AMENDMENTS TO CERTIFICATE OF INCORPORATION
REGARDING THE MERGER CONSIDERATION
Proposal 2 seeks approval of amendments to Sections 5.1 and 5.6 of SFX's
Certificate of Incorporation. As currently in force, Section 5.1 provides
that, except as otherwise expressly provided in the Certificate of
Incorporation, all shares of Common Stock must be identical and entitle the
holders thereof to the same rights and privileges. As currently in force,
Section 5.6 provides that, in any merger, consolidation, or business
combination, the consideration to be received per share by the holders of
Class A Common Stock, Class B Common Stock and Class C Common Stock must be
identical for each class of stock; however, if shares of common stock are to
be distributed in one of these transactions, the shares may differ as to
voting rights to the extent that voting rights now differ among the Class A
Common Stock, the Class B Common Stock and the Class C Common Stock.
Therefore, as currently in force, Sections 5.1 and 5.6 could prohibit the
difference between the Class A Merger Consideration and the Class B Merger
Consideration. See "Proposal 1: The Merger." The aggregate premium to be paid
to the holders of Class B Common Stock (Messrs. Sillerman and Ferrel) in the
Merger is $23.6 million. See "Proposal 1: The Merger--Interests of Certain
Persons."
In order to permit the Class B Merger Consideration, the Board of
Directors has approved the following amendments to Sections 5.1 and 5.6 of
the Certificate of Incorporation (except for section titles, the underlining
indicates new language):
5.1 Identical Rights. Except as herein otherwise expressly provided in
this Restated Certificate of Incorporation, including, without limitation,
in connection with any transactions excepted from Sections 5.2 or 5.6
hereof, all Common Shares shall be identical and shall entitle the holders
thereof to the same rights and privileges.
5.6 Consideration on Merger, Consolidation, etc. In any merger,
consolidation, or business combination, the consideration to be received
per share by the holders of Class A Shares, Class B Shares and Class C
Shares must be identical for each class of stock, except that in any such
transaction in which shares of common stock are to be distributed, such
shares may differ as to voting rights to the extent that voting rights now
differ among the Class A Shares, the Class B Shares and the Class C
Shares, except that, in connection with the transactions contemplated by
the Agreement and Plan of Merger, dated as of August 24, 1997, as it may
be amended from time to time (the "Merger Agreement"), among SBI Holding
Corporation, SBI Radio Acquisition Corporation and the Corporation, each
Class A Share shall receive the Class A Common Stock Merger Consideration
(as such term is defined in the Merger Agreement) and each Class B Share
shall receive the Class B Common Stock Merger Consideration (as such term
is defined in the Merger Agreement), and except that the provisions of
this Section 5.6 (other than this exception to such provisions) shall not
be applicable to any other consideration to be received or which may be
deemed to be received by the holders of the Common Shares (including the
holders of Class B Shares) pursuant to (i) the Spin Off or the Alternate
Transaction (as such terms are defined in the Merger Agreement), (ii) any
of the agreements contemplated by the Merger Agreement, including, without
limitation, the Consulting, Non-Compete and Termination Agreement among
SBI Holding Corporation, the Corporation and Robert F.X. Sillerman and the
Stockholder Agreement among SBI Holding Corporation, SBI Acquisition
Corporation, the Corporation and Robert F.X. Sillerman or (iii) the
employment agreements, as presently in force or as amended or entered into
from time to time, of Robert F.X. Sillerman and Michael G. Ferrel.
THE BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS THAT YOU VOTE FOR APPROVAL
OF PROPOSAL 2. SEE "PROPOSAL 1: THE MERGER--BACKGROUND OF THE MERGER." The
approval of Proposal 2 is necessary in order for SFX to be able to pay
disparate consideration to the holders of Class A Common Stock and to the
holders of Class B Common Stock, as set forth in the Merger Agreement.
Therefore, the Merger will not be consummated unless Proposal 2 is approved
by the requisite vote. The affirmative vote of the holders of a majority of
the voting power of all outstanding shares of the Common Stock, voting
together as a single class (with each share of Class A Common Stock entitled
to 1 vote and each share of Class B Common Stock entitled to 10 votes), and
the affirmative votes of the holders of a majority of the voting
64
<PAGE>
power of all outstanding shares of Class A Common Stock and Series D
Preferred Stock, each voting as a separate class, are required to approve
Proposal 2. FAILURE TO APPROVE PROPOSAL 2 WILL PREVENT THE CONSUMMATION OF
THE MERGER AND IS LIKELY TO REQUIRE SFX TO PAY A TERMINATION FEE. See
"Certain Considerations--Termination Fee If Stockholders Do Not Approve the
Merger and the Amendments; -- Sillerman Stockholder Agreement" and "The
Merger Agreement--Conditions; -- Termination." However, failure to approve
Proposal 2 will not prevent the consummation of the Spin-Off.
Mr. Sillerman has agreed to vote all shares of Common Stock held by him in
favor of Proposal 2. Mr. Sillerman may be deemed to beneficially own as of
the Record Date approximately 1.6% of the outstanding shares of Class A
Common Stock and 97.8% of the outstanding shares of Class B Common Stock
(excluding options and warrants to acquire shares), which represent
approximately 11.1% of the outstanding shares of Common Stock and
approximately 52.0% of the combined voting power of the outstanding Common
Stock. Accordingly, the affirmative vote of the holders of a majority of the
voting power of the outstanding Common Stock, voting together as a single
class (with the Class A Common Stock entitled to 1 vote per share, and the
Class B Common Stock entitled to 10 votes per share) is assured, but the
affirmative votes of the holders of a majority of the outstanding shares of
Class A Common Stock (including Mr. Sillerman's shares, which he has agreed
to vote in favor of Proposal 2) and Series D Preferred Stock, each voting as
a separate class, will still be necessary to approve Proposal 2, and are not
assured.
65
<PAGE>
PROPOSAL 3: AMENDMENTS TO CERTIFICATE OF INCORPORATION
REGARDING THE SPIN-OFF
Proposal 3 seeks approval of amendments to Sections 5.1 and 5.2(a) of
SFX's Certificate of Incorporation and to Section 4(x) of SFX's Certificate
of Designations, Preferences and Relative, Participating, Optional and other
Special Rights of Preferred Stock and Qualifications, Limitations and
Restrictions Thereof of 6-1/2% Series D Cumulative Convertible Exchangeable
Preferred Stock Due May 31, 2007 (the "Series D Certificate of
Designations"). As described in Proposal 2, Section 5.1 currently provides
that, except as otherwise expressly provided in the Certificate of
Incorporation, all shares of Common Stock must be identical and entitle the
holders thereof to the same rights and privileges. As currently in force,
Section 5.2(a) provides that, when, as and if dividends are declared by the
Board of Directors, whether payable in cash, in property or in securities of
SFX, the holders of shares of Common Stock will be entitled to share equally
in and to receive, in accordance with the number of shares of Common Stock
held by each holder, all dividends, except that if dividends are declared
that are payable in shares of Common Stock, the stock dividends will be
payable at the same rate on each class of Common Stock and will be payable
only in shares of Class A Common Stock to holders of shares of Class A Common
Stock, in shares of Class B Common Stock to holders of shares of Class B
Common Stock and in shares of Class C Common Stock to holders of shares of
Class C Common Stock. As currently in force, Section 4(x) prohibits SFX from
paying any dividend or making any distribution to, or on behalf of, the
holders of any class of Common Stock unless the holders of Class A Common
Stock share therein on an equal share for share basis. Since the stock
dividend in the Spin-Off will be a dividend of common stock of SFX
Entertainment and not of SFX, Sections 5.1, 5.2(a) and 4(x), as currently in
force, may prohibit the Spin-Off as currently contemplated by SFX. See "The
Spin-Off."
In order to preserve in the Spin-Off the relative voting rights in SFX
Entertainment of the holders of Class A Common Stock and the holders of Class
B Common Stock, the Board of Directors has approved the following amendments
to Sections 5.1 and 5.2(a) of the Certificate of Incorporation and to Section
4(x) of the Series D Certificate of Designations as contained in the
Certificate of Incorporation (except for section titles, the underlining
indicates new language):
5.1 Identical Rights. Except as herein otherwise expressly provided in
this Restated Certificate of Incorporation, including, without limitation,
in connection with any transactions excepted from Sections 5.2 or 5.6
hereof, all Common Shares shall be identical and shall entitle the holders
thereof to the same rights and privileges.
5.2. Dividends. (a) When, as, and if dividends are declared by the
Corporation's Board of Directors (the "Board of Directors"), whether
payable in cash, in property, or in securities of the Corporation, the
holders of Common Shares shall be entitled to share equally in and to
receive, in accordance with the number of Common Shares held by each such
holder, all such dividends, except that if dividends are declared that are
payable in Common Shares, such stock dividends shall be payable at the
same rate on each class of Common Shares and shall be payable only in
Class A Shares to holders of Class A Shares, in Class B Shares to holders
of Class B Shares and in Class C Shares to holders of Class C Shares, and
except that the holders of the Class A Shares shall receive shares of
class A common stock of SFX Entertainment, Inc. in the Spin Off (as
defined in the Agreement and Plan of Merger, dated as of August 24, 1997,
as it may be amended from time to time, among SBI Holding Corporation, SBI
Radio Acquisition Corporation and the Corporation) having rights, powers
and privileges similar to the Class A Shares, and the holders of the Class
B Shares shall receive shares of class B common stock of SFX
Entertainment, Inc. in the Spin Off having rights, powers and privileges
similar to the Class B Shares.
Section 4(x):
(x) The Corporation shall not pay any dividend or make any distribution
to, or on behalf of, the holders of any class or series of Common Stock
unless the holders of Class A Common Stock share therein on an equal share
for share basis, except that the holders of Class A Common Stock shall
receive shares of class A common stock of SFX Entertainment, Inc. in the
Spin Off (as defined in the Agreement and Plan of Merger, dated as of
August 24, 1997, as it may be amended from time
66
<PAGE>
to time, among SBI Holding Corporation, SBI Radio Acquisition Corporation
and the Corporation) having rights, powers and privileges similar to the
Class A Common Stock, and the holders of Class B Common Stock shall
receive shares of class B common stock of SFX Entertainment, Inc. in the
Spin Off having rights, powers and privileges similar to the Class B
Common Stock.
THE BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS THAT YOU VOTE FOR PROPOSAL
3. The approval of Proposal 3 is necessary in order for SFX to be able to
preserve the relative voting rights in SFX Entertainment of the holders of
Class A Common Stock and Class B Common Stock. As currently contemplated, SFX
would issue in the Spin-Off shares of SFX Entertainment Class A common stock
to the holders of Class A Common Stock and Series D Preferred Stock, and
would issue shares of SFX Entertainment Class B common stock to the holders
of Class B Common Stock. STOCKHOLDERS ARE URGED TO CAREFULLY READ THE
PROPOSED CERTIFICATE OF INCORPORATION OF SFX ENTERTAINMENT, ATTACHED AS ANNEX
E TO THIS PROXY STATEMENT, FOR A COMPLETE DESCRIPTION OF THE SFX
ENTERTAINMENT CLASS A COMMON STOCK AND CLASS B COMMON STOCK. In addition, SFX
will place in escrow an aggregate of approximately 609,858 shares of SFX
Entertainment Class A common stock for delivery to the holders of the
Warrants and will issue approximately 2,966 shares of SFX Entertainment Class
A common stock to holders of interests in SFX's director deferred stock
ownership plan. The approval of Proposal 3 is necessary to allow SFX to issue
differing classes of SFX Entertainment stock to the holders of Class A Common
Stock and the holders of Class B Common Stock. Even if the Merger does not
occur for any reason, SFX intends to consummate the Spin-Off. The
consummation of the Spin-Off will result in a significant reduction in SFX's
operations and financial resources, which may adversely impact its ability to
make scheduled payments to holders of Series D Preferred Stock (among others)
if the Merger is not consummated. However, the consummation of the Spin-Off
will also allow holders of Series D Preferred Stock on the Spin-Off record
date to receive shares of SFX Entertainment Class A common stock. See "The
Spin-Off." STOCKHOLDERS ARE ALSO URGED TO CAREFULLY READ THE PROSPECTUS OF
SFX ENTERTAINMENT, ATTACHED AS ANNEX D TO THIS PROXY STATEMENT, FOR MORE
INFORMATION REGARDING THE SPIN-OFF AND SFX ENTERTAINMENT.
The affirmative vote of the holders of a majority of the voting power of
the outstanding shares of the Common Stock, voting together as a single class
(with each share of Class A Common Stock entitled to 1 vote and each share of
Class B Common Stock entitled to 10 votes), and the affirmative votes of the
holders of a majority of the voting power of all outstanding shares of Class
A Common Stock and Series D Preferred Stock, each voting as a separate class,
are required to approve the amendment to Sections 5.1 and 5.2 contained in
Proposal 3. The affirmative vote of a majority of the voting power of the
outstanding shares of the Common Stock, voting together as a single class,
and the affirmative vote of the holders of a majority of voting power of all
outstanding shares of Series D Preferred Stock, voting as a separate class,
are required to approve the amendment to Section 4(x) contained in Proposal
3. FAILURE TO APPROVE PROPOSAL 3 WILL PREVENT THE CONSUMMATION OF THE
SPIN-OFF, AS CURRENTLY CONTEMPLATED BY SFX. If Proposal 3 is not approved,
SFX will be required to determine whether to consummate the Spin-Off by other
means than currently contemplated or whether to dispose of SFX Entertainment
in another manner. If the Spin-Off or an alternate disposition of SFX
Entertainment is not consummated, SFX may be required to pay a termination
fee. See "Certain Considerations--Termination Fee If Stockholders Do Not
Approve the Merger and the Amendments;--Sillerman Stockholder Agreement; --
Changes in SFX and SFX Entertainment" and "The Merger
Agreement--Conditions;--Termination."
Mr. Sillerman has agreed to vote all shares of Common Stock held by him in
favor of Proposal 3. Mr. Sillerman may be deemed to beneficially own as of
the Record Date approximately 1.6% of the outstanding shares of Class A
Common Stock and 97.8% of the outstanding shares of Class B Common Stock
(excluding options and warrants to acquire shares), which represent
approximately 11.1% of the outstanding shares of Common Stock and
approximately 52.0% of the combined voting power of the outstanding Common
Stock. Accordingly, the affirmative vote of the holders of a majority of the
voting power of the outstanding Common Stock, voting together as a single
class (with the Class A Common Stock having 1 vote per share, and the Class B
Common Stock having 10 votes per share) is assured, but the affirmative votes
of the holders of a majority of the outstanding shares of Class A Common
Stock (including Mr. Sillerman's shares, which he has agreed to vote in favor
of Proposal 3) and Series D Preferred Stock, each voting as a separate class,
will still be necessary to approve Proposal 3, and are not assured.
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<PAGE>
If Proposal 3 is approved and the Spin-Off is consummated, Mr. Sillerman
may be deemed to beneficially own approximately 6.9% of the shares of SFX
Entertainment Class A common stock and 89.9% of the shares of SFX
Entertainment Class B common stock, which together will represent
approximately 45.7% of the combined voting power of the SFX Entertainment
common stock. Similarly, if Proposal 3 is approved and the Spin-Off is
consummated, SFX's current directors and executive officers are anticipated
to beneficially own approximately 10.7% of the shares of SFX Entertainment
Class A common stock and 100% of the shares of SFX Entertainment Class B
common stock, which together will represent approximately 52.3% of the
combined voting power of the SFX Entertainment common stock. See "Proposal 1:
The Merger--Interests of Certain Persons in the Merger--Stock Options, Stock
Appreciation Rights and SCMC Warrants." Accordingly, Mr. Sillerman, alone and
together with SFX's current directors and executive officers, will be able to
control the outcome of the votes of the stockholders of SFX Entertainment on
most matters. SFX and Messrs. Sillerman and Ferrel have reached tentative
agreements that Messrs. Sillerman and Ferrel will serve as officers and
directors of SFX Entertainment; however, if Proposal 3 is not approved, there
can be no assurance that they will serve in any such capacity, in which event
SFX intends to pursue alternative means of disposing of SFX Entertainment.
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SELECTED CONSOLIDATED FINANCIAL DATA OF SFX
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
The Selected Consolidated Financial Data of SFX includes the historical
financial statements of Capstar Communications, Inc., a predecessor of SFX
("Capstar"), and the historical financial statements of SFX since its
formation on February 26, 1992. The financial information presented below
should be read in conjunction with the information set forth in "Unaudited
Pro Forma Condensed Combined Financial Statements" and the notes thereto and
the financial statements and the notes of SFX incorporated by reference in
this Proxy Statement. The financial information has been derived from the
audited and unaudited financial statements of SFX and the entities acquired
or to be acquired by SFX since January 1, 1996. The pro forma summary data as
of September 30, 1997 and for the year ended December 31, 1996 and the nine
months ended September 30, 1997 are derived from the unaudited pro forma
condensed combined financial statements which, in the opinion of the
management, reflect all adjustments necessary for a fair presentation of the
transactions for which such pro forma financial information is given.
Operating results for the nine months ended September 30, 1997, are not
necessarily indicative of the results that may be achieved for the fiscal
year ending December 31, 1997. The historical consolidated financial results
for SFX are not comparable from year to year because of the acquisition and
disposition of various business operations during the periods covered.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------------------------------------------------
PRO FORMA
FOR THE RECENT PRO FORMA
AND PENDING FOR THE
TRANSACTIONS(8) SPIN-OFF(9)
(UNAUDITED) (UNAUDITED)
1992 1993 1994 1995 1996 1996 1996
-------- --------- ------- -------- --------- -------------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net broadcasting revenue........................ $15,003 $ 34,233 $55,556 $ 76,830 $ 143,061 $ 272,694 $272,694
Concert promotion revenue....................... -- -- -- -- -- 552,365 --
Station and other operating expenses............ 9,624 21,555 33,956 51,039 92,816 184,267 184,267
Concert promotion operating expenses............ -- -- -- -- -- 505,537 --
Depreciation, amortization, duopoly integration
costs and acquisition related costs(1) ........ 3,208 4,475 5,873 9,137 17,311 85,451 47,656
Corporate expenses.............................. 769 1,808 2,964 3,797 6,313 8,000 5,000
Non-recurring charges including adjustments to
broadcast rights agreement(2)(3)(4)(5) ........ -- 13,980 -- 5,000 28,994 25,662 25,662
-------- --------- ------- -------- --------- -------------- ---------
Operating income (loss)......................... 1,402 (7,585) 12,763 7,857 (2,373) 16,142 10,109
Other expense (income).......................... -- (17) 121 (650) (2,117) (4,588) (2,756)
Equity (income) loss from investments ......... -- -- -- -- -- (3,402) --
Interest expense................................ 3,610 7,351 9,332 12,903 34,897 115,920 71,613
-------- --------- ------- -------- --------- -------------- ---------
Income (loss) before income taxes,
extraordinary item and cumulative effect of a
change in accounting principle................. (2,208) (14,919) 3,310 (4,396) (35,153) (91,788) (58,748)
Income tax expense (benefit).................... -- 1,015 1,474 -- 480 3,500 2,000
Extraordinary loss on debt retirement........... -- 1,665 -- -- 15,219 -- --
Cumulative effect of a change in accounting
principle...................................... -- 182 -- -- -- -- --
-------- --------- ------- -------- --------- -------------- ---------
Net income (loss)............................... (2,208) (17,781) 1,836 (4,396) (50,852) (95,288) (60,748)
Redeemable preferred stock dividends and
accretion(6)................................... 385 557 348 291 6,061 41,424 38,124
-------- --------- ------- -------- --------- -------------- ---------
Net income (loss) applicable to common stock ... $(2,593) $(18,338) $ 1,488 $ (4,687)$ (56,913) $(136,712) $(98,872)
======== ========= ======= ======== ========= ============== =========
Net income (loss) per share..................... $ (2.20) $ (7.08) $ 0.26 $ (0.71)$ (7.52) $ (8.63) $ (6.24)
======== ========= ======= ======== ========= ============== =========
Weighted average common shares outstanding ..... 1,179 2,589 5,792 6,596 7,564 15,840 15,840
OTHER OPERATING DATA: (7)
Broadcast Cash Flow............................. $ 5,379 $ 12,678 $21,600 $ 25,791 $ 50,245 $ 88,427 $ 88,427
Concert Cash Flow............................... -- -- -- -- -- 46,828 --
EBITDA.......................................... 4,610 10,870 18,636 21,994 43,932 127,255 83,427
CASH FLOW FROM:
Operating Activities .......................... 1,171 76 1,174 499 (13,447) -- --
Investing Activities .......................... (115) (47,221) (6,184) (25,697) (470,513) -- --
Financing Activities .......................... (495) 66,122 (2,083) 33,897 502,668 -- --
</TABLE>
<PAGE>
(RESTUBBED TABLE CONTINUED FROM ABOVE)
<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30,
-------------------------------------------------------
PRO FORMA
FOR THE RECENT PRO FORMA
AND PENDING FOR THE
ACTUAL ACTUAL TRANSACTIONS(8) SPIN-OFF(9)
(UNAUDITED)(UNAUDITED) (UNAUDITED) (UNAUDITED)
1996 1997 1997 1997
--------- --------- -------------- ---------
<S> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net broadcasting revenue........................ $ 92,840 $ 188,984 $222,731 $222,731
Concert promotion revenue....................... -- 75,740 500,843 --
Station and other operating expenses............ 61,448 115,871 142,934 142,934
Concert promotion operating expenses............ -- 63,394 440,266 --
Depreciation, amortization, duopoly integration
costs and acquisition related costs(1) ........ 10,663 31,429 61,677 33,299
Corporate expenses.............................. 4,475 6,849 8,698 5,891
Non-recurring charges including adjustments to
broadcast rights agreement(2)(3)(4)(5) ........ 27,489 17,995 17,995 17,995
--------- --------- -------------- ---------
Operating income (loss)......................... (11,235) 29,186 52,004 22,612
Other expense (income).......................... (3,320) (2,692) (3,261) (2,482)
Equity (income) loss from investments ......... -- -- (5,653) --
Interest expense................................ 22,169 46,438 86,741 53,555
--------- --------- -------------- ---------
Income (loss) before income taxes,
extraordinary item and cumulative effect of a
change in accounting principle................. (30,084) (14,560) (25,823) (28,461)
Income tax expense (benefit).................... -- 845 4,500 1,000
Extraordinary loss on debt retirement........... 15,219 -- -- --
Cumulative effect of a change in accounting
principle...................................... -- -- -- --
--------- --------- -------------- ---------
Net income (loss)............................... (45,303) (15,405) (30,323) (29,461)
Redeemable preferred stock dividends and
accretion(6)................................... 3,551 27,723 31,381 28,906
--------- --------- -------------- ---------
Net income (loss) applicable to common stock ... $ (48,854) $ (43,128) $(61,704) $(58,367)
========= ========= ============== =========
Net income (loss) per share..................... $ (6.61) $ (4.61) $ (3.89) $ (3.68)
========= ========= ============== =========
Weighted average common shares outstanding ..... 7,394 9,364 15,840 15,840
OTHER OPERATING DATA: (7)
Broadcast Cash Flow............................. $ 31,392 $ 73,113 $ 79,797 $ 79,797
Concert Cash Flow............................... -- 12,346 60,577 --
EBITDA.......................................... 26,917 78,610 131,676 73,906
CASH FLOW FROM:
Operating Activities .......................... (18,773) (3,418) -- --
Investing Activities .......................... (442,797) (492,300) -- --
Financing Activities .......................... 489,816 485,309 -- --
</TABLE>
69
<PAGE>
SELECTED CONSOLIDATED FINANCIAL DATA OF SFX
(IN THOUSANDS)
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------------------------------
1992 1993 1994 1995 1996
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Current assets ............. $ 4,515 $ 31,273 $ 28,367 $ 30,949 $ 88,689
Total assets................ 36,127 152,871 145,808 187,337 859,327
Long-term debt ............. 39,011 81,627 81,516 81,850 481,460
Temporary equity (12)....... -- -- -- -- --
Redeemable Preferred Stock:
Series A Preferred Stock . 3,892 917 -- -- --
Series B Preferred Stock . -- 2,784 2,466 1,735 917
Series C Preferred Stock . -- -- -- 1,550 1,636
Series D Preferred Stock . -- -- -- -- 149,500
Series E Preferred Stock . -- -- -- -- --
Stockholders' equity
(deficiency) .............. (9,411) 48,598 48,856 83,061 94,517
</TABLE>
(RESTUBBED TABLE CONTINUED FROM ABOVE)
<TABLE>
<CAPTION>
SEPTEMBER 30, 1997
-----------------------------------------
PRO FORMA FOR PRO FORMA
THE PENDING FOR THE
ACTUAL TRANSACTIONS(10) SPIN-OFF(11)
(UNAUDITED) (UNAUDITED) (UNAUDITED)
----------- -------------- ------------
<S> <C> <C> <C>
BALANCE SHEET DATA:
Current assets ............. $ 140,689 $ 245,826 $ 128,500
Total assets................ 1,392,887 2,016,632 1,243,018
Long-term debt ............. 784,255 1,230,323 731,501
Temporary equity (12)....... -- 16,500 --
Redeemable Preferred Stock:
Series A Preferred Stock . -- -- --
Series B Preferred Stock . 998 998 998
Series C Preferred Stock . 1,703 1,703 1,703
Series D Preferred Stock . 149,500 149,500 149,500
Series E Preferred Stock . 215,636 215,636 215,636
Stockholders' equity
(deficiency) .............. 69,554 134,215 (9,008)
</TABLE>
- ------------
(1) Includes $1,380,000, $1,137,000 and $565,000 of duopoly integration
costs incurred during the years ended December 31, 1995 and 1996 and
the nine months ended September 30, 1997, respectively.
(2) In 1993, non-recurring charges related to the valuation of common stock
issued to SFX's founders at SFX's initial public offering in September
1993 and certain pooling costs related to the merger of Capstar with
and into a subsidiary of SFX.
(3) In 1995, a $5.0 million charge was incurred with respect to the
diminished value of a contract to broadcast the Texas Rangers.
(4) In 1996, the non-recurring charges represent the repurchase of stock
from and the forgiveness of a loan to SFX's former president, a reserve
of a loan and the issuance of warrants to a related party, the purchase
of an officer's options and a charge related to the termination of a
broadcast rights agreement.
(5) In 1997, the non-recurring and unusual charges , represent amounts
related to the pending Spin-Off and Merger, consisting of $11.6 million
of executive bonuses, the establishment of a reserve for a loan from
SFX's Executive Chairman of $2.6 million and $3.8 million of legal and
professional fees associated with the pending transaction.
(6) Includes dividends on preferred stock which SFX redeemed in 1993,
accretion on outstanding redeemable preferred stock, dividends on the
Series D Preferred Stock, dividends on the Series E Preferred Stock and
accretion on the Fifth Year Put Option issued to the PACE Sellers in
connection with the PACE Acquisition.
(7) "Broadcast Cash Flow" means net revenues less station operating
expenses. "Concert Cash Flow" means concert revenues less concert
costs. "EBITDA" means net income (loss) before (i) extraordinary items,
(ii) provisions for income taxes, (iii) interest (income) expense, (iv)
other (income) expense, (v) cumulative effects of changes in accounting
principles, (vi) depreciation, amortization, duopoly integration costs
and acquisition related costs, and (vii) non-recurring charges. The
difference between Broadcast Cash Flow and EBITDA is that EBITDA
reflects the impact of corporate expenses. Although Broadcast Cash Flow
and EBITDA are not measures of performance calculated in accordance
with GAAP, SFX believes that Broadcast Cash Flow and EBITDA are
accepted by the broadcasting industry as generally recognized measures
of performance and are used by analysts who report publicly on the
performance of broadcasting companies. Nevertheless, these measures
should not be considered in isolation or as a substitute for operating
income, net income, net cash provided by operating activities or any
other measure for determining SFX's operating performance or liquidity
which is calculated in accordance with GAAP.
(8) The unaudited pro forma Statement of Operations Data for the Recent and
Pending Transactions for the nine months ended September 30, 1997, and
the year ended December 31, 1996, are presented as if SFX had completed
the Recent and Pending Transactions as of January 1, 1996. The terms
"Recent Transactions" and "Pending Transactions" are defined in the
Glossary to the Unaudited Pro Forma Condensed Combined Financial
Statements.
70
<PAGE>
(9) The unaudited pro forma Statement of Operations for the Spin-Off for
the nine months ended September 30, 1997, and the year ended December
31, 1996 are presented as if SFX had completed the sale of SFX
Broadcasting as defined in the Glossary to the Unaudited Pro Forma
Condensed Combined Financial Statements.
(10) The unaudited pro forma Balance Sheet Data at September 30, 1997, is
presented as if SFX had completed the Pending Transactions as of
September 30, 1997. The term "Pending Transactions" is defined in the
Glossary to the Unaudited Pro Forma Condensed Combined Financial
Statements.
(11) The unaudited pro forma Balance Sheet Data at September 30, 1997, is
presented as if SFX had completed the Spin-Off as of September 30,
1997.
(12) The PACE Agreement provides that each PACE Seller (as defined) shall
have a Fifth Year Put Option, exercisable during a period beginning on
the fifth anniversary of the closing of the PACE Acquisition and ending
90 days thereafter, to require SFX Entertainment to purchase up to
one-third of SFX Entertainment's Class A Common Stock received by such
PACE Seller (representing 500,000 shares in the aggregate) for a cash
purchase price of $33.00 per share. With certain limited exceptions,
the Fifth Year Put Option rights are not assignable by the PACE
Sellers. The maximum amount payable under all Fifth Year Put Options
($16,500,000) has been presented as temporary equity on the pro forma
balance sheet.
71
<PAGE>
SELECTED CONSOLIDATED FINANCIAL DATA OF SFX ENTERTAINMENT
(in thousands, except per share amounts)
The Selected Consolidated Financial Data of SFX Entertainment includes the
historical financial statements of Delsener/Slater and affiliated companies,
the predecessor of SFX Entertainment for each of the five years ended
December 31, 1996 and the nine months ended September 30, 1996, and the
historical financial statements of SFX Entertainment, for the nine months
ended September 30, 1997. The statement of operations data with respect to
Delsener/Slater for the years ended December 31, 1992 and 1993, and the
balance sheet data as of December 31, 1993 and 1994 is unaudited. The
financial information presented below should be read in conjunction with the
information set forth in "Unaudited Pro Forma Condensed Combined Financial
Statements" and the notes thereto and the historical financial statements and
the notes thereto of SFX Entertainment, the Recent Acquisitions and the
Pending Acquisitions included herein (including in Annex D). The financial
information has been derived from the audited and unaudited financial
statements of SFX Entertainment, the Recent Acquisitions and the Pending
Acquisitions. The pro forma summary data as of September 30, 1997 and for the
year ended December 31, 1996 and the nine months ended September 30, 1997 are
derived from the unaudited pro forma condensed combined financial statements,
which, in the opinion of management, reflect all adjustments necessary for a
fair presentation of the transactions for which such pro forma financial
information is given. Operating results for the nine months ended September
30, 1997 are not necessarily indicative of the results that may be achieved
for the fiscal year ending December 31, 1997.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------------------------------------
PREDECESSOR (ACTUAL)
---------------------------------------------------------------
1996 (1)
PRO FORMA
1992 1993 1994 1995 1996 (UNAUDITED)
--------- --------- --------- --------- --------- -----------
<S> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS
DATA:
Revenue.................... $38,017 $46,526 $92,785 $47,566 $50,362 $552,365
Operating expenses......... 36,631 45,635 90,598 47,178 50,687 505,537
Depreciation &
amortization.............. 758 762 755 750 747 37,795
Corporate expenses (2) .... -- -- -- -- -- 3,000
--------- --------- --------- --------- --------- -----------
Operating income (loss) ... 628 129 1,432 (362) (1,072) 6,033
Interest expense........... (171) (148) (144) (144) (60) (44,307)
Other income............... 74 85 138 178 198 1,832
Equity income (loss) from
investments .............. -- -- (9) 488 525 3,402
--------- --------- --------- --------- --------- -----------
Income (loss) before
income taxes.............. 531 66 1,417 160 (409) (33,040)
Income tax (provision)
benefit................... (32) (57) (5) (13) (106) (1,500)
--------- --------- --------- --------- --------- -----------
Net income (loss).......... $ 499 $ 9 $ 1,412 $ 147 $ (515) (34,540)
========= ========= ========= ========= ========= ===========
Accretion on temporary
equity (3)................ (3,300)
-----------
Net loss applicable to
common shares ............ $(37,840)
===========
Net loss per common share . $ (1.90)
===========
Weighted average common
shares outstanding (4) ... 20,400
===========
OTHER OPERATING DATA:
EBITDA (5)................. $ -- $ -- $ 2,187 $ 388 $ (325) $ 43,828
========= ========= ========= ========= ========= ===========
Cash flow from:
Operating activities .... $ -- $ -- $ 2,959 $ (453) $ 4,214 $ --
Investing activities .... -- -- 0 0 (435) --
Financing activities .... -- -- (477) (216) (1,431) --
Ratio of earnings to fixed
charges (6)............... 4.1x 1.4x 11.3x 2.1x -- --
</TABLE>
<PAGE>
(RESTUBBED TABLE CONTINUED FROM ABOVE)
<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30,
--------------------------------------
PREDECESSOR
-------------
1997 (1)
1996 1997 PRO FORMA
ACTUAL ACTUAL (UNAUDITED)
------------- ---------- -----------
<S> <C> <C> <C>
STATEMENT OF OPERATIONS
DATA:
Revenue.................... $41,609 $ 74,396 $500,843
Operating expenses......... 42,930 63,045 440,266
Depreciation &
amortization.............. 744 4,041 28,378
Corporate expenses (2) .... -- 1,307 2,807
------------- ---------- -----------
Operating income (loss) ... (2,065) 6,003 29,392
Interest expense........... (60) (956) (33,186)
Other income............... 143 213 779
Equity income (loss) from
investments .............. 525 1,344 5,653
------------- ---------- -----------
Income (loss) before
income taxes.............. (1,457) 6,604 2,638
Income tax (provision)
benefit................... (80) (2,952) (3,500)
------------- ---------- -----------
Net income (loss).......... $(1,537) $ 3,652 (862)
============= ========== ===========
Accretion on temporary
equity (3)................ (2,475)
============= -----------
Net loss applicable to
common shares ............ $ (3,337)
============= ===========
Net loss per common share . $ (.17)
============= ===========
Weighted average common
shares outstanding (4) ... 20,400
============= ===========
OTHER OPERATING DATA:
EBITDA (5)................. $(1,321) $ 10,044 $ 57,770
============= ========== ===========
Cash flow from:
Operating activities .... $ 2,761 $ 789 $ --
Investing activities .... 0 (71,997) --
Financing activities .... 684 78,302 --
Ratio of earnings to fixed
charges (6)............... -- 8.4x 1.0x
</TABLE>
72
<PAGE>
SELECTED CONSOLIDATED FINANCIAL DATA OF SFX ENTERTAINMENT
(in thousands)
BALANCE SHEET DATA(7):
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------------------
PREDECESSOR (ACTUAL)
-------------------------------------
1993 1994 1995 1996
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Current assets.............. $1,823 $4,453 $3,022 $6,191
Property and equipment,
net........................ 4,484 3,728 2,978 2,231
Intangible assets, net ..... -- -- -- --
Total assets................ 6,420 8,222 6,037 8,879
Current liabilities......... 4,356 3,423 3,138 7,973
Long-term debt, including
current portion ........... -- 1,830 -- --
Temporary equity(3) ........ -- -- -- --
Stockholders' equity........ 6,420 2,969 2,900 907
</TABLE>
(RESTUBBED TABLE CONTINUED FROM ABOVE)
<TABLE>
<CAPTION>
SEPTEMBER 30, 1997
-----------------------
PRO FORMA
ACTUAL (UNAUDITED)(8)
<S> <C> <C>
Current assets.............. $ 12,189 $117,326
Property and equipment,
net........................ 55,882 185,371
Intangible assets, net ..... 59,721 429,066
Total assets................ 135,470 773,614
Current liabilities......... 11,333 89,619
Long-term debt, including
current portion ........... 16,453 498,822
Temporary equity(3) ........ -- 16,500
Stockholders' equity........ 101,378 143,223(9)
</TABLE>
- ------------
(1) The Unaudited Pro Forma Statement of Operations Data for the year ended
December 31, 1996 and the nine months ended September 30, 1997 are
presented as if SFX Entertainment had completed the Recent
Acquisitions, the Financing, the Pending Acquisitions, the Spin-Off and
the Merger as of January 1, 1996. There can be no assurance that any of
the Financing, the Pending Acquisitions, the Spin-Off and the Merger
will be consummated on the terms assumed in preparing such pro forma
data or at all. See "Risk Factors--Changes in SFX and SFX
Entertainment."
(2) Pro forma corporate expenses are reduced by $3,000,000 and $1,693,000
for fees earned from Triathlon for the year ended December 31, 1996 and
for the nine months ended September 30, 1997, respectively. The right
to receive such fees in the future are to be assigned to SFX
Entertainment by SFX in connection with the Spin-Off. Future fee may
vary, above the minimum fee of $500,000, depending upon the level of
acquisition and financing activities of Triathlon.
(3) The PACE Agreement provides that each PACE seller shall have a Fifth
Year Put Option, exercisable during a period beginning on the fifth
anniversary of the closing of the PACE Acquisition and ending 90 days
thereafter, to require SFX Entertainment to purchase up to one-third of
the SFX Entertainment's Class A common stock received by that PACE
seller (representing 500,000 shares in the aggregate) for a cash
purchase price of $33.00 per share. With certain limited exceptions,
the Fifth Year Put Option rights are not assignable by the PACE
sellers. The maximum amount payable under the Fifth Year Put Option
($16,500,000) has been presented as temporary equity on the pro forma
balance sheet.
(4) Includes 500,000 shares of SFX Entertainment's Class A common stock to
be issued to the PACE sellers in connection with the Fifth Year Put
Option; these shares are not included in calculating the net loss per
common share.
(5) "EBITDA" is defined as earnings before interest, taxes, other income,
net, equity income (loss) from investments and depreciation and
amortization. Although EBITDA is not a measure of performance
calculated in accordance with GAAP, SFX Entertainment believes that
EBITDA is accepted by the entertainment industry as a generally
recognized measure of performance and is used by analysts who report
publicly on the performance of entertainment companies. Nevertheless,
this measure should not be considered in isolation or as a substitute
for operating income, net income, net cash provided by operating
activities or any other measure for determining SFX Entertainment's
operating performance or liquidity which is calculated in accordance
with GAAP.
There are other adjustments that could effect EBITDA but have not
been reflected herein. Had such adjustments been made,
Adjusted EBITDA on a pro forma basis would have been approximately
$58,200,000 for the year ended December 31, 1996 and $67,300,000 for
the nine months ended September 30, 1997. These adjustments include the
elimination of non-recurring charges including a litigation settlement
recovered by PACE and Pavilion Partners of $6,000,000 and $0, expected
cost savings in connection with the Pending Acquisitions associated
with the elimination of duplicative staffing and general and
administrative expenses of $5,000,000 and $3,800,000 and includes SFX
Entertainment's pro rata share of equity income from investments of
$3,400,000 and $5,700,000, for the year ended December 31, 1996 and the
nine months ended September 30, 1997, respectively.
While management believes that such cost savings and the elimination
of non-recurring expenses are achievable, SFX Entertainment's ability
to fully achieve such cost savings and to eliminate the non-recurring
expenses is subject to numerous factors certain of which may be beyond
SFX Entertainment's control.
(6) For purposes of computing the ratio of earnings to fixed charges,
"earnings" consists of earnings before income taxes and fixed charges.
"Fixed charges" consists of interest on all indebtedness. Earnings were
insufficient to cover fixed charges by $393,000 for the year ended
December 31, 1996, $1,605,000 for the nine months ended September 30,
1996 and $32,420,000 on a pro forma basis for the year ended December
31, 1996.
(7) The required 1992 balance sheet data for Delsener/Slater has not been
included herein due to the difficulty in accumulating a verifiable
balance sheet as of that date coupled with management's belief that
such information would not be of substantial use to a potential
investor. The difficulty in preparing an accurate balance sheet is due
to the fact that (i) Delsener/Slater was not audited at such time, (ii)
Delsener/Slater included a number of companies with different fiscal
year ends and (iii) the unaudited balance sheets of Delsener/Slater and
its related entities were not prepared in strict accordance are with
GAAP reporting requirements as such entities were privately held. The
lack of usefulness of the information is due to the fact that (i)
Delsener/Slater is the predecessor of SFX Entertainment and therefore
its accounts were adjusted to a new basis upon its acquisition by SFX;
(ii) the balance sheet is principally comprised of cash, leasehold
improvements and accruals for bonuses to the prior owners and would not
include the operating lease for the Jones Beach Ampitheather, which
management believes is Delsener/Slater's most significant operating
agreement; and (iii) the balance sheet of Delsener/Slater as of
December 31 in any year contains a low level of assets relative to
operating income, as the concert business is seasonal (with most
concerts occurring in the summer), and the promotion business does not
require large amounts of capital investment.
(8) The Unaudited Pro Forma Balance Sheet data at September 30, 1997 is
presented as if SFX Entertainment had completed the Financing, the
Pending Acquisitions, the Spin-Off and the Merger as of September 30,
1997.
(9) Retained earnings on a pro forma basis for the Financing, the Pending
Acquisitions, the Spin-Off and the Merger have not been adjusted for
future charges to earnings which will result from the issuance of stock
and options granted to certain executive officers and other employees
of SFX Entertainment.
73
<PAGE>
UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS
The following financial statements and notes thereto contain
forward-looking statements that involve risks and uncertainties. The actual
results of SFX may differ materially from those discussed herein. 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.
In the opinion of management, all adjustments necessary to fairly present
this pro forma information have been made. The Unaudited Pro Forma Condensed
Combined Financial Statements are based upon, and should be read in
conjunction with, the historical financial statements and the respective
notes to such financial statements incorporated herein by reference. The pro
forma information is based upon tentative allocations of the purchase price
for acquisitions completed within the last year and acquisitions still
pending, and does not purport to be indicative of the results that would have
been reported had such events actually occurred on the dates specified, nor
is it indicative of SFX's future results. SFX cannot predict whether the
consummation of the Pending Acquisition and Disposition--Broadcasting or
Pending Acquisitions and the Financing--Entertainment will conform to the
assumptions used in the preparation of the Unaudited Pro Forma Condensed
Combined Financial Statements.
See Glossary at the end of these Unaudited Pro Forma Condensed Combined
Financial Statements for the definition of certain terms not otherwise
defined herein.
The Unaudited Pro Forma Condensed Combined Balance Sheet at September 30,
1997 is presented as if SFX had completed the Pending Acquisition and
Disposition--Broadcasting, the Pending Acquisitions and the
Financing--Entertainment and the Spin-Off of SFX Entertainment as of
September 30, 1997. No adjustment has been made to the Unaudited Pro Forma
Condensed Combined Balance Sheet for the Chancellor Exchange, other than the
receipt of cash, as it will be recorded at historical cost.
The Unaudited Pro Forma Condensed Combined Statements of Operations for
the year ended December 31, 1996 and the nine months ended September 30, 1997
are presented as if SFX had completed the Completed Transactions, the Pending
Acquisition and Disposition--Broadcasting, the Pending Acquisitions and the
Financing--Entertainment and the Spin-Off of SFX Entertainment as of January
1, 1996. The Albany Acquisition has not been reflected in the Unaudited Pro
Forma Condensed Combined Statement of Operations for the year ended December
31, 1996 as it would not have a material impact.
The Unaudited Pro Forma Condensed Combined Financial Statements have been
prepared assuming that the approximately 4.2 million shares of SFX
Entertainment Class A common stock being issued in connection with certain of
the Pending Acquisitions--Entertainment are valued at $13.33 per share, the
value negotiated with the sellers for purposes of the Pending
Acquisitions--Entertainment and is based upon certain financial projections
developed jointly by SFX Entertainment and the sellers. There is presently no
trading market for the SFX Entertainment Class A common stock. There can be
no assurance that the assumptions upon which the valuation is based will, in
fact, be correct or that the valuation will approximate the actual trading
prices of the SFX Entertainment Class A common stock.
74
<PAGE>
SFX BROADCASTING, INC.
UNAUDITED PRO FORMA CONDENSED COMBINED BALANCE SHEET
SEPTEMBER 30, 1997
(IN THOUSANDS)
<TABLE>
<CAPTION>
PENDING SFX ENTERTAINMENT
PENDING ACQUISITIONS PRO FORMA PRO FORMA
SFX ACQUISITION AND AND THE PRO FORMA FOR THE FOR THE
BROADCASTING, DISPOSITION-- FINANCING-- FOR THE PENDING SPIN-OFF
INC. AS BROADCASTING ENTERTAINMENT PENDING ACQUISITIONS OF SFX
REPORTED (A) (B) TRANSACTIONS (C) ENTERTAINMENT
--------------- --------------- ------------------ -------------- ----------------- ---------------
<S> <C> <C> <C> <C> <C> <C>
ASSETS
Current assets ....... $ 140,689 $ -- $105,137 $ 245,826 $117,326 $ 128,500
Property and
equipment, net ...... 132,707 (610) 129,489 261,586 185,371 76,215
Intangible assets, net 1,097,751 (8,345) 369,345 1,458,751 429,066 1,029,685
Other assets ......... 21,740 (5,444) 34,173 50,469 41,851 8,618
--------------- --------------- ------------------ -------------- ----------------- ---------------
Total assets ......... $1,392,887 $(14,399) $638,144 $2,016,632 $773,614 $1,243,018
=============== =============== ================== ============== ================= ===============
LIABILITIES AND
STOCKHOLDERS' EQUITY
Current liabilities .. $ 61,188 $ (914) $ 78,286 $ 138,560 $ 89,619 $ 48,947
Deferred taxes ....... 105,497 -- 12,731 118,228 15,547 102,681
Long-term debt
(including current
portion):
Privately-placed
debt................. -- -- 350,000 350,000 350,000 --
Credit Facility ..... 316,000 (35,921) 132,369 412,448 132,369 280,079
Senior Subordinated
Notes............... 450,000 -- -- 450,000 -- 450,000
Other long-term debt 18,255 (380) -- 17,875 16,453 1,422
Other liabilities .... 4,556 -- 5,583 10,139 9,073 1,066
Minority interest .... -- -- 830 830 830 --
Temporary equity ..... -- -- 16,500 16,500 16,500 --
Redeemable preferred
stock
Series B Preferred
Stock .............. 998 -- -- 998 -- 998
Series C Preferred
Stock .............. 1,703 -- -- 1,703 -- 1,703
Series D Preferred
Stock .............. 149,500 -- -- 149,500 -- 149,500
Series E Preferred
Stock .............. 215,636 -- -- 215,636 -- 215,636
Stockholders' equity . 69,554 22,816 41,845 134,215 143,223 (9,008)
--------------- --------------- ------------------ -------------- ----------------- ---------------
Total liabilities and
stockholders' equity . $1,392,887 $(14,399) $638,144 $2,016,632 $773,614 $1,243,018
=============== =============== ================== ============== ================= ===============
</TABLE>
75
<PAGE>
NOTES TO UNAUDITED PRO FORMA CONDENSED COMBINED BALANCE SHEET
(A) Pending Acquisition and Disposition--Broadcasting
<TABLE>
<CAPTION>
SEPTEMBER 30, 1997
-------------------------------------------------------------
PENDING
ACQUISITION
CAPSTAR NASHVILLE PRO FORMA AND
DISPOSITION (1) ACQUISITION ADJUSTMENTS (2) DISPOSITION
--------------- ------------- --------------- -------------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
ASSETS
Current assets .............................. $ 59,921 $1,370 $(33,000)(a) $ --
(1,370)(a)
(2,000)(b)
11,000 (c)
(35,921)(d)
Property and equipment, net ................. (4,828) 4,218 (610)
Intangible assets, net ...................... (33,567) 3,303 27,479 (a) (8,345)
2,000 (b)
3,440 (b)
(11,000)(c)
Other assets ................................ (4) 566 (566)(a) (5,444)
(2,000)(a)
(3,440)(b)
--------------- ------------- --------------- -------------
Total assets ............................... $ 21,522 $9,457 $(45,378) $(14,399)
=============== ============= =============== =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities ......................... $ (914) $ 545 $ (545)(a) $ (914)
Long-term debt (including current portion):
Credit Facility............................. (35,921)(d) (35,921)
Other long-term debt ....................... (380) (380)
Stockholders' equity ........................ 22,816 8,912 (8,912)(a) 22,816
--------------- ------------- --------------- -------------
Total liabilities and stockholders' equity $ 21,522 $9,457 $(45,378) $(14,399)
=============== ============= =============== =============
</TABLE>
(1) Capstar Disposition
To reflect the Capstar Disposition for $60,000,000 in cash to SFX. SFX
will record a gain of approximately $23,000,000 on the disposition.
<TABLE>
<CAPTION>
JACKSON
AND
BILOXI CAPSTAR
SALE PROCEEDS STATIONS DISPOSITION
--------------- ----------- -------------
(IN THOUSANDS)
<S> <C> <C> <C>
ASSETS
Current assets .............................. $60,000 $ (79) $ 59,921
Property and equipment, net ................. (4,828) (4,828)
Intangible assets, net ...................... (33,567) (33,567)
Other assets ................................ (4) (4)
--------------- ----------- -------------
Total assets ............................... $60,000 $(38,478) $ 21,522
=============== =========== =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities ......................... $ (914) $ (914)
Long-term debt .............................. (380) (380)
Stockholders' equity ........................ $60,000 (37,184) 22,816
--------------- ----------- -------------
Total liabilities and stockholders' equity $60,000 $(38,478) $ 21,522
=============== =========== =============
</TABLE>
76
<PAGE>
SFX expects to use the proceeds from the Capstar Disposition to complete a
similar acquisition so that the Capstar Disposition can be treated as a
like-kind exchange which would be substantially tax free. Should SFX be
unable to structure such a transaction, SFX would utilize its available net
operating loss carryforwards and pay approximately $6,000,000 in additional
income taxes. No adjustment has been made for the potential payment of any
additional income taxes.
(2) Pro Forma Adjustments
a. To reflect the Nashville Acquisition for $33,000,000 in cash (net
of a $2,000,000 deposit made in August 1997), the related excess of
the purchase price paid over net book value of $27,479,000, and the
adjustments to remove $1,370,000 of current assets, $566,000 of
other assets, $545,000 of current liabilities, and stockholders'
equity of $8,912,000.
b. To reflect additional acquisition costs of approximately $2,000,000
related to the Nashville Acquisition and Chancellor Exchange,
principally consisting of professional fees and to reclassify
deposits, professional fees and other payments of approximately
$3,440,000 included in other assets as of September 30, 1997.
c. To reflect the $11,000,000 of cash to be received in the Chancellor
Exchange. No gain or loss will be recognized because the fair
market value of the stations received, as adjusted for cash
received or paid, equals the carrying value of the stations
exchanged.
d. To use the net cash proceeds from the Capstar Disposition,
Nashville Acquisition and Chancellor Exchange to reduce debt under
SFX's Credit Agreement.
77
<PAGE>
(B) Pending Acquisitions and the Financing--Entertainment
<TABLE>
<CAPTION>
SEPTEMBER 30, 1997 (IN THOUSANDS)
----------------------------------------------------------------
PACE AND CONCERT/
PAVILION CONTEMPORARY NETWORK BGP SOUTHERN
ACQUISITIONS ACQUISITION ACQUISITION ACQUISITION ACQUISITION
I II III IV V
------------ ------------ ----------- ----------- -----------
<S> <C> <C> <C><C> <C> <C>
ASSETS:
Current assets.............. $(150,730) $(72,800) $(44,510) $(54,222) $(16,615)
Property and equipment,
net........................ 82,489 25,000 1,000 20,000 1,000
Intangible assets, net ..... 125,314 66,500 61,701 50,179 15,151
Other assets................ 34,706 -- 391 222 464
------------ ------------ ----------- ----------- -----------
TOTAL ASSETS................ $ 91,779 $ 18,700 $ 18,582 $ 16,179 $ --
============ ============ =========== =========== ===========
LIABILITIES &
STOCKHOLDER'S EQUITY:
Current liabilities......... $ 63,756 $ --$ 8,468 $ 6,062 $ --
Deferred taxes.............. -- -- 114 2,617 --
Privately-placed debt....... -- -- -- -- --
Credit facility............. -- -- -- -- --
Other long-term debt........ -- -- -- -- --
Other liabilities........... 5,583 -- -- -- --
Minority interest........... 2,440 -- -- --
Temporary equity............ 16,500 -- -- -- --
Stockholders' Equity........ 3,500 18,700 10,000 7,500 --
------------ ------------ ----------- ----------- -----------
TOTAL LIABILITIES &
STOCKHOLDERS' EQUITY....... $ 91,779 $ 18,700 $ 18,582 $ 16,179 $ --
============ ============ =========== =========== ===========
</TABLE>
(RESTUBBED TABLE CONTINUED FROM ABOVE)
<TABLE>
<CAPTION>
PRO FORMA FOR
PRO FORMA THE PENDING
PRO FORMA ADJUSTMENTS FOR ACQUISITIONS AND
ADJUSTMENTS THE FINANCING THE FINANCING--
VI VII ENTERTAINMENT
----------- --------------- ----------------
<S> <C> <C> <C> <C> <C>
ASSETS:
Current assets.............. $ 2,145 (a) $352,893 $105,137
(40,500)(b) 88,976
40,500
Property and equipment,
net........................ -- -- 129,489
Intangible assets, net ..... 10,000 (d) 369,345
40,500 (b)
Other assets................ (1,610)(c) -- 34,173
----------- --------------- ----------------
TOTAL ASSETS................ $ 10,535 $482,369 $638,144
=========== =============== ================
LIABILITIES &
STOCKHOLDER'S EQUITY:
Current liabilities......... $ -- $ -- $ 78,286
Deferred taxes.............. 10,000 (d) -- 12,731
Privately-placed debt....... -- 350,000 350,000
Credit facility............. -- 132,369 132,369
Other long-term debt........ -- --
Other liabilities........... -- -- 5,583
Minority interest........... (1,610)(c) -- 830
Temporary equity............ -- -- 16,500
Stockholders' Equity........ 2,145 (a) -- 41,845
----------- --------------- ----------------
TOTAL LIABILITIES &
STOCKHOLDERS' EQUITY....... $ 10,535 $482,369 $638,144
=========== =============== ================
</TABLE>
78
<PAGE>
I. PACE AND PAVILION ACQUISITIONS
Reflects the PACE Acquisition and the separate acquisitions of the
remaining two partners' interests in Pavilion Partners (the "Pavilion
Acquisition"). The PACE Acquisition is not conditioned on the consummation of
the Pavilion Acquisition.
<TABLE>
<CAPTION>
AS OF SEPTEMBER 30, 1997 (000'S)
----------------------------------------------------------
PAVILION
PACE PARTNERS PRO FORMA PACE
AS REPORTED AS REPORTED ADJUSTMENTS TOTAL (F)
------------- ------------- --------------- ------------
<S> <C> <C> <C> <C>
Current assets........................... $45,087 $ 30,178 $(109,500)(a) $(150,730)
(25,523)(a)
(9,507)(b)
(4,171)(b)
(27,500)(c)
(49,794)(e)
Property and equipment, net.............. -- 59,938 5,000 (a) 82,489
9,103 (b)
(19,052)(d)
27,500 (c)
Intangible assets, net................... 17,894 -- 107,420 (a) 125,314
Other assets............................. 26,856 12,660 9,507 (b) 34,706
(4,810)(d)
(9,507)(d)
------------- ------------- --------------- ------------
Total Assets............................. $89,837 $102,776 $(100,834) $ 91,779
============= ============= =============== ============
Current liabilities...................... $43,171 $ 17,254 $ 2,000 (b) $ 63,756
2,932 (b)
1,601 (d)
Deferred taxes........................... -- --
Long-term debt (including current
portion)................................ 25,523 57,700 (25,523)(a) --
(7,906)(d)
(49,794)(e)
Other liabilities........................ 4,063 1,520 5,583
Minority interest........................ -- 2,440 -- 2,440
Temporary equity ........................ -- -- 16,500 (a) 16,500
Stockholders' Equity..................... 17,080 23,862 (17,080)(a) 3,500
20,000 (a)
(16,500) (a)
(23,862)(d)
- ---------------------------------------- ------------- ------------- --------------- ------------
Total Liabilities & Stockholders'
Equity.................................. $89,837 $102,776 $(100,834) $ 91,779
============= ============= =============== ============
</TABLE>
PRO FORMA ADJUSTMENTS:
(a) To reflect the PACE Acquisition for $109,500,000 in cash, the issuance
of 1,500,000 shares of SFX Entertainment's Class A common stock valued
by the parties at $20,000,000, the repayment of debt of $25,523,000
which is expected to be repaid shortly after closing, the related
increase in the fair value allocated to fixed assets of $5,000,000; the
related excess of the purchase price paid over the fair value of net
tangible assets of $107,420,000, and the elimination of stockholder's
equity of $17,080,000. Pursuant to the terms of the PACE Agreement,
additional consideration is required to be paid by SFX Entertainment if
the deemed value of SFX Entertainment's Class A common stock is below
$13.33 per share at the time of the Spin-Off under certain
circumstances.
The PACE Agreement further provides that each PACE seller will have a
Fifth Year Put Option, exercisable during a period beginning on the
fifth anniversary of the closing of the PACE Acquisition and ending 90
days thereafter, to require SFX Entertainment to purchase up to
one-third of the shares of SFX Entertainment's Class A common stock
(500,000 shares) received by such PACE seller for a cash purchase price
of $33.00 per share. With certain limited exceptions, the Fifth Year
Put Option rights are not assignable by the PACE sellers. The maximum
amount payable under the Fifth Year Put Option ($16,500,000) has been
presented as temporary equity on the pro forma balance sheet.
79
<PAGE>
Pursuant to the PACE Agreement, certain notes receivables and loans
made to key executives will be repaid in connection with the closing of
the PACE Acquisition. Such repayment has not been reflected herein.
(b) To reflect the acquisition of an additional 33.33% indirect interest in
Pavilion Partners from Blockbuster for $4,171,000 in cash, the
assumption of $2,932,000 in liabilities and the granting of naming
rights of three venues for a two-year period with an estimated value of
$2,000,000, which will be recognized as income over such two year
period, and the related increase in the fair value allocated to fixed
assets of $9,103,000. Also reflects the purchase of a note receivable
from Blockbuster, due from Pavilion Partners at its current outstanding
balance, including accrued interest, of $9,507,000. This note will be
eliminated in consolidation upon the acquisition of Sony's interest in
Pavilion Partners, as described below.
(c) To reflect the acquisition of an additional 33.33% indirect interest in
Pavilion Partners from Sony for $27,500,000 in cash.
(d) To eliminate PACE's equity method investment in Pavilion Partners
following the acquisition of 100% of Pavilion Partners and to eliminate
Pavilion Partners' historical equity. Also reflects the elimination of
the $7,906,000 intercompany notes receivable and accrued interest of
$1,601,000 acquired from Blockbuster. There can be no assurance that
SFX Entertainment will be able to consummate the acquisition of either
or both of Blockbuster's and Sony's respective interests in Pavilion
Partners and, as a result, SFX Entertainment may not obtain 100% of
Pavilion Partners . See "Agreements Related to Pending
Acquisitions--PACE Acquisition--Pavilion Acquisition" in Annex D.
(e) To reflect the repayment of Pavilion Partners' third party debt at the
closing of the Pavilion Acquisition.
(f) SFX Entertainment has agreed to lend PACE up to $25,000,000 for
potential acquisitions to be made by PACE whether or not the PACE
Acquisition is consummated. None of these acquisitions are considered
probable. As a result, none of such loans or acquisitions have been
reflected in the pro forma adjustment.
See "Agreements Related to Pending Acquisitions--PACE Acquisition" in
Annex D.
II. 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, MO that is operated by Contemporary. The
Contemporary Acquisition is not conditioned upon the consummation of the
acquisition of such 50% interest.
<TABLE>
<CAPTION>
AS OF SEPTEMBER 30, 1997 (000'S)
-------------------------------------------------------------
RIVERPORT
CONTEMPORARY AMPHITHEATER PRO FORMA CONTEMPORARY
AS REPORTED PARTNERS ADJUSTMENTS(A) ACQUISITION
-------------- -------------- -------------- --------------
<S> <C> <C> <C> <C>
Current assets........................... $13,375 $ 2,603 $(72,800) $(72,800)
(15,978)
Property and equipment, net.............. 2,838 11,355 10,807 25,000
Intangible assets, net................... -- -- 66,500 66,500
Other assets............................. 7,430 8 (1,205) --
(6,233)
-------------- -------------- -------------- --------------
Total Assets............................. $23,643 $13,966 $(18,909) $ 18,700
============== ============== ============== ==============
Current liabilities...................... $ 7,786 $ 1,022 $ (8,808) $ --
Other long-term debt (including current
portion)................................ 1,578 -- (1,578) --
Other liabilities........................ 5,390 478 (5,868) --
-------------- -------------- -------------- --------------
Total Liabilities........................ 14,754 1,500 (16,254) --
Stockholders' Equity..................... 8,889 12,466 18,700 18,700
(21,355)
-------------- -------------- -------------- --------------
Total Liabilities & Stockholders'
Equity.................................. $23,643 $13,966 $(18,909) $ 18,700
============== ============== ============== ==============
</TABLE>
80
<PAGE>
PRO FORMA ADJUSTMENTS:
(a) To reflect the Contemporary Acquisition for $72,800,000 in cash,
including the additional acquisition of the remaining 50% interest in
the Riverport Amphitheater Partners not already owned by Contemporary
and the issuance of 1,402,851 shares of SFX Entertainment Class A
common stock valued at $18,700,000, the related increase in the fair
value allocated to fixed assets of $10,807,000, the related excess of
the purchase price paid over the fair value of net tangible assets of
$66,500,000, and the adjustment to eliminate $15,978,000 of current
assets, $1,205,000 of other assets, $8,808,000 of current liabilities,
$1,578,000 of notes payable, $5,868,000 of other liabilities, and
stockholders' equity of $21,355,000, and to reflect the elimination of
Contemporary Group's $6,233,000 equity investment in Riverport
Amphitheather Partners. Pursuant to the Contemporary Agreement, SFX
Entertainment has eliminated certain cash and receivables from current
assets, accounts payable and accrued expenses from current liabilities,
and other assets and other liabilities (principally, deferred revenue),
which will not be acquired or assumed by SFX Entertainment upon closing
the Contemporary Acquisition. Adjustment to eliminate Contemporary's
historical stockholders' equity and replace it with value of the equity
securities to be issued by SFX Entertainment in connection with the
Contemporary Acquisition has also been made.
If Contemporary is unable to complete this acquisition of the remaining
50% interest in Riverport Amphitheater Partners, the cash consideration
paid by SFX Entertainment for Contemporary will be reduced by
$10,500,000.
The acquisition agreement provides that in the event the Contemporary
Acquisition is consummated prior to the consummation of the Spin-Off,
1,402,851 shares of preferred stock of SFX Entertainment will be issued to
the sellers. Such preferred stock is to be converted into an equal number of
shares of SFX Entertainment Class A common stock upon consummation of the
Spin-Off or, if the Spin-Off shall not have occurred prior to July 1, 1998,
such preferred stock is to be redeemed at its fair market value, but in no
event less than $18,700,000. In addition, pursuant to the terms of the
Contemporary Agreement, SFX Entertainment has agreed to make certain payments
to any Contemporary sellers that own shares of SFX Entertainment's Class A
common stock on the second anniversary of the closing of the Contemporary
Acquisition if the average trading price of such stock on the 20-day period
ending on such period is less than $13.33 per share. See "Agreements Related
to the Pending Acquisitions--Contemporary Acquisition" in Annex D.
III. NETWORK ACQUISITION
The Network Acquisition consists of the separate acquisitions of Network
Magazine and SJS. Each of these acquisitions is conditioned on the concurrent
closing of the other.
<TABLE>
<CAPTION>
AS OF SEPTEMBER 30, 1997 (000'S)
----------------------------------------------------------
NETWORK
MAGAZINE SJS PRO FORMA NETWORK
AS REPORTED AS REPORTED ADJUSTMENTS ACQUISITION
------------- ------------- -------------- -------------
<S> <C> <C> <C> <C>
Current assets........................... $ 3,127 $4,325 $(52,000)(a) $(44,510)
1,516 (b)
(1,478)(c)
Property and equipment, net.............. 304 334 362 (a) 1,000
Intangible assets, net................... -- -- 63,217 (a) 61,701
(1,516)(b)
Other assets............................. 299 92 -- 391
------------- ------------- -------------- -------------
Total Assets............................. $ 3,730 $4,751 $ 10,101 $ 18,582
============= ============= ============== =============
Current liabilities...................... $ 3,659 $4,809 -- $ 8,468
Deferred taxes........................... 114 -- -- 114
Long-term debt (including current
portion)................................ 1,478 -- (1,478)(c) --
------------- ------------- -------------- -------------
Total Liabilities........................ 5,251 4,809 (1,478) 8,582
Stockholders' Equity..................... (1,521) (58) 1,579 (a) 10,000
10,000 (a)
------------- ------------- -------------- -------------
Total Liabilities & Stockholders'
Equity.................................. $ 3,730 $4,751 $ 10,101 $ 18,582
============= ============= ============== =============
</TABLE>
81
<PAGE>
PRO FORMA ADJUSTMENTS:
(a) To reflect the Network Acquisition for $52,000,000 in cash and the
issuance of 750,188 shares of SFX Entertainment Class A common stock
valued by the parties at $10,000,000, the related increase in fair
value allocated to fixed assets of $362,000, and the related excess of
the purchase price paid over the fair value of net tangible assets of
$63,217,000, and the elimination of stockholder's deficiency of
$1,579,000.
SFX Entertainment's purchase agreement for Network Magazine and SJS
provides that the purchase price will be increased by $4,000,000 if
total 1998 EBITDA for Network and SJS as defined equals or exceeds
$9,000,000; by an additional $4 for each $1 increase in such EBITDA
between $9,000,000 and $10,000,000 and by an additional $6 for each $1
increase in such EBITDA between $10,000,000 and $11,000,000 (up to a
maximum of $14,000,000 of additional consideration). The additional
consideration is payable in shares of SFX Entertainment's Class A
common stock or, in certain circumstances, in cash. The pro forma
financial statements assume that no additional consideration is paid.
(b) To reflect a net working capital adjustment as required in the Network
Acquisition agreement. Pursuant to the agreement, the final cash
purchase price of Network Magazine and SJS shall be adjusted for any
difference between net working capital, as defined, and $500,000. The
working capital adjustment is calculated as the difference between
current assets and current liabilities of Network Magazine and SJS at
closing.
(c) To reflect the repayment of Network Magazine's long-term debt at
closing.
SFX Entertainment's purchase agreement for Network Magazine and SJS provides
SFX Entertainment with an option to acquire an office building in Burbank,
California, which currently serves as Network Magazine's headquarters, at a
cost of approximately $2,400,000. This potential transaction has not been
reflected on the pro forma balance sheet.
See "Agreements Related to the Pending Acquisitions--Network Agreement" in
Annex D.
IV. BGP ACQUISITION
<TABLE>
<CAPTION>
AS OF SEPTEMBER 30, 1997 (000'S)
--------------------------------------------
PRO FORMA BGP
AS REPORTED ADJUSTMENTS ACQUISITION
------------- -------------- -------------
<S> <C> <C> <C>
Current assets........................... $18,759 $(60,800)(a) $(54,222)
(12,181)(b)
Property and equipment, net.............. 9,233 10,767 (a) 20,000
Intangible assets, net .................. 1,460 48,719 (a) 50,179
Other assets............................. 222 -- 222
------------- -------------- -------------
Total Assets............................. $29,674 $(13,495) $ 16,179
============= ============== =============
Current liabilities...................... $ 6,062 $ -- $ 6,062
Deferred taxes .......................... 2,617 -- 2,617
Other long-term debt (including current
portion)................................ 12,181 (12,181)(b) --
------------- -------------- -------------
Total Liabilities........................ 20,860 (12,181) 8,679
Stockholders' Equity..................... 8,814 (8,814)(a) 7,500
7,500 (a)
------------- -------------- -------------
Total Liabilities & Stockholders'
Equity.................................. $29,674 $(13,495) $ 16,179
============= ============== =============
</TABLE>
PRO FORMA ADJUSTMENTS:
(a) To reflect the BGP Acquisition for $60,800,000 in cash and the issuance
of 563,000 shares of SFX Entertainment's Class A common stock valued at
$7,500,000, the related increase in fair value allocated to fixed
assets of $10,767,000, and the related excess of the purchase price
paid over the fair value of net tangible assets of $48,719,000, and the
elimination of $8,814,000 of stockholder's equity.
82
<PAGE>
(b) To reflect the repayment of BGP's long-term debt at closing. Although
SFX Entertainment is assuming $12,200,000 of long-term debt, BGP is
required to have working capital at least equal to such liabilities at
the closing of the BGP Acquisition. The purchase price will be reduced
dollar-for-dollar to the extent that long-term debt exceeds working
capital.
See "Agreements Related to the Pending Acquisitions--BGP Acquisition"
in Annex D.
V. CONCERT/SOUTHERN ACQUISITION
<TABLE>
<CAPTION>
AS OF SEPTEMBER 30, 1997 (000'S)
--------------------------------------------
CONCERT/
PRO FORMA SOUTHERN
AS REPORTED ADJUSTMENTS(A) ACQUISITION
------------- -------------- -------------
<S> <C> <C> <C>
Current assets........................... $1,921 $(16,615) $(16,615)
(1,921)
Property and equipment, net.............. 360 640 1,000
Intangible assets, net................... -- 15,151 15,151
Other assets............................. 919 (455) 464
------------- -------------- -------------
Total Assets............................. $3,200 $ (3,200) $ --
============= ============== =============
Current liabilities...................... $1,254 $ (1,254) $ --
------------- -------------- -------------
Total Liabilities........................ 1,254 (1,254) --
Stockholders' Equity..................... 1,946 (1,946) --
------------- -------------- -------------
Total Liabilities & Stockholders'
Equity.................................. $3,200 $ (3,200) $ --
============= ============== =============
</TABLE>
PRO FORMA ADJUSTMENTS:
(a) To reflect the Concert/Southern Acquisition for $16,615,000 in cash;
the related increase in fair value allocated to fixed assets of
$640,000, the related excess of the purchase price paid over the fair
value of net tangible assets of $15,151,000; and the adjustments to
eliminate $1,921,000 of current assets, $1,254,000 of current
liabilities, stockholders' equity of $1,946,000 and a $455,000
investment in a non-entertainment affiliated entity not being acquired
by SFX Entertainment. Pursuant to the Concert/Southern Acquisition
agreement, SFX Entertainment has eliminated certain cash and
receivables from current assets and accounts payable and other accrued
expenses from current liabilities, which will not be acquired or
assumed by SFX Entertainment upon closing the Concert/Southern
Acquisition. Adjustment to eliminate Concert/Southern's historical
combined stockholders' equity and replace it with the value of the
equity securities to be issued by SFX Entertainment in connection with
the Concert/Southern Acquisition has also been made.
See "Agreements Related to the Pending Acquisitions--Concert/Southern" in
Annex D.
VI. PRO FORMA ADJUSTMENTS FOR PENDING ACQUISITIONS--ENTERTAINMENT
(a) The Distribution Agreement provides that SFX will transfer any positive
Working Capital in existence at the closing of the Merger to SFX
Entertainment, and that if Working Capital is negative at that time,
SFX Entertainment will pay the amount of such shortfall to SFX. As of
September 30, 1997 the amount of positive Working Capital would have
been $2,145,000 and such amount is reflected in the cash to be acquired
by SFX Entertainment pursuant to the Distribution Agreement. The actual
amount of Working Capital as of the closing of the Merger may differ
substantially from the amount in existence on September 30, 1997, and
will be a function of, among other things, the operating results of SFX
through the date of the Merger and the actual cost of consummating the
Merger and the related transactions. Additionally, SFX Entertainment
will be responsible for any taxes resulting from the Spin-Off to the
extent such taxes result from any gain on the distribution. See
"Agreements Between SFX Entertainment and SFX."
(b) To reflect estimated costs associated with the Pending Acquisitions and
the Financing and the related transactions. Consists of approximately
(i) $5.5 million in fees and expenses in connection with the
83
<PAGE>
Pending Acquisitions, (ii) $17.2 million in fees in connection with the
Spin-Off, the consent solicitations and other required consents and
(iii) $17.8 million of fees and expenses in connection with the
Financing. The information relating to fees and expenses is based on
management's estimates, and may not be indicative of, and are likely to
vary from, the actual fees and expense incurred by SFX Entertainment
relating to the Financing, the Pending Acquisitions, the Spin-Off and
the Merger.
(c) To reflect the consolidation of GSAC Partners (the entity which
operates the PNC Bank Arts Center) following the acquisition of the
remaining 50% ownership interest in GSAC currently owned by Pavilion.
(d) To reflect deferred taxes associated with differences between the book
and tax bases of assets and liabilities acquired.
VII. PRO FORMA ADJUSTMENTS FOR THE FINANCING
Represents assumed borrowings to finance the Pending Acquisitions
including the privately-placed debt and borrowings under the proposed senior
credit facility. There can be no assurance that SFX Entertainment will be
able to enter into or obtain financing under the proposed senior credit
facility, on acceptable terms, or at all. SFX Entertainment anticipates using
$352.9 million of proceeds to finance the cash portion of the Pending
Acquisitions, $89 million for the repayment of debt assumed in the Pending
Acquisitions and $40.5 million for the payment of estimated costs associated
with the Pending Acquisitions and the Financing and related transactions. The
repayment of assumed debt includes $25.5 million in connection with the PACE
Acquisition, $49.8 million in connection with the Pavilion Acquisition, $12.2
million in connection with the BGP Acquisition and $1.4 million in connection
with the Network Acquisition.
(C) SFX Entertainment Pro Forma for the Pending Acquisitions
Reflects SFX Entertainment after the Pending Acquisitions.
(D) Pro Forma for the Spin-Off of SFX Entertainment
Represents the pro forma balance sheet of SFX after the Spin-Off of SFX
Entertainment.
84
<PAGE>
SFX BROADCASTING, INC.
UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS
NINE MONTHS ENDED SEPTEMBER 30, 1997
(In Thousands, Except Per Share Amounts)
<TABLE>
<CAPTION>
PENDING PENDING
ACQUISITION ACQUISITIONS
SFX AND AND THE
BROADCASTING, COMPLETED DISPOSITION-- FINANCING--
INC. AS TRANSACTIONS BROADCASTING ENTERTAINMENT
REPORTED (A) (B) (C)
--------------- -------------- -------------- ---------------
<S> <C> <C> <C> <C>
Net broadcasting
revenues............... $188,984 $38,685 $(4,938)
Concert promotion
revenue ............... 74,396 12,293 $414,154
Station and other
operating expenses ... 115,871 28,289 (1,226)
Concert promotion
operating expenses ... 63,045 12,236 364,985
Depreciation,
amortization, duopoly
integration costs and
acquisition related
costs.................. 31,429 7,090 (95) 23,253
Corporate expenses...... 7,198* 1,500
-------------- -------------- ---------------
Other .................. 17,995
--------------- -------------- -------------- ---------------
Operating income
(loss)................. 27,842 3,363 (3,617) 24,416
Interest expense ....... 46,438 8,408 31,895
Other expense (income) . (2,692) -- (3) (566)
Equity (income) loss
from investments....... (1,344) -- -- (4,309)
--------------- -------------- -------------- ---------------
Income before income
tax expense ........... (14,560) (5,045) (3,614) (2,604)
Income tax expense
(benefit).............. 845 32 (3) 3,626
--------------- -------------- -------------- ---------------
Net income (loss) ...... (15,405) (5,077) (3,611) (6,230)
Redeemable preferred
stock dividends and
accretion ............. 27,723 1,183 -- 2,475
--------------- -------------- -------------- ---------------
Net income (loss)
applicable to common
shares................. $(43,128) $(6,260) $(3,611) $ (8,705)
=============== ============== ============== ===============
Net loss per common
share.................. $ (4.61)
Weighted average common
shares outstanding..... 9,364
</TABLE>
(RESTUBBED TABLE CONTINUED FROM ABOVE)
<TABLE>
<CAPTION>
SFX PRO FORMA
ENTERTAINMENT FOR THE
PRO FORMA FOR FOR THE SPIN-OFF
THE COMPLETED PENDING OF SFX
AND PENDING ACQUISITIONS ENTERTAINMENT
TRANSACTIONS (D) (E)
--------------- --------------- ---------------
<S> <C> <C> <C>
Net broadcasting
revenues............... $222,731 $222,731
Concert promotion
revenue ............... 500,843 $500,843 --
Station and other
operating expenses ... 142,934 142,934
Concert promotion
operating expenses ... 440,266 440,266 --
Depreciation,
amortization, duopoly
integration costs and
acquisition related
costs.................. 61,677 28,378 33,299
Corporate expenses...... 8,698* 2,807 5,891
--------------- --------------- ---------------
Other .................. 17,995 17,995
--------------- --------------- ---------------
Operating income
(loss)................. 52,004 29,392 22,612
Interest expense ....... 86,741 33,186 53,555
Other expense (income) . (3,261) (779) (2,482)
Equity (income) loss
from investments....... (5,653) (5,653) --
--------------- --------------- ---------------
Income before income
tax expense ........... (25,823) 2,638 (28,461)
Income tax expense
(benefit).............. 4,500 3,500 1,000
--------------- --------------- ---------------
Net income (loss) ...... (30,323) (862) (29,461)
Redeemable preferred
stock dividends and
accretion ............. 31,381 2,475 28,906
--------------- --------------- ---------------
Net income (loss)
applicable to common
shares................. $(61,704) $ (3,337) $(58,367)
=============== =============== ===============
Net loss per common
share.................. $ (.17)** $ (3.68)
Weighted average common
shares outstanding..... 20,400 15,840
</TABLE>
- ------------
* Net of $1,693,000 of fees from Triathlon.
** Includes 500,000 shares of SFX Entertainment Class A common stock to be
issued to the PACE sellers in connection with the Fifth Year Put
Option; such shares are not included in calculating the net loss per
common share.
85
<PAGE>
SFX BROADCASTING, INC.
UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, 1996
(In Thousands, Except Per Share Amounts)
<TABLE>
<CAPTION>
PENDING
ACQUISITION
SFX AND
BROADCASTING, COMPLETED DISPOSITION--
INC. AS TRANSACTIONS BROADCASTING
REPORTED (A) (B)
--------------- -------------- --------------
<S> <C> <C> <C>
Net broadcasting
revenues............. $143,061 $131,014 $(1,381)
Concert promotion
revenue ............. 104,784
Station and other
operating expenses .. 92,816 90,243 1,208
Concert promotion
operating expenses . 91,240
Depreciation,
amortization,
duopoly integration
costs and
acquisition related
costs................ 17,311 36,528 650
Corporate expenses ... 6,313 (313)
Other................. 28,994 (3,332)
--------------- -------------- --------------
Operating income
(loss)............... (2,373) 21,432 (3,239)
Interest expense .... 34,897 38,496
Other expense
(income)............. (2,117) (467) (538)
Equity (income) loss
from investments ... (525)
--------------- -------------- --------------
Income before income
tax expense.......... (35,153) (16,072) (2,701)
Income tax expense
(benefit)............ 480 1,315
--------------- -------------- --------------
Net income (loss) .... (35,633) (17,387) (2,701)
Redeemable preferred
stock dividends and
accretion............ 6,061 32,063 --
--------------- -------------- --------------
Net income (loss)
applicable to common
shares............... $(41,694) $(49,450) $(2,701)
=============== ============== ==============
Net loss per common
share ............... $ (4.57)
Weighted average
common shares
outstanding.......... 9,128 71
</TABLE>
(RESTUBBED TABLE CONTINUED FROM ABOVE)
<TABLE>
<CAPTION>
SFX
PENDING ENTERTAINMENT PRO FORMA
ACQUISITIONS PRO FORMA FOR THE
AND THE PRO FORMA FOR FOR THE SPIN-OFF
FINANCING-- THE COMPLETED PENDING OF SFX
ENTERTAINMENT AND PENDING ACQUISITIONS ENTERTAINMENT
(C) TRANSACTIONS (D) (E)
--------------- --------------- --------------- ---------------
<S> <C> <C> <C> <C>
Net broadcasting
revenues............. $ 272,694 $272,694
Concert promotion
revenue ............. $447,581 552,365 $552,365 --
Station and other
operating expenses .. 184,267 184,267
Concert promotion
operating expenses . 414,297 505,537 505,537 --
Depreciation,
amortization,
duopoly integration
costs and
acquisition related
costs................ 30,962 85,451 37,795 47,656
Corporate expenses ... 2,000 8,000 3,000 5,000
Other................. -- 25,662 -- 25,662
--------------- --------------- --------------- ---------------
Operating income
(loss)............... 322 16,142 6,033 10,109
Interest expense .... 42,527 115,920 44,307 71,613
Other expense
(income)............. (1,466) (4,588) (1,832) (2,756)
Equity (income) loss
from investments ... (2,877) (3,402) (3,402) --
--------------- --------------- --------------- ---------------
Income before income
tax expense.......... (37,862) (91,788) (33,040) (58,748)
Income tax expense
(benefit)............ 1,705 3,500 1,500 2,000
--------------- --------------- --------------- ---------------
Net income (loss) .... (39,567) (95,288) (34,540) (60,748)
Redeemable preferred
stock dividends and
accretion............ 3,300 (41,424) 3,300 38,124
--------------- --------------- --------------- ---------------
Net income (loss)
applicable to common
shares............... $(42,867) $(136,712) $(37,840) $(98,872)
=============== =============== =============== ===============
Net loss per common
share ............... $ (1.90)** $ (6.24)
Weighted average
common shares
outstanding.......... 20,400 15,840
</TABLE>
- ------------
* Net of $3,000,000 of fees from Triathlon.
** Includes 500,000 shares of SFX Entertainment Class A common stock to be
issued to the PACE sellers in connection with the Fifth Year Put
Option; such shares are not included in calculating the net loss per
common share.
86
<PAGE>
NOTES TO UNAUDITED PRO FORMA CONDENSED COMBINED
STATEMENTS OF OPERATIONS
(A) Completed Trasactions
<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30, 1997 (IN THOUSANDS)
----------------------------------------------------------------
CBS SECRET
TEXAS COAST HARTFORD MEADOWS EXCHANGE COMMUNICATIONS
ACQUISITION ACQUISITION ACQUISITION (6) ACQUISITION
----------- ----------- ----------- ---------- --------------
<S> <C> <C> <C> <C> <C>
Net broadcast revenues ... $652 $638 $ (60) $20,626
Concert promotion
revenue.................. $ 601
Station and other
operating expenses....... 401 664 630 11,230
Concert promotion
operating expense........ 631
Depreciation,
amortization, duopoly
integration costs and
acquisition related
costs.................... -- -- 221 -- 1,207
Corporate expenses........ -- -- -- -- --
----------- ----------- ----------- ---------- --------------
Operating income (loss) .. 251 (26) (251) (690) 8,189
Interest expense.......... -- -- 199 -- 1,459
Other expense (income) ... -- -- -- -- 79
----------- ----------- ----------- ---------- --------------
Income (loss) before
income tax expense....... 251 (26) (450) (690) 6,651
Income tax expense
(benefit)................ -- -- -- 32 --
----------- ----------- ----------- ---------- --------------
Net income (loss) ........ 251 (26) (450) (722) 6,651
Preferred stock dividend
requirements............. -- -- -- -- --
----------- ----------- ----------- ---------- --------------
Net income (loss)
applicable to common
shares .................. $251 $(26) $(450) $(722) $ 6,651
=========== =========== =========== ========== ==============
</TABLE>
(RESTUBBED TABLE CONTINUED FROM ABOVE)
<TABLE>
<CAPTION>
CHARLOTTE PRO FORMA
RICHMOND EXCHANGE SUNSHINE HEARST ADJUSTMENTS COMPLETED
ACQUISITION (7) ACQUISITION ACQUISITION (8) TRANSACTIONS
----------- ---------- ----------- ----------- ----------- ------------
<S> <C> <C> <C> <C> <C> <C>
Net broadcast revenues ... $5,105 $1,564 $10,160 $38,685
Concert promotion
revenue.................. $11,692 12,293
Station and other
operating expenses....... 3,722 1,328 -- 10,314 28,289
Concert promotion
operating expense........ 11,605 12,236
Depreciation,
amortization, duopoly
integration costs and
acquisition related
costs.................... 456 375 686 -- $ 125 (a) 7,090
2,512 (b)
393 (c)
884 (l)
231 (m)
Corporate expenses........ -- -- -- -- -- --
----------- ---------- ----------- ----------- ----------- ------------
Operating income (loss) .. 927 (139) (599) (154) (4,145) 3,363
Interest expense.......... 481 (730) 1,106 -- (47,397)(a) 8,408
16,848 (a)
36,282 (a)
195 (h)
(35)(j)
Other expense (income) ... -- -- -- -- (79)(i) --
----------- ---------- ----------- ----------- ----------- ------------
Income (loss) before
income tax expense....... 446 591 (1,705) (154) (9,959) (5,045)
Income tax expense
(benefit)................ -- -- -- -- 32
----------- ---------- ----------- ----------- ----------- ------------
Net income (loss) ........ 446 591 (1,705) (154) (9,959) (5,077)
Preferred stock dividend
requirements............. -- -- -- -- 1,183 (n) 1,183
----------- ---------- ----------- ----------- ----------- ------------
Net income (loss)
applicable to common
shares .................. $ 446 $ 591 $(1,705) $ (154) $(11,142) $(6,260)
=========== ========== =========== =========== =========== ============
</TABLE>
87
<PAGE>
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1996 (IN THOUSANDS)
-------------------------------------------------------------------------------------------------------------
LIBERTY PRISM
ACQUISITION ACQUISITION HOUSTON
INCLUDING INCLUDING OTHER EXCHANGE
MMR WASHINGTON LOUISVILLE 1996 AND DALLAS DELSENER/ TEXAS
MERGER DISPOSITIONS DISPOSITIONS ACQUISITIONS DISPOSITION SLATER COAST HARTFORD MEADOWS
(1) (2) (3) (4) (5) ACQUISITION ACQUISITION ACQUISITION ACQUISITIONS
------- ------------ ------------ ------------ ----------- ----------- ----------- ----------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net broadcast
revenues ......$20,038 $24,992 $13,511 $ 4,728 $ (8,680) $4,281 $5,742
Concert
promotion
revenue ....... $50,361 $10,175
Station and
other
operating
expenses ...... 11,531 17,774 10,897 2,869 (10,307) 2,968 5,607
Concert
promotion
operating
expense ....... 50,686 9,306
Depreciation,
amortization,
duopoly
integration
costs and
acquisition
related costs . 6,081 5,150 1,241 1,492 (284) 747 36 27 1,550
Corporate
expenses ...... 1,253 1,478 808 111 110 -- -- -- --
Other .......... 577 -- -- -- (3,500) -- (48) -- --
------- ------------ ------------ ------------ ----------- ----------- ----------- ----------- ------------
Operating
income (loss) . 596 590 565 256 5,301 (1,072) 1,325 108 (681)
Interest
expense ....... -- 3,326 773 382 (1,667) 60 -- 19 1,275
Other expense
(income) ..... -- 5,935 -- (11,948) -- (198) (65) (8) (30)
Equity (income)
loss from
investments .. -- -- -- -- -- (525) -- -- --
------- ------------ ------------ ------------ ----------- ----------- ----------- ----------- ------------
Income (loss)
before income
tax expense ... 596 (8,671) (208) 11,822 6,968 (409) 1,390 97 (1,926)
Income tax
expense
(benefit) ..... -- (3,378) -- 45 938 106 22 32 17
------- ------------ ------------ ------------ ----------- ----------- ----------- ----------- ------------
Net income
(loss) ........ 596 (5,293) (208) 11,777 6,030 (515) 1,368 65 (1,943)
Preferred stock
dividend
requirement ... -- -- -- -- -- -- -- -- --
Net income
(loss)
applicable to
common shares .$ 596 $(5,293) $ (208) $ 11,777 $ 6,030 $ (515) $1,368 $ 65 $(1,943)
======= ============ ============ ============ =========== =========== =========== =========== ============
Average common
shares
outstanding ..
</TABLE>
<PAGE>
(RESTUBBED TABLE CONTINUED FROM ABOVE)
<TABLE>
<CAPTION>
PRO
CBS SECRET CHARLOTTE FORMA
EXCHANGE COMMUNICATIONS RICHMOND EXCHANGE SUNSHINE HEARST ADJUSTMENTS COMPLETED
(6) ACQUISITION ACQUISITION (7) ACQUISITION ACQUISITION (8) TRANSACTIONS
-------- -------------- ----------- --------- ----------- ----------- ----------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net broadcast
revenues ...... $ 10 $35,532 $ 9,007 $6,222 $15,631 $131,014
Concert
promotion
revenue ....... $44,248 104,784
Station and
other
operating
expenses ...... 1,288 20,844 7,757 3,885 15,130 90,243
Concert
promotion
operating
expense ....... 37,326 (6,078)(o) 91,240
Depreciation,
amortization,
duopoly
integration
costs and
acquisition
related costs . -- 3,970 780 500 1,522 293 $ 1,491 (a) 36,528
8,052 (b)
559 (d)
3,014 (l)
308 (m)
Corporate
expenses ...... -- -- 1,037 -- -- 169 (3,713)(e) (313)
1,434 (e)
(3,000)(f)
Other .......... (363) 2 -- -- -- -- (3,332)
-------- -------------- ----------- --------- ----------- ----------- ----------- ------------
Operating
income (loss) . (915) 10,716 (567) 1,837 5,400 39 (2,066) 21,432
Interest
expense ....... -- -- 1,210 -- 3,019 -- (5,583)(a) 38,496
22,462 (a)
(35,635)(a)
48,375 (a)
547 (h)
(67)(j)
Other expense
(income) ..... -- 1,175 -- -- (138) -- (5,935)(g) (467)
11,920 (g)
(1,175)(i)
Equity (income)
loss from
investments .. -- -- -- -- -- -- (525)
-------- -------------- ----------- --------- ----------- ----------- ----------- ------------
Income (loss)
before income
tax expense ... (915) 9,541 (1,777) 1,837 2,519 39 (36,975) (16,072)
Income tax
expense
(benefit) ..... 783 -- -- -- 1,138 -- 1,612 (g) 1,315
-------- -------------- ----------- --------- ----------- ----------- ----------- ------------
Net income
(loss) ........ (1,698) 9,541 (1,777) 1,837 1,381 39 (38,587) (17,387)
Preferred stock
dividend
requirement ... -- -- -- -- -- -- 32,063 (n) 32,063
Net income
(loss)
applicable to
common shares . $(1,698) $ 9,541 $(1,777) $1,837 $ 1,381 $ 39 $(70,650) $(49,450)
======== ============== =========== ========= =========== =========== =========== ============
Average common
shares
outstanding .. 70,796 (k) 70,796
</TABLE>
88
<PAGE>
(1) MMR Merger
Reflects the net effect of the historical operations of Multi-Market
Radio, Inc. ("MMR") as adjusted for acquisitions and dispositions. SFX has
not included in the pro forma statement of operations cost savings of
$792,000 it believes would have been achieved in connection with the MMR
Hartford Acquisition had the transaction been consummated as of January 1,
1996, consisting principally of the elimination of certain duplicative
technical sales and general and administrative functions due to the
operation of a cluster of stations in the Hartford market.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1996
-------------------------------------------------------------------
MMR
AS MMR HARTFORD PRO FORMA MMR
REPORTED DISPOSITIONS(A) ACQUISITION ADJUSTMENTS MERGER
---------- --------------- ------------- ------------- ---------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Net broadcast revenues....... $18,832 $(1,623) $2,829 $20,038
Station operating expenses .. 11,422 (1,931) 2,040 11,531
Depreciation/amortization ... 7,611 (1,833) 277 $ 26 (b) 6,081
Corporate expenses........... 2,517 -- -- 1,253 (c) 1,253
(2,517)(c)
Other........................ 63 -- -- 514 (e) 577
---------- --------------- ------------- ------------- ---------
Operating income (loss) ..... (2,781) 2,141 512 724 596
Interest expense............. 5,265 -- 274 (5,539)(d) --
Other expense (income)....... -- (57) (12) 69 (d) --
Income tax expense
(benefit)................... -- 7 (7)(d) --
---------- --------------- ------------- ------------- ---------
Net income (loss)............ $(8,046) $ 2,198 $ 243 $ 6,201 $ 596
========== =============== ============= ============= =========
</TABLE>
(a) Reflects the elimination of the operations of stations WRSF-FM,
sold in March 1996, WRXR-FM and WKBG-FM, sold in July 1996,
WYAK-FM and WMYB-FM, sold in March 1997, and KOLL-FM, sold in
April 1997.
(b) Reflects $26,000 for the year ended December 31, 1996 in
amortization of intangible assets recorded in connection with the
MMR Merger, Myrtle Beach Acquisition, MMR Hartford Acquisition,
related incremental deferred taxes and change in amortization
periods.
(c) To record incremental corporate overhead charges of $1,253,000
associated with the MMR Merger for the year ended December 31,
1996, and to eliminate MMR's existing corporate overhead of
$2,517,000 for the year ended December 31, 1996.
(d) Elimination of nonrecurring income of $69,000 for the year ended
December 31, 1996, interest expense of $5,539,000 for the year
ended December 31, 1996, and income tax expense of $7,000 for the
year ended December 31, 1996.
(e) Reflects non-cash compensation charge for the issuance of shares
of the Series A and Series B Convertible Preferred Stock of MMR.
The shares of Series A and Series B stock were issued to certain
officers and advisors of MMR in July and November 1996,
respectively, and converted into Class A Common Stock of SFX upon
consummation of the MMR Merger. Certain of the shares issued
pursuant to the Series A and Series B conversions which were
issued to individuals currently employed by SFX are being held in
escrow and are being released in five equal annual installments
ending in April 2001.
89
<PAGE>
(2) Liberty Acquisition
Reflects the net effect of the historical operations of the Liberty
Acquisition adjusted for the Washington Dispositions.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1996
-------------------------------------------
LIBERTY AS WASHINGTON LIBERTY
REPORTED DISPOSITIONS ACQUISITION
------------ -------------- -------------
(IN THOUSANDS)
<S> <C> <C> <C>
Net broadcast revenues .... $25,966 $ (974) $24,992
Station operating
expenses.................. 19,337 (1,563) 17,774
Depreciation/amortization . 5,926 (776) 5,150
Corporate expenses......... 1,566 (88) 1,478
------------ -------------- -------------
Operating income........... (863) 1,453 590
Interest expense........... 3,467 (141) 3,326
Other expense (income) ... 5,935 -- 5,935
Income tax benefit......... (3,378) -- (3,378)
------------ -------------- -------------
Net income (loss).......... $(6,887) $ 1,594 $(5,293)
============ ============== =============
</TABLE>
(3) Prism Acquisition
Reflects the net effect of the historical operations of the Prism
Acquisition adjusted for the Louisville Dispositions.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1996
-----------------------------------------
PRISM AS LOUISVILLE PRISM
REPORTED DISPOSITIONS ACQUISITION
---------- -------------- -------------
(IN THOUSANDS)
<S> <C> <C> <C>
Net broadcast revenues .... $16,859 $(3,348) $13,511
Station operating
expenses.................. 13,373 (2,476) 10,897
Depreciation/amortization . 1,599 (358) 1,241
Corporate expenses......... 808 -- 808
---------- -------------- -------------
Operating income (loss) ... 1,079 (514) 565
Interest expense........... 773 -- 773
---------- -------------- -------------
Net loss................... $ 306 $ (514) $ (208)
========== ============== =============
</TABLE>
90
<PAGE>
(4) Other 1996 Acquisitions
Reflects the net effect of the combined historical operations of the
Greensboro Acquisition, the Raleigh-Greensboro Acquisitions, the
Greenville Acquisition and the Jackson Acquisitions.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1996
--------------------------------------------------------
RALEIGH-
GREENSBORO AND
GREENSBORO GREENVILLE JACKSON
ACQUISITIONS ACQUISITION ACQUISITIONS TOTAL
-------------- ------------- -------------- ----------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Net broadcast revenues .... $3,619 $ 639 $470 $ 4,728
Station operating expenses 2,264 271 334 2,869
Depreciation/amortization . 1,168 244 80 1,492
Corporate expenses ......... 4 107 -- 111
-------------- ------------- -------------- ----------
Operating income (loss) .... 183 17 56 256
Interest expense............ 59 323 -- 382
Other expense (income) ..... (51) (11,897) -- (11,948)
Income tax expense.......... 45 -- -- 45
-------------- ------------- -------------- ----------
Net income (loss)........... $ 130 $ 11,591 $ 56 $ 11,777
============== ============= ============== ==========
</TABLE>
(5) Houston Exchange and Dallas Disposition
To reflect the exchange of KRLD-AM and the Texas State Networks for
KKRW-FM in the Houston Exchange, and the sale of KTCK-AM in the Dallas
Disposition.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1996
----------------------------------------------------------------------------------------
HOUSTON EXCHANGE
DISPOSITIONS ACQUISITION ADJUSTMENTS* AND DALLAS DISPOSITION
------------------------------------------------ -------------- ----------------------
KRLD-AM TSN KTCK-AM KKRW-FM
----------- ---------- ---------- -------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Net broadcast revenues .... $(10,711) $(2,843) $(2,136) $7,010 $ -- $ (8,680)
Station operating expenses (9,316) (2,222) (2,490) 3,721 -- (10,307)
Depreciation/amortization . (1,157) (226) (284) 81 1,302 (284)
Corporate expenses ......... -- -- -- 110 -- 110
Other....................... (1,600) -- (1,900) -- -- (3,500)
----------- ---------- ---------- ------------- -------------- ----------------------
Operating income (loss) ... 1,362 (395) 2,538 3,098 (1,302) 5,301
Interest expense ........... (1,482) (373) 188 -- -- (1,667)
Other expense (income) .... -- -- -- 938 -- 938
----------- ---------- ---------- ------------- -------------- ----------------------
Net income (loss) .......... $ 2,844 $ (22) $ 2,350 $2,160 $(1,302) $ 6,030
=========== ========== ========== ============= ============== ======================
</TABLE>
(*) To reflect historical depreciation and amortization of KRLD-AM
and the Texas State Networks and the disposition of KTCK-AM.
91
<PAGE>
(6) CBS Exchange
To reflect the net effect of the exchange of WHFS-FM for KTXQ-FM and
KRRW-FM in the CBS Exchange.
<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30, 1997
------------------------------------------------
KTXQ-FM WHFS-FM CBS
KRRW-FM DISPOSAL ADJUSTMENTS* EXCHANGE
--------- ---------- -------------- ----------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Net broadcast revenues .... $1,628 $1,688 $ -- $ (60)
Station operating
expenses.................. 1,655 1,025 -- 630
Depreciation/amortization . 54 783 729 --
--------- ---------- -------------- ----------
Operating income (loss) ... (81) (120) (729) (690)
Income tax expense......... 32 -- -- 32
--------- ---------- -------------- ----------
Net income (loss).......... $ (113) $ (120) $(729) $(722)
========= ========== ============== ==========
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1996
------------------------------------------------
KTXQ-FM WHFS-FM CBS
KRRW-FM DISPOSAL ADJUSTMENTS* EXCHANGE
--------- ---------- -------------- ----------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Net broadcast revenues........ $9,572 $9,562 $ -- $ 10
Station operating expenses ... 7,116 5,828 -- 1,288
Depreciation/amortization .... 218 1,548 1,330 --
Other ........................ -- 363 -- (363)
--------- ---------- -------------- ----------
Operating income.............. 2,238 1,823 (1,330) (915)
Income tax expense (benefit) 783 -- -- 783
--------- ---------- -------------- ----------
Net income (loss)............. $1,455 $1,823 $(1,330) $(1,698)
========= ========== ============== ==========
</TABLE>
* To eliminate depreciation of KTXQ-FM and KRRW-FM and reflect
depreciation of WHFS-FM.
(7) Charlotte Exchange
Reflects the transfer of WDSY-FM and $20,000,000 in exchange for WRFX-FM
in the Charlotte Exchange.
<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30, 1997
-------------------------------------------------------
WDSY-FM WRFX-FM CHARLOTTE
DISPOSITION ACQUISITION ADJUSTMENTS EXCHANGE
------------- ------------- ------------- -----------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Net revenues................... $(4,367) $5,931 $1,564
Station operating expenses .... (1,794) 3,122 1,328
Depreciation, amortization and
acquisition related costs .... (183) -- $ 558 375
------------- ------------- ------------- -----------
Operating income............... (2,390) 2,809 (558) (139)
------------- ------------- ------------- -----------
Interest expense............... (730) -- -- (730)
Net income (loss).............. $(1,660) $2,809 $(558) $ 591
============= ============= ============= ===========
</TABLE>
92
<PAGE>
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1996
-------------------------------------------------------
WDSY-FM WRFX-FM CHARLOTTE
DISPOSITION ACQUISITION ADJUSTMENTS EXCHANGE
------------- ------------- ------------- -----------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Net revenues................... $(3,697) $9,919 $6,222
Station operating expenses .... (1,593) 5,478 3,885
Depreciation, amortization and
acquisition related costs .... -- 2,907 $(2,407)* 500
------------- ------------- ------------- -----------
Operating income............... (2,104) 1,534 2,407 1,837
------------- ------------- ------------- -----------
Net income (loss).............. $(2,104) $1,534 $ 2,407 $1,837
============= ============= ============= ===========
</TABLE>
* To reflect historical depreciation of WDSY-FM net of decrease in
amortization due to the exchange allocation.
(8) Pro Forma Adjustments
SFX has not included in the pro forma adjustments certain cost savings
totaling $11,559,000 it believes would have been realized for the year
ended December 31, 1996 following the Liberty Acquisition, the Prism
Acquisition, the Houston Exchange, the Jackson Acquisitions, the Hearst
Acquisition, the Charlotte Exchange, the Richmond Acquisition, the
Texas Coast Acquisition and Hartford Acquisition and $2,881,000 for the
nine months ended September 30, 1997 following the Richmond
Acquisition, the Hearst Acquisition, the Charlotte Exchange, Hartford
Acquisition, and Texas Coast Acquisition, had these transactions been
consummated as of January 1, 1996. The cost savings consist principally
of the elimination of certain duplicative technical, sales and general
and administrative functions due to the operation of a cluster of
stations in each of its principal markets, a reduction of employee
benefit costs and commission rates and the elimination of programming
personnel due to automation and simulcasting.
While management believes that such cost savings and the elimination
of non-recurring expenses are reasonably achievable, and many of which
have been achieved, SFX's ability to fully achieve such cost savings
and to eliminate the non-recurring expenses is subject to numerous
factors, many of which are beyond SFX's control. These factors may
include difficulties in integrating the acquired stations and the
incurrence of unanticipated severance, promotional or other costs and
expenses. There can be no assurance that SFX will realize all such
cost savings.
a. To reflect interest expense of $36,282,000 and $48,375,000 for the
nine months ended September 30, 1997 and the year ended December 31,
1996, respectively, related to the $450,000,000 of Senior
Subordinated Notes at 10.75% issued in 1996, amortization of deferred
financing costs of $125,000 and $1,491,000 for the nine months ended
September 30, 1997 and the year ended December 31, 1996,
respectively, interest expense of $16,848,000 and $22,462,000
relating to the borrowings from the Credit Agreement at 8% for the
nine months ended September 30, 1997 and the year ended December 31,
1996, respectively, and elimination of existing interest expense (net
of interest on other debt) of $47,397,000 and $41,218,000 related to
SFX and the sellers for the nine months ended September 30, 1997 and
the year ended December 31, 1996, respectively.
93
<PAGE>
b. Reflects increase (decrease) in amortization of intangible assets
resulting from the purchase price allocation, deferred taxes recorded
and change in amortization period:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1996 NINE MONTHS ENDED SEPTEMBER 30, 1997
--------------------------------------------------------------------------------------------
INCREASE DUE DECREASE DUE INCREASE DUE DECREASE DUE
TO PURCHASE TO CHANGE IN TO PURCHASE TO CHANGE IN
PRICE AMORTIZATION NET INCREASE PRICE AMORTIZATION NET INCREASE
ALLOCATION PERIODS (DECREASE) ALLOCATION PERIODS (DECREASE)
-------------- -------------- -------------- -------------- -------------- --------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Liberty Acquisition .. $1,699 $(2,399) $ (700)
Prism Acquisition .... 1,010 (642) 368
Charlotte WTDR/WLYT
Acquisition ......... 490 490
Jackson Acquisitions . 108 108
Greenville and
Greensboro
Acquisitions......... 597 (623) (26)
Albany Acquisition .. 23 23 $ 2 $ 2
Hartford Acquisition 910 910 152 152
Texas Coast
Acquisition.......... 1,067 1,067 89 89
Richmond Acquisition . 1,053 (164) 889 527 (82) 445
Hearst Acquisition ... 733 733 428 428
Secret Communications
Acquisition ......... 6,207 (2,018) 4,189 2,069 (673) 1,396
-------------- --------------
Total Pro Forma
adjustments........ $8,052 $2,512
============== ==============
</TABLE>
c. To reflect depreciation expense for fixed assets associated with the
Texas Coast, Hartford and Richmond Acquisitions as per SFX's
depreciation policy.
d. To reflect $559,000 in amortization relating to the present value of
the Triathlon consulting fees assigned to SFX under the SCMC
Termination Agreement for the year ended December 31, 1996.
e. To record incremental corporate overhead charges of $1,434,000 for
the year ended December 31, 1996, relating to increases in personnel,
professional fees and administrative expenses associated with the
increased size of SFX due to the Completed Transactions and Pending
Acquisition and Disposition--Broadcasting and the elimination of
$3,713,000 for the year ended December 31, 1996, of the corporate
overhead of the sellers.
f. Reflects fees of $3,000,000 incurred by Triathlon and would have been
payable to SFX under the revised SCMC Agreement for the year ended
December 31, 1996. Future fees may be lesser or greater based upon
future acquisition and financing activity by Triathlon. Minimum
annual fees will be $1,000,000 per year.
g. Elimination of acquisition related costs of $5,935,000 recorded on
the income statement of Liberty for the year ended December 31, 1996,
a gain on the sale of assets of $11,920,000 recorded on the books of
ABS Greenville Partners, L.P. for the year ended December 31, 1996
and net income tax benefit of $1,612,000 for the year ended December
31, 1996.
h. To record interest expense of $195,000 and $547,000 for the nine
months ended September 30, 1997 and the year ended December 31, 1996,
respectively, in connection with the long-term payments due for the
Delsener/Slater Acquisition, the Texas Coast Acquisition and the
Sunshine Acquisition.
i. Elimination of LMA fees paid by Secret Communications for WJJJ-FM
and WDSY-FM.
j. Elimination of interest expense on Jackson note payable to third
party acquired by Capstar.
k. Reflects the issuance of 70,796 shares of SFX Class A common stock in
connection with the Sunshine Acquisition for a total value of
$2,000,000.
l. To reflect the depreciation and amortization expense adjustment of
$3,014,000 and $884,000 associated with the Delsener/Slater, Meadows,
and Sunshine concert acquisitions for the year ended December 31,
1996 and the nine months ended September 30, 1997, respectively.
m. To reflect the amortization of $231,000 and $308,000 associated with
the John Boy and Billy Network contract payments for the nine months
ended September 30, 1997 and the year ended December 31, 1996,
respectively.
94
<PAGE>
n. To record the incremental Series D Preferred Stock and the Series E
Preferred Stock dividends issued to finance a portion of the Pending
Acquisition and Disposition--Broadcasting at a rate of 6.5% and 12
5/8%, respectively.
o. Reflects the elimination of non-recurring Delsener/Slater officers'
bonuses and wages not being paid under SFX's new employment
contracts.
(B) Pending Acquisition & Disposition--Broadcasting
<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30, 1997 (IN THOUSANDS)
----------------------------------------------------------------------
PENDING
CAPSTAR NASHVILLE PRO FORMA ACQUISITION AND
DISPOSITION ACQUISITION ADJUSTMENTS (1) DISPOSITION--BROADCASTING
------------- ------------- --------------- ------------------------
<S> <C> <C> <C> <C>
Net broadcast revenues ................ $(9,831) $4,893 $(4,938)
Station and other operating expenses . (5,489) 4,263 (1,226)
Depreciation, amortization, duopoly
integration costs and acquisition
related costs ........................ (1,201) 467 39 (c) (95)
207 (d)
393 (b)
------------- ------------- --------------- ------------------------
Operating income (loss) ............... (3,141) 163 (639) (3,617)
Interest expense ...................... (36) -- 36 (a)
Other expense (income) ................ -- (3) (3)
------------- ------------- --------------- ------------------------
Income (loss) before income tax
expense .............................. (3,105) 166 (675) (3,614)
Income tax expense (benefit) .......... -- (3) (3)
------------- ------------- --------------- ------------------------
Net income (loss) ..................... (3,105) 169 (675) (3,611)
------------- ------------- --------------- ------------------------
Net income (loss) applicable to common
shares ............................... $(3,105) $ 169 $ (675) $(3,611)
============= ============= =============== ========================
YEAR ENDED DECEMBER 31, 1996 (IN THOUSANDS)
----------------------------------------------------------------------
PENDING
CAPSTAR NASHVILLE PRO FORMA ACQUISITION AND
DISPOSITION ACQUISITION ADJUSTMENTS (1) DISPOSITION--BROADCASTING
------------- ------------- --------------- ------------------------
Net broadcast revenues................. $(9,012) $8,081 $ (450)(d) $(1,381)
Station and other operating expenses .. (5,265) 6,473 1,208
Depreciation, amortization, duopoly
integration costs and acquisition
related costs ........................ (852) 652 275 (d) 650
50 (c)
525 (b)
------------- ------------- --------------- ------------------------
Operating income (loss)................ (2,895) 956 (1,300) (3,239)
Interest expense....................... (2,108) -- 2,108 (a)
Other expense (income)................. (538) -- (538)
------------- ------------- --------------- ------------------------
Income (loss) before income tax
expense............................... (249) 956 (3,408) (2,701)
Income tax expense (benefit)........... -- --
------------- ------------- --------------- ------------------------
Net income (loss)...................... (249) 956 (3,408) (2,701)
------------- ------------- --------------- ------------------------
Net income (loss) applicable to common
shares................................ $ (249) $ 956 $(3,408) $(2,701)
============= ============= =============== ========================
</TABLE>
95
<PAGE>
(1) Pro Forma Adjustments
SFX has not included in the pro forma adjustments certain cost savings
totalling $539,000 it believes would have been realized for the year ended
December 31, 1996 following the Nashville Acquisition and the Chancellor
Exchange and $375,000 for the nine months ended September 30, 1997 following
the Nashville Acquisition and the Chancellor Exchange, had these transactions
been consummated as of January 1, 1996. The cost savings consist principally
of the elimination of certain duplicative technical, sales and general and
administrative functions due to the operation of a cluster of stations in
each of its principal markets, a reduction of employee benefit costs and
commission rates and the elimination of programming personnel due to
automation and simulcasting.
While management believes that such cost savings and the elimination of
non-recurring expenses are reasonably achievable, SFX's ability to fully
achieve such cost savings and to eliminate the non-recurring expenses is
subject to numerous factors, many of which are beyond SFX's control. These
factors may include difficulties in integrating the acquired stations and the
incurrence of unanticipated severance, promotional or other costs and
expenses. There can be no assurance that SFX will realize all such cost
savings.
a. To reflect the elimination of existing interest expense of $36,000
and $2,108,000 related to the Capstar Disposition for the nine months
ended September 30, 1997 and the year ended December 31, 1996,
respectively.
b. Reflects increase in amortization of intangible assets of $393,000
and $525,000 for the nine months ended September 30, 1997 and the
year ended December 31, 1996, respectively, resulting from the
purchase price allocation and change in amortization period related
to the Nashville Acquisition.
c. Amortization of $39,000 and $50,000 for acquisition costs associated
with the Nashville Acquisition for the nine months ended September
30, 1997 and the year ended December 31, 1996, respectively.
d. To reflect the reduced amortization of goodwill and elimination of
LMA fees of the Chancellor Exchange.
96
<PAGE>
(C) Pending Acquisitions and the Financing--Entertainment
<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30, 1997 (IN THOUSANDS)
-----------------------------------------------------------------------------------------------
PACE CONCERT/ PRO FORMA
AND PAVILION CONTEMPORARY NETWORK BGP SOUTHERN PRO FORMA ADJUSTMENTS
ACQUISITIONS ACQUISITION ACQUISITION ACQUISITION ACQUISITION ADJUSTMENTS FOR THE FINANCING
I II III IV V VI VII
------------ ------------ ----------- ----------- ----------- ----------- -----------------
<S> <C> <C> <C> <C> <C> <C> <C>
Revenue................. $229,480 $85,570 $20,563 $65,448 $13,093 $ -- $ --
Operating expenses...... 205,365 75,784 13,893 59,312 10,631 -- --
Depreciation &
amortization........... 4,476 1,081 207 611 57 16,821 (a) --
Corporate expenses...... -- -- -- -- -- 1,500 (b) --
------------ ------------ ----------- ----------- ----------- ----------- -----------------
Operating income (loss). 19,639 8,705 6,463 5,525 2,405 (18,321) --
Interest expense........ 4,803 227 196 837 -- -- (6,063)(a)
-- 31,895 (b)
Other (income) expenses. 1,594 (170) (123) (764) (57) (1,046)(c) --
Equity (income) loss
from investments....... (5,321) -- -- -- (34) 1,046 (c) --
------------ ------------ ----------- ----------- ----------- ----------- -----------------
Income/(loss) before
income tax expense..... 18,563 8,648 6,390 5,452 2,496 (18,321) (25,832)
Income tax expense
(benefit).............. 3,751 -- 135 2,133 -- (2,393)(d) --
------------ ------------ ----------- ----------- ----------- ----------- -----------------
Net income (loss)....... $ 14,812 $ 8,648 $ 6,255 $ 3,319 $ 2,496 (15,928) (25,832)
============ ============ =========== =========== =========== =========== =================
Accretion on temporary
equity ................ 2,475 (e)
-----------
Net loss applicable to
common shares ......... $(18,403)
===========
</TABLE>
(RESTUBBED TABLE CONTINUED FROM ABOVE)
<TABLE>
<CAPTION>
PRO FORMA
FOR THE
PENDING
ACQUISITION
AND THE
FINANCING--
ENTERTAINMENT
-------------
<S> <C>
Revenue......................... $414,154
Operating expenses.............. 364,985
Depreciation & amortization .... 23,253
Corporate expenses.............. 1,500
-------------
Operating income (loss)......... 24,416
Interest expense................ 31,895
Other (income) expenses......... (566)
Equity (income) loss from
investments.................... (4,309)
-------------
Income/(loss) before income tax
expense........................ (2,604)
Income tax expense (benefit) ... (3,626)
-------------
Net income (loss)............... (6,230)
=============
Accretion on temporary equity . 2,475
-------------
Net loss applicable to common
shares ........................ $ (8,705)
=============
</TABLE>
97
<PAGE>
I. PACE AND PAVILION ACQUISITIONS
Reflects the PACE Acquisition and the separate acquisitions of PACE's two
partners' interests in Pavilion Partners, a partnership that owns certain
amphitheaters operated by PACE. The PACE Acquisition is not conditional on
the consummation of the Pavilion Acquisition.
<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30, 1997 (IN THOUSANDS)
---------------------------------------------------------
PACE PAVILION PRO FORMA PACE
AS REPORTED AS REPORTED ADJUSTMENTS ACQUISITION
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Revenue ................................ $137,616 $91,114 $ 750 (a) $229,480
Operating expenses...................... 131,473 75,319 (1,427)(b) 205,365
Depreciation & amortization............. 1,462 3,014 -- 4,476
Other expenses.......................... 447 -- (447)(c) --
------------- ------------- ------------- -------------
Operating income........................ 4,234 12,781 2,624 19,639
Interest expense........................ 1,517 3,286 -- 4,803
Other expenses.......................... 64 1,530 -- 1,594
Equity (income) loss from investments .. (6,949) (1,654) 3,282 (d) (5,321)
------------- ------------- ------------- -------------
Income/(loss) before income tax
expense................................ 9,602 9,619 (658) 18,563
Income tax expense...................... 3,751 -- -- 3,751
------------- ------------- ------------- -------------
Net income (loss)....................... $ 5,851 $ 9,619 $ (658) $ 14,812
============= ============= ============= =============
</TABLE>
PRO FORMA ADJUSTMENTS:
(a) To reflect non-cash revenue resulting from SFX Entertainment granting
Blockbuster naming rights to three venues for two years for no future
consideration as part of its agreement to acquire Blockbuster's
indirect 33 1/3% interest in Pavilion Partners.
(b) Reflects the elimination of $520,000 of certain officers' salaries and
bonuses which will not be paid under SFX Entertainment's new employment
contracts and of $907,000 of non-recurring costs incurred in connection
with PACE's previously planned initial public offering, which has since
been canceled. The amount of the pro forma adjustment to eliminate
salaries and bonuses is based on SFX Entertainment's agreements with
the affected employees that a bonus will not be paid unless there is a
significant improvement in the results of the PACE Acquisition.
Accordingly, no such bonus is reflected in the pro forma statement of
operations as should the PACE Acquisition's results, once acquired by
SFX Entertainment, be at a similar level to that in these pro forma
statements of operations no bonus would be paid and SFX Entertainment
would not be contractually obligated to pay a bonus.
(c) Reflects the elimination of non-recurring restricted stock compensation
to PACE executives.
(d) To eliminate PACE's income from its 33 1/3% equity investment in
Pavilion Partners. PACE currently owns 33 1/3% in Pavilion and has
agreed to acquire the remaining 66 2/3% interest in Pavilion Partners
pursuant to the anticipated acquisitions of Blockbuster's and Sony's
interests in Pavilion Partners. There can be no assurance that SFX
Entertainment will be able to consummate the acquisition of either or
both of Blockbuster's and Sony's respective interest in Pavilion
Partners and, as a result, SFX Entertainment may not obtain 100% of
Pavilion Partners. See "Agreements Related to Pending
Acquisitions--PACE Acquisition--Pavilion Acquisition" in Annex D.
II. CONTEMPORARY ACQUISITION
Reflects the Contemporary Acquisition and the separate acquisition of the
remaining 50% interest in Riverport Amphitheater Partners, a partnership that
owns an amphitheater in St. Louis, Missouri that is operated by Contemporary.
The Contemporary Acquisition is not conditioned upon the consummation of the
acquisition of such 50% interest.
98
<PAGE>
<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30, 1997 (IN THOUSANDS)
-----------------------------------------------------------
CONTEMPORARY RIVERPORT PRO FORMA CONTEMPORARY
AS REPORTED AS REPORTED ADJUSTMENTS ACQUISITION
-------------- ------------- ------------- --------------
<S> <C> <C> <C> <C>
Revenue ................................ $71,141 $14,429 $ -- $85,570
Operating expenses...................... 66,764 11,223 (2,203)(a) 75,784
Depreciation & amortization............. 498 583 -- 1,081
-------------- ------------- ------------- --------------
Operating income........................ 3,879 2,623 2,203 8,705
Interest expense........................ 153 74 -- 227
Other income............................ (122) (48) -- (170)
Equity (income) from investments ....... (1,298) -- 1,298 (b) --
-------------- ------------- ------------- --------------
Income (loss) before income tax
expense................................ 5,146 2,597 905 8,648
Income tax expense...................... -- -- -- --
-------------- ------------- ------------- --------------
Net income (loss)....................... $ 5,146 $ 2,597 $ 905 $ 8,648
============== ============= ============= ==============
</TABLE>
PRO FORMA ADJUSTMENTS:
(a) Reflects the elimination of certain officers' salaries and bonuses and
other consulting expenses which will not be paid under SFX
Entertainment's new employment and other contracts. The amount of the
pro forma adjustment to eliminate salaries and bonuses is based on SFX
Entertainment's agreements with the affected employees that a bonus
will not be paid unless there is a significant improvement in the
results of the Contemporary Acquisition. Accordingly, no such bonus is
reflected in the pro forma statement of operations as should the
Contemporary Acquisition's results, once acquired by SFX Entertainment,
be at a similar level to that in these pro forma statements of
operations no bonus would be paid and SFX Entertainment would not be
contractually obligated to pay a bonus.
(b) Reflects the elimination of Contemporary's equity income in Riverport
Amphitheater Partners. Contemporary has entered into an agreement to
acquire its partners' 50% interest in this venture. If Contemporary is
unable to complete this acquisition of the remaining 50% interest in
Riverport Amphitheater Partners, the cash consideration paid by SFX
Entertainment for Contemporary will be reduced by $10,500,000.
The Contemporary Agreement provides that in the event the Contemporary
Acquisition is consummated prior to the consummation of the Spin-Off,
1,402,851 shares of preferred stock will be issued to the sellers. Such
preferred stock is to be converted into an equal number of shares of SFX
Entertainment Class A common stock upon consummation of the Spin-Off or, if
the Spin-Off shall not have occurred prior to July 1, 1998, such preferred
stock is to be redeemed at their fair market value, but in no event less than
$18,700,000. See "Agreements Related to the Pending
Acquisitions--Contemporary Acquisition" in Annex D.
99
<PAGE>
III. NETWORK ACQUISITION
The Network Acquisition consists of the separate acquisitions of Network
Magazine and SJS. Each of these acquisitions is conditioned on the concurrent
closing of the other.
<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30, 1997 IN (000'S)
--------------------------------------------------------------
THE NETWORK
MAGAZINE SJS PRO FORMA NETWORK
AS REPORTED (A) AS REPORTED (A) ADJUSTMENTS ACQUISITIONS
--------------- --------------- ------------- --------------
<S> <C> <C> <C> <C>
Revenue ................................ $12,047 $10,737 $(2,221)(c) $20,563
Operating expenses...................... 11,878 10,717 (6,481)(b) 13,893
(2,221)(c)
Depreciation & amortization............. 119 88 -- 207
--------------- --------------- ------------- --------------
Operating income (loss)................. 50 (68) 6,481 6,463
Interest expense........................ 163 33 -- 196
Other income............................ (43) (80) -- (123)
--------------- --------------- ------------- --------------
(Loss) income before income tax
expense................................ (70) (21) 6,481 6,390
Income tax expense ..................... -- 135 -- 135
--------------- --------------- ------------- --------------
Net (loss) income ...................... $ (70) $ (156) $ 6,481 $ 6,255
=============== =============== ============= ==============
</TABLE>
PRO FORMA ADJUSTMENTS:
(a) SFX Entertainment's purchase agreement for Network Magazine and SJS
provides that the purchase price will be increased by $4,000,000 if
total 1998 EBITDA as defined equals $9,000,000; by an additional $4 for
each $1 increase in EBITDA between $9,000,000 and $10,000,000 and by an
additional $6 for each $1 increase in EBITDA between $10,000,000 and
$11,000,000 (maximum of $14,000,000 additional consideration). The
additional consideration is payable in stock or cash at SFX
Entertainment's option. The pro forma statement of operation assumes
that no additional consideration is paid.
(b) Reflects the elimination of certain officers' salaries and bonuses
which will not be paid under SFX Entertainment's new employment
contracts. The amount of the pro forma adjustment to eliminate salaries
and bonuses is based on SFX Entertainment's agreements with the
affected employees that a bonus will not be paid unless there is a
significant improvement in the results of Network. Accordingly, no such
bonus is reflected in the pro forma statement of operations as should
Network's results, once acquired by SFX Entertainment, be at a similar
level to that in these pro forma statements of operations no bonus
would be paid and SFX Entertainment would not be contractually
obligated to pay a bonus.
(c) Reflects the elimination of transactions between Network Magazine and
SJS.
See "Agreements Related to the Pending Acquisitions--Network Acquisition"
in Annex D.
100
<PAGE>
IV. BGP ACQUISITION
<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30, 1997 IN
(000'S)
---------------------------------------------
PRO FORMA BGP
AS REPORTED (A) ADJUSTMENTS ACQUISITION
--------------- ------------- -------------
<S> <C> <C> <C>
Revenue ......................... $65,448 $ -- $65,448
Operating expenses............... 59,312 -- 59,312
Depreciation & amortization ..... 611 -- 611
--------------- ------------- -------------
Operating income ................ 5,525 -- 5,525
Interest expense................. 837 -- 837
Other income..................... (764) -- (764)
--------------- ------------- -------------
Income before income tax
expense......................... 5,452 -- 5,452
Income tax expense............... 2,133 -- 2,133
--------------- ------------- -------------
Net income....................... $ 3,319 $ -- 3,319
=============== ============= =============
</TABLE>
(a) Reflects BGP's audited actual operating results for the nine months
ended October 31, 1997.
See "Agreements Related to the Pending Acquisitions--BGP" in Annex D.
V. CONCERT/SOUTHERN ACQUISITION
<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30, 1997 IN
(000'S)
-------------------------------------------
CONCERT/
PRO FORMA SOUTHERN
AS REPORTED ADJUSTMENTS ACQUISITION
------------- ------------- -------------
<S> <C> <C> <C>
Revenue .............................. $13,093 $ -- $13,093
Operating expenses.................... 11,097 (466)(a) 10,631
Depreciation & amortization........... 57 -- 57
------------- ------------- -------------
Operating income...................... 1,939 466 2,405
Interest expense...................... -- -- --
Other income.......................... (57) -- (57)
Equity loss (income) from
investments.......................... 11 (45)(b) (34)
------------- ------------- -------------
Income before income tax expense ..... 1,985 511 2,496
Income tax expense.................... -- -- --
------------- ------------- -------------
Net income............................ $ 1,985 $ 511 $ 2,496
============= ============= =============
</TABLE>
PRO FORMA ADJUSTMENTS:
(a) Reflects the elimination of certain officers' salaries and bonuses
which will not be paid under SFX Entertainment's new employment
contracts. The amount of the pro forma adjustment to eliminate salaries
and bonuses is based on SFX Entertainment's agreements with the
affected employees that a bonus will not be paid unless there is a
significant improvement in the results of Concert/Southern.
Accordingly, no such bonus is reflected in the pro forma statement of
operations as should Concert/Southern's results, once acquired by SFX
Entertainment, be at a similar level to that in these pro forma
statements of operations no bonus would be paid and SFX Entertainment
would not be contractually obligated to pay a bonus.
(b) Reflects the elimination of equity income of a non-entertainment
affiliated entity which is not being acquired by SFX Entertainment.
See "Agreements Related to the Pending Acquisitions--Concert/Southern" in
Annex D.
VI. PRO FORMA ADJUSTMENTS:
(a) Reflects the increase in depreciation and amortization resulting from
the preliminary purchase accounting treatment of the Pending
Acquisitions. SFX Entertainment amortizes goodwill over 15 years.
(b) To record incremental corporate overhead charges associated with
incremental headquarters personnel and general and administrative
expenses that management estimates will be necessary following
completion of the Pending Acquisitions.
(c) To reclassify Delsener/Slater's equity income in the PNC Bank Arts
Center venue following the acquisition of Pavilion Partners, which owns
the other 50% equity interest in the venue.
101
<PAGE>
(d) Represents an adjustment to the provision for income taxes to reflect
an approximate pro forma tax provision of $3,500,000. The calculation
treats all companies to be acquired pursuant to the Pending
Acquisitions as "C" Corporations and includes a benefit of
approximately $6,000,000 related to the pro forma loss carryforward of
approximately $16,000,000 from the twelve months ended December 31,
1996. The above provision also reflects the non-deductibility of
approximately $12,000,000 of goodwill amortization, tax savings related
to the pro forma adjustments for the Financing and state taxes of
approximately $3,500,000.
(e) Represents the accretion on the Fifth Year Put Option issued to the
PACE sellers in connection with the PACE Acquisition.
VII. PRO FORMA FOR THE FINANCING:
(a) Represents the elimination of existing interest expense for the Pending
Acquisitions.
(b) Reflects interest expense associated with the privately-placed debt at
9 1/8% per annum, the proposed credit facility and other debt and
deferred compensation costs related to the Pending Acquisitions. The
interest rate assumed for the credit facility was 8% per annum. A
one-quarter percent increase or decrease in the assumed weighted
average interest rate for the credit facility would change the pro
forma interest expense by approximately $250,000. There can be no
assurance that SFX Entertainment will be able to consummate the credit
facility on acceptable terms, or at all.
102
<PAGE>
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1996 (IN THOUSANDS)
---------------------------------------------------
PACE AND
PAVILION CONTEMPORARY NETWORK BGP
ACQUISITIONS ACQUISITION ACQUISITION ACQUISITION
I II III IV
------------ ------------ ----------- -----------
<S> <C> <C> <C> <C>
Revenue......................... $246,548 $71,545 $24,556 $92,331
Operating expenses.............. 237,429 64,320 18,403 84,466
Depreciation & amortization .... 5,336 1,334 268 1,474
Corporate expenses.............. -- -- -- --
------------ ------------ ----------- -----------
Operating income (loss)......... 3,783 5,891 5,885 6,391
Interest expense................ 5,456 383 294 1,258
Other (income) expenses......... (265) (216) (42) (584)
Equity (income) loss from
investments.................... (3,227) -- -- --
------------ ------------ ----------- -----------
Income (loss) before income tax
expense ....................... 1,819 5,724 5,633 5,717
Income tax expense (benefit) .. (714) 35 303 1,272
------------ ------------ ----------- -----------
Net income (loss) .............. $ 2,533 $ 5,689 $ 5,330 $ 4,445
============ ============ =========== ===========
Accretion on temporary equity ..
Net loss applicable to common
shares.........................
</TABLE>
(RESTUBBED TABLE CONTINUED FROM ABOVE)
<TABLE>
<CAPTION>
PRO FORMA
CONCERT/ PRO FORMA FOR THE PENDING
SOUTHERN PRO FORMA ADJUSTMENTS ACQUISITIONS AND
ACQUISITION ADJUSTMENTS FOR THE FINANCING THE FINANCING--
V VI VII ENTERTAINMENT
----------- ----------- ----------------- ----------------
<S> <C> <C> <C> <C>
Revenue......................... $12,601 $ -- $ -- $447,581
Operating expenses.............. 9,679 -- -- 414,297
Depreciation & amortization .... 69 22,481 (a) -- 30,962
Corporate expenses.............. -- 2,000 (b) -- 2,000
----------- ----------- ----------------- ----------------
Operating income (loss)......... 2,853 (24,481) -- 322
(7,391)(a)
Interest expense................ -- -- 42,527 42,527
Other (income) expenses......... (47) (312)(d) -- (1,466)
Equity (income) loss from
investments.................... 38 312 (d) -- (2,877)
----------- ----------- ----------------- ----------------
Income (loss) before income tax
expense ....................... 2,862 (24,481) (35,136) (37,862)
Income tax expense (benefit) .. -- 809 (c) -- 1,705
----------- ----------- ----------------- ----------------
Net income (loss) .............. $ 2,862 (25,290) $(35,136) (39,567)
=========== =================
Accretion on temporary equity .. 3,300 (e) 3,300
----------- ----------------
Net loss applicable to common
shares......................... $(28,590) $(42,867)
=========== ================
</TABLE>
103
<PAGE>
I. PACE AND PAVILION ACQUISITIONS
Reflects the PACE Acquisition and the separate acquisitions of two
partners' interest in a partnership that owns certain amphitheaters operated
by PACE. The PACE Acquisition is not conditioned on the consummation of the
Pavilion Acquisition.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1996 (IN THOUSANDS)
--------------------------------------------------------------------------------------
PAVILION PAVILION PAVILION
PACE PARTNERS PARTNERS PARTNERS PRO FORMA PACE
AS REPORTED (A) 1 MONTH (B) 11 MONTHS (B) AS REPORTED ADJUSTMENTS ACQUISITION
--------------- ----------- ------------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C>
Revenue......................... $156,325 $5,259 $83,964 $89,223 $ 1,000(c) $246,548
Operating expenses.............. 155,533 5,199 77,267 82,466 (570)(d) 237,429
Depreciation & amortization .... 1,737 253 3,346 3,599 -- 5,336
Other expenses.................. 3,675 -- -- -- (3,675)(e) --
--------------- ----------- ------------- ------------- ------------- -------------
Operating (loss) income ........ (4,620) (193) 3,351 3,158 5,245 3,783
Interest expense................ 1,206 395 3,855 4,250 -- 5,456
Other income.................... (59) (123) (83) (206) -- (265)
Equity (income) loss from
investments.................... (3,048) 82 (129) (47) (132)(f) (3,227)
--------------- ----------- ------------- ------------- ------------- -------------
Income (loss) before income tax
expense........................ (2,719) (547) (292) (839) 5,377 1,819
Income tax (benefit)............ (714) -- -- -- -- (714)
--------------- ----------- ------------- ------------- ------------- -------------
Net (loss) income .............. $ (2,005) $ (547) $ (292) $ (839) $ 5,377 $ 2,533
=============== =========== ============= ============= ============= =============
</TABLE>
PRO FORMA ADJUSTMENTS:
(a) Reflects PACE's audited operating results for fiscal year ended
September 30, 1996.
(b) Reflects Pavilion Partners' unaudited operating results for the one
month ended October 31, 1995 and the audited operating results for the
eleven months ended September 30, 1996. During 1996, Pavilion Partners
changed its fiscal year-end from October 31 to September 30.
PACE currently owns 33 1/3% in Pavilion Partners and has agreed to
acquire the remaining 66 2/3% interest from the two other partners,
Blockbuster and Sony.
(c) To reflect non-cash revenue resulting from SFX Entertainment granting
Blockbuster naming rights to three venues for two years for no future
consideration as part of its agreement to acquire Blockbuster's
indirect 33 1/3% interest in Pavilion Partners.
(d) Reflects the elimination of $570,000 of certain officers' salaries and
bonuses which will not be paid under SFX Entertainment's new employment
contracts. The amount of the pro forma adjustment to eliminate salaries
and bonuses is based on SFX Entertainment's agreements with the
affected employees that a bonus will not be paid unless there is a
significant improvement in the results of the PACE Acquisition.
Accordingly, no such bonus is reflected in the pro forma statement of
operations as should the PACE Acquisition's results, once acquired by
SFX Entertainment, be at a similar level to that in these pro forma
statements of operations no bonus would be paid and SFX Entertainment
would not be contractually obligated to pay a bonus.
(e) Reflects the elimination of non-recurring restricted stock compensation
to PACE executives.
(f) To eliminate PACE's income from its 33 1/3% equity investment in
Pavilion Partners. PACE currently owns 33 1/3% in Pavilion Partners and
has agreed to acquire the remaining 66 2/3% interest in Pavilion
Partners pursuant to the proposed acquisitions of Blockbuster's and
Sony's partnership interests. There can be no assurance that SFX
Entertainment will be able to consummate the acquisition of either or
both of Blockbuster's and Sony's respective interests in Pavilion
Partners and, as a result, SFX Entertainment may not obtain 100% of
Pavilion Partners. See "Agreements Related to Pending
Acquisitions--PACE Acquisition--Pavilion Acquisition" in Annex D.
104
<PAGE>
II. 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, MO that is operated by Contemporary. The
Contemporary Acquisition is not conditioned upon the consummation of the
acquisition of such 50% interest.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1996 (IN THOUSANDS)
-----------------------------------------------------------
CONTEMPORARY RIVERPORT PRO FORMA CONTEMPORARY
AS REPORTED AS REPORTED ADJUSTMENTS ACQUISITION
-------------- ------------- ------------- --------------
<S> <C> <C> <C> <C>
Revenue................................. $59,852 $11,693 $ -- $71,545
Operating expenses...................... 58,189 9,168 (3,037)(a) 64,320
Depreciation & amortization............. 567 767 -- 1,334
-------------- ------------- ------------- --------------
Operating income ....................... 1,096 1,758 3,037 5,891
Interest expense........................ 213 170 -- 383
Other income............................ (159) (57) -- (216)
Equity (income) loss from investments .. (822) -- 822 (b) --
-------------- ------------- ------------- --------------
Income (loss) before income tax
expense................................ 1,864 1,645 2,215 5,724
Income tax expense ..................... 35 -- 35
-------------- ------------- ------------- --------------
Net income.............................. $ 1,829 $ 1,645 $ 2,215 $ 5,689
============== ============= ============= ==============
</TABLE>
PRO FORMA ADJUSTMENTS:
(a) Reflects the elimination of certain officers' salaries and bonuses
which will not expected be paid under SFX Entertainment's new
employment and other contracts. The amount of the pro forma adjustment
to eliminate salaries and bonuses is based on SFX Entertainment's
agreements with the affected employees that a bonus will not be paid
unless there is a significant improvement in the results of the
Contemporary Acquisition. Accordingly, no such bonus is reflected in
the pro forma statement of operations as should the Contemporary
Acquisition's results, once acquired by SFX Entertainment, be at a
similar level to that in these pro forma statements of operations no
bonus would be paid and SFX Entertainment would not be contractually
obligated to pay a bonus.
(b) Reflects the elimination of Contemporary's equity income in Riverport
Amphitheater Partners. Contemporary had entered into an agreement to
acquire its partners' 50% interest in this venture. If Contemporary is
unable to complete this acquisition of the remaining 50% interest in
Riverport Amphitheater Partners, the cash consideration paid by SFX
Entertainment for Contemporary will be reduced by $10,500,000.
The Contemporary Agreement provides that in the event the Contemporary
Acquisition is consummated prior to the consummation of the Spin-Off,
1,402,851 shares of preferred stock of SFX Entertainment will be issued to
the Sellers. Such preferred stock is to be converted into an equal number of
shares of SFX Entertainment's Class A common stock upon consummation of the
Spin-Off or, if the Spin-Off shall not have occurred prior to July 1, 1998,
such preferred stock is to be redeemed by SFX Entertainment at its fair
market value, but in no event less than $18,700,000. See "Agreements Related
to the Pending Acquisitions--Contemporary Acquisition" in Annex D.
105
<PAGE>
III. NETWORK ACQUISITIONS
The Network Acquisitions consist of the separate acquisitions of Network
Magazine and SJS. Each of these acquisitions is conditioned on the concurrent
closing of the other.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1996 (IN THOUSANDS)
------------------------------------------------------------
THE NETWORK
MAGAZINE SJS PRO FORMA NETWORK
AS REPORTED (A) AS REPORTED ADJUSTMENTS ACQUISITIONS
--------------- ------------- ------------- --------------
<S> <C> <C> <C> <C>
Revenue.......................... $14,767 $11,375 $(1,586)(c) $24,556
Operating expenses............... 14,275 11,259 (5,545)(b) 18,403
(1,586)(c)
Depreciation & amortization ..... 184 84 -- 268
--------------- ------------- ------------- --------------
Operating income ................ 308 32 5,545 5,885
Interest expense................. 291 3 -- 294
Other income..................... (42) -- -- (42)
--------------- ------------- ------------- --------------
Income before income tax
expense......................... 59 29 5,545 5,633
Income tax expense .............. 212 91 -- 303
--------------- ------------- ------------- --------------
Net (loss) income ............... $ (153) $ (62) $ 5,545 $ 5,330
=============== ============= ============= ==============
</TABLE>
PRO FORMA ADJUSTMENTS:
(a) Reflects Network Magazine's audited operating results for fiscal year
ended September 30, 1996. SFX Entertainment's purchase agreement for
Network Magazine and SJS provides that the purchase price will be
increased by $4,000,000 if total 1998 EBITDA as defined equals
$9,000,000; by an additional $4 for each $1 increase in EBITDA between
$9,000,000 and $10,000,000 and by an additional $6 for each $1 increase
in EBITDA between $10,000,000 and $11,000,000 (maximum of $14,000,000
additional consideration). The additional consideration is payable is
stock or cash at SFX Entertainment's option. The pro forma statement of
operations assumes that no additional consideration is paid.
(b) Reflects the elimination of certain officers' salaries and bonuses
which will not be paid under SFX Entertainment's new employment
contracts. The amount of the pro forma adjustment to eliminate salaries
and bonuses is based on SFX Entertainment's agreements with the
affected employees that a bonus will not be paid unless there is a
significant improvement in the results of Network. Accordingly, no such
bonus is reflected in the pro forma statement of operations as should
Network's results, once acquired by SFX Entertainment, be at a similar
level to that in these pro forma statements of operations no bonus
would be paid and SFX Entertainment would not be contractually
obligated to pay a bonus.
(c) Reflects the elimination of transactions between Network Magazine and
SJS.
See "Agreements Related to the Pending Acquisitions--Network" in Annex
D.
106
<PAGE>
IV. BGP ACQUISITION
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1996 (IN THOUSANDS)
---------------------------------------------
PRO FORMA BGP
AS REPORTED (A) ADJUSTMENTS ACQUISITION
--------------- ------------- -------------
<S> <C> <C> <C>
Revenue.......................... $92,331 $ -- $92,331
Operating expenses............... 87,520 (3,054)(b) 84,466
Depreciation & amortization ..... 1,474 -- 1,474
--------------- ------------- -------------
Operating income ................ 3,337 3,054 6,391
Interest expense................. 1,258 -- 1,258
Other Expense.................... (584) -- (584)
--------------- ------------- -------------
Income before income tax
expense......................... 2,663 3,054 5,717
Income tax expense .............. 1,272 -- 1,272
--------------- ------------- -------------
Net income ...................... $ 1,391 $ 3,054 $ 4,445
=============== ============= =============
</TABLE>
PRO FORMA ADJUSTMENTS:
(a) Reflects BGP's audited operating results for the fiscal year ended
January 31, 1997.
(b) Reflects the elimination of certain officers' salaries and bonuses,
partnership life insurance, profit sharing and other expenses which
will not be paid under SFX Entertainment's new employment contracts.
The amount of the pro forma adjustment to eliminate salaries and
bonuses is based on SFX Entertainment's agreements with the affected
employees that a bonus will not be paid unless there is a significant
improvement in the results of BGP. Accordingly, no such bonus is
reflected in the pro forma statement of operations as should BGP's
results, once acquired by SFX Entertainment, be at a similar level to
that in these pro forma statements of operations no bonus would be
paid, and SFX Entertainment would not be contractually obligated to pay
a bonus.
See "Agreements Related to the Pending Acquisitions--BGP" in Annex D.
V. CONCERT/SOUTHERN ACQUISITION
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1996 (IN THOUSANDS)
-------------------------------------------
CONCERT/
PRO FORMA SOUTHERN
AS REPORTED ADJUSTMENTS ACQUISITION
------------- ------------- -------------
<S> <C> <C> <C>
Revenue.......................... $12,601 $ -- $12,601
Operating expenses............... 10,873 (1,194)(a) 9,679
Depreciation & amortization ..... 69 -- 69
------------- ------------- -------------
Operating income ................ 1,659 1,194 2,853
Investment income................ (47) -- (47)
Equity loss from investments .... 27 11 (b) 38
------------- ------------- -------------
Income before income tax
expense......................... 1,679 1,183 2,862
Income tax expense .............. -- -- --
------------- ------------- -------------
Net income ...................... $ 1,679 $ 1,183 $ 2,862
============= ============= =============
</TABLE>
PRO FORMA ADJUSTMENTS:
(a) Reflects the elimination of certain officers' salaries and bonuses
which will not be paid under SFX Entertainment's new employment
contracts. The amount of the pro forma adjustment to eliminate salaries
and bonuses is based on SFX Entertainment's agreements with the
affected employees that a bonus will not be paid unless there is a
significant improvement in the results of Concert/Southern.
Accordingly, no such bonus is reflected in the pro forma statement of
operations as should Concert/Southern's results, once acquired by SFX
Entertainment, be at a similar level to that in these pro forma
statements of operations no bonus would be paid and SFX Entertainment
would not be contractually obligated to pay a bonus.
107
<PAGE>
(b) Reflects the elimination of equity loss of a non-entertainment
affiliated entity which is not being acquired by SFX Entertainment.
See "Agreements Related to the Pending Acquisitions--Concert/Southern"
in Annex D.
VI. PRO FORMA ADJUSTMENTS:
(a) Reflects the increase in depreciation and amortization resulting from
the preliminary purchase accounting treatment of the Pending
Acquisitions. SFX Entertainment amortizes goodwill over 15 years.
(b) To record incremental corporate overhead charges associated with
incremental headquarters personnel that management estimates will be
necessary following completion of the Pending Acquisitions.
(c) Reflects estimated state and local income taxes. On a consolidated pro
forma basis, SFX Entertainment has a net operating loss for the year
ending December 31, 1996 of approximately $16 million for which no
federal tax benefit has been provided.
(d) To reclassify the Delsener/Slater's equity income in the PNC Bank Arts
Center venue following the acquisition of Pavilion which owns the other
50% equity interest in the venue.
(e) Represents the accretion on the Fifth Year Put Option issued to the
PACE sellers in connection with the PACE Acquisition.
VII. PRO FORMA FOR THE FINANCING:
(a) Represents the elimination of existing interest expense for the Pending
Acquisitions.
(b) Reflects interest expense associated with the privately-placed debt at
9 1/8 per annum, the proposed credit facility, other debt and deferred
compensation costs for the Pending Acquisitions. The interest rate
assumed in the credit facility was 8% per annum. A one-quarter
percentage increase or decrease in the assumed weighted average
interest rate for the credit facility would change annual pro forma
interest expense by approximately $330,000. There can be no assurance
that SFX Entertainment will be able to obtain such credit facility on
acceptable terms, or at all.
(D) SFX Entertainment Pro Forma for the Pending Acquisitions
o Reflects pro forma operating results of SFX Entertainment had all the
Pending Acquisitions--Entertainment and the Delsener/Slater, Meadows,
and Sunshine Acquisitions been consummated at January 1, 1996.
(E) Pro Forma for the Spin-Off of SFX Entertainment
o Reflects pro forma operating results of SFX after the Spin-Off of SFX
Entertainment.
108
<PAGE>
GLOSSARY TO UNAUDITED PRO FORMA CONDENSED
COMBINED FINANCIAL STATEMENTS
"Albany Acquisition" means the acquisition by SFX, consummated in January
1997, of substantially all of the assets used in the operation of WYSR-FM,
operating in Albany, New York.
"BGP Acquisition" means the pending acquisition by SFX Entertainment of BG
Presents, Inc., a concert promotion company operating in San Francisco,
California.
"Blockbuster" means, collectively, Charlotte Amphitheater Corporation and
The Westside Amphitheater Corporation.
"Capstar Disposition" means the pending sale by SFX of the Jackson
stations and the Biloxi station.
"CBS Exchange" means the exchange by SFX, consummated in March 1997 of
radio station WHFS-FM, operating in Washington, D.C./Baltimore, Maryland, for
KTXQ-FM and KRRW-FM, both operating in Dallas, Texas, and owned by CBS, Inc.
As such, historical operating results for WHFS-FM, KTXQ-FM and KRRW-FM have
been added to SFX, as reported amounts for the twelve months ending December
31, 1996 and from January 1, 1997 through March 31, 1997.
"Chancellor Exchange" means the pending exchange of SFX's radio stations
WBAB-FM, WHFM-FM, WBLI-FM and WGBB-AM, each operating on Long Island, New
York, for WFYV-FM and WAPE-FM, both operating in Jacksonville, Florida, and a
payment to SFX of $11.0 million in cash.
"Charlotte Acquisition" means the acquisition by SFX, consummated in
February 1996, of WTDR-FM and WLYT-FM, both operating in Charlotte, North
Carolina. As such, historical operating results for WTDR-FM and WLYT-FM have
been added to SFX, as reported amounts from January 1, 1996 through February
1, 1996.
"Charlotte Exchange" means the exchange by SFX, consummated in August 1997
of WDSY-FM in Pittsburgh, Pennsylvania and $20 million in cash for WRFX-FM in
Charlotte, North Carolina. As such, historical operating results for WRFX-FM
have been added to SFX, as reported amounts for the year ending December 31,
1996 and from January 1, 1997 through August 1, 1997.
"Completed Transactions" means, collectively, the MMR Merger, the
Greensboro Acquisition, the Liberty Acquisition, the Prism Acquisition, the
Jackson Acquisitions, the Greenville Acquisition, the CBS Exchange, the
Louisville Acquisition, the Raleigh-Greensboro Acquisitions, the Houston
Exchange, the Albany Acquisition, the Delsener/Slater Acquisition, the
Meadows Acquisition, the Secret Communications Acquisition, the Sunshine
Acquisition, the Richmond Acquisition, the Hearst Acquisition, the
acquisitions of WTDR-FM and WLYT-FM, both operating in Charlotte, North
Carolina, KTCK-FM, operating in Dallas, Texas, and KYXY-FM, operating in San
Diego, California, the Little Rock Disposition, the Washington Dispositions,
the Louisville Dispositions, the Dallas Disposition.
"Concert/Southern Acquisition" means the pending acquisition by SFX
Entertainment of Concerts/ Southern, a concert promotion company, operating
in Atlanta, Georgia.
"Contemporary Acquisition" means the pending acquisition by SFX
Entertainment of the Contemporary Group, a concert promotion company,
operating in St. Louis, Missouri, and certain affiliated entities.
"Credit Agreement" means the definitive credit agreement SFX entered into
on June 23, 1997, which increases amounts available under its senior credit
facility to $400 million.
"Dallas Disposition" means the sale by SFX, consummated in October 1996,
of radio station KTCK-AM, operating in Dallas, Texas. As such, historical
operating results for KTCK-AM have been added to SFX, as reported amounts
from January 1, 1996 through October 17, 1996.
"Delsener/Slater Acquisition" means the acquisition by SFX, consummated in
January 1997, of Delsener/Slater Enterprises, Ltd., a concert promotion
company, and certain affiliated entities (collectively, "Delsener/Slater").
As such, historical the operating results for Delsener/Slater have been added
to SFX, as reported amounts for the 12 months ending December 31, 1996.
"Greensboro Acquisition" means the acquisition by SFX, consummated in
December 1996, of substantially all of the assets of WHSL-FM, operating in
Greensboro, North Carolina. As such, historical the operating results for
WHSL-FM have been added to SFX, as reported amounts from January 1, 1996
through December 6, 1996.
109
<PAGE>
"Greenville Acquisition" means the acquisition by SFX, consummated in June
1996, of substantially all of the assets of WROQ-FM, operating in
Greenville-Spartanburg, South Carolina. As such, historical the operating
results for WROQ-FM have been added to SFX, as reported amounts from January
1, 1996 through June 25, 1996.
"Hartford Acquisition" means the acquisition by SFX, consummated in
February 1997, of WWYZ-FM, which operates in Hartford, Connecticut. As such,
historical the operating results for WWYZ-FM have been added to SFX, as
reported amounts for the year ending December 31, 1996 and from January 1,
1997 through February 28, 1997.
"Hearst Acquisition" means the acquisition by SFX, consummated in August
1997, of two radio stations operating in Pittsburgh, Pennsylvania and two
stations in Milwaukee, Wisconsin for cash. As such, historical operating
results for the Pittsburgh and Milwaukee Stations have been added to SFX, as
reported amounts for the year ending December 31, 1996 and from January 1,
1997 through August 1, 1997.
"Houston Exchange" means the exchange by SFX, consummated in December
1996, of SFX's radio station KRLD-AM, operating in Dallas, Texas, and SFX's
Texas State Networks for radio station KKRW-FM, operating in Houston, Texas.
As such, historical the operating results for KRLD-FM and KKRW-FM have been
added to SFX, as reported amounts from January 1, 1996 through December 1,
1996.
"Jackson Acquisitions" means, collectively, the acquisitions by SFX,
consummated in the third quarter of 1996, of substantially all of the assets
of WJDX-FM, WSTZ-FM and WZRX-AM, each operating in Jackson, Mississippi. As
such, historical the operating results for WJDX-FM have been added to SFX, as
reported amounts from January 1, 1996 through July 19, 1996, while the
historical operating results for WSTZ-FM and WZRX-AM have been added to SFX,
as reported amounts from January 1, 1996 through August 29, 1996.
"Liberty Acquisition" means the acquisition by SFX, consummated in July
1996, of Liberty Broadcasting Incorporated, which owned and operated or
provided programming to or sold advertising on behalf of 14 FM and six AM
radio stations located in six markets: Washington, DC/Baltimore, Maryland;
Nassau-Suffolk, New York; Providence, Rhode Island; Hartford, Connecticut;
Albany, New York; and Richmond, Virginia. As such, historical the operating
results for the 14 FM and six AM stations have been added to SFX, as reported
amounts from January 1, 1996 through July 1, 1996.
"Louisville Acquisition" means the acquisition by SFX, consummated in
September 1996, from Prism of substantially all of the assets of WVEZ-FM,
WTFX-FM and WWKY-AM, each operating in Louisville, Kentucky. As such,
historical the operating results for the three stations have been added to
SFX, as reported amounts from January 1, 1996 through September 17, 1996.
"Louisville Dispositions" means the sale by SFX, consummated in October
1996, of the three stations acquired in the Louisville Acquisition. As such,
historical operating results for the three stations have been added to SFX,
as reported amounts from January 1, 1996 through October 1, 1996.
"Meadows Acquisition" means the acquisition by SFX, consummated in March
1997, of the Meadows Music Theater in Hartford, Connecticut. As such,
historical operating results for Meadows Music Theater have been added to
SFX, as reported amounts for the year ending December 31, 1996 and from
January 1, 1997 through March 19, 1997.
"MMR" means Multi-Market Radio, Inc.
"MMR Hartford Acquisition" means MMR's acquisition by SFX, consummated in
September 1996, of WKSS-FM, operating in Hartford, Connecticut. As such,
historical operating results for WKSS-FM have been added to SFX, as reported
amounts from January 1, 1996 through September 4, 1996.
"MMR Merger" means the merger, consummated in November 1996, of a
wholly-owned subsidiary of SFX with and into MMR, as a result of which MMR
became a wholly-owned subsidiary of SFX. As such, historical operating
results for MMR have been added to SFX, as reported amounts from January 1,
1996 through November 22, 1996.
"Myrtle Beach Acquisition" means MMR's acquisition of WMYB-FM, operating
in Myrtle Beach, South Carolina.
110
<PAGE>
"Nashville Acquisition" means the pending acquisition by SFX of WJZC-FM,
WLAC-FM and WLAC-AM, each operating in Nashville, Tennessee, from Sinclair
Broadcasting Group.
"Network Acquisition" means the pending acquisition by SFX Entertainment
of the Network Magazine Group and SJS Entertainment, a creator, producer and
distributor of live concert programming and network radio special events.
"PACE Acquisition" means the pending acquisition by SFX Entertainment of
PACE Entertainment Corporation (including the purchase of the Pavilion
Partners), a concert promotion company operating in Houston, Texas.
"Pending Acquisition and Disposition--Broadcasting" means, collectively,
the Capstar Disposition and the Nashville Acquisition.
"Pending Acquisitions--Entertainment" means, collectively, the BGP
Acquisition, the Concerts/ Southern Acquisition, the Contemporary
Acquisition, the Network Acquisitions, and the PACE Acquisition.
"Pending Transactions" means the Pending Acquisition and
Disposition--Broadcasting and the Pending Acquisitions--Entertainment.
"Prism Acquisition" means the acquisition by SFX, consummated in the third
quarter of 1996, of substantially all of the assets of Prism used in the
operation of ten FM and six AM radio stations located in five markets:
Louisville, Kentucky; Jacksonville, Florida; Raleigh, North Carolina; Tucson,
Arizona; and Wichita, Kansas. As such, historical operating results for the
Prism stations have been added to SFX, as reported amounts from January 1,
1996 through July 8, 1996.
"Raleigh-Greensboro Acquisitions" means the acquisition by SFX,
consummated in June 1996, of substantially all of the assets of WMFR-AM,
WMAG-FM and WTCK-AM, each operating in Greensboro, North Carolina, and
WTRG-FM and WRDU-FM, both operating in Raleigh, North Carolina. As such,
historical operating results for the Raleigh-Greensboro stations have been
added to SFX, as reported amounts from January 1, 1996 through June 28, 1996.
"Richmond Acquisition" means the acquisition by SFX, consummated in July
1997, of ABS Communications L.L.C., which owns or will acquire WVGO-FM,
WLEE-FM, WKHK-FM and WBZU-FM, each operating in Richmond, Virginia, net of
the pending disposition of WVGO for $4.5 million. As such, historical
operating results for the four stations have been added to SFX, as reported
amounts for the year ending December 31, 1996 and from January 1, 1997
through July 2, 1997.
"Sale of SFX Broadcasting" means the pending sale of substantially all the
radio assets of SFX Broadcasting for approximately $2 billion in cash and
acquired debt.
"Secret Communications Acquisition" means the acquisition by SFX of
WFBQ-FM, WRZX-FM and WNDE-AM, each operating in Indianapolis, Indiana,
consummated in April 1997, and WDVE-FM, WXDX-FM, and WJJJ-FM, each operating
in Pittsburgh, Pennsylvania, consummated in June 1997. As such, historical
operating results for the Indianapolis stations have been added to SFX, as
reported amounts for the year ending December 31, 1996 and from January 1,
1997 through April 1, 1997, while the operating results for the Pittsburgh
stations have been added to SFX, as reported amounts are included for the
year ending December 31, 1996 and from January 1, 1997 through June 1, 1997.
"Sony" means YM Corp.
"Sunshine Acquisition" means the acquisition by SFX, consummated in June
1997, of Sunshine Promotions, Inc. a concert promotion company, and certain
affiliated entities (collectively "Sunshine"). As such, historical operating
results for Sunshine Promotions have been added to SFX, as reported amounts
for the year ending December 31, 1996 and from January 1, 1997 through June
1, 1997.
"Texas Coast Acquisition" means the acquisition by SFX, consummated in
February 1997, of radio stations KQUE-FM and KNUZ-AM in Houston, Texas. As
such, historical operating results for KQUE-FM and KNUZ-AM have been added to
SFX, as reported amounts for the year ending December 31, 1996 and from
January 1, 1997 through February 28, 1997.
"Washington Dispositions" means the sale by SFX, consummated in July 1996,
of three of the stations acquired from Liberty Broadcasting, each operating
in the Washington, D.C./Baltimore, Maryland market. As such, historical the
operating results for the three stations have been added to SFX, as reported
amounts from January 1, 1996 through July 1, 1996.
111
<PAGE>
PRINCIPAL STOCKHOLDERS
The following table gives information concerning the beneficial ownership
of SFX's capital stock as of February 10, 1998, by (a) each director and
executive officer of SFX, (b) all executive officers and directors of SFX as
a group and (c) each person known by SFX to own beneficially more than 5% of
any class of SFX's voting stock. To the best of SFX's knowledge, none of
SFX's directors and officers hold shares of Series D Preferred Stock, and
there are no 5% holders of Series D Preferred Stock. Information concerning
the anticipated beneficial ownership of SFX Entertainment's capital stock
following the Spin-Off is set forth under the heading "Principal
Stockholders" in the Prospectus of SFX Entertainment which is attached hereto
as Annex D.
<TABLE>
<CAPTION>
CLASS A CLASS B
PERCENT OF
COMMON STOCK COMMON STOCK
--------------------------- ------------------------- TOTAL
NAME AND ADDRESS OF NUMBER OF PERCENT OF NUMBER OF PERCENT OF VOTING
BENEFICIAL OWNER(1) SHARES CLASS SHARES CLASS POWER
- ---------------------------------- ------------- ------------ ----------- ------------ ------------
<S> <C> <C> <C> <C> <C>
Directors and Executive Officers:
Robert F.X. Sillerman(2) ........ 756,913(3) 7.5% 1,024,168 97.8% 53.4%
Michael G. Ferrel ............... 15,592(4) * 22,869 2.2% 1.2%
D. Geoffrey Armstrong ........... 171,296(5) 1.8% -- -- *
Thomas P. Benson ................ 7,000(6) * -- -- *
Howard J. Tytel ................. 44,213(7) * -- -- *
Richard A. Liese ................ 8,700(8) * -- -- *
James F. O'Grady, Jr. ........... 850(9) * -- -- *
Paul Kramer ..................... 2,000(9) * -- -- *
Edward F. Dugan ................. 2,000(9) * -- -- *
All directors and executive
officers as a group (9 persons) 1,008,564 9.8% 1,047,037 100.0% 55.2%
5% Stockholders:
The Goldman Sachs Group, L.P. .. 689,574(10) 7.2% -- -- 3.4%
85 Broad Street
New York, NY 10004
Franklin Resources, Inc. ........ 533,180(11) 5.6% -- -- 2.7%
777 Mariners Island Boulevard
San Mateo, CA 94404
</TABLE>
- ------------
* Less than 1%
(1) Unless otherwise set forth above, the address of each stockholder is
the address of SFX, which is 650 Madison Avenue, New York, New York
10022. Pursuant to Rule 13d-3 of the Exchange Act, as used in this
table, (a) "beneficial ownership" means the sole or shared power to
vote, or to direct the disposition of, a security, and (b) a person
is deemed to have "beneficial ownership" of any security that the
person has the right to acquire within 60 days of February 10, 1998.
For purposes of this table, "beneficial ownership" does not include
shares of Class A Common Stock issuable upon exercise of options that
are not scheduled to vest within 60 days of February 10, 1998.
However, all of those options will be effectively vested upon
consummation of the Merger. See "Proposal 1: The Merger--Interests of
Certain Persons--Stock Options, Stock Appreciation Rights and SCMC
Warrants." In addition, for purposes of this table, "beneficial
ownership" of Class A Common Stock does not include the number of
shares of Class A Common Stock issuable upon conversion of shares of
Class B Common Stock even though the shares of Class B Common Stock
are convertible at any time, at the option of the holder thereof
(subject to the approval of the FCC, if applicable), into shares of
Class A Common Stock. Unless noted otherwise, (a) information as to
beneficial ownership is based on statements furnished to SFX by the
beneficial owners, and (b) stockholders possess sole voting and
dispositive power with respect to shares listed on this table. As of
February 10, 1998, there were issued and outstanding 9,517,663 shares
of Class A Common Stock, 1,047,037 shares of Class B Common Stock and
2,990,000 shares of Series D Preferred Stock.
(2) Mr. Sillerman has signed a voting agreement with respect to all of
his shares of Common Stock. See "Proposal 1: The Merger--Sillerman
Stockholder Agreement."
112
<PAGE>
(3) Includes (a) 6,663 shares that may be acquired pursuant to the
exercise of options which have been vested or will vest in 60 days of
February 10, 1998, and (b) 600,000 shares issuable upon the exercise
of the warrants issued to SCMC, a company controlled by Mr.
Sillerman. If the 1,024,168 shares of Class B Common Stock held by
Mr. Sillerman were included in calculating his ownership of Class A
Common Stock, Mr. Sillerman would beneficially own 1,781,081 shares
of Class A Common Stock, representing approximately 17.6% of the
class. See "Proposal 1: The Merger--Interests of Certain Persons in
the Merger--Arrangement Between Robert F.X. Sillerman and Howard J.
Tytel."
(4) Includes 4,773 shares that may be acquired pursuant to the exercise
of options which have vested or will vest within 60 days of February
10, 1998. If the 22,869 shares of Class B Common Stock held by Mr.
Ferrel were included in calculating his ownership of Class A Common
Stock, Mr. Ferrel would beneficially own 38,461 shares of Class A
Common Stock, representing less than 1% of the class.
(5) Includes 161,800 shares that may be acquired pursuant to the exercise
of options which have vested or will vest within 60 days of February
10, 1998.
(6) Consists of 7,000 shares that may be acquired pursuant to the
exercise of options which have vested or will vest within 60 days of
February 10, 1998.
(7) Includes 32,281 shares that may be acquired pursuant to the exercise
of options which have vested or will vest within 60 days of February
10, 1998. In addition, Mr. Tytel is a minority stockholder of SCMC,
which beneficially owns 600,000 shares of Class A Common Stock;
however, he is not deemed to beneficially own any such shares. See
"Proposal 1: The Merger--Interests of Certain Persons in the
Merger--Arrangement Between Robert F.X. Sillerman and Howard J.
Tytel."
(8) Consists of 8,700 shares that may be acquired pursuant to the
exercise of options which have vested or will vest within 60 days of
February 10, 1998.
(9) Does not include shares underlying interests in SFX's director
deferred stock ownership plan. See "Proposal 1: The Merger--Interests
of Certain Persons in the Merger--Change of Control Arrangements."
(10) Based on information contained in Amendment No. 1 to Schedule 13D
filed with the SEC on September 24, 1997. As of September 19, 1997,
The Goldman Sachs Group, L.P., a holding partnership, beneficially
owned 689,574 shares, of which 649,574 shares were beneficially owned
by Goldman, Sachs & Co., including 293,952 shares issuable upon
conversion of shares of Series D Preferred Stock. The Goldman Sachs
Group, L.P. is a general partner of (and owns a 99% interest in)
Goldman, Sachs & Co., a broker dealer and an investment adviser under
the Investment Advisers Act of 1940.
(11) Based on information contained in Schedule 13G filed with the SEC on
February 9, 1998. As of January 30, 1998, one or more open or
closed-end investment companies or other managed accounts (which are
advised by Franklin Mutual Advisors, Inc., a subsidiary of Franklin
Resources, Inc.) beneficially owned 533,180 shares of Class A Common
Stock. The principal shareholders of Franklin Resources, Inc. (a
holding company) are Charles B. Johnson and Rupert H. Johnson, Jr.
All of these named persons and corporations disclaim any economic
interest or beneficial ownership in the securities. Franklin Mutual
Advisers, Inc. is an investment adviser under the Investment Advisers
Act of 1940. The address of Franklin Mutual Advisers, Inc. is 51 John
F. Kennedy Parkway, Short Hills, New Jersey 07078.
POSSIBLE CHANGE IN CONTROL
Mr. Sillerman has pledged an aggregate of 793,401 of his shares of Class B
Common Stock as collateral for a line of credit, pursuant to which Mr.
Sillerman currently has no outstanding borrowings. Mr. Sillerman continues to
be entitled to exercise voting and consent rights with respect to the pledged
shares, with certain restrictions. However, if Mr. Sillerman defaults in the
payment of future loans extended to him under the line of credit, the bank
will be entitled to sell the pledged shares. Although the Class B Common
Stock has 10 votes per share in most matters, the pledged shares will
automatically convert into shares of Class A Common Stock upon such a sale.
In the event of such a sale, SFX Buyer would have the right of first refusal
to purchase the pledged shares. Furthermore, a sale of the pledged shares
would reduce Mr. Sillerman's share of the voting power of the Common Stock,
and would therefore be likely to result in a change of control of SFX.
113
<PAGE>
MARKET PRICES AND DIVIDEND POLICY
The table below sets forth the high and low sales prices per share of
Class A Common Stock, as reported by the Nasdaq National Market, for the
calendar quarters indicated.
<TABLE>
<CAPTION>
<S> <C> <C>
HIGH LOW
--------------------------------------------- -------
1996:
First Quarter........................ $35 $25-1/2
Second Quarter ...................... 39-1/4 31-1/2
Third Quarter ....................... 48 37-1/2
Fourth Quarter ...................... 48-1/4 24-3/4
1997:
First Quarter........................ $37-1/4 $27
Second Quarter ...................... 42-3/8 27-9/16
Third Quarter ....................... 74-3/4 40
Fourth Quarter ...................... 80-1/2 72-1/2
1998:
First Quarter (through February 12,
1998)................................ $89-1/2 $80-1/8
</TABLE>
On August 22, 1997, the last trading day preceding the public announcement
of the execution of the Merger Agreement, the high and low sale prices of the
Class A Common Stock as reported by the Nasdaq National Market were $71 and
$64 1/4. On February 12, 1998, the high and low sale prices of the Class A
Common Stock as reported by the Nasdaq National Market were $89 1/8 and $87
7/8. STOCKHOLDERS ARE URGED TO OBTAIN A CURRENT PRICE QUOTATION FOR THE CLASS
A COMMON STOCK.
No cash dividends have been declared or paid on the Class A Common Stock
since SFX's incorporation. In addition, SFX's current credit facility and the
Merger Agreement prohibit the payment of cash dividends. See "The Merger
Agreement--Covenants."
114
<PAGE>
FORWARD-LOOKING STATEMENTS
This Proxy Statement, including the documents incorporated herein by
reference, contains forward-looking statements. Future events and actual
results, financial or otherwise, may differ materially from the results set
forth in or implied in the forward-looking statements. Factors that might
cause such a difference include the risks and uncertainties involved in SFX's
business, including, but not limited to, the effect of economic and market
conditions, the level and volatility of interest rates, the impact of current
or pending legislation and regulation and the other risks and uncertainties
discussed in "Certain Considerations" in this Proxy Statement and in
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" in SFX's Form 10-K for the fiscal year ended December 31, 1996,
which is incorporated by reference into this Proxy Statement.
INDEPENDENT AUDITORS
Ernst & Young LLP serves as SFX's independent auditors. A representative
of Ernst & Young LLP will be at the Special Meeting to answer questions by
stockholders and will have the opportunity to make a statement if so desired.
OTHER MATTERS
The Board of Directors knows of no other matter to be acted upon at the
Special Meeting. However, if any other matters are properly brought before
the Special Meeting, the persons named in the accompanying form of proxy will
vote thereon in accordance with their best judgment.
AVAILABLE INFORMATION
SFX is subject to the information requirements of the Exchange Act, and in
accordance therewith files reports, proxy statements and other information
with the SEC. The reports, proxy statements and other information filed by
SFX with the SEC can be inspected and copied at the public reference
facilities maintained by the SEC at Judiciary Plaza, 450 Fifth Street, N.W.,
Room 1024, Washington, D.C. 20549, and at the following Regional Offices of
the SEC: Seven World Trade Center, 13th Floor, New York, New York 10048 and
Northwest Atrium Center, 500 West Madison Street, Suite 1400, Chicago,
Illinois 60661. Copies of the material also can be obtained from the Public
Reference Section of the SEC, 450 Fifth Street, N.W., Washington, D.C. 20549
at prescribed rates. SFX is an electronic filer under the EDGAR (Electronic
Data Gathering, Analysis and Retrieval) system maintained by the SEC. The SEC
maintains a Web Site (http://www.sec.gov) on the Internet that contains
reports, proxy and information statements and other information regarding
companies that file electronically with the SEC. In addition, material filed
by SFX can be inspected at the offices of The Nasdaq Stock Market, Inc.,
Reports Section, 1735 K Street, N.W., Washington, D.C. 20006. Certain
important information relating to the Spin-Off and SFX Entertainment is set
forth in the SFX Entertainment prospectus (which is a part of this Proxy
Statement and is attached as Annex D) and in the registration statement on
Form S-1 relating thereto (Reg. No. 333-43287). See "Additional Information"
in the SFX Entertainment prospectus.
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The following documents previously filed by SFX with the SEC under the
Exchange Act are incorporated herein by reference:
(a) SFX's Annual Report on Form 10-K for the fiscal year ended December
31, 1996;
(b) SFX's Quarterly Reports on Form 10-Q for the quarters ended March 31,
1997, June 30, 1997 and September 30, 1997; and
(c) SFX's Current Reports on Form 8-K dated January 17, 1997, January 21,
1997, January 22, 1997, January 27, 1997, April 15, 1997, June 16,
1997, July 11, 1997, August 25, 1997, December 11, 1997, December 24,
1997, January 7, 1998, January 28, 1998, January 29, 1998, January
30, 1998, February 5, 1998 and February 17, 1998 and SFX's Current
Reports on Form 8-K/A dated June 16, 1997 and December 10, 1997.
115
<PAGE>
All documents filed by SFX pursuant to Sections 13(a), 13(c), 14 or 15(d)
of the Exchange Act after the date of this Proxy Statement and prior to the
Special Meeting will be deemed to be incorporated by reference into this
Proxy Statement and to be a part hereof from the date of filing of the
documents. Any statement contained in a document incorporated or deemed to be
incorporated by reference herein will be deemed to be modified or superseded
for purposes hereof to the extent that a statement contained herein (or in
any other subsequently filed document that is or is deemed to be incorporated
by reference herein) modifies or supersedes the previous statement. Any
statement so modified or superseded will not be deemed to constitute a part
hereof except as so modified or superseded.
THIS PROXY STATEMENT INCORPORATES DOCUMENTS BY REFERENCE THAT ARE NOT
PRESENTED HEREIN OR DELIVERED HEREWITH. THESE DOCUMENTS (OTHER THAN EXHIBITS
TO THE DOCUMENTS UNLESS THE EXHIBITS ARE SPECIFICALLY INCORPORATED BY
REFERENCE HEREIN) ARE AVAILABLE, WITHOUT CHARGE, UPON ORAL OR WRITTEN REQUEST
BY ANY PERSON TO WHOM THIS PROXY STATEMENT HAS BEEN DELIVERED, FROM SFX
BROADCASTING, INC., 650 MADISON AVENUE, NEW YORK, NEW YORK 10022, ATTENTION:
TIMOTHY KLAHS, DIRECTOR OF INVESTOR RELATIONS, TELEPHONE NUMBER (212)
407-9126. IN ORDER TO ENSURE TIMELY DELIVERY OF THE DOCUMENTS PRIOR TO THE
SPECIAL MEETING, ANY REQUEST SHOULD BE MADE BY MARCH 19, 1998. SFX WILL
DELIVER THE REQUESTED DOCUMENTS BY FIRST CLASS MAIL OR OTHER EQUALLY PROMPT
MEANS WITHIN ONE BUSINESS DAY OF RECEIPT OF THE REQUEST.
YOU SHOULD RELY ONLY ON THE INFORMATION CONTAINED OR INCORPORATED BY
REFERENCE IN THIS PROXY STATEMENT TO VOTE ON PROPOSALS 1, 2 AND 3. WE HAVE
NOT AUTHORIZED ANYONE TO PROVIDE YOU WITH INFORMATION THAT IS DIFFERENT FROM
WHAT IS CONTAINED IN THIS PROXY STATEMENT. THIS PROXY STATEMENT IS DATED
FEBRUARY 13, 1998. YOU SHOULD NOT ASSUME THAT THE INFORMATION CONTAINED IN
THIS PROXY STATEMENT IS ACCURATE AS OF ANY DATE OTHER THAN THAT DATE, AND
NEITHER THE MAILING OF THIS PROXY STATEMENT TO STOCKHOLDERS NOR THE
CONSUMMATION OF THE MERGER SHALL CREATE ANY IMPLICATION TO THE CONTRARY.
STOCKHOLDER PROPOSALS
Under the rules of the SEC, any SFX stockholder who wishes to submit a
proposal for presentation at SFX's 1998 Annual Meeting of Stockholders (if
the Merger has not been consummated prior to the date that Meeting is to be
held) must submit the proposal to SFX at its principal executive offices,
Attention: Secretary. The proposal must have been received not later than
December 19, 1997 for inclusion, if appropriate, in SFX's proxy statement and
form of proxy relating to the 1998 Annual Meeting.
BY ORDER OF THE BOARD OF DIRECTORS
/s/ Howard J. Tytel
-----------------------------------
Howard J. Tytel
Secretary
February 13, 1998
116
<PAGE>
ANNEX A
AGREEMENT AND PLAN OF MERGER
AMONG
SBI HOLDING CORPORATION,
SBI RADIO ACQUISITION CORPORATION
AND
SFX BROADCASTING, INC.
DATED AS OF AUGUST 24, 1997
AND
AS AMENDED ON
FEBRUARY 9, 1998
(COMPOSITE VERSION)
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
--------
<S> <C>
ARTICLE I
THE MERGER................................................................. A-1
SECTION 1.01. The Merger................................................... A-1
SECTION 1.02. Closing...................................................... A-1
SECTION 1.03. Effective Time............................................... A-2
SECTION 1.04. Effects of the Merger........................................ A-2
SECTION 1.05. Certificate of Incorporation and By-laws..................... A-2
SECTION 1.06. Directors.................................................... A-2
SECTION 1.07. Officers..................................................... A-2
ARTICLE II
EFFECT OF THE MERGER ON THE SECURITIES OF THE CONSTITUENT CORPORATIONS;
EXCHANGE OF CERTIFICATES.................................................. A-2
SECTION 2.01. Effect on Capital Stock...................................... A-2
SECTION 2.02. Exchange of Certificates..................................... A-4
SECTION 2.03. Warrants, Options and SARs................................... A-5
ARTICLE III
REPRESENTATIONS AND WARRANTIES............................................. A-6
SECTION 3.01. Representations and Warranties of the Company ............... A-6
SECTION 3.02. Representations and Warranties of Parent and Sub ............ A-19
ARTICLE IV
COVENANTS RELATING TO CONDUCT OF BUSINESS.................................. A-21
SECTION 4.01. Conduct of Business.......................................... A-21
SECTION 4.02. No Solicitation.............................................. A-24
SECTION 4.03. Stockholders Meeting......................................... A-25
SECTION 4.04. Assistance................................................... A-26
SECTION 4.05. Releases..................................................... A-26
SECTION 4.06. Termination of Certain Affiliate Transactions ............... A-26
ARTICLE V
ADDITIONAL AGREEMENTS...................................................... A-26
SECTION 5.01. Access to Information; Confidentiality....................... A-26
SECTION 5.02. Reasonable Efforts........................................... A-27
SECTION 5.03. Benefit Plans................................................ A-28
SECTION 5.04. Indemnification, Exculpation and Insurance................... A-28
SECTION 5.05. Fees and Expenses; Deposit................................... A-29
SECTION 5.06. Public Announcements......................................... A-31
SECTION 5.07. Delsener/Slater Spin Off..................................... A-31
SECTION 5.08. Repayment of Indebtedness.................................... A-38
A-i
<PAGE>
PAGE
--------
SECTION 5.09. Closing Extension............................................ A-38
SECTION 5.10. [Intentionally Omitted]...................................... A-38
SECTION 5.11. Change of Name............................................... A-38
SECTION 5.12. Outstanding Indebtedness..................................... A-38
SECTION 5.13. Entertainment Business....................................... A-39
ARTICLE VI
CONDITIONS PRECEDENT....................................................... A-39
SECTION 6.01. Conditions to Each Party's Obligation To Effect the Merger .. A-39
SECTION 6.02. Conditions to Obligations of Parent and Sub.................. A-39
SECTION 6.03. Conditions to Obligation of the Company...................... A-40
ARTICLE VII
TERMINATION, AMENDMENT AND WAIVER.......................................... A-40
SECTION 7.01. Termination.................................................. A-40
SECTION 7.02. Effect of Termination........................................ A-41
ARTICLE VIII
GENERAL PROVISIONS......................................................... A-42
SECTION 8.01. Nonsurvival of Representations and Warranties ............... A-42
SECTION 8.02. Notices...................................................... A-42
SECTION 8.03. Definitions.................................................. A-42
SECTION 8.04. Interpretation............................................... A-43
SECTION 8.05. Counterparts................................................. A-44
SECTION 8.06. Entire Agreement; No Third-Party Beneficiaries .............. A-44
SECTION 8.07. Governing Law................................................ A-44
SECTION 8.08. Assignment................................................... A-44
SECTION 8.09. Enforcement.................................................. A-44
SECTION 8.10. Director and Officer Liability............................... A-45
SECTION 8.11. Termination Date ............................................ A-45
</TABLE>
Annex A Form of Amendment to Company's Certificate of Incorporation
Annex B Form of Release Agreement
Annex C Form of Escrow Agreement
Annex D Form of Letter of Credit
A-ii
<PAGE>
AGREEMENT AND PLAN OF MERGER dated as of August 24, 1997 and as amended on
February 9, 1998, among SBI Holding Corporation, a Delaware corporation
("Parent"), SBI Radio Acquisition Corporation, a Delaware corporation and a
wholly owned subsidiary of Parent ("Sub"), and SFX Broadcasting, Inc., a
Delaware corporation (the "Company").
WHEREAS, the respective Boards of Directors of Parent, Sub and the
Company, (including a special committee of the Company's independent
directors (the "Independent Committee")), and Parent acting as the sole
stockholder of Sub, have approved the merger of Sub with and into the Company
(the "Merger"), upon the terms and subject to the conditions set forth in
this Agreement;
WHEREAS, as a condition of the willingness of Parent to enter into this
Agreement, the holder (the "Principal Stockholder") of substantially all of
the outstanding Class B Common Stock, par value $.01 per share, of the
Company ("Class B Common Stock"), has entered into the Stockholder Agreement
dated as of the date hereof (the "Stockholder Agreement") with Parent, which
provides, among other things, that, subject to the terms and conditions
thereof, the Principal Stockholder will vote his shares of Common Stock (as
defined in Section 2.01(b)) in favor of the Merger and the approval and
adoption of this Agreement and the transactions contemplated hereby;
WHEREAS, Parent and Sub are unwilling to enter into this Agreement (and
effect the transactions contemplated hereby) unless, contemporaneously with
the execution and delivery hereof, the Principal Stockholder enters into a
Consulting, Non-Compete and Termination Agreement (the "Non-Compete and
Termination Agreement"), which shall establish (i) the terms and provisions
under which such individual's employment contract with the Company shall
terminate and (ii) the terms and provisions of a non-competition agreement
between the Company and such individual and, in order to induce Parent and
Sub to enter into this Agreement, the Company and such individual are
executing and delivering concurrently herewith the Non-Compete and
Termination Agreement;
WHEREAS, the Board of Directors of the Company and the Independent
Committee have approved for purposes of Section 203 of the Delaware General
Corporation Law (the "DGCL") the terms of the Stockholder Agreement and the
transactions contemplated thereby;
WHEREAS, the Board of Directors of the Company has approved (and the
Independent Committee has recommended) the amendments to the Certificate of
Incorporation of the Company as contemplated herein and recommended the
adoption of such amendments by the stockholders of the Company; and
WHEREAS, Parent, Sub and the Company desire to make certain
representations, warranties, covenants and agreements in connection with the
Merger and also to prescribe various conditions to the Merger;
NOW, THEREFORE, in consideration of the representations, warranties,
covenants and agreements contained in this Agreement, the parties 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 the DGCL, Sub shall be merged
with and into the Company at the Effective Time (as defined in Section 1.03).
Following the Effective Time, the separate corporate existence of Sub shall
cease and the Company shall continue as the surviving corporation (the
"Surviving Corporation") and shall succeed to and assume all the rights and
obligations of Sub in accordance with the DGCL.
SECTION 1.02. Closing. Subject to the provisions of Article VI, the
closing of the Merger (the "Closing") will take place at the offices of Baker
& McKenzie, 805 Third Avenue, New York, New York, on the earlier of (i) May
31, 1998 (as such date may be extended pursuant to Section 5.09) or (ii) such
time, date or place as Parent shall specify by providing written notice to
the Company at least five (5) business days prior to such date (the "Closing
Date"), provided that in no event shall the Closing take place prior
A-1
<PAGE>
to the date that is fifteen (15) business days after the Merger Approval (as
defined in Section 6.01(a)) is obtained so long as the Merger Approval is
obtained on or before April 24, 1998.
SECTION 1.03. Effective Time. Subject to the provisions of this Agreement,
as soon as practicable on the Closing Date, the parties shall file a
certificate of Merger or other appropriate documents (in any such case, the
"Certificate of Merger") executed in accordance with the relevant provisions
of the DGCL and shall make all other filings or recordings required under the
DGCL. The Merger shall become effective at such time as the Certificate of
Merger is duly filed with the Delaware Secretary of State, or at such other
time as Sub and the Company shall agree should be specified in the
Certificate of Merger (the time the Merger becomes effective being
hereinafter referred to as the "Effective Time").
SECTION 1.04. Effects of the Merger. The Merger shall have the effects set
forth in Section 259 of the DGCL.
SECTION 1.05. Certificate of Incorporation and By-laws. (a) The
certificate of incorporation of the Company as in effect immediately prior to
the Effective Time shall be the certificate of incorporation of the Surviving
Corporation until thereafter changed or amended as provided therein or by
applicable law.
(b) The by-laws of Sub as in effect at the Effective Time shall be the
by-laws of the Surviving Corporation until thereafter changed or amended as
provided therein or by applicable law.
SECTION 1.06. Directors. The directors of 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 duly elected and qualified, as the case may be.
SECTION 1.07. Officers. The officers of 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 and qualified, as the case may be.
ARTICLE II
EFFECT OF THE MERGER ON THE SECURITIES OF THE
CONSTITUENT CORPORATIONS; EXCHANGE OF CERTIFICATES
SECTION 2.01. Effect on Capital Stock. As of the Effective Time, by virtue
of the Merger and without any action on the part of the holder of any shares
of the capital stock of the Company or Sub:
(a) Capital Stock of Sub. Each issued and outstanding share of capital
stock of Sub shall be converted into and become a number of fully paid and
nonassessable shares of Class A Common Stock, par value $.01 per share, of
the Surviving Corporation equal to the quotient realized by dividing (i) the
sum of the aggregate number of shares of Common Stock (as defined in Section
2.01(b)) determined on a fully-diluted basis immediately prior to the
Effective Time by (ii) the aggregate number of shares of capital stock of Sub
issued and outstanding immediately prior to the Effective Time. The term "on
a fully-diluted basis" shall mean, as of any date, the number of shares of
Common Stock then outstanding (including any Dissenting Shares (as defined in
Section 2.01(f)) and shares of Common Stock that are owned by and held in the
treasury of the Company), together with the aggregate number of shares of
Common Stock that the Company may be required, now or in the future, 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 Warrants, Unit Purchase Options, Options (as such terms are
defined in Section 2.03) and all Preferred Stock and assuming the maximum
number of shares of Common Stock issuable thereunder).
(b) Conversion of Common Stock. (i) Each issued and outstanding share of
Class A Common Stock, par value $.01 per share, of the Company ("Class A
Common Stock" and together with the Class B Common Stock, the "Common Stock")
(other than shares to be canceled in accordance with Section 2.01(e) or
Dissenting Shares) shall be converted into the right to receive $75.00, as
such amount may be
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increased pursuant to Sections 5.07, 5.09 and 5.13 (the "Class A Common
Stock Merger Consideration"), payable to the holder thereof in cash, without
any interest thereon, upon surrender of the certificate representing such
share. As of the Effective Time, all such shares of Class A Common Stock
shall no longer be outstanding and shall automatically be canceled and
retired and shall cease to exist, and each holder of a certificate
representing any such shares of Class A Common Stock shall cease to have any
rights with respect thereto, except the right to receive the Class A Common
Stock Merger Consideration to be paid in consideration therefor upon
surrender of such certificate in accordance with Section 2.02, without
interest.
(ii) Each issued and outstanding share of Class B Common Stock (other
than shares to be canceled in accordance with Section 2.01(e) or
Dissenting Shares) shall be converted into the right to receive $97.50, as
such amount may be increased pursuant to Sections 5.07, 5.09 and 5.13 (the
"Class B Common Stock Merger Consideration"), payable to the holder
thereof in cash, without any interest thereon, upon surrender of the
certificate representing such share. As of the Effective Time, all such
shares of Class B Common Stock shall no longer be outstanding and shall
automatically be canceled and retired and shall cease to exist, and each
holder of a certificate representing any such shares of Class B Common
Stock shall cease to have any rights with respect thereto, except the
right to receive the Class B Common Stock Merger Consideration to be paid
in consideration therefor upon surrender of such certificate in accordance
with Section 2.02, without interest.
(c) Conversion of the Preferred Stock.
(i) Each issued and outstanding share of Series B Redeemable Preferred
Stock, par value $.01 per share, of the Company ("Series B Preferred
Stock") (other than shares to be canceled in accordance with Section
2.01(e) or Dissenting Shares) shall be converted into the right to receive
$1,000 (the "Series B Merger Consideration"), payable to the holder
thereof in cash, without any interest thereon, upon surrender of the
certificate representing such share. As of the Effective Time, all such
shares of Series B Preferred Stock shall no longer be outstanding and
shall automatically be canceled and retired and shall cease to exist, and
each holder of a certificate representing any such shares of Series B
Preferred Stock shall cease to have any rights with respect thereto,
except the right to receive the Series B Merger Consideration to be paid
in consideration therefor upon surrender of such certificate in accordance
with Section 2.02, without interest.
(ii) Each issued and outstanding share of Series C Redeemable Convertible
Preferred Stock, par value $.01 per share, of the Company ("Series C
Preferred Stock") (other than shares to be canceled in accordance with
Section 2.01(e) or Dissenting Shares) shall be converted into the right to
receive $1,000, plus any accrued but unpaid dividends (the "Series C
Merger Consideration"), payable to the holder thereof in cash, without any
interest thereon, upon surrender of the certificate representing such
share. As of the Effective Time, all such shares of Series C Preferred
Stock shall no longer be outstanding and shall automatically be canceled
and retired and shall cease to exist, and each holder of a certificate
representing any such shares of Series C Preferred Stock shall cease to
have any rights with respect thereto, except the right to receive the
Series C Merger Consideration to be paid in consideration therefor upon
surrender of such certificate in accordance with Section 2.02, without
interest.
(iii) Each issued and outstanding share of Series D Cumulative
Convertible Exchangeable Preferred Stock, par value $.01 per share, of the
Company ("Series D Preferred Stock") (other than shares to be canceled in
accordance with Section 2.01(e) or Dissenting Shares) shall be converted
into the right to receive an amount equal to the product of (A) the Class
A Common Stock Merger Consideration and (B) the number of shares of Class
A Common Stock into which such share of Series D Preferred Stock would
have been convertible immediately prior to the Effective Time (the "Series
D Merger Consideration"), payable to the holder thereof in cash, without
any interest thereon, upon surrender of the certificate representing such
share. As of the Effective Time, all such shares of Series D Preferred
Stock shall no longer be outstanding and shall automatically be canceled
and retired and shall cease to exist, and each holder of a certificate
representing any such shares of
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Series D Preferred Stock shall cease to have any rights with respect
thereto, except the right to receive the Series D Merger Consideration to
be paid in consideration therefor upon surrender of such certificate in
accordance with Section 2.02, without interest.
(iv) Each issued and outstanding share of 12 5/8% Series E Cumulative
Exchangeable Preferred Stock, par value $.01 per share, of the Company
("Series E Preferred Stock" and together with the Series B Preferred
Stock, the Series C Preferred Stock and the Series D Preferred Stock, the
"Preferred Stock") shall continue to be outstanding subsequent to the
Effective Time as Series E Cumulative Exchangeable Preferred Stock of the
Surviving Corporation, having in respect of the Surviving Corporation the
same powers, preferences and relative participating, optional and other
special rights and the qualifications, limitations and restrictions
thereof that the Series E Preferred Stock had in respect of the Company
immediately prior to the Effective Time.
(d) Senior Notes.
(i) The 10 3/4% Senior Subordinated Notes due 2006 (the "2006 Notes")
that are outstanding at the Effective Time shall continue to be
outstanding subsequent to the Effective Time as debt instruments of the
Surviving Corporation, having in respect of the Surviving Corporation the
same terms and conditions thereof that the Notes had in respect of the
Company immediately prior to the Effective Time.
(ii) The 11 3/8% Senior Subordinated Notes due 2000 (the "2000 Notes")
that are outstanding at the Effective Time shall continue to be
outstanding subsequent to the Effective Time as debt instruments of the
Surviving Corporation, having in respect of the Surviving Corporation the
same terms and conditions thereof that the Notes had in respect of the
Company immediately prior to the Effective Time. The 2006 Notes and the
2000 Notes are collectively referred to herein as the "Notes."
(e) Cancellation of Treasury Stock and Parent-Owned Stock. Each share of
Common Stock and Preferred Stock (other than Series E Preferred Stock) that
is owned by the Company or by any Subsidiary of the Company and each share of
Common Stock and Preferred Stock (other than Series E Preferred Stock) that
is owned by Parent, Sub or any other Subsidiary of Parent shall automatically
be canceled and retired and shall cease to exist, and no consideration shall
be delivered in exchange therefor.
(f) Dissenting Shares. Notwithstanding anything in this Agreement to the
contrary, shares of Common Stock and Preferred Stock (other than Series E
Preferred Stock) that are issued and outstanding immediately prior to the
Effective Time and that are held by stockholders who have properly exercised
appraisal rights with respect thereto under Section 262 of the DGCL (the
"Dissenting Shares") shall not be converted into the right to receive the
consideration therefor specified in this Section 2.01, but the holders of
Dissenting Shares shall be entitled to receive such payment as shall be
determined pursuant to Section 262 of the DGCL; provided, however, that if
any such holder shall have failed to perfect or shall withdraw or lose the
right to appraisal and payment under the DGCL, each such holder's shares of
Common Stock or Preferred Stock shall thereupon be deemed to have been
converted as of the Effective Time into the right to receive the
consideration therefor specified in this Section 2.01, without any interest
thereon, as provided in Section 2.02, and such shares shall no longer be
Dissenting Shares.
SECTION 2.02. Exchange of Certificates.
(a) Paying Agent. At or prior to the Effective Time, Parent shall enter
into an agreement with a bank or trust company mutually acceptable to Parent
and the Company (the "Paying Agent"), which shall provide that Parent shall
deposit with the Paying Agent as of the Effective Time, for the benefit of
the holders of shares of Common Stock and Preferred Stock (other than Series
E Preferred Stock) for exchange in accordance with this Article II, through
the Paying Agent, cash in the aggregate amount required to make the cash
payments specified in Section 2.01, in respect of (i) the Common Stock issued
and outstanding at the Effective Time (other than Dissenting Shares and
shares canceled in accordance with Section 2.01(e)) and (ii) the Preferred
Stock (other than Series E Preferred Stock) issued and outstanding at the
Effective Time (other than Dissenting Shares and shares canceled in
accordance with Section 2.01(e)), such sum being hereinafter referred to as
the "Exchange Fund." The Paying Agent shall, pursuant to irrevocable
instructions, deliver cash in exchange for surrendered certificates
representing Common Stock or Preferred Stock (other than Series E Preferred
Stock).
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(b) Exchange Procedures. As soon as reasonably practicable after the
Effective Time but no later than three business days following the Effective
Time, the Paying Agent shall mail to each holder of record of a certificate
or certificates which immediately prior to the Effective Time represented
outstanding shares of Common Stock or Preferred Stock (other than Series E
Preferred Stock) (the "Certificates"), (i) a letter of transmittal (which
shall specify that delivery shall be effected, and risk of loss and title to
the Certificates shall pass, only upon delivery of the Certificates to the
Paying Agent and shall be in such form and have such other provisions as
Parent may reasonably specify) and (ii) instructions for use in effecting the
surrender of the Certificates in exchange for the consideration payable
therefor pursuant to Section 2.01. Upon surrender of a Certificate for
cancellation to the Paying Agent or to such other agent or agents as may be
appointed by Parent, together with such letter of transmittal, duly executed,
and such other documents as may reasonably be required by the Paying Agent,
the holder of such Certificate shall be entitled to receive in exchange
therefor the cash which such holder has the right to receive pursuant to the
provisions of this Article II, and the Certificate so surrendered shall
forthwith be canceled. If any holder of Common Stock or Preferred Stock
(other than Series E Preferred Stock) shall be unable to surrender such
holder's Certificates because such Certificates have been lost, stolen or
destroyed, such holder may deliver in lieu thereof an affidavit and indemnity
agreement in form and substance reasonably satisfactory to the Parent. In the
event of a transfer of ownership of Common Stock or Preferred Stock (other
than Series E Preferred Stock) which is not registered in the transfer
records of the Company, cash representing the consideration payable pursuant
to Section 2.01 may be paid to a Person other than the Person in whose name
the Certificate so surrendered is registered, if such Certificate shall be
properly endorsed or otherwise be in proper form for transfer and the Person
requesting such payment shall pay any transfer or other Taxes required by
reason of payment of the consideration specified in Section 2.01 to a Person
other than the registered holder of such Certificate or establish to the
satisfaction of Parent that such tax has been paid or is not applicable.
Until surrendered as contemplated by this Section 2.02, each Certificate
shall be deemed at any time after the Effective Time to represent only the
right to receive upon such surrender the consideration specified in this
Article II. No interest will be paid or will accrue on any cash payable to
holders of Certificates pursuant to the provisions of this Article II.
(c) Transfer Books. At and after the Effective Time, there shall be no
transfers on the stock transfer books of the Company of the shares of Common
Stock or Preferred Stock (other than Series E Preferred Stock) which were
outstanding immediately prior to the Effective Time. If, after the Effective
Time, Certificates are presented to the Surviving Corporation, they shall be
canceled and exchanged as provided in this Article II.
(d) Termination of Exchange Fund. Any portion of the Exchange Fund which
remains undistributed to the holders of the Certificates for one year after
the Effective Time shall be delivered to Parent, upon demand, and any holders
of the Certificates who have not theretofore complied with this Article II
shall thereafter look only to Parent for payment of the consideration
therefor specified in this Article II.
(e) No Liability. None of Parent, Sub, the Company or the Paying Agent
shall be liable to any Person in respect of any cash from the Exchange Fund
delivered to a public official pursuant to any applicable abandoned property,
escheat or similar law.
(f) Investment of Exchange Fund. The Paying Agent shall invest any cash
included in the Exchange Fund, as directed by Parent, on a daily basis,
provided that any such investment is guaranteed as to payment of principal
and interest by the federal government of the United States. Any interest and
other income resulting from such investments shall be paid to Parent.
SECTION 2.03. Warrants, Options and SARs.
(a) At the Effective Time, each then outstanding warrant to purchase
shares of Common Stock granted by the Company pursuant to that certain
Warrant Agreement dated March 23, 1994 by and among Multi-Market Radio, Inc.
("MMR"), American Stock Transfer & Trust Company, D.H. Blair Investment
Banking Corp. and Americorp Securities, Inc. (the "Public Warrants"), to the
underwriters of MMR's initial public offering dated July 28, 1993 (the "IPO
Warrants"), to The Huff Alternative Income Fund, L.P. dated November 22, 1996
(the "Huff Warrants"), upon exercise of those certain unit purchase
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options (the "Unit Purchase Option Warrants") issued by the Company and
dated March 23, 1994 and to Sillerman Communications Management Corporation
dated April 15, 1996 (the "SCMC Warrants," and together with the Public
Warrants, the IPO Warrants, the Huff Warrants and the Unit Purchase Option
Warrants, the "Warrants") shall continue to be outstanding subsequent to the
Effective Time subject to the respective terms and conditions of the
agreements relating thereto and shall thereafter be exercisable for cash and,
to the extent provided in Section 5.07, stock of Delsener/Slater Holdings (as
defined in Section 5.07).
(b) Each then outstanding unit purchase option dated March 23, 1994 (the
"Unit Purchase Options") shall continue to be outstanding subsequent to the
Effective Time subject to the respective terms and conditions of the
agreements relating thereto and shall thereafter be exercisable for cash.
(c) Effective as of the Effective Time:
(i) Each then outstanding (A) option to purchase shares of Common Stock
granted by the Company pursuant to the Company's 1993 Stock Option Plan,
the Company's 1994 Stock Option Plan, the Company's 1995 Stock Option
Plan, the Company's 1996 Stock Option Plan, the Company's 1997 Stock
Option Plan, MMR's 1993 Stock Option Plan, MMR's 1994 Stock Option Plan
and MMR's 1995 Stock Option Plan (collectively, the "Stock Plans")
(whether or not then presently exercisable) and (B) option to purchase
Class A Common Stock granted to Robert F.X. Sillerman or Michael G. Ferrel
other than pursuant to a Stock Plan (collectively, the "Options") (whether
or not then presently exercisable) shall be canceled, and each holder of a
canceled Option shall be entitled to receive, as soon as practicable after
the Effective Time, in consideration for the cancellation of such Option,
an amount in cash, without any interest thereon, for each share of Class A
Common Stock subject to such Option, equal to the difference between the
Class A Common Stock Merger Consideration and the per share exercise price
of such Option to the extent such difference is a positive number, less
any applicable withholding Taxes (as defined in Section 3.01(j)(viii)).
The aggregate consideration payable to each Option holder shall be rounded
up to the nearest penny.
(ii) Each then outstanding stock appreciation right with respect to
shares of Common Stock granted by the Company (whether or not presently
exercisable) (collectively, the "SARs") shall be canceled, and each holder
of a canceled SAR shall be entitled to receive, as soon as practicable
after the Effective Time, in consideration for the cancellation of such
SAR, an amount in cash, without any interest thereon, for each share of
Common Stock subject to such SAR, equal to the difference between the
Class A Common Stock Merger Consideration and the per share base price of
such SAR to the extent such difference is a positive number, less any
applicable withholding Taxes. The aggregate consideration payable to each
SAR holder shall be rounded up to the nearest penny.
(d) The surrender of a Warrant, Unit Purchase Option, Option or SAR to the
Company in exchange for the consideration set forth in this Section 2.03
shall, to the extent permitted by law, be deemed a release of any and all
rights the holder had or may have had in respect of such Warrant, Unit
Purchase Option, Option or SAR.
ARTICLE III
REPRESENTATIONS AND WARRANTIES
SECTION 3.01. Representations and Warranties of the Company. The Company
represents and warrants to Parent and Sub as follows:
(a) Organization, Standing and Corporate Power. Each of the Company and
each of its Significant Subsidiaries (as defined in Section 8.03(i)) is a
corporation or other entity duly organized, validly existing and in good
standing under the laws of the jurisdiction in which it is incorporated or
organized and has the requisite corporate or other power and authority to
carry on its business as now being conducted. Each of the Company and each of
its Significant Subsidiaries is duly qualified or licensed to do business and
is in good standing in each jurisdiction in which the nature of its business
or the ownership or leasing of its properties makes such qualification or
licensing necessary, other than in such jurisdictions where the
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failure to be so qualified or licensed or to be in good standing
individually or in the aggregate would not have a Material Adverse Effect (as
defined in Section 8.03(f)) on the Company. The Company has delivered to
Parent prior to the execution of this Agreement complete and correct copies
of its certificate of incorporation and by-laws, as in effect on the date of
this Agreement, and the certificates of incorporation and by-laws (or
comparable organizational documents) of its Significant Subsidiaries, in each
case as amended to date.
(b) Subsidiaries. As of the date hereof, Section 3.01(b)(i) of the Company
Disclosure Schedule (as defined in Section 8.03(n)) sets forth a true and
complete list of each Subsidiary of the Company. Except as set forth in
Section 3.01(b)(ii) of the Company Disclosure Schedule, all the outstanding
shares of capital stock of, or other ownership interests in, each Subsidiary
of the Company have been validly issued and (with respect to corporate
Subsidiaries) are fully paid and nonassessable and are owned directly or
indirectly by the Company, free and clear of all pledges, claims, liens,
charges, encumbrances and security interests of any kind or nature whatsoever
(collectively, "Liens"). Except for the capital stock of its Subsidiaries and
the partnership interests listed in Section 3.01(b)(iii) of the Company
Disclosure Schedule, as of the date hereof, the Company does not own,
directly or indirectly, any capital stock or other ownership interest in any
corporation, limited liability company, partnership, joint venture or other
entity.
(c) Capital Structure. The authorized capital stock of Company consists of
100,000,000 shares of Class A Common Stock, 10,000,000 shares of Class B
Common Stock, 1,200,000 shares of Class C Common Stock, par value $.01 per
share, of the Company ("Class C Common Stock"), and 10,010,000 shares of
Preferred Stock. As of June 30, 1997, (i) 8,394,568 shares of Class A Common
Stock were issued and outstanding (other than shares issued after June 30,
1997, the issuance of which would have been permitted under Section
4.01(a)(ii) if done following the date of this Agreement), (ii) 1,047,037
shares of Class B Common Stock were issued and outstanding, (iii) no shares
of Class C Common Stock were issued and outstanding, (iv) 2,000 shares of
Series B Preferred Stock were issued and outstanding, (v) 2,000 shares of
Series C Preferred Stock were issued and outstanding, (vi) 2,990,000 shares
of Series D Preferred Stock were issued and outstanding (as such number may
be reduced pursuant to the parenthetical contained in clause (i) above) and
(vii) 2,250,000 shares of Series E Preferred Stock were issued and
outstanding. Except as set forth in Section 3.01(c)(i) of the Company
Disclosure Schedule and except for options that may be granted as permitted
under clause (F) of Section 4.01(a)(ii), there are no outstanding stock
appreciation rights or rights to receive shares of Common Stock or Preferred
Stock granted under the Stock Plans or otherwise. Section 3.01(c)(i) of the
Company Disclosure Schedule sets forth a complete and correct list, as of
June 30, 1997, of the holders of all options, and the number, class and
series of shares subject to each such option and the exercise prices thereof.
Since June 30, 1997, the Company has not issued any (i) Common Stock, other
than Common Stock that was issued upon the exercise, conversion or exchange
of Options, Warrants, Unit Purchase Options and other securities which were
outstanding on June 30, 1997, or (ii) securities which are exercisable for or
convertible or exchangeable into Common Stock. All outstanding shares of
capital stock of the Company are, and all shares which may be issued will be,
when issued, duly authorized, validly issued, fully paid and nonassessable
and not subject to preemptive rights. Except for the Options, Warrants, Unit
Purchase Options and Preferred Stock (as to which no more than 6,371,649
shares of Class A Common Stock (as such number may be reduced pursuant to the
parenthetical contained in clause (i) above) and no shares of Class B Common
Stock are issuable thereunder) and except as set forth above or in Section
3.01(c)(i) of the Company Disclosure Schedule, and except for options that
may be granted as permitted under clause (F) of Section 4.01(a)(ii), there
are no outstanding securities, options, warrants, calls, rights, commitments,
agreements, arrangements or undertakings of any kind to which the Company or
any of its Subsidiaries is a party or by which any of them is bound
obligating the Company or any of its Subsidiaries to issue, deliver or sell,
or cause to be issued, delivered or sold, additional shares of capital stock
or other voting securities of the Company or of any of its Subsidiaries or
obligating the Company or any of its Subsidiaries to issue, grant, extend or
enter into any such security, option, warrant, call, right, commitment,
agreement, arrangement or undertaking. Except as set forth in Section
3.01(c)(i) of the Company Disclosure Schedule, there are no outstanding
contractual obligations of the Company or any of its Subsidiaries to
repurchase, redeem or otherwise acquire any shares of capital stock of the
Company or any of its Subsidiaries. Except for the
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redemption and repurchase obligations with respect to the Preferred Stock
set forth in the Company's certificate of incorporation and except as
contemplated hereby or as set forth in Section 3.01(c)(ii) of the Company
Disclosure Schedule, there are no outstanding contractual obligations of the
Company to vote or to dispose of any shares of the capital stock of any of
its Subsidiaries.
(d) Authority; Noncontravention. The Company has all requisite corporate
power and authority to enter into this Agreement (collectively with the
Stockholders Agreement, the Escrow Agreement (as defined in Section 5.05(f))
and the Non-Compete and Termination Agreement, the "Transaction Documents")
and, subject to the Stockholder Approval (as defined in Section 3.01(k)), to
consummate the transactions contemplated by the Transaction Documents. The
execution and delivery of the Transaction Documents by the Company and the
consummation by the Company of the transactions contemplated by the
Transaction Documents (including the "Amendments" as defined in this Section
3.01(d)) have been duly authorized by all necessary corporate action on the
part of the Company, subject to the Stockholder Approval. Each of the
Transaction Documents has been duly executed and delivered by the Company
and, subject to the Stockholder Approval, constitutes a valid and binding
obligation of the Company, enforceable against the Company in accordance with
its terms. Except as disclosed in Section 3.01(d)(i) of the Company
Disclosure Schedule, the execution and delivery of the Transaction Documents
do not, and compliance with the provisions of the Transaction Documents will
not, conflict with, or result in any violation of, or default (with or
without notice or lapse of time, or both) under, or give rise to a right of
termination, cancellation or acceleration of any obligation or loss of a
material benefit under, or result in the creation of any Lien upon any of the
properties or assets of the Company or any of its Subsidiaries under, (i)
subject to the adoption of the Amendments, the certificate of incorporation
or by-laws of the Company or the comparable organizational documents of any
of its Subsidiaries, (ii) subject to the consents and other matters referred
to in the following sentence, any loan or credit agreement, note, bond,
mortgage, indenture, lease or other agreement, instrument, permit,
concession, franchise or license applicable to the Company or any of its
Subsidiaries or their respective properties or assets or (iii) subject to the
governmental filings and other matters referred to in the following sentence,
any judgment, order, decree, statute, law, ordinance, rule or regulation
applicable to the Company or any of its Subsidiaries or their respective
properties or assets, other than, in the case of clauses (ii) and (iii), any
such conflicts, violations, defaults, rights, Liens, judgments, orders,
decrees, statutes, laws, ordinances, rules or regulations that individually
or in the aggregate would not (x) have a Material Adverse Effect on the
Company, (y) impair the ability of the Company to perform its obligations
under any of the Transaction Documents in any material respect or (z) delay
in any material respect or prevent the consummation of any of the
transactions contemplated by the Transaction Documents. No consent, approval,
order or authorization of, or registration, declaration or filing with, any
Federal, state or local government or any court, administrative or regulatory
agency or commission or other governmental authority or agency (a
"Governmental Entity") or other Person, is required by or with respect to the
Company or any of its Subsidiaries in connection with the execution and
delivery of the Transaction Documents by the Company or the consummation by
the Company of the transactions contemplated by the Transaction Documents,
except for (1) the filing of a premerger notification and report form by the
Company under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as
amended (the "HSR Act"); (2) the filing with the Securities and Exchange
Commission (the "SEC") of (A) a proxy statement relating to the Stockholders
Meeting (as defined in Section 4.03), as amended or supplemented from time to
time (the "Proxy Statement"), (B) if necessary, a registration statement on
the appropriate form (the "Registration Statement") under the Securities Act
of 1933, as amended (the "Securities Act"), in respect of the transactions
contemplated in Section 5.07 and (C) such reports under Section 13(a) or
15(d) of the Securities Exchange Act of 1934, as amended (the "Exchange
Act"), as may be required in connection with the Transaction Documents and
the transactions contemplated by the Transaction Documents; (3) the filing of
the Certificate of Merger with the Delaware Secretary of State and
appropriate documents with the relevant authorities of other states in which
the Company is qualified to do business; (4) the filing of one or more
certificates of amendment relating to the amendments to the Company's
certificate of incorporation as contemplated by Annex A (the "Amendments")
with the Secretary of State of Delaware; (5) such filings with and approvals
of the Federal Communications Commission or any successor entity (the "FCC")
as may be required under the Communications Act of
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1934, as amended, and the rules, regulations and policies of the FCC
thereunder (collectively, the "Communications Act"), including filings and
approvals in connection with the transfer of control of the FCC Licenses (as
defined in Section 3.01(q)); (6) such other filings and consents as may be
required under any environmental, health or safety law or regulation
pertaining to any notification, disclosure or required approval necessitated
by the Merger or the transactions contemplated by the Transaction Documents;
(7) such consents, approvals, orders or authorizations the failure of which
to be made or obtained would not reasonably be expected to have a Material
Adverse Effect on the Company, impair the ability of the Company to perform
its obligations under this Agreement in any material respect or delay in any
material respect or prevent the consummation of the transactions contemplated
by the Transaction Documents; and (8) as disclosed in Section 3.01(d)(ii) of
the Company Disclosure Schedule.
(e) SEC Documents; Undisclosed Liabilities. The Company has filed all
required reports, schedules, forms, statements and other documents with the
SEC since January 1, 1995 (the "Company SEC Documents"). As of their
respective dates, the Company SEC Documents complied in all material respects
with the requirements of the Securities Act, or the Exchange Act, as the case
may be, and the rules and regulations of the SEC promulgated thereunder
applicable to such Company SEC Documents, and none of the Company SEC
Documents when filed contained any untrue statement of a material fact or
omitted to state a material fact required to be stated therein or necessary
in order to make the statements therein, in light of the circumstances under
which they were made, not misleading. Except to the extent that information
contained in any Company SEC Document has been revised or superseded by a
later filed Company SEC Document, none of the Company SEC Documents contains
any untrue statement of a material fact or omits to state any material fact
required to be stated therein or necessary in order to make the statements
therein, in light of the circumstances under which they were made, not
misleading. The financial statements of the Company included in the Company
SEC Documents comply as to form in all material respects with applicable
accounting requirements and the published rules and regulations of the SEC
with respect thereto, have been prepared in accordance with generally
accepted accounting principles (except, in the case of unaudited statements,
as permitted by Form 10-Q of the SEC and pro forma financial statements as
required by SEC Regulation S-X) applied on a consistent basis during the
periods involved (except as may be indicated in the notes thereto) and fairly
present in all material respects the consolidated financial position of the
Company and its consolidated Subsidiaries as of the dates thereof and the
consolidated results of their operations and cash flows for the periods then
ended (subject, in the case of unaudited statements, to normal year-end audit
adjustments). Except as set forth on Section 3.01(e) of the Company
Disclosure Schedule or in the Filed SEC Documents (as defined in Section
3.01(f)), and except for liabilities and obligations incurred in the ordinary
course of business consistent with past practice, since June 30, 1997 to the
date hereof, neither the Company nor any of its Subsidiaries has any material
liabilities or obligations of any nature (whether accrued, absolute,
contingent or otherwise) required by generally accepted accounting principles
to be recognized or disclosed on a consolidated balance sheet of the Company
and its consolidated Subsidiaries or in the notes thereto.
(f) Absence of Certain Changes or Events. Except as disclosed in the
Company SEC Documents filed and publicly available prior to the date of this
Agreement (as amended to the date of this Agreement, the "Filed SEC
Documents"), as contemplated by this Agreement or in Section 3.01(f) of the
Company Disclosure Schedule, since June 30, 1997, the Company has conducted
its business only in the ordinary course consistent with past practice, and
there has not been (i) any declaration, setting aside or payment of any
dividend or other distribution (whether in cash, stock or property) with
respect to any of the Company's capital stock other than regular cash
dividends on shares of Preferred Stock, (ii) any split, combination or
reclassification of any of its capital stock or any issuance or the
authorization of any issuance of any other securities in respect of, in lieu
of or in substitution for shares of its capital stock, (iii) (x) any granting
by the Company to any executive officer or other key employee of the Company
of any increase in compensation, except for normal increases in the ordinary
course of business consistent with past practice or as required under
employment or other agreements or benefit arrangements in effect as of the
date of the most recent audited financial statements included in the Filed
SEC Documents or (y) any granting by the Company to any such executive
officer of any increase in severance or termination pay, except as was
required under any employment, severance, termination or other agreements or
benefit
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arrangements in effect as of June 30, 1997, (iv) except as required by a
change in generally accepted accounting principles, any change in accounting
methods, principles or practices by the Company materially affecting its
assets, liabilities or business or (v) any event, circumstance, or fact that
has resulted in a Material Adverse Change in the Company.
(g) Litigation. Except as disclosed in the Filed SEC Documents or in
Section 3.01(g) of the Company Disclosure Schedule, there is no suit, action,
proceeding or indemnification claim (including any proceeding by or before
the FCC but excluding proceedings of general applicability to the radio
industry) pending or, to the knowledge of the Company, threatened against or
affecting the Company or any of its Subsidiaries that individually or in the
aggregate could reasonably be expected to either (i) have a Material Adverse
Effect on the Company, (ii) impair the ability of the Company to perform its
obligations under the Transaction Documents in any material respect or (iii)
delay in any material respect or prevent the consummation of any of the
transactions contemplated by the Transaction Documents, nor is there any
judgment, decree, injunction, rule or order of any Governmental Entity or
arbitrator outstanding against the Company or any of its Subsidiaries having,
or which could reasonably be expected to have, any effect referred to in
clause (i), (ii) or (iii) above, except for any suit, action or proceeding
asserted after the date hereof by any stockholders of the Company in
connection with any of the transactions contemplated by the Transaction
Documents.
(h) Absence of Changes in Benefit Plans. Except (x) as disclosed in the
Filed SEC Documents or in Section 3.01(h) of the Company Disclosure Schedule,
(y) for normal increases in the ordinary course of business consistent with
past practice or as required by law or (z) as contemplated by this Agreement,
since June 30, 1997, there has not been any adoption or amendment in any
material respect by the Company or any of its significant Subsidiaries of any
collective bargaining agreement or any bonus, pension, profit sharing,
deferred compensation, incentive compensation, stock ownership, stock
purchase, stock option, phantom stock, retirement, vacation, severance,
disability, death benefit, hospitalization, medical or other material plan
providing material benefits to any current or former employee, officer or
director of the Company or any of its Subsidiaries. Without limiting the
foregoing, except as disclosed in the Filed SEC Documents or in Section
3.01(h) of the Company Disclosure Schedule, since June 30, 1997, there has
not been any change in any actuarial or other assumption used to calculate
funding obligations with respect to any Pension Plan (as defined below), or
in the manner in which contributions to any Pension Plan are made or the
basis on which such contributions are determined. Except as disclosed in the
Filed SEC Documents or in Section 3.01(h) of the Company Disclosure Schedule,
there exist no employment, consulting or severance agreements currently in
effect between the Company and any current or former employee, officer or
director of the Company providing for annual base compensation or payments in
excess of $100,000.
(i) ERISA Compliance. Except as disclosed in Section 3.01(i) of the
Company Disclosure Schedule or as otherwise disclosed to Parent or Sub:
(i) The Company has delivered or made available to Parent 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) (a "Welfare Plan"), 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 the Company, any of its Significant
Subsidiaries or any other Person or entity that, together with the
Company, is treated as a single employer under Section 414(b), (c), (m) or
(o) of the United States Internal Revenue Code of 1986, as amended (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 the Company or any of its
Subsidiaries or with respect to which the Company or any Commonly
Controlled Entity has any material contingent liability (collectively,
"Benefit Plans"). The Company has delivered or made available to Parent
true, complete and correct copies of (w) 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, (x) the most recent summary plan description for each Benefit
Plan for which the preparation of any such summary plan
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description is required by ERISA, (y) each currently effective trust
agreement, insurance or group annuity contract and each other funding or
financing arrangement relating to any Benefit Plan and (z) a schedule of
employer expenses with respect to each Benefit Plan for the current plan
year of each Benefit Plan.
(ii) 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 the Company, 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, is reasonably likely to result in a
Material Adverse Effect on the Company.
(iii) (A) 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 and (B) 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.
(iv) 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 the Company, no
such determination letter has been revoked, revocation of such letter has
not been threatened nor has such Pension Plan been amended since the
effective date of its most recent determination letter in any respect that
would adversely affect its qualification. The Company has delivered or
made available to Parent 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 the Company, 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 the Company.
(v) (A) Neither the Company nor any of its Significant 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 is reasonably likely to subject the Company, any of its Significant
Subsidiaries, any employee of the Company or its Significant Subsidiaries
or, to the knowledge of the Company, 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 the Company;
(B) 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 (a "Standard Termination") or, to
the knowledge of the Company, has been the subject of a "reportable event"
(as defined in Section 4043 of ERISA and the regulations thereunder) and
no such Pension Plan is reasonably expected to be terminated other than in
a Standard Termination; and (C) none of the Company, any of its
Significant Subsidiaries or, to the knowledge of the Company, 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 the Company.
(vi) As of the most recent valuation date for each Pension Plan that is a
"defined benefit pension plan" (as defined in Section 3(35) of ERISA)(a
"Defined Benefit Plan"), there was not any amount of "unfunded benefit
liabilities" (based upon the plan's ongoing actuarial assumptions used for
funding purposes as set forth in the most recent actuarial report or
valuation) under such Defined Benefit Plan in excess of $100,000 and the
aggregate amount of all such unfunded benefit liabilities under all such
Defined Benefit Plans as of such date did not exceed $100,000, and there
are no facts
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or circumstances that would materially change the funded status of any
such Defined Benefit Plan as of the date hereof. The Company has furnished
to Parent the most recent actuarial report or valuation with respect to
each Defined Benefit Plan. To the knowledge of the Company, the
information supplied to the plan actuary by the Company and any of its
Subsidiaries for use in preparing those reports or valuations was complete
and accurate in all material respects.
(vii) 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 as of the date hereof and would
not, individually or in the aggregate, be reasonably likely to result in a
Material Adverse Effect on the Company.
(viii) No Commonly Controlled Entity has engaged in a transaction
described in Section 4069 of ERISA that could subject the Company 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
the Company.
(ix) 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.
(x) Prior to the date hereof, the Company has made available to Parent
copies of all agreements and Benefit Plans under which any employee of the
Company or any of its 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 and Section 3.01(i) of the Company
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.
(xi) 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.
(xii) MNotwithstanding any of the foregoing to the contrary, the
representations and warranties of this Section 3.01(i), other than clauses
(i) and (ix), 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 the Company has no knowledge.
(j) Taxes.
(i) Each of the Company, its Subsidiaries and any affiliated,
consolidated, combined, unitary or similar group of which the Company or
any of its Subsidiaries is or was a member (a "Tax Group") has filed all
tax returns and reports required to be filed by it or requests for
extensions to file such returns or reports have been timely filed, granted
and have not expired, except to the extent that such failures to file or
to have extensions granted that remain in effect individually or in the
aggregate would not have a Material Adverse Effect on the Company. All
returns filed by the Company, each of its Subsidiaries and any Tax Group
are complete and accurate in all material respects to the knowledge of the
Company. The Company and each of its Subsidiaries has paid (or the Company
has paid on its behalf) all Taxes shown as due on such returns, and the
most recent financial statements contained in the Filed SEC Documents
reflect an adequate reserve for all Taxes payable by the Company and its
Subsidiaries for all taxable periods and portions thereof accrued through
the date of such financial statements.
(ii) No deficiencies for any Taxes have been proposed, asserted or
assessed against the Company or any of its Subsidiaries that are not
adequately reserved for, except for deficiencies that individually or in
the aggregate would not have a Material Adverse Effect on the Company, and
no requests for waivers of the time to assess any such Taxes have been
granted or are pending that individually or in the aggregate would have a
Material Adverse Effect on the Company. The statute
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of limitations on assessment or collection of any Federal income taxes
due from the Company, any of its Subsidiaries or any Tax Group has expired
for all taxable years of the Company, any of its Subsidiaries or any Tax
Group through 1991. No audit or other proceeding by any court,
governmental or regulatory authority or similar Person is pending in
regard to any material Taxes due from or with respect to the Company or
any of its Subsidiaries or any material tax return filed by, or with
respect to the Company, any of its Subsidiaries or any Tax Group, other
than normal and routine audits by non-federal governmental authorities.
None of the assets or properties of the Company or any of its Subsidiaries
is subject to any tax lien, other than any such liens for Taxes which are
not yet due and payable, which may thereafter be paid without penalty or
the validity of which is being contested in good faith by appropriate
proceedings and for which adequate reserves are being maintained in
accordance with generally accepted accounting principles ("Permitted Tax
Liens").
(iii) No consent to the application of Section 341(f)(2) of the Code (or
any predecessor provision) has been made or filed by or with respect to
the Company or, for so long as the Company has owned any Subsidiary, by or
with respect to such Subsidiary. None of the Company or any of its
Subsidiaries has agreed to make any material adjustment pursuant to
Section 481(a) of the Code (or any predecessor provision) by reason of any
change in any accounting method, and there is no application pending with
any taxing authority requesting permission for any changes in any
accounting method of the Company or any of its Subsidiaries which, in each
respective case, will or would reasonably cause the Company or any of its
Subsidiaries to include any material adjustment in taxable income for any
taxable period (or portion thereof) ending after the Closing Date.
(iv) Except as set forth in the Filed SEC Documents, neither the Company
nor any of its Subsidiaries is a party to, is bound by, or has any
obligation under, any tax sharing agreement, tax allocation agreement or
similar contract, agreement or arrangement.
(v) Neither the Company nor any of its Subsidiaries has executed or
entered into with the Internal Revenue Service, or any taxing authority, a
Closing agreement pursuant to Section 7121 of the Code or any similar
provision of state, local, foreign or other income tax law, which will
require any increase in taxable income or alternative minimum taxable
income, or any reduction in tax credits for, the Company or any of its
Subsidiaries for a taxable period ending after the Closing Date.
(vi) As of June 30, 1997, the Company's adjusted basis for federal income
tax purposes in the stock of Delsener/Slater (as defined in Section 5.07)
was at least $100,000,000.
(vii) As of June 30, 1997, the Tax Group had a net operating loss carry
forward of at least $40,000,000.
(viii) As used in this Agreement, "Taxes" shall include all Federal,
state and local 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.
(k) Voting Requirements. The affirmative vote of the holders of a majority
of the voting power of all outstanding shares of Common Stock voting as a
single class, and the affirmative vote of the holders of a majority of the
voting power of all outstanding shares of Class A Common Stock, Series D
Preferred Stock and/or Series E Preferred Stock, each voting as a separate
class, at the Stockholders Meeting or by written consent in lieu thereof are
the only votes of holders of any class or series of the Company's capital
stock necessary to approve or adopt the Amendments. Subject to the approval
and adoption of the Amendments by the stockholders of the Company, the
affirmative vote of the holders of a majority of the voting power of all
outstanding shares of Common Stock, voting as a single class, at the
Stockholders Meeting is the only vote of the holders of any class or series
of Company's capital stock necessary to approve and adopt this Agreement and
the Merger. The votes required in the preceding two sentences are
collectively referred to herein as the "Stockholder Approval."
(l) State Takeover Statutes. The Board of Directors of the Company has
approved the terms of this Agreement and the Stockholder Agreement and the
consummation of the Merger and the other transactions contemplated by this
Agreement and the Stockholder Agreement, and such approval is
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sufficient to render inapplicable to the Merger and the other transactions
contemplated by this Agreement and the Stockholder Agreement the provisions
of Section 203 of the DGCL. To the Company's knowledge, no other state
takeover statute or similar statute or regulation applies or purports to
apply to the Merger, this Agreement, the Stockholder Agreement or any of the
transactions contemplated by this Agreement or the Stockholder Agreement and
no provision of the certificate of incorporation, by-laws or other governing
instruments of the Company or any of its Subsidiaries would, directly or
indirectly, restrict or impair the ability of Parent to vote, or otherwise to
exercise the rights of a stockholder with respect to, shares of the Company
and its Subsidiaries that may be acquired or controlled by Parent.
(m) Labor Matters. Neither the Company nor any of its Subsidiaries is the
subject of any suit, action or proceeding which is pending or, to the
knowledge of the Company, threatened, asserting that the Company or any of
its Subsidiaries has committed an unfair labor practice (within the meaning
of the National Labor Relations Act or applicable state statutes) or seeking
to compel the Company or any of its Subsidiaries to bargain with any labor
organization as to wages and conditions of employment, in any such case, that
is reasonably expected to result in a material liability of the Company and
its Subsidiaries. No strike or other labor dispute involving the Company or
any of its Subsidiaries is pending or, to the knowledge of the Company,
threatened, and, to the knowledge of the Company, there is no activity
involving any employees of the Company or any of its Subsidiaries seeking to
certify a collective bargaining unit or engaging in any other organizational
activity, except for any such dispute or activity which would not have a
Material Adverse Effect on the Company.
(n) Opinion of Financial Advisor. Lehman Brothers has reviewed, among
other things, this Agreement and the other Transaction Documents. The Company
has received the opinion of Lehman Brothers dated the date of this Agreement,
to the effect that, as of such date, the Class A Common Stock Merger
Consideration is fair to the holders of the Class A Common Stock from a
financial point of view, a copy of which opinion has been delivered to
Parent.
(o) Compliance with Applicable Laws. Each of the Company and each of its
Subsidiaries has in effect all Federal, state and local governmental
approvals, authorizations, certificates, filings, franchises, licenses,
notices, permits and rights ("Permits") necessary for it to own, lease or
operate its properties and assets and to carry on its business as now
conducted, and there has occurred no default under any such Permit, except
for the lack of Permits and for defaults under Permits which lack or default
individually or in the aggregate would not reasonably be expected to have a
Material Adverse Effect on the Company, impair the ability of the Company to
perform its obligations under this Agreement in any material respect or delay
in any material respect or prevent the consummation of the transactions
contemplated by this Agreement. Except as disclosed in the Filed SEC
Documents, the Company and its Subsidiaries are in compliance with all
applicable statutes, laws, ordinances, rules, orders and regulations of any
Governmental Entity, except for possible noncompliance which individually or
in the aggregate would not reasonably be expected to have a Material Adverse
Effect on the Company, impair the ability of the Company to perform its
obligations under this Agreement in any material respect or delay in any
material respect or prevent the consummation of the transactions contemplated
by this Agreement.
(p) Contracts; Debt Instruments.
(i) Neither the Company nor any of its Subsidiaries is in violation of or
in default under (nor does there exist any condition which upon the
passage of time or the giving of notice would cause such a violation of or
default under) any loan or credit agreement, note, bond, mortgage,
indenture, lease, permit, concession, franchise, license or any other
contract, agreement, arrangement or understanding to which it is a party
or by which it or any of its properties or assets is bound, except for
violations or defaults that individually or in the aggregate would not
reasonably be expected to have a Material Adverse Effect on the Company,
impair the ability of the Company to perform its obligations under this
Agreement in any material respect or delay in any material respect or
prevent the consummation of the transactions contemplated by this
Agreement. The agreements described in Section 3.01(p) of the Company
Disclosure Schedule are in full force and effect and are binding on the
parties thereto.
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(ii) The Company has made available to Parent (x) true and correct
copies of all loan or credit agreements, notes, bonds, mortgages,
indentures and other agreements and instruments pursuant to which any
Indebtedness of the Company or any of its Subsidiaries in an aggregate
principal amount in excess of $600,000 is outstanding or may be incurred
and (y) accurate information regarding the respective principal amounts
currently outstanding thereunder. For purposes of this
Agreement,"Indebtedness" shall mean, with respect to any Person, without
duplication, (A) all obligations of such Person for borrowed money, or
with respect to deposits or advances of any kind to such Person, (B) all
obligations of such Person evidenced by bonds, debentures, notes or
similar instruments, (C) all obligations of such Person under conditional
sale or other title retention agreements relating to property purchased by
such Person, (D) 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), (E)
all capitalized lease obligations of such Person, (F) 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,
(G) all obligations of such Person under interest rate or currency hedging
transactions (valued at the termination value thereof), (H) all letters of
credit issued for the account of such Person and (I) all guarantees and
arrangements having the economic effect of a guarantee of such Person of
any Indebtedness of any other Person.
(q) FCC Licenses; Operations of Licensed Facilities. The Company and its
Subsidiaries have operated the radio stations for which the Company or any of
its Subsidiaries holds licenses from the FCC (the "Licensed Facilities") in
material compliance with the terms of the Permits issued by the FCC to the
Company and its Subsidiaries for the operation of the Licensed Facilities
(the "FCC Licenses"), and the Communications Act, except for possible
non-compliance which could not reasonably be expected to have a Material
Adverse Effect on the Company, impair the ability of the Company to perform
its obligations under this Agreement in any material respect or delay in any
material respect or prevent the consummation of the transactions contemplated
by this Agreement. The Company and its Subsidiaries have filed or made all
applications, reports and other disclosures required by the FCC to be filed
or made with respect to the Licensed Facilities and have paid all FCC
regulatory fees with respect thereto except for possible filings or
disclosures that if not so filed or disclosed could not reasonably be
expected to have a Material Adverse Effect on the Company, impair the ability
of the Company to perform its obligations under this Agreement in any
material respect or delay in any material respect or prevent the consummation
of the transactions contemplated by this Agreement. The Company and each of
its Subsidiaries are the authorized legal holders of all FCC Licenses
necessary or used in the operation of the businesses of the Licensed
Facilities as presently operated except where the absence of such FCC
Licenses could not reasonably be expected to have a Material Adverse Effect
on the Company. All such FCC Licenses are validly held and are in full force
and effect, unimpaired by any act or omission of the Company, each of its
Subsidiaries or their respective officers, employees or agents. Except as
disclosed in Section 3.01(q) of the Company Disclosure Schedule, as of the
date hereof, no application, action or proceeding is pending for the renewal
or major modification of any of the FCC Licenses and, to the Company's
knowledge, there is not now before the FCC any material investigation,
proceeding, notice of violation, order of forfeiture or complaint against the
Company or any of its Subsidiaries relating to any of the Licensed Facilities
that, if adversely decided, would have a Material Adverse Effect on the
Company, impair the ability of the Company to perform its obligations under
this Agreement in any material respect or delay in any material respect or
prevent the consummation of the transactions contemplated by this Agreement
(and the Company is not aware of any basis that would cause the FCC not to
renew any of the FCC Licenses that are renewable). Except as disclosed in
Section 3.01(q) of the Company Disclosure Schedule, there is not now pending
and, to the Company's knowledge, there is not threatened, any action by or
before the FCC to revoke, suspend, cancel, rescind or modify in any material
respect any of the FCC Licenses that, if adversely decided, would have a
Material Adverse Effect on the Company.
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(r) Environmental Matters. Except as disclosed in Section 3.01(r) of the
Company Disclosure Schedule, to the knowledge of the Company:
(i) the real property and facilities owned by the Company or any of its
Subsidiaries and the operations of the Company or any of its Subsidiaries
thereon comply in all material respects with all Environmental Laws;
(ii) no judicial proceedings are pending or threatened against the
Company or any of its Subsidiaries alleging the violation of any
Environmental Laws, and there are no administrative proceedings pending or
threatened against the Company or any of its Subsidiaries alleging the
material violation of any Environmental Laws and no written notice from
any Governmental Entity or any private or public Person has been received
by the Company or any of its Subsidiaries claiming any material violation
of any Environmental Laws in connection with any real property or facility
owned by the Company or any of its Subsidiaries, or requiring any material
remediation, clean-up, modification, repairs, work, construction,
alterations, or installations on or in connection with any real property
or facility owned, operated or leased by the Company or any of its
Subsidiaries that are necessary to comply with any Environmental Laws and
that have not been complied with or otherwise resolved to the satisfaction
of the party giving such notice;
(iii) all material Permits required to be obtained or filed by the
Company or any of its Subsidiaries under any Environmental Laws in
connection with the Company's or any of its Subsidiaries' operations,
including those activities relating to the generation, use, storage,
treatment, disposal, release, or remediation of Hazardous Substances (as
such term is defined in Section 3.01(r)(iv) hereof), have been duly
obtained or filed, and the Company and each of its Subsidiaries are in
compliance in all material respects with the terms and conditions of all
such Permits;
(iv) all Hazardous Substances used or generated by the Company or any of
its Subsidiaries on, in, or under any of the Company's or any of its
Subsidiaries owned, operated, or leased real property or facilities are
and have at all times been generated, stored, used, treated, disposed of,
and released by such Persons or on their behalf in such manner as not to
result in any material Environmental Costs or Liabilities. "Hazardous
Substances" means (a) any hazardous materials, hazardous wastes, hazardous
substances, toxic wastes, and toxic substances as those or similar terms
are defined under any Environmental Laws; (b) any asbestos or any material
which contains any hydrated mineral silicate, including chrysolite,
amosite, crocidolite, tremolite, anthophylite and/or actinolite, whether
friable or non-friable; (c) PCBs, or PCB-containing materials, or fluids;
(d) radon; (e) any other hazardous, radioactive, toxic or noxious
substance, material, pollutant, contaminant, constituent, or solid, liquid
or gaseous waste regulated under any Environmental Law; (f) any petroleum,
petroleum hydrocarbons, petroleum products, crude oil and any fractions or
derivatives thereof, any oil or gas exploration or production waste, and
any natural gas, synthetic gas and any mixtures thereof; and (g) any
substance that, whether by its nature or its use, is subject to regulation
under any Environmental Laws or with respect to which any Environmental
Laws or Governmental Entity requires environmental investigation,
monitoring or remediation. "Environmental Costs or Liabilities" means any
material losses, liabilities, obligations, damages, fines, penalties,
judgments, settlements, actions, claims, costs and expenses (including,
without limitation, reasonable fees, disbursements and expenses of legal
counsel, experts, engineers and consultants, and the reasonable costs of
investigation or feasibility studies and performance of remedial or
removal actions and cleanup activities) in connection with (A) any
violation of any Environmental Laws, (B) order of, or contract of the
Company or any of its Subsidiaries with, any Governmental Entity or any
private or public Persons arising out of or resulting from the treatment,
storage, disposal or release by the Company or any of its Subsidiaries of
any Hazardous Substances in material violation of any Environmental Law or
(C) a claim by any private or public Person arising out of any material
exposure of any Person or property to Hazardous Substances in material
violation of any Environmental Law;
(v) there are not now, nor have there been in the past, on, in or under
any property or facilities when owned by the Company or any of its
Subsidiaries or when owned, leased or operated by any of their
predecessors, any Hazardous Substances that are in a condition or location
that materially
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violates any Environmental Law or that has required or would require any
material remediation under any Environmental Laws or give rise to a claim
for damages or compensation by any affected Person or to any material
Environmental Costs or Liabilities and that have not been cured, complied
with, remediated, or resolved to the satisfaction of such affected Person
or paid or resolved in all material respects; and
(vi) neither the Company nor any of its Subsidiaries has received any
written notification from any source advising the Company or any of its
Subsidiaries that: (a) it is a potentially responsible party under CERCLA
or any other Environmental Laws; (b) any real property or facility
currently or previously owned, operated, or leased by it is identified or
proposed for listing as a federal National Priorities List ("NPL") (or
state-equivalent) site or a Comprehensive Environmental Response,
Compensation and Liability Information System ("CERCLIS") list (or
state-equivalent) site; or (c) any facility to which it has ever
transported or otherwise arranged for the disposal of Hazardous Substances
is identified or proposed for listing as an NPL (or state-equivalent) site
or CERCLIS (or state-equivalent) site.
(s) Information Supplied. None of the information supplied or to be
supplied by the Company for inclusion or incorporation by reference into the
Proxy Statement will, at the date the Proxy Statement is first mailed to the
Company's stockholders or at the time of the Stockholders Meeting, contain
any untrue statement of a material fact or omit to state any material fact
required to be stated therein or necessary to make the statements therein, in
light of the circumstances under which they are made, not misleading.
(t) Board Recommendation. As of the date hereof, each of the Board of
Directors of the Company and the Independent Committee, at a meeting duly
called and held, have each unanimously (i) determined that this Agreement and
the transactions contemplated hereby are fair to and in the best interests of
the holders of the Class A Common Stock and have approved the same, (ii)
resolved to recommend that the Company's stockholders approve this Agreement
and the transactions contemplated herein and (iii) approved and recommended
for adoption to the Company's stockholders the Amendments.
(u) Property.
(i) Section 3.01(u) of the Company Disclosure Schedule sets forth all of
the real property owned in fee by the Company and its Subsidiaries that
are material to the conduct of business of the Company and its
Subsidiaries, taken as a whole. Each of the Company and its Subsidiaries
owns fee title to each parcel of real property owned by it free and clear
of all Liens, except for Permitted Liens (as defined in this Section
3.01(u)).
(ii) With respect to the tangible properties and assets of the Company
and its Subsidiaries (excluding real property) that are material to the
conduct of the broadcast operations of the Company and its Subsidiaries,
the Company and its Subsidiaries have good title to, or hold pursuant to
valid and enforceable leases, all such properties and assets, with only
such exceptions as, individually or in the aggregate, would not have a
Material Adverse Effect on the Company and subject to the Permitted Liens.
All of the assets of the Company and its Subsidiaries have been maintained
and repaired for their continued operation and are in good operating
condition, reasonable wear and tear excepted, and usable in the ordinary
course of business, except where the failure to be in such repair or
condition or so usable would not individually or in the aggregate have a
Material Adverse Effect on the Company.
(iii) Section 3.01(u) of the Company Disclosure Schedule sets forth each
lease, sublease, license, sublicense or other agreement (collectively, the
"Property Leases") under which the Company or any of its Subsidiaries uses
or occupies or has the right to use or occupy, now or in the future, any
real property or personal property material to the conduct of the
businesses of the Company and its Subsidiaries, taken as a whole. Except
to the extent that (x) it would not have a Material Adverse Effect on the
Company, or (y) the term of such Property Lease has expired or been
terminated and the Company or its Subsidiaries continues to use or occupy
any of the subject property on a period to period basis (i.e., "month to
month"), each Property Lease is valid, binding
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and in full force and effect, all rent and other sums and charges which
are due and payable by the Company and its Subsidiaries as tenants
thereunder are current except as set forth in Section 3.01(u) of the
Company Disclosure Schedule, and neither the Company nor any of its
Subsidiaries has received actual notice that any party thereto is in
default in any material respect under any lease, sublease, license,
sublicense or use or occupancy agreement listed in Section 3.01(u) of the
Company Disclosure Schedule. Each of the Company and its Subsidiaries has
a valid leasehold interest (including subleasehold and subleasehold
estates) and/or right of use under a license or sublicense agreement or
other possessory rights in each location used or occupied for broadcast
purposes (whether office, studio, tower, transmitter building and/or
antenna) leased, subleased, subsubleased, licensed, sublicensed or used by
it free and clear of all Liens, except for Permitted Liens.
(iv) As used in this Agreement, "Permitted Liens" shall mean: (i)
statutory liens securing payments not yet delinquent or the validity of
which are being contested in good faith by appropriate actions, (ii)
purchase money liens arising in the ordinary course, (iii) liens for Taxes
and special assessments (e.g., for municipal improvements) not yet due and
payable and/or delinquent, (iv) liens reflected or reserved against in the
unaudited balance sheet of the Company dated as of June 30, 1997 (which
have not been discharged), (v) liens which in the aggregate do not
materially detract from the value for use for broadcasting purposes or
materially impair the present and continued use of the properties or
assets subject thereto in the usual and normal conduct of the radio
broadcast business of the Company, (vi) liens on leases, subleases,
sub-subleases, easements, licenses, rights of use, rights to access and
rights of way arising from the provisions of such agreements or
benefitting or created by any superior estate, right or interest which is
prior in right or prior in lien to that of the subject lease, sublease,
sub-sublease, easement, license, right of use, right to access or right of
way, (vii) any liens set forth in the title policies, endorsements, title
commitments, title certificates and title reports relating to the
Company's interests in real property, copies of which have been provided
to or made available for review by Parent and Subsidiary, (viii) any
leases, subleases, occupancy agreements or licenses of the Company's real
property, (ix) the lien of any and all security agreements, documents,
mortgages and deeds of trust held by, or for the benefit of, (A) The Bank
of New York, individually and as agent, and its co-lenders, principals
and/or participants and their respective successors and assigns pursuant
to the Third Amended and Restated Credit Agreement dated as of June 23,
1997 among, inter alia, the Company and The Bank of New York, as amended
from time to time (the "Credit Agreement") and (B) Ken Brown (or any
Affiliate of his) affecting the WMXB tower site in the Richmond, Virginia
market as more fully described in Section 3.01(u) of the Company
Disclosure Schedule, (x) any state of facts that an accurate survey or
personal inspection of the Company's real property (whether owned, leased
or licensed) would show, provided same does not material adversely affect
the use thereof for their present broadcasting purposes, (xi)
encroachments of stoops, areas, cellar steps or doors, trim, copings,
retaining walls, bay windows, balconies, sidewalk elevators, fences, fire
escapes, cornices, foundations, footings and similar projections, if any,
on, over or under any of the Company's real property (whether owned,
leased or licensed) or the streets or sidewalks abutting any of such real
property, and the rights of governmental authorities to require the
removal of any such projections and variations between record lines of
such real property and retaining walls and the like, if any, (xii) any
easements or rights of use, if any, created in favor of any public utility
or municipal department or agency for electricity, steam, gas, telephone,
cable television, water, sewer or other services in any street or avenue
abutting the Company's real property (whether owned, leased or licensed),
and the right, if any, to use and maintain wires, cables, terminal boxes,
lines, service connections, poles, mains and facilities servicing any of
such real property or in, on, over or across any of such real property,
(xiii) covenants, easements, restrictions, agreements, consents and other
instruments, now of record, provided same do not materially adversely
interfere with the use of the Company's real property (whether owned,
leased or licensed) for their present broadcast purposes, (xiv)
variations, if any, between tax lot lines and property lines, (xv)
deviations, if any, of fences or shrubs from property lines, (xvi) any
other declaration or instrument affecting any of the Company's real
property (whether owned, leased or licensed) necessary or appropriate to
comply with any law, ordinance, regulation, zoning resolution or
requirement of applicable governmental authorities or any other public
authority, applicable to the
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maintenance, demolition, construction, alteration, repair or restoration
of the improvements at the Company's real property (whether owned, leased
or licensed), which does not materially adversely affect the use of
thereof for their present broadcast purposes, (xvii) the provisions of the
applicable zoning resolution and other regulations, resolutions and
ordinances and any amendments thereto now or hereafter adopted, (xviii)
Liens described in the Company SEC Documents, and (xix) any other Liens
set forth in Section 3.01(u) of the Company Disclosure Schedule. For the
purposes hereof "Company's real property" and "Company's interests in real
property" shall include the real property and interests therein owned or
held respectively by the Company and/or its Subsidiaries.
(v) Related Party Transactions. Except as set forth on Section 3.01(v) of
the Company Disclosure Schedule, as contemplated herein or as disclosed in
the Company Filed SEC Documents, no director, officer, Affiliate or
"associate" (as such term is defined in Rule 12b-2 under the Exchange Act)
of the Company or any of its Subsidiaries is currently a party to any
transaction which would be required to be disclosed under Item 404 of
Regulation S-K of the Securities Act.
SECTION 3.02. Representations and Warranties of Parent and Sub. Parent and
Sub represent and warrant to the Company as follows:
(a) Organization, Standing and Corporate Power. Each of Parent and Sub is
a corporation duly organized, validly existing and in good standing under the
laws of the jurisdiction in which it is incorporated and has the requisite
corporate power and authority to carry on its business as now being conducted
or currently proposed to be conducted. Each of Parent and Sub is duly
qualified or licensed to do business and is in good standing in each
jurisdiction in which the nature of its business or the ownership or leasing
of its properties makes such qualification or licensing necessary, other than
in such jurisdictions where the failure to be so qualified or licensed or to
be in good standing individually or in the aggregate would not have a
Material Adverse Effect on Parent or materially impair or delay the
consummation of the transactions contemplated by this Agreement. Parent has
delivered to the Company prior to the execution of this Agreement complete
and correct copies of its certificate of incorporation and by-laws and the
certificate of incorporation and by-laws of Sub, in each case as amended to
the date hereof.
(b) Authority; Non-Contravention. Parent and Sub have all requisite
corporate power and authority to execute and deliver the Transaction
Documents and to consummate the transactions contemplated by the Transaction
Documents. The execution and delivery of the Transaction Documents by Parent
and Sub and the consummation by Parent and Sub of the transactions
contemplated by the Transaction Documents have been unanimously approved by
the Board of Directors of Parent and Sub and duly authorized by all necessary
corporate action on the part of Parent and Sub, and no other corporate
proceedings on the part of Parent and Sub are necessary to authorize the
Transaction Documents or to consummate such transactions. No vote of Parent
stockholders is required to approve the Transaction Documents or the
transactions contemplated hereby. Each of the Transaction Documents has been
duly executed and delivered by Parent and Sub and, assuming due
authorization, execution and delivery of the Transaction Documents by the
Company and the other parties thereto, constitutes a valid and binding
obligation of Parent and Sub, enforceable against Parent and Sub in
accordance with its terms.
The execution and delivery of the Transaction Documents do not, and the
consummation of the transactions contemplated by the Transaction Documents
and compliance with the provisions of the Transaction Documents by Parent or
Sub, as the case may be, will not, conflict with, or result in any violation
of, or default (with or without notice or lapse of time, or both) under, or
give rise to a right of termination, cancellation or acceleration of any
obligation or loss of a material benefit under, or result in the creation of
any Lien upon any of the properties or assets of Parent, Sub or any of
Parent's other Subsidiaries under, (i) the articles or certificate of
incorporation or by-laws of Parent and Sub, (ii) any loan or credit
agreement, note, bond, mortgage, indenture, lease or other agreement,
instrument, permit, concession, franchise or license applicable to Parent,
Sub or such other Subsidiary or their respective properties or assets or
(iii) subject to the governmental filings and other matters referred to in
the following sentence, any judgment, order, decree, statute, law, ordinance,
rule or regulation applicable to Parent, Sub or such other Subsidiary or
their respective properties or assets, other than, in the case of
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<PAGE>
clauses (ii) and (iii), any such conflicts, violations, defaults, rights,
Liens, judgments, orders, decrees, statutes, laws, ordinances, rules or
regulations that individually or in the aggregate would not (x) have a
Material Adverse Effect on Parent, (y) impair the ability of Parent and Sub
to perform their respective obligations under the Transaction Documents in
any material respect or (z) delay in any material respect or prevent the
consummation of any of the transactions contemplated by the Transaction
Documents. No consent, approval, order or authorization of, or registration,
declaration or filing with, any Governmental Entity is required by or with
respect to Parent or Sub in connection with the execution and delivery of the
Transaction Documents or the consummation by Parent or Sub, as the case may
be, of any of the transactions contemplated by the Transaction Documents,
except for (1) the filing of a pre-Merger notification and report form by
Parent under the HSR Act; (2) the filing of the Certificate of Merger with
the Delaware Secretary of State and appropriate documents with the relevant
authorities of other states in which the Company is qualified to do business;
(3) such filings with and approvals of the FCC as may be required under the
Communications Act, including filings and approvals in connection with the
transfer of control of the FCC Licenses; and (4) such consents, approvals,
orders or authorizations the failure of which to be made or obtained would
not reasonably be expected to have a Material Adverse Effect on Parent,
impair the ability of Parent to perform its obligations in any material
respect or delay in any material respect or prevent the consummation of the
transactions contemplated by this Agreement.
(c) Information Supplied. None of the information supplied or to be
supplied by Parent or Sub specifically for inclusion or incorporation by
reference in the Proxy Statement will, at the date the Proxy Statement is
first mailed to the Company's stockholders or at the time of the Stockholders
Meeting, contain any untrue statement of a material fact or omit to state any
material fact required to be stated therein or necessary in order to make the
statements therein, in light of the circumstances under which they are made,
not misleading.
(d) Financing. Parent has available, or at the Closing will have
available, sufficient funds (through existing credit arrangements or
otherwise) to enable it to consummate the transactions contemplated by the
Transaction Documents on their respective terms and conditions. Parent's and
Sub's obligations hereunder are not subject to any conditions regarding their
ability to obtain financing for the consummation of the transactions
contemplated by the Transaction Documents. Parent and Sub are each able to
lawfully certify in the FCC Applications (as defined in Section 5.02) that it
is financially qualified to consummate the transactions contemplated hereby.
(e) Litigation. There is no suit, action, proceeding or indemnification
claim (including any proceeding by or before the FCC but excluding
proceedings of general applicability to the radio industry) pending or, to
the knowledge of Parent, threatened against or affecting Parent or any of its
Subsidiaries that individually or in the aggregate could reasonably be
expected to (i) impair the ability of Parent or Sub to perform its
obligations under the Transaction Documents in any material respect or (ii)
delay in any material respect or prevent the consummation of any of the
transactions contemplated by the Transaction Documents, nor is there any
judgment, decree, injunction, rule or order of any Governmental Entity or
arbitrator outstanding against Parent or any of its Subsidiaries having, or
which could reasonably be expected to have, any effect referred to in clause
(i) or (ii) above, except for any suit, action or proceeding asserted after
the date hereof by any stockholders of the Company in connection with any of
the transactions contemplated by this Agreement.
(f) Surviving Corporation After the Merger. Assuming the representations
and warranties of the Company contained in this Agreement are true and
accurate in all material respects immediately prior to the Effective Time,
and assuming that immediately prior to the Effective Time neither the Company
nor any member of the Delsener/Slater Group has failed to comply with a
covenant under this Agreement or any of the Spin Off Documents, as
applicable, which failure resulted, or could reasonably be expected to
result, in a material change in the Company's assets and liabilities, the
Surviving Corporation will not, at and immediately after the Effective Time,
and after giving effect to the Merger and the other transactions contemplated
in connection therewith (and any changes in the Surviving Corporation's
assets and liabilities as a result thereof) (i) be insolvent or rendered
insolvent (either because its financial condition is such that the sum of its
debts is greater than the value of its assets at fair valuation or because
the present fair saleable value of its assets will be less than the amount
required to pay its probable liabilities
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<PAGE>
on its debts as they mature); and (ii) receive less than a reasonably
equivalent value in exchange for such transfer or obligation and was not
engaged in or was not about to be engaged in a business or transaction for
which the remaining assets of the Company constituted an unreasonably small
capital and did not intend to incur, or believe or reasonably should have
believed that the Company would incur, debts beyond its ability to pay same
as they become due.
(g) Net Worth of Surviving Corporation. Assuming that immediately prior to
the Effective Time neither the Company nor any member of the Delsener/Slater
Group has failed to comply with a covenant under this Agreement or any Spin
Off Documents, as applicable, which failure resulted, or could reasonably be
expected to result in a material change in the Company's assets and
liabilities, the Surviving Corporation will have a Consolidated Net Worth
immediately following the Merger and a Debt to Cash Flow Ratio at the time of
the Merger sufficient to comply with both Section 5.01 of the Indenture
Relating to the 2006 Notes (the "Indenture") and Section 8(c) of the
Certificate of Designations, Preferences and Relative, Participating,
Optional and Other Special Rights of Preferred Stock and Qualifications,
Limitations and Restrictions Thereof Relating to the Series E Preferred Stock
(the "Series E Certificate"). Any terms used in this paragraph but not
otherwise defined in this Agreement shall have the meanings given them in
either the Indenture or the Series E Certificate, as applicable.
ARTICLE IV
COVENANTS RELATING TO CONDUCT OF BUSINESS
SECTION 4.01. Conduct of Business.
(a) Conduct of Business by the Company. During the period from the date of
this Agreement to the Effective Time, except as contemplated by this
Agreement and the transactions contemplated hereby, the Company shall, and
shall cause its 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 and regulations (including the Communications Act). Without
limiting the generality of the foregoing, during the period from the date of
this Agreement to the Effective Time, except as contemplated by this
Agreement and the transactions contemplated hereby, the Company shall not,
and shall not permit any of its Subsidiaries to, without the consent of
Parent:
(i) (A) except as set forth in Section 4.01(a)(i) of the Company
Disclosure Schedule or as provided in Sections 4.01(a)(xviii) and 5.07,
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
Subsidiary of the Company to its parent and regular cash dividends on
shares of Preferred Stock, (B) 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 (C) except with respect to the mandatory redemption provisions of
the Series B Preferred Stock and the Series C Preferred Stock, purchase,
redeem or otherwise acquire any shares of capital stock of the Company or
any of its Subsidiaries or any other securities thereof or any rights,
warrants or options to acquire any such shares or other securities;
(ii) except as set forth in Section 4.01(a)(ii) of the Company Disclosure
Schedule, 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 (A) the
issuance of Class A Common Stock pursuant to the Asset Purchase and Sales
Agreement dated June 1997, among Sunshine Concerts, L.L.C., the Company,
Sunshine Promotions, Inc. and the stockholders of Sunshine Promotions,
Inc. (the "Sunshine Agreement"), (B) the issuance of Class A Common Stock
upon the exercise of Employee Stock Options outstanding on the date of
this Agreement and in accordance with their present terms, (C) the
issuance of Class A Common Stock upon conversion of the Class B Common
Stock, the Series C Preferred Stock or the Series D Preferred Stock, in
each case in accordance with their present terms, (D) the issuance of
Class A Common Stock upon the exercise of warrants or options of the
Company outstanding on the date of this Agreement or upon the exercise of
the Unit Purchase
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Option Warrants, in each case in accordance with their present terms, (E)
the issuance of Class A Common Stock and Unit Purchase Option Warrants
upon exercise of the Unit Purchase Options and (F) the issuance of Class A
Common Stock and options to purchase Class A Common Stock not to exceed
150,000 shares of Common Stock on a fully-diluted basis;
(iii) amend its certificate of incorporation, by-laws or other comparable
organizational documents;
(iv) except and to the extent as set forth in Section 4.01(a)(iv) and (v)
of the Company Disclosure Schedule, 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, (A) any business or any corporation,
limited liability company, partnership, joint venture, association or
other business organization or division thereof, (B) any assets that
individually or in the aggregate are material to the Company and its
Subsidiaries taken as a whole or (C) any broadcast radio stations;
(v) except and to the extent as set forth in Section 4.01(a)(iv) and (v)
of the Company Disclosure Schedule, sell, lease, license, mortgage or
otherwise encumber or subject to any Lien or otherwise dispose of (A) any
of its properties or assets, other than in the ordinary course of business
consistent with past practice, that are material to the Company and its
Subsidiaries taken as a whole or (B) any broadcast radio stations;
(vi) except as set forth in Section 4.01(a)(vi) of the Company Disclosure
Schedule, except to finance capital expenditures permitted by clause (vii)
below or as contemplated by Section 5.07 and except for borrowings for
working capital purposes not in excess of $25,000,000 at any one time
outstanding incurred in the ordinary course of business consistent with
past practice and except for intercompany Indebtedness between the Company
and any of its Subsidiaries or between such Subsidiaries, (A) incur or
guarantee any Indebtedness, or (B) make any loans, advances or capital
contributions to, or investments in, any other Person, other than to the
Company or any direct or indirect wholly owned Subsidiary of the Company
or to officers and employees of the Company or any of its Subsidiaries for
travel, business or relocation expenses in the ordinary course of
business;
(vii) except as set forth under the caption "Committed Projects" in
Section 4.01(a)(vii) of the Company Disclosure Schedule or as permitted by
Section 5.07, make or agree to make any new capital expenditures which in
the aggregate are in excess of $500,000; provided, however, that with the
consent of Parent, the Company may make additional capital expenditures
(which consent shall not be unreasonably withheld with respect to those
capital expenditures set forth under the caption "Proposed Projects" in
Section 4.01(a)(vii) of the Company Disclosure Schedule);
(viii) make any tax election that could reasonably be expected to have a
Material Adverse Effect on the Company or settle or compromise any
material income tax liability;
(ix) except as set forth in Section 4.01(a)(ix) of the Company Disclosure
Schedule or as required by law, and except in the ordinary course of
business or as would not reasonably be expected to have a Material Adverse
Effect on the Company, modify, amend or terminate any material contract or
agreement to which the Company or any Subsidiary is a party or waive,
release or assign any material rights or claims thereunder;
(x) make any material change to its accounting methods, principles or
practices, except as may be required by generally accepted accounting
principles;
(xi) fail to act in the ordinary course of business consistent with past
practices of the Company exercising commercially reasonable care to (A)
preserve substantially intact the Company's and each of its Subsidiaries'
present business organization, (B) keep available the services of any
employee with an employment contract with the Company or any of its
Subsidiaries, and (C) preserve its present relationships with customers,
suppliers and others having business dealings with them;
(xii) fail to use commercially reasonable efforts to maintain the
material assets of the Company and each of its Subsidiaries in their
current physical condition, except for ordinary wear and tear and damage,
provided that nothing contained herein shall be deemed to require the
Company or its Subsidiaries to undertake or complete any capital
improvements or replacements;
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(xiii) merge or consolidate with or into any other legal entity or
dissolve or liquidate any of its material Subsidiaries;
(xiv) except as set forth in Section 4.01(a)(xiv) of the Company
Disclosure Schedule and as required by the terms and provisions of written
contracts between the Company or any of its Subsidiaries and an employee
thereof as in existence on the date of this Agreement or except in
connection with the extension of any collective bargaining agreements, (A)
adopt or amend any Benefit Plan other than in the ordinary course of
business consistent with past practice or as required by law, or (B)
materially increase in any manner the aggregate compensation or fringe
benefits (including, without limitation, commissions) of any officer,
director, or employee or other station and broadcast personnel of the
Company or any of its Subsidiaries (whether employees or independent
contractors) other than as required by law;
(xv) except as set forth in Section 4.01(a)(xv) of the Company Disclosure
Schedule, pay, discharge, or satisfy any material (on a consolidated basis
for the Company and its Subsidiaries taken as a whole) claims,
liabilities, or obligations (absolute, accrued, asserted or unasserted,
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 the Company and its Subsidiaries taken as a whole) accounts payable,
liabilities, or obligations when due and payable;
(xvi) except as set forth in Section 4.01(a)(xvi) of the Company
Disclosure Schedule, enter into any agreement with any Person other than
Parent or any of the Company's Subsidiaries with respect to any local
marketing agreement, time brokerage agreement, joint sales agreement, or
any other similar agreement;
(xvii) engage in any transactions with any of its Affiliates (other than
among the Company and its Subsidiaries and among such Subsidiaries) other
than (A) transactions disclosed in Section 4.01(a)(xvii) of the Company
Disclosure Schedule, or (B) transactions that do not provide for any
ongoing obligations on the part of the Company after the Closing, would
not reasonably be expected to have a Material Adverse Effect on the
Company, would not impair the ability of the Company to perform its
obligations under the Transaction Documents in any material respect and
would not delay in any material respect or prevent the consummation of the
transactions contemplated by the Transaction Documents;
(xviii) fail to declare and pay in cash on each normal record date and
payment date all accrued and unpaid dividends on each series of
outstanding Preferred Stock;
(xix) take or fail to take any action that would result in the Series C
Preferred Stock becoming convertible into Class A Common Stock; or
(xx) authorize, or commit or agree to take, any of the foregoing actions.
Notwithstanding anything herein to the contrary, the Company and its
Subsidiaries may engage in any of the transactions contemplated in Section
5.07, including, without limitation, any (x) acquisitions by any of the
Delsener/Slater Group, whether or not the performance of any obligations
under the agreements related to such acquisitions are guaranteed by the
Company (provided that any such guarantee shall terminate as of or before the
Effective Time), (y) financing related to the Delsener/Slater Group and/or
such acquisitions (including, without limitation, any incurrence of
indebtedness), whether or not incurred or guaranteed by the Company (provided
that any such guarantee shall terminate as of or before the Effective Time),
and (z) issuance of shares of Delsener/Slater Holdings common stock.
(b) Conduct of Business by Parent. During the period from the date of this
Agreement to the Effective Time, unless the Company shall otherwise agree in
writing or except as otherwise required by this Agreement, Parent shall, and
shall cause its 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 Parent's ability to perform its obligations hereunder.
(c) Other Actions. The Company and Parent 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 that are qualified as to
materiality becoming untrue, (ii) any of such representations and warranties
that are not so qualified becoming untrue in any material respect or (iii)
any of the conditions to the Merger set forth in Article
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VI not being satisfied. In addition, the Company further covenants that from
and after the date hereof until the Effective Time, without the prior written
consent of Parent, the Company shall not, except as otherwise set forth in
Section 4.01(c) of the Company Disclosure Schedule, take any action that
could reasonably be expected to impair or delay in any material respect
obtaining the FCC Consent (as defined in Section 6.01(b)) or complying with
or satisfying the terms thereof or result in imposition of materially adverse
conditions on the FCC Consent. On and prior to the Effective Time, Parent and
Sub shall remain qualified under the Communications Act and otherwise to
consummate the transactions contemplated herein.
(d) Advice of Changes. The Company and Parent shall promptly advise the
other party orally and in writing of (i) any representation or warranty made
by the advising party contained in this Agreement that is qualified as to
materiality becoming untrue or inaccurate in any respect or any such
representation or warranty that is not so qualified becoming untrue or
inaccurate in any material respect, (ii) the failure by the advising party to
comply with or satisfy in any material respect any covenant, condition or
agreement to be complied with or satisfied by the advising party under this
Agreement or (iii) any change or event having, or which, insofar as can
reasonably be foreseen, would have, a Material Adverse Effect on such party
or on the truth of its respective representations and warranties or the
ability of the conditions set forth in Article VI to be satisfied; provided,
however, that no such notification shall affect the representations,
warranties, covenants or agreements of the parties or the conditions to the
obligations of the parties under this Agreement.
(e) Notification of Certain Matters. If Parent (or its Affiliates) or the
Company receives an administrative or other order or notification relating to
any violation or claimed violation of the rules and regulations of the FCC,
or of any Governmental Entity, that could affect Parent's, Sub's or the
Company's ability to consummate the transactions contemplated hereby, or
should Parent (or its Affiliates) or the Company become aware of the fact
(including any change in law or regulations (or any interpretation thereof by
the FCC)) relating to the qualifications of Parent (and its controlling
Persons) that reasonably could be expected to cause the FCC to withhold its
consent to the transfer of control of the FCC Licenses, Parent or the
Company, as the case may be, shall promptly notify the other party thereof
and the Company shall use all reasonable efforts to take such steps as may be
necessary, to remove any impediment of the Company to consummate the
transactions contemplated by this Agreement. In addition, Parent or the
Company, as the case may be, shall give to the other party prompt written
notice of (i) the occurrence, or failure to occur, of any event of which it
becomes aware that has caused or that would be likely to cause any
representation or warranty of Parent and Sub or the Company, as the case may
be, contained in this Agreement to be untrue or inaccurate at any time from
the date hereof to the Closing Date, and (ii) the failure of Parent and Sub
or the Company, as the case may be, or any officer, director, employee or
agent thereof, to comply with or satisfy in any material respect any
covenant, condition or agreement to be complied with or satisfied by it
hereunder. No such notification shall affect the representations or
warranties of the parties or the conditions to their respective obligations
hereunder.
SECTION 4.02. No Solicitation.
(a) From and after the date hereof until the termination of this
Agreement, neither the Company nor any of its Subsidiaries, nor any of their
respective officers, directors, representatives, agents or Affiliates
(including, without limitation, any investment banker, attorney or accountant
retained by the Company or any of its Subsidiaries) (collectively,
"Representatives") will, and the Company will cause the employees of the
Company and its Subsidiaries not to, directly or indirectly, (i) solicit,
initiate or encourage the submission of any Takeover Proposal (as defined in
Section 8.03(l)), (ii) enter into any agreement with respect to any Takeover
Proposal or give any approval of the type referred to in Section 3.01(l) with
respect to any Takeover Proposal or (iii) participate in any discussions or
negotiations regarding, or furnish to any Person any information with respect
to, 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; provided, however, that if at any time prior to the
receipt of the Stockholder Approval, the Board of Directors of the Company
determines in good faith, based on the advice of outside counsel, that it is
necessary to do so in order to comply with its fiduciary duties to the
Company's stockholders under applicable law, the Company (and its
Representatives) may, in response to an unsolicited Takeover Proposal of the
sort referred to in clause (x) of Section 8.03(k) that involves consideration
to the Company's stockholders with a value that the Company's Board of
Directors
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reasonably believes, after receiving advice from the Company's financial
advisor, is superior to the consideration provided for in the Merger, and
subject to compliance with Section 4.02(c), (x) furnish information with
respect to the Company pursuant to a customary confidentiality agreement
(having terms substantially similar to those contained in the Confidentiality
Agreement (as defined in Section 5.01)) to any Person making such proposal
and (y) participate in negotiations regarding such proposal. The Company
shall immediately cease and cause to be terminated any existing solicitation,
initiation, encouragement, activity, discussion or negotiation with any
parties conducted heretofore by the Company or any Representatives with
respect to any Takeover Proposal existing on the date hereof. Without
limiting the foregoing, it is understood that any violation of the
restrictions set forth in the preceding sentence by any Representative of the
Company or any of its Subsidiaries, whether or not such Person is purporting
to act on behalf of the Company or any of its Subsidiaries or otherwise,
shall be deemed to be a breach of this Section 4.02(a) by the Company.
(b) Neither the Board of Directors of the Company nor any committee
thereof (including without limitation the Independent Committee) shall (x)
withdraw or modify, or propose to withdraw or modify, in a manner adverse to
Parent, the approval (including, without limitation, either the Board of
Directors' or the Independent Committee's resolution providing for such
approval) or recommendation by such Board of Directors or such committee of
this Agreement, the Merger or the Amendments or (y) approve or recommend, or
propose to approve or recommend, any Takeover Proposal, except in the case of
clause (x) or (y), in connection with a Superior Proposal (as defined in
Section 8.03(k)) and then only at or after the termination of this Agreement
pursuant to Section 7.01(c).
(c) In addition to the obligations of the Company set forth in paragraphs
(a) and (b) of this Section 4.02, the Company promptly shall advise Parent
orally and in writing of any request for information or of any Takeover
Proposal or any inquiry with respect to or which could reasonably be expected
to lead to any Takeover Proposal, the identity of the Person making any such
request, Takeover Proposal or inquiry and all the terms and conditions
thereof. The Company will keep Parent fully informed of the status and
details (including amendments or proposed amendments) of any such request,
Takeover Proposal or inquiry.
(d) Nothing contained in this Section 4.02 shall prohibit the Company from
taking and disclosing to its stockholders a position contemplated by Rule
14d-9 or Rule 14e-2 promulgated under the Exchange Act; provided, however,
neither the Company nor its Board of Directors nor any committee thereof
shall, except as permitted by Section 4.02(b), withdraw or modify, or propose
to withdraw or modify, its approval or recommendation with respect to the
Merger (including, without limitation, either the Board of Directors' or the
Independent Committee's resolution providing for such approval) or approve or
recommend, or propose to approve or recommend, a Takeover Proposal.
SECTION 4.03. Stockholders Meeting. (a) The Company will, as soon as
practicable following the date of this Agreement, (i) duly call, give notice
of, convene and hold a meeting of its stockholders (the "Stockholders
Meeting") for the purpose of obtaining Stockholder Approval of (A) the
Amendments to Sections 5.1, 5.2 and 5.6 of the Company's Restated Certificate
of Incorporation and (B) this Agreement and the Merger and (ii) will commence
one or more solicitations of written consents in lieu of a meeting for the
purpose of obtaining the Stockholder Approval of the Amendments not
referenced in item (i) above. Without limiting the generality of the
foregoing, the Company agrees that its obligations pursuant to the first
sentence of this Section 4.03 shall not be affected by the commencement,
public proposal, public disclosure or communication to the Company of any
Takeover Proposal. The Company will, through its Board of Directors and the
Independent Committee, recommend to its stockholders the approval and
adoption of this Agreement, the Merger and the Amendments and such
recommendation and approval shall be set forth in the Proxy Statement, except
to the extent that the Board of Directors of the Company shall have withdrawn
or modified its approval or recommendation of this Agreement, the Merger or
the Amendments and terminated this Agreement in accordance with Section
7.01(c).
(b) The Company shall prepare and file a preliminary Proxy Statement with
the SEC within six weeks following the date of this Agreement and shall use
its commercially reasonable efforts to respond to any comments of the SEC or
its staff, and, to the extent permitted by law, to cause the Proxy Statement
to be mailed to the Company's stockholders as promptly as practicable after
responding to all such
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comments to the satisfaction of the SEC staff and in any event at least
twenty (20) business days prior to the Stockholders Meeting. The Company
shall notify Parent promptly of the receipt of any comments from the SEC or
its staff and of any request by the SEC or its staff for amendments or
supplements to the Proxy Statement or for additional information and will
supply Parent with copies of all correspondences between the Company or any
of its representatives, on the one hand, and the SEC or its staff, on the
other hand, with respect to the Proxy Statement or the Merger. Prior to the
filing of the Proxy Statement or any amendment thereto with the SEC, the
Company shall provide the Parent and its legal counsel with a reasonable
opportunity to review and comment on such document. If at any time prior to
the Stockholders Meeting there shall occur any event that should be set forth
in an amendment or supplement to the Proxy Statement, the Company shall
promptly prepare and mail to its stockholders such an amendment or
supplement. The Company shall not mail any Proxy Statement, or any amendment
or supplement thereto, to which Parent reasonably objects. Parent shall
cooperate with and provide such information as is reasonably requested by the
Company in the preparation of the Proxy Statement or any amendment or
supplement thereto.
SECTION 4.04. Assistance. If Parent requests, the Company will cooperate,
and the Company will cause each of its Subsidiaries and will request its
accountants, at the sole cost and expense of Parent, to cooperate in all
reasonable respects in connection with any financing efforts of Parent or its
Affiliates (including providing reasonable assistance in the preparation of
one or more registration statements or other offering documents relating to
debt and/or equity financing) and any other filings that may be made by
Parent or its Affiliates with the SEC, all at the sole expense of Parent and
during normal business hours, upon reasonable prior notice and in such manner
as will not unreasonably interfere with the conduct of the Company's or any
of its Subsidiaries' businesses. Subject to the foregoing, the Company shall,
and shall cause each of its Subsidiaries to, (i) furnish to its independent
accountants (or, if requested by Parent to Parent's independent public
accountants), such customary management representation letters as its
accountants may reasonably require of the Company as a condition to its
execution of any required accountants' consents necessary in connection with
the delivery of any "comfort" letters requested by financing sources of
Parent or its Affiliates and (ii) furnish to Parent all financial statements
(audited and unaudited) and other information in the possession of the
Company or any of its Subsidiaries or their representatives or agents as
Parent shall reasonably determine is required in connection with such
financing.
SECTION 4.05. Releases. The Company shall (i) use its commercially
reasonable efforts to receive, prior to the Effective Time, an Option Release
Agreement in substantially the form attached hereto as Annex B (a "Release
Agreement") from each Person (other than the Persons named in Section 4.05 of
the Company Disclosure Schedule (the "Executive Group")) who is the holder of
any Options or SARs, (ii) obtain from each member of the Executive Group a
Release Agreement and (iii) use its commercially reasonable efforts to
receive prior to the Effective Time an agreement substantially similar to the
Release Agreement from each Person who is the holder of Unit Purchase
Options.
SECTION 4.06. Termination of Certain Affiliate Transactions. The Company
will amend each of the agreements set forth on Section 4.06 of the Company
Disclosure Schedule so that immediately prior to the Effective Time it will
have no obligations thereunder except as set forth in Section 4.06 of the
Company Disclosure Schedule.
ARTICLE V
ADDITIONAL AGREEMENTS
SECTION 5.01. Access to Information; Confidentiality. Subject to the
Confidentiality Agreement (as defined below), each of the Company and Parent
shall, and shall cause each of its respective Subsidiaries to, afford to the
other party and to the officers, employees, accountants, counsel, financial
advisors, lenders and other representatives of such other party, reasonable
access during normal business hours during the period prior to the Effective
Time to all their respective properties, books, contracts, commitments,
personnel and records and, during such period, each of the Company and Parent
shall, and shall cause each of its respective Subsidiaries to, prepare or
cause to be prepared, or furnish promptly to the other party (a) a copy of
each report, schedule, registration statement and other document filed by it
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during such period pursuant to the requirements of Federal or state
securities laws and (b) all other information concerning its business,
properties and personnel as such other party may reasonably request. Each of
the Company and Parent will hold, and will cause its respective officers,
employees, accountants, counsel, financial advisors and other representatives
and Affiliates to hold, any nonpublic information in accordance with the
terms of the Confidentiality Agreement dated as of August 1, 1997, between
Capstar Broadcasting Partners, Inc. and the Company (the "Confidentiality
Agreement").
SECTION 5.02. Reasonable Efforts.
(a) Upon the terms and subject to the conditions set forth in this
Agreement, each of the parties agrees to use all reasonable efforts to take,
or cause to be taken, all actions, and to do, or cause to be done, and to
assist and cooperate with the other parties in doing, all things necessary,
proper or advisable to consummate and make effective, in the most expeditious
manner practicable, the Merger and the other transactions contemplated by the
Transaction Documents, including (i) the obtaining of all necessary consents,
approvals or waivers from third parties ("Third Party Consents"), (ii) the
defending of any lawsuits or other legal proceedings, whether judicial or
administrative, challenging any of the Transaction Documents or the
consummation of the transactions contemplated by the Transaction Documents
(such as in connection with the transfer of control of the FCC Licenses),
including seeking to have any stay or temporary restraining order entered by
any court or other Governmental Entity vacated or reversed and (iii) the
execution and delivery of any additional instruments necessary to consummate
the transactions contemplated by, and to fully carry out the purposes of, the
Transaction Documents. Except for making the filings contemplated in Section
5.02(b), notwithstanding anything to the contrary contained in this
Agreement, nothing in this Agreement shall obligate Parent or Sub to use
reasonable efforts to obtain approval of the FCC Applications or clearance
under the HSR Act and the grant of any waivers in connection therewith.
However, notwithstanding the preceding sentence, Parent shall obtain approval
of the FCC Applications and clearance under the HSR Act and the grant of any
waivers in connection therewith prior to the Termination Date unless the
failure to obtain such clearance, consents and waivers is primarily the
result of Acts or Changes. For purposes of this Agreement "Acts or Changes"
shall mean (i) acts or omissions on the part of the Company or any of its
Subsidiaries in conducting their respective operations and activities other
than relating to the number of licenses or amount of revenues in a particular
market, (ii) a breach by the Company of its obligations under this Agreement
or (iii) a statutory change or enactment made by Congress which (A) decreases
the number of radio licenses which an entity may own nationally or locally or
(B) adversely relates to the concentration of radio licenses which an entity
may own in a market, and as a result of the change or enactment referred to
in either clause (A) or (B) above, Parent's performance of its obligations
under this Agreement would result in a Material Adverse Effect on Parent and
its Attributable Entities, taken as a whole. For purposes of the preceding
sentence, "Attributable Entities" shall mean Parent and any entities whose
radio licenses would be attributable to Parent under applicable FCC rules or
regulations or under the HSR Act.
(b) In connection with and without limiting the foregoing, Parent and the
Company shall file the applications (the "FCC Applications") with the FCC for
the transfer of control of the FCC Licenses within 21 business days after the
date hereof but in no event prior to September 8, 1997. Additionally, as soon
as practicable after the date of this Agreement, but in no event more than
twenty-one (21) business days after the date of this Agreement, Parent and
the Company will file or will cause to be filed all notifications and
documents in connection with this Agreement required to be filed pursuant to
the HSR Act, and the rules and regulations promulgated under the HSR Act.
Parent and the Company will make or cause to be made all such other filings
and submissions under the HSR Act and regulations required to consummate the
transactions contemplated by this Agreement. Both Parent and the Company will
request early termination of the waiting period imposed by the HSR Act.
Subject to the Confidentiality Agreement, Parent and the Company will
coordinate and cooperate with one another in exchanging information and
reasonable assistance as the other may request in connection with
notifications or other filings made under the HSR Act. Parent and the Company
shall keep the other party apprised of the status of any inquiries made by
the U.S. Department of Justice, Antitrust Division, or the Federal Trade
Commission (collectively, the "Federal Antitrust Agencies"), with respect to
the transactions contemplated by this Agreement. Both Parent and the Company
shall use their best efforts to cause a termination
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of the waiting period imposed by the HSR Act without the entry by a court of
competent jurisdiction of an order enjoining the consummation of or the
transactions contemplated by this Agreement; provided that, Parent shall
consent to the divestiture of such properties as may be necessary to receive
approval by the Federal Antitrust Agencies without entry of such an
injunction; provided, however, that Parent and Sub (and their Affiliates)
shall not be required by this provision to divest any interest they may hold
in any television station. Parent shall pay all expenses and assume all
obligations with respect to such divestitures. As may be reasonably requested
by Parent, and subject to the receipt of confidentiality agreements
reasonably acceptable to the Company, the Company shall provide reasonable
access to its business, assets and operations, on a basis consistent with
that described in Section 5.01, as may be necessary to cooperate with Parent
in connection with its efforts to effectuate such divestitures and the
Company shall otherwise reasonably cooperate with Parent by making any
required governmental filing.
(c) In connection with and without limiting the foregoing, the Company and
its Board of Directors shall (i) take all action necessary to ensure that no
state takeover statute or similar statute or regulation is or becomes
applicable to the Merger, this Agreement, the Stockholder Agreement or any of
the other transactions contemplated by this Agreement or the Stockholder
Agreement and (ii) if any state takeover statute or similar statute or
regulation becomes applicable to the Merger, this Agreement, the Stockholder
Agreement or any other transaction contemplated by this Agreement or the
Stockholder Agreement, take all action necessary to ensure that the Merger
and the other transactions contemplated by this Agreement and the Stockholder
Agreement may be consummated as promptly as practicable on the terms
contemplated by this Agreement and the Stockholder Agreement and otherwise to
minimize the effect of such statute or regulation on the Merger and the other
transactions contemplated by this Agreement and the Stockholder Agreement.
SECTION 5.03. Benefit Plans. Parent shall take such action as may be
necessary so that on and after the Effective Time and for one year
thereafter, directors (who are employees of the Company or any of its
Subsidiaries), officers and employees of the Company and its Subsidiaries
shall be provided employee benefits, plans and programs (including but not
limited to incentive compensation, deferred compensation, pension, life
insurance, medical (which eligibility shall not be subject to any exclusions
for any pre-existing conditions if such individual has met the participation
requirements of such benefits, plans or programs of the Company or its
Subsidiaries), profit sharing (including 401(k), severance, salary
continuation and fringe benefits) which are no less favorable in the
aggregate than those generally available to similarly situated directors,
officers and employees of Capstar Broadcasting Corporation and its
Subsidiaries. For purposes of eligibility to participate and vesting in all
benefits provided to directors, officers and employees, the directors,
officers and employees of the Company and its Subsidiaries will be credited
with their years of service with the Company and its Subsidiaries and prior
employers to the extent service with the Company and its Subsidiaries and
prior employers is taken into account under plans of the Company and its
Subsidiaries. Upon termination of any health plan of the Company or any of
its Subsidiaries, individuals who were directors, officers or employees of
the Company or its Subsidiaries at the Effective Time shall if employed by
the Company and its Subsidiaries become eligible to participate in such
health plans established by Parent. Amounts paid before the Effective Time by
directors, officers and employees of the Company and its Subsidiaries under
any health plans of the Company shall after the Effective Time be taken into
account in applying deductible and out-of-pocket limits applicable under the
health plans of Parent provided as of the Effective Time to the same extent
as if such amounts had been paid under such health plans of Parent.
SECTION 5.04. Indemnification, Exculpation and Insurance.
(a) The certificate of incorporation and by-laws of the Surviving
Corporation shall contain provisions no less favorable with respect to
indemnification than are set forth in the certificate of incorporation and
by-laws of the Company, as in effect on the date hereof, which provisions
shall not be amended, repealed or otherwise modified for a period of six
years from the Effective Time in any manner that would affect adversely the
rights thereunder of individuals who at any time prior to the Effective Time
were directors, officers or employees of the Company or any of its
Subsidiaries, unless such modification shall be required by law.
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(b) From and after the Effective Time, Parent and the Surviving
Corporation shall indemnify, defend and hold harmless each Person who is now,
or has been at any time prior to the date of this Agreement or who becomes
prior to the Effective Time, an officer, director or employee of the Company
or any of its Subsidiaries (collectively, the "Indemnified Parties") against
all losses, reasonable 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 employee of the Company or any of its 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 contemplated hereby), whether
asserted or claimed prior to, at or after the Effective Time, in each case to
the fullest extent permitted under Delaware law, 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. Without limiting the foregoing, in the event any such Claim is
brought against any of the Indemnified Parties, (i) such Indemnified Parties
may retain counsel (including local counsel) satisfactory to them and which
shall be reasonably satisfactory to Parent and the Surviving Corporation and
they shall pay all reasonable fees and expenses of such counsel for such
Indemnified Parties; and (ii) Parent and the Surviving Corporation shall use
all reasonable efforts to assist in the defense of any such Claim, provided
that Parent and the Surviving Corporation shall not be liable for any
settlement effected without their written consent, which consent, however,
shall not be unreasonably withheld. Notwithstanding the foregoing, nothing
contained in this Section 5.04 shall be deemed to grant any right to any
Indemnified Party which is not permitted to be granted to an officer,
director or employee of Parent under Delaware law, assuming for such purposes
that Parent's certificate of incorporation and bylaws provide for the maximum
indemnification permitted by law.
(c) Parent will cause to be maintained for a period of not less than six
years from the Effective Time the Company's current directors' and officers'
insurance and indemnification policy to the extent that it provides coverage
for events occurring prior to the Effective Time ("D&O Insurance") for all
Persons who are directors and officers of the Company on the date of this
Agreement, so long as the annual premium therefor would not be in excess of
200% of the last annual premium therefor paid prior to the date of this
Agreement (the "Maximum Premium"); provided, however, that Parent may, in
lieu of maintaining such existing D&O Insurance as provided above, cause
coverage to be provided under any policy maintained for the benefit of Parent
or any of its Subsidiaries, so long as the terms thereof are no less
advantageous to the intended beneficiaries thereof than the existing D&O
Insurance. If the existing D&O Insurance expires, is terminated or canceled
during such six-year period, Parent will use all reasonable efforts to cause
to be obtained as much D&O Insurance as can be obtained for the remainder of
such period for an annualized premium not in excess of the Maximum Premium,
on terms and conditions no less advantageous to the covered Persons than the
existing D&O Insurance. The Company represents to Parent that the Maximum
Premium is $450,000.
SECTION 5.05. Fees and Expenses; Deposit.
(a) Except as provided below in this Section 5.05 and Section 7.02, and
except for FCC filing fees in connection with the filing of the FCC
Applications and filing fees under the HSR Act in connection with the
transactions contemplated by this Agreement, 50% of which shall be paid by
Parent and 50% of which shall be paid by the Company, all fees and expenses
incurred in connection with the Merger, this Agreement, the Stockholder
Agreement and the transactions contemplated by this Agreement and the
Stockholder Agreement shall be paid by the party incurring such fees or
expenses, whether or not the Merger is consummated.
(b) The Company shall pay, or shall cause to be paid, in same day funds to
Parent, or its designee, the following specified termination fee (the
"Termination Fee") upon demand if this Agreement is terminated as follows:
(i) if this Agreement is terminated pursuant to Section 7.01(b)(i), then a
Termination Fee of $25,000,000 shall be payable upon demand; (ii) if this
Agreement is terminated pursuant to Section 7.01(b)(v), then a Termination
Fee of $10,000,000 shall be payable upon demand; or
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(iii) if this Agreement is terminated pursuant to either Section 7.01(c) or
7.01(d) (including a conditional termination pursuant to the proviso
contained in Section 7.01(d)), then a Termination Fee of $50,000,000 shall be
payable contemporaneously with such termination.
(c) In the event that this Agreement is terminated pursuant to either
Section 7.01(b)(i) or 7.01(b)(v) and within one year of such termination
definitive documentation with respect to a Takeover Proposal has been entered
into or 50% or more of the outstanding Common Stock has been acquired
pursuant to a tender offer made as a Takeover Proposal, then the Company
shall pay, or shall cause to be paid, contemporaneously with such
consummation, in same day funds to Parent, or its designee, an additional
amount of Termination Fee in an amount equal to $25,000,000 in the case of
termination under 7.01(b)(i) and $40,000,000 in the case of a termination
under Section 7.01(b)(v).
(d) In the event that this Agreement is terminated pursuant to Section
7.01(b)(i), 7.01(b)(v), 7.01(c) or 7.01(d), the Company shall pay upon
demand, or shall cause to be paid, in same day funds to Parent, or its
designee, such amount as may be required to reimburse Parent and its
Affiliates (the "Reimbursement Amount") for all reasonable out-of-pocket
fees, costs and expenses incurred by any of them in connection with their due
diligence efforts or the transactions contemplated hereby, including, without
limitation, (A) fees, costs and expenses of accountants, counsel, financial
advisors and other similar advisors, (B) fees paid to any Governmental Entity
and (C) fees, costs and expenses paid or payable to third parties under any
financing commitments or similar arrangements or in connection with financing
transactions or efforts, including, without limitation, any purchaser or
underwriter's discounts relating to the sale of the debt or equity financing
or (except for the principal amount payable in connection therewith, but
including all accrued interest payable in connection therewith) the making of
any repurchase offer in respect of such financing (collectively, "Expenses");
provided however, the Reimbursement Amount shall not exceed (x) $2,500,000 in
the case of a termination under either Section 7.01(b)(i), 7.01(c) or 7.01(d)
and (y) $10,000,000 in the case of a termination under Section 7.01(b)(v).
(e) The Termination Fee and Reimbursement Amount shall be paid by the
Company without reservation of rights or protests and the Company upon making
such payment shall be deemed to have released and waived any and all rights
that it may have to recover such amounts.
(f) Concurrently with the execution of this Agreement, in order to secure
Parent's and Sub's performance under this Agreement and as security for
damages that may be payable by Parent or Sub to the Company hereunder, Parent
shall place into escrow pursuant to the Deposit Escrow Agreement in the form
attached as Annex C hereto (the "Escrow Agreement") an irrevocable letter of
credit (the "Letter of Credit") in the sum of $100,000,000 substantially in
the form attached as Annex D hereto. The Letter of Credit will provide that
the Company can draw the amount thereof after its release to the Company from
the Escrow Agreement.
(g) If this Agreement is terminated pursuant to (i) Section 7.01(b)(ii)
and as of such date the conditions set forth in Sections 6.01(b) and 6.01(c)
have not been fulfilled other than a nonfulfillment primarily due to Acts or
Changes; (ii) Section 7.01(b)(iii) and such order, injunction, decree, ruling
or other action is not primarily due to Acts or Changes, or (iii) Section
7.01(b)(iv) by the Company, then Parent and Company shall promptly instruct
the escrow agent under the Escrow Agreement to release the Letter of Credit
to the Company as liquidated damages. The parties agree that the foregoing
liquidated damages are reasonable considering all the circumstances existing
as of the date hereof and constitute the parties' good faith estimate of the
actual damages reasonably expected to result from the termination of this
Agreement as described in this Section 5.05(g). Except as contemplated by
Section 5.05(i), the Company agrees that, to the fullest extent permitted by
law, the Company's right to payment of such liquidated damages as provided in
this Section 5.05(g) shall be its sole and exclusive remedy if the Closing
does not occur because of a termination of this Agreement as described in
this Section 5.05(g) or with respect to any damages whatsoever that the
Company may suffer or allege to suffer as a result of any Claim or cause of
action asserted by the Company relating to or arising from breaches of the
representations, warranties or covenants of Parent or Sub contained in this
Agreement and to be made or performed at or prior to the Closing. If this
Agreement is terminated either by Parent or the Company
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pursuant to any provision of Section 7.01 other than a termination described
in clauses (i), (ii) or (iii) of this Section 5.05(g), then, Parent and the
Company shall instruct the escrow agent under the Escrow Agreement to release
the Letter of Credit to Parent.
(h) As a condition to the release of the Letter of Credit to the Company
under Section 5.05(g), the Company shall deliver to the Parent an agreement
which irrevocably and unconditionally releases, acquits, and forever
discharges Parent and Sub and their respective successors, assigns, officers,
directors, employees, agents, stockholders, Subsidiaries, Parent companies
and other Affiliates (corporate or otherwise) (the "Released Parties") of and
from any and all Released Claims, including, without limitation, all Released
Claims arising out of, based upon, resulting from or relating to the
negotiation, execution, performance, breach or otherwise related to or
arising out of the Transaction Documents or any agreement entered into in
connection therewith or related thereto. "Released Claims" as used herein
shall mean any and all charges, complaints, claims, causes of action,
promises, agreements, rights to payment, rights to any equitable remedy,
rights to any equitable subordination, demands, debts, liabilities, express
or implied contracts, obligations of payment or performance, rights of offset
or recoupment, accounts, damages, costs, losses or expenses (including
attorneys' and other professional fees and expenses) held by the Company or
any of its Subsidiaries, whether known or unknown, matured or unmatured,
suspected or unsuspected, liquidated or unliquidated, absolute or contingent,
direct or derivative relating to the transactions contemplated by the
Transaction Documents, provided, however, that Released Claims shall not
include claims for unpaid expenses and interest described in Section 5.05(i)
relating to the release of the Escrowed Property (as defined in the Escrow
Agreement) or for any escrow expenses unpaid by Parent and withheld by the
escrow agent from the Escrowed Property pursuant to the Escrow Agreement
(i) In the event that this Agreement is terminated and Parent and the
Company do not promptly agree on who is entitled to the Letter of Credit
then, upon a Final Determination (as defined in the Escrow Agreement) the
non-prevailing party shall pay to the prevailing party (x) the amount of the
reasonable fees and expenses actually incurred by the prevailing party in
connection with obtaining the Final Determination and (y) interest on the
face amount of the Letter of Credit at the annual rate of 10% commencing as
of the date of the termination or purported termination of this Agreement and
ending as of the date that the Escrowed Property has been released from
escrow to the prevailing party.
SECTION 5.06. Public Announcements. Parent and Sub, on the one hand, and
the Company, on the other hand, will consult with each other before issuing,
and provide each other the opportunity to review, comment upon and concur
with, any press release or other public statements with respect to the
transactions contemplated by this Agreement, including the Merger, and shall
not issue any such press release or make any such public statement prior to
such consultation, except as may be required by applicable law, court process
or by obligations pursuant to any listing agreement with any national
securities exchange or the National Association of Securities Dealers, Inc.
The parties agree that the initial press release to be issued with respect to
the transactions contemplated by this Agreement and the Stockholder Agreement
shall be in the form heretofore agreed to by the parties.
SECTION 5.07. Delsener/Slater Spin Off. Prior to the Closing, the Company
shall (a) contribute all of the capital stock of SFX Concerts, Inc., formerly
known as Delsener/Slater Enterprises, Inc. ("Delsener/Slater"), that the
Company directly or indirectly owns to a newly formed Subsidiary of the
Company to be formed in Delaware ("Delsener/Slater Holdings"), and (b)
distribute pro rata to the holders of Common Stock, to the holders of Series
D Preferred Stock and (if the Company so elects) to the holders of interests
in the Company's Director Deferred Stock Purchase Plan (the "Spin Off"), in a
taxable transaction, all of the capital stock owned by the Company in
Delsener/Slater Holdings, with the holders of the Class A Common Stock and
Class B Common Stock receiving in the Spin Off class A common stock and class
B common stock, respectively, of Delsener/Slater Holdings having features
similar to such Class A Common Stock or Class B Common Stock; provided that,
notwithstanding the foregoing, simultaneously with the Spin Off, the Company
shall place that number of shares of the class A common stock of
Delsener/Slater Holdings in an escrow account with an escrow agent selected
by the Company and governed by an escrow agreement reasonably acceptable to
the Company and Parent for delivery to the holders of the IPO Warrants, Huff
Warrants and SCMC Warrants upon exercise of such
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Warrants that equals the aggregate number of shares of common stock of
Delsener/Slater Holdings that the holders of such Warrants would have been
entitled to receive as a result of their ownership of the Class A Common
Stock that they would have received if they had exercised all of their IPO
Warrants, Huff Warrants and SCMC Warrants immediately prior to the Spin Off.
As soon as practicable following the execution of this Agreement, Parent and
the Company shall in good faith mutually agree on the definitive
documentation necessary to effectuate the Spin Off and document the
contractual relationship between Delsener/Slater Holdings and the Company
(the "Spin Off Documentation"). The parties hereto agree that the Spin Off
Documentation shall be consistent with the following principles:
(a) Delsener/Slater Holdings shall indemnify, defend and hold the Company
and its Subsidiaries (other than Delsener/Slater Holdings and its
Subsidiaries, collectively the "Delsener/Slater Group") harmless from and
against any liabilities (other than income tax liabilities) to which the
Company or any of its Subsidiaries (other than the Delsener/Slater Group) may
be or become subject that relate to the assets, business, operations, debts
or liabilities of the Delsener/Slater Group including without limitation,
liabilities to be assumed by any member of the Delsener/Slater Group as
contemplated herein, whether arising prior to, concurrent with or after the
Spin Off or as a result of the failure to obtain all necessary third party
consents to the Spin Off.
(b) The Company shall indemnify, defend and hold the Delsener/Slater Group
harmless from and against any liabilities (other than income tax liabilities)
to which the Delsener/Slater Group may be or become subject that relate to
the assets, business, operations, debts or liabilities of the Company or its
Subsidiaries (other than the Delsener/Slater Group) whether arising prior to,
concurrent with or after the Spin Off.
(c) The Spin Off Documentation shall include an agreement that addresses
issues of the allocation of Tax liabilities and deconsolidation of the
Company and the Delsener/Slater Group which shall be consistent with the
following principles:
(i) Any tax sharing agreement between any of the Delsener/Slater Group
and any of the Company and its Subsidiaries shall be terminated as of the
effective date of the Spin Off (the "Spin Off Date") and will have no
further effect for any taxable year (whether the current year, a future
year, or a past year).
(ii) The Company shall include the income of the Delsener/Slater Group
(including any deferred income triggered into income by Reg. Section
1.1502-13 and Reg. Section 1.1502-14 and any excess loss accounts taken
into income under Reg. Section 1.1502-19) on the Company's consolidated
federal income tax returns and consolidated or combined state and local
income taxes that are properly includible thereon for all periods through
the Spin Off Date and pay any income taxes attributable to such income.
Delsener/Slater Holdings shall reimburse the Company for the federal,
state and local income taxes payable by the Company Tax Group attributable
to such income, as determined on a separate company basis, to the extent
not included in the computation of the Working Capital, provided that
Delsener/Slater Holdings shall have no reimbursement obligation if the
Company has no income tax liability on a consolidated basis as a result of
a net operating loss. The Delsener/Slater Group will furnish tax
information to the Company for inclusion in the Company's federal
consolidated income tax return for the period which includes the Spin Off
Date in accordance with Delsener/Slater's past custom and practice. The
income of the Delsener/Slater Group will be apportioned to the period up
to and including the Spin Off Date and the period after the Spin Off Date
by Closing the books of the Delsener/Slater Group as of the end of the
Spin Off Date.
(iii) The Company shall control any audit or contest relating to Taxes
attributable to the Company Tax Group. The Company shall allow
Delsener/Slater Holdings and its counsel to participate, at its own
expense, in any audits of the Company's consolidated federal income tax
returns to the extent that such returns relate to the Delsener/Slater
Group. The Company will not settle any such audit in a manner which would
adversely affect the Delsener/Slater Group after the Spin Off Date without
the prior written consent of Delsener/Slater Holdings, which consent shall
not unreasonably be withheld.
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(iv) The Company shall immediately pay to Delsener/Slater Holdings any
tax refund (or reduction in tax liability) resulting from a carry back of
a post-acquisition tax attribute of any of the Delsener/Slater Group into
the Company's consolidated tax return, when such refund or reduction is
realized by the Company Tax Group. The Company will cooperate with the
Delsener/Slater Group in obtaining such refunds (or reduction in tax
liability), including through the filing of amended tax returns or refund
claims. Delsener/Slater Holdings will indemnify the Company for any Taxes
resulting from the disallowance of such post-acquisition tax attribute on
audit or otherwise.
(v) The Company shall not elect to retain any net operating loss
carryovers or capital loss carryovers of the Delsener/Slater Group.
(vi) Delsener/Slater Holdings shall indemnify the Company Tax Group for
any Taxes arising from any gain, realized by the Company arising out of,
based upon or attributable to the Spin Off to the extent that such taxable
income exceeds the net operating losses of the Company that are available
to the Company in the taxable year of the Spin Off (without regard to
subsequent taxable years) to shelter such taxable income for purposes of
computing the federal income tax liability of the Company Tax Group. The
Company agrees to consult in good faith with Delsener/Slater Holdings
regarding the amount of gain, if any, recognized by the Company as a
result of the Spin Off.
(d) The Spin Off Documentation shall provide for the registration under
applicable federal and state securities laws of the distribution of
securities of Delsener/Slater Holdings in the Spin Off and the exercise of
the Warrants if such registration is either required under applicable law or
would otherwise be required to cause such securities to be freely
transferable by Persons not Affiliates of Delsener/Slater Holdings, and
customary representations and warranties regarding information contained in
the Registration Statement and other filings made with the SEC in connection
with the Spin Off.
(e) The Spin Off Documentation shall provide that the Company shall obtain
all necessary third party consents to the Spin Off except where the failure
to obtain such consents, in the aggregate, would not (i) have a Material
Adverse Effect on the Company, (ii) impair the ability of the Company to
perform its obligations under the Transaction Documents in any material
respect or (iii) delay in any material respect or prevent the consummation of
any of the transactions contemplated by the Transaction Documents. The Spin
Off Documentation shall provide that the Spin Off shall be done in compliance
with the Company's certificate of incorporation and by-laws and in material
compliance with all applicable laws and shall be subject to obtaining all
applicable consents of Governmental Entities.
(f) (i) At the time of the Spin Off, Delsener/Slater Holdings shall assume
that certain Lease Agreement dated May 1, 1986, as amended, between AR DE
Realty Corp., N.V. and Sillerman-Magee Communications Management Corporation,
assumed by the Company, and that certain Lease Agreement dated May 27, 1997,
between HIRO Real Estate Co. and the Company (the "Leases"), debt and
liabilities incurred by Delsener/Slater or Delsener/Slater Holdings or their
respective Subsidiaries after the date hereof in connection with acquisitions
and capital expenditures approved by their respective Boards of Directors and
such other debt and liabilities as Delsener/Slater Holdings deems
appropriate. The Company shall cause Delsener/Slater Holdings and its
Subsidiaries to be released from all other debt and accrued liabilities.
(ii) The Delsener/Slater Group shall be entitled to all accounts
receivable relating to the Entertainment Business of the Company.
(iii) The Company shall, or shall cause its Subsidiaries to, as
applicable, contribute, transfer or convey to Delsener/Slater Holdings,
prior to the Spin Off (or at such time contemplated by Section 5.07(h)),
the assets described in Section 5.07(f)(iii) of the Company Disclosure
Schedule, and Delsener/Slater Holdings shall assume all of the Company's
and such Subsidiaries' obligations under such agreements to the extent set
forth on such schedule.
(g) The Spin Off Documentation shall not include any representations or
warranties by the Company relating to the business, operations, assets, debts
or liabilities of Delsener/Slater Holdings or its Subsidiaries.
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(h) On the Closing Date, the employees of the Company listed in Section
5.07(h) of the Company Disclosure Schedule (the "Spin Off Employees") shall
be offered full-time employment by Delsener/ Slater Holdings or one of its
Subsidiaries. If the Spin Off occurs prior to the Closing Date, such
employees shall continue to be employed by the Company (at the Company's
expense), but shall devote such time as deemed reasonably necessary,
consistent with their obligations to the Company, in support of the conduct
of the Entertainment Business by the Delsener/Slater Group on a basis
consistent with the time and scope of services that such employees devoted
and provided to the Entertainment Business prior to the Spin Off. Effective
immediately prior to the Effective Time, Delsener/Slater Holdings shall
assume all obligations arising under any employment agreement or arrangement
(written or oral) between the Company or any of its Subsidiaries and the Spin
Off Employees other than the rights, if any, of the Spin Off Employees to
receive the options upon termination following a change of control as defined
in their respective employment agreements (the "Termination Options")
immediately prior to the Effective Time (with such Termination Options being
deemed granted as of such time) and all existing rights to indemnification.
Such assumption agreement shall provide that the Company and its
Subsidiaries, effective as of the Effective Time (or effective as of the Spin
Off Date as to any member of the Spin Off Employees that devotes
substantially all of his or her business time to the Entertainment Business)
shall be indemnified by Delsener/Slater Holdings from all obligations arising
under such employment agreements or arrangements (except in respect of the
Termination Options and all existing rights to indemnification). The
above-described assumption agreement shall also provide that the Company and
its Subsidiaries (other than the Delsener/Slater Group) shall release the
Executive Group from all Claims by the Company or its Subsidiaries (other
than the Delsener/Slater Group) except for Claims arising from or
attributable to the transactions contemplated by this Agreement or any other
Transaction Document or otherwise asserted prior to the Effective Time. The
Delsener/Slater Group shall not solicit the employment of any employees of
the Company or its Subsidiaries not currently engaged in the Entertainment
Business; provided, however, that the Delsener/Slater Group may solicit and
contract for the employment effective no earlier than the Effective Time, of
Spin Off Employees.
(i) (i) In the event that the Spin Off occurs prior to the Closing Date
then on the Spin Off Date, the management of the Company shall make an
allocation of working capital between Delsener/Slater Holdings and the
Company, consistent with the proper operation of the Company in its usual,
regular and ordinary course, and the Company shall deliver to Delsener/Slater
Holdings, in immediately available funds by wire transfer to such bank
account as Delsener/Slater Holdings shall specify, any positive amount
allocated to Delsener/Slater Holdings.
(ii) Not less than five business days prior to the Closing Date, the
Company shall deliver to Delsener/Slater Holdings a good faith estimate of
Working Capital (as defined in Section 5.07(i)(iv)) as of the Closing Date
(the "Estimated Working Capital") accompanied by a certificate by the
Chief Executive Officer and Chief Financial Officer of the Company
certifying that the Estimated Working Capital has been calculated in
accordance with this Agreement. If the Estimated Working Capital is a
positive number, then at the Closing the Company shall deliver to
Delsener/Slater Holdings, in immediately available funds by wire transfer
to such bank account as Delsener/Slater Holdings shall specify, an amount
of cash equal to the Estimated Working Capital. If the Estimated Working
Capital is a negative number, then at the Closing the Company shall cause
Delsener/Slater Holdings to deliver, and Delsener/Slater Holdings shall
deliver to the Company, in immediately available funds by wire transfer to
such bank account as the Company shall specify, an amount of cash equal to
the Estimated Working Capital.
(iii) (A) As soon as practicable after the Closing Date, the Company will
prepare a statement of Working Capital as of the Closing Date, which will
be audited by Ernst & Young LLP (the "Company's Working Capital
Statement") at the expense of the Company. The Company will deliver the
Company's Working Capital Statement to Delsener/Slater Holdings as soon as
practicable and in any event within ninety days after the Closing Date. If
within fifteen days following delivery of the Company's Working Capital
Statement to Delsener/Slater Holdings, Delsener/Slater Holdings has not
given the Company notice of its objection to the Company's Working Capital
Statement (such notice must contain a statement of the basis of such
objection), then the Working Capital reflected
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on the Company's Working Capital Statement shall be deemed final and
conclusive and shall be the "Final Working Capital." If Delsener/Slater
Holdings gives such notice of objection within the fifteen day period,
then the issues in dispute will be submitted to a "big six" accounting
firm (other than Ernst & Young LLP) to be selected jointly by
Delsener/Slater Holdings and the Parent within the following fifteen days
or, if they fail to agree, such accounting firm shall be Arthur Andersen
(Chicago office) (it being understood that the Chicago office of Arthur
Andersen was chosen because of representations made that neither Parent
and its Affiliates or the Company and its Affiliates have a material
relationship with such office and if any of such parties prior to the
calculation of the Final Working Capital develops a material relationship
with such office, the party having such a relationship shall promptly
notify the other party of such relationship and the parties will select
another office of Arthur Andersen or another "big six" accounting firm
with which none of such parties has a material relationship to serve as
the accountants) (the "Accountants"), for resolution and the Accountants
shall determine the "Final Working Capital" within thirty days after the
dispute is submitted to them. If issues in dispute are submitted to the
Accountants for resolution, (i) each party will furnish to the Accountants
such work papers and other documents and information relating to the
disputed issues as the Accountants may request and are available to that
party or its Subsidiaries (or its independent public accountants), and
will be afforded the opportunity to present to the Accountants any
material relating to the determination and to discuss the determination
with the Accountants; (ii) the determination by the Accountants of Final
Working Capital, as set forth in a notice delivered to both parties by the
Accountants, will be binding and conclusive on the parties; and (iii)
Delsener/Slater Holdings and the Company will each bear one-half of the
fees and expenses of the Accountants for such determination. The Company
shall make its employees and books and records available to
Delsener/Slater Holdings for purposes of verifying Final Working Capital
and shall cause Ernst & Young LLP to make its work papers used in
determining Final Working Capital available to Delsener/Slater Holdings.
(B) On the third business day following the determination of the Final
Working Capital (the "Payment Date"), (i) if the Working Capital
Adjustment Amount (as defined below) is a positive number, then the
Company will pay such amount to Delsener/Slater Holdings in immediately
available funds by wire transfer to such bank account as Delsener/Slater
Holdings shall specify and (ii) if the Working Capital Adjustment Amount
is a negative number, then Delsener/Slater Holdings will pay such amount
to the Company in immediately available funds by wire transfer to a bank
account specified by the Company. Notwithstanding the foregoing, if
Delsener/Slater Holdings has notified the Company in writing prior to the
Payment Date that it wishes to have all or any portion of the Final
Working Capital (such amount, the "Consideration Adjustment") treated as
an adjustment to the Class A Common Stock Merger Consideration and the
Class B Common Stock Merger Consideration, the Class A Common Stock Merger
Consideration and the Class B Common Stock Merger Consideration shall be
increased by an amount equal to the quotient of the Consideration
Adjustment divided by the fully diluted number of shares of Common Stock
outstanding immediately prior to the Effective Time, and the Company shall
(1) promptly distribute the appropriate amount to the appropriate holders,
immediately prior to the Effective Time, of Common Stock and Series D
Preferred Stock, (2) promptly distribute upon exercise the appropriate
amount to holders of Options, Warrants and Unit Purchase Options
unexercised immediately prior to the Effective Time, and (3) promptly
distribute the appropriate amount to holders of Options, Warrants, and
Unit Purchase Options who exercised such securities on and after the
Effective Time and prior to the Payment Date; provided that as a condition
precedent to the Company's obligations under this sentence,
Delsener/Slater Holdings shall have paid to the Company in immediately
available funds by wire transfer to an account specified by the Company
the difference, if any, between the Consideration Adjustment and the
Working Capital Adjustment Amount so that the aggregate net amount to be
paid or received by the Company, as the case may be, pursuant to this
sentence is equal to the amount that would have been paid or received, as
the case may be, pursuant to the first sentence of this paragraph had the
Consideration Adjustment not been made.
(iv) The term "Working Capital" shall mean, as of the point in time
immediately prior to the Effective Time, the sum of all current assets of
the Company and its consolidated Subsidiaries minus
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the sum of all current liabilities of the Company and its consolidated
Subsidiaries, each as determined in accordance with GAAP applied on a
basis consistent with the balance sheet of the Company as of June 30, 1997
included in the Company SEC Documents (provided that no liabilities or
reserves reflected on such balance sheet shall be reduced or eliminated
except by reason of a payment or credit occurring in the ordinary course
of business and consistent with past practices).
Notwithstanding the foregoing, Working Capital shall, without duplication
either in this computation or as between this computation and the computation
of Excess Debt, (i) be increased by the lesser of (A) 50% of all fees and
expenses incurred by the Company in connection with acquiring consents from
holders of the Series E Preferred Stock and the 2006 Notes in connection with
the transactions contemplated by this Agreement and (B) $1,000,000, (ii) be
increased by, if a positive number, or decreased by, if a negative number,
the product of (A) the Class A Common Stock Merger Consideration and (B) the
difference between 15,589,083 less the sum of the fully diluted number of
shares of Common Stock outstanding immediately prior to the Effective Time
(excluding the Meadows Shares (as defined below)) (calculated in a manner
consistent with Section 3.01(c)(i) of the Company Disclosure Schedule, such
calculation to include, without limitation, derivative securities that will
become issuable upon consummation of the transactions contemplated by this
Agreement), (iii) be reduced by the difference between $84,554,649 less the
sum of (A) the aggregate exercise price of all Options, Warrants and Unit
Purchase Options outstanding immediately prior to the Effective Time plus (B)
the aggregate exercise price of all Unit Purchase Option Warrants underlying
Unit Purchase Options outstanding immediately prior to the Effective Time
plus (C) the aggregate base price of all SARs outstanding immediately prior
to the Effective Time, (iv) be reduced by the product of (A) $42 and (B) the
aggregate number of shares of Common Stock subject to a right of repurchase
in favor of the Company (the "Meadows Shares") granted pursuant to that
certain Agreement of Merger dated February 12, 1997 among the Company,
Nederlander of Connecticut, Inc. and the other parties thereto outstanding
immediately prior to the Effective Time, (v) be increased by all capital
expenditures paid by the Company and its Subsidiaries after June 30, 1997 and
immediately prior to the Effective Time permitted by Section 4.01(a)(vii),
(vi) be decreased by all accrued capital expenditures of the Company as of
immediately prior to the Effective Time (to the extent not reflected in
current liabilities), (vii) be increased by dividends that have been accrued
immediately prior to the Effective Date whose regularly scheduled payment
date has not then yet occurred, (viii) except as required by clause (xi)
below, exclude any liabilities attributable to Indebtedness, (ix) exclude any
liabilities included in clauses (i) through (v) of the following sentence,
(x) be decreased by unpaid costs, fees and expenses of the Company arising
out of, based upon or that will arise from the transactions contemplated by
this Agreement (other than as a result of actions taken by Sub) (including,
without limitation, amounts related to the termination of any employees,
broker fees, legal, accounting and advisory fees and fees incurred in
connection with third party consents, waivers and amendments of creditors or
holders of Preferred Stock), (xi) be reduced by the amount of the Excess
Debt, if a positive number, or be increased by the amount of the Excess Debt,
if a negative number, and (xii) be reduced by the amount of the Series E
Premium (as defined below).
The term "Series E Premium" shall mean the difference between (i) the
Average Trading Price times 142,032 and (ii) 14,203,200. The term "Average
Trading Price" shall mean the highest of the following averages: (i) the
average of the last sales price of the Series E Preferred Stock during the 15
consecutive business days ending on the Closing Date, or (ii) the average of
the last sales price of the Series E Preferred Stock during the 15
consecutive business days immediately preceding February 9, 1998.
The term "Excess Debt" shall mean, as of immediately prior to the
Effective Time, the difference between the sum of the following and
$899,700,000: (i) the difference between (A) Indebtedness of the Company and
its consolidated Subsidiaries less (B) the difference between $70,000,000 and
any amounts (other than the reimbursement of expenses) actually received by
the Company and its consolidated subsidiaries after the date hereof under
agreements relating to the sale or LMA (such LMA payments not to exceed
$30,000 per month) of its WVGO-FM and the sale or LMA of its Jackson/Biloxi
radio stations, less (C) any Indebtedness incurred to finance acquisitions
approved by Parent of stock of or substantially all of the assets of radio
stations, less (D) interest accrued as of immediately prior to the Effective
Time that is not then due and payable, (ii) the Series B Merger
Consideration, (iii) the Series C Merger
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Consideration, (iv) the liquidation preference amount of the Series E
Preferred Stock, and (v) Environmental Costs or Liabilities accrued and not
paid after June 30, 1997 to the extent they exceed $100,000 in the aggregate.
"Working Capital Adjustment Amount" shall mean an amount equal to the Final
Working Capital, less the Estimated Working Capital, together with interest
on the absolute value of the difference at 10% per annum beginning on the
Closing Date and ending on the date of payment of the Working Capital
Adjustment Amount as provided in Section 5.07(i)(iii)(B).
Notwithstanding the foregoing, Working Capital shall not include any asset
transferred to Delsener/ Slater Holdings or any of its Subsidiaries, any
liability assumed by Delsener/Slater Holdings, or any liability to which none
of the Company or any of its Subsidiaries is a party immediately after the
Effective Time and any such computation shall assume that the Spin Off has
been consummated.
(j) The Company may, in its sole discretion, (i) at any time prior to the
filing of the Proxy Statement with the SEC, dispose of its interest in
Delsener/Slater for any reason and in any manner, and (ii) at any time after
the Proxy Statement has been filed with the SEC, if the Spin Off would
violate applicable law or any material agreement to which the Company or any
of its Subsidiaries is a party, dispose of Delsener/Slater in any manner (an
"Alternate Transaction"); provided that in each such case the terms of such
disposition do not delay the consummation of the Merger, are not materially
more adverse to the Company or Parent than the Spin Off and any resulting
adverse financial changes are appropriately reflected in Working Capital; and
provided further that to the extent that any such disposition results in
fixed and determinable financial benefits to Parent when compared to the Spin
Off, the Class A Common Stock Merger Consideration and Class B Common Stock
Merger Consideration shall be adjusted in an aggregate amount equal to such
increase in benefits.
(k) At the request of Delsener/Slater and subject to the requirements and
restrictions imposed on the Company by any of its financing documents, the
Company shall from time to time after the date hereof and prior to the Spin
Off Date permit Delsener/Slater to (i) acquire (whether by merger, stock or
asset acquisition or otherwise) additional businesses engaged in the business
in which Delsener/Slater is engaged or (ii) make capital improvements on
assets owned or leased by Delsener/Slater or its Subsidiaries, and in each
such case loan Delsener/Slater the funds with which to place deposits on and
consummate such acquisitions and capital improvements. All amounts borrowed
by Delsener/Slater from the Company pursuant to this clause (k) shall be paid
by Delsener/Slater to the Company by wire transfer of immediately available
funds to a bank account specified by the Company on the Spin Off Date and
shall not be considered for purposes of computing Working Capital under
clause (i) of this Section 5.07. In furtherance of the foregoing, the Company
shall be entitled to increase the borrowing availability under the Credit
Agreement for such purposes. The Company shall use its best efforts to obtain
any waivers, consents or modifications under any financing or other agreement
of the Company required or desirable in connection with such acquisitions or
capital improvements.
(l) Notwithstanding anything in this Agreement to the contrary, the
consummation of the transactions contemplated by this Section 5.07 and in the
Spin Off Documentation or any action or inaction taken in furtherance
thereof, including without limitation any transaction to which neither the
Company nor any of its Subsidiaries (other than Delsener/Slater Holdings and
its Subsidiaries) is a party, shall not be deemed to be a breach of a
representation, warranty or covenant in this Agreement unless the foregoing,
except as otherwise specifically permitted hereunder, individually or in the
aggregate would reasonably be expected to have a Material Adverse Effect on
the Company, impair the ability of the Company to perform its obligations
under this Agreement in any material respect or delay or prevent the
consummation of the transactions contemplated by this Agreement.
(m) The indemnification obligations referred to in this Section 5.07 shall
survive the Spin Off Date for a period of six years and thereafter as to any
claims for indemnification asserted prior to the expiration of such period.
(n) Prior to the Spin Off Date, the Company and Delsener/Slater Holdings
shall obtain from Ron Delsener and Mitch Slater a release or waiver of any
rights that they may have to purchase or acquire all or part of the
Delsener/Slater Group.
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(o) Prior to the Spin Off Date, Delsener/Slater Holdings shall assume all
obligations of the Company and its Subsidiaries arising under the Sunshine
Agreement and, if not terminated prior to the Spin Off Date, the agreement
described in Section 4.06 of the Company Disclosure Schedule. Prior to the
Spin Off Date, the Company shall accelerate the issuance of, and issue, any
shares of Common Stock contemplated by the Sunshine Agreement.
(p) The Spin Off Documentation shall provide that prior to the Effective
Time the Company shall, to the extent requested by Parent, cause the
Delsener/Slater Group to perform its obligations under the Spin Off
Documentation.
SECTION 5.08. Repayment of Indebtedness. At or prior to the Closing,
Parent shall cause all Indebtedness outstanding under the Credit Agreement to
be repaid and shall cause all lenders party to the Credit Agreement to
terminate and release all Liens on any property or assets (including, without
limitation, the stock of Delsener/Slater Holdings and its Subsidiaries and
all of their respective properties and assets) subject to the Spin Off or
Alternate Transaction, as applicable, securing such Indebtedness.
Notwithstanding the immediately preceding sentence, Parent may cause all
Indebtedness under the Credit Agreement to be refinanced in full or may
obtain waivers to any breaches of the Credit Agreement that the transactions
contemplated herein would cause so long as (a) any such refinancing or the
obtaining of such waivers would not adversely affect any consent obtained by
the Company to implement the Spin Off or Alternate Transaction and (b) all
Liens on any property or assets (including without limitation the stock of
Delsener/Slater Holdings and its Subsidiaries and all of their respective
properties and assets) subject to the Spin Off or Alternate Transaction, as
applicable, securing such indebtedness shall be released at or prior to the
Closing.
SECTION 5.09. Closing Extension. Parent may extend the initial Termination
Date set forth in Section 7.01(b)(ii) for up to three calendar months, in one
calendar month intervals, by providing the Company notice of its election to
do so not later than five days prior to the then scheduled Termination Date.
In the event that Parent elects to extend the Termination Date pursuant to
the immediately preceding sentence, the Class A Common Stock Merger
Consideration and the Class B Common Stock Merger Consideration shall each be
increased by $1.00 for each calendar month that the Termination Date is
extended beginning on the first day of each such month provided, however,
that no such increase shall be paid if (i)(A) all conditions to the
obligations of Parent and Sub to effect the Merger set forth in Section 6.01
and Section 6.02 have been satisfied except for the conditions set forth in
Sections 6.01(b) and 6.01(c) and (B) the failure to satisfy the conditions
set forth in Sections 6.01(b) and 6.01(c) is primarily the result of Acts or
Changes or (ii) (A) the Merger shall be restrained or otherwise prohibited by
a temporary or preliminary judicial order, decree, ruling or other action
arising from claims or litigation involving the Company and its stockholders
(collectively, the "Preliminary Order") and (B) Parent delivers to the
Company prior to the applicable Termination Date written notice to the effect
that it shall consummate the Merger within ten business days after the
lifting or withdrawal of the Preliminary Order; provided that if, within ten
business days after the date of the lifting or withdrawal of the Preliminary
Order, Parent fails to consummate the Merger and such failure is not due to
the Company's failure to fulfill any of its obligations contained in Section
6.01 and Section 6.02, the Class A Common Stock Merger Consideration and the
Class B Common Stock Merger Consideration shall be increased by $2.00 for
each calendar month (or partial calendar month) after the initial Termination
Date provided for herein. In the event that the Preliminary Order has not
been lifted or withdrawn by the close of business on August 31, 1998, then
either Parent or the Company may extend the date of the Closing for an
additional 45 days by delivering, prior to September 1, 1998, written notice
to the other party to such effect. In the event that (x) neither Parent nor
the Company elects to extend the Closing for such additional 45-day period or
(y) either Parent or the Company elects to extend the Closing for such 45-day
period and the Preliminary Order has not been lifted or withdrawn prior to
the end of such 45-day period, then this Agreement shall terminate without
any liability or obligation on the part of either party other than payment of
fees and expenses pursuant to Section 5.05(a) and the obligation to release
the Letter of Credit to Parent.
SECTION 5.10. [Intentionally Omitted]
SECTION 5.11 Change of Name. Within 10 business days after the Closing,
Parent shall cause Surviving Corporation and each of its Subsidiaries, if
necessary, to file certificates of amendment with the
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appropriate Secretary of State, amending such company's certificate of
incorporation to change the name of such Company to any name which does not
include the letters "SFX". At the Closing, Parent will assign to
Delsener/Slater Holdings or its designee all right, title and interest,
including all the good will related thereto, in and to the name "SFX"
together with all causes of action and the right to recover for past
infringements of the name "SFX." As soon as commercially practicable, but in
no event later than six months from the Closing Date, Parent shall cease all
use of the name "SFX" in all modes.
SECTION 5.12. Outstanding Indebtedness. Except as contemplated in Section
5.07, as of immediately prior to the Effective Time the Company shall take
such action so as to cause the outstanding indebtedness of the Company for
borrowed money (excluding leases) to consist only of the Notes and borrowings
under the Credit Agreement, as it may be amended in accordance with Section
5.07.
SECTION 5.13. Entertainment Business. In the event that the transactions
contemplated by Section 5.07 are not consummated at or prior to the Closing
and Parent nonetheless waives the condition set forth in Section 6.02(e), the
Class A Merger Consideration and the Class B Merger Consideration shall be
increased by the quotient of $42,500,000 divided by the fully diluted number
of shares of Common Stock outstanding immediately prior to the Effective
Time.
ARTICLE VI
CONDITIONS PRECEDENT
SECTION 6.01. Conditions to Each Party's Obligation To Effect the
Merger. The respective obligation of each party to effect the Merger is
subject to the satisfaction or waiver on or prior to the Closing Date of the
following conditions:
(a) Stockholder Approval. The Stockholder Approval shall have been
obtained with respect to (i) the approval and adoption of this Agreement and
the Merger and (ii) the Amendments that modify Sections 5.1 and 5.6 of the
Company's Restated Certificate of Incorporation (collectively, the "Merger
Approval").
(b) FCC Consents. The FCC shall have issued the FCC consent ("FCC
Consent") approving the applications for transfer of control of the FCC
Licenses for the operation of the Licensed Facilities in connection with the
Merger.
(c) HSR Act. The applicable waiting period under the HSR Act shall have
expired or terminated.
(d) No Injunctions or Restraints. No statute, rule, regulation, executive
order, decree, temporary restraining order, preliminary or permanent
injunction or other order enacted, entered, promulgated, enforced or issued
by any court of competent jurisdiction or other Governmental Entity
preventing the consummation of the Merger shall be in effect.
SECTION 6.02. Conditions to Obligations of Parent and Sub. The obligations
of Parent and Sub to effect the Merger are further subject to satisfaction or
waiver of the following conditions:
(a) Representations and Warranties. The representations and warranties of
the Company set forth in this Agreement shall be true and correct 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), and
except to the extent the failure of such representations and warranties to be
true and correct would not, in the aggregate, have a Material Adverse Effect
on the Company. Parent shall have received a certificate signed on behalf of
the Company by the chief executive officer and the chief financial officer of
the Company to such effect.
(b) Performance of Obligations of the Company. The Company shall have
performed in all material respects all obligations required to be performed
by it under this Agreement at or prior to the Closing Date, and Parent shall
have received a certificate signed on behalf of the Company by the chief
executive officer and the chief financial officer of the Company to such
effect.
(c) Final Order. The FCC Consent shall not contain any conditions that
would be materially adverse to either the Parent, the Surviving Corporation
or their Affiliates. The FCC Consent shall be a
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Final Order. A "Final Order" shall be an action by the FCC (i) which has not
been reversed, stayed, enjoined, set aside, annulled or suspended, (ii) with
respect to which no timely request for stay or review, petition for
reconsideration or appeal has been filed by a non-party to this Agreement (or
an Affiliate of Parent) or the FCC Applications or sua speonte action of the
FCC with comparable effect is pending and (iii) as to which the normal time
for filing any such request, petition or appeal or for the taking of any such
sua speonte action by the FCC has expired.
(d) Release Agreements. The following shall have been obtained (i) the
Release Agreement from each member of the Executive Group as contemplated in
Section 4.05 and (ii) the assumption agreements contemplated in Section
5.07(h).
(e) Delsener/Slater. The Spin Off or an Alternate Transaction shall have
been consummated.
(f) Third Party Consents. All Third Party Consents shall have been
obtained other than those the failure of which to obtain would not have a
Material Adverse Effect on the Company.
Notwithstanding anything herein to the contrary, the obligations of Parent
and Sub to effect the Merger shall not be subject to the consummation of any
of the acquisitions, dispositions, exchanges or other transfers of assets
which are contemplated by Section 4.01(a) of the Company Disclosure Schedule.
SECTION 6.03. Conditions to Obligation of the Company. The obligation of
the Company to effect the Merger is further subject to satisfaction or waiver
of the following conditions:
(a) Representations and Warranties. The representations and warranties of
Parent and Sub set forth in this Agreement shall be true and correct 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), and except to the extent the failure of such representations and
warranties to be true and correct would not, in the aggregate, have a
Material Adverse Effect on Parent's ability to perform its obligations
hereunder. The Company shall have received a certificate signed on behalf of
Parent by an executive officer of Parent to such effect.
(b) Performance of Obligations of Parent and Sub. Parent and Sub shall
have performed in all material respects all obligations required to be
performed by them under this Agreement at or prior to the Closing Date, and
the Company shall have received a certificate signed on behalf of Parent by
an executive officer of Parent to such effect.
(c) Grace Period If Stockholder Approval Is Not Obtained for Other
Amendments. If the Stockholder Approval of the Amendments other than those
contained in Sections 5.1 and 5.6 of the Company's Restated Certificate of
Incorporation is not obtained by the date the Merger Approval is obtained at
the Stockholders Meeting, then at least forty-five (45) days shall have
passed from such date; provided, however, that if such forty-five day period
would end after May 14, 1998, such period shall be deemed to end on May 14,
1998.
ARTICLE VII
TERMINATION, AMENDMENT AND WAIVER
SECTION 7.01. Termination. This Agreement may be terminated prior to the
Effective Time whether before or after approval of the matters presented in
connection with the Merger by the stockholders of the Company:
(a) by mutual written consent of Parent, Sub and the Company by mutual
action of their respective Boards of Directors;
(b) by either Parent or the Company:
(i) (A) if, upon a vote at a duly held Stockholders Meeting or any
adjournment thereof at which the Merger Approval shall have been voted
upon, any portion of the Merger Approval shall not have been obtained or
(B) unless (1) prohibited by an event described in either clause (iii) or
(v) of this Section 7.01(b) or (2) resulting from any act or omission of
Parent or Sub or their Affiliates,
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as of the day immediately prior to the Termination Date either (x) no
Stockholders Meeting shall have been held or (y) if held no vote shall
have been taken in respect of the Merger Approval;
(ii) if the Merger shall not have been consummated on or before the
Termination Date; the term Termination Date shall mean (A) May 31, 1998 or
(B) if such date has been extended by Parent as provided in Section 5.09,
the date as so extended;
(iii) if any Governmental Entity shall have issued an order, injunction,
decree or ruling or taken any other action permanently enjoining,
restraining or otherwise permanently prohibiting the Merger and such
order, injunction, decree, ruling or other action shall have become final
and nonappealable (other than a judicial order, decree, ruling or other
action contemplated by Section 7.01(b)(v));
(iv) in the event of a breach by the other party of any representation,
warranty, covenant or other agreement contained in this Agreement which
(A) would give rise to the failure of a condition set forth in Section
6.02(a) or (b) or Section 6.03(a) or (b), as applicable, and (B) cannot be
or has not been cured within thirty (30) days after the giving of written
notice to the breaching party of such breach provided in no event shall
such thirty (30) day period extend beyond the Termination Date (a
"Material Breach") (provided that the terminating party is not then in
Material Breach of any representation, warranty, covenant or other
agreement contained in this Agreement); or
(v) if the Merger shall have been permanently restrained, enjoined or
otherwise permanently prohibited by a judicial order, decree, ruling or
other action arising from Claims or litigation involving the Company and
its stockholders;
(c) by the Company prior to obtaining the Merger Approval, if (i) the
Board of Directors of the Company shall have determined in good faith, based
on the advice of outside counsel, that it is necessary, in order to comply
with its fiduciary duties to the Company's stockholders under applicable law,
to terminate this Agreement to enter into an agreement with respect to or to
consummate a transaction constituting a Superior Proposal, (ii) the Company
shall have given notice to Parent advising Parent that the Company has
received a Superior Proposal from a third party, specifying the material
terms and conditions of such Superior Proposal (including the identity of the
third party) and the material terms and conditions of any agreements or
arrangements to be entered into in connection with a Superior Proposal with
respect to the Principal Stockholder and that the Company intends to
terminate this Agreement in accordance with this Section 7.01(c), and (iii)
either (A) Parent shall not have revised its takeover proposal within five
business days after the date on which such notice is deemed to have been
given to Parent, or (B) if Parent within such period shall have revised its
takeover proposal, the Board of Directors of the Company, after receiving
advice from the Company's financial advisor, shall have determined in its
good faith reasonable judgment that the third party's Takeover Proposal is
superior to Parent's revised takeover proposal; provided that the Company may
not effect such termination pursuant to this Section 7.01(c) unless the
Company has contemporaneously with such termination tendered payment to
Parent, or its designee, of the Termination Fee and the Reimbursement Amount
(if and to the extent that Parent has provided to the Company documentation
reasonably acceptable to the Company in support of the amounts claimed) that
is due Parent or its designee pursuant to Section 5.05; or
(d) by Parent if (i) the Board of Directors or the Independent Committee
of the Company shall have failed in the Proxy Statement to make the
recommendation contemplated by Section 4.03, (ii) a tender offer or exchange
offer for 50% or more of the outstanding shares of capital stock of the
Company is commenced (other than by the Company or its Affiliates) and the
Board of Directors of the Company fails to timely recommend against the
stockholders of the Company tendering their shares into such tender offer or
exchange offer, or (iii) a Takeover Proposal has been publicly announced by
the Company and the Board of Directors of the Company shall fail to publicly
reaffirm its approval or recommendation of the Merger and this Agreement on
or before the tenth business day following the date on which such Takeover
Proposal shall have been announced; provided that Parent in exercising its
termination rights hereunder may condition the effectiveness of such
termination upon receipt of the Termination Fee and Reimbursement Amount (if
and to the extent that Parent has provided to the Company documentation
reasonably acceptable to the Company in support of the amounts claimed) that
are due Parent or its designee pursuant to Section 5.05.
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SECTION 7.02. Effect of Termination. In the event of termination of this
Agreement by either the Company or Parent as provided in Section 7.01, this
Agreement shall forthwith become void and have no effect, without any
liability or obligation on the part of Parent, Sub or the Company, (i) other
than the provisions of the last sentence of Section 5.01, Section 5.05, this
Section 7.02 and Article VIII, and (ii) except to the extent that such
termination results from the Material Breach by a party of any of its
representations, warranties, covenants or agreements set forth in this
Agreement, in which case subject to Section 5.05 the non-breaching party will
be entitled to recover damages and its Expenses.
ARTICLE VIII
GENERAL PROVISIONS
SECTION 8.01. Nonsurvival of Representations and Warranties. None of the
representations and warranties in this Agreement or in any instrument
delivered pursuant to this Agreement shall survive the Effective Time. This
Section 8.01 shall not limit any covenant or agreement of the parties which
by its terms contemplates performance after the Effective Time.
SECTION 8.02. Notices. All notices, requests, claims, demands and other
communications under this Agreement shall be in writing and shall be deemed
given if delivered personally, telecopied (which is confirmed) or sent by
overnight courier (providing proof of delivery) to the parties at the
following addresses (or at such other address for a party as shall be
specified by like notice):
(a) if to Parent or Sub, to
Hicks, Muse, Tate & Furst Incorporated
200 Crescent Court, Suite 1600
Dallas, Texas 75201
Telecopy No.: (214) 740-7313
Attention: Lawrence D. Stuart, Jr.
with a copy to:
Vinson & Elkins L.L.P.
3700 Trammell Crow Center
2001 Ross Avenue
Dallas, Texas 75201
Telecopy No.: (214) 220-7716
Attention: Michael D. Wortley
and
(b) if to the Company, to
SFX Broadcasting, Inc.
150 East 58th Street, 19th Floor
New York, New York 10155
Telecopy No.: (212) 753-3188
Attention: Howard J. Tytel
with a copy to:
For the Company:
Baker & McKenzie
805 Third Avenue
New York, NY 10022
Telecopy No.: (212) 759-9133
Attention: Amar Budarapu
and
For the Independent Committee:
Morgan, Lewis & Bockius LLP
101 Park Avenue
New York, New York 10178
Telecopy No.: (212) 309-7044
Attention: Howard L. Shecter
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SECTION 8.03. Definitions. For purposes of this Agreement:
(a) an "Affiliate" of any Person means another Person that directly or
indirectly, through one or more intermediaries, controls, is controlled by,
or is under common control with, such first Person;
(b) "Entertainment Business" means the business of venue ownership,
operation and management and the booking, promotion and/or production of
entertainment events and shall include, without limitation, related
merchandising, concession management and Internet-based marketing;
(c) "Environmental Laws" means all applicable laws and rules of common law
pertaining to the environment and natural resources, including the
Comprehensive Environmental Response Compensation and Liability Act (42
U.S.C. Section 9601 et seq.) ("CERCLA"), the Emergency Planning and Community
Right to Know Act, the Superfund Amendments and Reauthorization Act of 1986,
the Resource Conservation and Recovery Act, the Hazardous and Solid Waste
Amendments Act of 1984, the Clean Air Act, the Clean Water Act, the Toxic
Substances Control Act, the Safe Drinking Water Act, the Oil Pollution Act of
1990, the Hazardous Materials Transportation Act, and any similar an
analogous statutes, regulations and decisional law of any governmental
authority, as each of the foregoing may be amended and in effect on or prior
to the Closing;
(d) "Expenses" has the meaning assigned thereto in Section 5.05(d);
(e) "Indebtedness" has the meaning assigned thereto in Section
3.01(p)(ii);
(f) "Material Adverse Change" or "Material Adverse Effect" means, when
used in connection with the Company or Parent, any change, effect, event or
occurrence that is materially adverse to the business, properties, assets,
condition (financial or otherwise) or results of operations of such party and
its Subsidiaries taken as a whole, other than any change, effect, event or
occurrence relating to the United States economy in general or to the United
States radio broadcasting industry in general, and, as applicable, not
specifically relating to the Company or Parent or their respective
Subsidiaries;
(g) "Permitted Liens" has the meaning assigned thereto in Section
3.01(u)(iv);
(h) "Person" means an individual, corporation, partnership, limited
liability company, joint venture, association, trust, unincorporated
organization or other entity;
(i) a "Significant Subsidiary" means any Subsidiary of the Company or
Parent, as applicable, that constitutes a significant subsidiary within the
meaning of Rule 1-02 of Regulation S-X of the SEC;
(j) a "Subsidiary" of any Person means another Person, an amount of the
voting securities, other voting ownership or voting partnership interests of
which is sufficient to elect at least a majority of its Board of Directors or
other governing body (or, if there are no such voting interests, 50% or more
of the equity interests of which) is owned directly or indirectly by such
first Person;
(k) "Superior Proposal" means (x) a bona fide Takeover Proposal to
acquire, directly or indirectly, for consideration consisting of cash and/or
securities, more than 50% of the shares and/or voting power of Common Stock
then outstanding or all or substantially all the assets of the Company, and
(y) otherwise on terms which the Board of Directors of the Company determines
in its good faith reasonable judgment to be more favorable to the Company's
stockholders than the Merger (based on the written opinion, with only
customary qualifications, of the Company's independent financial advisor that
the value of the consideration provided for in such proposal is superior to
the value of the consideration provided for in the Merger), for which
financing, to the extent required, is then committed or which, in the good
faith reasonable judgment of the Board of Directors of the Company, based on
advice from the Company's independent financial advisor, is reasonably
capable of being financed by such third party and for which the Board of
Directors of the Company determines, in its good faith reasonable judgment,
that such proposed transaction is reasonably likely to be consummated without
undue delay;
(l) "Takeover Proposal" means any proposal for a merger, consolidation or
other business combination involving the Company or any proposal or offer to
acquire in any manner, directly or indirectly, an equity interest in, any
more than 25% of the voting power of, or a substantial portion of the assets
of, the Company and its Subsidiaries, taken as a whole, other than the
transactions contemplated by this Agreement; provided, however, that such
term does not include the transactions contemplated hereby or in any
ancillary documents;
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(m) "Taxes" has the meaning assigned thereto in Section 3.01(j)(viii);
and
(n) "Company Disclosure Schedule" means the Disclosure Schedule delivered
by the Company to Parent prior to the execution of this Agreement.
SECTION 8.04. Interpretation. When a reference is made in this Agreement
to an Article, Section or Annex, such reference shall be to an Article or
Section of, or an Annex to, this Agreement unless otherwise indicated. The
table of contents and headings contained in this Agreement are for reference
purposes only and shall not affect in any way the meaning or interpretation
of this Agreement. Whenever the words "include", "includes" or "including"
are used in this Agreement, they shall be deemed to be followed by the words
"without limitation". The words "hereof", "herein" and "hereunder" and words
of similar import when used in this Agreement shall refer to this Agreement
as a whole and not to any particular provision of this Agreement. All terms
defined in this Agreement shall have the defined meanings when used in any
certificate or other document made or delivered pursuant hereto unless
otherwise defined therein. The definitions contained in this Agreement are
applicable to the singular as well as the plural forms of such terms and to
the masculine as well as to the feminine and neuter genders of such term. Any
agreement, instrument or statute defined or referred to herein or in any
agreement or instrument that is referred to herein means such agreement,
instrument or statute as from time to time amended, modified or supplemented,
including (in the case of agreements or instruments) by waiver or consent and
(in the case of statutes) by succession of comparable successor statutes and
references to all attachments thereto and instruments incorporated therein.
References to a Person are also to its permitted successors and assigns and,
in the case of an individual, to his heirs and estate, as applicable.
SECTION 8.05. Counterparts. This Agreement may be executed in one or more
counterparts, all of which shall be considered one and the same agreement and
shall become effective when one or more counterparts have been signed by each
of the parties and delivered to the other parties.
SECTION 8.06. Entire Agreement; No Third-Party Beneficiaries. This
Agreement (including the documents and instruments referred to herein) and
the Confidentiality Agreement (a) constitute the entire agreement, and
supersede all prior agreements and understandings, both written and oral,
among the parties with respect to the subject matter of this Agreement and
(b) except for the provisions of Article II, and Section 5.04, are not
intended to confer upon any Person other than the parties any rights or
remedies.
SECTION 8.07. Governing Law. This Agreement shall be governed by, and
construed in accordance with, the laws of the State of Delaware, regardless
of the laws that might otherwise govern under applicable principles of
conflicts of laws thereof.
SECTION 8.08. Assignment. 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; provided, however, that (i)
upon notice to the Company and without releasing Parent or Sub from any of
their obligations or liabilities hereunder, Parent or Sub may assign or
delegate any or all of their rights or obligations under this Agreement to
any Affiliate thereof so long as such assignment or delegation does not delay
the Closing, and (ii) nothing in this Agreement shall limit Parent's or Sub's
ability to make a collateral assignment of its rights under this Agreement to
any institutional lender that provides funds to Parent or Sub without the
consent of the Company. The Company shall execute an acknowledgment of such
assignment(s) and collateral assignments in such forms as Parent or its
institutional lenders may from time to time reasonably request; provided,
however, that unless written notice is given to the Company that any such
collateral assignment has been foreclosed upon, the Company shall be entitled
to deal exclusively with Parent as to any matters arising under this
Agreement or any of the other agreements delivered pursuant hereto. In the
event of such an assignment, the provisions of this Agreement shall inure to
the benefit of and be binding on such assignees.
SECTION 8.09. Enforcement. The Company agrees that irreparable damage
would occur and that Parent would not have any adequate remedy at law in the
event that any of the provisions of this Agreement were not performed in
accordance with their specific terms or were otherwise breached. It is
accordingly agreed that Parent shall be entitled to an injunction or
injunctions to prevent breaches of this
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Agreement and to enforce specifically the terms and provisions of this
Agreement in any Federal court located in the State of Delaware or in
Delaware state court, this being in addition to any other remedy to which
they are entitled at law or in equity. In addition, each of the parties
hereto (a) consents to submit itself to the personal jurisdiction of any
Federal court located in the State of Delaware or any Delaware state court in
the event any dispute arises out of this Agreement or any of the transactions
contemplated by this Agreement, (b) agrees that it will not attempt to deny
or defeat such personal jurisdiction by motion or other request for leave
from any such court and (c) agrees that it will not bring any action relating
to this Agreement or any of the transactions contemplated by this Agreement
in any court other than a Federal court sitting in the State of Delaware or a
Delaware state court.
SECTION 8.10. Director and Officer Liability. The directors, officers, and
stockholders of Parent and its Affiliates shall not have any personal
liability or obligation arising under this Agreement (including any Claims
that the Company may assert) other than as an assignee of this Agreement or
as otherwise provided herein. Except to the extent that a person is a party
signatory thereto in his personal capacity, the directors, officers and
stockholders of the Company and their respective Affiliates shall not have
any personal liability or obligation arising under this Agreement (including
any Claims that Parent or Sub may assert).
SECTION 8.11. Termination Date. Notwithstanding any provision of this
Agreement to the contrary, in the event that any Termination Date provided
for hereunder shall fall on a non-Business Day, then such Termination Date
shall automatically be extended to the first Business Day following such
scheduled Termination Date. The term "Business Day" shall mean any day, other
than a Saturday, Sunday or a day on which banking institutions in the City of
New York, State of New York, are required or authorized by law to close.
[The rest of this page has intentionally been left blank.]
A-45
<PAGE>
IN WITNESS WHEREOF, Parent, Sub and the Company have caused this
Agreement to be signed by their respective officers thereunto duly
authorized, all as of the date first written above.
SBI HOLDING CORPORATION
By: /s/ Eric Neuman
-----------------------------------
Name: Eric C. Neuman
Title: Vice President
SBI RADIO ACQUISITION CORPORATION
By: /s/ Eric Neuman
-----------------------------------
Name: Eric C. Neuman
Title: Vice President
SFX BROADCASTING, INC.
By: /s/ Robert F.X. Sillerman
-----------------------------------
Name: Robert F.X. Sillerman
Title: Executive Chairman
A-46
<PAGE>
[LEHMAN BROTHERS LETTERHEAD]
ANNEX B
OPINION OF LEHMAN BROTHERS
Board of Directors and, February 13, 1998
The Special Committee of the Board of Directors
SFX Broadcasting, Inc., Inc.
150 East 58th Street
New York, NY 10155
Members of Board of Directors and the Special Committee:
We understand that SFX Broadcasting, Inc. (the "Company") is entering into
a merger agreement with SBI Holdings Corporation, the parent of SBI Radio
Acquisition Corporation ("SBI"), pursuant to which (i) SBI will be merged with
and into the Company (the "Merger") and each outstanding share of Class A common
stock of the Company, as well as each outstanding warrant to purchase shares of
Class A common stock, and shares of Series D Preferred Stock convertible into
shares of Class A common stock (together, the "Fully Diluted Class A Shares")
will be converted into the right to receive $75 per share in cash (except that
the Series D Preferred Stock will converted into the right to receive $75 times
the then effective conversion ratio) and (ii) prior to the Merger, the
Company will either (A) spin-off its concert promotion business (the "Concert
Business") to the Company's shareholders (the "Spin-Off") or (B) sell the
Concert Business to a third party with the proceeds of such sale to be
distributed to the Company's shareholders (the "Third Party Sale") (together
with the Merger, the "Proposed Transaction"). In addition, in connection with
the Merger, (i) each holder of Class B shares of common stock of the Company
will receive additional consideration of $22.50 per share for an aggregate
consideration of $23.6 million and (ii) the holders of options to purchase
Class A common stock will relinquish all options for their net value over the
strike price at $75 per share. The terms and conditions of the Proposed
Transaction are set forth in more detail in the Merger Agreement dated August
24, 1997 between the Company and SBI Holding Company and SBI, as amended on
February 9, 1998 ("the Agreement").
We have been requested by the Special Committee of the Board of Directors
of the Company (the "Special Committee") to render our opinion with respect
to the fairness, from a financial point of view, to the holders of the Fully
Diluted Class A Shares of the consideration to be received by such
shareholders in the Proposed Transaction. We have not been requested to opine
as to, and our opinion does not in any manner address, the Company's
underlying business decision to proceed with or effect the Proposed
Transaction.
B-1
<PAGE>
In arriving at our opinion, we reviewed and analyzed: (1) the Agreement
and the specific terms of the Proposed Transaction; (2) publicly available
information concerning the Company that we believe to be relevant to our
analysis, including the Company's (i) annual report and Form 10-K for the
year ended December 31, 1996; (ii) proxy statement dated April 18, 1997; and
(iii) Form 10-Q for the quarters ended March 31, June 30, and September 30,
1997; and (iv) forms 8-K and 8-K/A filed since December 31, 1996; (3)
financial and operating information with respect to the business, operations
and prospects of the Company (including the Concert Business) furnished to us
by the Company, including station by station projections for 1997 and 1998
and projections for the Concert Business for 1997 and 1998; (4) a trading
history of the Company's common stock from August 19, 1996 to the present and
a comparison of that trading history with those of other companies that we
deemed relevant; (5) a comparison of the historical financial results and
present financial condition of the Company and the Concert Business with
those of other companies that we deemed relevant; (6) the results of the
Company's efforts to solicit indications of interest from third parties with
respect to a purchase of the Company; and (7) a comparison of the financial
terms of the Proposed Transaction with the financial terms of certain other
transactions that we deemed relevant. In addition, we have had discussions
with the management of the Company concerning its business, operations,
assets, financial condition and prospects and have undertaken such other
studies, analyses and investigations as we deemed appropriate.
In arriving at our opinion, we have assumed and relied upon the accuracy
and completeness of the financial and other information used by us without
assuming any responsibility for independent verification of such information
and have further relied upon the assurances of management of the Company that
they are not aware of any facts or circumstances that would make such
information inaccurate or misleading. With respect to the financial
projections of the Company, upon advice of the Company, we have assumed that
such projections have been reasonably prepared on a basis reflecting the best
currently available estimates and judgments of the management of the Company
as to the future financial performance of the Company and that the Company
will perform substantially in accordance with such projections. In arriving
at out opinion, we have conducted only a limited physical inspection of the
properties and facilities of the Company and have not made or obtained any
evaluations or appraisals of the assets or liabilities of the Company. In
addition, you have not authorized us to broadly solicit, and we have not so
solicited, proposals from third parties with respect to the purchase of all
or a part of the Company's business. Our opinion necessarily is based upon
market, economic and other conditions as they exist on, and can be evaluated
as of, the date of this letter.
In addition, we have not been requested to opine as to, and our opinion
does not in any manner address, the price at which shares of common stock of
the company which will hold the Concert Business (the "Concert Business
Stock") will actually trade following the consummation of the Spin-off. The
process by which securities trading markets establish a market price for any
security is complex, involving the interaction of numerous factors, and
market prices will fluctuate with changes in, among other things, the
financial condition, business and prospects of the issuer and comparable
companies and economic and financial market conditions. In addition, trading
in shares of the Concert Business Stock will likely be characterized by a
period of redistribution among the Company's shareholders who receive such
shares in the Spin-off
B-2
<PAGE>
(especially in light of the taxable nature of the Spin-off), which may
temporarily depress the market price of such shares during such period.
Accordingly, this opinion should not be viewed as providing any indication or
prediction of the market value of the shares of the Concert Business Stock to
be received by a shareholder pursuant to the Proposed Transaction.
Based upon and subject to the foregoing, we are of the opinion as of the
date hereof that, from a financial point of view, the consideration to be
received by the holders of the Fully Diluted Class A Shares in the Proposed
Transaction is fair to such shareholders.
We have acted as financial advisor to the Company in connection with the
Proposed Transaction and will receive a fee for our services which is
contingent upon the consummation of the Proposed Transaction. In addition,
the Company has agreed to indemnify us for certain liabilities that may arise
out of the rendering of this opinion. We also have performed various
investment banking services for the Company in the past and have received
customary fees for such services. In the ordinary course of our business, we
actively trade in the debt and equity securities of the Company for our own
account and for the accounts of our customers and, accordingly, may at any
time hold a long or short position in such securities.
This opinion is for the use and benefit of the Special Committee and the
Board of Directors of the Company and is rendered to the Special Committee
and the Board of Directors in connection with their consideration of the
Proposed Transaction. This opinion is not intended to be and does not
constitute a recommendation to any shareholder of the Company as to how such
shareholder should vote with respect to the Proposed Transaction.
Very truly yours,
LEHMAN BROTHERS
B-3
<PAGE>
ANNEX C
GENERAL CORPORATION LAW OF THE STATE OF DELAWARE
SECTION 262. APPRAISAL RIGHTS
(a) Any stockholder of a corporation of this State who holds shares of
stock on the date of the making of a demand pursuant to subsection (d) of
this section with respect to such shares, who continuously holds such shares
through the effective date of the merger or consolidation, who has otherwise
complied with subsection (d) of this section and who has neither voted in
favor of the merger or consolidation nor consented thereto in writing
pursuant to ss.228 of this title shall be entitled to an appraisal by the
Court of Chancery of the fair value of his shares of stock under the
circumstances described in subsections (b) and (c) of this section. As used
in this section, the word "stockholder" means a holder of record of stock in
a stock corporation and also a member of record of a nonstock corporation;
the words "stock" and "share" mean and include what is ordinarily meant by
those words and also membership or membership interest of a member of a
nonstock corporation; and the words "depository receipt" mean a receipt or
other instrument issued by a depository representing an interest in one or
more shares, or fractions thereof, solely of stock of a corporation, which
stock is deposited with the depository.
(b) Appraisal rights shall be available for the shares of any class or
series of stock of a constituent corporation in a merger or consolidation to
be effected pursuant to ss.251 (other than a merger effected pursuant to
ss.251(g) of this title), ss.252, ss.254, ss.257, ss.258, ss.263 or ss.264 of
this title:
(1) Provided, however, that no appraisal rights under this section shall
be available for the shares of any class or series of stock, which stock,
or depository receipts in respect thereof, at the record date fixed to
determine the stockholders entitled to receive notice of and to vote at
the meeting of stockholders to act upon the agreement of merger or
consolidation, were either (i) listed on a national securities exchange or
designated as a national market system security on an interdealer
quotation system by the National Association of Securities Dealers, Inc.
or (ii) held of record by more than 2,000 holders; and further provided
that no appraisal rights shall be available for any shares of stock of the
constituent corporation surviving a merger if the merger did not require
for its approval the vote of the holders of the surviving corporation as
provided in subsection (f) of ss.251 of this title.
(2) Notwithstanding paragraph (1) of this subsection, appraisal rights
under this section shall be available for the shares of any class or
series of stock of a constituent corporation if the holders thereof are
required by the terms of an agreement of merger or consolidation pursuant
to ss.ss.251, 252, 254, 257, 258, 263 and 264 of this title to accept for
such stock anything except:
a. Shares of stock of the corporation surviving or resulting from
such merger or consolidation, or depository receipts in respect
thereof;
b. Shares of stock of any other corporation, or depository receipts
in respect thereof, which shares of stock (or depository receipts in
respect thereof) or depository receipts at the effective date of the
merger or consolidation will be either listed on a national securities
exchange or designated as a national market system security on an
interdealer quotation system by the National Association of Securities
Dealers, Inc. or held of record by more than 2,000 holders;
c. Cash in lieu of fractional shares or fractional depository
receipts described in the foregoing subparagraphs a. and b. of this
paragraph; or
d. Any combination of the shares of stock, depository receipts and
cash in lieu of fractional shares or fractional depository receipts
described in the foregoing subparagraphs a., b. and c. of this
paragraph.
(3) In the event all of the stock of a subsidiary Delaware corporation
party to a merger effected under ss.253 of this title is not owned by the
parent corporation immediately prior to the merger, appraisal rights shall
be available for the shares of the subsidiary Delaware corporation.
C-1
<PAGE>
(c) Any corporation may provide in its certificate of incorporation that
appraisal rights under this section shall be available for the shares of any
class or series of its stock as a result of an amendment to its certificate
of incorporation, any merger or consolidation in which the corporation is a
constituent corporation or the sale of all or substantially all of the assets
of the corporation. If the certificate of incorporation contains such a
provision, the procedures of this section, including those set forth in
subsections (d) and (e) of this section, shall apply as nearly as is
practicable.
(d) Appraisal rights shall be perfected as follows:
(1) If a proposed merger or consolidation for which appraisal rights are
provided under this section is to be submitted for approval at a meeting
of stockholders, the corporation, not less than 20 days prior to the
meeting, shall notify each of its stockholders who was such on the record
date for such meeting with respect to shares for which appraisal rights
are available pursuant to subsections (b) or (c) hereof that appraisal
rights are available for any or all of the shares of the constituent
corporations, and shall include in such notice a copy of this section.
Each stockholder electing to demand the appraisal of his shares shall
deliver to the corporation, before the taking of the vote on the merger or
consolidation, a written demand for appraisal of his shares. Such demand
will be sufficient if it reasonably informs the corporation of the
identity of the stockholder and that the stockholder intends thereby to
demand the appraisal of his shares. A proxy or vote against the merger or
consolidation shall not constitute such a demand. A stockholder electing
to take such action must do so by a separate written demand as herein
provided. Within 10 days after the effective date of such merger or
consolidation, the surviving or resulting corporation shall notify each
stockholder of each constituent corporation who has complied with this
subsection and has not voted in favor of or consented to the merger or
consolidation of the date that the merger or consolidation has become
effective; or
(2) If the merger or consolidation was approved pursuant to ss.228 or
ss.253 of this title, each constituent corporation, either before the
effective date of the merger or consolidation or within ten days
thereafter, shall notify each of the holders of any class or series of
stock of such constituent corporation who are entitled to appraisal rights
of the approval of the merger or consolidation and that appraisal rights
are available for any or all shares of such class or series of stock of
such constituent corporation, and shall include in such notice a copy of
this section; provided that, if the notice is given on or after the
effective date of the merger or consolidation, such notice shall be given
by the surviving or resulting corporation to all such holders of any class
or series of stock of a constituent corporation that are entitled to
appraisal rights. Such notice may, and, if given on or after the effective
date of the merger or consolidation, shall, also notify such stockholders
of the effective date of the merger or consolidation. Any stockholder
entitled to appraisal rights may, within 20 days after the date of mailing
of such notice, demand in writing from the surviving or resulting
corporation the appraisal of such holder's shares. Such demand will be
sufficient if it reasonably informs the corporation of the identity of the
stockholder and that the stockholder intends thereby to demand the
appraisal of such holder's shares. If such notice did not notify
stockholders of the effective date of the merger or consolidation, either
(i) each such constituent corporation shall send a second notice before
the effective date of the merger or consolidation notifying each of the
holders of any class or series of stock of such constituent corporation
that are entitled to appraisal rights of the effective date of the merger
or consolidation or (ii) the surviving or resulting corporation shall send
such a second notice to all such holders on or within 10 days after such
effective date; provided, however, that if such second notice is sent more
than 20 days following the sending of the first notice, such second notice
need only be sent to each stockholder who is entitled to appraisal rights
and who has demanded appraisal of such holder's shares in accordance with
this subsection. An affidavit of the secretary or assistant secretary or
of the transfer agent of the corporation that is required to give either
notice that such notice has been given shall, in the absence of fraud, be
prima facie evidence of the facts stated therein. For purposes of
determining the stockholders entitled to receive either notice, each
constituent corporation may fix, in advance, a record date that shall be
not more than 10 days prior to the date the notice is given, provided,
that if the notice is given on or after the
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<PAGE>
effective date of the merger or consolidation, the record date shall be
such effective date. If no record date is fixed and the notice is given
prior to the effective date, the record date shall be the close of
business on the day next preceding the day on which the notice is given.
(e) Within 120 days after the effective date of the merger or
consolidation, the surviving or resulting corporation or any stockholder who
has complied with subsections (a) and (d) hereof and who is otherwise
entitled to appraisal rights, may file a petition in the Court of Chancery
demanding a determination of the value of the stock of all such stockholders.
Notwithstanding the foregoing, at any time within 60 days after the effective
date of the merger or consolidation, any stockholder shall have the right to
withdraw his demand for appraisal and to accept the terms offered upon the
merger or consolidation. Within 120 days after the effective date of the
merger or consolidation, any stockholder who has complied with the
requirements of subsections (a) and (d) hereof, upon written request, shall
be entitled to receive from the corporation surviving the merger or resulting
from the consolidation a statement setting forth the aggregate number of
shares not voted in favor of the merger or consolidation and with respect to
which demands for appraisal have been received and the aggregate number of
holders of such shares. Such written statement shall be mailed to the
stockholder within 10 days after his written request for such a statement is
received by the surviving or resulting corporation or within 10 days after
expiration of the period for delivery of demands for appraisal under
subsection (d) hereof, whichever is later.
(f) Upon the filing of any such petition by a stockholder, service of a
copy thereof shall be made upon the surviving or resulting corporation, which
shall within 20 days after such service file in the office of the Register in
Chancery in which the petition was filed a duly verified list containing the
names and addresses of all stockholders who have demanded payment for their
shares and with whom agreements as to the value of their shares have not been
reached by the surviving or resulting corporation. If the petition shall be
filed by the surviving or resulting corporation, the petition shall be
accompanied by such a duly verified list. The Register in Chancery, if so
ordered by the Court, shall give notice of the time and place fixed for the
hearing of such petition by registered or certified mail to the surviving or
resulting corporation and to the stockholders shown on the list at the
addresses therein stated. Such notice shall also be given by 1 or more
publications at least 1 week before the date of the hearing, in a newspaper
of general circulation published in the City of Wilmington, Delaware or such
publication as the Court deems advisable. The forms of the notices by mail
and by publication shall be approved by the Court, and the costs thereof
shall be borne by the surviving or resulting corporation.
(g) At the hearing on such petition, the Court shall determine the
stockholders who having complied with this section and who have become
entitled to appraisal rights. The Court may require the stockholders who have
demanded an appraisal for their shares and who hold stock represented by
certificates to submit their certificates of stock to the Register in
Chancery for notation thereon of the pendency of the appraisal proceedings;
and if any stockholder fails to comply with such direction, the Court may
dismiss the proceedings as to such stockholder.
(h) After determining the stockholders entitled to an appraisal, the Court
shall appraise the shares, determining their fair value exclusive of any
element of value arising from the accomplishment or expectation of the merger
or consolidation, together with a fair rate of interest, if any, to be paid
upon the amount determined to be the fair value. In determining such fair
value, the Court shall take into account all relevant factors. In determining
the fair rate of interest, the Court may consider all relevant factors,
including the rate of interest which the surviving or resulting corporation
would have had to pay to borrow money during the pendency of the proceeding.
Upon application by the surviving or resulting corporation or by any
stockholder entitled to participate in the appraisal proceeding, the Court
may, in its discretion, permit discovery or other pretrial proceedings and
may proceed to trial upon the appraisal prior to the final determination of
the stockholder entitled to an appraisal. Any stockholder whose name appears
on the list filed by the surviving or resulting corporation pursuant to
subsection (f) of this section and who has submitted his certificates of
stock to the Register in Chancery, if such is required, may participate fully
in all proceedings until it is finally determined that he is not entitled to
appraisal rights under this section.
(i) The Court shall direct the payment of the fair value of the shares,
together with interest, if any, by the surviving or resulting corporation to
the stockholders entitled thereto. Interest may be simple or
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<PAGE>
compound, as the Court may direct. Payment shall be so made to each such
stockholder, in the case of holders of uncertificated stock forthwith, and
the case of holders of shares represented by certificates upon the surrender
to the corporation of the certificates representing such stock. The Court's
decree may be enforced as other decrees in the Court of Chancery may be
enforced, whether such surviving or resulting corporation be a corporation of
this State or of any state.
(j) The costs of the proceeding may be determined by the Court and taxed
upon the parties as the Court deems equitable in the circumstances. Upon
application of a stockholder, the Court may order all or a portion of the
expenses incurred by any stockholder in connection with the appraisal
proceeding, including, without limitation, reasonable attorney's fees and the
fees and expenses of experts, to be charged pro rata against the value of all
the shares entitled to an appraisal.
(k) From and after the effective date of the merger or consolidation, no
stockholder who has demanded his appraisal rights as provided in subsection
(d) of this section shall be entitled to vote such stock for any purpose or
to receive payment of dividends or other distributions on the stock (except
dividends or other distributions payable to stockholders of record at a date
which is prior to the effective date of the merger or consolidation);
provided, however, that if no petition for an appraisal shall be filed within
the time provided in subsection (e) of this section, or if such stockholder
shall deliver to the surviving or resulting corporation a written withdrawal
of his demand for an appraisal and an acceptance of the merger or
consolidation, either within 60 days after the effective date of the merger
or consolidation as provided in subsection (e) of this section or thereafter
with the written approval of the corporation, then the right of such
stockholder to an appraisal shall cease. Notwithstanding the foregoing, no
appraisal proceeding in the Court of Chancery shall be dismissed as to any
stockholder without the approval of the Court, and such approval may be
conditioned upon such terms as the Court deems just.
(l) The shares of the surviving or resulting corporation to which the
shares of such objecting stockholders would have been converted had they
assented to the merger or consolidation shall have the status of authorized
and unissued shares of the surviving or resulting corporation.
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<PAGE>
PROSPECTUS ANNEX D
[SFX LOGO]
CLASS A COMMON STOCK AND CLASS B COMMON STOCK
($.01 PAR VALUE PER SHARE)
SFX Broadcasting, Inc. ("SFX") currently operates in two principal lines
of business: radio broadcasting and live entertainment. In August 1997, SFX
entered into an agreement (as amended, the "SFX Merger Agreement") to merge
(the "SFX Merger") its radio business with a subsidiary of SBI Holdings
Corporation ("SFX Buyer"). If the SFX Merger is consummated, then, among
other things, holders of SFX's Class A common stock will have the right to
receive $75.00 per share, holders of SFX's Class B common stock will have the
right to receive $97.50 per share, and holders of SFX's Series D preferred
stock will have the right to receive $82.40 per share, subject to certain
adjustments. In the SFX Merger Agreement, SFX retained the right to spin off
its live entertainment business to its stockholders (the "Spin-Off"). At a
special meeting to be held on March 26, 1998, SFX's stockholders will vote
on, among other things, the SFX Merger and an amendment to SFX's certificate
of incorporation regarding the voting rights of stock to be received by two
members of management in the Spin-Off. If this amendment is approved (whether
or not the SFX Merger occurs) and if the other conditions to the Spin-Off are
satisfied or waived, SFX will consummate the Spin-Off by issuing shares of
SFX Entertainment, Inc. ("SFX Entertainment"), which holds SFX's live
entertainment operations, to SFX's stockholders as a dividend in a taxable
transaction. See "Certain Federal Income Tax Consequences." Based on the
number of SFX's shares and interests in its director deferred stock ownership
plan outstanding, and assuming the exercise of outstanding options and
warrants of SFX before the record date for the Spin-Off, SFX will distribute
approximately 14,200,000 shares of SFX Entertainment's Class A Common Stock
and 1,047,037 shares of its Class B Common Stock in the Spin-Off. This
Prospectus is SFX Entertainment's prospectus relating to those shares.
If the Pending Acquisitions (as defined herein), the Spin-Off and the SFX
Merger are consummated, then, among other things:
SFX ENTERTAINMENT WILL:
o continue to own and operate SFX's live entertainment venue operation,
promotion, production and marketing and consulting business (the
"Entertainment Business"), representing approximately 22% of SFX's revenues
for the nine months ended September 30, 1997 and 9% of SFX's assets as of
that time (before the Pending Acquisitions); and
o own and operate the businesses acquired in the Pending Acquisitions.
SFX WILL BE WHOLLY-OWNED BY SBI HOLDINGS CORPORATION AND WILL:
o continue to own and operate SFX's radio broadcasting business,
representing approximately 78% of SFX's revenues for the nine months ended
September 30, 1997 and 91% of SFX's assets as of that time (before the
Pending Acquisitions); and
o at the time of the SFX Merger, make a payment to SFX Entertainment, or
receive a payment from SFX Entertainment, for Working Capital (as defined in
"Agreements Between SFX Entertainment and SFX--Distribution Agreement").
Before the Spin-Off, SFX Entertainment and SFX will enter into a
Distribution Agreement, which will govern the terms and conditions of the
Spin-Off (the "Distribution Agreement"). A form of the Distribution Agreement
is Annex F to the attached Proxy Statement. See "Agreements Between SFX
Entertainment and SFX--Distribution Agreement" and Annex F to the Proxy
Statement.
In the Spin-Off, for each share of SFX's Class A common stock held on the
record date for the Spin-Off to be set by SFX's board of directors (the
"Spin-Off Record Date"), the holder will receive one share of SFX
Entertainment's Class A common stock, par value $.01 per share, which has 1
vote in most matters (the "SFX Entertainment Class A Common Stock"). For each
share of SFX's Class B common stock owned on the Spin-Off Record Date, the
holder will receive one share of SFX Entertainment's Class B common stock,
par value $.01 per share, which has 10 votes in most matters (the "SFX
Entertainment Class B Common Stock" and, with the SFX Entertainment Class A
Common Stock, the "SFX Entertainment Common Stock"). Holders of SFX's Series
D preferred stock will receive the number of shares of SFX Entertainment
Class A Common Stock obtained by multiplying the number of shares held by
1.0987 (rounded down to the next whole share). For each share of SFX's Class
A common stock credited under SFX's director deferred stock ownership plan,
the holder of that interest will receive one share of SFX Entertainment Class
A Common Stock. In addition, persons who exercise certain warrants of SFX
after the Spin-Off Record Date will be entitled to receive, among other
things, up to 636,289 shares of SFX Entertainment Class A Common Stock.
Holders will not receive cash in lieu of fractional shares. After the
Spin-Off and certain other transactions described in this Prospectus, Robert
F.X. Sillerman, the Executive Chairman of SFX Entertainment, will
beneficially own approximately 45.7%, and all directors and executive
officers together will beneficially own approximately 52.3%, of the combined
vote of the SFX Entertainment Common Stock. Accordingly, these individuals
will generally be able to control the election of a majority of SFX
Entertainment's board of directors, as well as stockholder votes on most
other matters. See "Risk Factors--Control by Management," "Management,"
"Principal Stockholders of SFX Entertainment" and "Certain Relationships and
Related Transactions."
SFX Entertainment presently owns, leases or operates 20 venues in five
states, and engages in concert and live entertainment promotion, production
and marketing activities. SFX Entertainment has agreed to acquire the
following five additional live entertainment businesses (the "Pending
Acquisitions"): PACE Entertainment Corporation ("PACE"); Contemporary Group
("Contemporary"); BG Presents, Inc. ("BGP"); Album Network, Inc., SJS
Entertainment Corporation and The Network 40, Inc. (collectively, "Network");
and Concert/Southern Promotions ("Concert/Southern"). The aggregate
consideration to be paid in the Pending Acquisitions is expected to be
approximately $352.8 million in cash, the assumption and repayment of $75.3
million of debt and the issuance of 4,216,680 shares of SFX Entertainment
Class A Common Stock. SFX Entertainment intends to finance the cash portion
of the Pending Acquisitions through a combination of a recently completed
private placement of $350.0 million of 9 1/8% Senior Subordinated Notes due
2008 (the "Notes") and borrowings under an anticipated $300.0 million senior
credit facility (the "Proposed Credit Facility" and, together with the Notes,
the "Financing"). See "Business," "Agreements Related to the Pending
Acquisitions," "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and "Description of Indebtedness." Although SFX
Entertainment anticipates consummating the Pending Acquisitions during the
first quarter of 1998, there can be no assurance that any or all of the
Pending Acquisitions will be consummated during that time period, or at all.
The Spin-Off is not conditioned on the prior consummation of any of the
Pending Acquisitions, the SFX Merger or the entering into or borrowing under
the Proposed Credit Facility.
SFX stockholders will not pay any consideration for receiving SFX
Entertainment Common Stock in the Spin-Off. The SFX Entertainment Class A
Common Stock does not currently trade publicly. SFX Entertainment has applied
to list it on the Nasdaq Stock Market's National Market (the "Nasdaq National
Market") but may seek listing on an exchange.
PLEASE READ THIS PROSPECTUS AND THE ATTACHED PROXY STATEMENT CAREFULLY,
SINCE EACH CONTAINS IMPORTANT INFORMATION. ALSO, PAY PARTICULAR ATTENTION TO
THE "RISK FACTORS" BEGINNING ON PAGE D-14.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION, NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED
UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.
THE DATE OF THIS PROSPECTUS IS FEBRUARY 13, 1998.
<PAGE>
PROSPECTUS TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
---------
<S> <C>
SUMMARY ................................... D-4
SFX Entertainment ........................ D-4
Overview of the Spin-Off and the SFX
Merger .................................. D-7
The Spin-Off ............................. D-8
Summary Consolidated Financial Data of SFX
Entertainment ........................... D-12
RISK FACTORS .............................. D-14
Absence of Combined Operating History;
Potential Inability to Integrate
Acquisition Businesses .................. D-14
Risks Related to Pending Acquisitions .... D-14
Control of Motor Sports and Theatrical
Businesses .............................. D-18
BGP Right of First Refusal ............... D-18
Control of Delsener/Slater ............... D-18
Future Acquisitions ...................... D-18
Expansion Strategy; Need for Additional
Funds ................................... D-18
Substantial Leverage ..................... D-19
Economic Conditions and Consumer Tastes .. D-20
Availability of Artists and Events ....... D-20
Control of Venues ........................ D-20
Restrictions Imposed by SFX
Entertainment's Indebtedness ............ D-21
No Prior Market for SFX Entertainment
Stock ................................... D-21
Working Capital Adjustments and Repayment
of Advances ............................. D-22
Control by Management; Stock Issued to
Management .............................. D-22
Dependence on Key Personnel .............. D-22
Potential Conflicts of Interest .......... D-23
Indemnification Arrangements ............. D-24
Seasonality .............................. D-24
Competition .............................. D-25
Regulatory Matters ....................... D-25
Environmental Matters .................... D-25
Fraudulent Conveyance .................... D-25
Anti-Takeover Effects .................... D-26
OVERVIEW OF THE LIVE ENTERTAINMENT INDUSTRY D-27
Concert Promotion Industry ............... D-27
Theatrical Industry ...................... D-27
Motor Sports Industry .................... D-28
BUSINESS .................................. D-29
General .................................. D-29
Current and Historical Operations ........ D-29
SFX Entertainment's Live Entertainment
Activities .............................. D-30
Operating Strategy ....................... D-37
Pending Acquisitions ..................... D-39
Properties ............................... D-43
Employees ................................ D-44
Litigation ............................... D-44
Potential Conflicts of Interest .......... D-44
Seasonality .............................. D-45
Competition .............................. D-45
Regulatory Matters ....................... D-45
Forward-Looking Statements ............... D-45
THE SPIN-OFF .............................. D-47
Background and Reasons for the Spin-Off .. D-47
Manner of Effecting the Spin-Off ......... D-48
Regulatory Matters ....................... D-49
AGREEMENTS BETWEEN SFX ENTERTAINMENT AND
SFX ...................................... D-50
Distribution Agreement ................... D-50
Tax Sharing Agreement .................... D-55
Employee Benefits Agreement .............. D-56
CERTAIN FEDERAL INCOME TAX CONSEQUENCES ... D-57
AGREEMENTS RELATED TO THE PENDING
ACQUISITIONS ............................. D-59
PACE Acquisition ......................... D-59
Contemporary Acquisition ................. D-66
BGP Acquisition .......................... D-70
Network Acquisition ...................... D-72
Concert/Southern Acquisition ............. D-74
D-2
<PAGE>
PAGE
---------
LISTING AND TRADING OF SFX ENTERTAINMENT
CLASS A COMMON STOCK ..................... D-77
DIVIDEND POLICY ........................... D-77
CAPITALIZATION ............................ D-78
UNAUDITED PRO FORMA CONDENSED COMBINED
FINANCIAL STATEMENTS ..................... D-80
SELECTED CONSOLIDATED FINANCIAL DATA OF
SFX ENTERTAINMENT ........................ D-101
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF
OPERATIONS ............................... D-103
Recent Acquisitions ...................... D-104
Pending Acquisitions ..................... D-104
Spin-Off and SFX Merger .................. D-106
Results of Operations .................... D-107
Historical Results ....................... D-109
Liquidity and Capital Resources .......... D-111
MANAGEMENT ................................ D-118
Directors and Executive Officers ......... D-118
Executive Compensation ................... D-122
Employment Agreements and Arrangements
with Certain Officers and Directors ..... D-122
PRINCIPAL STOCKHOLDERS OF SFX ENTERTAINMENT D-124
Possible Change in Control ............... D-126
CERTAIN RELATIONSHIPS AND RELATED
TRANSACTIONS ............................. D-127
Agreements with SFX ...................... D-127
SFX Entertainment Common Stock to Be
Received in the Spin-Off ................ D-127
Issuance of Stock to Holders of SFX's
Options and SARs ........................ D-127
Employment Agreements .................... D-127
Delsener/Slater Employment Agreements .... D-128
Assumption of Employment Agreements;
Certain Change of Control Payments ...... D-129
Indemnification of Mr. Sillerman ......... D-129
Potential Conflicts of Interest .......... D-129
Relationship Between Howard J. Tytel and
Baker & McKenzie ........................ D-130
Arrangement Between Robert F.X. Sillerman
and Howard J. Tytel ..................... D-130
Triathlon Fees ........................... D-130
Relationships and Transactions with SFX .. D-130
SHARES ELIGIBLE FOR FUTURE SALE ........... D-131
DESCRIPTION OF CAPITAL STOCK .............. D-132
Common Stock ............................. D-132
Preferred Stock .......................... D-134
Warrants and Other Securities of SFX ..... D-134
DESCRIPTION OF INDEBTEDNESS ............... D-136
Notes .................................... D-136
Proposed Credit Facility ................. D-137
Other Debt ............................... D-140
ADDITIONAL INFORMATION .................... D-141
LEGAL MATTERS ............................. D-141
EXPERTS ................................... D-141
INDEX TO DEFINED TERMS .................... D-143
INDEX TO FINANCIAL STATEMENTS ............. D-F-1
</TABLE>
D-3
<PAGE>
SUMMARY
The following is a summary of the information contained elsewhere in this
Prospectus. This summary does not purport to be complete and is qualified in
its entirety by, and is subject to, the more detailed information and
financial statements, including the notes thereto, set forth in this
Prospectus. Unless otherwise indicated, all information in this Prospectus
assumes consummation of (a) the Spin-Off (including recapitalizing SFX
Entertainment to increase its authorized capital stock and to increase the
number of shares of SFX Entertainment Common Stock outstanding) and the SFX
Merger described in "The Spin-Off" and in the accompanying Proxy Statement
and (b) the entering into and borrowing under the Proposed Credit Facility as
described in "Management's Discussion and Analysis of Financial Condition and
Results of Operations--Liquidity and Capital Resources." However, there can
be no assurance that any or all of these transactions will be consummated on
the terms described herein or at all. This Prospectus is Annex D to the Proxy
Statement. PLEASE READ THIS PROSPECTUS AND THE PROXY STATEMENT CAREFULLY IN
THEIR ENTIRETIES.
SFX ENTERTAINMENT
SFX Entertainment, Inc. is a leading promoter of, and operator of venues
for, live entertainment events, including music concerts. Upon acquisition of
the businesses to be acquired in the Pending Acquisitions (the "Acquisition
Businesses"), management believes that SFX Entertainment will be the largest
diversified promoter and producer of live entertainment, including music
concerts, theatrical shows and specialized motor sports events. After
consummation of the Pending Acquisitions, SFX Entertainment (which currently
owns or operates 20 venues) believes that it will own and/or operate the
largest network of venues used principally for music concerts and other live
entertainment events in the United States, with 39 venues either directly
owned or operated under lease or exclusive booking arrangements in 21 of the
top 50 markets, including 9 amphitheaters in 6 of the top 10 markets. Through
its large number of venues, its strong market presence and the long operating
histories of SFX Entertainment and the businesses to be acquired pursuant to
the Pending Acquisitions, SFX Entertainment will operate an integrated
franchise that will promote and produce a broad variety of live entertainment
events locally, regionally and nationally. During 1997, approximately 1.4
million people attended approximately 210 events promoted and/or produced by
SFX Entertainment, including approximately 200 music concerts. During the
same year, approximately 25 million people attended 9,100 events promoted
and/or produced by SFX Entertainment and the Acquisition Businesses,
including approximately 3,880 music concerts, 4,850 theatrical shows and 188
specialized motor sports events. These events included: (a) music concerts
featuring artists such as The Rolling Stones, Phish, Fleetwood Mac, Ozzy
Osbourne and Alanis Morissette, (b) music festivals such as Lollapalooza and
the George Strait Country Music Festival, (c) touring theatrical productions
such as The Phantom of the Opera, Jekyll & Hyde, Rent and The Magic of David
Copperfield, and (d) specialized motor sports events, such as Truck Fest and
American Motorcycle Association Supercross racing events.
SFX Entertainment's core business is the promotion and production of live
entertainment events, most significantly for concert and other music
performances in venues owned and/or operated by SFX Entertainment and in
third-party venues. As promoter, SFX Entertainment typically markets events
and tours, sells tickets, rents or otherwise provides event venues and
arranges for local production services (such as stage, set, sound and
lighting). As producer, SFX Entertainment, upon consummation of the Pending
Acquisitions, will (a) create tours for music concert, theatrical,
specialized motor sports and other events, (b) develop and manage
Broadway-style touring theatrical shows ("Touring Broadway Shows") and (c)
develop specialized motor sports and other live entertainment events. In
connection with its live entertainment events, SFX Entertainment also derives
related revenue streams, including from the sale of corporate sponsorships
and advertising, the sale of concessions and the merchandising of a broad
range of products. On a pro forma basis giving effect to the Pending
Acquisitions, SFX Entertainment's music and ancillary businesses would have
comprised approximately 77%, theater would have comprised approximately 17%
and specialized motor sports would have comprised approximately 6% of SFX
Entertainment's total net revenues for the 12 months ended September 30,
1997.
D-4
<PAGE>
SFX Entertainment currently owns and/or operates under lease or exclusive
booking arrangement a total of 20 venues, including two amphitheaters and two
theaters in the New York--Northern New Jersey--Long Island market; an
amphitheater and a theater/ballroom in the Indianapolis market; an
amphitheater in the Columbus market; an amphitheater in the Hartford market;
and an amphitheater in the Rochester market. SFX Entertainment believes that,
upon consumation of the Pending Acquisitions, it will own and/or operate the
largest number of venues in the United States used principally for music
concerts and other live entertainment events. The following table summarizes
the amphitheaters, theaters and other venues to be owned and/or operated
under lease or exclusive booking arrangement by SFX Entertainment on a pro
forma basis after giving effect to the Pending Acquisitions. There can be no
assurance that any or all of the Pending Acquisitions will be consummated on
the terms described in this Prospectus or at all. See "Risk Factors--Risks
Related to the Pending Acquisitions" and "Business--Pending Acquisitions."
<TABLE>
<CAPTION>
NUMBER OF TOTAL
MARKET NUMBER OF THEATERS AND TOTAL SEATING
MARKET RANK(1)AMPHITHEATERS(2) CLUBS(2) VENUES(2) CAPACITY
- ------------------------------ -------- -------------- ------------------- --------- ---------------
<S> <C> <C> <C> <C> <C>
New York--Northern New
Jersey--Long Island........... 1 2 2 4 37,570
Los Angeles--Riverside--
Orange County................. 2 2 -- 2 40,500(3)
San Francisco--Oakland--San
Jose.......................... 5 2 4 6 49,499(4)
Philadelphia--Wilmington--
Atlantic City................. 6 1 -- 1 25,000
Dallas--Fort Worth............. 9 1 -- 1 20,100
Houston--Galveston--Brazoria .. 10 1 1 2 15,800
Atlanta........................ 12 2 2 4 28,250
St. Louis...................... 17 1 2 3 24,100
Phoenix--Mesa.................. 18 1 -- 1 20,000
Pittsburgh..................... 19 1 -- 1 22,500
Kansas City.................... 24 1 2 3 30,000
Sacramento--Yolo............... 26 -- 1 1 N/A(4)
Indianapolis................... 28 1 1 2 23,700
Columbus....................... 30 1 -- 1 20,000
Charlotte--Gastonia--Rock
Hill.......................... 32 1 -- 1 18,000
Hartford....................... 36 1 -- 1 25,000
Rochester...................... 39 1 -- 1 12,700
Nashville...................... 41 1 -- 1 20,100
Oklahoma City.................. 43 1 -- 1 9,000
Raleigh--Durham--Chapel Hill .. 47 1 -- 1 20,000
West Palm Beach--Boca Raton ... 50 1 -- 1 20,000
Reno........................... 119 1 -- 1 8,500
-------------- ------------------- --------- ---------------
Total......................... 25 15 40 490,319(3),(4)
</TABLE>
- ------------
(1) Based on the July 1994 population of metropolitan statistical areas as
set forth in the 1996 Statistical Abstracts of the United States.
(2) Does not include venues in the 31 markets where PACE sells
subscriptions for Touring Broadway Shows. See "Business--SFX
Entertainment's Live Entertainment Activities--Production."
(3) Additional seating of approximately 40,000 is available for certain
events.
(4) Club seating, which cannot be accurately determined because clubs
typically have either open or reserved seating for any given event, is
not reflected.
D-5
<PAGE>
SFX Entertainment was formed as a subsidiary of SFX in 1997. SFX acquired
Delsener/Slater Enterprises, Ltd. ("Delsener/Slater"), a New York-based
concert promotion company, in January 1997. Delsener/Slater has long-term
leases or is the exclusive promoter for several of the major concert venues
in the New York City metropolitan area, including the Jones Beach
Amphitheater, a 14,000-seat complex located in Wantagh, New York, and the PNC
Bank Arts Center (formerly known as the Garden State Arts Center), a
17,500-seat complex located in Holmdel, New Jersey. In March 1997,
Delsener/Slater acquired a 37-year lease to operate the Meadows Music
Theater, a 25,000-seat indoor/outdoor complex located in Hartford,
Connecticut. In June 1997, SFX acquired Sunshine Promotions, Inc., a concert
promoter in the Midwest, and certain other related companies ("Sunshine
Promotions" and, together with the acquisitions of Delsener/Slater and the
Meadows Music Theater lease, the "Recent Acquisitions"). As a result of the
acquisition of Sunshine Promotions, SFX Entertainment owns the Deer Creek
Music Theater, a 21,000-seat complex located in Indianapolis, Indiana, and
the Polaris Amphitheater, a 20,000-seat complex located in Columbus, Ohio,
and has a long-term lease to operate the Murat Centre, a 2,700-seat theater
and 2,200-seat ballroom located in Indianapolis, Indiana.
In December 1997, SFX Entertainment agreed to consummate the Pending
Acquisitions, consisting of the acquisition of the operations of PACE and
Pavilion Partners (the "PACE Acquisition"), Contemporary (the "Contemporary
Acquisition"), BG Presents, Inc. (the "BGP Acquisition"), Network (the
"Network Acquisition") and Concert/Southern (the "Concert/Southern
Acquisition"). The aggregate purchase price of the Pending Acquisitions is
expected to be approximately $484.3 million, consisting of approximately
$352.8 million in cash, $75.3 million in repaid debt and the issuance of
approximately 4.2 million shares of SFX Entertainment Common Stock
(approximately 21% of the outstanding shares of SFX Entertainment Common
Stock, after the Spin-Off and other issuances described in this Prospectus)
with an attributed negotiated value of $56.2 million. There can be no
assurance that the value attributed by the parties to SFX Entertainment's
capital stock will approximate the actual trading price of the stock. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Liquidity and Capital Resources."
SFX Entertainment intends to finance the Pending Acquisitions through the
Financing, consisting of the Notes and borrowings under the Proposed Credit
Facility. SFX Entertainment has received commitments from a group of lenders
for the Proposed Credit Facility, and expects to enter into the definitive
agreement with respect to the facility before consummating the Pending
Acquisitions (other than the PACE Acquisition). Under the expected terms of
the Proposed Credit Facility, the maximum amount of funding available on a
pro forma basis for the twelve months ended September 30, 1997 would have
been approximately $175.0 million. This amount, plus the net proceeds from
the proposed sale of debt securities, would be sufficient to (i) consummate
the Pending Acquisitions (approximately $428.1 million), (ii) pay certain
fees and expenses related to the Spin-Off, the Pending Acquisitions, the
Financing and certain consents related thereto (approximately $40.5 million),
(iii) fund certain planned capital expenditures (approximately $39.0
million), (iv) make various other payments in connection with the Pending
Acquisitions, certain change-of-control provisions contained in the
employment agreeements being assumed by SFX Entertainment and the exercise of
an option to acquire an office building and related property from Network
(approximately $12.7 million). However, pursuant to the expected terms of the
Proposed Credit Facility, pro forma for the twelve months ended September 30,
1997, the maximum amount of borrowing availability under the facility would
have been insufficient to fund the approximately $8.3 million payable in
connection with the Meadows Repurchase (as defined herein) or to make certain
contingent payments which may arise, as more fully described below. While SFX
Entertainment believes that expected improvements in its cash flows will
permit it to borrow sufficient funds under the Proposed Credit Facility to
fund the Meadows Repurchase, there can be no assurance that SFX Entertainment
will be able to achieve such increased cash flow levels, or that other
available sources of financing will be available under terms acceptable to
SFX Entertainment or permitted under the terms of SFX Entertainment's
applicable debt instruments or that certain contingent amounts will not
become payable. See "Risk Factors--Risk Related to the Pending
Acquisitions--Financing Matters" and "--Working Capital Adjustments and
Repayment of Advances" and "Description of Indebtedness." In addition, the
information relating to fees and expenses is based on management's estimates,
and may not be indicative of, and are likely to vary from, the actual fees
and expenses incurred by SFX Entertainment relating to the Financing, the
Pending Acquisitions, the Spin-Off and the SFX Merger.
D-6
<PAGE>
Certain agreements of SFX Entertainment, including the Distribution
Agreement, the Tax Sharing Agreement, certain employment agreements and the
agreements relating to the Pending Acquisitions provide for tax and other
indemnities, purchase price adjustments and future contingent payments in
certain circumstances, including an increase in the cash purchase price for
the Pending Acquisitions if SFX Entertainment is unable to issue shares of
its capital stock to certain of the sellers and, in the case of the PACE
Acquisition, a potential requirement to advance to PACE up to $25.0 million
pursuant to an acquisition facility, and certain other cash payments, in each
case which could be material. These obligations of SFX Entertainment,
contingent or otherwise, will reduce Working Capital should they become
payable, and there can be no assurance that SFX Entertainment will have
sufficient sources of liquidity at the time of any such payments to satisfy
such obligations. See "Risk Factors--Risks Related to Pending Acquisitions,"
"Management's Discussion and Analysis of Financing Condition and Results of
Operations--Pending Acquisitions," "--Liquidity and Capital
Resources--Pending Acquisitions," "Agreements Related to the Pending
Acquisitions," "Certain Relationships and Related
Transactions--Indemnification of Mr. Sillerman" and "Agreements Between SFX
Entertainment and SFX--Distribution Agreement" and "--Tax Sharing Agreement."
SFX Entertainment may also be responsible for certain other payments in
connection with, and to be made contemporaneously with or prior to, the
consummation of the SFX Merger and/or the Spin-Off, including approximately
$8.3 million payable in connection with the Meadows Repurchase and the amount
of any shortfall in Working Capital. See "Risk Factors--Working Capital
Adjustments and Repayment of Advances" and "Management's Discussion and
Analysis of Financial Condition and Results of Operations--Liquidity and
Capital Resources."
On a pro forma basis, as of September 30, 1997 and for the nine months
then ended, the Pending Acquisitions represented 83% of SFX Entertainment's
revenues, 82% of assets and 29% of stockholders' equity. SFX Entertainment
anticipates consummating the Pending Acquisitions in the first quarter of
1998. However, the timing and completion of the Pending Acquisitions are
subject to a number of conditions, certain of which are beyond SFX
Entertainment's control (including availability of sufficient financing) and
there can be no assurance that any Pending Acquisitions will be consummated
during that period, on the terms described herein, or at all. See "Risk
Factors--Risks Related to Pending Acquisitions" and "Agreements Related to
the Pending Acquisitions."
The address and telephone number of SFX Entertainment's principal
executive offices are: 650 Madison Avenue, 16th Floor, New York, New York
10022; (212) 838-3100.
OVERVIEW OF THE SPIN-OFF AND THE SFX MERGER
In August 1997, SFX entered into the SFX Merger Agreement among SFX Buyer,
a wholly-owned subsidiary of SFX Buyer ("SFX Buyer Sub") and SFX. On the
terms and subject to the conditions set forth in the SFX Merger Agreement,
SFX will be merged with SFX Buyer Sub, with SFX surviving the SFX Merger and
becoming a wholly-owned subsidiary of SFX Buyer. As a waivable condition to
and in order to facilitate the SFX Merger, SFX has agreed to effect the
Spin-Off (or an alternative transaction to dispose of SFX Entertainment)
prior to consummation of the Merger. The Spin-Off will separate the
Entertainment Business from SFX's radio broadcasting business and will enable
SFX Buyer to acquire only SFX's radio broadcasting business in the SFX
Merger. It will also allow SFX's stockholders to continue their equity
participation in the Entertainment Business.
On February 10, 1998, SFX obtained consents under the indenture governing
certain of its notes and the Certificate of Designations of its Series E
preferred stock that were required to consummate the Spin-Off and to permit
SFX Entertainment to consummate the Financing. On January 7, 1998, SFX sent
to holders of certain of its securities (including its common stock) an
information statement (and on January 28, 1998, SFX sent those holders a
supplement to the information statement), which contained information
relevant to those holders with respect to the granting of consents.
At or prior to the Spin-Off, pursuant to the Distribution Agreement, SFX
will contribute to SFX Entertainment all of its assets relating to the
Entertainment Business. Immediately after the Spin-Off, SFX will pay to SFX
Entertainment an allocation of working capital in an amount estimated by
SFX's
D-7
<PAGE>
management to be consistent with the proper operation of SFX Entertainment,
and SFX Entertainment will assume all of SFX's liabilities related to the
Entertainment Business, as well as certain other liabilities. At the time of
the SFX Merger, SFX will contribute its positive Working Capital to SFX
Entertainment. If Working Capital is negative, SFX Entertainment must pay the
amount of the shortfall to SFX. As of September 30, 1997, SFX Entertainment
estimates that Working Capital to be received by SFX Entertainment would have
been approximately $2.1 million (excluding the Series E Adjustment, as defined
herein), and that approximately $135.5 million of additional assets and
$34.1 million of liabilities would have been contributed to SFX Entertainment.
The actual amount of Working Capital as of the closing of the SFX Merger may
differ substantially from the amount as of September 30, 1997, and will be a
function of, among other things, the operating results of SFX through the
date of the SFX Merger, the actual cost of consummating the SFX Merger and
the related transactions and other obligations of SFX, including the payment
of dividends and interest on SFX's debt. SFX is also likely to incur
significant expenses that will reduce Working Capital, including
approximately $8.3 million payable in connection with the Meadows Repurchase.
Working Capital will also be reduced by at least $2.1 million pursuant to the
Series E Adjustment. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations--Liquidity and Capital Resources." In
addition, at the time of the Spin-Off, SFX Entertainment must repay sums
advanced to SFX Entertainment by SFX for certain acquisitions or capital
expenditures subsequent to the date of the SFX Merger Agreement and which
have not been repaid. As of January 31, 1998, SFX had advanced approximately
$8.0 million to SFX Entertainment for use in connection with certain
acquisitions and capital expenditures. SFX Entertainment intends to repay
these amounts from the proceeds of the private placement of Notes or
borrowings under the Proposed Credit Facility. SFX may advance additional
amounts to SFX Entertainment for these purposes before the consummation of
the Spin-Off. See "The Spin-Off," "Agreements Between SFX Entertainment and
SFX" and "Management's Discussion and Analysis of Financial Condition and
Results of Operations--Liquidity and Capital Resources."
In the Spin-Off, shares of SFX Entertainment Common Stock will be
distributed pro rata to holders on the Spin-Off Record Date of SFX's Class A
common stock, Class B common stock, Series D preferred stock and interests in
SFX's director deferred stock ownership plan, and the remaining shares will
be placed in escrow to be issued upon the exercise of certain warrants of
SFX. Pursuant to the SFX Merger Agreement, when the SFX Merger is
consummated, each outstanding share (except for shares of holders who
exercise dissenters' appraisal rights) of SFX's (a) Class A common stock will
convert into the right to receive $75.00 (subject to increase under certain
circumstances), (b) Class B common stock will convert into the right to
receive $97.50 (subject to increase under certain circumstances), (c) Series
D preferred stock will convert into the right to receive $82.40 (subject to
increase or decrease under certain circumstances) and (d) Series C preferred
stock will convert into the right to receive $1,000.00 plus any accrued but
unpaid dividends, as described under "The Merger Agreement--The Merger" in
the attached Proxy Statement.
THE SPIN-OFF
The following is a brief summary of certain terms of the Spin-Off. The
Spin-Off and the Distribution Agreement are more fully described under "The
Spin-Off" and "Agreements Between SFX Entertainment and SFX," and a form of
the Distribution Agreement is attached as Annex F to the attached Proxy
Statement.
DISTRIBUTING COMPANY .......... SFX. References to SFX include its
subsidiaries, except where the context
otherwise requires.
DISTRIBUTED COMPANY ........... SFX Entertainment, which will hold the
assets and be responsible for the
liabilities of SFX relating to the
Entertainment Business, as well as certain
other liabilities. In connection with the
SFX Merger, SFX Entertainment will be
required to make or entitled to receive
certain payments of Working Capital of SFX.
References to SFX Entertainment include its
subsidiaries
D-8
<PAGE>
and assume completion of the transfer of
assets and liabilities, except where the
context otherwise requires. See "Business"
and "The Spin-Off."
SHARES TO BE ISSUED IN THE
PENDING ACQUISITIONS ........ 4,216,680 shares of SFX Entertainment Class
A Common Stock.(1)
SHARES TO BE DISTRIBUTED IN THE
SPIN-OFF ..................... Approximately 14,200,000 shares of SFX
Entertainment Class A Common Stock and
1,047,037 shares of SFX Entertainment Class
B Common Stock.(2)
CONDITIONS TO THE SPIN-OFF .... Stockholder approval of Proposal 3 in the
accompanying Proxy Statement; acceptance for
listing or trading of SFX Entertainment
Class A Common Stock; receipt of all
necessary third-party and stockholder
consents; and others. The Spin-Off is not
conditioned on the entry into the Proposed
Credit Facility or the prior consummation of
any of the Pending Acquisitions or the SFX
Merger. Management believes that it will
consummate the Spin-Off early in the second
quarter of 1998, although there can be no
assurance that the Spin-Off will be
consummated during that time period, on the
terms described herein or at all. See
"Agreements Between SFX Entertainment and
SFX--Distribution Agreement--Conditions to
the Spin-Off."
DISTRIBUTION RATIO TO SFX
STOCKHOLDERS ................. For each share owned on the Spin-Off Record
Date of: (a) SFX's Class A common stock, 1
share of SFX Entertainment Class A Common
Stock; (b) SFX's Class B common stock, 1
share of SFX Entertainment Class B Common
Stock; and (c) SFX's Series D preferred
stock, approximately 1.0987 shares of SFX
Entertainment Class A Common Stock, rounded
down to the nearest whole number for each
holder. In addition, participants in SFX's
director deferred stock ownership plan will
receive 1 share of SFX Entertainment Class A
Common Stock per share of SFX's Class A
common stock credited to their accounts.
Shares of SFX Entertainment Class A Common
Stock will also be placed in escrow for
issuance upon exercise of certain warrants
of SFX. See "The Spin-Off--Manner of
Effecting the Spin-Off."
- ------------
(1) If SFX Entertainment is unable to issue these shares of its capital
stock in certain of the Pending Acquisitions, then the cash portion of
the purchase price in those acquisitions will increase. See "Risk
Factors--Risks Related to the Pending Acquisitions," "Agreements
Related to the Pending Acquisitions" and "Management's Discussion and
Analysis of Financial Condition and Results of Operations--Liquidity
and Capital Resources."
(2) Assumes that all presently outstanding and exercisable options and
warrants of SFX are exercised prior to the Spin-Off Record Date.
Includes the issuance of (i) 793,633 shares of SFX Entertainment Class
A Common Stock upon the exercise of options under SFX's option plans,
(ii) 804,384 shares of SFX Entertainment Class A Common Stock upon the
exercise of certain warrants of SFX and (iii) 2,766 shares issuable
pursuant to SFX's director deferred stock ownership plan. See "The
Spin-Off--Manner of Effecting the Spin-Off." Does not include shares
anticipated to be issued in the Pending Acquisitions and pursuant to
certain employment agreements after the Spin-Off. See "Agreements
Related to the Pending Acquisitions" and"Management--Employment
Agreements and Arrangements with Certain Officers and Directors."
D-9
<PAGE>
FEDERAL INCOME TAX
CONSEQUENCES ................. The receipt of stock of SFX Entertainment in
the Spin-Off will be a taxable event for the
stockholder for U.S. federal income tax
purposes and may also be taxable events
under applicable local, state and foreign
tax laws. See "Certain Federal Income Tax
Consequences."
TRADING MARKET ................ There is currently no public market for SFX
Entertainment Class A Common Stock. SFX
Entertainment has applied to list the SFX
Entertainment Class A Common Stock on the
Nasdaq National Market but may seek listing
on an exchange. See "Listing and Trading of
SFX Entertainment Class A Common Stock."
ASSETS AND LIABILITIES OF SFX
ENTERTAINMENT ................ SFX will transfer to SFX Entertainment all
of its assets relating to the Entertainment
Business, and SFX Entertainment will assume
all of SFX's Entertainment Business
liabilities, as well as certain other
liabilities. SFX Entertainment will also
hold the assets and liabilities purchased in
the Pending Acquisitions, and will have
consummated the Financing, consisting of the
recent private placement of $350.0 million of
Notes and anticipated borrowings under the
Proposed Credit Facility. See "Business,"
"The Spin-Off," "Agreements Between SFX
Entertainment and SFX," "Agreements Related
to the Pending Acquisitions," "Management's
Discussion and Analysis of Financial Condition
and Results of Operations" and "Description of
Indebtedness."
WORKING CAPITAL ............... At the time of the SFX Merger, SFX will pay
to SFX Entertainment any positive Working
Capital; if Working Capital is negative, SFX
Entertainment must pay the amount of the
shortfall to SFX. As of September 30, 1997,
SFX Entertainment estimates that Working
Capital payable by SFX to SFX Entertainment
would have been approximately $2.1 million
(excluding the Series E Adjustment), and
that approximately $135.5 million of
additional assets and $34.1 million of
liabilities would have been apportioned to
SFX Entertainment. However, certain
transactions contemplated by SFX may
significantly reduce Working Capital. See
"Risk Factors--Working Capital Adjustments
and Repayment of Advances," "The Spin-Off,"
"Agreements Between SFX Entertainment and
SFX," "Agreements Related to the Pending
Acquisitions" and "Management's Discussion and
Analysis of Financial Condition and Results of
Operations--Liquidity and Capital Resources."
EFFECT OF THE SPIN-OFF ........ SFX will deliver to Chase Mellon Shareholder
Services, L.L.C., as the distribution agent
(the "Distribution Agent") and as escrow
agent (the "Escrow Agent"), shares of SFX
Entertainment Class A Common Stock
representing all of the outstanding shares
of SFX Entertainment Class A Common Stock
and SFX Entertainment Class B Common Stock.
The Distribution Agent will distribute
shares of SFX Entertainment Class A Common
Stock to the holders of SFX's Class A common
stock, Series D preferred stock and
interests in SFX's director de-
D-10
<PAGE>
ferred stock ownership plan, and will
distribute shares of SFX Entertainment Class
B Common Stock to the holders of SFX's Class
B common stock, in each case to the holders
as of the close of business on the Spin-Off
Record Date. Holders of certain warrants of
SFX who exercise their warrants after the
Spin-Off Record Date will be entitled to
receive from the Escrow Agent shares of SFX
Entertainment Class A Common Stock, in
addition to stock of SFX or cash in lieu
thereof. See "The Spin-Off--Manner of
Effecting the Spin-Off."
RELATIONSHIP WITH SFX AFTER THE
SPIN-OFF ..................... After the Spin-Off, SFX Entertainment and
SFX will be separate companies. However,
until the consummation of the SFX Merger,
they will share their boards of directors,
senior management and administrative
functions. SFX Entertainment and SFX have
agreed to indemnify each other after the
Spin-Off for liabilities arising from
various matters, including from the other
company's assets and operations. SFX
Entertainment may also be responsible for
certain taxes resulting from the Spin-Off.
See "Agreements Between SFX Entertainment
and SFX" and "Management."
SPIN-OFF RECORD DATE .......... It is expected that the Spin-Off Record Date
will be established on a date subsequent to
March 26, 1998 (the date of SFX's
stockholder meeting), but no later than the
date of consummation of the SFX Merger.
However, there can be no assurance that the
Spin-Off will occur.
DATE OF THE SPIN-OFF .......... If the conditions to the Spin-Off set forth
in the Distribution Agreement are fulfilled
or waived, the Spin-Off will be effected on
a date to be determined by the board of
directors of SFX, which, in any event, will
be before the closing of the SFX Merger.
DISTRIBUTION AGENT, TRANSFER
AGENT AND REGISTRAR .......... Chase Mellon Shareholder Services, L.L.C.
RISK FACTORS .................. Stockholders should carefully review the
matters discussed under the section titled
"Risk Factors" in this Prospectus.
D-11
<PAGE>
SUMMARY CONSOLIDATED FINANCIAL DATA OF SFX ENTERTAINMENT
(in thousands, except per share amounts)
The Summary Consolidated Financial Data of SFX Entertainment includes the
historical financial statements of Delsener/Slater and affiliated companies,
the predecessor of SFX Entertainment, for each of the five years ended
December 31, 1996 and the nine months ended September 30, 1996, and the
historical financial statements of SFX Entertainment for the nine months
ended September 30, 1997. The statement of operations data with respect to
Delsener/Slater for the years ended December 31, 1992 and 1993, and the
balance sheet data as of December 31, 1993 and 1994 is unaudited. The
financial information presented below should be read in conjunction with the
information set forth in "Unaudited Pro Forma Condensed Combined Financial
Statements" and the notes thereto and the historical financial statements and
the notes thereto of SFX Entertainment, the Recent Acquisitions and the
Pending Acquisitions included herein. The financial information has been
derived from the audited and unaudited financial statements of SFX
Entertainment, the Recent Acquisitions and the Pending Acquisitions. The pro
forma summary data as of September 30, 1997 and for the year ended December
31, 1996 and the nine months ended September 30, 1997 are derived from the
unaudited pro forma condensed combined financial statements, which, in the
opinion of management, reflect all adjustments necessary for a fair
presentation of the transactions for which such pro forma financial
information is given. Operating results for the nine months ended September
30, 1997 are not necessarily indicative of the results that may be achieved
for the fiscal year ending December 31, 1997.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------------------------------------
PREDECESSOR (ACTUAL) 1996 (1)
---------------------------------------------------- PRO FORMA
1992 1993 1994 1995 1996 (UNAUDITED)
--------- --------- --------- --------- --------- -----------
<S> <C> <C> <C> <C> <C> <C>
STATEMENT OF
OPERATIONS DATA:
Revenue................ $38,017 $46,526 $92,785 $47,566 $50,362 $552,365
Operating expenses .... 36,631 45,635 90,598 47,178 50,687 505,537
Depreciation &
amortization.......... 758 762 755 750 747 37,795
Corporate
expenses (2).......... -- -- -- -- -- 3,000
--------- --------- --------- --------- --------- -----------
Operating income
(loss)................ 628 129 1,432 (362) (1,072) 6,033
Interest expense....... (171) (148) (144) (144) (60) (44,307)
Other income, net .... 74 85 138 178 198 1,832
Equity income (loss)
from investments ..... -- -- (9) 488 525 3,402
--------- --------- --------- --------- --------- -----------
Income (loss) before
income taxes.......... 531 66 1,417 160 (409) (33,040)
Income tax (provision)
benefit............... (32) (57) (5) (13) (106) (1,500)
--------- --------- --------- --------- --------- -----------
Net income (loss)...... $ 499 $ 9 $ 1,412 $ 147 $ (515) (34,540)
========= ========= ========= ========= =========
Accretion on temporary
equity (3)............ (3,300)
Net loss applicable to -----------
common shares ........
Net loss $(37,840)
==========
per common share...... $ (1.90)
Weighted average ===========
common shares
outstanding (4).......
OTHER OPERATING DATA:
EBITDA (5)............. $ -- $ -- $ 2,187 $ 388 $ (325) 20,400
========= ========= ========= ========= ========= ===========
Cash flow from:
Operating activities . $ -- $ -- $ 2,959 $ (453) $ 4,214 $ 43,828
Investing activities . -- -- 0 0 (435) $ --
Financing activities . -- -- (477) (216) (1,431) --
Ratio of earnings to
fixed charges (6)..... 4.1x 1.4x 11.3x 2.1x -- --
</TABLE>
(RESTUBBED TABLE CONTINUED FROM ABOVE)
<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30,
--------------------------------------
PREDECESSOR
-------------
1997 (1)
1996 1997 PRO FORMA
ACTUAL ACTUAL (UNAUDITED)
------------- ---------- -----------
<S> <C> <C> <C>
STATEMENT OF
OPERATIONS DATA:
Revenue................ $41,609 $74,396 $500,843
Operating expenses .... 42,930 63,045 440,266
Depreciation &
amortization.......... 744 4,041 28,378
Corporate
expenses (2).......... -- 1,307 2,807
------------- ---------- -----------
Operating income
(loss)................ (2,065) 6,003 29,392
Interest expense....... (60) (956) (33,186)
Other income, net .... 143 213 779
Equity income (loss)
from investments ..... 525 1,344 5,653
------------- ---------- -----------
Income (loss) before
income taxes.......... (1,457) 6,604 2,638
Income tax (provision)
benefit............... (80) (2,952) (3,500)
------------- ---------- -----------
Net income (loss)...... $(1,537) $ 3,652 (862)
============= ==========
Accretion on temporary
equity (3)............ (2,475)
-----------
Net loss applicable to
common shares ........ $ (3,337)
===========
Net loss
per common share...... $ (.17)
===========
Weighted average
common shares
outstanding (4)....... 20,400
===========
OTHER OPERATING DATA:
EBITDA (5)............. $(1,321) $10,044 $ 57,770
============= ========= ===========
Cash flow from:
Operating activities . $2,761 $ 789 $ --
Investing activities . 0 (71,997) --
Financing activities . 684 78,302 --
Ratio of earnings to
fixed charges (6)..... -- 8.4x 1.0x
</TABLE>
D-12
<PAGE>
SUMMARY CONSOLIDATED FINANCIAL DATA OF SFX ENTERTAINMENT
(in thousands)
BALANCE SHEET DATA(7):
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------------------
PREDECESSOR (ACTUAL)
-------------------------------------
1993 1994 1995 1996
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Current assets.............. $1,823 $4,453 $3,022 $6,191
Property and equipment,
net........................ 4,484 3,728 2,978 2,231
Intangible assets, net ..... -- -- -- --
Total assets................ 6,420 8,222 6,037 8,879
Current liabilities......... 4,356 3,423 3,138 7,973
Long-term debt, including
current portion............ -- 1,830 -- --
Temporary equity(3)......... -- -- -- --
Stockholders' equity........ 6,420 2,969 2,900 907
</TABLE>
(RESTUBBED TABLE CONTINUED FROM ABOVE)
<TABLE>
<CAPTION>
SEPTEMBER 30, 1997
-----------------------
PRO FORMA
ACTUAL (UNAUDITED)(8)
--------- --------------
<S> <C> <C>
Current assets.............. $ 12,189 $117,326
Property and equipment,
net........................ 55,882 185,371
Intangible assets, net ..... 59,721 429.060
Total assets................ 135,470 773,614
Current liabilities......... 11,333 89,619
Long-term debt, including
current portion............ 16,453 498,822
Temporary equity(3)......... -- 16,500
Stockholders' equity........ 101,378 143,223(9)
</TABLE>
- ------------
(1) The Unaudited Pro Forma Statement of Operations Data for the year ended
December 31, 1996 and the nine months ended September 30, 1997 are
presented as if SFX Entertainment had completed the Recent
Acquisitions, the Financing, the Pending Acquisitions, the Spin-Off and
the SFX Merger as of January 1, 1996. There can be no assurance that
any of the Financing, the Pending Acquisitions, the Spin-Off and the
SFX Merger will be consummated on the terms assumed in preparing such
pro forma data or at all. See "Risk Factors--Risks Related to Pending
Acquisitions."
(2) Pro forma corporate expenses are reduced by $3,000,000 and $1,693,000
for fees earned from Triathlon Broadcasting Company ("Triathlon") for
the year ended December 31, 1996 and for the nine months ended
September 30, 1997, respectively. The right to receive such fees in the
future is to be assigned to SFX Entertainment by SFX in connection with
the Spin-Off. Future fees may vary, above the minimum fee of $500,000,
depending upon the level of acquisition and financing activities of
Triathlon. See "Certain Relationships and Related
Transactions--Triathlon Fees."
(3) The PACE Acquisition agreement provides that each PACE seller shall
have an option (a "Fifth Year Put Option"), exercisable during a period
beginning on the fifth anniversary of the closing of the PACE
Acquisition and ending 90 days thereafter, to require SFX Entertainment
to purchase up to one-third of the SFX Entertainment Class A Common
Stock received by that PACE seller (representing 500,000 shares in the
aggregate) for a cash purchase price of $33.00 per share. With certain
limited exceptions, the Fifth Year Put Option rights are not assignable
by the sellers. The maximum amount payable under all Fifth Year Put
Options ($16,500,000) has been presented as temporary equity on the pro
forma balance sheet.
(4) Includes 500,000 shares of SFX Entertainment Class A Common Stock to be
issued to the PACE sellers in connection with the Fifth Year Put
Option; these shares are not included in calculating the net loss per
common share.
(5) "EBITDA" is defined as earnings before interest, taxes, other income,
net, equity income (loss) from investments and depreciation and
amortization. Although EBITDA is not a measure of performance
calculated in accordance with generally accepted accounting principals
("GAAP"), SFX Entertainment believes that EBITDA is accepted by the
entertainment industry as a generally recognized measure of performance
and is used by analysts who report publicly on the performance of
entertainment companies. Nevertheless, this measure should not be
considered in isolation or as a substitute for operating income, net
income, net cash provided by operating activities or any other measure
for determining SFX Entertainment's operating performance or liquidity
which is calculated in accordance with GAAP.
There are other adjustments that could effect EBITDA but have not been
reflected herein. Had such adjustments been made, EBITDA as so adjusted
("Adjusted EBITDA") on a pro forma basis would have been approximately
$58,200,000 for the year ended December 31, 1996 and $67,300,000 for
the nine months ended September 30, 1997. These adjustments include the
elimination of non-recurring charges including a litigation settlement
recovered by PACE and Pavilion of $6,000,000 and $0, expected cost
savings in connection with the Pending Acquisitions associated with the
elimination of duplicative staffing and general and administrative
expenses of $5,000,000 and $3,800,000 and include SFX Entertainment's
pro rata share of equity income from investments of $3,400,000 and
$5,700,000, for the year ended December 31, 1996 and the nine months
ended September 30, 1997, respectively.
While management believes that such cost savings and the elimination of
non-recurring expenses are achievable, SFX Entertainment's ability to
fully achieve such cost savings and to eliminate the non-recurring
expenses is subject to numerous factors certain of which may be beyond
SFX Entertainment's control.
(6) For purposes of computing the ratio of earnings to fixed charges,
"earnings" consists of earnings before income taxes and fixed charges.
"Fixed charges" consists of interest on all indebtedness. Earnings were
insufficient to cover fixed charges by $393,000 for the year ended
December 31, 1996, $1,605,000 for the nine months ended September 30,
1996 and $32,420,000 on a pro forma basis for the year ended December
31, 1996.
(7) The required 1992 balance sheet data for Delsener/Slater has not been
included herein due to the difficulty in preparing an accurate balance
sheet as of that date coupled with management's belief that such
information would not be of substantial use to a potential investor.
The difficulty in preparing an accurate balance sheet is due to the
fact that (i) Delsener/Slater was not audited at such time, (ii)
Delsener/Slater included a number of companies with different year
ends, and (iii) the unaudited balance sheets of Delsener/Slater and its
related entities were not prepared in strict accordance with the GAAP
reporting requirements as such entities were privately held. The lack
of usefulness of the information is due to the fact that (i)
Delsener/Slater is the predecessor of SFX Entertainment and therefore
its accounts were adjusted to a new basis upon its acquisition by SFX;
(ii) the balance sheet is principally comprised of cash, leasehold
improvements and accruals for bonuses to the prior owners and would not
include the operating lease for the Jones Beach Amphitheater, which
management believes is Delsener/Slater's most significant operating
agreement; and (iii) the balance sheet of Delsener/Slater as of
December 31 in any year contains a low level of assets relative to
operating income, as the concert business is seasonal (with most
concerts occurring in the summer), and the promotion business does not
require large amounts of capital investment.
(8) The Unaudited Pro Forma Balance Sheet Data at September 30, 1997 is
presented as if SFX Entertainment had completed the Financing, the
Pending Acquisitions, the Spin-Off and the SFX Merger as of September
30, 1997.
(9) Retained earnings on a pro forma basis for the Financing, the Pending
Acquisitions, the Spin-Off and the SFX Merger have not been adjusted
for future charges to earnings which will result from the issuance of
stock and options granted to certain executive officers and other
employees of SFX Entertainment. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations--Liquidity
and Capital Resources--Future Charges to Earnings."
D-13
<PAGE>
RISK FACTORS
Stockholders should carefully consider and evaluate the following risk
factors together with the other information set forth in this Prospectus.
Certain statements, estimates, predictions and projections contained in
this Prospectus under "Summary," "Risk Factors," "Business," "Management's
Discussion and Analysis of Financial Condition and Results of Operations,"
"The Spin-Off" and "Agreements Related to the Pending Acquisitions," in
addition to certain statements contained elsewhere in this Prospectus, are
"forward-looking statements" within the meaning of Section 27A of the
Securities Act of 1933, as amended (the "Securities Act"), and Section 21E of
the Securities Exchange Act of 1934, as amended (the "Exchange Act"),
although these sections do not apply to this offering. These forward-looking
statements are prospective, involving risks and uncertainties. While these
forward-looking statements, and any assumptions on which they are based, are
made in good faith and reflect SFX Entertainment's current judgment regarding
the direction of its business, actual results will almost always vary,
sometimes materially, from any estimates, predictions, projections,
assumptions or other future performance suggested herein. Some important
factors (but not necessarily all factors) that could affect SFX
Entertainment's revenues, growth strategies, future profitability and
operating results, or that otherwise could cause actual results to differ
materially from those expressed in or implied by any forward-looking
statement, include the following: lack of operating history as an independent
public company; failure to consummate any or all of the Pending Acquisitions;
inability to enter into and borrow under the Proposed Credit Facility;
inability to successfully implement operating strategies (including the
achievement of cost savings); failure to derive anticipated benefits from the
Pending Acquisitions; working capital adjustments; payments pursuant to
indemnification arrangements; seasonality of operations or financial results;
changes in economic conditions and consumer tastes; competition; regulatory
difficulties; and the other matters referred to under "Risk Factors" or
elsewhere in this Prospectus. Stockholders are urged to carefully consider
these factors in connection with the forward-looking statements. SFX
Entertainment does not undertake to release publicly any revisions to
forward-looking statements that may be made to reflect events or
circumstances after the date of this Prospectus or to reflect the occurrence
of unanticipated events.
ABSENCE OF COMBINED OPERATING HISTORY; POTENTIAL INABILITY TO INTEGRATE
ACQUISITION BUSINESSES
The business of SFX Entertainment has been developed principally through
the acquisition of established live entertainment businesses, which have all
been acquired since January 1997. Prior to their acquisition by SFX
Entertainment, these acquired companies operated independently. In addition,
each of the Acquisition Businesses currently operates independently, and the
Pending Acquisitions will significantly increase the size and operations of
SFX Entertainment. The Unaudited Pro Forma Condensed Combined Financial
Statements include the combined operating results of the recently acquired
businesses and the Acquisition Businesses during periods when they were not
under common control of management, and therefore may not necessarily be
indicative of the results that would have been attained had SFX Entertainment
and the acquired businesses operated on a combined basis during those
periods. SFX Entertainment's prospects should be considered in light of the
numerous risks commonly encountered in business combinations. Although the
anticipated management of SFX Entertainment has significant experience in
other industries, there can be no assurance that SFX Entertainment's
management group will be able to effectively integrate the Acquisition
Businesses. SFX Entertainment's business, financial condition and results of
operations could be materially adversely affected if SFX Entertainment is
unable to retain the key personnel that have contributed to the historical
performances of the Acquisition Businesses or SFX Entertainment. See
"--Dependence on Key Personnel," "Business" and "Agreements Related to the
Pending Acquisitions."
RISKS RELATED TO PENDING ACQUISITIONS
Although management believes that the consummation of the Pending
Acquisitions is in the best interests of SFX Entertainment, it will involve
substantial expenditures and risks on the part of SFX Entertainment. There
can be no assurance that the Pending Acquisitions will be completed
successfully or, if completed, will yield the expected benefits to SFX
Entertainment or will not materially adversely affect SFX Entertainment's
business, financial condition or results of operations.
D-14
<PAGE>
Financing Matters
The aggregate purchase price of the Pending Acquisitions is expected to be
approximately $484.3 million, consisting of approximately $352.8 million in
cash, repayment of $75.3 million in debt and the issuance of approximately
4.2 million shares of SFX Entertainment Class A Common Stock with a
negotiated value of $56.2 million. There can be no assurance that the value
attributed by the parties to SFX Entertainment's capital stock will
approximate the actual trading price of the stock. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations." In
order to consummate the Pending Acquisitions, SFX Entertainment will require
significant additional financing, which it anticipates obtaining through
borrowings under the Proposed Credit Facility. Pursuant to the expected terms
of the proposed credit facility, pro forma for the 12 months ended September
30, 1997, the maximum amount of funding available to SFX Entertainment under
the facility as of September 30, 1997 would have been approximately $175.0
million. This amount, in addition to the recent private placement of $350.0
million in Notes, would be sufficient to (i) consummate the Pending
Acquisitions (approximately $428.1 million), (ii) pay certain fees and
expenses related to the Spin-Off, the Pending Acquisitions, the Financing and
certain consents related thereto (approximately $40.5 million), (iii) fund
certain planned capital expenditures (approximately $39.0 million), (iv) make
various other payments in connection with the Pending Acquisitions, certain
change-of-control provisions contained in the employment agreeements being
assumed by SFX Entertainment and the exercise of an option to acquire an
office building and related property from Network (approximately $12.7
million). However, pursuant to the expected terms of the credit facility, pro
forma for the twelve months ended September 30, 1997, the maximum amount of
borrowing availability under the facility would have been insufficient to
fund the approximately $8.3 million payable in connection with the Meadows
Repurchase or to make certain contingent payments which may arise, as more
fully described below. While SFX Entertainment believes that expected
improvements in its cash flows will permit it to borrow sufficient
funds under the Proposed Credit Facility to fund the Meadows Repurchase,
there can be no assurance that SFX Entertainment will be able to achieve such
increased cash flow levels, or that other available sources of financing will
be available under terms acceptable to SFX Entertainment or permitted under
the terms of SFX Entertainment's applicable debt instruments or that
certain contingent amounts will not become payable. See "--Working Capital
Adjustments and Repayment of Advances" and "Description of Indebtedness." In
addition, the information relating to fees and expenses is based on
management's estimates, and may not be indicative of, and are likely to vary
from, the actual fees and expenses incurred by SFX Entertainment relating to
the Financing, the Pending Acquisitions, the Spin-Off and the SFX Merger.
Certain agreements of SFX Entertainment, including the Distribution
Agreement, the Tax Sharing Agreement, certain employment agreements and the
agreements relating to the Pending Acquisitions provide for tax and other
indemnities, purchase price adjustments and future contingent payments in
certain circumstances, including, if SFX Entertainment is unable to issue
shares of its capital stock to certain of the sellers by virtue of having
failed to consummate the Spin-Off or for any other reason. In that case, the
aggregate cash consideration that would be owed to the sellers in the Pending
Acquisitions would increase by approximately $56.2 million, resulting in a
corresponding increase in debt and decrease in stockholders' equity. Although
management believes that the Spin-Off is likely to occur, the Spin-Off is
subject to certain conditions, some of which are outside of management's
control, and there can be no assurance that the Spin-Off will be consummated
on the terms presently contemplated or at all. In addition, the agreements
relating to the Pending Acquisitions provide for certain other purchase price
adjustments and future contingent payments in certain circumstances. There
can be no assurance that SFX Entertainment will have sufficient sources of
available capital to pay any material increases in cash consideration or
satisfy future contingent cash payment obligations in connection with the
Pending Acquisitions. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations--Pending Acquisitions" and "-- Liquidity
and Capital Resources," and "Agreements Related to the Pending Acquisitions,"
"Certain Relationships and Related Transactions--Indemnification of Mr.
Sillerman" and "Agreements Between SFX Entertainment and SFX--Distribution
Agreement" and "--Tax Sharing Agreement."
D-15
<PAGE>
SFX Entertainment may also be responsible for certain other payments in
connection with, and to be made contemporaneously with or prior to, the
consummation of the SFX Merger and/or the Spin-Off, including approximately
$8.3 million payable in connection with the Meadows Repurchase and the amount
of any shortfall in Working Capital. See "Risk Factors--Working Capital
Adjustments and Repayment of Advances" and "Management's Discussion and
Analysis of Financial Condition and Results of Operations--Liquidity and
Capital Resources."
If the Pending Acquisitions are not consummated due to a material breach
by SFX Entertainment (such as an inability to obtain financing in a timely
fashion), then SFX Entertainment may lose deposits aggregating approximately
$2.0 million and be responsible for other damages resulting from any
potential breach of the agreements relating to the Pending Acquisitions. In
addition, if Proposal 3 in the attached Proxy Statement (a proposal that will
allow the Spin-Off to occur as currently structured) is not approved, that
failure could result in a "Change of Control" pursuant to the expected terms
of the credit facility. In that event, there can be no assurance that SFX
Entertainment would be able to obtain a waiver of that provision, and there
can be no assurance of the terms, if any, under which such a waiver could be
obtained. The failure to obtain such a waiver could result in a material
adverse effect to SFX Entertainment's business, results of operations and
financial condition. SFX Entertainment's ability to borrow under the Proposed
Credit Facility or to obtain other financing is restricted by the terms of
the indenture governing the Notes (the "Indenture"). See "Description of
Indebtedness."
Furthermore, consummation of the Pending Acquisitions will result in
substantial charges to earnings relating to interest expense and the
recognition and amortization of goodwill; these charges would increase SFX
Entertainment's losses or reduce or eliminate its earnings, if any. See
"Agreements Related to the Pending Acquisitions," "Unaudited Pro Forma
Condensed Combined Financial Statements" (including the notes thereto) and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Liquidity and Capital Resources."
PACE Acquisition
The Pavilion Partners partnership agreement contains a provision (the
"Pavilion Exclusivity Provision") that restricts PACE and its affiliates from
directly or indirectly owning or operating amphitheaters outside of Pavilion
Partners, with certain limited exceptions. If SFX Entertainment consummates
the PACE Acquisition but not the acquisition of the remaining partnership
interests in Pavilion Partners (the "Pavilion Acquisition"), absent an
amendment to the partnership agreement, SFX Entertainment may be in breach of
the Pavilion Exclusivity Provision. The partnership agreement provides for
certain cumulative remedies available to the non-breaching partner, including
the right to (a) sue for damages, (b) seek an injunction, (c) deny the
breaching partner any of its voting, consent or approval rights under the
partnership agreement and (d) where the nature of the damages incurred by the
non-breaching partner is difficult or impossible to ascertain, purchase the
breaching partner's entire interest in Pavilion Partners for 75% of the
balance of the breaching partner's capital account. Management believes that
the Pavilion Acquisition will be consummated; however, there can be no
assurance that any portion of the Pavilion Acquisition will be consummated on
the terms described in this Prospectus or at all. In addition, if SFX
Entertainment consummates the PACE Acquisition but fails to consummate all of
the Pavilion Acquisition, the Pavilion Partners partnership agreement might
not be amended to remove the Pavilion Exclusivity Provision. See "Agreements
Related to the Pending Acquisitions--PACE Acquisition--Pavilion Acquisition."
SFX Entertainment has agreed to waive the condition to the closing of the
PACE Acquisition that the sellers deliver all of the outstanding shares of
PACE, if the sellers deliver 85% of the shares at closing. If only 85% of the
outstanding shares are delivered, SFX Entertainment intends to effect a
cash-out merger of the remaining stockholders of PACE. However, any cash-out
merger might not occur on terms as favorable to SFX Entertainment as those
contemplated in the PACE Acquisition agreement. Furthermore, pursuant to the
terms of the PACE Acquisition agreement, PACE provided a final bring down of
its representations and warranties to December 24, 1997. As a consequence, if
SFX Entertainment closes the PACE Acquisition, it will assume the risk of any
material adverse changes in the business of PACE subsequent to that date.
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The PACE Acquisition agreement provides that each PACE seller will have a
Fifth Year Put Option, exercisable for 90 days after the fifth anniversary of
the closing of the PACE Acquisition, to require SFX Entertainment to
repurchase up to one-third of the SFX Entertainment Class A Common Stock
received by that seller (representing 500,000 shares in the aggregate) for
$33.00 in cash per share. With certain limited exceptions, these option
rights are not assignable by the sellers. In certain circumstances, if the
selling price of SFX Entertainment Class A Common Stock is less than $13.33
per share, SFX Entertainment may be required to make an offer to the sellers
to provide an additional cash payment or additional shares of SFX
Entertainment Class A Common Stock, which each seller will have the option of
taking. See "Agreements Related to the Pending Acquisitions--PACE
Acquisition."
Contemporary Acquisition
In addition, in the Contemporary Acquisition agreement, SFX Entertainment
agreed to make payments to any Contemporary sellers who own shares of SFX
Entertainment Class A Common Stock on the second anniversary of the closing
of the Contemporary Acquisition. These payments will be due only if the
average trading price of the SFX Entertainment Class A Common Stock during
the 20-day period ending on the anniversary date is less than $13.33 per
share. There can be no assurance that the average trading price of the SFX
Entertainment Class A Common Stock will be $13.33 per share at that time. See
"Agreements Related to the Pending Acquisitions--Contemporary Acquisition."
Closing Dates
The BGP Acquisition and the Contemporary Acquisition are scheduled to
close by February 12 and 15, 1998, respectively. However, SFX Entertainment
does not anticipate entering into the proposed credit facility by either of
those dates. Each acquisition agreement provides for a 30-day cure period.
Although there can be no assurance, management believes that either these
acquisitions will be consummated before the termination of the applicable
cure periods or SFX Entertainment will enter into amendments to the
acquisition agreements extending the closing date.
General
As a result of the foregoing, there can be no assurance as to when the
Pending Acquisitions will be consummated or that they will be consummated on
the terms described in this Prospectus or at all. Furthermore, the
consummation of the Pending Acquisitions may fail to conform to the
assumptions used in the preparation of the Unaudited Pro Forma Condensed
Combined Financial Statements included herein. Therefore, in analyzing the
Unaudited Pro Forma Condensed Combined Financial Statements and other
information, stockholders should consider that the Pending Acquisitions may
not be consummated at all or on the terms described in this Prospectus. In
addition, although SFX Entertainment and SFX have conducted a due diligence
investigation of the Acquisition Businesses, the scope of their investigation
has been limited. Although the agreements governing the Pending Acquisitions
generally provide for indemnification from the seller for a limited period of
time with respect to certain matters, the indemnification is subject to
thresholds and limitations, and it is possible that other material matters
not identified in due diligence will subsequently be identified or that the
matters heretofore identified will prove to be more significant than
currently expected. See "Agreements Related to the Pending Acquisitions."
Although none of the Pending Acquisitions (except one acquisition of an
interest in Pavilion Partners) is conditioned on the consummation of any
other Pending Acquisition, consummation of each of the Pending Acquisitions
is subject to the satisfaction or waiver of a number of closing conditions,
certain of which are beyond SFX Entertainment's control, including, approvals
under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended
(the "HSR Act"). The failure to satisfy these conditions would permit each of
the parties to the acquisition agreements to refuse to consummate the
respective Pending Acquisitions. For a more complete description of the
closing conditions for each of the Pending Acquisitions, see "Agreements
Related to the Pending Acquisitions."
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CONTROL OF MOTOR SPORTS AND THEATRICAL BUSINESSES
Pursuant to the employment agreement entered into between Brian Becker and
SFX Entertainment in connection with the PACE Acquisition, Mr. Becker has the
option, exercisable within 15 days after the second anniversary of the
consummation of the PACE Acquisition, to acquire SFX Entertainment's then
existing motor sports line of business (or, if that line of business has
previously been sold, SFX Entertainment's then existing theatrical line of
business) at its then fair market value. Mr. Becker's exercise of this option
could have a material adverse effect on SFX Entertainment's business,
financial condition and results of operations. In addition, Mr. Becker also
has the right under certain circumstances to acquire the theatrical or motor
sports line of business at a price equal to 95% of the proposed purchase
price. See "Agreements Related to the Pending Acquisitions--PACE
Acquisition--Becker Employment Agreement." On a pro forma basis giving effect
to the Pending Acquisitions, specialized motor sports would have comprised
approximately 6%, and theater would have comprised approximately 17%, of SFX
Entertainment's total net revenues for the 12 months ended September 30,
1997.
BGP RIGHT OF FIRST REFUSAL
SFX Entertainment has agreed that it will not sell all, or substantially
all, of BGP's assets (as of December 11, 1997) for three years following the
consummation of the BGP Acquisition without offering the BGP sellers the
opportunity to purchase the assets on the same terms as those included in any
bona fide offer received by SFX Entertainment from any third party. See
"Agreements Related to the Pending Acquisitions--BGP Acquisition."
CONTROL OF DELSENER/SLATER
After the consummation of the Spin-Off or the SFX Merger, the senior
management of Delsener/ Slater may have the right pursuant to their
employment agreements (a) to purchase the outstanding capital stock of
Delsener/Slater for Fair Market Value (as defined in their employment
agreements) or (b) to receive a cash payment equal to 15% of the amount by
which the Fair Market Value of Delsener/Slater exceeds the fixed payment
portion of the cash purchase price of the acquisition of Delsener/Slater,
plus 20% interest thereon. The senior management of Delsener/Slater and SFX
have reach an agreement in principle to waive any of the above rights in
connection with the Spin-Off, the SFX Merger and related transactions;
however, there can be no assurance that the rights will be waived on terms
acceptable to SFX and SFX Entertainment or at all. In addition, although SFX
Entertainment is in the process of negotiating amendments to these
agreements, these and certain other rights described in the agreements may
continue to apply to transactions after, or unrelated to, the Spin-Off or the
SFX Merger. See "Certain Relationships and Related
Transactions--Delsener/Slater Employment Agreements."
FUTURE ACQUISITIONS
SFX Entertainment expects to pursue additional acquisitions of live
entertainment businesses in the future, although SFX Entertainment has no
present understandings, commitments or agreements with respect to any
acquisitions besides the Pending Acquisitions. Future acquisitions by SFX
Entertainment could result in (a) potentially dilutive issuances of equity
securities, (b) the incurrence of substantial additional indebtedness and/or
(c) the amortization of expenses related to goodwill and other intangible
assets, any or all of which could materially adversely affect SFX
Entertainment's business, financial condition and results of operations.
Acquisitions involve numerous risks, including difficulties in the
assimilation of the operations, technologies, services and products of the
acquired companies and the diversion of management's attention from other
business concerns. If any acquisition occurs, SFX Entertainment's business,
financial condition and results of operations may be materially adversely
affected.
EXPANSION STRATEGY; NEED FOR ADDITIONAL FUNDS
SFX Entertainment intends to pursue additional expansion opportunities.
However, it may be unable to identify and acquire additional suitable
businesses or obtain the financing necessary to acquire the
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businesses. Each acquisition may also be subject to the prior approval of SFX
Entertainment's lenders. Any debt financing would require payments of
principal and interest and would adversely impact SFX Entertainment's cash
flow. Additional financing for future acquisitions may be unavailable and,
depending on the terms of the proposed acquisitions and financings, may be
restricted by the terms of the Proposed Credit Facility and the Indenture.
See "Management's Discussion and Analysis of Financial Condition and Results
of Operations--Liquidity and Capital Resources." Furthermore, future
acquisitions may result in potentially dilutive issuances of equity
securities as well as charges to operations relating to interest expense or
the recognition and amortization of goodwill; these charges would increase
SFX Entertainment's losses or reduce or eliminate its earnings, if any.
Acquisitions also involve numerous risks, including difficulties in the
assimilation of operations, technologies, services and products of the
acquired companies and the diversion of management's attention from other
business concerns. If any additional acquisition occurs, SFX Entertainment's
business, financial condition and results of operations might be materially
adversely affected.
SUBSTANTIAL LEVERAGE
SFX Entertainment is a highly leveraged company. As of September 30, 1997,
on a pro forma basis giving effect to the Financing, the Pending Acquisitions
and the Spin-Off, SFX Entertainment's consolidated indebtedness would have
been approximately $498.8 million (of which $350.0 million would have
consisted of the Notes, and the balance would have consisted of $132.3
million in debt under the Proposed Credit Facility and $16.5 million in
pre-existing senior debt), its temporary equity would have been approximately
$16.5 million, and its stockholders' equity would have been approximately
$143.2 million. See "Unaudited Condensed Combined Pro Forma Financial
Statements." If SFX Entertainment is unable to issue shares of capital stock,
and thus is obligated to pay cash to the sellers in the Pending Acquisitions
in lieu of issuing shares of its common stock, then its total pro forma
indebtedness would increase by $56.2 million, and its pro forma stockholders'
equity would decrease by a similar amount. On a pro forma basis for the
Pending Acquisitions and the Financing, SFX Entertainment's ratio of total
debt to total capitalization as of September 30, 1997 would have been 1.3 to
1 (1.2 to 1 if SFX Entertainment is obligated to pay cash in lieu of issuing
shares), and its ratio of earnings to fixed charges for the nine months ended
September 30, 1997 would have been 1.0 to 1. Although management believes
that the Spin-Off is likely to occur, the Spin-Off is subject to certain
conditions, some of which are outside of management's control. The Spin-Off
might not be consummated on the terms presently contemplated, or at all.
Certain of the agreements relating to the Pending Acquisitions provide for
other purchase price adjustments and future contingent payments in certain
circumstances. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations--Pending Acquisitions." In addition, SFX
Entertainment may incur substantial additional indebtedness from time to time
to finance future acquisitions, for capital expenditures or for other
purposes. See "Capitalization" and "Unaudited Condensed Combined Pro Forma
Financial Statements."
SFX Entertainment's ability to make scheduled payments of principal of, to
pay interest on or to refinance its indebtedness, or to fund planned capital
expenditures, will depend on its future financial performance, which, to a
certain extent, is subject to general economic, financial, competitive,
legislative, regulatory and other factors beyond its control, as well as the
success of the Acquisition Businesses and their integration into SFX
Entertainment's operations. Based on the current level of operations of SFX
Entertainment and the Acquisition Businesses and anticipated cost savings and
revenue growth, management believes that, following the consummation of the
Pending Acquisitions, cash flow from operations and available cash, together
with anticipated borrowings under the Proposed Credit Agreement, will be
adequate to meet SFX Entertainment's future liquidity needs until at least
the first quarter of 1999. However, SFX Entertainment may be unable to make
planned borrowings, including the Financing; SFX Entertainment's business and
the acquired businesses may not generate sufficient cash flow from
operations; anticipated improvements in operating results may not be
achieved; and future working capital borrowings may be unavailable in an
amount sufficient to enable SFX Entertainment to service its indebtedness, to
make necessary capital or other expenditures or to fund its other liquidity
needs. SFX Entertainment may be required to refinance a portion of the
principal amount of its indebtedness prior to their respective maturities.
However, SFX Entertainment may be unable to effect
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any refinancing on commercially reasonable terms or at all. See "Management's
Discussion and Analysis of Financial Condition and Results of
Operations--Liquidity and Capital Resources."
The degree to which SFX Entertainment is and will be leveraged could have
material consequences to the holders of shares of SFX Entertainment's Common
Stock, including, but not limited to, (a) increasing SFX Entertainment's
vulnerability to general adverse economic and industry conditions, (b)
limiting SFX Entertainment's ability to obtain additional financing to fund
future acquisitions, working capital, capital expenditures and other general
corporate requirements, (c) requiring the dedication of a substantial portion
of SFX Entertainment's cash flow from operations to the payment of principal
of, and interest on, its indebtedness, thereby reducing the availability of
the cash flow to fund working capital, capital expenditures or other general
corporate purposes, (d) limiting SFX Entertainment's flexibility in planning
for, or reacting to, changes in its business and the industry and (e) placing
SFX Entertainment at a competitive disadvantage to less leveraged
competitors. In addition, the Indenture contains, and the Proposed Credit
Facility is likely to contain, financial and other restrictive covenants that
will limit the ability of SFX Entertainment to, among other things, borrow
additional funds. Failure by SFX Entertainment to comply with these covenants
could result in an event of default that, if not cured or waived, could have
a material adverse effect on SFX Entertainment's business, financial
condition and results of operations. SFX Entertainment anticipates that the
indebtedness to be incurred under the Proposed Credit Facility will be
secured by a pledge of the stock of its subsidiaries and by liens on
substantially all of its and its subsidiaries' tangible assets. In addition,
the Notes are, and borrowings under the Proposed Credit Facility are likely
to be, guaranteed by SFX Entertainment's subsidiaries. See "Description of
Indebtedness."
ECONOMIC CONDITIONS AND CONSUMER TASTES
SFX Entertainment's operations are affected by general economic conditions
and consumer tastes. The demand for live entertainment tends to be highly
sensitive to consumers' disposable incomes, and thus a decline in general
economic conditions that generally reduces consumers' disposable incomes can,
in turn, materially adversely affect SFX Entertainment's revenues. In
addition, the profitability of events promoted or produced by SFX
Entertainment is directly related to the ancillary revenues generated by
those events, and the ancillary revenues decrease with lower attendance
levels. The success of a music concert, theatrical show or motor sports event
depends on public tastes, which are unpredictable and susceptible to change,
and may also be significantly affected by the number and popularity of
competitive productions, concerts or events as well as other forms of
entertainment. It is impossible for SFX Entertainment to predict the success
of any music concert, theatrical show or motor sports event. In addition,
decreased attendance, a change in public tastes or an increase in competition
could have a material adverse effect on SFX Entertainment's business,
financial condition and results of operations.
AVAILABILITY OF ARTISTS AND EVENTS
SFX Entertainment's and the Acquisition Businesses' success and ability to
sell tickets (including subscriptions) are highly dependent on the
availability of popular musical artists, Touring Broadway Shows and
specialized motor sports talent, among other performers of live
entertainment. SFX Entertainment's and the Acquisition Businesses' results of
operations have been adversely affected in periods where fewer popular
musical artists and/or popular theatrical productions were available for
presentation. There can be no assurance that popular musical artists,
theatrical shows or specialized motor sports talent will be available to SFX
Entertainment in the future. The lack of availability of these artists and
productions could have a material adverse effect on SFX Entertainment's
business, financial condition and results of operations.
CONTROL OF VENUES
SFX Entertainment and the Acquisition Businesses operate a number of their
live entertainment venues under leasing or booking agreements, and
accordingly SFX Entertainment's long-term success will depend in part on its
ability to renew these agreements when they expire or terminate. There can be
no
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assurance that SFX Entertainment will be able to renew these agreements on
acceptable terms or at all, or that it will be able to obtain attractive
agreements with substitute venues. See "Business--SFX Entertainment's Live
Entertainment Activities--Venue Operations."
RESTRICTIONS IMPOSED BY SFX ENTERTAINMENT'S INDEBTEDNESS
The Indenture contains (and the Proposed Credit Facility will likely
contain) a number of significant covenants that, among other things, will
restrict the ability of SFX Entertainment and its subsidiaries to dispose of
assets, incur additional indebtedness, repay other indebtedness, pay
dividends, make certain investments or acquisitions, repurchase or redeem
capital stock, engage in mergers or consolidations, or engage in certain
transactions with subsidiaries and affiliates and otherwise restrict
corporate activities. These restrictions may adversely affect SFX
Entertainment's ability to finance its future operations or capital needs or
to engage in other business activities that may be in the interest of SFX
Entertainment. In addition, the Indenture requires (and the Proposed Credit
Facility will likely require) SFX Entertainment to maintain compliance with
certain financial ratios, such as a maximum total leverage ratio, a maximum
senior leverage ratio, a minimum fixed charges ratio, a minimum pro forma
interest expense ratio and a minimum debt service ratio. SFX Entertainment's
ability to comply with these ratios and limits may be affected by events
beyond its control. A breach of any of these covenants or the inability of
SFX Entertainment to comply with the required financial ratios or limits
could result in an event of default under any credit facility. Such an event
of default could permit the lenders to declare all borrowings outstanding to
be due and payable, to require SFX Entertainment to apply all of its
available cash to repay its borrowings or to prevent SFX Entertainment from
making debt service payments on certain portions of its outstanding
indebtedness. If SFX Entertainment were unable to repay any borrowings when
due, the lenders could proceed against their collateral. The Proposed Credit
Facility is likely to require SFX Entertainment and its subsidiaries to grant
the lenders thereunder a continuing security interest in all of their
tangible assets and in the capital stock of the guaranteeing subsidiaries. If
SFX Entertainment's indebtedness were to be accelerated, there can be no
assurance that the assets of SFX Entertainment would be sufficient to repay
its indebtedness in full. See "Description of Indebtedness."
In addition, if Proposal 3 in the attached Proxy Statement is not approved
and the Spin-Off or an alternative disposition of SFX Entertainment is
nevertheless consummated, then these events would likely result in a "Change
of Control" pursuant to the expected terms of the Proposed Credit Facility.
Futhermore, Mr. Sillerman has pledged certain shares of SFX Entertainment
Class B Common Stock that, if sold, could result in such a "Change of
Control." See "Principal Stockholders--Possible Change of Control." In the
event of such a "Change of Control," SFX Entertainment might be unable to
obtain a waiver of that provision of the credit facility, or might be
required to make substantial concessions to the lenders under the credit
facility in order to obtain such a waiver. The failure to obtain such a
waiver could result in a material adverse effect to SFX Entertainment's
business, results of operation and financial condition. See "Description of
Indebtedness--Proposed Senior Credit Facility."
NO PRIOR MARKET FOR SFX ENTERTAINMENT STOCK
There has been no prior trading market for any stock of SFX Entertainment.
Although SFX Entertainment intends to seek listing of the SFX Entertainment
Class A Common Stock on the Nasdaq National Market or on a national exchange,
there can be no assurance that it will be initially listed on the Nasdaq
National Market or elsewhere or will continue to be listed in the future.
Even if a trading market does develop in the SFX Entertainment Class A Common
Stock, there can be no assurance that trading would be sustained or that the
volume would be sufficient for trading to occur with any frequency. As a
result, it could be difficult to make purchases or sales of SFX Entertainment
Class A Common Stock in the market at any particular time. In addition, until
the SFX Entertainment Class A Common Stock is fully distributed and an
orderly market develops, the trading prices of SFX Entertainment Class A
Common Stock may fluctuate significantly. There can be no assurance as to the
trading prices of SFX Entertainment Class A Common Stock before or after the
Spin-Off. See "Shares Eligible for Future Sale."
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WORKING CAPITAL ADJUSTMENTS AND REPAYMENT OF ADVANCES
Pursuant to the Distribution Agreement, SFX Entertainment must pay SFX any
net negative Working Capital at the time of consummation of the SFX Merger.
Alternatively, SFX must pay to SFX Entertainment any net positive Working
Capital (excluding the Series E Adjustment). Therefore, the capitalization of
SFX Entertainment will depend, to a large extent, on the operating results of
SFX through the date of the SFX Merger. As of September 30, 1997, SFX
Entertainment estimates that Working Capital to be received by SFX
Entertainment would have been approximately $2.1 million (excluding the
Series E Adjustment). The actual amount of Working Capital as of the closing
of the SFX Merger may differ substantially from the amount as of September
30, 1997, and will be a function of, among other things, the operating
results of SFX through the date of the SFX Merger, the actual cost of
consummating the SFX Merger and the related transactions. SFX will also incur
certain other significant expenses prior to the consummation of the SFX
Merger that could reduce Working Capital, including the payment of dividends
and interest on SFX's debt and the Meadows Repurchase. Moreover, Working
Capital will be reduced by at least $2.1 million pursuant to the Series E
Adjustment. If SFX Entertainment is required to make Working Capital payments
to SFX, there can be no assurance that SFX Entertainment will have the funds
to do so or that it will have sufficient funds to conduct its operations after
making the required payments.
In addition, at the time of the Spin-Off, SFX Entertainment must repay
sums advanced to it by SFX for certain acquisitions or capital expenditures
after August 25, 1997 and not repaid at or before the closing of the
Spin-Off. As of January 31, 1998, SFX had advanced approximately $8.0 million
to SFX Entertainment for use in connection with certain acquisitions and
capital expenditures. SFX Entertainment intends to repay these amounts from
the proceeds of the private placement of Notes or borrowings under the
Proposed Credit Facility. SFX may advance additional amounts to SFX
Entertainment for these purposes before the consummation of the Spin-Off. See
"Agreements Between SFX Entertainment and SFX--Distribution Agreement" and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Liquidity and Capital Resources."
CONTROL BY MANAGEMENT; STOCK ISSUED TO MANAGEMENT
At the time of completion of the Spin-Off (assuming that Proposal 3 in the
attached Proxy Statement is approved), and after the grant of additional
shares as described in "Management--Employment Agreements and Arrangements
with Certain Officers and Directors" and "Certain Relationships and Related
Transactions--Issuance of Stock to Holders of SFX's Options and SARs," it is
anticipated that Mr. Sillerman will beneficially own approximately 45.7% of
the total voting power of the SFX Entertainment Common Stock, and that all
directors and executive officers together will beneficially own approximately
52.3% of the total voting power of the SFX Entertainment Common Stock.
Accordingly, these persons will have substantial influence over the affairs
of SFX Entertainment, including the ability to control the election of a
majority of the board of directors of SFX Entertainment (the "Board"), the
decision whether to effect or prevent a merger or sale of assets (except in
certain "going private transactions") and other matters requiring stockholder
approval. In addition, the issuance of these shares of SFX Entertainment
Common Stock to certain members of senior management of SFX Entertainment in
connection with their employment with SFX Entertainment will result in
substantial non-cash charges to operations, which could increase SFX
Entertainment's losses or reduce or eliminate its earnings, if any. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations," "Management," "Principal Stockholders of SFX Entertainment" and
"Description of Capital Stock."
DEPENDENCE ON KEY PERSONNEL
The success of SFX Entertainment depends substantially on the abilities
and continued service of certain of its (and its subsidiaries') executive
officers and directors. In particular, SFX Entertainment will depend on the
continued services of Robert F.X. Sillerman, Michael G. Ferrel, Geoffrey
Armstrong, Howard J. Tytel and Thomas P. Benson. Although these individuals
have greater experience in the radio broadcasting business than the live
entertainment industry, they do have significant expertise in selecting,
negotiating and financing acquisitions and in operating and managing public
companies. In addition, most of SFX Entertainment's directors and executive
officers are also currently acting as directors and
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executive officers of SFX. Until the consummation of the SFX Merger, these
directors and executive officers can be anticipated to expend substantial
time and effort in managing the business of SFX (which may detract from their
performance with respect to SFX Entertainment). If the SFX Merger is not
consummated, there can be no assurance that SFX Entertainment will be able to
retain the services of these directors and executive officers. See "The
Spin-Off" and "Management." SFX Entertainment and Messrs. Sillerman and
Ferrel have reached agreements in principle that those individuals will serve
as officers and directors of SFX Entertainment. However, if Proposal 3 in the
attached Proxy Statement is not approved, there can be no assurance that they
will serve in that capacity, in which event SFX intends to pursue alternative
means of disposing of SFX Entertainment.
Messrs. Sillerman and Tytel are also officers and directors of, and have
an aggregate equity interest of approximately 9.2% in, The Marquee Group,
Inc. ("Marquee"), a company involved in various aspects of the sports, news
and other entertainment industries, and own a substantial equity interest in
Triathlon, a company that owns and operates radio stations. In addition, they
provide consulting services to both companies through an affiliated entity.
Messrs. Sillerman and Tytel devote time to both Marquee and Triathlon, and
the amount of time they continue to devote to those companies could detract
from their duties as officers and directors of SFX Entertainment. However,
neither Mr. Sillerman nor Mr. Tytel has an employment agreement with Marquee
or Triathlon, and they do not anticipate devoting significant amounts of time
to Marquee or Triathlon.
Furthermore, the operations of each of the businesses to be acquired in
the Pending Acquisitions are local in nature and depend to a significant
degree on the continued services of between one to three individuals at each
business, all of whom SFX Entertainment anticipates employing pursuant to
written employment agreements after the Pending Acquisitions are consummated.
See "Management" and "Certain Relationships and Related Transactions." SFX
Entertainment anticipates that each of these individuals will make
significant contributions to its business, and the loss of their services
could have a material adverse effect on SFX Entertainment's business,
financial condition and results of operations. There can be no assurance that
SFX Entertainment will be able to retain the services of these individuals.
See "Management."
POTENTIAL CONFLICTS OF INTEREST
Marquee is a publicly-traded company that, among other things, acts as
booking agent for tours and appearances for musicians and other entertainers.
Messrs. Sillerman and Tytel have an aggregate equity interest of
approximately 9.2% in Marquee; Mr. Sillerman is the chairman of the board of
directors, and Mr. Tytel is a director, of Marquee. See "Certain
Relationships and Related Transactions--Potential Conflicts of Interest." SFX
Entertainment anticipates that, from time to time, it will enter into
transactions and arrangements (particularly, booking arrangements) with
Marquee and Marquee's clients, and it may compete with Marquee for specific
concert promotion engagements. In any transaction or arrangement with
Marquee, Messrs. Sillerman and Tytel are likely to have conflicts of interest
as officers and directors of SFX Entertainment. Any such transaction or
arrangement will be subject to the approval of the independent committees of
SFX Entertainment and SFX, except that booking arrangements in the ordinary
course of business will be subject to periodic review but not the approval of
each particular arrangement.
In addition, Marquee acts as a promoter of various sporting events and
sports personalities. At the time of the consummation of the Contemporary
Acquisition, SFX Entertainment will produce ice skating and gymnastics events
that may compete with events in which Marquee is involved. See "Certain
Relationships and Related Transactions--Potential Conflicts of Interest."
In addition, prior to the consummation of the SFX Merger, Mr. Sillerman
and other members of SFX Entertainment's management team will have management
obligations to both SFX and Entertainment that may cause them to have certain
conflicts of interest. See "Management--Employment Agreements and
Arrangements with Certain Officers and Directors" and "Certain Relationships
and Related Transactions--Potential Conflicts of Interest."
Pursuant to the employment agreement entered into between Brian Becker and
SFX Entertainment, Mr. Becker has the option, exercisable within 15 days
after the second anniversary of the consummation
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of the PACE Acquisition, to acquire SFX Entertainment's then existing motor
sports line of business (or, if that line of business has previously been
sold, SFX Entertainment's then existing theatrical line of business) at its
then fair market value. Mr. Becker's option may present a conflict of
interest in his role as a director of SFX Entertainment in evaluating
proposals for the acquisition or development of either line of business. See
"--Control of Motor Sports and Theatrical Businesses" and "Agreements Related
to the Pending Acquisitions--PACE Acquisition."
INDEMNIFICATION ARRANGEMENTS
In the Distribution Agreement, SFX Entertainment will agree to indemnify,
defend and hold SFX and its subsidiaries harmless from and against certain
liabilities to which SFX or any of its subsidiaries may be or become subject.
These liabilities relate to the assets, business, operations, employees
(including under any employment agreement assumed by SFX Entertainment in the
Spin-Off), debts or liabilities of SFX Entertainment and its subsidiaries
(collectively, the "SFX Entertainment Group"). Although SFX Entertainment
does not anticipate that any material liabilities for which it has agreed to
indemnify SFX and its subsidiaries will arise, it is possible that SFX
Entertainment will become subject to these liabilities. Any of these
liabilities may have a material adverse effect on SFX Entertainment's
business, financial condition or results of operations. See "Agreements
Between SFX Entertainment and SFX--the Distribution Agreement."
In addition, pursuant to the tax sharing agreement to be entered into
between SFX Entertainment and SFX (the "Tax Sharing Agreement"), SFX
Entertainment also will be responsible for certain taxes resulting from the
Spin-Off, including any income taxes to the extent that the income taxes
result from gain on the distribution that exceeds the net operating losses of
SFX and SFX Entertainment available to offset gain resulting from the
Spin-Off. See "Agreements Between SFX Entertainment and SFX--Tax Sharing
Agreement." The actual amount of the indemnification payment by SFX
Entertainment to SFX will be based on the value of the SFX Entertainment
Common Stock on the date of the Spin-Off; this amount cannot be predicted
with accuracy at this time. It is possible that the amount of the
indemnification payment will be significant and will have a material
adverse effect on SFX Entertainment.
Concurrently with the execution of the SFX Merger Agreement, Mr. Sillerman
waived his right to receive indemnification from SFX, its subsidiaries, SFX
Buyer Sub and SFX Buyer, after the effective time of the SFX Merger with
respect to claims or damages relating to the SFX Merger Agreement and the
transactions contemplated thereby, except to the extent that SFX can be
reimbursed under the terms of its directors' and officers' liability
insurance. It is anticipated that, after the Spin-Off, SFX Entertainment will
agree to indemnify (to the extent permitted by law) Mr. Sillerman for any
such claims or damages. In addition, pursuant to Messrs. Sillerman's and
Ferrel's existing employment agreements with SFX (which will be assumed by
SFX Entertainment pursuant to the SFX Merger Agreement), SFX Entertainment
will be obligated to indemnify them (to the extent permitted by law) for
one-half of the cost of any excise tax that may be assessed against them for
any change-of-control payments made to them by SFX in connection with the SFX
Merger. See "Certain Relationships and Related Transactions--Assumption of
Employment Agreements; Certain Change of Control Payments" and "--
Indemnification of Mr. Sillerman."
SEASONALITY
SFX Entertainment's operations and revenues are largely seasonal in
nature, with generally higher revenue generated in the second and third
quarters of the year. For example, on a pro forma basis for the Recent
Acquisitions, SFX Entertainment generated approximately 70% of its revenues
in the second and third quarters for the 12 months ending September 30, 1997.
SFX Entertainment's outdoor venues are primarily utilized in the summer
months and do not generate substantial revenue in the late fall, winter and
early spring. Similarly, the musical concerts that SFX Entertainment promotes
largely occur in the second and third quarters. To the extent that SFX
Entertainment's entertainment marketing and consulting relate to musical
concerts, they also predominantly generate revenues in the second and third
quarters. Therefore, the seasonality of SFX Entertainment's business causes
(and will probably continue to cause) a significant variation in SFX
Entertainment's quarterly operating results. These variations in demand could
have a material adverse effect on the timing of SFX Entertainment's cash
flows and, therefore, on its ability to service its obligations with respect
to its indebtedness. However, SFX
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Entertainment believes that this variation may be somewhat offset with the
acquisition of typically non-summer seasonal businesses in the Pending
Acquisitions, such as motor sports (which is winter-seasonal) and Touring
Broadway Shows (which typically tour between September and May). See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
COMPETITION
Competition in the live entertainment industry is intense, and competition
is fragmented among a wide variety of entities. SFX Entertainment competes on
a local, regional and national basis with a number of large venue owners and
entertainment promoters for the hosting, booking, promoting and producing of
music concerts, theatrical shows, motor sports events and other live
entertainment events. Moreover, SFX Entertainment's marketing and consulting
operations compete with advertising agencies and other marketing
organizations. SFX Entertainment and the Acquisition Businesses compete not
only with other live entertainment events, including sporting events and
theatrical presentations, but also with non-live forms of entertainment, such
as television, radio and motion pictures. A number of SFX Entertainment's
competitors may have greater operating and financial flexibility than SFX
Entertainment. In addition, many of these competitors also have long-standing
relationships with performers, producers and promoters and may offer other
services that are not provided by SFX Entertainment. There can be no
assurance that SFX Entertainment will be able to compete successfully in this
market or against these competitors. See "Business--Competition."
REGULATORY MATTERS
SFX Entertainment's business is not generally subject to material
governmental regulation. However, if SFX Entertainment seeks to acquire or
construct new venue operations, its ability to do so will be subject to
extensive local, state and federal governmental licensing, approval and
permit requirements, including approvals of state and local land-use and
environmental authorities, building permits, zoning permits and liquor
licenses. Significant acquisitions may also be subject to the requirements of
the HSR Act. Other types of licenses, approvals and permits from governmental
or quasi-governmental agencies might also be required for other opportunities
that SFX Entertainment may pursue in the future, although SFX Entertainment
has no agreements or understandings with respect to these opportunities at
this time. There can be no assurance that SFX Entertainment will be able to
obtain the licenses, approvals and permits it may require from time to time
in order to operate its business.
ENVIRONMENTAL MATTERS
SFX Entertainment has real property relating to its business, consisting
of fee interests, leasehold interests and other contractual interests. SFX
Entertainment's properties are subject to foreign, federal, state and local
environmental laws and regulations regarding the use, storage, disposal,
emission, release and remediation of hazardous and nonhazardous substances,
materials or wastes, including laws relating to noise emissions (which may
affect, among other things, the hours of operation of SFX Entertainment's
venues). Further, under certain of these laws and regulations, SFX
Entertainment could be held strictly, jointly and severally liable for the
remediation of hazardous substance contamination at its facilities or at
third-party waste disposal sites, and could also be held liable for any
personal or property damage related to any contamination. SFX Entertainment
believes that it is, and the properties to be acquired in the Pending
Acquisitions are, in substantial compliance with all of these laws and
regulations, and has performed preliminary environmental assessments of all
of the properties that are (or after consummating the Pending Acquisitions
will be) wholly-owned, without identifying material environmental hazards.
Although the level of future expenditures cannot be determined with
certainty, SFX Entertainment does not anticipate, based on currently known
facts, that its environmental costs are likely to have a material adverse
effect on SFX Entertainment's business, financial condition and results of
operations.
FRAUDULENT CONVEYANCE
The Board of Directors of SFX does not intend to consummate the Spin-Off
unless it is satisfied that SFX is solvent before and will be solvent
following the Spin-Off and that the Spin-Off is otherwise permissible under
applicable law. There is no certainty, however, that a court would find the
facts relied
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on and the judgments made by the Board of Directors of SFX to be binding on
creditors of SFX or that a court would reach the same conclusions as the
Board of Directors of SFX in determining that SFX is solvent at the time of,
and after giving effect to, the Spin-Off. If a court in a lawsuit filed by an
unpaid creditor or representative of unpaid creditors, such as a trustee in
bankruptcy, were to find that, at the time the Spin-Off is consummated or
after giving effect thereto, SFX (a) was insolvent, (b) was rendered
insolvent by reason of the Spin-Off, (c) was engaged in a business or
transaction for which the remaining assets of SFX constituted unreasonably
small capital or (d) intended to incur, or believed it would incur, debts
beyond its ability to pay as the debts matured, then the court might void the
Spin-Off (in whole or in part) as a fraudulent conveyance and require SFX's
stockholders to return the shares of SFX Entertainment distributed in the
Spin-Off (in whole or in part) to SFX or require SFX Entertainment to fund
certain liabilities of SFX for the benefit of SFX's creditors. If the assets
of SFX Entertainment were recovered as fraudulent transfers by a creditor or
trustee of SFX, the relative priority of right to payment between any
financing and any fraudulent transfer claimant would be unclear, and SFX
Entertainment could be rendered insolvent. In addition, under applicable
corporate law, a corporation generally makes distributions to its
stockholders only out of its surplus (net assets minus capital) and not out
of capital. The foregoing consequences would also apply were a court to find
that the Spin-Off was not made out of SFX surplus. Indebtedness of SFX
Entertainment is being incurred to finance the Pending Acquisitions, to
refinance certain indebtedness of SFX Entertainment and the Pending
Acquisitions, to pay related fees and expenses, and for general corporate
purposes. Management believes that the indebtedness of SFX Entertainment
represented by the Financing is being incurred for proper purposes and in
good faith, and that, based on present forecasts and other financial
information, after the consummation of the Spin-Off and the Pending
Acquisitions, SFX Entertainment will be solvent, will have sufficient capital
for carrying on its business and will be able to pay its debts as they
mature.
SFX Entertainment believes that, in accordance with the facts examined in
connection with the Spin-Off and the Financing, (a) SFX and SFX Entertainment
will be solvent at the time of the Spin-Off and the Financing, respectively,
and (b) the Spin-Off will be made entirely out of SFX surplus in accordance
with applicable law. However, SFX Entertainment cannot predict what standard
a court might apply in evaluating these matters, and it is possible that the
court would disagree with SFX Entertainment's conclusions.
ANTI-TAKEOVER EFFECTS
The Amended and Restated Certificate of Incorporation of SFX Entertainment
(the "SFX Entertainment Certificate"), the By-laws of SFX Entertainment (the
"SFX Entertainment By-laws") and the Delaware General Corporation Law (the
"DGCL") contain (or will contain) several provisions that could have the
effect of delaying, deferring or preventing a change of control of SFX
Entertainment in a transaction not approved by the Board. The SFX
Entertainment Certificate will provide for the issuance of shares of SFX
Entertainment Class B Common Stock (with 10 votes per share in most matters),
and the holders of these shares will generally be able to prevent a change of
control of SFX Entertainment if they so desire. In addition, the SFX
Entertainment Certificate will authorize the Board to issue up to 25,000,000
shares of preferred stock in one or more series and to fix the number of
shares and the relative designations and powers, preferences, and rights, and
qualifications, limitations, and restrictions thereof, without further vote
or action by the stockholders. Issuances of preferred stock could, under
certain circumstances, have the effect of delaying or preventing a change in
control of SFX Entertainment and may adversely affect the rights of holders
of SFX Entertainment Common Stock. Furthermore, SFX Entertainment is subject
to the anti-takeover provisions of Section 203 of the DGCL, which prohibit
SFX Entertainment from engaging in a "business combination" with an
"interested stockholder" for three years after the date of the transaction in
which the person became an interested stockholder (unless the business
combination is approved in a prescribed manner). The application of Section
203 could also have the effect of delaying or preventing a change in control
of SFX Entertainment. The Board has also adopted certain other programs,
plans and agreements with SFX Entertainment's management and/or employees
that may make a change of control more expensive. See "Management" and
"Description of Capital Stock."
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OVERVIEW OF THE LIVE ENTERTAINMENT INDUSTRY
CONCERT PROMOTION INDUSTRY
The concert promotion industry consists primarily of regional promoters
focused generally in one or two major metropolitan markets. According to
Amusement Business, industry gross box office receipts for North American
concert tours totaled $922 million in 1996, compared to $322 million in 1985,
representing a compounded annual growth rate of approximately 10%. SFX
Entertainment believes that overall increases in ticket sales during the last
several years are in part due to the increasing popularity of amphitheaters
as live entertainment venues, as well as an increasing number of tours that
attract older audiences who did not previously attend musical concerts.
Typically, in order to initiate a music concert or other live
entertainment event or tour, a booking agent contracts with a performer to
arrange a venue and date, or series of venues and dates, for the performer's
event. The booking agent in turn contacts a promoter or promoters in the
locality or region of the relevant venue or venues. The promoter markets the
event, sells tickets, rents or otherwise provides the event venue or venues,
and arranges for local production services (such as stage, set, sound and
lighting). In certain instances, particularly in connection with music
festivals, a promoter may also provide limited production services.
Individual industry participants, such as SFX Entertainment, often perform
more than one of the booking, promotion and venue operation functions.
The booking agent generally receives a fixed fee for its services, or in
some cases, a fee based on the success of the event or events, in each case
from the artist. The promoter typically agrees to pay the performer the
greater of a guaranteed amount and a profit-sharing payment based on gross
ticket revenues, therefore assuming the risk of an unsuccessful event. The
promoter sets ticket prices and advertises the event in order to cover
expenses and generate profits. In the case of an unprofitable event, a
promoter will sometimes renegotiate a lower guarantee in order to mitigate
the promoter's losses (in a process known as "settlement"). In some
instances, the promoter agrees to accept a fee from the booking agent for the
promoter's services, and the booking agent bears the financial risk of the
event.
A venue operator typically contracts with a promoter to rent its venue for
a specific event on a specific date or dates. The venue operator provides
services such as concessions, parking, security, ushers and ticket-takers,
and receives revenues from concessions, merchandise, sponsorships, parking
and premium box seats. A venue operator will typically receive (for each
event it hosts) a fixed fee or percentage of ticket sales for use of the
venue, as well as a fee representing between 40-50% of total concession sales
from the vendors and 10-25% of total merchandise sales from the performer.
Concert venues are generally comprised of stadiums (typically 32,000 seats
or more), amphitheaters or arenas (typically 5,000 to 32,000 seats), clubs
(typically less than 2,000 seats) and theaters (typically 100 to 5,000
seats). Amphitheaters are generally outdoor venues that are used primarily in
the summer season. They have become increasingly popular venues for concerts
because the seating configuration is designed specifically for concert
events, often resulting in more available seats, fewer obstructed seats,
better lines of sight to the stage and superior acoustics. In addition,
because they typically cost less to construct, maintain and operate than
traditional multi-purpose stadiums and arenas, amphitheaters often are able
to host concerts and other events that would not be profitable in a stadium
or arena.
THEATRICAL INDUSTRY
The audience for live professional theater has increased significantly in
the last two decades. According to Variety Magazine, gross ticket sales for
the entire industry of Touring Broadway Shows and Broadway shows have
increased from $431.5 million during the 1986-7 season to $1.3 billion during
the 1996-7 season, a compounded annual growth rate of 11.7%. During this
time, the number of touring weeks and markets where Touring Broadway Shows
could profitably be presented have expanded. Sales for Touring Broadway Shows
have grown as a percentage of total industry gross ticket sales, from
approximately 52% in the 1986-7 season to approximately 60% in the 1996-7
season. The growth of the national theatrical industry had resulted, in part,
from the development of local subscription series for Touring Broadway Shows,
the construction of new performing arts centers with seating capacities of
2,500 or more in many municipalities, and an increase in the quality of
Touring Broadway Shows and in the
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number of multiple-week engagements produced for presentation outside of New
York City. Touring Broadway Shows are typically revivals of previous
commercial successes or reproductions of theatrical shows currently playing
on Broadway in New York City ("Broadway Shows").
Live professional theater consists mainly of the production of existing
musical and dramatic works and the development of new works. In general,
musicals require more investment of time and capital than dramatic
productions. For an existing musical work (which is more likely to be
presented as a Touring Broadway Show), a period of 12 to 24 months typically
elapses between the time a producer acquires the theatrical stage rights and
the date when the musical is first performed before the public. During this
time, a touring company is assembled, and the show is readied for the road.
By comparison, dramatic productions typically have smaller production
budgets, shorter pre-production periods and lower operating costs, and tend
to occupy smaller theaters for shorter runs.
A producer of a Broadway Show or a Touring Broadway Show first acquires
the rights to the work from its owners, who typically receive royalty
payments in return. The producer then assembles the cast of the play, hires a
director and arranges for the design and construction of sets and costumes.
The producer of a Touring Broadway Show also must arrange transportation and
schedule the show with local promoters. The local promoter of a Touring
Broadway Show, who generally operates or has relationships with venues in
individual markets, provides all local services such as selling tickets,
hiring local personnel, buying advertising and paying a fixed guarantee
(typically between $100,000 and $400,000) to the producer of the show for
each week that the show is presented. The promoter is then entitled to
recover the amount of the guarantee plus its local costs from ticket
revenues. Any remaining ticket revenues are shared by the promoter and the
producer, with the producer typically receiving approximately 60% of the
profits. Although Touring Broadway Shows are generally substantially less
expensive to produce than Broadway Shows, they may be financed through a
limited partnership with third-party investors who receive a profit interest
in the production. Often, investors in Touring Broadway Shows will also
invest in the underlying Broadway Show, in part to help secure touring
rights. After investors have received the complete return of their
investment, net profits are split between the limited partners and the show's
producer. The amount of net profits allocated to the show's producer,
including fees and royalties, varies somewhat, but is normally in the range
of 50% after certain profit participations are deducted. After certain net
profits, a producer may also receive a production fee and royalties. A
typical Touring Broadway Show requires 45 playing weeks with a weekly
guarantee from the local promoter of approximately $250,000 to recoup
production and touring costs; more elaborate touring productions with larger
casts or sets, such as The Phantom of the Opera or Miss Saigon, generally
require significantly higher weekly revenues and additional playing weeks in
order to recoup production and touring costs.
Tickets for Touring Broadway Shows often are sold through "subscription
series," which are pre-sold season tickets for a defined package of shows to
be presented in a given venue.
MOTOR SPORTS INDUSTRY
Specialized motor sports events make up a growing segment of the live
entertainment industry. This growth has resulted from additional demand in
existing markets and new demand in markets where new arenas and stadiums have
been built. The increasing popularity of specialized motor sports over the
last several years has coincided with (and, in part, been due to) the
increased popularity of other professional motor sports events, such as
professional auto racing (including NASCAR, CART and Indy Car Racing). A
number of specialized motor sports events are televised on several of the
major television networks and are also shown on television in markets outside
of the United States.
In general, one to four motor sports events will be produced and presented
each year in a market, with larger markets hosting more performances.
Stadiums and arenas typically work with producers and promoters to manage the
scheduling of events to maximize each event's results and each season's
revenues. The cost of producing and promoting a typical single stadium event
ranges from $300,000 to $600,000, and the cost of producing and presenting a
typical single arena event ranges from $50,000 to $150,000. Monster trucks,
demolition derbies, thrill acts, air shows and other motor sports concepts
and events are typically created and financed by third parties and hired to
perform in an individual event or season of events. As in other motor sports,
corporate sponsorships and television exposure are important financial
components that contribute to the success of a single event or season of
events.
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BUSINESS
There can be no assurance that any or all of the Pending Acquisitions will
be consummated on the terms described herein, or at all. See "Risk
Factors--Risks Related to Pending Acquisitions."
GENERAL
SFX Entertainment, Inc. is a leading promoter of, and operator of venues
for, live entertainment events. Upon consummation of the Pending
Acquisitions, management believes that SFX Entertainment will be the largest
diversified promoter and producer of live entertainment, including music
concerts, theatrical shows and specialized motor sports events. After
consummation of the Pending Acquisitions, SFX Entertainment (which currently
owns or operates 20 venues) believes that it will own and/or operate the
largest network of venues used principally for music concerts and other live
entertainment events in the United States, with 39 venues either directly
owned or operated under lease or exclusive booking arrangements in 21 of the
top 50 markets, including 9 amphitheaters in 6 of the top 10 markets. Through
its large number of venues, its strong market presence and the long operating
histories of SFX Entertainment and the businesses to be acquired pursuant to
the Pending Acquisitions, SFX Entertainment will operate an integrated
franchise that will promote and produce a broad variety of live entertainment
events locally, regionally and nationally. During 1997, approximately 1.4
million people attended approximately 210 events promoted and/or produced by
SFX Entertainment, including approximately 200 music concerts. During the
same year, approximately 25 million people attended 9,100 events promoted
and/or produced by SFX Entertainment and the Acquisition Businesses,
including approximately 3,880 music concerts, 4,850 theatrical shows and 188
specialized motor sports events. These events included: (a) music concerts
featuring artists such as The Rolling Stones, Phish, Fleetwood Mac, Ozzy
Osbourne and Alanis Morissette, (b) music festivals such as Lollapalooza and
the George Strait Country Music Festival, (c) touring theatrical productions
such as The Phantom of the Opera, Jekyll & Hyde, Rent and The Magic of David
Copperfield, and (d) specialized motor sports events, such as Truck Fest and
American Motorcycle Association Supercross racing events.
SFX Entertainment's core business is the promotion and production of live
entertainment events, most significantly for concert and other music
performances in venues owned and/or operated by SFX Entertainment and in
third-party venues. As promoter, SFX Entertainment typically markets events
and tours, sells tickets, rents or otherwise provides event venues and
arranges for local production services (such as stage, set, sound and
lighting). As producer, SFX Entertainment, upon consummation of the Pending
Acquisitions, will (a) create tours for music concert, theatrical,
specialized motor sports and other events, (b) develop and manage Touring
Broadway Shows and (c) develop specialized motor sports and other live
entertainment events. In connection with its live entertainment events, SFX
Entertainment also derives related revenue streams, including from the sale
of corporate sponsorships and advertising, the sale of concessions and the
merchandising of a broad range of products. On a pro forma basis giving
effect to the Pending Acquisitions, SFX Entertainment's music and ancillary
businesses would have comprised approximately 77%, theater would have
comprised approximately 17% and specialized motor sports would have comprised
approximately 6% of SFX Entertainment's total net revenues for the 12 months
ended September 30, 1997.
CURRENT AND HISTORICAL OPERATIONS
SFX Entertainment, currently a wholly-owned subsidiary of SFX, was formed
in January of 1997 to acquire and hold SFX's live entertainment operations.
SFX acquired Delsener/Slater, a New York-based concert promotion company, in
January 1997. Delsener/Slater has long-term leases or is the exclusive
promoter for several concert venues in the New York City metropolitan area,
including the Jones Beach Amphitheater, a 14,000-seat complex located in
Wantagh, New York, and the PNC Bank Arts Center (formerly known as the Garden
State Arts Center), a 17,500-seat complex located in Holmdel, New Jersey. In
March 1997, Delsener/Slater acquired a 37-year lease to operate the Meadows
Music Theater, a 25,000-seat indoor/outdoor complex located in Hartford,
Connecticut. In June 1997, SFX acquired Sunshine Promotions, a concert
promoter in the Midwest. As a result of the acquisition of Sunshine
Promotions, SFX Entertainment owns the Deer Creek Music Theater, a
21,000-seat complex located in
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Indianapolis, Indiana and the Polaris Amphitheater, a 20,000-seat complex
located in Columbus, Ohio, and has a long-term lease to operate the Murat
Centre, a 2,700-seat theater and 2,200-seat ballroom located in Indianapolis,
Indiana. In certain cases, the senior management of Delsener/Slater have
certain rights to purchase the outstanding stock of Delsener/Slater, along
with certain other rights to receive additional cash payments. See "Risk
Factors--Control of Delsener/Slater" and "Certain Relationships and Related
Transactions--Delsener/Slater Employment Agreements." SFX Entertainment has
also acquired rights or ownership interests in various additional venues, as
set forth in "--SFX Entertainment's Live Entertainment Activities--Venue
Operation."
SFX was formed in 1992 principally to acquire and operate radio
broadcasting stations. In August 1997, SFX agreed to the SFX Merger and to
the Spin-Off of SFX Entertainment to the stockholders of SFX on a pro rata
basis. Before consummating the SFX Merger, SFX intends (a) to contribute its
concert and other live entertainment operations to SFX Entertainment and (b)
to distribute all of the outstanding shares of common stock of SFX
Entertainment to the holders of common stock, Series D preferred stock and
certain warrants of SFX in the Spin-Off. SFX Entertainment intends to borrow
under the Proposed Credit Facility and consummate the Pending Acquisitions
before the Spin-Off and the SFX Merger. SFX intends to consummate the
Spin-Off on or prior to the consummation of the SFX Merger. The Spin-Off is
subject to certain conditions, including (a) the acceptance for listing or
trading of the SFX Entertainment Class A Common Stock, subject to official
notice of issuance, on a national exchange or The Nasdaq Stock Market and (b)
the receipt of all necessary third-party and stockholder consents to the
Spin-Off as presently contemplated. There can be no assurance that the
conditions to the Spin-Off will be satisfied or that the Pending Acquisitions
will be consummated prior to the Spin-Off on the terms described herein or at
all. However, the Spin-Off is not conditioned on the prior consummation of
the Financing, any of the Pending Acquisitions or the SFX Merger. Management
believes that the Spin-Off is likely to be consummated early in the second
quarter of 1998, although there can be no assurance that the Spin-Off will be
consummated on the terms described herein or at all.
SFX ENTERTAINMENT'S LIVE ENTERTAINMENT ACTIVITIES
SFX Entertainment is, and after the consummation of the Pending
Acquisitions will be to a greater extent, engaged in (a) the booking,
promotion and production of live entertainment events and tours, (b) the
ownership and/or operation of concert and other entertainment venues and (c)
the sale of corporate sponsorships and advertising and provision of marketing
and consulting services to third parties.
Booking and Promotion
Currently, SFX Entertainment books and promotes music concert and other
live entertainment events, principally in the New York--Northern New
Jersey--Long Island, Indianapolis, Columbus, Hartford and Rochester markets.
SFX Entertainment and the Acquisition Businesses book and promote music
concert, theatrical, specialized motor sports and other live entertainment
events and tours such as music festivals, comedy tours, figure skating shows,
gymnastics tours, motivational speaking tours and other special events. SFX
Entertainment and the Acquisition Businesses book and promote events in a
number of types of venues (including amphitheaters, theaters, clubs, arenas
and stadiums) that are owned and/or operated by SFX Entertainment, by the
Acquisition Businesses or by third parties. See "--Venue Operations." SFX
Entertainment and the Acquisition Businesses primarily promote concerts
performed by newer groups having widespread popularity (e.g., Phish, Dave
Matthews and Hootie & the Blowfish) and by more established groups having
relatively long-standing and more stable bases of popularity (e.g., James
Taylor and Jimmy Buffet). Operating profit per show for concerts performed by
either type of group tends to be generally similar because the more popular
new groups command significantly higher ticket prices but also require higher
compensation, while more established groups may draw larger audiences.
Moreover, SFX Entertainment believes that its large distribution network upon
consummation of the Pending Acquisitions will enable it to set an aggregate
guarantee for a series of shows, mitigating the risk of loss associated with
a single show. SFX Entertainment also believes that the market research and
audience demographics database that it will acquire in the Pending
Acquisitions, when combined with its existing audience data collection
efforts, will permit highly-effective, targeted marketing, such as
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direct-mail and subscription series campaigns, which SFX Entertainment
believes will increase ticket pre-sales and overall sales in a cost-efficient
manner. In addition, Contemporary's Capital Tickets retail distribution
outlets and Dialtix interactive, voice-response automated phone ticket order
system are currently operating in three markets. SFX Entertainment believes
that expanding the markets where it can utilize its own ticketing sources
will permit SFX Entertainment to promote its live entertainment events more
effectively. The following table identifies artists whose events were
recently promoted by SFX Entertainment or the Acquisition Businesses:
<TABLE>
<CAPTION>
<S> <C> <C>
Aerosmith Elton John Phil Collins
Alabama Fleetwood Mac* Pink Floyd
Alanis Morissette James Taylor Phish
Bette Midler Jerry Seinfeld* R.E.M.
Billy Joel Jimmy Buffett Rod Stewart
Brooks & Dunn John Secada The Rolling Stones
Chris Rock* Live Seal
Clint Black Melissa Etheridge Sheryl Crow
Crosby, Stills & Nash Metallica Smashing Pumpkins
Dave Matthews Michael Bolton Stone Temple Pilots
Depeche Mode Ozzy Osbourne* Tim Allen*
The Eagles Pearl Jam Tina Turner
Earth, Wind & Fire Peter Gabriel U2
</TABLE>
* National tour produced.
Production
SFX Entertainment is currently involved in the creation of tours for music
concert and other live entertainment events. Upon consummation of the Pending
Acquisitions, SFX Entertainment's production activities will be broadened to
include (a) the creation of tours for music concert, theatrical, specialized
motor sports and other live entertainment events, (b) the development and
management of Touring Broadway Shows and (c) the development of specialized
motor sports shows, proprietary characters and television programming. The
Acquisition Businesses produce tours on a national or regional basis and, in
1997, structured national tours for Fleetwood Mac and Ozzy Osbourne, among
others. SFX Entertainment plans to increase its production of national music
tours. PACE also produces Touring Broadway Shows, acquiring the stage and
touring rights from a show's owner, assembling the touring cast, hiring a
director and arranging for the construction and design of sets and costumes.
Touring Broadway Shows are typically revivals of previous commercial
successes or reproductions of theatrical shows currently playing on Broadway
in New York City. PACE also produces and makes small investments (i.e., from
approximately $150,000 to $600,000) as a limited partner in the creation of a
small number of original Broadway Shows in exchange for obtaining touring
rights and favorable scheduling for those shows.
The Touring Broadway Show production and promotion industry is highly
fragmented. SFX Entertainment believes it will be, after consummating the
Pending Acquisitions, the largest of six multiple-market promoters of Touring
Broadway Shows in the United States, and that the remainder of the industry
is made up of single-market promoters. PACE competes with other producers and
promoters to obtain presentation arrangements with venues and performing arts
organizations in various markets, including in markets that have more than
one venue suitable for presenting a Touring Broadway Show. Upon consummation
of the Pending Acquisitions, SFX Entertainment's competitors, some of whom
have also been partners of PACE in certain theater investments from time to
time, will include a number of
D-31
<PAGE>
New York-based production companies that also promote Touring Broadway Shows
and a number of regional promoters. On a pro forma basis giving effect to the
Pending Acquisitions, SFX Entertainment would have had a producing interest
or investment in the following shows for 1997 and/or 1998:
<TABLE>
<CAPTION>
SHOW TITLE TYPE SFX ENTERTAINMENT'S INVOLVEMENT
- ------------------------------ ---------------------- -----------------------------------
<S> <C> <C>
Big Touring Production
Damn Yankees Touring Production
David Copperfield Touring Production
Death Trap Touring Production
Funny Girl Touring Production
Harmony Development Production
Jekyll & Hyde Broadway Production
Kiss of the Spiderwoman Touring Production
Man of La Mancha Touring Production
Smokey Joe's Cafe Touring Production
The Sound of Music Touring Production
West Side Story Touring Production
A Chorus Line Touring (US & UK) Investment
Annie Broadway Investment
Carousel Touring Investment
Cirque Ingenieux Touring Investment
Grease Broadway & Touring Investment
Chicago Broadway & Touring Investment
How to Succeed in Business Broadway & Touring Investment
Martin Guerre West End (UK) Investment
Rent Broadway & Touring Investment
Steel Pier Broadway Investment
Triumph of Love Broadway Investment
West Side Story Touring (UK) Investment
</TABLE>
SFX Entertainment believes that there are approximately 50 domestic
markets that can provide the potential audience and gross ticket revenues for
a full scale Touring Broadway Show to be profitable, and an additional 50
markets where smaller scale productions with shorter runs can be presented
profitably. In most of these cities, there are a limited number of venues
that can accommodate a Touring Broadway Show.
PACE currently sells subscription series for its Touring Broadway Shows in
the following 31 of the approximately 60 markets that maintain active touring
schedules:
<TABLE>
<CAPTION>
<S> <C> <C>
Atlanta, GA Long Beach, CA Palm Beach, FL
Austin, TX Louisville, KY Phoenix, AZ
Baltimore, MD Miami, FL Pittsburgh, PA
Chicago, IL Milwaukee, WI Portland, OR
Cincinnati, OH Minneapolis, MN San Antonio, TX
Columbus, OH Myrtle Beach, SC Seattle, WA
Dallas, TX Nashville, TN Tampa, FL
Ft. Lauderdale, FL New Orleans, LA Ottawa, Canada
Green Bay, WI Omaha, NE Edmonton, Canada
Houston, TX Orange County, CA
Indianapolis, IN Orlando, FL
</TABLE>
D-32
<PAGE>
Subscriptions historically have covered two-thirds of PACE's break-even
point for Touring Broadway Shows. In 1997, PACE had approximately 220,000
subscribers for its Touring Broadway Shows.
Certain of the Acquisition Businesses also produce motor sports events
such as monster truck events, tractor pulls, mud races, demolition derbies
and motocross races, and design tracks and other elements for those events.
Competition among producers in the specialized motor sports industry is
between three large companies and a number of smaller regional companies. SFX
Entertainment believes that, upon consummation of the Pending Acquisitions,
it will be the largest participant in the industry, on a pro forma basis
having produced 188 events in over 70 markets in 1997. SFX Entertainment's
two major specialized motor sports competitors produce approximately 40 and
55 events each year, respectively. SFX Entertainment also will compete with
several regional specialized motor sports companies, which each present only
a small number of events, as well as a number of local promoters that present
only one or two events per year.
In addition, SFX Entertainment and the Acquisition Businesses produce a
variety of other forms of live entertainment, including music festivals,
radio programs, air shows, figure skating shows, gymnastics tours, comedy
tours, motivational speaking tours and television programming based on
certain of their events and other events.
Venue Operations
SFX Entertainment's revenues from its venue operations are derived
primarily from corporate sponsorships and advertising, concessions,
merchandise, parking and other related items. A venue operator will typically
receive for each event it hosts a fixed fee or percentage of ticket sales for
use of the venue, as well as a fee representing between 40-50% of total
concession sales from the vendors and 10-25% of total merchandise sales from
the performer. As a venue owner, SFX Entertainment typically receives 100% of
sponsorship and advertising revenues. Since few artists will play in every
available market during a tour, SFX Entertainment competes with venues in
other markets for dates of popular national tours. The favorable cost
structure of amphitheaters and their ability to draw fans is often an
important factor in the decision of a performer to choose to perform in an
amphitheater market. In certain cities, SFX Entertainment also competes with
other venues to promote an artist in that city. SFX Entertainment currently
owns and/or operates under lease or exclusive booking arrangement a total of
20 venues, including two amphitheaters and two theaters in the New
York--Northern New Jersey--Long Island market, an amphitheater and a
theater/ballroom in the Indianapolis market, an amphitheater in the Columbus
market, an amphitheater in the Hartford market and an amphitheater in the
Rochester market. After consummation of the Pending Acquisitions, SFX
Entertainment (which currently owns or operates 20 venues) believes that it
will own and/or operate the largest network of venues used principally for
music concerts and other live entertainment events in the United States, with
39 venues either directly owned or operated under lease or exclusive booking
arrangements in 21 of the top 50 markets, including 9 amphitheaters in 6 of
the top 10 markets. The following chart sets forth certain information with
respect to the venues that will be owned and/or operated by SFX
Entertainment, after giving effect to the Pending Acquisitions:
<TABLE>
<CAPTION>
SFX TOTAL AVG. NO. OF TOTAL SEATS
MARKET TYPE OF ENTERTAINMENT'S SEATING ATTENDANCE EVENTS SOLD IN
MARKET AND VENUE RANK(1) VENUE INTEREST CAPACITY IN 1996 IN 1996 1996
- ------------------------------ -------- -------------- ---------------------- ----------- ------------ --------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
New York--Northern New 1
Jersey--Long Island:
PNC Bank Arts
Center(2)(formerly Garden
State Arts Center)
(Holmdel, NJ) ............. amphitheater 22-year lease (expires 17,500(3) 6,512 48 312,595
October 31, 2017)
Jones Beach Marine
Amphitheater (Wantagh, NY) . amphitheater 10-year license 14,000(3) 8,712 44 383,314
agreement (expires
December 31, 1999)
Roseland Theater ............ theater exclusive booking 3,200 2,765 57 157,605
agent
Westbury Music Fair
(Westbury, NY) ............. theater 43-year lease (expires 2,870 2,026 190 384,917
December 31, 2034)
D-33
<PAGE>
SFX TOTAL AVG. NO. OF TOTAL SEATS
MARKET TYPE OF ENTERTAINMENT'S SEATING ATTENDANCE EVENTS SOLD IN
MARKET AND VENUE RANK(1) VENUE INTEREST CAPACITY IN 1996 IN 1996 1996
- ------------------------------ -------- -------------- ---------------------- ----------- ------------ --------- ------------
Los Angeles--Riverside--Orange 2
County:
Glen Helen Blockbuster
Pavilion(2)
(San Bernardino, CA) ...... amphitheater 50% partnership 25,000(4) 9,842 25 246,039
interest in 25-year
lease (expires July 1,
2018)
Irvine Meadows
Amphitheater(2)
(Irvine, CA) ............... amphitheater 50% partnership 15,500 8,505 32 272,162
interest in 20-year
lease (expires
February 28, 2017)
San Francisco--Oakland--San 5
Jose:
Shoreline Amphitheater(5) ... amphitheater facility owned; 25,000 10,306 37 381,315
land leased for 35
years (expires
November 30, 2021)
Concord Pavilion(5) ......... amphitheater 10-year exclusive 12,500 6,002 42 252,070
outside booking agent
(expires December 31,
2005)
Greek Theater(5) ............ theater 4-year lease (expires 8,500 5,572 10 55,718
October 31, 1998)
Warfield Theatre(5) ......... theater 10-year lease (expires 2,250 1,727 56 96,726
May 31, 2008)
Fillmore Auditorium(5) ..... theater 10-year lease (expires 1,249 913 146 133,279
August 31, 2007)
Punchline Comedy Club(5) ... club 5-year lease (expires N/A N/A N/A N/A
September 15, 2001)
Philadelphia--Wilmington-- 6
Atlantic City:
Blockbuster/SONY Music
Entertainment Centre on the
Waterfront(2) .............. amphitheater 31-year lease (expires 25,000 7,111 48 341,319
February 9, 2025)
Dallas--Ft. Worth: 9
Starplex Amphitheater(2) .... amphitheater 32.5% partnership 20,100 9,479 33 312,806
interest in 31 year
lease (expires
December 31, 2028)
Houston--Galveston--Brazoria: 10
Cynthia Woods Mitchell
Pavilion(2)................. amphitheater 15-year management 13,000 9,178 36 258,364
contract (expires
December 31, 2009)
Bayou Place Performance theater 50% partnership 2,800 N/A N/A N/A
Hall(2)..................... interest in 10-year
lease (expires
December 31, 2007)
Atlanta: 12
Lakewood Amphitheater(2) .... amphitheater 32.5% partnership 19,000 9,768 22 214,896
interest in 35-year
lease (expires January
1, 2019)
Chastain Park amphitheater 10-year lease (expires 7,000 5,732 28 160,492
Amphitheater(6)............. December 31, 2000)
Roxy Theater(6) ............. theater 7-year lease (expires 1,600 673 92 61,960
March 31, 2004)
Cotton Club(6) .............. theater 5-year lease (expires 650 321 152 48,751
June 12, 2000)
St. Louis: 17
Riverport Amphitheater(7) ... amphitheater 50% partnership 21,000 8,782 44 386,399
interest in
ownership(8)
American Theater(7) ......... theater 10-year lease (expires 2,000 1,485 22 32,662
July 31, 2004)
D-34
<PAGE>
SFX TOTAL AVG. NO. OF TOTAL SEATS
MARKET TYPE OF ENTERTAINMENT'S SEATING ATTENDANCE EVENTS SOLD IN
MARKET AND VENUE RANK(1) VENUE INTEREST CAPACITY IN 1996 IN 1996 1996
- ------------------------------ -------- -------------- ---------------------- ----------- ------------ --------- ------------
Westport Playhouse(7) ...... theater 1-year lease 1,100 897 22 19,724
Phoenix--Mesa: 18
Desert Sky Blockbuster
Pavilion(2)................. amphitheater 60-year lease (expires 20,000 8,165 32 261,284
June 30, 2049)
Pittsburgh: 19
Star Lake Amphitheater(2) ... amphitheater 45-year lease (expires 22,500 9,471 44 416,733
December 31, 2034)
Kansas City: 24
Sandstone Amphitheater(7)
(Kansas City, KS)........... amphitheater 10-year lease 18,000 7,150 36 257,395
(expires December 31,
2002)
Starlight Theater(7) ........ theater annual exclusive 9,000 2,908 10 29,083
booking agent contract
(1998 renewal under
negotiation)
Memorial Hall(7) ............ theater 1998 contract renewal 3,000 2,169 17 36,874
under negotiation
Sacramento--Yolo: 26
Punchline Comedy Club(5) ... club 9-year lease (expires N/A N/A N/A N/A
December 17, 1999)
Indianapolis: 28
Deer Creek Music Center .... amphitheater owned 21,000 10,187 38 387,119
Murat Centre ................ theater and 50-year lease (expires 2,700 1,900 85
161,500(9)
ballroom August 31, 2045)
Columbus: 30
Polaris Amphitheater......... amphitheater owned 20,000 6,751 38 256,553
Charlotte--Gastonia--Rock 32
Hill:
Charlotte Blockbuster amphitheater owned 18,000 6,185 39 241,233
Pavilion(2) ................
Hartford: 36
Meadows Music Theater ...... amphitheater facility owned; 25,000 6,914 38 262,741
land leased for 37
years (expires
September 13, 2034)
Rochester: 39
Finger Lakes Amphitheater ... amphitheater 3-year lease (expires 12,700 4,203 15 63,044
in 1999)
Nashville: 41
Starwood Amphitheater(2) .... amphitheater one-half ownership 20,100 6,970 27 188,187
Oklahoma City: 43
Zoo Amphitheatre(7).......... amphitheater year-to-year exclusive 9,000 4,510 6 27,061
booking agent
D-35
<PAGE>
SFX TOTAL AVG. NO. OF TOTAL SEATS
MARKET TYPE OF ENTERTAINMENT'S SEATING ATTENDANCE EVENTS SOLD IN
MARKET AND VENUE RANK(1) VENUE INTEREST CAPACITY IN 1996 IN 1996 1996
- ------------------------------ -------- -------------- ---------------------- ----------- ------------ --------- ------------
Raleigh--Durham--Chapel Hill: 50
Walnut Creek amphitheater 66 2/3% partnership 20,000 8,476 43 364,489
Amphitheater(2)............. interest in 40-year
lease (expires October
31, 2030)
West Palm Beach--Boca Raton: 50
SONY Music/Blockbuster Coral
Sky Amphitheater(2)......... amphitheater 75% partnership 20,000 9,417 26 244,835
interest in 10-year
lease (expires January
4, 2005)
Reno: 119
Reno Hilton Amphitheater(5) . amphitheater operating agreement 8,500 3,977 21 83,509
(renewal under
negotiation)
----------- ------------ --------- ------------
TOTAL ......................... 490,319 5,829(10) 1,701 7,798,753
</TABLE>
- ------------
(1) Based on the July 1994 population of metropolitan statistical areas as
set forth in the 1996 Statistical Abstracts of the United States. Does
not include venues where PACE sells subscriptions for Touring Broadway
Shows.
(2) After the consummation of the PACE Acquisition (including the Pavilion
Acquisition). There can be no assurance that SFX Entertainment will be
able to consummate the acquisition of either or both of the interests of
Charlotte Amphitheater Corporation and The Westside Amphitheater
Corporation (collectively, "Blockbuster Sub") and YM Corp. ("Sony Sub")
in Pavilion Partners; as a result, SFX Entertainment may not obtain 100%
ownership of Pavilion Partners.
(3) Assumes completion of current expansion projects, which are anticipated
to be completed by summer 1998.
(4) Additional seating of approximately 40,000 is available for certain
events.
(5) After the consummation of the BGP Acquisition.
(6) After the consummation of the Concert/Southern Acquisition.
(7) After the consummation of the Contemporary Acquisition.
(8) Contemporary currently owns a 50% interest in a partnership that owns
the Riverport Amphitheater. If Contemporary is unable to purchase the
remaining partnership interest prior to the consummation of the
Contemporary Acquisition, the purchase price for Contemporary will be
reduced. See "Agreements Related to the Pending
Acquisitions--Contemporary Acquisition."
(9) Numbers shown are for 1997. Numbers for 1996 are unavailable.
(10) Represents average attendance by venue. Average attendance in 1996 by
event was 4,585.
Because SFX Entertainment and the Acquisition Businesses operate a number
of their venues under leasing or booking agreements, SFX Entertainment's
long-term success will depend on its ability to renew these agreements when
they expire or terminate. There can be no assurance that SFX Entertainment
will be able to renew these agreements on acceptable terms or at all, or that
it will be able to obtain attractive agreements with substitute venues.
Sponsorships and Advertising; Marketing and Other Services
In order to maximize revenues, SFX Entertainment actively pursues the sale
of local, regional and national corporate sponsorships, including the naming
of venues (e.g., the PNC Bank Arts Center) and the designation of "official"
event or tour sponsors, concessions providers (e.g., beer and soda), credit
card companies, phone companies, film manufacturers and radio stations, among
others. Sponsorship arrangements can provide significant additional revenues
at negligible incremental cost, and many of SFX Entertainment's existing
venues and venues to be acquired in the Pending Acquisitions currently have
no sponsorship arrangements in many of the available categories (including
naming rights). SFX Entertainment believes that the national venue network
being assembled in the Pending Acquisitions will likely (a) attract a larger
number of major corporate sponsors and (b) enable SFX Entertainment to sell
national sponsorship rights at a premium over local or regional sponsorship
rights. SFX Entertainment also pursues the sale of corporate advertising at
its venues, and believes that it has substantial advertising space available
(e.g., billboard space) that it has not yet begun to utilize. SFX
Entertainment also believes that (a) its relationships with advertisers will
enable it to better utilize available advertising space and (b) the
aggregation of its audiences nationwide will create the opportunity for
advertisers to access a nationwide market.
D-36
<PAGE>
SFX Entertainment and the Acquisition Businesses provide a variety of
marketing and consulting services derived from or complementary to their live
entertainment operations, including (a) local, regional and national live
marketing programs and (b) subscription or fee based radio and music industry
data compilation and distribution. Live marketing programs are generally
specialized advertising campaigns designed to promote a client's product or
service by providing samples or demonstrations in a live format, typically
including at malls and college campuses. For example, Contemporary presents
live marketing events on behalf of AT&T for the purposes of demonstrating the
advantages of AT&T's long distance service over that of its competitors. This
program is in its third year, and Contemporary is now the primary vendor for
this service. Additionally, SFX Entertainment believes that Contemporary is
one of the leading producers of national mall touring events, producing over
65 events every year in the country's top-rated shopping malls. These events,
either in stores or mall congregation areas, are designed to promote brand
awareness and drive follow-up sales. Contemporary recently had mall tour
campaigns for Newsweek magazine (the Newsweek Technology Tour) and for Radio
Shack (The Rock and Roll Hall of Fame/Radio Shack Tour). SFX Entertainment
believes that, along with mall events, Contemporary is one of the industry
leaders in events produced on college campuses. Currently in its seventh
year, the CBS College Tour will appear at 40 colleges in the U.S. In addition
to promoting the image of the CBS Television Network, these tours also create
value-added tie-in promotions and marketing programs for the network's top
advertisers. During each year, Contemporary uses over 100 vehicles (including
semi-trailer trucks, vans and other vehicles) traveling nationwide in support
of these programs, and draws on over 1,000 independent marketing associates
across the country with respect to its marketing campaigns.
SFX Entertainment and the Acquisition Businesses are engaged in music
marketing, research and artist development activities, and Network is a
publisher of trade magazines for radio broadcasters, music retailers,
performers and record industry executives. Each of Network's magazines
focuses on research and insight common to a specific contemporary radio
format. Network also provides radio airplay and music retail research
services to record labels, artist managers, retailers and radio broadcasters.
Network gathers its information directly from nearly 1,100 radio programmers
and product buyers and in 1996 had more than 300 clients for these services.
Annual fees from these services during this period have ranged from $2,500 to
$250,000 per corporate client.
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, Network produces eight daily radio "show
prep" services that stations use to supplement in-house content production.
In 1996, Network delivered these services to approximately 1,100 radio
stations in exchange for commercial inventory or airtime, which in turn was
sold to national network advertisers. Network also provides consulting and
entertainment marketing services to corporate clients with music business
interests.
OPERATING STRATEGY
SFX Entertainment's principal objectives are (a) to maximize revenue and
cash flow growth opportunities by being a leading promoter and producer of
live entertainment and (b) to own and/or operate leading live entertainment
venues in the United States. SFX Entertainment's specific strategies include
the following:
Own and/or Operate Leading Live Entertainment Venues in the Nation's Top 50
Markets
A key component of SFX Entertainment's strategy is to own and/or operate a
network of leading live entertainment venues in the nation's top 50 markets.
SFX Entertainment believes that this strategy will enable it to (a) utilize
its nationwide venue footprint, significant industry expertise and access to
a large aggregate audience to secure more events and distribute content on a
national scale, (b) sell additional products and maximize numerous other
related revenue sources, (c) position itself to produce national tours by
leading music performers in order to capture a greater percentage of revenues
from those tours and (d) encourage wider use by performers of SFX
Entertainment's venues by providing centralized access to a nationwide
network of venues. After consummation of the Pending Acquisitions, SFX
Entertainment (which currently owns or operates 20 venues) believes that it
will own and/or operate the largest network of venues used principally for
music concerts and other live entertainment events in the
D-37
<PAGE>
United States, with 39 venues either directly owned or operated under lease
or exclusive booking arrangements in 21 of the top 50 markets, including 9
amphitheaters in 6 of the top 10 markets.
Maximize Related Revenue Opportunities
SFX Entertainment intends to enhance revenues and cash flows by maximizing
revenue sources arising from and related to its leadership position in the
live entertainment business. These related revenues comprised approximately
17% of SFX Entertainment's total revenues for the nine months ended September
30, 1997. Management believes that these related revenue sources generally
have higher margins than promotion and production revenues and include, among
others, (a) the sale of corporate sponsorship, naming and other rights,
concessions, merchandise, parking and other products and services and (b) the
sale of rights to advertise to SFX Entertainment's large aggregate national
audience. Categories available for sponsorship arrangements include the
naming of the venue itself (e.g., the PNC Bank Arts Center) and the
designation of "official" event or tour sponsors, concessions providers
(e.g., beer and soda), credit card companies, phone companies, film
manufacturers and radio stations, among others. Sponsorship arrangements can
provide significant additional revenues at negligible incremental cost, and
many of SFX Entertainment's existing venues and venues to be acquired in the
Pending Acquisitions currently have no sponsorship arrangements in many of
the available categories (including naming rights). SFX Entertainment also
intends to maximize related revenues by developing and exploiting
intellectual property rights associated with (a) its production of musical
concert tours and themed events (such as regional music festivals) and (b)
branded characters created as an integral part of the content, marketing and
merchandising of certain motor sports events.
Exploit Synergies of the Acquisition Businesses
SFX Entertainment plans to maximize revenues by exploiting synergies among
its existing businesses and the Acquisition Businesses. SFX Entertainment
believes that it can utilize the best business practices of the respective
Acquisition Businesses on a national scale. For example, the Atlanta-based
regional Music Midtown Festival, created and promoted by Concert/Southern
(one of the Acquisition Businesses), is a highly successful music festival
concept that drew approximately 200,000 attendees in 1997; SFX Entertainment
believes that it can use the event as a model for other markets. In addition,
SFX Entertainment believes that the radio industry trade publications of
Network (another of the Acquisition Businesses) will enable SFX Entertainment
to introduce new acts and new musical releases to radio programming directors
nationwide. This exposure can enhance recorded music sales and, in turn,
music concert attendance, particularly for artists having relationships with
SFX Entertainment.
Increase Use of Venues; Diversification of Acts and Venues
Typically, a venue is not utilized for many of the dates available for
live entertainment events in any given season. SFX Entertainment believes
that it will be able to increase the utilization of its venues through its
ability to affect scheduling on a nationwide basis, its local knowledge,
relationships and expertise and its and the Acquisition Businesses'
presentation of a variety of additional events, including comedy acts, magic
acts, motivational speeches, national figure skating and gymnastics
competitions and exhibitions and bull riding competitions, among others. SFX
Entertainment believes that a diversified portfolio of performers, events and
venues reduces reliance on the commercial success of any one performer, event
or venue.
Innovative Event Marketing
SFX Entertainment plans to use innovative event marketing to increase
admissions, sponsorship and advertising revenues, and, to a limited extent,
average ticket prices at its venues. In particular, SFX Entertainment
believes that it can increase the profitability of its venues by offering
premium ticket packages, including (a) season ticket packages that include
amenities such as preferred seating, VIP parking, waiter service, private
club and/or "upscale" concession menus, (b) subscription series packages
allowing customers to purchase tickets for a set of performances and (c)
preferred seating, such as box seating and VIP seating areas, which typically
generate higher revenues per seat. Moreover, the market research and audience
demographics databases that SFX Entertainment will acquire through certain of
D-38
<PAGE>
the Pending Acquisitions, when combined with SFX Entertainment's existing
audience data collection efforts, will permit highly-effective targeted
marketing, such as direct-mail and subscription series campaigns, which SFX
Entertainment believes will increase ticket pre-sales and overall sales in a
cost-efficient manner.
Strict Cost Controls; Nationally Coordinated Booking, Marketing & Accounting
SFX Entertainment's senior management imposes strict financial reporting
requirements and expense budget limitations on all of its businesses,
enabling senior management to monitor the performance and operations of all
of its businesses, to eliminate duplicative administrative costs and to
realize expense savings. Moreover, SFX Entertainment believes that its size
after consummating the Pending Acquisitions will enable it to achieve
substantial economies of scale by (a) implementing a nationally coordinated
booking system (for contracting for and scheduling acts), while continuing to
utilize the substantial local expertise of the Acquisition Businesses, (b)
establishing a centralized marketing team to exploit ancillary revenue
streams on local, regional and national levels, including from sponsorship,
advertising and merchandising opportunities, and (c) implementing a
centralized accounting system.
Pursue Complementary Acquisition Opportunities
The live entertainment business is characterized by numerous participants,
including booking agents, promoters, producers, venue owners and venue
operators, many of which are entrepreneurial, capital-constrained local or
regional businesses that do not achieve significant economies of scale from
their operations. SFX Entertainment believes that the fragmented nature of
the industry presents attractive acquisition opportunities, and that its
larger size will provide it with improved access to the capital markets that
will give it a competitive advantage in implementing its acquisition
strategy. Through consolidation, SFX Entertainment will be better able to
coordinate negotiations with performer and talent agents, addressing what SFX
Entertainment believes is a growing desire among performers and talent agents
to deal with fewer, more sophisticated promoters. SFX Entertainment intends
to pursue additional strategic acquisitions of (a) amphitheater and other
live entertainment venues and (b) local and regional promoters and producers
of music concert, theatrical, specialized motor sports and other live
entertainment events. SFX Entertainment may also pursue acquisitions of other
related or complementary venues or businesses.
PENDING ACQUISITIONS
In December 1997, SFX Entertainment entered into agreements to acquire the
live entertainment businesses summarized in the following table. The
consummation of the Pending Acquisitions is subject to a variety of factors,
including compliance with numerous conditions precedent, some of which are
outside of SFX Entertainment's control. See "Agreements Related to the
Pending Acquisitions." There can be no assurance that the Pending
Acquisitions will be consummated on the terms described herein or at all. See
"Risk Factors--Risks Related to Pending Acquisitions."
D-39
<PAGE>
<TABLE>
<CAPTION>
TOTAL
CONSIDERATION(1)
($ IN SELECTED
COMPANY MILLIONS) BUSINESS(ES) VENUES(2)
- --------------- -------------- ------------------------------------ ----------------------------------
<S> <C> <C> <C>
PACE (INCLUDING $245.9 Music, theater and specialized motor American Theater
PAVILION sports event promotion and Bayou Place Performance Hall
PARTNERS) production. PACE is one of the Blockbuster/SONY Music
largest diversified promoters and Entertainment Centre on the
producers of live entertainment in Waterfront
the United States, having what SFX Charlotte Blockbuster Pavilion
Entertainment believes is the Cynthia Woods Mitchell Pavilion
largest U.S. distribution network in Desert Sky Blockbuster Pavilion
each of its music, theater and Glen Helen Blockbuster Pavilion
specialized motor sports businesses. Irvine Meadows Amphitheater
Pavilion Partners is one of the Lakewood Amphitheater
leading owners of amphitheaters in PNC Bank Arts Center
the United States. SONY Music/Blockbuster Coral Sky
Amphitheater
Star Lake Amphitheater
Starplex Amphitheater
Starwood Amphitheater
Walnut Creek Amphitheater
- --------------- -------------- ------------------------------------ ----------------------------------
CONTEMPORARY $ 91.5 A fully-integrated live Memorial Hall
entertainment and special event Riverport Amphitheater
promoter and producer, venue owner Sandstone Amphitheater
and operator, ticket distributor and Starlight Theater
consumer marketer. West Fair Amphitheater
Westport Playhouse
Zoo Amphitheater
- --------------- -------------- ------------------------------------ ----------------------------------
BGP $ 68.3 One of the oldest producers and Concord Pavilion
promoters of, and owner-operators of Fillmore West Auditorium
venues for, live entertainment in Greek Theater
the United States, and a leading Punchline Comedy Club (Sacramento)
promoter of live entertainment in Punchline Comedy Club
the San Francisco Bay area. (San Francisco)
Seattle, WA--Under construction.
Shoreline Amphitheater
Warfield Theater
- --------------- -------------- ------------------------------------ ----------------------------------
NETWORK $ 62.0 Network Magazine Group ("Network N/A
MAGAZINE/ SJS Magazine"), a leading publisher of
trade magazines for the radio
broadcasting industry, and SJS
Entertainment Corporation ("SJS"), a
leading independent creator,
producer and distributor of
music-related programming, services
and research.
- --------------- -------------- ------------------------------------ ----------------------------------
CONCERT/ $ 16.6 A promoter of live music events in Chastain Park Amphitheater
SOUTHERN the Atlanta, Georgia metropolitan Cotton Club
area. Roxy Theater
- --------------- -------------- ------------------------------------ ----------------------------------
</TABLE>
(footnotes on next page)
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------------
(1) Includes the cash portion of purchase price, the negotiated value of SFX
Entertainment Class A Common Stock, if any, to be issued, and debt or
other liabilities, if any, to be repaid. Excludes certain potential
contingent consideration. See "Agreements Related to the Pending
Acquisitions." The approximately 4.2 million shares of SFX Entertainment
Class A Common Stock expected to be issued in connection with certain of
the Pending Acquisitions have been valued by the applicable parties at
$13.33 per share for purposes of calculating the consideration to be
given for the Pending Acquisitions. This valuation is based on financial
projections developed jointly by SFX Entertainment and the relevant
sellers. There is presently no trading market for the SFX Entertainment
Class A Common Stock, and there can be no assurance that the assumptions
underlying the valuation will, in fact, be correct or that the valuation
will approximate the actual trading price of the SFX Entertainment Class
A Common Stock. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations--Pending Acquisitions."
(2) Includes venues owned and/or operated under lease or under exclusive
booking arrangements.
PACE
On December 12, 1997, SFX Entertainment executed an agreement (the "PACE
Agreement") to acquire PACE, for a total purchase price of $155.0 million
(including the issuance of stock of SFX Entertainment valued by the parties
at approximately $20.0 million and the repayment of $25.5 million of debt).
PACE is one of the largest diversified promoters and producers of live
entertainment in the United States, having what SFX Entertainment believes to
be the largest distribution network in each of its music concerts, theatrical
shows and motor sports events business segments. As part of its distribution
network for music concerts, PACE owns interests in and manages the largest
network of amphitheaters in the United States. During 1997, more than 15
million people attended approximately 5,700 events produced or presented by
PACE. These events included: (a) music concerts featuring artists such as Rod
Stewart, Jimmy Buffett and Ozzy Osbourne; (b) theatrical shows such as The
Phantom of the Opera, Jekyll & Hyde, Rent and The Magic of David Copperfield;
and (c) specialized motor sports events featuring AMA Supercross racing,
monster trucks, demolition derbies and thrill acts. In 1997, PACE Music
presented 491 amphitheater events in the United States, and 348
non-amphitheater events in over 40 markets. Its recently formed touring
division, PACE Touring, produces national tours of music events, having
produced two national music tours in 1997. In 1997, PACE Theatrical (a)
presented approximately 300 weeks of theater in over 30 markets, including 31
subscription markets with approximately 220,000 subscribers, and (b) produced
or had significant investments in the production of 19 Broadway Shows and
Touring Broadway Shows. In 1997, PACE Motor Sports presented over 188 events
in over 70 markets. In connection with the acquisition of PACE, SFX
Entertainment has contracted to obtain 100% of Pavilion Partners, a
partnership that owns interests in 10 of the 41 venues to be owned by SFX
Entertainment, by acquiring one-third of Pavilion Partners through the
acquisition of PACE and the remaining two-thirds of Pavilion Partners through
separate agreements with Sony Sub and Blockbuster Sub, for a combined
consideration of $90.9 million (including the repayment of $49.8 million of
debt related to the two-thirds interest). There can be no assurance that SFX
Entertainment will be able to consummate the acquisition of either or both of
Blockbuster Sub's and Sony Sub's interests in Pavilion partners; as a result,
SFX Entertainment may not obtain 100% ownership of Pavilion Partners. If SFX
Entertainment is unable to obtain 100% ownership of Pavilion Partners, then
SFX Entertainment may, among other things, be in breach of an exclusivity
provision contained in the Pavilion Partners partnership agreement, unless
that agreement can be amended. See "Risk Factors--Risks Related to the
Pending Acquisitions" and "Agreements Related to the Pending
Acquisitions--PACE Acquisition--Pavilion Acquisition."
Under certain circumstances, SFX Entertainment may be required to sell
either its motor sports or theatrical lines of business. See "Risk
Factors--Control of Motor Sports and Theatrical Businesses" and "Agreements
Related to the Pending Acquisitions--PACE Acquisition--Becker Employment
Agreement."
The agreement governing the partnership through which PACE holds its
interest in the Lakewood Amphitheater in Atlanta, Georgia contains a
provision that purports to restrict PACE and its affiliates from directly or
indirectly owning or operating another amphitheater in Atlanta. In
management's view, this provision will not materially affect the business or
prospects of SFX Entertainment. However, SFX Entertainment will acquire an
interest in the Chastain Park Amphitheater, also in Atlanta, in the
Concert/Southern Acquisition. SFX Entertainment intends to seek a waiver of
the restrictive provision; however, it is possible that SFX Entertainment
will be unable to obtain the waiver.
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Contemporary
On December 12, 1997, SFX Entertainment executed an agreement (the
"Contemporary Agreement") to acquire by merger and asset acquisition, the
music concert, live entertainment, event marketing, computerized ticketing
and related businesses of Contemporary for approximately $91.5 million
(including the issuance of stock of SFX Entertainment valued by the parties
at approximately $18.7 million). Contemporary is a vertically-integrated live
entertainment and special event promoter and producer, venue operator and
consumer marketer. Contemporary is also the leading promoter, producer and
tour developer of Christian performers (including Amy Grant and Michael W.
Smith) and is a major promoter and producer of comedy tours (including those
of Jerry Seinfeld, Tim Allen, Chris Rock and HBO's Def Comedy Jam).
Contemporary (through its Capital Tickets subsidiary) sells tickets for its
own events and events at its venues through a wide distribution of retail
outlets and a state-of-art interactive voice response phone system (operated
by its Dialtix affiliate) that permits automated ticket orders and credit
card payment. In addition to the venues controlled by Contemporary, clients
of Capital Tickets and Dialtix include the Kiel Center, a 20,000 seat arena
in St. Louis, Missouri (home arena of the National Hockey League's St. Louis
Blues), and Trans World Dome, a 60,000 seat stadium in St. Louis, Missouri
(home stadium of the National Football League's St. Louis Rams).
Contemporary is also one of the top special event sales promotion and
marketing companies in the country. Contemporary develops programs for
national consumer product companies and for demonstrating, sampling and
selling products to consumers. Contemporary's clients have included AT&T, CBS
TV, Radio Shack, Coca Cola USA, Reebok, Nabisco and the National Basketball
Association. See "Agreements Related to the Pending
Acquisitions--Contemporary Acquisition."
BGP
On December 11, 1997, SFX Entertainment executed an agreement (the "BGP
Agreement") to acquire BGP for total consideration of $68.3 million
(including the issuance of capital stock of SFX Entertainment valued by the
parties at $7.5 million or, at SFX Entertainment's option, an equivalent
amount in cash). Although SFX Entertainment has also agreed to repay $12.2
million of BGP debt, the sellers in the BGP Acquisition have agreed to have
working capital in BGP at closing at least equal to the amount of this
assumed debt. BGP is one of the oldest promoters and producers of live
entertainment in the United States and is the principal promoter of live
entertainment in the San Francisco Bay area. During 1997, more than 2.3
million people attended approximately 1,450 events promoted and/or produced
by BGP. Events recently promoted or produced by BGP include: (a) music
concerts featuring artists such as Alanis Morissette, Bruce Springsteen, Dave
Matthews, Gloria Estefan, James Taylor, Jimmy Buffett, Metallica, Neil
Diamond, Phish and The Who; and (b) theatrical shows such as Lord of the
Dance and The Magic of David Copperfield. In 1997, BGP promoted (a) 124
amphitheater events and (b) 1,199 non-amphitheater events in over 20 markets.
Divisions of BGP also produce and promote national gymnastic and ice-skating
tours and events as well as major corporate events for San Francisco and
Silicon Valley corporate customers. In 1997, BGP presented a total of 133
gymnastic, ice-skating and major corporate events for clients such as Adobe
Systems, Charles Schwab, Banana Republic, Oracle, PowerBar, Sterling Software
and Excite. BGP also acts as a talent manager for national acts including the
Neville Brothers, the Gin Blossoms, Taj Mahal and Cracker. See "Agreements
Related to the Pending Acquisitions--BGP Acquisition."
Network
On December 10, 1997, SFX Entertainment executed an agreement (the
"Network Agreement") to acquire Network for a total purchase price of $62.0
million (including the issuance of stock of SFX Entertainment valued by the
parties at approximately $10.0 million). In addition, SFX Entertainment has
the option to acquire an office building and related property for $2.4
million. Network Magazine is engaged in music marketing, research and artist
development activities and is a publisher of trade magazines for radio
broadcasters, music retailers, performers and record industry executives.
Each magazine is focused on research and insight common to a specific
contemporary radio format. These publications, Album Network, Network 40,
Urban Network, Virtually Alternative, Totally Adult, AggroActive and Educated
Guess, derive revenue from advertising sales and subscriptions. Network
Magazine
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<PAGE>
also publishes The Yellow Pages of Rock, which is a reference book popular
with people and companies doing business in the broadcast music industry.
Network Magazine is currently developing a consumer music magazine that will
be distributed free to customers at music retail locations. Network Magazine
also provides radio airplay and music retail research services to record
labels, artist managers, retailers and radio broadcasters. Network Magazine
gathers its information directly from nearly 1,100 radio programmers and
product buyers and, in 1996, had more than 300 clients for these services.
Annual fees during this period ranged from $2,500 to $250,000 per corporate
client.
Network Magazine and SJS are both creators and distributors of network
radio special events and live concert programming for over 400 music radio
stations in the top 200 United States radio markets. Additionally, SJS is an
independent creator, producer and distributor of music related programming,
services and research. SJS produces eight daily radio "show prep" services
that stations use to supplement in-house content production. In 1996, SJS
delivered these services to approximately 1,100 radio stations. Together,
Network Magazine and SJS barter or exchange these programs and services to
radio broadcasters for commercial inventory or airtime, which is in turn sold
by SJS to national network advertisers. Network also provides consulting and
entertainment marketing services to corporate clients with music business
interests. See "Agreements Related to the Pending Acquisitions--Network
Acquisition."
Concert/Southern
On December 15, 1997, SFX Entertainment executed an agreement (the
"Concert/Southern Agreement") to acquire Concert/Southern Promotions for a
total cash purchase price of $16.6 million (including payment of the $1.6
million present value of a deferred liability). Concert/Southern is a
promoter of live entertainment in the Atlanta metropolitan area. During 1997,
more than 555,000 people attended approximately 370 events promoted or
produced by Concert/Southern. These events included concerts featuring
artists such as Celine Dion, James Taylor, Alanis Morissette, ZZ Top, Bruce
Springsteen, Bob Dylan, Harry Connick, Jr. and Greg Allman, in addition to a
week-long engagement of the Broadway Show Stomp. Concert/Southern also owns
the rights to the Music Midtown Festival in downtown Atlanta. This three day
multi-stage music festival presents over 80 bands, and in 1997 drew
approximately 200,000 people to the downtown Atlanta area. Concert/Southern
is currently developing a Music Midtown Festival for June 1998 in Charlotte,
North Carolina and has plans to export this festival to other sites in future
years. See "Agreements Related to the Pending Acquisitions--Concert/Southern
Acquisition."
SFX Entertainment expects to complete all of the Pending Acquisitions as
soon as practicable after completing the Financing and prior to the SFX
Merger. SFX Entertainment anticipates that it will consummate all of the
Pending Acquisitions in the first quarter of 1998. However, the timing and
completion of the Pending Acquisitions are subject to a number of conditions,
certain of which are beyond SFX Entertainment's control, and there can be no
assurance that the Pending Acquisitions will be completed during that time
period or on the terms described herein, or at all. See "Risk Factors--Risks
Related to Pending Acquisitions" and "Agreements Relating to the Pending
Acquisitions." In addition, there can be no assurance that the value
attributed by the parties to SFX Entertainment's capital stock will
approximate the actual trading price of the stock. See "Management's
Discussion and Analysis of Financial Condition and Results of
Operations--Pending Acquisitions."
PROPERTIES
SFX Entertainment's executive offices are at 650 Madison Avenue, 16th
Floor, New York, New York 10022. After the consummation of the Spin-Off and
the Pending Acquisitions, in addition to the properties described in "--SFX
Entertainment's Live Entertainment Activities--Venue Operations," SFX
Entertainment will lease office space in Austin and Houston, Texas; Atlanta,
Georgia; Chicago, Illinois; Miami, Florida; Gaithersburg, Maryland; Burbank
and Santa Monica, California; Seattle, Washington; London, England; and St.
Louis, Missouri. These properties are generally leased for terms of 1 to 10
years.
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<PAGE>
EMPLOYEES
As of the date of the Spin-Off, SFX Entertainment expects to have
approximately 800 full-time employees. SFX Entertainment will also, from time
to time, hire or contract for part-time or seasonal employees or independent
contractors, although its staffing needs will vary. Pursuant to the SFX
Merger Agreement, SFX Entertainment has agreed to assume all obligations
rising under any employment agreements or arrangements between SFX or any of
its subsidiaries and the employees identified in the merger agreement. These
employees include the members of senior management and all other employees
currently employed in SFX's corporate headquarters in New York. See
"Management." Management believes that its relations with its employees are
good. A number of the employees to be retained by SFX Entertainment,
including those to be retained in connection with the Pending Acquisitions,
are covered by collective bargaining agreements.
LITIGATION
Although SFX Entertainment is involved in several suits and claims in the
ordinary course of business, it is not currently a party to any legal
proceeding that it believes would have a material adverse effect on its
business, financial condition or results of operations.
POTENTIAL CONFLICTS OF INTEREST
Marquee is a publicly-traded company that, among other things, acts as
booking agent for tours and appearances for musicians and other entertainers.
Messrs. Sillerman and Tytel have an aggregate equity interest of
approximately 9.2% in Marquee; Mr. Sillerman is the chairman of its board of
directors, and Mr. Tytel is one of its directors. SFX Entertainment
anticipates that, from time to time, it will enter into transactions and
arrangements (particularly, booking arrangements) with Marquee and Marquee's
clients, and it may compete with Marquee for specific concert promotion
engagements. In any transaction or arrangement with Marquee, Messrs.
Sillerman and Tytel are likely to have conflicts of interest as officers and
directors of SFX Entertainment. These transactions or arrangements will be
subject to the approval of the independent committees of SFX Entertainment
and SFX, except that booking arrangements in the ordinary course of business
will be subject to periodic review but not the approval of each particular
arrangement. Marquee also acts as a promoter of various sporting events and
sports personalities. After the consummation of the Contemporary Acquisition,
SFX Entertainment will produce ice skating and gymnastics events that may
compete with events in which Marquee is involved. See "Certain Relationships
and Related Transactions--Potential Conflicts of Interest."
In addition, prior to the consummation of the SFX Merger, Mr. Sillerman
and other members of SFX Entertainment's management team will have management
obligations to both SFX and SFX Entertainment that may cause them to have
conflicts of interest. See "Management--Employment Agreements and
Arrangements with Certain Officers and Directors" and "Certain Relationships
and Related Transactions--Potential Conflicts of Interest."
Pursuant to the employment agreement entered into between Brian Becker and
SFX Entertainment in connection with the PACE Acquisition, Mr. Becker has the
option, exercisable within 15 days after the second anniversary of the
consummation of the PACE Acquisition, to purchase SFX Entertainment's then
existing motor sports line of business (or, if that line of business has been
sold, SFX Entertainment's then existing theatrical line of business) at its
then fair market value. Mr. Becker's option may present a conflict of
interest in his role as a director of SFX Entertainment in evaluating
proposals for the acquisition of either line of business. See "Agreements
Related to the Pending Acquisitions--PACE Acquisition--Becker Employment
Agreement."
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<PAGE>
SEASONALITY
SFX Entertainment's operations and revenues are largely seasonal in
nature, with generally higher revenue generated in the second and third
quarters of the year. For example, on a pro forma basis for the Recent
Acquisitions, SFX Entertainment generated approximately 70% of its revenues
in the second and third quarters for the 12 months ending September 30, 1997.
SFX Entertainment's outdoor venues are primarily utilized in the summer
months and do not generate substantial revenue in the late fall, winter and
early spring. Similarly, the musical concerts that SFX Entertainment promotes
largely occur in the second and third quarters. To the extent that SFX
Entertainment's entertainment marketing and consulting relate to musical
concerts, they also predominantly generate revenues in the second and third
quarters. Therefore, the seasonality of SFX Entertainment's business causes
(and will probably continue to cause) a significant variation in SFX
Entertainment's quarterly operating results. These variations in demand could
have a material adverse effect on the timing of SFX Entertainment's cash
flows and, therefore, on its ability to service its obligations with respect
to its indebtedness. However, SFX Entertainment believes that this variation
may be somewhat offset with the acquisition of typically non-summer seasonal
businesses in the Pending Acquisitions, such as motor sports (which is
winter-seasonal) and Touring Broadway Shows (which typically tour between
September and May). See "Management's Discussion and Analysis of Financial
Condition and Results of Operations."
COMPETITION
Competition in the live entertainment industry is intense, and competition
is fragmented among a wide variety of entities. SFX Entertainment competes on
a local, regional and national basis with a number of large venue owners and
entertainment promoters for the hosting, booking, promoting and producing of
music concerts, theatrical shows, motor sports events and other live
entertainment events. Moreover, SFX Entertainment's marketing and consulting
operations compete with advertising agencies and other marketing
organizations. SFX Entertainment and the Acquisition Businesses compete not
only with other live entertainment events, including sporting events and
theatrical presentations, but also with non-live forms of entertainment, such
as television, radio and motion pictures. A number of SFX Entertainment's
competitors have substantially greater resources than SFX Entertainment.
Certain of SFX Entertainment's competitors may also operate on a less
leveraged basis, and have greater operating and financial flexibility, than
SFX Entertainment. In addition, many of these competitors also have long
standing relationships with performers, producers, and promoters and may
offer other services that are not provided by SFX Entertainment. There can be
no assurance that SFX Entertainment will be able to compete successfully in
this market or against these competitors.
REGULATORY MATTERS
The business of SFX Entertainment is not generally subject to material
governmental regulation. However, if SFX Entertainment seeks to acquire or
construct new venue operations, its ability to do so will be subject to
extensive local, state and federal governmental licensing, approval and
permit requirements, including, among other things, approvals of state and
local land-use and environmental authorities, building permits, zoning
permits and liquor licenses. Significant acquisitions may also be subject to
the requirements of the HSR Act. Other types of licenses, approvals and
permits from governmental or quasi-governmental agencies might also be
required for other opportunities that SFX Entertainment may pursue in the
future, although SFX Entertainment has no agreements or understandings with
respect to these opportunities at this time. There can be no assurance that
SFX Entertainment will be able to obtain the licenses, approvals and permits
it may require from time to time in order to operate its business.
FORWARD-LOOKING STATEMENTS
Many of the statements, estimates, predictions and projections contained
in this "Business" section of the Prospectus, in addition to certain
statements contained elsewhere in this Prospectus, are "forward-looking
statements" within the meaning of Section 27A of the Securities Act and
Section 21E of the Exchange Act, although those sections do not apply to this
offering. These forward-looking
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<PAGE>
statements are prospective, involving risks and uncertainties. While these
forward-looking statements, and any assumptions on which they are based, are
made in good faith and reflect SFX Entertainment's current judgment regarding
the direction of its business, actual results will almost always vary,
sometimes materially, from any estimates, predictions, projections,
assumptions or other future performance suggested herein. Some important
factors (but not necessarily all factors) that could affect SFX
Entertainment's revenues, growth strategies, future profitability and
operating results, or that otherwise could cause actual results to differ
materially from those expressed in or implied by any forward-looking
statement, include the following: lack of operating history as an independent
public company; failure to consummate any or all of the Pending Acquisitions;
failure to derive anticipated benefits from the Pending Acquisitions; working
capital adjustments; payments pursuant to indemnification arrangements;
seasonality of operations or financial results; changes in economic
conditions and consumer tastes; competition; regulatory difficulties; and the
other matters referred to under "Risk Factors" or elsewhere in this
Prospectus. Stockholders are urged to carefully consider these factors in
connection with the forward-looking statements. SFX Entertainment does not
undertake to release publicly any revisions to forward-looking statements
that may be made to reflect events or circumstances after the date of this
Prospectus or to reflect the occurrence of unanticipated events.
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<PAGE>
THE SPIN-OFF
BACKGROUND AND REASONS FOR THE SPIN-OFF
SFX was formed in 1992 to acquire, own and operate radio stations. SFX's
strategy was to enhance its stations' financial performance and exploit the
changing regulatory environment (which was evolving to allow companies to own
more radio stations) by acquiring stations at attractive prices. When SFX
completed its initial public offering of common stock in 1993, it became one
of only a few publicly traded companies solely devoted to owning and
operating radio stations. SFX continued to grow after its initial public
offering, from a company that owned or operated 10 stations in six markets to
a company that currently owns or programs 74 stations in 19 markets.
Despite escalating acquisition prices, SFX succeeded in its acquisition
strategy by identifying markets and radio stations with significant growth
potential and by employing management's expertise in operating radio stations
to improve financial performance. In addition, management developed and
assembled clusters of radio stations that, when combined in contiguous
regions, could justify the increased acquisition prices the market demanded.
Over time, however, identifying attractive acquisition opportunities
became increasingly difficult. In late 1996, SFX began to explore
opportunities in other entertainment-related industries where management
could employ its expertise and where significant growth opportunities might
exist. Management concluded that the live entertainment industry offers
attractive acquisition opportunities because it, like the radio industry in
1993, is highly fragmented and consists of mostly local or regional
companies. As a result, SFX began investing in the live entertainment
industry in early 1997, while continuing to pursue radio station acquisitions
and tax-free exchanges of radio stations that would be likely to increase
SFX's broadcast cash flow.
Despite its continuing activity in the radio industry, SFX explored the
option of maximizing shareholder value on a shorter time horizon through the
sale or merger of SFX under appropriate circumstances. During August 1997,
management discussed proposals with various potential acquirors.
After negotiations with the potential acquirors, the board of directors of
SFX determined that the SFX Merger was superior to the other proposals SFX
had received because (a) it offered the highest value to the holders of SFX's
Class A common stock, (b) it would permit SFX to spin off the concert and
live entertainment business to its stockholders, thereby allowing the
stockholders to participate in the opportunities presented by that business,
and (c) SFX Buyer was willing to permit the transaction to be structured in a
manner that would allow the holders of SFX's Class A common stock to
effectively have a separate class vote on the transaction. On August 24,
1997, SFX executed the SFX Merger Agreement with SFX Buyer.
On January 15, 1998, the board of directors of SFX approved the Spin-Off,
as contemplated by the Distribution Agreement, and approved the Distribution
Agreement and the Tax Sharing Agreement, together with the transactions
contemplated by those agreements.
Consistent with SFX's determination that the concert and live
entertainment business offers attractive acquisition opportunities, SFX
Entertainment has already agreed to consummate the Pending Acquisitions for
an aggregate purchase price of approximately $484.3 million, consisting of
approximately $352.8 million in cash, $75.3 million in repaid debt and the
issuance of approximately 4.2 million shares SFX Entertainment Common Stock
with an attributed negotiated value of $56.2 million. There can be no
assurance that the value attributed by the parties to SFX Entertainment's
capital stock will approximate the actual trading price of the stock. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Liquidity and Capital Resources." Management intends to finance
these acquisitions with the proceeds of SFX Entertainment's recent private
placement of $350.0 million in Notes and with borrowings under the Proposed
Credit Agreement; management anticipates closing the Pending Acquisitions
before the Spin-Off. See "Description of Indebtedness."
The Board believes that the Spin-Off, together with the SFX Merger, will
accomplish a number of important business objectives. The Spin-Off and SFX
Merger will allow SFX's stockholders to realize a
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<PAGE>
significant premium for SFX's existing radio broadcasting business, while at
the same time permitting those stockholders to continue their participation
in the Entertainment Business. The Spin-Off will enable SFX Entertainment to
have its own publicly traded equity security to finance its own growth
opportunities. By distributing the SFX Entertainment Common Stock to SFX's
stockholders, SFX's board of directors believes that there will be a greater
potential for increasing the long-term value of the investment of SFX's
stockholders in the Entertainment Business. SFX's board of directors believes
that the Spin-Off will enable investors to better evaluate the performance,
investment characteristics and the future prospects of the Entertainment
Business, enhancing the likelihood that it will achieve appropriate market
recognition of its performance and potential.
MANNER OF EFFECTING THE SPIN-OFF
Prior to the Spin-Off, SFX Entertainment will amend and restate its
certificate of incorporation to, among other things, increase its authorized
capital stock and will issue to SFX, in exchange for the issued and
outstanding shares of stock of SFX Entertainment then held by SFX, the number
of shares of SFX Entertainment's common stock necessary to consummate the
Spin-Off. Assuming that SFX's stockholders approve Proposal 3 in the attached
Proxy Statement (a proposal that will allow the Spin-Off to occur as
currently structured), the Spin-Off will be a dividend distribution to the
holders of record at the close of business on the Spin-Off Record Date (a
date to be determined by the board of directors of SFX) of the outstanding
shares of SFX's common stock, Series D preferred stock, interests in SFX's
director deferred stock ownership plan and certain warrants and will be made
as follows:
o holders of SFX's Class A common stock will receive 1 share of SFX
Entertainment Class A Common Stock per share held;
o holders of SFX's Class B common stock will receive 1 share of SFX
Entertainment Class B Common Stock per share held;
o holders of SFX's Series D preferred stock will receive the number of
shares of SFX Entertainment Class A Common Stock obtained by multiplying
the number of shares held by 1.0987 (rounded down to the next whole
share);
o SFX will place in escrow with the Escrow Agent an aggregate of
approximately 609,858 shares of SFX Entertainment Class A Common Stock for
delivery to the holders of the warrants granted by SFX to Sillerman
Communications Management Corporation (the "SCMC Warrants") and to the
underwriters of Multi-Market Radio, Inc.'s ("MMR's") initial public
offering (the "IPO Warrants" and, together with the SCMC Warrants, the
"Warrants"), upon exercise of the Warrants (see "Certain Relationships and
Related Transactions--SFX Entertainment Common Stock to Be Received in the
Spin-Off"); and
o Messrs. Dugan, Kramer and O'Grady will receive an aggregate of 2,766
shares of SFX Entertainment Class A Common Stock as adjustments to their
interests under SFX's director deferred stock ownership plan.
See "Description of Capital Stock" for a description of the SFX Entertainment
Class A Common Stock and the SFX Entertainment Class B Common Stock.
Fractional shares of SFX Entertainment Common Stock will not be delivered in
the Spin-Off.
The distribution of shares of SFX Entertainment Common Stock in the
Spin-Off will be made on the distribution date to be set by the Board, which,
in any event, will be before the closing of the SFX Merger (the "Spin-Off
Distribution Date"). The Spin-Off is subject to further action by the Board
of Directors, which must set the Spin-Off Record Date and the Spin-Off
Distribution Date and declare the dividend effectuating the Spin-Off. All
shares of SFX Entertainment Common Stock will be fully paid, nonassessable
and free of preemptive rights.
On the Spin-Off Distribution Date, SFX will deposit with Chase Mellon
Shareholder Services, L.L.C., as the Distribution Agent, certificates
representing the aggregate number of shares of SFX Entertainment Class A
Common Stock and SFX Entertainment Class B Common Stock issuable to
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holders of SFX's common stock, Series D preferred stock and interests in
SFX's director deferred stock ownership plan (approximately 14,200,000 shares
of SFX Entertainment Class A Common Stock and 1,047,037 shares of SFX
Entertainment Class B Common Stock). SFX will instruct the Distribution Agent
to distribute the SFX Entertainment Common Stock to holders of SFX's common
stock, Series D preferred stock and interests in SFX's director deferred
stock ownership plan in accordance with the terms of the Distribution
Agreement as promptly as practicable following the Spin-Off Distribution
Date. Any shares deposited with the Distribution Agent but not required to be
distributed to holders of SFX's common stock and Series D preferred stock
will be returned to SFX Entertainment and subsequently canceled.
On the Spin-Off Distribution Date, SFX will also deposit with Chase Mellon
Shareholder Services, L.L.C., as Escrow Agent, certificates representing the
aggregate number of shares of SFX Entertainment Class A Common Stock that the
holders of Warrants would have been entitled to received as a result of their
ownership of SFX's Class A common stock if they had exercised all of the
Warrants immediately prior to the Spin-Off Record Date. Thereafter, upon
exercise of each Warrant, the Escrow Agent will deliver to the holder of that
Warrant the number of shares of SFX Entertainment Class A Common Stock to
which the holder is entitled. Any shares deposited with the Escrow Agent but
not required to be distributed to holders of Warrants will be returned to SFX
Entertainment and subsequently canceled.
The receipt of shares of SFX Entertainment Common Stock in the Spin-Off
will be taxable to the recipients of shares. See "Certain Federal Income Tax
Consequences."
The Spin-Off will be accounted for by SFX Entertainment based on the
historical cost of related assets. SFX will record the Spin-Off as a
nonmonetary distribution to stockholders, also at historical cost.
Following the Spin-Off and other transactions described in this
Prospectus, approximately 81 million shares of SFX Entertainment Class A
Common Stock (including 2 million shares to be reserved for issuance pursuant
to SFX Entertainment's stock option plan), 8 million shares of SFX
Entertainment Class B Common Stock and 25 million shares of SFX Entertainment
preferred stock will remain unissued.
NO HOLDER OF ANY CLASS OR SERIES OF SFX STOCK WILL BE REQUIRED TO PAY ANY
CASH OR OTHER CONSIDERATION FOR THE SHARES OF SFX ENTERTAINMENT COMMON STOCK
TO BE RECEIVED IN THE SPIN-OFF OR TO SURRENDER OR EXCHANGE SHARES OF SFX
STOCK (OTHER THAN IN REGARD TO THE EXCHANGE AS PART OF THE SFX MERGER AS
DESCRIBED IN THE ATTACHED PROXY STATEMENT) OR TO TAKE ANY OTHER ACTION IN
ORDER TO RECEIVE SFX ENTERTAINMENT COMMON STOCK.
REGULATORY MATTERS
No material United States federal or state regulatory approvals are
required in connection with the Spin-Off that have not been obtained. For a
discussion of United States regulatory approvals with respect to the SFX
Merger, see "Proposal 1: The Merger--Regulatory Matters" in the attached
Proxy Statement.
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AGREEMENTS BETWEEN SFX ENTERTAINMENT AND SFX
For the purpose of effecting the Spin-Off and governing certain of the
relationships between SFX Entertainment and SFX after the Spin-Off, SFX
Entertainment, SFX and SFX Buyer have entered or will enter into the various
agreements described below. The material features of the Distribution
Agreement are summarized below, and a form of the Distribution Agreement is
attached as Annex F to the accompanying Proxy Statement. The Tax Sharing
Agreement and a proposed employee benefits agreement (the "Employee Benefits
Agreement"), the material features of which are also summarized below, have
been filed with the Securities and Exchange Commission (the "SEC") as
exhibits to SFX Entertainment's Registration Statement on Form S-1, File No.
333-43287 (the "SFX Entertainment Registration Statement"). The following
descriptions do not purport to be complete and are qualified in their
entirety by reference to the actual agreements.
DISTRIBUTION AGREEMENT
Manner of Effecting the Spin-Off
The Distribution Agreement provides for the distribution of shares of SFX
Entertainment Common Stock to the holders of record on the Spin-Off Record
Date of SFX's common stock, Series D preferred stock, interests in SFX's
director deferred stock ownership plan and, upon exercise, Warrants, as
described in "The Spin-Off--Manner of Effecting the Spin-Off."
Transfer and Assumption of Assets and Obligations
The Distribution Agreement provides that, at the time of the Spin-Off, SFX
Entertainment will assume (a) certain of SFX's leases and employment
agreements, (b) debt and liabilities incurred by SFX Entertainment or its
subsidiaries after the date of the SFX Merger Agreement in connection with
acquisitions and capital expenditures, (c) liabilities under an airplane
lease, (d) liabilities under an agreement pursuant to which The Sillerman
Companies, Inc., a consulting company of which Mr. Sillerman is the Chairman
of the Board of Directors and Chief Executive Officer, and of which Mr. Tytel
is the Executive Vice President, General Counsel and a Director ("TSC"),
provides services to Triathlon and (e) any other debt and liabilities that
SFX Entertainment deems appropriate. SFX is obligated to use its commercially
reasonable efforts to release SFX Entertainment and its subsidiaries from all
other debt and accrued liabilities prior to the effective time of the SFX
Merger.
SFX Entertainment will be entitled to all of SFX's accounts receivable
relating to SFX's live entertainment business. SFX will transfer to SFX
Entertainment, prior to the Spin-Off:
o an airplane lease;
o fees payable by Triathlon for services provided by TSC;
o two real estate leases and assets located on the leased property;
o a note receivable relating to the sale of SFX's radio stations operating
in Myrtle Beach;
o the employment agreements of certain employees of SFX; and
o all other assets used primarily by SFX Entertainment.
SFX Entertainment will assume all of SFX's and its subsidiaries' obligations
accruing after the date of the Spin-Off under the above agreements and in
connection with the transfer of assets and employees.
Transferred Employees
If the Spin-Off occurs prior to the closing date of the SFX Merger, SFX's
senior management and certain other employees of SFX will devote as much time
as they deem reasonably necessary to conduct the operations of SFX
Entertainment, while continuing to serve in their present capacities with,
and consistent with their obligations to, SFX. At the time of consummation of
the SFX Merger, SFX Entertainment will assume all obligations arising under
any employment agreement or arrangement
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between SFX or any of its subsidiaries and the employees who are transferred
to SFX Entertainment other than rights, if any, under those employment
agreements to receive options after a change of control and all existing
rights of indemnification. Messrs. Dugan, Kramer and O'Grady have indicated
that, if the SFX Merger Agreement is terminated, they will promptly resign
from their position as directors of SFX Entertainment, and the Board will
appoint three new independent directors to serve until the next annual
meeting of SFX Entertainment's stockholders. See "Management."
Working Capital
Pursuant to the Distribution Agreement (and as required by the SFX Merger
Agreement), SFX Entertainment and SFX have agreed to allocate funds between
them for working capital. If the Spin-Off occurs prior to the consummation of
the SFX Merger, then, immediately after the Spin-Off, SFX's management will
allocate working capital between SFX Entertainment and SFX, and SFX will pay
to SFX Entertainment any positive amount allocated to SFX Entertainment. In
any event, at least five business days before the consummation of the SFX
Merger, SFX must provide SFX Entertainment with a good faith estimate of
Working Capital (as defined below) as of the date of consummation of the SFX
Merger (the "Estimated Working Capital"). If the Estimated Working Capital is
a positive number, then SFX must pay to SFX Entertainment an amount equal to
the Estimated Working Capital at the time of consummation of the SFX Merger.
On the other hand, if the Estimated Working Capital is a negative number,
then SFX Entertainment must pay to SFX an amount equal to the Estimated
Working Capital at the time of consummation of the SFX Merger.
As soon as practicable (and in any event within ninety days) after the SFX
Merger is consummated, SFX must deliver to SFX Entertainment an audited
statement of Working Capital as of the date of consummation of the SFX
Merger. If SFX Entertainment does not object to SFX's Working Capital
statement within fifteen days following delivery thereof, then the Working
Capital reflected on SFX's Working Capital statement will be the "Final
Working Capital." If SFX Entertainment does so object, then the issues in
dispute will be submitted to a major national accounting firm for resolution
and to determine the "Final Working Capital."
On the third business day after the Final Working Capital is determined,
SFX or SFX Entertainment, as the case may be, must pay to the other an amount
equal to the Final Working Capital, less the Estimated Working Capital
previously paid, together with interest on the absolute value of the
difference at an annual rate of 10% beginning on the date of consummation of
the SFX Merger and ending on the date of payment of the amount (the "Working
Capital Adjustment Amount"). However, if SFX Entertainment notifies SFX prior
to the payment date that it wishes to have all or any portion of the Final
Working Capital (the "SFX Merger Consideration Adjustment") treated as an
adjustment to the consideration payable in connection with the SFX Merger,
then the consideration payable in connection with the SFX Merger will be
increased by an amount equal to the quotient of the SFX Merger Consideration
Adjustment divided by the fully diluted number of shares of SFX's common
stock outstanding immediately prior to the consummation of the SFX Merger,
and SFX must promptly distribute (a) the appropriate amount to the
appropriate holders, immediately prior to the consummation of the SFX Merger,
of SFX's common stock and Series D preferred stock, (b) upon exercise, the
appropriate amount to holders of options, warrants and unit purchase options
of SFX unexercised immediately prior to the consummation of the SFX Merger
and (c) the appropriate amount to holders of options, warrants and unit
purchase options of SFX who exercised their securities on and after the
consummation of the SFX Merger and prior to the final payment date. If SFX
Entertainment elects to treat any portion of the Final Working Capital as an
SFX Merger Consideration Adjustment, then SFX Entertainment must pay SFX the
difference, if any, between the SFX Merger Consideration Adjustment and the
Working Capital Adjustment Amount so that the aggregate net amount to be paid
or received (as the case may be) by SFX is equal to the amount that would
have been paid or received if the SFX Merger Consideration Adjustment had not
been made.
"Working Capital" means the sum of all current assets of SFX and its
consolidated subsidiaries minus the sum of all current liabilities of SFX and
its consolidated subsidiaries, as of the point in time immediately prior to
the consummation of the SFX Merger, adjusted (without duplication) by:
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(a) increasing Working Capital by 50% (up to $1.0 million) of all fees
and expenses incurred by SFX in connection with acquiring consents
from holders of SFX's Series E preferred stock and certain of its
outstanding notes in connection with the transactions contemplated
by the SFX Merger Agreement;
(b) increasing (if a positive number) or decreasing (if a negative
number) Working Capital by the product of (A) $75.00 (or any other
amount payable to holders of SFX's Class A common stock) and (B)
the difference between 15,589,083 less the sum of the fully diluted
number of shares of SFX common stock outstanding immediately prior
to the time of consummation of the SFX Merger (excluding up to
250,838 shares of SFX's common stock subject to a right of
repurchase granted by SFX in connection with an acquisition);
(c) reducing Working Capital by the difference between $84,554,649 less
the sum of (A) the aggregate exercise price of all options,
warrants and unit purchase options of SFX outstanding immediately
prior to the SFX Merger consummation plus (B) the aggregate
exercise price of all warrants underlying unit purchase options of
SFX outstanding immediately prior to the SFX Merger consummation
plus (C) the aggregate base price of all SARs of SFX outstanding
immediately prior to the SFX Merger consummation;
(d) reducing Working Capital by the product of (A) $42 and (B) up to
250,838 shares of SFX's common stock subject to a right of
repurchase by SFX granted in connection with an acquisition (see
"Management's Discussion and Analysis of Financial Condition and
Results of Operations--Liquidity and Capital Resources--Meadows
Repurchase");
(e) increasing Working Capital by all permitted radio-related capital
expenditures paid by SFX and its subsidiaries after June 30, 1997
and immediately prior to the SFX Merger consummation;
(f) decreasing Working Capital by all accrued capital expenditures of
SFX as of immediately prior to the SFX Merger consummation (to the
extent not reflected in current liabilities);
(g) increasing Working Capital by accrued but not yet payable
dividends;
(h) except as required by clause (i) below, excluding from Working
Capital any liabilities attributable to indebtedness of SFX;
(i) excluding from Working Capital any liabilities included in clauses
(i) through (iv) of clause (k) below;
(j) reducing Working Capital by unpaid costs, fees and expenses of SFX
arising out of, based on or that will arise from the transactions
contemplated by the SFX Merger Agreement (other than as a result of
actions taken by SFX Buyer Sub) (including amounts relating to the
termination of any employees, broker fees, legal fees, accounting
fees, advisory fees and fees incurred in connection with third
party consents, waivers and amendments of creditors or holders of
SFX's preferred stock);
(k) reducing Working Capital by the amount of SFX's Excess Debt (as
defined below), if a positive number, or increasing Working Capital
by the amount of the Excess Debt, if a negative number. "Excess
Debt" means, as of immediately prior to the consummation of the SFX
Merger, the difference between the sum of the following and $899.7
million:
(i) the difference between (A) indebtedness of SFX and its
subsidiaries, less (B) the difference between $70.0 million and
any amounts (other than the reimbursement of expenses) actually
received by SFX and its consolidated subsidiaries after August
24, 1997, under agreements relating to the sale or local
marketing arrangement (the local marketing payments may not
exceed $30,000 per month) of its WVGO-FM and the sale or local
marketing arrangement of its Jackson/Biloxi radio stations,
less (C) any indebtedness incurred to finance acquisitions
approved by Buyer of stock of or substantially all of the
assets of radio stations, less (D) interest accrued as of
immediately prior to the consummation of the SFX Merger that is
not then due and payable,
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(ii) the aggregate merger consideration payable to holders of SFX's
Series C preferred stock (which SFX anticipates will be $2.0
million),
(iii) the aggregate liquidation preference amount of SFX's Series E
preferred stock, and
(iv) environmental costs or liabilities accrued and not paid after
June 30, 1997, to the extent they exceed $100,000 in the
aggregate; and
(l) reducing Working Capital by the difference between (i) 142,032
times the higher of (A) the average of the last sales price of
SFX's Series E preferred stock during the 15 business days ending
on the date of consummation of the SFX Merger, or (B) the average
of the last sales price of SFX's Series E preferred stock during
the 15 business days preceding February 9, 1998 ($115.08), and (ii)
$14,203,200 (the "Series E Adjustment").
Working Capital will not include any asset transferred to SFX
Entertainment or any of its subsidiaries, any liability assumed by SFX
Entertainment or any liability to which none of SFX or any of its
subsidiaries is a party immediately after the consummation of the SFX Merger.
Any computation of Working Capital should assume that the Spin-Off has been
consummated. As of September 30, 1997, Working Capital payable by SFX to SFX
Entertainment would have been approximately $2.1 million (excluding the
Series E Adjustment). The actual amount of Working Capital as of the closing
of the SFX Merger may differ substantially from the amount in existence as of
September 30, 1997, and will be a function of, among other things, the
operating results of SFX through the date of the SFX Merger, the actual cost
of consummating the SFX Merger and the related transactions and other
obligations of SFX, including the payment of dividends and interest on SFX's
debt. See "Risk Factors--Working Capital Adjustments and Repayment of
Advances" and "Management's Discussion and Analysis of Financial Condition
and Results of Operations--Liquidity and Capital Resources--Spin-Off."
Acquisitions and Capital Improvements
SFX and SFX Entertainment have agreed that SFX Entertainment may, from
time to time, (a) acquire additional businesses engaged in the Entertainment
Business or (b) make capital improvements on assets owned or leased by it or
its subsidiaries. In each case, SFX must loan SFX Entertainment the funds
with which to consummate the acquisitions and capital improvements. However,
all amounts so borrowed by SFX Entertainment must be repaid on the date of
the Spin-Off. SFX may increase the borrowing availability under its credit
agreement for these purposes, and must use its best efforts to obtain any
required or desirable waivers, consents or modifications under any financing
or other agreement of SFX in connection with the acquisitions or capital
improvements.
If SFX Entertainment makes such additional acquisitions or capital
improvements, it will be required to obtain financing to repay the amounts
that it borrows from SFX, which financing may take the form of public or
private sales of debt or equity securities, bank credit or other financing.
See "--Working Capital." However, there can be no assurance that SFX
Entertainment will be able to obtain such financing on advantageous terms, or
at all. If SFX Entertainment obtains a loan from SFX and is unable to obtain
financing to repay SFX as of the date of the Spin-Off, SFX will be in breach
of the SFX Merger Agreement.
As of January 31, 1998, SFX had advanced approximately $8.0 million to SFX
Entertainment for use in connection with certain acquisitions and capital
expenditures. SFX Entertainment intends to repay these amounts from the
proceeds of the Financing. SFX may advance additional amounts to SFX
Entertainment for these purposes before the consummation of the Spin-Off.
Release and Indemnification
Pursuant to the Distribution Agreement, SFX has agreed to release SFX
Entertainment and its subsidiaries and affiliates (other than SFX and its
subsidiaries) and all persons who at any time prior to the Spin-Off
Distribution Date were stockholders, directors, agents or employees of SFX
Entertainment or its subsidiaries from any and all claims arising from any
acts or events occurring or failing to occur or any conditions existing on or
before the Spin-Off Distribution Date (other than claims arising from
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transactions contemplated by the Distribution Agreement, the SFX Merger
Agreement and certain related agreements). Similarly, SFX Entertainment has
agreed to release SFX, its affiliates (other than SFX Entertainment and its
subsidiaries) and all persons who at any time prior to the date of the
Spin-Off were stockholders, directors, agents or employees of SFX or its
subsidiaries from any and all claims arising from any acts or events
occurring or failing to occur or any conditions existing on or before the
date of the Spin-Off (other than claims arising from transactions
contemplated by the Distribution Agreement, the SFX Merger Agreement and
certain related agreements).
The Distribution Agreement requires SFX Entertainment to indemnify, defend
and hold SFX and its subsidiaries (other than SFX Entertainment and its
subsidiaries) and each of its directors, officers, employees and agents
harmless from and against any liabilities (other than income tax liabilities)
to which SFX or any of its subsidiaries (other than SFX Entertainment and its
subsidiaries) may be or become subject that (a) relate to the assets,
business, operations, debts or liabilities of SFX Entertainment and its
subsidiaries (including liabilities to be assumed by SFX Entertainment as
contemplated in the Distribution Agreement and any liabilities arising under
certain guarantees of SFX in conection with the Pending Acquisitions),
whether arising prior to, concurrent with or after the Spin-Off or (b) result
from a breach by SFX Entertainment or its subsidiaries of any representation,
warranty, or covenant contained in the Distribution Agreement or any related
agreements.
The Distribution Agreement requires SFX to indemnify, defend and hold the
SFX Entertainment Group and each of its directors, officers, employees and
agents harmless from and against any liabilities (other than income tax
liabilities) to which the SFX Entertainment Group may be or become subject
that (a) relate to the assets, business, operations, debts or liabilities of
SFX or its subsidiaries (other than the SFX Entertainment Group), whether
arising prior to, concurrent with or after the Spin-Off or (b) result from a
breach by SFX or its subsidiaries (other than SFX Entertainment) of any
representation, warranty, or covenant contained in the Distribution Agreement
or any related agreements.
The release and indemnification obligations contained in the Distribution
Agreement will survive the Spin-Off for a period of six years (and thereafter
as to any claims for indemnification asserted prior to the expiration of that
period).
SFX Entertainment Registration Statement and Consent Solicitation Documents
SFX Entertainment has represented to SFX that the SFX Entertainment
Registration Statement and the consent solicitation documents sent to the
holders of certain of SFX's securities did not, at the time it became
effective or was mailed, contain any untrue statement of a material fact or
omit to state a material fact required to be stated in order to make the
statements in the SFX Entertainment Registration Statement and the consent
solicitation documents, in light of the circumstances under which they were
made, not misleading.
Related Agreements
SFX and SFX Entertainment have agreed that any tax sharing agreement to
which they are parties must be terminated as of the effective date of the
Spin-Off. In addition, the Distribution Agreement requires SFX and SFX
Entertainment to enter into the Tax Sharing Agreement and Employee Benefits
Agreement (as described below) on or before the date of the Spin-Off.
Use of Names; Intellectual Property
At the closing of the SFX Merger, SFX will assign to SFX Entertainment or
its designee the name "SFX," together with all causes of action and the right
to recover for past infringements of that name. As soon as commercially
practicable, but no later than six months from the consummation of the SFX
Merger, SFX must cease all use of the name "SFX" or other trademarks, trade
names or their identifiers owned by, licensed to, or transferred pursuant to
the Distribution Agreement to SFX Entertainment.
Conditions to the Spin-Off
Pursuant to the Distribution Agreement, the obligations of SFX
Entertainment and SFX to consummate the Spin-Off will be subject to the
fulfillment or waiver of each of the following conditions:
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o SFX's board of directors must be satisfied that SFX's surplus (as
defined under Delaware law) would be sufficient to permit the Spin-Off
under Delaware law and must formally approve the Spin-Off;
o the SFX Entertainment Registration Statement must be declared effective
by the SEC, and no stop order may be issued or pending with respect
thereto;
o the SFX Entertainment Class A Common Stock must be accepted for listing
or trading, subject to official notice of issuance, on a national
exchange or The Nasdaq Stock Market;
o all necessary third party consents to the Spin-Off must be obtained;
o the necessary stockholder approvals must be obtained to consummate the
Spin-Off as presently contemplated;
o there must not be in effect any temporary restraining order,
preliminary or permanent injunction or other order issued by any court
of competent jurisdiction or other legal restraint or prohibition
preventing the consummation of the Spin-Off;
o SFX Entertainment and SFX must enter into the Tax Sharing Agreement and
the Employee Benefits Agreement; and
o each of the covenants and provisions in the Distribution Agreement
required to be performed or complied with prior to the Spin-Off must be
performed or complied with.
SFX's board of directors is entitled to waive any of the above conditions
prior to the Spin-Off.
Expenses of Spin-Off
Pursuant to the Distribution Agreement, all fees and expenses incurred in
connection with the Spin-Off will be paid by the party incurring them.
Termination of the SFX Merger Agreement
If the SFX Merger Agreement is terminated in accordance with its terms for
any reason, the boards of directors of SFX and SFX Entertainment will each
appoint a committee of independent directors (none of whom will serve on both
boards of directors) to negotiate in good faith with respect to all matters
that they deem necessary to effectuate the separation of the affairs of SFX
and SFX Entertainment, including the employment of employees to be
transferred to SFX Entertainment pursuant to the Distribution Agreement. No
adjustments will be made to the initial allocation of working capital between
SFX and SFX Entertainment if the SFX Merger Agreement is terminated in
accordance with its terms.
Amendment or Modification
SFX and SFX Entertainment can only amend the Distribution Agreement by
written agreement with the consent of SFX Buyer (which may not be
unreasonably withheld).
Termination
The Distribution Agreement may be terminated and the Spin-Off abandoned at
any time before the date of the Spin-Off by, and in the sole discretion of,
SFX. In the event of such a termination, no party will have any liability to
any other party.
TAX SHARING AGREEMENT
Prior to the Spin-Off, SFX and SFX Entertainment will enter into the Tax
Sharing Agreement. Under the Tax Sharing Agreement, SFX Entertainment will
agree to pay to SFX the amount of the tax liability of SFX and SFX
Entertainment combined, to the extent properly attributable to SFX
Entertainment for the period up to and including the Spin-Off, and will
indemnify SFX for any tax adjustment made in subsequent years that relates to
taxes properly attributable to SFX Entertainment
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during the period prior to and including the Spin-Off. SFX, in turn, will
indemnify SFX Entertainment for any tax adjustment made in years subsequent
to the Spin-Off that relates to taxes properly attributable to the SFX during
the period prior to and including the Spin-Off. SFX Entertainment also will
be responsible for any taxes of SFX resulting from the Spin-Off, including
any income taxes to the extent that the income taxes result from gain on the
distribution that exceeds the net operating losses of SFX and SFX
Entertainment available to offset gain resulting from the Spin-Off.
See "Risk Factors--Indemnification Arrangements."
EMPLOYEE BENEFITS AGREEMENT
Prior to the Spin-Off, SFX and SFX Entertainment will enter into an
Employee Benefits Agreement. Pursuant to the Employee Benefits Agreement, SFX
and SFX Entertainment will agree to take all actions necessary or appropriate
so that, as of the Spin-Off, SFX Entertainment and its subsidiaries will no
longer be participating employers and sponsors of the 401(k), health, group
term life insurance, long term disability insurance and cafeteria plans
maintained by SFX (collectively, the "SFX Employee Benefit Plans"). The
Employee Benefits Agreement will also provide for the treatment of the
benefits under the SFX Employee Benefit Plans of employees being transferred
from SFX to SFX Entertainment or who are otherwise employed by SFX
Entertainment upon the Spin-Off. With respect to employees transferred from
SFX to SFX Entertainment or who are otherwise employed by SFX Entertainment
upon the Spin-Off, SFX will have sole responsibility for retaining and
discharging any claims that are incurred on or prior to the date of their
transfer under SFX Employee Benefit Plans that are not 401(k) plans. On or
prior to the Spin-Off, SFX Entertainment will continue to pay premiums and
contributions under the SFX Employee Benefit Plans in accordance with its
past practices and procedures, except that any premiums and contributions for
the month in which the Spin-Off occurs shall be paid as soon as practicable
after that month and pro-rated. To the extent the account balances under the
401(k) plan maintained by SFX of employees being transferred from SFX to SFX
Entertainment or who are otherwise employed by SFX Entertainment upon the
Spin-Off are not distributed, SFX and SFX Entertainment must take all actions
necessary or appropriate to effect their transfer to a 401(k) plan
established by SFX Entertainment.
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CERTAIN FEDERAL INCOME TAX CONSEQUENCES
The following discussion sets forth the material federal income tax
consequences of the Spin-Off and the SFX Merger applicable to stockholders
that hold their shares as capital assets within the meaning of Section 1221
of the Internal Revenue Code of 1986, as amended (the "Tax Code"). However,
the discussion does not address all federal income tax considerations that
may be relevant to particular stockholders in light of their specific
circumstances, such as stockholders who are dealers in securities, foreign
persons or stockholders who acquired their shares in connection with stock
options or stock purchase warrants. Each stockholder is urged to consult the
holder's own tax adviser to determine the tax consequences to the holder of
the SFX Merger and the Spin-Off in light of the holder's particular
circumstances, including the applicability and effect of federal, state,
local and foreign income and other tax laws and possible changes in those tax
laws (which may have retroactive effect).
Subject to the possible recharacterization discussed below, the receipt of
SFX Entertainment Common Stock as a result of the Spin-Off should be taxable
to the recipient as a distribution from SFX under Section 301 of the Tax
Code. The amount of the distribution for federal income tax purposes and the
basis for determining gain or loss on a subsequent disposition of the SFX
Entertainment Common Stock would be the fair market value of the SFX
Entertainment Common Stock at the time of the Spin-Off, and a stockholder's
holding period for SFX Entertainment Common Stock received in the Spin-Off
will begin on the day following the Spin-Off.
The receipt of the SFX Entertainment Common Stock should be taxable to the
holders of shares of SFX stock as a dividend to the extent of SFX's current
or accumulated earnings and profits (determined as of the end of SFX's
taxable year, which will occur on the date of the SFX Merger). Any amount of
SFX Entertainment Common Stock that exceeds the above-mentioned earnings and
profits of SFX would first be treated as a non-taxable return of capital to
the extent of each stockholder's tax basis in shares of SFX stock, and the
stockholder's tax basis in the stock would be reduced accordingly (but not
below zero). To the extent that the amount of SFX Entertainment Common Stock
were to exceed the stockholder's tax basis in shares of SFX stock, the excess
would be treated as long-term or short-term capital gain from the sale or
exchange of shares of SFX stock, depending on the period the stockholder held
the shares of SFX stock. Although SFX does not currently have accumulated
earnings and profits, it is possible that there may be earnings and profits
for the year of the SFX Merger, because the Spin-Off might give rise to
taxable gain to SFX. There can be no assurance, therefore, that there will be
no current or accumulated earnings and profits, and thus it is possible that
all or a portion of the value of the SFX Entertainment Common Stock could
give rise to ordinary income.
With respect to corporate stockholders, the portion of the SFX
Entertainment Common Stock, if any, that is a taxable dividend under the
foregoing rules generally should be eligible for the 70% dividends received
deduction. However, a corporate stockholder's ability to use the dividends
received deduction is subject to several limitations, including those
relating to "debt financed portfolio stock" under Section 246A of the Tax
Code and certain holding period requirements. In addition, even if the
dividends received deduction is fully available, a portion of the SFX
Entertainment Common Stock distribution may constitute an "extraordinary
dividend," which is subject to the provisions of Section 1059 of the Tax
Code.
The receipt by an SFX stockholder of cash pursuant to the SFX Merger (or
cash pursuant to the exercise of dissenters' rights of appraisal) will be a
taxable event for the stockholder. A stockholder will generally recognize
capital gain or loss for federal income tax purposes equal to the difference
between (a) the amount of cash received and (b) the tax basis in the shares
of SFX stock surrendered in exchange therefor (generally, the amount paid for
the shares of SFX stock, subject to downward adjustment as described herein
as a result of the Spin-Off). The gain or loss will be long-term capital gain
or loss if the stockholder's holding period for the surrendered shares is
more than one year at the time of consummation of the SFX Merger. Under
recently enacted legislation, individuals whose holding period for shares of
SFX stock exceeds 18 months will, in general, be subject to no more than a
20% tax on any gain, while individuals whose holding period for shares of SFX
stock is more than one year but not more than 18 months will, in general, be
subject to no more than a 28% tax on any gain. If an SFX stockholder
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owns more than one block of shares of SFX stock, the cash received must be
allocated ratably among the blocks in the proportion that the number of
shares of SFX stock in a particular block bears to the total number of shares
of SFX stock owned by the stockholder.
Although, as stated above, the receipt by an SFX stockholder of cash and
SFX Entertainment Common Stock should be treated as if only the cash payment
was received as payment for the shares of SFX stock, while the receipt of SFX
Entertainment Common Stock is taxable to the recipient as a distribution from
SFX under Section 301 of the Tax Code, and although SFX will report the
transaction in a manner consistent with this characterization, it is possible
that the Internal Revenue Service might contend that the transaction should
be treated as an exchange of shares of SFX stock for both cash and SFX
Entertainment Common Stock. Under this treatment, a stockholder will
generally recognize capital gain or loss for federal income tax purposes
equal to the difference between (a) the fair market value at the time of
consummation of the SFX Merger of the SFX Entertainment Common Stock received
plus the amount of cash received and (b) the tax basis in the shares of SFX
stock surrendered in exchange therefor (without adjustment for any portion of
the distribution of SFX Entertainment Common Stock that would have
constituted a return of capital, if the distribution were respected as such).
As discussed above, the gain or loss will be long-term capital gain or loss
if the stockholder's holding period for the surrendered shares is more than
one year at the time of consummation of the SFX Merger. Under this
characterization, if SFX has no current or accumulated earnings and profits
for the taxable year that includes the SFX Merger, the amount of capital gain
recognized by stockholders should be the same whether the Spin-Off is treated
as a distribution to stockholders, or as part of the sale price received as
payment for the shares of SFX stock. By contrast, if SFX does have earnings
and profits for that taxable year, such a characterization will generally
decrease the amount of tax payable by an individual (by converting ordinary
income to capital gain) and increase the amount of tax payable by a
corporation (by converting dividend income potentially eligible for a
dividends received deduction to capital gain).
A stockholder may be subject to information reporting and to backup
withholding at a rate of 31% of amounts paid to the stockholder, unless the
stockholder provides proof of an applicable exemption or a correct taxpayer
identification number, and otherwise complies with applicable requirements of
the backup withholding rules.
THE DISCUSSION OF FEDERAL INCOME TAX CONSEQUENCES SET FORTH ABOVE IS BASED
ON EXISTING LAW AS OF THE DATE OF THIS PROSPECTUS. STOCKHOLDERS ARE URGED TO
CONSULT THEIR TAX ADVISERS TO DETERMINE THE PARTICULAR TAX CONSEQUENCES TO
THEM OF THE SPIN-OFF AND THE SFX MERGER (INCLUDING THE APPLICABILITY AND
EFFECT OF FEDERAL, STATE, LOCAL, FOREIGN AND OTHER TAX LAWS).
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AGREEMENTS RELATED TO THE PENDING ACQUISITIONS
The following is a summary of the material terms of the agreements
relating to the Pending Acquisitions. This summary is not intended to be
complete and is subject to, and qualified in its entirety by reference to,
the agreements, which are filed as exhibits to the SFX Entertainment
Registration Statement and are incorporated herein by reference.
See "Additional Information."
The approximately 4.2 million shares of SFX Entertainment Class A Common
Stock expected to be issued in connection with certain of the Pending
Acquisitions have been valued by the applicable parties at $13.33 per share
for purposes of calculating the consideration to be given for the Pending
Acquisitions. This valuation is based on financial projections developed
jointly by SFX Entertainment and the relevant sellers. There is presently no
trading market for the SFX Entertainment Class A Common Stock. There can be
no assurance that the assumptions underlying the valuation will, in fact, be
correct or that the valuation will approximate the actual trading prices of
the SFX Entertainment Class A Common Stock.
PACE ACQUISITION
General
On December 12, 1997, SFX Entertainment entered into the PACE Agreement, a
stock purchase agreement with PACE and the shareholders of PACE (the "PACE
Sellers"), wherein SFX Entertainment agreed to purchase the outstanding
capital stock of PACE for approximately $109.5 million in cash (the "PACE
Cash Payment"), the repayment of $25.5 million in debt and the issuance of
1.5 million shares of SFX Entertainment Class A Common Stock valued by the
parties at $20.0 million (the "PACE Stock Consideration"). The PACE Cash
Payment will be delivered to the PACE Sellers at closing, while the PACE
Stock Consideration will be issued to the PACE Sellers at the time of the
Spin-Off. The PACE Cash Payment includes a $1.5 million premium in respect of
shares held by Becker Interests Limited Partnership. SFX has irrevocably and
unconditionally guaranteed the full and timely performance of all of SFX
Entertainment's obligations under the PACE Agreement. This guarantee is in
place until the latter of (a) delivery of the PACE Cash Payment or (b)
delivery of the PACE Stock Consideration.
The PACE Agreement provides that closing will take place no later than the
latter of (a) 10 business days following satisfaction or waiver of the
conditions to the obligations of the parties or (b) the earlier of (i) 60
days after PACE has obtained, or is deemed to have obtained, all necessary
third party consents or (ii) March 1, 1998, provided that the closing date is
not earlier than February 23, 1998.
Representations and Warranties
PACE and each of the PACE Sellers have made representations and warranties
in the PACE Agreement with respect to, among other things:
o the due organization and good standing of PACE;
o each PACE Seller's good title to his or her shares of PACE common stock;
o the PACE Agreement as a valid and binding obligation of PACE and each of
the PACE Sellers; and
o with certain disclosed exceptions, performance of the PACE Agreement not
conflicting with the provisions of any other agreement to which PACE or
any PACE Seller is a party.
In addition, SFX Entertainment has made representations and warranties in
the agreement with respect to, among other things:
o its due organization and good standing;
o the PACE Agreement as a valid and binding obligation of SFX
Entertainment;
o with certain disclosed exceptions, performance of the agreement not
conflicting with the provisions of any other agreement to which SFX
Entertainment is a party; and
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o the PACE Stock Consideration's due authorization and, when issued and
delivered, status as duly issued, fully paid and non-assessable.
All representations and warranties in the PACE Agreement (except certain
representations and warranties of the PACE Sellers' concerning their title to
the shares of PACE and of PACE with respect to state and federal income
taxes) will expire on the earlier to occur of (a) 18 months following
consummation of the PACE Acquisition and (b) 60 days following the completion
of the first audit of PACE's financial statements that occurs after closing.
Indemnification
The PACE Sellers have agreed to indemnify SFX Entertainment, each of its
officers, directors and agents and each person who controls SFX Entertainment
against certain losses (the "PACE Damages"). The PACE Damages include losses
arising from (a) any breach of the representations and warranties made by
PACE or the PACE Sellers in the agreement, (b) any breach of the covenants or
agreements made by PACE or the PACE Sellers in the agreement or (c) any
liabilities with respect to the Excluded Assets (as defined in the PACE
Agreement). Except for damages arising from a breach of a representation,
warranty or covenant made by a PACE Seller on the PACE Seller's behalf, each
PACE Seller's liability under the PACE Agreement is limited to his or her
proportional share of the PACE Sellers' aggregate liability. The maximum
aggregate liability of the PACE Sellers to indemnify SFX Entertainment is
limited to (a) $2.0 million with respect to breaches of representations or
warranties of PACE disclosed to SFX Entertainment on or before December 24,
1997 and (b) $10.0 million with respect to PACE Damages (including damages
described in (a)). SFX Entertainment is not entitled to receive
indemnification from the PACE Sellers, except to the extent that the
aggregate amount of damages incurred by SFX Entertainment exceeds $750,000
(in which case SFX Entertainment will be indemnified from the first dollar of
damages).
SFX Entertainment has agreed to indemnify the PACE Sellers against losses
arising out of or based on the breach of any of the representations,
warranties, covenants or agreements made by SFX Entertainment in the PACE
Agreement. In addition, SFX Entertainment has agreed to indemnify and hold
harmless each present and former employee, officer or director of PACE, to
the fullest extent permitted under applicable law, against any damages in
connection with any action or omission occurring prior to consummation of the
PACE Acquisition (except for damages arising from a claim by SFX
Entertainment for indemnification under the agreement or a claim among or
between the PACE Sellers or PACE optionholders related solely to transactions
contemplated by the PACE Agreement). The maximum aggregate liability of SFX
Entertainment to indemnify the PACE Sellers is limited to $10 million with
respect to breaches of SFX Entertainment's representations and warranties.
However, there is no such limitation to SFX Entertainment's liability with
respect to any breach by SFX Entertainment of any of the covenants or
agreements contained in the PACE Agreement.
Closing Conditions
The consummation of the PACE Acquisition is subject to certain closing
conditions, including (a) the absence of governmental action that would
restrain, enjoin or otherwise prohibit completion of the PACE Acquisition,
(b) the absence of any injunction or order of specific performance that
purports to prohibit the PACE Acquisition and (c) expiration or termination
of any applicable waiting period under the HSR Act.
The obligation of SFX Entertainment to consummate the PACE Acquisition is
subject to certain conditions precedent, including:
o the truth and accuracy of all representations and warranties of PACE and
the PACE Sellers contained in the agreement as of December 24, 1997 (the
"PACE Reps and Warranties Condition");
o PACE's and the PACE Sellers' performance of and compliance with, in all
material respects, their respective obligations and covenants and
conditions contained in the agreement;
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o the absence of any Material Adverse Effect (as defined in the PACE
Agreement) affecting PACE on or before December 24, 1997 (the "PACE
Material Adverse Effect Condition");
o repayment by certain insiders of PACE to PACE of certain loans;
o PACE's receipt from Sony Sub and Blockbuster Sub of a waiver of certain
provisions of Pavilion Partners' partnership agreement; and
o execution by each holder of options to purchase common stock of PACE
(the "PACE Stock Options") of an option redemption agreement.
As required by the PACE Agreement, PACE obtained the consent of
Blockbuster Sub upon entering into the Blockbuster Agreement (as defined
below), wherein PACE agreed to purchase substantially all of Blockbuster
Sub's interest in Pavilion Partners. If PACE does not earlier obtain the
actual consent of Sony Sub, the consent will, nonetheless, be deemed to have
been obtained by PACE if SFX Entertainment has not terminated the PACE
Agreement on or before January 30, 1998.
On December 29, 1997, SFX Entertainment received certificates from an
officer of PACE and Allen J. Becker as representative of the PACE Sellers
(the "PACE Sellers' Representative") with respect to the fulfillment of the
PACE Reps and Warranties Condition and the PACE Material Adverse Effect
Condition. As a result of the delivery of these certificates, these two
conditions are deemed to be satisfied.
SFX Entertainment has agreed to waive the condition to closing that the
PACE Sellers deliver all of the outstanding shares of PACE, if the PACE
Sellers deliver 85% of the shares at closing. If only 85% of the outstanding
shares of PACE are delivered at closing, then SFX Entertainment intends to
effect a cash-out merger of the remaining stockholders of PACE.
PACE Acquisition Facility
SFX Entertainment has agreed that, at any time up to consummation of the
PACE Acquisition, it will make available to PACE up to $25.0 million to be
used by PACE to fund certain acquisitions (the "PACE Acquisition Facility").
SFX Entertainment does not currently anticipate having to extend this
facility. If the PACE Agreement is terminated for any reason other than
failure of the PACE Sellers to (a) deliver their stock certificates at
closing or (b) satisfy all of the conditions to SFX Entertainment's
obligation to consummate the acquisition and the failure is caused by wilful
breach by, or gross negligence of, the PACE Sellers in the performance of
their obligations under the agreement, then PACE will have the option to
immediately repay, without interest, any amounts advanced under the PACE
Acquisition Facility or convert those amounts into a full recourse term loan
(the "PACE Term Loan") . The PACE Term Loan will have a five-year term
commencing on the date funds were first advanced under the PACE Acquisition
Facility. For the first two years, the PACE Term Loan will bear interest at
an annual rate equal to SFX Entertainment's blended cost of funds; the
interest rate will escalate 1% per annum each anniversary thereafter.
Interest on the PACE Term Loan will only be payable in arrears for the first
two years of its term, followed by amortization based on available cash flow
from the assets acquired with the PACE Term Loan proceeds (the "PACE Term
Loan Assets"). The PACE Term Loan will be secured by a first priority lien on
PACE Term Loan Assets and the Pavilion Partners Option (as defined below)
and, except with respect thereto, will be subordinate to loans made by PACE's
senior bank lender.
If the PACE Term Loan is not fully paid and discharged within 60 days
after any event of default under the PACE Term Loan, then SFX Entertainment
will have an option (the "Pavilion Partners Option") to require PACE to sell
to SFX Entertainment 100% of its partnership interest in Pavilion Partners, a
general partnership between PACE and Amphitheater Entertainment Partners
("AEP") that owns or operates several amphitheaters. The transferability of
PACE's interest in Pavilion Partners is subject to the consent of AEP, which
may be withheld by AEP in its sole discretion for any reason or no reason.
SFX Entertainment's ability to exercise the Pavilion Partners Option is
conditioned on, without further recourse against PACE or the PACE Sellers,
SFX Entertainment obtaining the consent of AEP.
Except as described below, any amounts borrowed under the PACE Acquisition
Facility will be immediately due and payable if the parties fail to
consummate the PACE Acquisition due to the PACE Sellers' failure to (a)
deliver their stock certificates at closing or (b) satisfy all of the
conditions to SFX
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Entertainment's obligation to consummate the acquisition and the failure is
caused by wilful breach by, or gross negligence of, the PACE Sellers in the
performance of their obligations under the agreement and SFX Entertainment is
not in breach of the PACE Agreement and has satisfied (or is prepared to
satisfy) all of the conditions precedent to the PACE Sellers' obligation to
close. In that event, SFX Entertainment has agreed that, for a period of 60
days following the acceleration, it will not exercise or pursue any remedies
available to it by reason of PACE's failure to pay the accelerated amounts.
If the PACE Acquisition Facility is accelerated as described above, the
aggregate amount borrowed pursuant to the PACE Acquisition Facility will bear
an interest rate of 3% above the interest rate then in effect (which will be
increased by 1/4% each month thereafter), and SFX Entertainment will have the
option to either (a) avail itself of any remedies at its disposal, including
foreclosing on the PACE Term Loan Assets, or (b) exercise the Pavilion
Partners Option and offset the outstanding balance of amounts borrowed under
the PACE Acquisition Facility against the price paid for PACE's interest in
Pavilion Partners. If, on termination of the PACE Agreement, PACE provides
SFX Entertainment with written notice that PACE does not have the right to
convert amounts borrowed into the PACE Term Loan (or irrevocably waives its
right to such a conversion), then amounts borrowed under the PACE Acquisition
Facility will not become due and payable until after 60 days following the
failure to consummate the PACE Acquisition.
If the PACE Agreement is terminated, and if SFX Entertainment is in breach
or not prepared to satisfy all conditions precedent to the PACE Sellers'
obligation to close, then any amounts borrowed under the PACE Acquisition
Facility will be converted into the PACE Term Loan. In that event, the PACE
Term Loan will be secured by a first priority lien on the PACE Term Loan
Assets; however, SFX Entertainment will have no rights to the Pavilion
Partners Option.
Termination
The PACE Agreement may be terminated:
o by mutual consent of SFX Entertainment and the PACE Sellers'
Representative; or
o if the PACE Acquisition is not consummated on or before March 1, 1998
(unless extended by the parties), except that, if the acquisition is not
consummated solely because any applicable waiting period under the HSR
Act has not expired or been terminated, then the date may be extended to
May 31, 1998 (unless further extended by the parties).
If the PACE Agreement has not been previously terminated and closing has not
occurred prior to April 1, 1998, the PACE Cash Payment will increase after
that date at an annual rate of 9%.
SFX Entertainment has agreed that, at closing, Allen J. Becker will be
appointed as a member of and Chairman of the Board of PACE for a term to
expire on the earlier of (a) the fifth anniversary of closing or (b) the
termination of Brian Becker's employment agreement (discussed below) for any
reason other than death or disability of Brian Becker. Pursuant to the Brian
Becker's employment agreement, Brian Becker will remain as Chief Executive
Officer of PACE for a five year period following closing and, at closing,
will be appointed as member of PACE's Board of Directors for 2 years and 15
days following the closing of the PACE Acquisition.
Amendments to PACE's By-laws
SFX Entertainment has also agreed that, prior to consummation of the PACE
Acquisition, PACE may amend its bylaws to provide for the following
(collectively, the "PACE By-law Provisions"):
o for a period of one year after closing, any proposed sale by SFX
Entertainment of either of PACE's theatrical or motor sports line of
business will require the majority approval of PACE's Board of Directors
and the affirmative vote of either Brian or Allen Becker;
o if either PACE's theatrical or its motor sports line of business has
been previously sold, the requirement of majority approval of PACE's
Board of Directors and the affirmative vote of either of Brian or Allen
Becker for the sale of the remaining line of business will be extended
to the fifteenth day following the second anniversary of closing;
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o in any event, SFX Entertainment may not, within the first two years and
15 days following closing of the acquisition, consummate the sale of
either line of business without providing at least 30 days' written
notice to PACE's Board of Directors and notifying the potential
purchaser of Brian Becker's right of first refusal for that line of
business (see "--Becker Employment Agreement");
o no member of PACE's Board of Directors may be removed therefrom except
for death, disability or with adequate cause; and
o for a period of two years and fifteen days following closing, the
unanimous vote of PACE's Board of Directors will be required to alter
any PACE By-law Provisions.
SFX Entertainment has further agreed that, prior to closing, PACE may
amend its Articles of Incorporation to prohibit any amendment or removal of
the PACE By-law Provisions without the unanimous approval of PACE's Board of
Directors.
Future Acquisitions
In the PACE Agreement, SFX Entertainment expressed its intention to
acquire additional businesses in the theatrical and motor sports lines of
business to be acquired and managed by PACE. However, if the revenues from
the theatrical and motor sports lines of business in any acquired company do
not constitute a majority of the acquired company's revenues, then SFX
Entertainment may hold the acquired company outside of PACE, but the
management of the acquired company's theatrical and motor sports businesses
will report to Brian E. Becker. In addition, SFX Entertainment has agreed
that within 30 days of the latter to occur of consummation of the PACE
Acquisition and the Contemporary Acquisition, SFX Entertainment will
contribute to PACE all of Contemporary's ownership interest, direct or
indirect, in the assets of United Sports of America. Pursuant to the Mr.
Becker's employment agreement with SFX Entertainment, beginning on the second
anniversary date of that agreement and exercisable for 15 days, he will have
the option to acquire PACE's motor sports line of business (or, if that line
of business was previously sold, PACE's theatrical line of business) at its
fair market value. Mr. Becker also has a right of first refusal on those
lines of business. See "--Becker Employment Agreement."
Bonuses
SFX Entertainment has agreed that, from closing until the earlier of (a)
396 days after completion of the Spin-Off or (b) the second anniversary of
consummation of the PACE Acquisition, it will, in the sole discretion of
Allen J. Becker, pay a severance payment or series of payments to each and
every At-Will Employee (as defined in the PACE Agreement) whose employment is
terminated based on any of the causes set forth in the PACE Agreement. The
aggregate amount of these severance payments must not exceed $1.0 million.
Options
If the Spin-Off is not completed by July 1, 1998, each PACE Seller will
have the option, exercisable within the first 10 days thereafter, to require
SFX Entertainment to pay to him or her $13.33 in cash in lieu of the each
share of PACE Stock Consideration to which the PACE Seller may otherwise be
entitled. If the Spin-Off has not been completed on or prior to the first day
of each third month after July 1, 1998, each PACE Seller will have such an
option exercisable within the first 10 days thereafter.
SFX Entertainment delivered to the PACE Sellers' Representative an
internally generated report concerning the projected range of fair value of
the PACE Stock Consideration. The report was based on certain assumptions
concerning the completion of the Pending Acquisitions prior to the Spin-Off.
If the average selling price per share of the SFX Entertainment Class A
Common Stock is less than $13.33 per share during the five-day period
immediately following completion of the Spin-Off, then, within 10 days after
completion of the Spin-Off, SFX Entertainment must deliver an updated report
to each PACE Seller who did not exercise his or her option (as described
above). If the updated report reflects an adverse change to the range of fair
value from the range of fair value shown in the initial report, then SFX
Entertainment must include in the updated report a written offer to those
PACE Sellers to provide an
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additional cash payment or additional shares of SFX Entertainment Class A
Common Stock, which each PACE Seller will have the option of taking, as
consideration for the adverse change. The sole remedy for any PACE Seller who
does not wish to accept SFX Entertainment's offer is the assertion of a claim
under the dispute resolution procedures specified in the PACE Agreement.
The PACE Agreement provides further that each PACE Seller has an option,
exercisable during a period beginning on the fifth anniversary of the closing
of the PACE Acquisition and ending 90 days thereafter, to require SFX
Entertainment to purchase up to one-third of the PACE Stock Consideration
received by the PACE Seller for a cash purchase price of $33.00 per share.
With certain limited exceptions, these option rights are not assignable by
the PACE Sellers.
Releases
Each PACE Seller has executed a release and waiver of any and all claims
that the PACE Seller may have against (a) any other PACE Seller, PACE or SFX
Entertainment that relates to the transactions or agreements by which the
PACE Seller acquired ownership of shares of PACE or PACE Stock Options and
any claims that each PACE Seller may have by reason of being a shareholder of
PACE and (b) any other PACE Seller, PACE or the Sellers' Representative as to
the transactions contemplated by the PACE Agreement.
Pavilion Acquisition
SFX Entertainment has agreed to obtain 100% ownership of Pavilion
Partners, a partnership that owns interests in 10 amphitheaters. This
acquisition will consist of (a) acquiring one-third of Pavilion Partners
through the acquisition of PACE and (b) acquiring the remaining two-thirds of
Pavilion Partners through separate agreements with Sony Sub and Blockbuster
Sub to acquire AEP (a 50-50 partnership between Sony Sub and Blockbuster Sub
that owns two-thirds of Pavilion Partners), for a combined consideration of
$90.9 million (including the repayment of $49.8 million of debt related to
the two-thirds interest).
On December 19, 1997, PACE and its wholly-owned subsidiary, SM/PACE, Inc.,
entered into a purchase agreement (the "Blockbuster Agreement") with Viacom,
Inc. and Blockbuster Sub (collectively, the "Blockbuster Group"), wherein
PACE agreed to purchase the Blockbuster Group's interest in AEP (the
"Blockbuster Acquisition") for an aggregate purchase price of approximately
$13.7 million in cash. This amount includes $9.5 million in respect of the
purchase of a Blockbuster Sub note receivable payable by Pavilion Partners
(secured by a lien on the Charlotte Amphitheater) and the assumption of
approximately $2.9 million of certain liabilities of the Blockbuster Group
owed to Pavilion Partners. In addition, the PACE Group will be required under
the Blockbuster Agreement to cause the Blockbuster Group to be released from
liability from its direct obligations with respect to indebtedness of
Pavilion Partners for borrowed funds.
Consummation of transactions contemplated by the Blockbuster Agreement is
subject to the receipt by PACE of (a) the consent of Sony Sub to the
amendment and restatement of each of the Pavilion Partners partnership
agreement and AEP's partnership agreement, (b) the consent of PACE's lender
to the extent necessary to complete the transaction without violating PACE's
credit agreement and (c) any other consents reasonably necessary for closing.
The Blockbuster Agreement may be terminated by mutual agreement of the
parties or by any party if closing does not occur by May 31, 1998.
Pursuant to a letter agreement (the "Sony Agreement"), dated December 22,
1997, PACE has agreed to purchase all of Sony Sub's interest in AEP for $27.5
million in cash plus the assumption of all of Sony Sub's obligations and
liabilities arising under Pavilion Partners and AEP's respective partnership
agreements. In addition, PACE will be required under the Sony Agreement to
cause Sony Sub and its parent corporation to be released from liability for
their direct contractual obligations in connection with the business of
Pavilion Partners.
The closing must occur no later than (a) five business days after the
consummation of the PACE Acquisition and (b) the date of closing of the
Blockbuster Acquisition or (c) March 30, 1998 (which may
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be extended to May 31, 1998 if the closing of the PACE Acquisition or the
acquisition of Sony Sub's interest in AEP does not occur on or before March
30, 1998 solely because an applicable HSR Act waiting period has not expired
or been terminated). If the closing does not occur by March 30, 1998, the
purchase price will be increased at an annual rate of 8%, compounded monthly.
Pursuant to the Sony Agreement, Sony Sub has given all consents necessary
for consummation of the PACE Acquisition and the acquisition of Blockbuster
Group's interest in AEP; however, those consents--as well as the remainder of
the Sony Agreement--are conditioned on (a) HSR approval for the transaction,
(b) the closing of the PACE Acquisition and (c) unless the Blockbuster
Acquisition has occurred earlier, receipt of the Blockbuster Group's consent
to the transfer of Sony Sub's AEP partnership interest as required by the AEP
partnership agreement. Sony Sub's consent to the PACE Acquisition can be
withdrawn if the acquisition of Sony Sub's interest in AEP does not occur on
or before the contractual closing date for any reason other than Sony Sub's
breach.
Becker Employment Agreement
As a condition to the execution of the PACE Agreement, SFX Entertainment
entered into an employment agreement with the Chief Executive Officer and
President of PACE, Mr. Brian Becker (the "Becker Employment Agreement"). The
Becker Employment Agreement has a term of five years commencing on the
closing of the PACE Acquisition. Mr. Becker will continue as President and
Chief Executive Officer of PACE. In addition, for the term of his employment,
Mr. Becker will serve as (a) a member of SFX Entertainment's Office of the
Chairman, (b) an Executive Vice President of SFX Entertainment and (c) a
director of each of PACE and SFX Entertainment (subject to shareholder
approval). During the term of his employment, Mr. Becker will receive (a) a
base salary of $294,000 for the first year, $313,760 for each of the second
and third years and $334,310 for each of the fourth and fifth years and (b)
an annual bonus in the discretion of the Board.
SFX Entertainment has agreed that it will not sell either the theatrical
or motor sports line of business of PACE prior to the first anniversary of
the PACE Acquisition. If SFX Entertainment sells either line of business
after the first anniversary, it has agreed not to sell the other line of
business prior to 15 days past the second anniversary of the PACE
Acquisition. The Becker Employment Agreement provides that Mr. Becker will
have a right of first refusal (the "Becker Right of First Refusal") if,
between the first and second anniversary of the PACE Acquisition, SFX
Entertainment receives a bona fide offer from a third party to purchase all
or substantially all of either the theatrical or motor sports lines of
business at a price equal to 95% of the proposed purchase price. The Fifth
Year Put Option (as defined in the PACE Agreement) will also be immediately
exercisable as of such closing. If that Mr. Becker does not exercise his
right of first refusal and either of the theatrical or motor sports line of
business is sold, then he will have an identical right of first refusal for
the sale of the remaining line of business beginning on the second
anniversary of the PACE Acquisition and ending six months thereafter. Mr.
Becker will be paid an administrative fee of $100,000 if he does not exercise
his right of first refusal and SFX Entertainment does not consummate the
proposed sale. Mr. Becker would thereafter retain all rights to the Becker
Right of First Refusal.
Beginning on the second anniversary of the date of the Becker Employment
Agreement, Mr. Becker will have the option (the "Becker Second Year Option"),
exercisable within 15 days thereafter, to elect one or more of the following:
to (a) put any stock or portion thereof (including any vested and unvested
options to purchase stock) and/or any compensation to be paid to Mr. Becker
to SFX Entertainment; (b) become a consultant to SFX Entertainment for no
more than an average of 20 hours per week for the remainder of the term and
with the same level of compensation set forth in the Becker Employment
Agreement; or (c) acquire PACE's motor sports line of business (or, if that
line of business was previously sold, PACE's theatrical line of business) at
its fair market value as determined in the Becker Employment Agreement.
The Becker Employment Agreement may be terminated (a) by SFX Entertainment
for Cause (as defined in the Becker Employment Agreement), (b) by SFX
Entertainment for Mr. Becker's death or permanent disability or (c) by Mr.
Becker at any time for any reason or upon exercise of the Becker Second Year
Option.
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In addition, Mr. Becker's employment may be terminated by SFX
Entertainment any time in SFX Entertainment's sole discretion or by Mr.
Becker at any time following, among other things, (a) failure to elect or
re-elect Mr. Becker as a director of SFX Entertainment, (b) a reduction in
Mr. Becker's base salary or in the formula to calculate his bonus, (c)
discontinuation of Mr. Becker's participation in any stock option, bonus or
other employee benefit plan, (d) prior to two years and fifteen days after
consummation of the PACE Acquisition, the sale of either the motor sports or
theatrical line of business to any person other than Mr. Becker (unless Mr.
Becker elected not to exercise the Becker Right of First Refusal (as defined
below)), (e) the sale of all or substantially all of the assets of PACE, (f)
a change of control of SFX Entertainment or (g) the failure by SFX
Entertainment to contribute any acquired business (which derives a majority
of its revenues from either a theatrical or motor sports line of business) to
PACE. If Mr. Becker's employment is terminated, then, among other things, (a)
for the period from the date of termination until the fifth anniversary of
the closing of the PACE Acquisition, SFX Entertainment must pay Mr. Becker
the base salary and any bonus to which he would otherwise be entitled and Mr.
Becker will be entitled to participate in any and all of the profit-sharing,
retirement income, stock purchase, savings and executive compensation plans
to the same extent he would otherwise have been entitled to participate, (b)
for a period of one year after the date of termination, SFX Entertainment
will maintain Mr. Becker's life, accident, medical, health care and
disability programs or arrangements and provide Mr. Becker with use of the
same office and related facilities and (c) if the termination occurs prior to
two years and 15 days after consummation of the PACE Acquisition, Mr. Becker
will retain the Becker Second Year Option and the Becker Right of First
Refusal.
Throughout the term of his employment and for a period of 18 months
thereafter, Mr. Becker has agreed not to, directly or indirectly, engage in
any activity or business that is directly competitive with SFX Entertainment
(or its affiliates) or solicit any of its employees to leave SFX
Entertainment (or its affiliates). However, these restrictions will not apply
if Mr. Becker exercises his rights, or SFX Entertainment breaches its
obligations, with respect to the Becker Right of First Refusal or the Becker
Second Year Option
SFX Entertainment has agreed to indemnify, defend and hold Mr. Becker
harmless to the maximum extent permitted by law against expenses, including
attorney's fees, incurred in connection with the fact that Mr. Becker is or
was an officer, employee or director of SFX Entertainment or any of its
affiliates.
CONTEMPORARY ACQUISITION
General
SFX Entertainment has entered into the Contemporary Agreement, a merger
and asset purchase agreement dated as of December 12, 1997, with Contemporary
and certain individuals and their trusts. Pursuant to the Contemporary
Agreement, SFX Entertainment has agreed to acquire certain concert,
production and promotion event marketing, computerized ticketing and related
businesses through both:
o the merger of Contemporary International Productions Corporation
("Contemporary International") into SFX Entertainment (the "Contemporary
Merger"); and
o the acquisition by a wholly-owned subsidiary of SFX Entertainment of
substantially all of the assets, excluding certain cash and receivables,
of the remaining members of Contemporary prior to January 1, 1998 (the
"Contemporary Asset Acquisition").
The aggregate consideration to be paid in the Contemporary Acquisition is
approximately $91.5 million, comprised of $72.8 million in cash and
approximately 1,402,851 shares of SFX Entertainment Class A Common Stock
valued by the parties at $18.7 million. However, if the Spin-Off is not
consummated before the closing of the Contemporary Acquisition, then SFX
Entertainment must issue shares of a redeemable convertible preferred stock
of SFX Entertainment ("SFX Entertainment Preferred Stock") that is
convertible at the time of the Spin-Off into the required shares of SFX
Entertainment Class A Common Stock. Any SFX Entertainment Preferred Stock
will be automatically redeemed as of July 1, 1998, unless previously
converted into shares of SFX Entertainment Class A Common Stock. The
aggregate redemption price for the shares of the SFX Entertainment Preferred
Stock would be their then fair market value, but in no event less than $18.7
million, and would be guaranteed
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by SFX in certain circumstances. The SFX Entertainment Preferred Stock is
adjustable for certain dividends paid on the SFX Entertainment Class A Common
Stock, recapitalizations, stock splits and similar transactions, if any. The
consideration to be paid in the Contemporary Acquisition is subject to
certain adjustments, including a reduction of $10.5 million in the purchase
price if Contemporary does not acquire the remaining 50% interest in the
Riverport Amphitheater Joint Venture. Simultaneously with the execution of
the Contemporary Agreement, SFX Entertainment deposited $2.0 million with an
escrow agent to be applied to the purchase price at closing. The deposit will
be payable to Contemporary as liquidated damages if Contemporary terminates
the agreement because of a material violation or breach of any
representation, warranty, covenant or agreement of SFX Entertainment or
because of the failure of certain conditions under the Contemporary
Agreement.
The shares of SFX Entertainment Class A Common Stock issuable in
connection with the Contemporary Merger will be "restricted securities" under
Rule 144 of the Securities Act when issued, but SFX Entertainment has agreed
to use its best efforts to cause the shares to be registered with the SEC for
resale. SFX Entertainment will have the ability to suspend use of the
registration statement for up to 30 days in any 12-month period for offerings
of securities by SFX Entertainment and for up to 45 days in any 12-month
period for other valid reasons.
The Contemporary Acquisition will be deemed effective as of January 1,
1998. Accordingly, as of January 1, 1998, SFX Entertainment, in general, will
be deemed to have received the benefits of and assumed the liabilities and
obligations with respect to the businesses of Contemporary, although SFX
Entertainment will not assume actual operational responsibility for
Contemporary until the closing. The Contemporary Acquisition is expected to
close on the fifth business day following the fulfillment or waiver of the
conditions to closing, but in no event after February 15, 1998 (subject to
extension for 30 days to cover breaches of representations, warranties,
covenants or agreements, and until April 30, 1998 to obtain approval under
the HSR Act). Simultaneously with the closing of the Contemporary
Acquisition, it is currently expected that Contemporary will acquire the 50%
interest in the Riverport Amphitheater Joint Venture, which it currently does
not own (although the acquisition is not a condition to the closing).
In the Contemporary Asset Acquisition, SFX Entertainment will acquire
substantially all of the non-cash assets of the constituent companies of
Contemporary other than Contemporary International, which is being merged
into SFX Entertainment. SFX Entertainment will also assume substantially all
of the ordinary course of business obligations and liabilities of those
companies incurred or to be performed after December 31, 1997. SFX
Entertainment is not assuming liabilities for (a) tax, environmental, ERISA,
workers' compensation or pension liabilities incurred prior to January 1,
1998, (b) liabilities or obligations for severance or similar payments
arising as a result of the Contemporary Acquisition, (c) any liabilities or
obligations that are not directly incident to the business or assets of
Contemporary, (d) any indebtedness for borrowed money, (e) any amount payable
to any affiliate of Contemporary (other than certain liabilities incurred
after January 1, 1998 or expressly assumed by SFX Entertainment), and (f) any
liabilities arising out of or in connection with any litigation pending
against Contemporary prior to January 1, 1998.
Representations and Warranties
Contemporary and SFX Entertainment have each made certain representations
and warranties to the other in the Contemporary Agreement. Other than
representations and warranties with regard to tax matters, which survive for
the statute of limitations applicable to the relevant representation or
warranty, all representations and warranties made by the parties to the
Contemporary Agreement survive the closing of the Contemporary Acquisition
until the completion of the consolidated audit of the Contemporary businesses
for the two year period ended December 31, 1997.
Indemnification
Contemporary has agreed to indemnify and hold harmless SFX Entertainment
against any and all losses that it may suffer by reason of (a) the breach by
Contemporary of any representation or warranty contained in the Contemporary
Agreement or related agreements, (b) the failure of Contemporary to
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perform any agreement or covenant required under the Contemporary Agreement
or related agreements or (c) any liability or debt of Contemporary not
expressly assumed by SFX Entertainment by the terms of the Contemporary
Agreement. SFX Entertainment has agreed to indemnify and hold harmless
Contemporary against any and all losses that it may suffer as a result of (a)
the breach by SFX Entertainment of any representation or warranty contained
in the Contemporary Agreement or related agreements, (b) the failure of SFX
Entertainment to perform any agreement or covenant required under the
Contemporary Agreement or related agreements or (c) the liabilities expressly
assumed by SFX Entertainment by the terms of the Contemporary Agreement.
Neither SFX Entertainment nor Contemporary will be entitled to be indemnified
pursuant to the Contemporary Agreement unless and until the aggregate of all
losses incurred by either party, as the case may be, exceeds $500,000, at
which time the indemnifying party will be obligated to indemnify the
indemnified party (a) if the indemnifying party is SFX Entertainment, for the
first dollar of losses and (b) if the indemnifying party is Contemporary, for
all losses in excess of $100,000. This threshold limitation does not apply in
certain circumstances. Absent fraud and except with respect to certain tax
representations and warranties and other matters, the liability of
Contemporary for indemnification under the Contemporary Agreement will not
exceed an aggregate amount equal to the sum of $3.1 million plus one-half of
the shares of SFX Entertainment Class A Common Stock received by the trusts
in the Contemporary Merger. If notice of any indemnification claim is given
after six months following the closing of the Contemporary Merger, then
Contemporary's liability will be limited to $3.1 million.
Covenants
Contemporary has also agreed to certain pre-closing covenants, including,
among other things, not to:
o make any capital expenditures in excess of $50,000;
o enter into any operating lease calling for net increased rentals in
excess of five percent (5%) annually per lease (over present rentals)
o acquire any assets or properties except in the ordinary course of
business and consistent with past practice;
o purchase, sell, assign or transfer any of the assets or properties
relating to its business to be acquired that are valued in excess of
$50,000; or
o enter into any new material contract or agreement or any amendment,
modification or termination of any existing material contract relating
to its assets, properties or business to be acquired, except in the
ordinary course of business and consistent with past practice and in any
event not requiring payment in excess of $50,000, other than talent
contracts.
In addition, Contemporary has agreed to satisfy out of the cash proceeds of
the Contemporary Acquisition (a) its expenses incurred in connection with the
Contemporary Acquisition, (b) all monetary liens on assets of Contemporary,
other than liens permitted under the agreement, and (c) any liabilities of
Contemporary that SFX Entertainment will not assume as a result of the
Contemporary Acquisition. All covenants and agreements made by the parties,
unless waived in writing, survive the closing.
Conditions to Closing
The closing of the Contemporary Acquisition is subject to certain closing
conditions, including:
o the accuracy of the representations and warranties and the compliance
with the covenants of Contemporary;
o the receipt of all governmental authorizations, approvals, consents and
waivers, including any authorizations required under the HSR Act;
o the receipt of consents and approvals required under certain existing
agreements of the parties;
o the absence of any action, suit, proceeding or investigation before any
court, administrative agency or governmental authority seeking to
restrain, prohibit or invalidate the consummation of the Contemporary
Merger or the Contemporary Asset Acquisition;
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o the execution of employment agreements with certain employees of
Contemporary; and
o the best efforts of Contemporary to deliver estoppel certificates from
each landlord under any lease, and nondisturbance and/or recognition
agreements from each mortgagee or superior lessor of a leased property,
relating to the Sandstone Amphitheater, the Westport Playhouse and the
American Theatre.
As a condition to Contemporary's obligations under the Contemporary
Agreement, if the Spin-Off does not occur prior to the closing, then SFX must
provide to the trusts that own Contemporary International a guarantee (which
may be extinguished at the time of the Spin-Off) of the redemption price for
the SFX Entertainment Preferred Stock. Additionally, the closing of the
Contemporary Asset Acquisition is conditioned on the consummation of the
Contemporary Merger.
Termination
The Contemporary Agreement may be terminated at any time prior to the
closing date:
o by the mutual consent of the parties;
o by any of the parties on February 15, 1998, if the other party
materially violates or breaches any representation, warranty, covenant
or agreement or any closing condition, and if the material violation or
breach is not cured within a reasonable period not to exceed the later
of March 17, 1998 or 30 days after receipt of written notice from the
other party; or
o if, through no fault of the terminating party, the conditions to closing
have become impossible to satisfy or a court has permanently enjoined
the closing and the related order has become final and is not subject to
appeal.
Neither party may terminate the agreement if the Contemporary Acquisition for
failure to consummate by February 15, 1998, if the failure to consummate
results solely from the applicable waiting periods under the HSR Act not
having expired or been terminated; in that case, either party may terminate
the agreement only if the Contemporary Acquisition is not consummated on or
before April 30, 1998. If the closing is delayed beyond February 15, 1998 as
described in the preceding sentence, then, notwithstanding the occurrence of
an event that has a material adverse effect on the business of Contemporary,
SFX Entertainment will be required to close the Contemporary Acquisition when
the waiting period under the HSR Act terminates (unless the termination has
not occurred by April 30, 1998) unless the material adverse effect is the
result of the intentional acts or intentional omissions of Contemporary or
its affiliates or an act or omission of Contemporary or one of its affiliates
that constitutes gross negligence in which case SFX Entertainment will have
the right, without any liability, to refuse to close or may proceed to close
the Contemporary Acquisition, subject to receiving reimbursement for the
material adverse effect of as much as $3.1 million in cash and up to one-half
of the SFX Entertainment Class A Common Stock received by the individuals and
trusts in the transaction.
Future Payment Obligations
If any individual or trust that is a party to the Contemporary Agreement
owns any shares of SFX Entertainment Class A Common Stock received in the
Contemporary Acquisition on the second anniversary of the closing date, and
if the average trading price of the stock over the 20-day period ending on
that date is less than $13.33 per share (subject to adjustment to compensate
for recapitalizations of SFX Entertainment or dividends to holders of SFX
Entertainment Class A Common Stock), then SFX Entertainment will make a
one-time cash payment to that individual or trust. The payment will equal to
the product of (a) the quotient of the difference between (i) the actual
average trading price per share over the 20-day trading period and (ii)
$13.33 (or the price as adjusted under the agreement) divided by two,
multiplied by (b) the number of shares of SFX Entertainment Class A Common
Stock received by that individual or trust in the Contemporary Acquisition
and owned as of the second anniversary date.
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BGP ACQUISITION
General
SFX Entertainment, through its wholly-owned subsidiary BGP Acquisition,
LLC ("BGP Acquisition Sub"), has entered into the BGP Agreement, a stock
purchase agreement dated as of December 11, 1997 with all of the shareholders
(the "BGP Sellers") of BGP. Pursuant to the BGP Agreement, SFX Entertainment
has agreed to purchase all of the outstanding capital stock of BGP for an
aggregate purchase price of approximately $68.3 million in cash, subject to
reduction on a dollar-for-dollar basis to the extent if BGP's Long Term Debt
exceeds its Net Working Capital (both as defined in the BGP Agreement).
If the Spin-Off occurs before the closing of the BGP Acquisition, then SFX
Entertainment may elect, in its sole discretion, to distribute up to 562,640
shares of SFX Entertainment Class A Common Stock to the BGP Sellers in lieu
of up to $7.5 million in cash. Similarly, if the Spin-Off does not occur
before the closing, then SFX Entertainment may elect, in its sole discretion,
to distribute options to purchase up to 562,640 shares of SFX Entertainment
Class A Common Stock to the BGP Sellers in lieu of up to $7.5 million in
cash. SFX Entertainment may be required, subject to certain conditions, to
repurchase the shares or options issued as consideration in the BGP
Acquisition, if, by June 30, 1998, the shares (a) are not registered with the
SEC, (b) are not listed with a nationally recognized exchange or (c) are
subject to any lock-up period.
SFX will guarantee the payment of the cash purchase price in the BGP
Acquisition.
Representations and Warranties
The BGP Sellers have made certain standard and customary representations
and warranties to SFX Entertainment with respect to BGP, including, among
other things, the completeness of the disclosure provided in connection with
the agreement. Similarly, the BGP Sellers have made certain representations
and warranties to SFX Entertainment with respect to themselves, including,
among other things, their competency to enter into the transaction, the
absence of conflicts, required consents and approvals, title to the stock to
be acquired, the absence of options or similar rights in the capital stock of
BGP and legal proceedings. In addition, BGP Acquisition Sub and SFX
Entertainment have made certain representations and warranties to each BGP
Seller with respect to, among other things, its authority to enter into the
transaction, the absence of defaults, the absence of legal proceedings,
required consents and the capitalization of SFX Entertainment. SFX
Entertainment has also represented and warranted to the BGP Sellers that it
will have net assets of not less than $100.0 million as of the closing date
of the BGP Acquisition. Except for representations and warranties relating to
tax matters, which survive for the applicable statute of limitations periods,
the representations and warranties of the parties contained in the BGP
Agreement survive until the first anniversary of the closing of the BGP
Acquisition.
Indemnification
The BGP Sellers have agreed to indemnify, defend and hold harmless BGP
Acquisition Sub from and against any losses based on, arising out of or
otherwise resulting from (a) any inaccuracy in any representation or breach
of any warranty of the BGP Sellers, (b) the breach or nonfulfillment of any
covenant, agreement or other obligation of the BGP Sellers, which breach
remains uncured for 30 days following written notice thereof or (c) certain
disclosed liabilities. SFX Entertainment has agreed to indemnify, defend and
hold harmless the BGP Sellers from and against any losses based on, arising
out of or otherwise resulting from (a) any inaccuracy in any representation
or breach of any warranty of BGP Acquisition Sub or (b) the breach or
nonfulfillment of any covenant, agreement or other obligation of BGP
Acquisition Sub (except those under the employee agreements required as a
condition to closing). Other than with respect to the payment of the purchase
price and tax liabilities, neither the BGP Sellers nor BGP Acquisition Sub is
entitled to indemnification under the BGP Agreement unless the aggregate
amount of losses suffered by either party exceeds $325,000, in which event
either party, as the case may be, will be entitled to indemnification for the
sum of (a) $137,500 plus (b) the amount by which the aggregate amount of
losses exceeds $325,000, up to and including (i) in the case of the BGP
Sellers, an amount equal to the payments at any time, received by the BGP
Sellers, severally, from BGP Acquisition Sub pursuant to the BGP Agreement
and (ii) in the case of BGP Acquisition Sub an amount equal to the
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payments, at any time, made by BGP Acquisition Sub to the BGP Sellers, in the
aggregate, pursuant to the BGP Agreement. The BGP Sellers have also agreed to
indemnify BGP Acquisition Sub against certain tax liabilities in excess of
the sum of $100,000 plus the amount determined to be Excess Working Capital
(as defined in the BGP Agreement) and to indemnify BGP Acquisition Sub and
BGP against all other tax liabilities in excess of Excess Working Capital.
Each party to the BGP Agreement has waived any consequential, exemplary or
special damages incurred in connection with the agreement.
Covenants
The BGP Sellers have agreed that, until the closing of the BGP
Acquisition, they will or will cause BGP to, among other things: (a) conduct
the operation of BGP's business in the ordinary course, (b) use their best
efforts to preserve BGP's business relationships with clients, customers,
accounts, agents, distributors, suppliers and others having business dealings
with BGP and (c) not participate in any discussions, communications or
negotiations with any persons (other than SFX Entertainment) with respect to
any direct or indirect acquisition of any material portion of the assets,
properties or common stock of BGP. On or prior to the closing of the
acquisition, certain key personnel of BGP will enter into employment
agreements with BGP Acquisition Sub; each BGP Seller that will not be a party
to such an employment agreement has agreed not to compete, directly or
indirectly, with the business of BGP for a period of two years following the
closing. In addition, the BGP Sellers have agreed not to use the names "Bill
Graham Presents" or "Fillmore" or any other similar name following the
closing.
Conditions to Closing
The closing of the BGP Acquisition is subject to certain closing
conditions, including:
o the accuracy of the representations and warranties contained in the BGP
Agreement as of the closing;
o the receipt of all consents (including any required under the HSR Act)
required to be obtained in connection with the acquisition;
o the absence of any action, suit, claim, proceeding or investigation that
questions the validity or legality of the acquisition or that could
reasonably be expected to have a material adverse effect on the ability
to consummate the acquisition;
o the execution of employment agreements between SFX Entertainment and
certain key employees of BGP;
o receipt by the BGP Sellers of confirmation that the base price used in
the determination of the number of shares of SFX Entertainment Common
Stock that may be distributed in lieu of cash consideration in the
acquisition is the lowest price used by Mr. Sillerman in his personal
acquisition of SFX Entertainment Common Stock;
o the absence of any material changes in BGP since October 31, 1997;
o the satisfaction or mutual termination of all obligations (other than
any obligation under the by-laws of BGP) between any BGP Seller and BGP,
the general unconditional releases by each BGP Seller of BGP from any
and all liabilities, and the release of all security interests held by
any party except SFX Entertainment in any property of BGP;
o the receipt of written waivers of each of the BGP Sellers' rights under
any shareholder or other agreement entered into with other shareholders
of BGP or BGP itself;
o the acknowledgment of the BGP Sellers that, other than certain materials
specifically excluded, the posters, handbills and other archive
materials referenced in the January 2, 1995 agreement between Bill
Graham Enterprises, Inc. and the heirs of William Graham are assets of
BGP and are to be transferred to SFX Entertainment;
o the termination of the Buy-Sell Agreement (as defined in the BGP
Agreement); and
o the execution of written leases with the Fillmore Auditorium and the
Warfield Theater.
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Termination
The BGP Agreement may be terminated by (a) mutual consent of the parties,
(b) either party if the closing does not occur by January 29, 1998 and the
terminating party does not cause the delay (or February 12, 1998 if the
conditions to closing have not been fulfilled by January 29, (c) SFX
Entertainment if there has been a material misrepresentation or material
breach in the representations, warranties or covenants of the BGP Sellers or
if there has been any material failure on the part of any of the BGP Sellers
to comply with their obligations under the BGP Agreement, (d) the BGP Sellers
if there has been a material misrepresentation or material breach in the
representations, warranties or covenants of SFX Entertainment or if there has
been any material failure on the part of SFX Entertainment to comply with its
obligations under the BGP Agreement or (e) either party if any court of
competent jurisdiction issues an order, decree or ruling or takes any other
action enjoining or otherwise prohibiting the transactions contemplated by
the BGP Agreement and the order, decree, ruling or other action becomes final
and non-appealable. The termination rights described in clauses (b) through
(d) above are subject to a 30 day cure period.
Restriction on Asset Sales
SFX Entertainment has agreed that it will not sell all, or substantially
all, of the assets of BGP (as of December 11, 1997), for a period of three
years following the closing of the BGP Acquisition without offering the BGP
Sellers the opportunity to purchase the assets on the same terms as those
included in any bona fide offer received by SFX Entertainment from any third
party.
NETWORK ACQUISITION
General
SFX Entertainment and its wholly-owned subsidiary SFX Entertainment
Network Group, L.L.C. ("Network Sub"), entered into the Network Agreement, a
stock and asset purchase agreement dated as of December 10, 1997, with the
holders of all of the outstanding capital stock of each of The Album Network,
Inc. ("Album Network") and SJS (collectively, the "Network Sellers") and The
Network 40, Inc. ("Network 40"), wherein SFX Entertainment has agreed to (a)
acquire all of the outstanding capital stock of each of Album Network and SJS
and (b) purchase substantially all of the assets and properties, and assume
substantially all of the liabilities and obligations, of Network 40, for an
aggregate purchase price of $52.0 million in cash (the "Network Cash
Consideration") to be delivered at closing and approximately 750,000 shares
of SFX Entertainment Class A Common Stock valued by the parties at $10.0
million (the "Network Stock Consideration") to be delivered at the time of
the Spin-Off. The Network Sellers will retain all working capital (as defined
in the Network Agreement) of the acquired businesses in excess of $500,000;
however, if this working capital is less than $500,000, the Network Cash
Consideration will be reduced by the amount of the deficit. If the Spin-Off
has not occurred prior to June 30, 1998, at the option of the Network
Sellers, SFX Entertainment may be required to pay $10 million (plus interest
at a rate of 10% per annum from the date of closing) in cash in lieu of the
issuance of the Network Stock Consideration. The Network Cash Consideration
has been guaranteed by SFX.
In addition to the Network Cash Consideration and the Network Stock
Consideration, SFX Entertainment is obligated to make an additional payment
to the Network Sellers by March 20, 1999 based on the aggregate EBITDA (as
defined in the Network Agreement) generated by Album Network, SJS and the
assets purchased from Network 40 in 1998 (the "Network Earn-Out EBITDA"). The
additional payment will range from a minimum of $4.0 million if the Network
Earn-Out EBITDA is $9.0 million to a maximum of $14.0 million if the Network
Earn-Out EBITDA is greater than $11.0 million and will be payable in shares
of SFX Entertainment Class A Common Stock (based on the average daily closing
price of SFX Entertainment Class A Common Stock for the 20 trading days prior
to March 15, 1999) except (a) if the Network Earn-Out EBITDA is less than
$9.6 million, SFX Entertainment may choose to make the additional payment in
cash or (b) if the Spin-Off has not occurred by March 20, 1999, the
additional payment must be made in cash. SFX has guaranteed full and prompt
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payment of the Network Cash Consideration upon the satisfaction by the
Network Sellers of all conditions precedent to the obligation of SFX
Entertainment to consummate the Network Acquisition and receipt of any
approvals required under the HSR Act.
SFX Entertainment has agreed that, within 60 days after the completion of
the Spin-Off, it will file with the SEC a registration statement covering all
shares of the Network Stock Consideration. The Network Sellers may not assign
their registration rights without SFX Entertainment's written consent. In
addition, if the Network Earn-Out EBITDA payment is made in shares of SFX
Entertainment Class A Common Stock, then SFX Entertainment must file with the
SEC, within 60 days after the issuance of the Network Earn-Out EBITDA shares,
a registration statement covering all of those shares.
Representations and Warranties
The Network Sellers have made certain representations and warranties to
SFX Entertainment in the Network Agreement that, among other things, (a) the
Network Agreement is a valid, legal and binding obligation of, and
enforceable in accordance with its terms against, each of the Network
Sellers, (b) except for certain disclosed exceptions, performance of the
Network Agreement will not, directly or indirectly, violate any material
agreement to which any of the Network Sellers or the acquired companies is a
party, (c) except for certain disclosed exceptions, no material consents from
third paries are necessary to consummate the Network Acquisition and (d)
since the date of the balance sheets provided to SFX Entertainment, none of
Network 40, Album Network or SJS has suffered a material adverse change in
their respective business, operations, properties, assets or condition. Each
of SFX Entertainment and Network Sub has made certain representations and
warranties to each Network Seller with respect to, among other things, (a)
its authority to enter into the transaction, (b) the absence of certain legal
proceedings, (c) that the Network Agreement is a valid, legal and binding
obligation of, and enforceable in accordance with its terms against, each of
SFX Entertainment and Network Sub, (d) required consents and (e) the
capitalization of SFX Entertainment. The representations and warranties of
the parties contained in the Network Agreement survive until June 30, 1999,
except for representations and warranties relating to corporate authority and
trustees' authority, authorization, validity of the agreement,
capitalization, further actions to perfect conveyances and good standing,
which survive for the applicable statute of limitations periods.
Office Purchase/Lease
SFX Entertainment has the option, exercisable on or prior to the later to
occur of three days after the receipt of all approvals under the HSR Act and
10 days prior to closing, to agree to enter into a purchase and sale
agreement with the Network Sellers to purchase an office building and related
property used in the conduct of the business of Network 40 and Album Network
for an aggregate purchase price of $2.4 million (which is not part of the
Network Cash Consideration), including reimbursement of certain costs of the
Network Sellers. Consummation of the purchase will be conditioned on, among
other things, a due diligence review of the real estate by SFX Entertainment.
If SFX Entertainment elects not to purchase the real estate, then it will
lease the real estate to the Network Sellers for a period of 10 years at Fair
Market Rent (as defined in the Network Agreement). The long-term lease will
provide that SFX Entertainment will have a right of first offer with regard
to sales of all or substantially all of the real estate. If SFX Entertainment
declines to accept such an offer and, within one year therefrom, the Network
Sellers accept a similar offer that is 95% or less in value than the offer
rejected by SFX Entertainment, then SFX Entertainment will have a right of
first refusal with regard to the accepted offer.
Covenants
The Network Sellers have agreed that, prior to the closing of the Network
Acquisition, they will, among other things: (a) conduct the operation of the
businesses to be acquired in the ordinary course, (b) use their best efforts
to preserve the business relationships of the businesses to be acquired, (c)
report periodically to SFX Entertainment, (d) satisfy all legal conditions
applicable to the proposed transactions, (e) repay all indebtedness of
related parties, (f) not participate in any discussions, communications or
D-73
<PAGE>
negotiations with any person with respect to any direct or indirect
acquisition of any material portion of the assets, properties or capital
stock of Network 40, Album Network, or SJS and (g) cause Network 40 and
Bullet Productions, Inc. to merge, with Network 40 as the surviving
corporation.
Indemnification
The Network Sellers and SFX Entertainment have agreed to enter into
indemnification agreements at closing whereby they agree to indemnify each
other and their successors and assigns from and against any losses resulting
from (a) any inaccuracy in any representation or breach of any warranty under
the Network Agreement and (b) the breach or nonfulfillment of any covenant,
agreement or other obligation under the Network Agreement. Other than with
respect to the payment of the Network Cash Consideration, the Network Stock
Consideration and the Network Earn-Out EBITDA payment, neither the Network
Sellers nor SFX Entertainment is entitled to indemnification unless the
aggregate amount of losses suffered by the party seeking indemnification
exceeds $250,000; in that case, that party will be indemnified from the first
dollar.
Conditions to Closing
The consummation of the Network Acquisition is subject to certain closing
conditions, including (a) the accuracy of the representations and warranties
contained in the Network Agreement as of the closing (except where made as of
a certain date), (b) the receipt of all material consents (including any
required under the HSR Act) required to be obtained in connection with the
Network Acquisition, (c) the absence of any action, suit, claim, proceeding
or investigation that challenges or requests relief with respect to the
proposed transactions or may have the effect of delaying or interfering with
the proposed transactions and (d) the execution of the employment agreements
with each of the Network Sellers and indemnification agreements described
above.
Closing and Termination
The consummation of the Network Acquisition will be on a date selected by
SFX Entertainment (but no earlier than January 31, 1998, and no later than
the date of the consummation of the Spin-Off). SFX Entertainment anticipates
consummating the Network Acquisition in the first quarter of 1998.
The Network Agreement may be terminated by (a) mutual consent of the
parties, (b) either party if the closing does not occur by March 1, 1998 and
the terminating party does not cause the delay or (c) either party if the
other party has materially breached any of its obligations under the
agreement and if the breach remains uncured for a 30-day period.
CONCERT/SOUTHERN ACQUISITION
General
SFX Entertainment, through its wholly-owned subsidiary SFX Concerts, Inc.,
has entered into the Concert/Southern Agreement, a purchase and sale
agreement dated December 15, 1997, with:
o Southern Promotions, Inc., High Cotton, Inc. and Cooley and Conlon
Management, Inc. (collectively, the "Concert/Southern Sale Companies"),
and certain shareholders of the Concert/ Southern Sale Companies;
o Buckhead Promotions, Inc., Northern Exposure, Inc., Pure Cotton, Inc.
and Interfest, Inc. (collectively, the "Concert/Southern Asset
Companies"); and
o Concert/Southern Chastain Promotions Joint Venture and Roxy Ventures
Joint Venture (collectively, the "Concert/Southern Joint Ventures").
Pursuant to the Concert/Southern Agreement, SFX Entertainment has agreed to
purchase all of the outstanding capital stock of the Concert/Southern Sale
Companies and substantially all of the assets of the Concert/Southern Asset
Companies and the Concert/Southern Joint Ventures excluding, among other
things, cash and receivables, for a purchase price of $16.6 million payable
in cash at closing. In addition,
D-74
<PAGE>
SFX Entertainment will assume the obligations of the Concert/Southern Asset
Companies and the Concert/Southern Joint Ventures arising under (a) certain
real estate contracts, (b) all other contracts arising in the ordinary course
of business and (c) any other contracts entered into by the closing date that
do not involve an obligation of $10,000 or more or $40,000 in the aggregate,
unless SFX Entertainment expressly agrees to do otherwise.
Representations and Warranties
The Concert/Southern Joint Ventures, the Concert/Southern Asset Companies
and the stockholders of the Concert/Southern Sale Companies (collectively,
the "Concert/Southern Sellers") have made certain customary representations
and warranties to SFX Entertainment in the Concert/Southern Agreement with
respect to, among other things, their organization and authority to enter
into the agreement, capitalization, title to shares, absence of conflicting
agreements or required consents, government authorizations, subsidiaries,
taxes, personal property, real property, contracts, status of contracts,
environmental matters, copyrights, trademarks and similar rights, personnel
information, financial statements, liabilities, absence of certain changes or
events, title to properties, litigation, compliance with laws, insurance,
accuracy of information, accounts receivable, payola/plugola and the business
of the Concert/Southern companies. SFX Entertainment has made certain
customary representations and warranties to the Concert/Southern Sellers with
respect to, among other things, organization and standing, authorization and
binding obligation, litigation and compliance with laws, investment intent
and the accuracy of information.
Indemnification
Each of SFX Entertainment and the Concert/Southern Sellers have agreed to
indemnify the other for losses resulting, directly or indirectly, from a
breach of any of its representations, warranties, covenants or agreements
contained in the Concert/Southern Agreement or any instrument or certificate
delivered pursuant thereto. The Concert/Southern Agreement provides that the
representations and warranties of the Concert/Southern Sellers and SFX
Entertainment contained therein will continue in force for a period of 12
months following the closing of the acquisition, after which time the
indemnification obligations of the parties will be limited to claims asserted
during the 12-month period. Neither the Concert/Southern Sellers nor SFX
Entertainment will have any liability to the other for breach of any
representation, warranty, covenant, agreement of the other party, except to
the extent that the aggregate of all claims by the other party for breaches
exceeds $100,000, in which case the party seeking indemnification will be
paid from the first dollar.
Covenants
The Concert/Southern Sellers have also agreed that, until the closing of
the acquisition, they will, among other things:
o use all reasonable efforts to preserve relationships with customers,
suppliers, employees and others;
o provide SFX Entertainment with monthly unaudited statements of revenue
and expenses; and
o provide SFX Entertainment with access to all books, records and other
facilities of the operating facilities.
The Concert/Southern Sellers have also agreed not to, other than in the
ordinary course of business:
o sell or dispose of any assets except the property located on Monroe
Drive in Atlanta, Georgia;
o grant any general increases in salaries or bonus (other than certain
specified bonuses);
o provide any pensions, retirement or other employee benefits unless
required by law; and
o permit any insurance policies to be canceled or terminated.
D-75
<PAGE>
Except as required by the Joint Venture Agreement with the Woodruff Arts
Center, none of the Concert/Southern Sellers will directly or indirectly
solicit or enter into any agreements regarding any merger, sale of shares of
capital stock, or sale of assets involving any of the operating entities of
Concert/Southern.
Conditions to Closing
The closing of the acquisition is subject to certain conditions, including
the accuracy and compliance with the representations, warranties and
covenants, the obtaining of requisite governmental consents, the resignation
of all officers and directors of each of the operating entities of the
Concert/Southern Sellers, receipt of all third party consents to the material
contracts of the operating entities and to all other contracts assigned or
transferred to SFX Entertainment, and the absence of adverse proceedings. SFX
Entertainment must also have entered into (a) employment agreements with
Messrs. Alex Cooley and Peter Conlon and (b) an agreement with Mr. Stephen
Selig, III with respect to certain preferred tickets for promotions in
Atlanta on terms to be mutually determined by SFX Entertainment and Mr.
Selig. In addition, receipt of the Robert W. Woodruff Arts Center, Inc.'s
consent to the sale or its waiver of its rights to purchase the assets
subject to the Concert/Southern Agreement is a condition to closing.
Closing and Termination
Consummation of the Concert/Southern Acquisition will occur on the later
of (a) 5 business days following the expiration or termination of all waiting
periods that are applicable to the acquisition pursuant to the HSR Act or (b)
March 31, 1998, unless extended to June 30, 1998 in connection with the
parties' HSR Act filings.
The Concert/Southern Agreement may be terminated:
o by the mutual written consent of the Concert/Southern Sellers and SFX
Entertainment;
o by either party if the closing has not occurred by March 31, 1998 (which
will be extended to June 30, 1998 if either party receives a request for
additional information in connection with their HSR Act filing);
o by either party if any judgment, final decree or order that would
prevent or make unlawful the closing is in effect;
o by a non-breaching party if the other breaches the agreement in any
material respect and fails to cure the breach within 30 calendar days;
o by either of SFX Entertainment or the Concert/Southern Sellers if the
conditions related to governmental consents and lack of adverse
proceedings of the other party are not satisfied;
o by SFX Entertainment if there is an uncured breach of the
Concert/Southern Sellers' representations and warranties with regard to
compliance with environmental laws (however, if the remedy for the
breach requires the expenditure of greater than an aggregate of $75,000,
then the Concert/Southern Agreement may be terminated at the option of
the Concert/Southern Sellers); or
o by SFX Entertainment if any of the purchased assets with a value greater
than $50,000 is damaged and is not restored or replaced by the
Concert/Southern Sellers.
If the Concert/Southern Agreement is terminated as a result of a material
breach by SFX Entertainment of its obligations thereunder, then SFX
Entertainment must pay the Concert/Southern Sellers liquidated damages in the
amount of $2.0 million.
D-76
<PAGE>
LISTING AND TRADING OF SFX ENTERTAINMENT CLASS A COMMON STOCK
SFX Entertainment has applied to list the SFX Entertainment Class A Common
Stock on the Nasdaq National Market but may seek listing on an exchange.
There is currently no public trading market for SFX Entertainment Class A
Common Stock. See "Risk Factors--No Prior Market for SFX Entertainment
Stock." A when-issued trading market (one in which shares can be traded
before certificates are actually available or issued) is expected to develop
in the SFX Entertainment Class A Common Stock on or about the Spin-Off Record
Date. Trading prices of the shares of SFX Entertainment Class A Common Stock,
before or after the Spin-Off, cannot be predicted. The SFX Entertainment
Class B Common Stock is not expected to be publicly traded.
On the Spin-Off Distribution Date, SFX will distribute approximately
13,400,000 shares to approximately 150 holders of record of the SFX's Class A
common stock, Series D preferred stock and interests in SFX's director
deferred stock ownership plan, assuming the exercise of outstanding warrants
of SFX before the Spin-Off Record Date and based on the number of holders of
record of SFX's Class A common stock, Series D preferred stock and interests
in SFX's director deferred stock ownership plan on February 9, 1998. The
Transfer Agent and Registrar for the SFX Entertainment Class A Common Stock
will be Chase Mellon Shareholder Services, L.L.C. In addition, the board of
directors of SFX Entertainment has approved the grant of up to 793,633 shares
of SFX Entertainment Class A Common Stock to holders as of the Spin-Off
Record Date of stock options or SARs of SFX, whether or not vested. It is
anticipated that SFX Entertainment will grant an aggregate of 190,000 shares
of SFX Entertainment Class A Common Stock pursuant to employment agreements.
See "Management--Employment Agreements and Arrangements with Certain Officers
and Directors" and "Certain Relationships and Related Transactions--Issuance
of Stock to Holders of SFX's Options and SARs."
Shares of SFX Entertainment Common Stock distributed to SFX stockholders
in the Spin-Off will be freely transferable, except for shares received by
persons who may be deemed to be "affiliates" of SFX Entertainment under the
Securities Act. See "Principal Stockholders of SFX Entertainment." Persons
who may be deemed to be affiliates of SFX Entertainment generally include
individuals or entities that control, are controlled by or are under common
control with SFX Entertainment, and may include certain officers and directors
of SFX Entertainment as well as principal stockholders of SFX Entertainment,
if any. Persons who are affiliates of SFX Entertainment may sell their shares
of SFX Entertainment Common Stock only pursuant to an effective registration
statement under the Securities Act or an exemption from the registration
requirements of the Securities Act, such as the exemptions afforded by
Section 4(2) of the Securities Act and Rule 144 thereunder. See "Shares
Eligible for Future Sale."
DIVIDEND POLICY
SFX Entertainment has no present plans to declare any dividends on the SFX
Entertainment Common Stock. The terms of the Indenture restrict (and the
terms of the Proposed Credit Facility are likely to restrict) SFX
Entertainment's ability to pay dividends on the SFX Entertainment Common
Stock in the future. The decision to declare a dividend and the amount
thereof, if any, will be in the sole discretion of the Board.
D-77
<PAGE>
CAPITALIZATION
The following table sets forth, as of September 30, 1997, (a) the
historical capitalization of SFX Entertainment, (b) the pro forma
capitalization of SFX Entertainment to reflect the Financing and the
consummation of the Pending Acquisitions and (c) the pro forma capitalization
of SFX Entertainment to reflect the Financing, the Pending Acquisitions, the
Spin-Off, the SFX Merger and the issuance of the stock described under
"Management--Employment Agreements and Arrangements with Certain Officers and
Directors" and "Certain Relationships and Related Party
Transactions--Issuance of Stock to Holders of SFX's Options and SARs." This
information should be read in conjunction with the financial statements and
the related notes thereto included elsewhere herein.
<TABLE>
<CAPTION>
SEPTEMBER 30, 1997
--------------------------------------------
(IN THOUSANDS)
PRO FORMA FOR
FINANCING,
PENDING
PRO FORMA FOR ACQUISITIONS,
FINANCING SPIN-OFF AND
AND PENDING SFX
ACQUISITIONS(2) MERGER(3)
ACTUAL(1) (UNAUDITED) (UNAUDITED)
---------- --------------- ---------------
<S> <C> <C> <C>
CASH AND CASH EQUIVALENTS..................................... $ 7,094 $ 60,390 $ 62,535
========== =============== ===============
DEBT:
Privately-placed debt ........................................ -- 350,000 350,000
Credit facility .............................................. -- 132,369 132,369
Other long-term debt.......................................... 16,453 16,453 16,453
---------- --------------- ---------------
TOTAL DEBT .................................................. 16,453 498,822 498,822
---------- --------------- ---------------
TEMPORARY EQUITY(4): -- 16,500 16,500
STOCKHOLDERS' EQUITY(5):
Preferred Stock, $.01 par value, 1,000 shares authorized,
none issued and outstanding as of September 30, 1997 actual
and pro forma ............................................... -- -- --
Class A Common Stock, $.01 par value, 1,000 shares
authorized, issued and outstanding as of September 30, 1997
actual, approximately 4,200,000 issued and outstanding pro
forma for the Financing and Pending Acquisitions and
approximately 18,700,000 issued and outstanding pro forma
for Financing, Pending Acquisitions, Spin-Off and SFX
Merger(6).................................................... -- 42 187
Class B Common Stock, $.01 par value, 1,000 shares
authorized, issued and outstanding as of September 30, 1997
actual and approximately 1,700,000 shares issued and
outstanding pro forma for Financing, Pending Acquisitions,
Spin-Off and SFX Merger(6)................................... -- -- 17
Additional paid-in capital ................................... 97,726 137,384 139,367
Retained earnings(7) ......................................... 3,652 3,652 3,652
---------- --------------- ---------------
Total stockholders' equity .................................. 101,378 141,078 143,223
---------- --------------- ---------------
Total capitalization......................................... $117,831 $656,400 $658,545
========== =============== ===============
</TABLE>
- ------------
(1) Reflects the consolidated historical balance sheet of SFX Entertainment
adjusted to reflect the contribution by SFX to SFX Entertainment's
capital of an intercompany payable incurred in connection with the
Recent Acquisitions. Only includes working capital associated with the
entertainment business.
(2) The cash portion of the purchase price in the Pending Acquisitions is
subject to increase under certain circumstances, including, in
particular, if SFX Entertainment is unable to issue shares of its
capital stock to certain of the sellers by virtue of having failed to
consummate the Spin-Off or for any other reason. In that case, the
aggregate cash consideration that would be owed to the sellers in the
Pending Acquisitions would increase by approximately $56.2 million,
resulting in a corresponding increase in debt and decrease in
stockholders' equity. In addition, the agreements relating to the
Pending Acquisitions provide for certain other purchase price
adjustments and future contingent payments in certain circumstances.
See "Risks Related to Pending Acquisitions" and "Management's
Discussion and Analysis of Financial Condition and Results of
Operations--Pending Acquisitions," "--Liquidity and Capital Resources
--Pending Acquisitions" and "Agreements Related to the Pending
Acquisitions."
D-78
<PAGE>
(3) The Distribution Agreement provides that SFX will transfer any positive
Working Capital in existence at the closing of the SFX Merger to SFX
Entertainment, and that if Working Capital is negative at that time,
SFX Entertainment will pay the amount of such shortfall to SFX. As of
September 30, 1997 the amount of positive Working Capital would have
been $2,145,000 (excluding the Series E Adjustment) and such amount is
reflected in the cash to be acquired by SFX Entertainment pursuant to
the Distribution Agreement. The actual amount of Working Capital as of
the closing of the SFX Merger may differ substantially from the amount
in existence on September 30, 1997, and will be a function of, among
other things, the operating results of SFX through the date of the SFX
Merger at the actual cost of consummating the SFX Merger and the
related transactions and other obligations of SFX, including the
payment of dividends and interest on SFX's debt. See "Risk
Factors--Working Capital Adjustments and Repayment of Advances."
Includes the issuance of stock pursuant to the anticipated employment
agreements and the stock issued to the holders of SFX options. See
"Management--Employment Agreements and Arrangements with Certain
Officers and Directors" and "Certain Relationships and Related
Transactions--Issuance of Stock to Holders of SFX's Options and SARs."
(4) The PACE Agreement provides that each PACE Seller shall have a Fifth
Year Put Option, exercisable during a period beginning on the fifth
anniversary of the closing of the PACE Acquisition and ending 90 days
thereafter, to require SFX Entertainment to purchase up to one-third of
the SFX's Class A Common Stock received by such PACE Seller
(representing 500,000 shares in the aggregate) for a cash purchase
price of $33.00 per share. With certain limited exceptions, the Fifth
Year Put Option rights are not assignable by the PACE Sellers. The
maximum amount payable under the Fifth Year Put Option ($16.5 million)
has been presented as temporary equity on the pro forma balance sheet.
(5) SFX has indicated that it will recapitalize SFX Entertainment prior to
the consummation of the Pending Acquisitions and the Spin-Off which
will allow for, among other things, an increase in the number of
authorized shares of common stock.
(6) Assumes that (a) an aggregate of 4,216,680 shares of SFX Entertainment
Class A Common Stock are issued pursuant to the Pending Acquisitions,
(b) an aggregate of 793,633 shares of SFX Entertainment Class A Common
Stock are issued to the holders of stock options and SARs issued by SFX
and (c) an aggregate of 290,000 shares of SFX Entertainment Class A
Common Stock and 650,000 shares of SFX Entertainment Class B Common
Stock are issued pursuant to certain anticipated employment agreements.
See "Management--Employment Agreements and Arrangements with Certain
Officers and Directors" and "Certain Relationships and Related
Transactions--Issuance of Stock to Holders of SFX's Options and SARs."
(7) Retained earnings on a pro forma basis for the Financing, the Pending
Acquisitions, the Spin-Off and the SFX Merger have not been adjusted
for future charges to earnings which will result from the issuance of
stock and options granted to certain executive officers and other
employees of SFX Entertainment. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations--Liquidity
and Capital Resources--Future Charges to Earnings."
D-79
<PAGE>
UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS
The following financial statements (the "Unaudited Pro Forma Condensed
Combined Financial Statements") and notes thereto contain forward-looking
statements that involve risks and uncertainties. The actual results of SFX
Entertainment may differ materially from those discussed herein for the
reasons identified herein. SFX Entertainment undertakes no obligation to
publicly release the result of any revisions to these forward-looking
statements that may be made to reflect any future events or circumstances.
In the opinion of management, all adjustments necessary to fairly present
this pro forma information have been made. The Unaudited Pro Forma Condensed
Combined Financial Statements are based upon, and should be read in
conjunction with, the historical financial statements of SFX Entertainment
and the Acquisition Businesses and the respective notes to such financial
statements included herein. The pro forma information is based upon tentative
allocations of purchase price for the Pending Acquisitions, and does not
purport to be indicative of the results that would have been reported had
such events actually occurred on the dates specified, nor is it indicative of
SFX Entertainment's future results if the aforementioned transactions are
completed. SFX Entertainment cannot predict whether the consummation of the
Pending Acquisitions will conform to the assumptions used in the preparation
of the Unaudited Pro Forma Condensed Combined Financial Statements.
Additionally, there can be no assurance that the Pending Acquisitions will be
consummated on the terms described herein, or at all.
The Unaudited Pro Forma Condensed Combined Balance Sheet at September 30,
1997 is presented as if SFX Entertainment had completed the Financing, the
Pending Acquisitions, the Spin-Off and the SFX Merger as of September 30,
1997.
The Unaudited Pro Forma Condensed Combined Statements of Operations for
the year ended December 31, 1996 and the nine months ended September 30, 1997
are presented as if SFX Entertainment had completed the Recent Acquisitions,
the Financing, the Pending Acquisitions, the Spin-Off and the SFX Merger as
of January 1, 1996.
The Unaudited Pro Forma Condensed Combined Financial Statements have been
prepared assuming that the approximately 4.2 million shares of SFX
Entertainment Class A Common Stock are issued in connection with certain of
the Pending Acquisitions and have been valued by the parties at $13.33 per
share for purposes of calculating the consideration to be given for the
Pending Acquisitions. Such valuation is based upon certain financial
projections developed jointly by SFX Entertainment and the sellers. There is
presently no trading market for SFX Entertainment Class A Common Stock, and
there can be no assurance that the assumptions upon which the valuation is
based will, in fact, be correct or that the valuation will approximate the
actual trading price of SFX Entertainment Class A Common Stock.
The cash portion of the purchase price in the Pending Acquisitions is
subject to increase under certain circumstances, including, in particular, if
SFX Entertainment is unable to issue shares of its capital stock to certain
of the sellers by virtue of having failed to consummate the Spin-Off by July
1, 1998 or for any other reason. In such case, the aggregate cash
consideration that would be owed to the sellers in the Pending Acquisitions
would increase by approximately $56.2 million resulting in a corresponding
increase in debt and decrease in stockholder's equity. Although management
believes the Spin-Off is likely to occur, the Spin-Off is subject to certain
conditions, some of which are outside of management's control. There can be
no assurance that the Spin-Off will be consummated on the terms presently
contemplated, or at all. In addition, the agreements relating to the Pending
Acquisitions provide for certain other purchase price adjustments and future
contingent payments in certain circumstances. See "Risk Factors--Risks
Related to Pending Acquisitions," "Management's Discussion and Analysis of
Financial Condition and Results of Operations--Liquidity and Capital
Resources" and "Agreements Related to the Pending Acquisitions."
Purchase accounting is based upon preliminary asset valuations, which are
subject to change.
D-80
<PAGE>
SFX ENTERTAINMENT, INC.
UNAUDITED PRO FORMA CONDENSED COMBINED BALANCE SHEET
SEPTEMBER 30, 1997
(in thousands)
<TABLE>
<CAPTION>
PRO FORMA FOR THE PENDING
ACQUISITIONS
-----------------------------------
SFX PACE
ENTERTAINMENT AND CONTEMPORARY
(ACTUAL) PAVILION ACQUISITIONS ACQUISITION
I II III
------------- --------------------- ------------
<S> <C> <C> <C>
ASSETS:
Current assets ..... $ 12,189 $(150,730) $(72,800)
Property and
equipment, net..... 55,882 82,489 25,000
Intangible assets,
net................ 59,721 125,314 66,500
Other assets........ 7,678 34,706 --
------------- --------------------- ------------
TOTAL ASSETS........ $135,470 $ 91,779 $ 18,700
============= ===================== ============
LIABILITIES &
STOCKHOLDERS'
EQUITY:
Current
liabilities........ $ 11,333 $ 63,756 $ --
Deferred taxes...... 2,816 -- --
Credit facility..... -- -- --
Privately-placed
debt............... -- -- --
Other long-term
debt (including
current portion) .. 16,453 -- --
Other liabilities .. 3,490 5,583 --
------------- --------------------- ------------
Total Liabilities .. 34,092 69,339 --
Minority interest .. -- 2,440 --
Temporary Equity ... -- 16,500 --
Stockholders'
Equity............. 101,378 3,500 18,700
------------- --------------------- ------------
TOTAL LIABILITIES &
STOCKHOLDERS'
EQUITY............. $135,470 $ 91,779 $ 18,700
============= ===================== ============
</TABLE>
<PAGE>
(RESTUBBED TABLE CONTINUED FROM ABOVE)
<TABLE>
<CAPTION>
PRO FORMA FOR
THE FINANCING,
THE PENDING
ACQUISITIONS,
CONCERT/ PRO FORMA THE SPIN-OFF
BGP NETWORK SOUTHERN PRO FORMA ADJUSTMENTS FOR AND THE
ACQUISITION ACQUISITION ACQUISITION ADJUSTMENTS THE FINANCING SFX
IV V VI VII VIII MERGER
----------- ----------- ----------- ----------- --------------- --------------
<S> <C> <C> <C> <C> <C> <C>
ASSETS:
Current assets ..... $(54,222) $(44,510) $(16,615) $ 2,145 (a) $352,893 $117,326
(40,500)(b) 88,976
40,500
Property and
equipment, net..... 20,000 1,000 1,000 -- -- 185,371
Intangible assets,
net................ 50,179 61,701 15,151 10,000 (d) 429,066
40,500 (b)
Other assets........ 222 391 464 (1,610)(c) -- 41,851
----------- ----------- ----------- ----------- --------------- --------------
TOTAL ASSETS........ $ 16,179 $ 18,582 $ -- $ 10,535 $482,369 $773,614
=========== =========== =========== =========== =============== ==============
LIABILITIES &
STOCKHOLDERS'
EQUITY:
Current
liabilities........ $ 6,062 $ 8,468 $ -- $ -- $ -- $ 89,619
Deferred taxes...... 2,617 114 -- 10,000 (d) 15,547
Credit facility..... -- -- -- -- 132,369 132,369
Privately-placed
debt............... -- -- -- -- 350,000 350,000
Other long-term
debt (including
current portion) .. -- -- -- -- 16,453
Other liabilities .. -- -- -- -- -- 9,073
----------- ----------- ----------- ----------- --------------- --------------
Total Liabilities .. 8,679 8,582 -- 10,000 482,369 613,061
Minority interest .. -- -- -- (1,610)(c) -- 830
Temporary Equity ... -- -- -- -- -- 16,500
Stockholders'
Equity............. 7,500 10,000 -- 2,145 (a) -- 143,223
----------- ----------- ----------- ----------- --------------- --------------
TOTAL LIABILITIES &
STOCKHOLDERS'
EQUITY............. $ 16,179 $ 18,582 $ -- $ 10,535 $482,369 $773,614
=========== =========== =========== =========== =============== ==============
</TABLE>
D-81
<PAGE>
I. Reflects the consolidated historical balance sheet of SFX Entertainment
adjusted to reflect the contribution by SFX to SFX Entertainment's capital of
an intercompany payable incurred primarily to complete the Recent
Acquisitions. Only includes working capital associated with the entertainment
business.
II. PACE AND PAVILION ACQUISITIONS
Reflects the PACE Acquisition and the separate acquisitions of the
remaining two partners' interests in Pavilion Partners. The PACE Acquisition
is not conditioned on the consummation of the Pavilion Acquisition.
<TABLE>
<CAPTION>
AS OF SEPTEMBER 30, 1997 (IN THOUSANDS)
----------------------------------------------------------
PACE PAVILION PRO FORMA PACE
AS REPORTED AS REPORTED ADJUSTMENTS TOTAL (F)
------------- ------------- --------------- ------------
<S> <C> <C> <C> <C>
ASSETS:
Current assets........................... $45,087 $ 30,178 $(109,500)(a) $(150,730)
(25,523)(a)
(9,507)(b)
(4,171)(b)
(27,500)(c)
(49,794)(e)
Property and equipment, net.............. -- 59,938 5,000 (a) 82,489
9,103 (b)
(19,052)(d)
27,500 (c)
Intangible assets, net................... 17,894 -- 107,420 (a) 125,314
Other assets............................. 26,856 12,660 9,507 (b) 34,706
(4,810)(d)
(9,507)(d)
------------- ------------- --------------- ------------
Total Assets............................. $89,837 $102,776 $(100,834) $ 91,779
============= ============= =============== ============
LIABILITIES & STOCKHOLDERS' EQUITY:
Current liabilities...................... $43,171 $ 17,254 $ 2,000 (b) $ 63,756
2,932 (b)
(1,601)(d)
Deferred taxes........................... -- -- -- --
Long-term debt (including current
portion)................................ 25,523 57,700 (25,523)(a) --
(7,906)(d)
(49,794)(e)
Other liability.......................... 4,063 1,520 -- 5,583
------------- ------------- --------------- ------------
Total Liabilities........................ 72,757 76,474 (79,892) 69,339
Minority interest........................ -- 2,440 -- 2,440
Temporary Equity......................... -- -- 16,500 (a) 16,500
Stockholders' Equity..................... 17,080 23,862 (17,080)(a) 3,500
20,000 (a)
(16,500)(a)
(23,862)(d)
------------- ------------- --------------- ------------
Total Liabilities & Stockholders'
Equity.................................. $89,837 $102,776 $(100,834) $ 91,779
============= ============= =============== ============
</TABLE>
- ------------
PRO FORMA ADJUSTMENTS:
(a) To reflect the PACE Acquisition for $109,500,000 in cash, the issuance
of 1,500,000 shares of SFX Entertainment's Class A Common Stock valued
by the parties at $20,000,000, the repayment of debt of $25,523,000
which is expected to be repaid shortly after closing, the related
increase in the fair value allocated to fixed assets of $5,000,000; the
related excess of the purchase price paid over the fair value of net
tangible assets of $107,420,000, and the elimination of stockholder's
equity of $17,080,000. Pursuant to the terms of the PACE Agreement,
additional consideration is required to be paid by SFX Entertainment if
the deemed value of SFX Entertainment Class A Common Stock is below
D-82
<PAGE>
$13.33 per share at the time of the Spin-Off under certain
circumstances.
The PACE Agreement further provides that each PACE Seller shall have a
Fifth Year Put Option, exercisable during a period beginning on the
fifth anniversary of the closing of the PACE Acquisition and ending 90
days thereafter, to require SFX Entertainment to purchase up to
one-third of the SFX Entertainment Class A Common Stock (500,000
shares) received by such PACE Seller for a cash purchase price of
$33.00 per share. With certain limited exceptions, the Fifth Year Put
Option rights are not assignable by the PACE Sellers. The maximum
amount payable under the Fifth Year Put Option ($16,500,000) has been
presented as temporary equity on the pro forma balance sheet.
Pursuant to the PACE Agreement, certain notes receivables and loans
made to key executives will be repaid in connection with the closing of
the PACE Acquisition. Such repayment has not been reflected herein.
(b) To reflect the acquisition of an additional 33.33% indirect interest in
Pavilion from Blockbuster for $4,171,000 in cash, the assumption of
$2,932,000 in liabilities and the granting of naming rights of three
venues for a two-year period with an estimated value of $2,000,000,
which will be recognized as income over such two-year period, and the
related increase in the fair value allocated to fixed assets of
$9,103,000. Also reflects the purchase of a note receivable from
Blockbuster, due from Pavilion at its current outstanding balance,
including accrued interest of, $9,507,000. This note will be eliminated
in consolidation upon the acquisition of Sony's interest in Pavilion,
as described below.
(c) To reflect the acquisition of an additional 33.33% indirect interest in
Pavilion Partners from Sony for $27,500,000 in cash.
(d) To eliminate PACE's equity method investment in Pavilion Partners
following the acquisition of 100% of Pavilion Partners and to eliminate
Pavilion Partners' historical equity. Also reflects the elimination of
the $7,906,000 intercompany notes receivable and accrued interest of
$1,601,000 acquired from Blockbuster. There can be no assurance that
SFX Entertainment will be able to consummate the acquisition of either
or both of Blockbuster's and Sony's respective interests in Pavilion
Partners and, as a result, SFX Entertainment may not obtain 100% of
Pavilion Partners. See "Agreements Related to Pending
Acquisitions--PACE Acquisition--Pavilion Acquisition."
(e) To reflect the repayment of Pavilion Partners' third party debt at the
closing of the Pavilion Acquisition.
(f) SFX Entertainment has agreed to lend PACE up to $25,000,000 for
potential acquisitions to be made by PACE whether or not the PACE
Acquisition is consummated. None of these acquisitions are considered
probable. As a result, none of such loans or acquisitions have been
reflected in the pro forma adjustment.
See "Agreements Related to Pending Acquisitions--PACE Acquisition."
III. CONTEMPORARY ACQUISITION
Reflects the Contemporary Acquisition and the separate acquisition of the
remaining 50% interest in Riverport Amphitheater Partners, a partnership that
owns an amphitheater in St. Louis, Missouri that is operated by Contemporary.
The Contemporary Acquisition is not conditioned upon the consummation of the
acquisition of such 50% interest.
D-83
<PAGE>
<TABLE>
<CAPTION>
AS OF SEPTEMBER 30, 1997 (IN THOUSANDS)
-------------------------------------------------------------
RIVERPORT
CONTEMPORARY AMPHITHEATER PRO FORMA CONTEMPORARY
AS REPORTED PARTNERS ADJUSTMENTS(A) ACQUISITION
-------------- -------------- -------------- --------------
<S> <C> <C> <C> <C>
ASSETS:
Current assets........................... $13,375 $ 2,603 $(72,800) $(72,800)
(15,978)
Property and equipment, net.............. 2,838 11,355 10,807 25,000
Intangible assets, net................... -- -- 66,500 66,500
Other assets............................. 7,430 8 (1,205) --
(6,233)
-------------- -------------- -------------- --------------
Total Assets............................. $23,643 $13,966 $(18,909) $ 18,700
============== ============== ============== ==============
LIABILITIES & STOCKHOLDERS' EQUITY:
Current liabilities...................... $ 7,786 $ 1,022 $ (8,808) $ --
Other long-term debt (including current
portion)................................ 1,578 -- (1,578) --
Other liabilities........................ 5,390 478 (5,868) --
-------------- -------------- -------------- --------------
Total Liabilities........................ 14,754 1,500 (16,254) --
Stockholders' Equity..................... 8,889 12,466 18,700 18,700
(21,355)
-------------- -------------- -------------- --------------
Total Liabilities & Stockholders'
Equity.................................. $23,643 $13,966 $(18,909) $ 18,700
============== ============== ============== ==============
</TABLE>
- ------------
PRO FORMA ADJUSTMENTS:
(a) To reflect the Contemporary Acquisition for $72,800,000 in cash,
including the additional acquisition of the remaining 50% interest in
the Riverport Amphitheater Partners not already owned by Contemporary
and the issuance of 1,402,851 shares of SFX Entertainment Class A
Common Stock valued by the parties at $18,700,000, the related
increase in the fair value allocated to fixed assets of $10,807,000,
the related excess of the purchase price paid over the fair value of
net tangible assets of $66,500,000, and the adjustment to eliminate
$15,978,000 of current assets, $1,205,000 of other assets, $8,808,000
of current liabilities, $1,578,000 of notes payable, $5,868,000 of
other liabilities, and stockholders' equity of $21,355,000, and to
reflect the elimination of Contemporary Group's $6,233,000 equity
investment in Riverport Amphitheather Partners. Pursuant to the
Contemporary Agreement, SFX Entertainment has eliminated certain cash
and receivables from current assets, accounts payable and accrued
expenses from current liabilities, and other assets and other
liablilties (principally, deferred revenue), which will not be
acquired or assumed by SFX Entertainment upon closing the Contemporary
Acquisition. Adjustment to eliminate Contemporary's historical
stockholders' equity and replace it with the value of the equity
securities to be issued by SFX Entertainment in connection with the
Contemporary Acquisition has also been made.
If Contemporary is unable to complete this acquisition of the
remaining 50% interest in Riverport Amphitheater Partners, the cash
consideration paid by SFX Entertainment for Contemporary will be
reduced by $10,500,000.
The acquisition agreement provides that in the event the Contemporary
Acquisition is consummated prior to the consummation of the Spin-Off,
1,402,851 shares of preferred stock of SFX Entertainment will be issued
to the sellers. Such preferred stock is to be converted into an
equal number of shares of SFX Entertainment's Class A Common Stock
upon consummation of the Spin-Off or, if the Spin-Off shall not have
occurred prior to July 1, 1998, such preferred stock is to be
redeemed at its fair market value, but in no event less than
$18,700,000. In addition, pursuant to the terms of the Contemporary
Agreement, SFX Entertainment has agreed to make certain payments to
any Contemporary sellers that own shares of SFX Entertainment's Class
A Common Stock on the second anniversary of the closing of the
Contemporary Acquisition if the average trading price of such stock
on the 20-day period ending on such period is less than $13.33 per
share. See "Agreements Related to the Pending
Acquisitions--Contemporary Acquisition."
D-84
<PAGE>
IV. BGP ACQUISITION
<TABLE>
<CAPTION>
AS OF SEPTEMBER 30, 1997 (IN THOUSANDS)
--------------------------------------------
PRO FORMA BGP
AS REPORTED ADJUSTMENTS ACQUISITION
------------- -------------- -------------
<S> <C> <C> <C>
ASSETS:
Current assets........................... $18,759 $(60,800)(a) $(54,222)
(12,181)(b)
Property and equipment, net.............. 9,233 10,767 (a) 20,000
Intangible assets, net .................. 1,460 48,719 (a) 50,179
Other assets............................. 222 -- 222
------------- -------------- -------------
Total Assets............................. $29,674 $(13,495) $ 16,179
============= ============== =============
LIABILITIES & STOCKHOLDERS' EQUITY:
Current liabilities...................... $ 6,062 $ -- $ 6,062
Deferred taxes .......................... 2,617 -- 2,617
Other long-term debt (including current
portion)................................ 12,181 (12,181)(b) --
------------- -------------- -------------
Total Liabilities........................ 20,860 (12,181) 8,679
Stockholders' Equity..................... 8,814 (8,814)(a) 7,500
7,500 (a)
------------- -------------- -------------
Total Liabilities & Stockholders'
Equity.................................. $29,674 $(13,495) $ 16,179
============= ============== =============
</TABLE>
- ------------
PRO FORMA ADJUSTMENTS:
(a) To reflect the BGP Acquisition for $60,800,000 in cash and the issuance
of 563,000 shares of SFX Entertainment Class A Common Stock valued at
$7,500,000, the related increase in fair value allocated to fixed
assets of $10,767,000 and the related excess of the purchase price paid
over the fair value of net tangible assets of $48,719,000, and the
elimination of $8,814,000 of stockholders' equity.
(b) To reflect the repayment of BGP's long-term debt at closing. Although
SFX Entertainment is assuming $12,200,000 of long-term debt, BGP is
required to have working capital at least equal to such liabilities at
the closing of the BGP Acquisition. The purchase price will be reduced
dollar-for-dollar to the extent that long-term debt exceeds working
capital.
See "Agreements Related to the Pending Acquisitions--BGP Acquisition."
V. NETWORK ACQUISITION
The Network Acquisition consists of the separate acquisitions of Network
Magazine and SJS. Each of these acquisitions is conditioned on the concurrent
closing of the other.
D-85
<PAGE>
<TABLE>
<CAPTION>
AS OF SEPTEMBER 30, 1997 (IN THOUSANDS)
----------------------------------------------------------
NETWORK
MAGAZINE SJS PRO FORMA NETWORK
AS REPORTED AS REPORTED ADJUSTMENTS ACQUISITION
------------- ------------- -------------- -------------
<S> <C> <C> <C> <C>
ASSETS:
Current assets........................... $ 3,127 $4,325 $(52,000)(a) $(44,510)
1,516 (b)
(1,478)(c)
Property and equipment, net.............. 304 334 362 (a) 1,000
Intangible assets, net................... -- -- 63,217 (a) 61,701
(1,516)(b)
Other assets............................. 299 92 -- 391
------------- ------------- -------------- -------------
Total Assets............................. $ 3,730 $4,751 $ 10,101 $ 18,582
============= ============= ============== =============
LIABILITIES & STOCKHOLDERS' EQUITY:
Current liabilities...................... $ 3,659 $4,809 -- $ 8,468
Deferred taxes........................... 114 -- -- 114
Long-term debt (including current
portion)................................ 1,478 -- (1,478)(c) --
------------- ------------- -------------- -------------
Total Liabilities........................ 5,251 4,809 (1,478) 8,582
Stockholders' Equity..................... (1,521) (58) 1,579 (a) 10,000
10,000 (a)
------------- ------------- -------------- -------------
Total Liabilities & Stockholders'
Equity.................................. $ 3,730 $4,751 $ 10,101 $ 18,582
============= ============= ============== =============
</TABLE>
- ------------
PRO FORMA ADJUSTMENTS:
(a) To reflect the Network Acquisition for $52,000,000 in cash and the
issuance of 750,188 shares of SFX Entertainment Class A Common Stock
valued by the parties at $10,000,000, the related increase in fair
value allocated to fixed assets of $362,000, and the related excess of
the purchase price paid over the fair value of net tangible assets of
$63,217,000, and the elimination of stockholders' deficiency of
$1,579,000.
SFX Entertainment's purchase agreement for Network Magazine and SJS
provides that the purchase price will be increased by $4,000,000 if
total 1998 EBITDA for Network and SJS as defined equals or exceeds
$9,000,000; by an additional $4 for each $1 increase in such EBITDA
between $9,000,000 and $10,000,000 and by an additional $6 for each $1
increase in such EBITDA between $10,000,000 and $11,000,000 (up to a
maximum of $14,000,000 of additional consideration). The additional
consideration is payable in shares of SFX Entertainment's Class A
Common Stock or, in certain circumstances, in cash. The pro forma
financial statements assume that no additional consideration is paid.
(b) To reflect a net working capital adjustment as required in the Network
Acquisition agreement. Pursuant to the Network Agreement, the final
cash purchase price of Network Magazine and SJS shall be adjusted for
any difference between net working capital, as defined, and $500,000.
The working capital adjustment is calculated as the difference between
current assets and current liabilities of Network Magazine and SJS at
closing.
(c) To reflect the repayment of Network Magazine's long-term debt at
closing.
SFX Entertainment's purchase agreement for Network Magazine and SJS
provides SFX Entertainment with an option to acquire an office building
in Burbank, California, which currently serves as Network Magazine's
headquarters, at a cost of approximately $2,400,000. This potential
transaction has not been reflected on the pro forma balance sheet.
See "Agreements Related to the Pending Acquisitions--Network
Acquisition."
D-86
<PAGE>
VI. CONCERT/SOUTHERN ACQUISITION
<TABLE>
<CAPTION>
AS OF SEPTEMBER 30, 1997 (IN THOUSANDS)
--------------------------------------------
CONCERT/
PRO FORMA SOUTHERN
AS REPORTED ADJUSTMENTS ACQUISITION
------------- -------------- -------------
<S> <C> <C> <C>
ASSETS:
Current assets........................... $1,921 $(16,615)(a) $(16,615)
(1,921)(a)
Property and equipment, net.............. 360 640 (a) 1,000
Intangible assets, net................... -- 15,151 (a) 15,151
Other assets............................. 919 (455)(a) 464
------------- -------------- -------------
Total Assets............................. $3,200 $ (3,200) $ --
============= ============== =============
LIABILITIES & STOCKHOLDERS' EQUITY:
Current liabilities...................... $1,254 $ (1,254)(a) $ --
------------- -------------- -------------
Total Liabilities........................ 1,254 (1,254) --
Stockholders' Equity..................... 1,946 (1,946)(a) --
------------- -------------- -------------
Total Liabilities & Stockholders'
Equity.................................. $3,200 $ (3,200) $ --
============= ============== =============
</TABLE>
- ------------
PRO FORMA ADJUSTMENTS:
(a) To reflect the Concert/Southern Acquisition for $16,615,000 in cash;
the related increase in fair value allocated to fixed assets of
$640,000, the related excess of the purchase price paid over the fair
value of net tangible assets of $15,151,000; and the adjustments to
eliminate $1,921,000 of current assets, $1,254,000 of current
liabilities, stockholders' equity of $1,946,000 and a $455,000
investment in a non-entertainment affiliated entity not being acquired
by SFX Entertainment. Pursuant to the Concert/Southern Agreement, SFX
Entertainment has eliminated certain cash and receivables from current
assets and accounts payable and other accrued expenses from current
liabilities, which will not be acquired or assumed by SFX Entertainment
upon closing the Concert/Southern Acquisition. Adjustment to eliminate
Concert/Southern's historical combined stockholders' equity and replace
it with the value of the equity securities to be issued by SFX
Entertainment in connection with the Concert/Southern Acquisition has
also been made.
See "Agreements Related to the Pending Acquisitions--Concert/Southern
Acquisition."
VII. PRO FORMA ADJUSTMENTS FOR PENDING ACQUISITIONS
(a) The Distribution Agreement provides that SFX will pay any positive
Working Capital in existence at the closing of the SFX Merger to SFX
Entertainment, and that if Working Capital is negative at that time,
SFX Entertainment will pay the amount of such shortfall to SFX. As of
September 30, 1997 the amount of positive Working Capital would have
been $2,145,000 (excluding the Series E Adjustment) and such amount is
reflected in the cash to be acquired by SFX Entertainment pursuant to
the Distribution Agreement. The actual amount of Working Capital as of
the closing of the SFX Merger may differ substantially from the amount
in existence on September 30, 1997, and will be a function of, among
other things, the operating results of SFX through the date of the SFX
Merger and the actual cost of consummating the SFX Merger and the
related transactions. Additionally, SFX Entertainment will be
responsible for any taxes resulting from the Spin-Off to the extent
such taxes result from any gain on the distribution. See "Agreements
Between SFX Entertainment and SFX."
(b) To reflect estimated costs associated with the Pending Acquisitions and
the Financing and the related transactions. Consists of approximately
(i) $5.5 million in fees and expenses in connection with the Pending
Acquisitions, (ii) $17.2 million in fees in connection with the
Spin-Off, the Consent Solicitations and other required consents and
(iii) $17.8 million of fees and expenses in connection with the
Financing. The information relataing to fees and expenses is based on
management's estimates, and may not be indicative of, and are likely to
vary from, the actual fees and expenses incurred by SFX Entertainment
relating to the Financing, the Pending Acquisitions, the Spin-Off and
the SFX Merger.
D-87
<PAGE>
(c) To reflect the consolidation of GSAC Partners (the entity which
operates the PNC Bank Arts Center) following the acquisition of the
remaining 50% ownership interest in GSAC currently owned by Pavilion
Partners.
(d) To reflect deferred taxes associated with differences between the book
and tax bases of assets and liabilities acquired.
VIII. PRO FORMA ADJUSTMENTS FOR THE FINANCING
Represents assumed borrowings to finance the Pending Acquisitions
including the Notes and Proposed Credit Facility. There can be no assurance
that SFX Entertainment will be able to enter into or obtain financing under
the Proposed Credit Facility, on acceptable terms, or at all. SFX
Entertainment anticipates using $352.9 million of proceeds to finance the
cash portion of the Pending Acquisitions, $89.0 million for the repayment of
debt assumed in the Pending Acquisitions and $40.5 million for the payment of
estimated costs associated with the Pending Acquisitions and the Financing
and related transactions. The repayment of assumed debt includes $25.5
million in connection with the PACE Acquisition, $49.8 million in connection
with the Pavilion Acquisition, $12.2 million in connection with the BGP
Acquisition and $1.4 million in connection with the Network Acquisition.
D-88
<PAGE>
SFX ENTERTAINMENT, INC.
UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS
NINE MONTHS ENDED SEPTEMBER 30, 1997
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
PRO FORMA FOR RECENT
ACQUISITIONS
----------------------
SFX
ENTERTAINMENT PRO FORMA
(ACTUAL) ADJUSTMENTS
I II PRO FORMA
------------- ----------- ---------
<S> <C> <C> <C>
Revenue...................... $74,396 $12,293 $86,689
Operating expenses........... 63,045 12,236 75,281
Depreciation & amortization . 4,041 1,084 5,125
Corporate expenses (1)....... 1,307 -- 1,307
------------- ----------- ---------
Operating income (loss) ..... 6,003 (1,027) 4,976
Interest expense............. 956 (956) 1,291
1,291
Other (income) expenses ..... (213) -- (213)
Equity (income) loss from
investments................. (1,344) -- (1,344)
------------- ----------- ---------
Income/(loss) before income
tax expense................. 6,604 (1,362) 5,242
Income tax expense
(benefit)................... 2,952 1,649 4,601
------------- ----------- ---------
Net income (loss)............ $ 3,652 $(3,011) $ 641
============= =========== =========
Accretion on temporary
equity .....................
Net loss applicable to
common shares ..............
Net loss per common share ...
Weighted average common
shares outstanding (2)......
</TABLE>
(RESTUBBED TABLE CONTINUED FROM ABOVE)
<TABLE>
<CAPTION>
PRO FORMA FOR PENDING ACQUISITIONS
-----------------------------------------------------------------------
PACE
AND CONCERT/ PRO FORMA
PAVILION CONTEMPORARY BGP NETWORK SOUTHERN PRO FORMA ADJUSTMENTS
ACQUISITIONS ACQUISITION ACQUISITION ACQUISITION ACQUISITION ADJUSTMENTS FOR THE FINANCING
III IV V VI VII VIII IX
------------ ------------ ----------- ----------- ----------- ----------- -----------------
<S> <C> <C> <C> <C> <C> <C> <C>
Revenue...................... $229,480 $85,570 $65,448 $20,563 $13,093 $ -- $ --
Operating expenses........... 205,365 75,784 59,312 13,893 10,631 -- --
Depreciation & amortization . 4,476 1,081 611 207 57 16,821 (a) --
Corporate expenses (1)....... -- -- -- -- -- 1,500 (b) --
------------ ------------ ----------- ----------- ----------- ----------- -----------------
Operating income (loss) ..... 19,639 8,705 5,525 6,463 2,405 (18,321) --
Interest expense............. 4,803 227 837 196 -- -- (6,063)(a)
-- 31,895 (b)
Other (income) expenses ..... 1,594 (170) (764) (123) (57) (1,046) (c) --
Equity (income) loss from
investments................. (5,321) -- -- -- (34) 1,046 (c) --
------------ ------------ ----------- ----------- ----------- ----------- -----------------
Income/(loss) before income
tax expense................. 18,563 8,648 5,452 6,390 2,496 (18,321) (25,832)
Income tax expense
(benefit)................... 3,751 -- 2,133 135 -- (7,120)(d) --
------------ ------------ ----------- ----------- ----------- ----------- -----------------
Net income (loss)............ $ 14,812 $ 8,648 $ 3,319 $ 6,255 $ 2,496 (11,201) $(25,832)
============ ============ =========== =========== =========== =========== =================
Accretion on temporary
equity ..................... (2,475)(e)
-----------
Net loss applicable to
common shares .............. $(13,676)
===========
Net loss per common share ...
Weighted average common
shares outstanding (2)......
</TABLE>
(RESTUBBED TABLE CONTINUED FROM ABOVE)
<TABLE>
<CAPTION>
PRO FORMA
FOR THE RECENT
ACQUISITIONS,
THE FINANCING,
THE PENDING
ACQUISITIONS,
THE SPIN-OFF
AND THE
SFX
MERGER
-------------
<S> <C>
Revenue...................... $500,843
Operating expenses........... 440,266
Depreciation & amortization . 28,378
Corporate expenses (1)....... 2,807
--------
Operating income (loss) ..... 29,392
Interest expense............. 33,186
Other (income) expenses ..... (779)
Equity (income) loss from
investments................. (5,653)
--------
Income/(loss) before income
tax expense................. 2,638
Income tax expense
(benefit)................... 3,500
--------
Net income (loss)............ (862)
Accretion on temporary
equity ..................... (2,475)
--------
Net loss applicable to
common shares .............. (3,337)
========
Net loss per common share ... $ (.17)
========
Weighted average common
shares outstanding (2)...... 20,400
========
</TABLE>
- ------------
(1) Net of fees from Triathlon of $1,693,000. These fees will vary, above
the minimum level of $500,000, based on the level of acquisition and
financing activities of Triathlon. SCMC previously assigned its rights
to receive fees payable under this agreement to SFX. Pursuant to the
terms of the Distribution Agreement, SFX will assign its rights to
receive such fees to SFX Entertainment. Triathlon has previously
announced that it is exploring ways of maximizing stockholder value,
including possible sale to a third party. In the event that Triathlon
were acquired by a third party, there can be no assurance that the
agreement would continue for the remainder of its term.
(2) Includes 500,000 shares of SFX Entertainment Class A Common Stock to be
issued to the PACE Sellers in connection with the Fifth Year Put
Option; such shares are not included in calculating the net loss per
common share.
D-89
<PAGE>
NOTES TO PRO FORMA INCOME STATEMENTS:
I. Represents SFX Entertainment's actual operating results for the nine
months ended September 30, 1997.
EBITDA for the nine months ended September 30, 1997 was $10,044,000
and $57,770,000 for SFX Entertainment on an actual basis and a pro
forma basis, respectively. EBITDA is defined as earnings before
interest, taxes, other income, net, equity income (loss) from
investments and depreciation and amortization. Although EBITDA is not
a measure of performance calculated in accordance with GAAP, SFX
Entertainment believes that EBITDA is accepted by the entertainment
industry as a generally recognized measure of performance and is used
by analysts who report publicly on the performance of entertainment
companies. Nevertheless, this measure should not be considered in
isolation or as a substitute for operating income, net income, net
cash provided by operating activities or any other measure for
determining SFX Entertainment's operating performance or liquidity
which is calculated in accordance with GAAP. Cash flows from
operating, investing and financing activities for SFX Entertainment
for the nine months ended September 30, 1997 were $789,000,
($71,997,000) and $78,302,000, respectively.
There are other adjustments that could affect EBITDA but have not
been reflected herein. Had such adjustments been made, Adjusted
EBITDA on a pro forma basis would have been approximately $67,300,000
for the nine months ended September 30, 1997. The adjustments include
the expected cost savings in connection with the Pending Acquisitions
associated with the elimination of duplicative staffing and general
and administrative expenses of $3,800,000, and include equity income
from investments of $5,700,000. While management believes that such
cost savings are achievable, SFX Entertainment's ability to fully
achieve such cost savings is subject to numerous factors, certain of
which may be beyond SFX Entertainment's control.
II. SFX Entertainment acquired Delsener/Slater, the Meadows Music Theater
lease and Sunshine Promotions on January 2, 1997, March 20, 1997 and
June 24, 1997, respectively. These adjustments represent the
operating results of the Meadows Music Theater and Sunshine
Promotions prior to their acquisition by SFX Entertainment.
III. PACE AND PAVILION ACQUISITIONS
Reflects the PACE Acquisition and the separate acquisitions of PACE's two
partners' interests in Pavilion Partners, a partnership that owns certain
amphitheaters operated by PACE. The PACE Acquisition is not conditioned on
the consummation of either part of the Pavilion Acquisition.
<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30, 1997 (IN THOUSANDS)
----------------------------------------------------------
PACE
AND
PACE PAVILION PRO FORMA PAVILION
AS REPORTED AS REPORTED ADJUSTMENTS ACQUISITIONS
------------- ------------- ------------- --------------
<S> <C> <C> <C> <C>
Revenue ................................ $137,616 $91,114 $ 750 (a) $229,480
Operating expenses...................... 131,473 75,319 (1,427)(b) 205,365
Depreciation & amortization............. 1,462 3,014 -- 4,476
Other expenses.......................... 447 -- (447)(c) --
------------- ------------- ------------- --------------
Operating income........................ 4,234 12,781 2,624 19,639
Interest expense........................ 1,517 3,286 -- 4,803
Other expenses.......................... 64 1,530 -- 1,594
Equity (income) loss from investments .. (6,949) (1,654) 3,282 (d) (5,321)
------------- ------------- ------------- --------------
Income/(loss) before income tax
expense................................ 9,602 9,619 (658) 18,563
Income tax expense...................... 3,751 -- -- 3,751
------------- ------------- ------------- --------------
Net income (loss)....................... $ 5,851 $ 9,619 $ (658) $ 14,812
============= ============= ============= ==============
</TABLE>
D-90
<PAGE>
------------
PRO FORMA ADJUSTMENTS:
(a) To reflect non-cash revenue resulting from SFX Entertainment granting
Blockbuster naming rights to three venues for two years for no future
consideration as part of its agreement to acquire Blockbuster's
indirect 33 1/3% interest in Pavilion.
(b) Reflects the elimination of $520,000 of certain officers' salaries and
bonuses which will not be paid under SFX Entertainment's new employment
contracts and of $907,000 of non-recurring costs incurred in connection
with PACE's previously planned initial public offering, which has since
been canceled. The amount of the pro forma adjustment to eliminate
salaries and bonuses is based on SFX Entertainment's agreements with
the affected employees that a bonus will not be paid unless there is a
significant improvement in the results of the PACE Acquisition.
Accordingly, no such bonus is reflected in the pro forma statement of
operations as should the PACE Acquisition's results, once acquired by
SFX Entertainment, be at a similar level to that in these pro forma
statements of operations no bonus would be paid, and SFX Entertainment
would not be contractually obligated to pay a bonus.
(c) Reflects the elimination of non-recurring restricted stock compensation
to PACE executives.
(d) To eliminate PACE's income from its 33 1/3% equity investment in
Pavilion Partners. PACE currently owns 33 1/3% in Pavilion Partners and
has agreed to acquire the remaining 66 2/3% interest in Pavilion
Partners pursuant to the Blockbuster Acquisition and Sony Acquisition.
There can be no assurance that SFX Entertainment will be able to
consummate the acquisition of either or both of Blockbuster's and
Sony's respective interests in Pavilion Partners and, as a result, SFX
Entertainment may not obtain 100% ownership of Pavilion Partners. See
"Agreements Related to Pending Acquisitions--PACE Acquisition--Pavilion
Acquisition."
IV. CONTEMPORARY ACQUISITION
Reflects the Contemporary Acquisition and the separate acquisition of the
remaining 50% interest in Riverport Amphitheater Partners, a partnership that
owns an amphitheater in St. Louis, Missouri that is operated by Contemporary.
The Contemporary Acquisition is not conditioned upon the consummation of the
acquisition of such 50% interest.
<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30, 1997 (IN THOUSANDS)
-----------------------------------------------------------
CONTEMPORARY RIVERPORT PRO FORMA CONTEMPORARY
AS REPORTED AS REPORTED ADJUSTMENTS ACQUISITION
-------------- ------------- ------------- --------------
<S> <C> <C> <C> <C>
Revenue ................................ $71,141 $14,429 $ -- $85,570
Operating expenses...................... 66,764 11,223 (2,203)(a) 75,784
Depreciation & amortization............. 498 583 -- 1,081
-------------- ------------- ------------- --------------
Operating income........................ 3,879 2,623 2,203 8,705
Interest expense........................ 153 74 -- 227
Other income............................ (122) (48) -- (170)
Equity (income) from investments ....... (1,298) -- 1,298 (b) --
-------------- ------------- ------------- --------------
Income (loss) before income tax
expense................................ 5,146 2,597 905 8,648
Income tax expense...................... -- -- -- --
-------------- ------------- ------------- --------------
Net income (loss)....................... $ 5,146 $ 2,597 $ 905 $ 8,648
============== ============= ============= ==============
</TABLE>
- ------------
PRO FORMA ADJUSTMENTS:
(a) Reflects the elimination of certain officers' salaries and bonuses and
other consulting expenses which will not be paid under SFX
Entertainment's new employment and other contracts. The amount of the
pro forma adjustment to eliminate salaries and bonuses is based on SFX
Entertainment's agreements
D-91
<PAGE>
with the affected employees that a bonus will not be paid unless there
is a significant improvement in the results of the Contemporary
Acquisition. Accordingly, no such bonus is reflected in the pro forma
statement of operations as should the Contemporary Acquisition's
results, once acquired by SFX Entertainment, be at a similar level to
that in these pro forma statements of operations no bonus would be
paid, and SFX Entertainment would not be contractually obligated to pay
a bonus.
(b) Reflects the elimination of Contemporary's equity income in Riverport
Amphitheater Partners. Contemporary has entered into an agreement to
acquire its partners' 50% interest in this venture. If Contemporary is
unable to complete this acquisition of the remaining 50% interest in
Riverport Amphitheater Partners, the cash consideration paid by SFX
Entertainment for Contemporary will be reduced by $10,500,000.
The Contemporary Agreement provides that in the event the Contemporary
Acquisition is consummated prior to the consummation of the Spin-Off,
1,402,851 shares of preferred stock of SFX Entertainment will be issued to
the sellers. Such preferred stock is to be converted into an equal number of
shares of SFX Entertainment's Class A Common Stock upon consummation of the
Spin-Off or, if the Spin-Off shall not have occurred prior to July 1, 1998,
such preferred stock is to be redeemed by SFX Entertainment at its fair
market value, but in no event less than $18,700,000. See "Agreements Related
to the Pending Acquisitions--Contemporary Acquisition."
V. BGP ACQUISITION
<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30, 1997 (IN
THOUSANDS)
---------------------------------------------
PRO FORMA BGP
AS REPORTED (A) ADJUSTMENTS ACQUISITION
--------------- ------------- -------------
<S> <C> <C> <C>
Revenue ......................... $65,448 $ -- $65,448
Operating expenses............... 59,312 -- 59,312
Depreciation & amortization ..... 611 -- 611
--------------- ------------- -------------
Operating income ................ 5,525 -- 5,525
Interest expense................. 837 -- 837
Other income..................... (764) -- (764)
--------------- ------------- -------------
Income before income tax
expense......................... 5,452 -- 5,452
Income tax expense............... 2,133 -- 2,133
--------------- ------------- -------------
Net income....................... $ 3,319 $ -- $ 3,319
=============== ============= =============
</TABLE>
- ------------
PRO FORMA ADJUSTMENTS:
(a) Reflects BGP's unaudited operating results for the nine months ended
October 31, 1997.
VI. NETWORK ACQUISITIONS
The Network Acquisitions consist of the separate acquisitions of Network
Magazine and SJS. Each of these acquisitions is conditioned on the concurrent
closing of the other.
<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30, 1997 (IN THOUSANDS)
--------------------------------------------------------------
THE NETWORK
MAGAZINE SJS PRO FORMA NETWORK
AS REPORTED (A) AS REPORTED (A) ADJUSTMENTS ACQUISITIONS
--------------- --------------- ------------- --------------
<S> <C> <C> <C> <C>
Revenue ................................ $12,047 $10,737 $(2,221)(c) $20,563
Operating expenses...................... 11,878 10,717 (6,481)(b) 13,893
(2,221)(c)
Depreciation & amortization............. 119 88 -- 207
--------------- --------------- ------------- --------------
Operating income (loss)................. 50 (68) 6,481 6,463
Interest expense........................ 163 33 -- 196
Other income............................ (43) (80) -- (123)
--------------- --------------- ------------- --------------
Income (loss) before income tax
expense................................ (70) (21) 6,481 6,390
Income tax expense ..................... -- 135 -- 135
--------------- --------------- ------------- --------------
Net (loss) income ...................... $ (70) $ (156) $ 6,481 $ 6,255
=============== =============== ============= ==============
</TABLE>
D-92
<PAGE>
------------
PRO FORMA ADJUSTMENTS:
(a) SFX Entertainment's purchase agreement for Network Magazine and SJS
provides that the purchase price will be increased by $4,000,000 if
total 1998 EBITDA as defined equals $9,000,000; by an additional $4 for
each $1 increase in EBITDA between $9,000,000 and $10,000,000 and by an
additional $6 for each $1 increase in EBITDA between $10,000,000 and
$11,000,000 (maximum of $14,000,000 additional consideration). The
additional consideration is payable in stock or cash at SFX
Entertainment's option. The pro forma statement of operation assumes
that no additional consideration is paid.
(b) Reflects the elimination of certain officers' salaries and bonuses
which will not be paid under SFX Entertainment's new employment
contracts. The amount of the pro forma adjustment to eliminate salaries
and bonuses is based on SFX Entertainment's agreements with the
affected employees that a bonus will not be paid unless there is a
significant improvement in the results of the Network Acquisitions.
Accordingly, no such bonus is reflected in the pro forma statement of
operations as should the Network Acquisitions' results, once acquired
by SFX Entertainment, be at a similar level to that in these pro forma
statements of operations no bonus would be paid, and SFX Entertainment
would not be contractually obligated to pay a bonus.
(c) Reflects the elimination of transactions between Network Magazine and
SJS.
VII. CONCERT/SOUTHERN ACQUISITION
<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30, 1997 (IN
THOUSANDS)
-------------------------------------------
CONCERT/
PRO FORMA SOUTHERN
AS REPORTED ADJUSTMENTS ACQUISITION
------------- ------------- -------------
<S> <C> <C> <C>
Revenue .............................. $13,093 $ -- $13,093
Operating expenses.................... 11,097 (466)(a) 10,631
Depreciation & amortization........... 57 -- 57
------------- ------------- -------------
Operating income...................... 1,939 466 2,405
Interest expense...................... -- -- --
Other income.......................... (57) -- (57)
Equity loss (income) from
investments.......................... 11 (45)(b) (34)
------------- ------------- -------------
Income before income tax expense ..... 1,985 511 2,496
Income tax expense.................... -- -- --
------------- ------------- -------------
Net income............................ $ 1,985 $ 511 $ 2,496
============= ============= =============
</TABLE>
- ------------
PRO FORMA ADJUSTMENTS:
(a) Reflects the elimination of certain officers' salaries and bonuses
which will not be paid under SFX Entertainment's new employment
contracts. The amount of the pro forma adjustment to eliminate salaries
and bonuses is based on SFX Entertainment's agreements with the
affected employees that a bonus will not be paid unless there is a
significant improvement in the results of the Concert/ Southern
Acquisition. Accordingly, no such bonus is reflected in the pro forma
statement of operations as should the Concert/Southern Acquisition's
results, once acquired by SFX Entertainment, be at a similar level to
that in these pro forma statements of operations no bonus would be
paid, and SFX Entertainment would not be contractually obligated to pay
a bonus.
(b) Reflects the elimination of equity income of a non-entertainment
affiliated entity which is not being acquired by SFX Entertainment.
VIII. PRO FORMA ADJUSTMENTS:
(a) Reflects the increase in depreciation and amortization resulting from
the preliminary purchase accounting treatment of the Pending
Acquisitions. SFX Entertainment amortizes goodwill over 15 years.
D-93
<PAGE>
(b) To record incremental corporate overhead charges associated with
incremental headquarters personnel and general and administrative
expenses that management estimates will be necessary following
completion of the Pending Acquisitions.
(c) To reclassify Delsener/Slater's equity income in the PNC Bank Arts
Center venue following the acquisition of Pavilion Partners which owns
the other 50% equity interest in the venue.
(d) Represents an adjustment to the provision for income taxes to reflect
an approximate pro forma tax provision of $3,500,000. The calculation
treats all companies to be acquired pursuant to the Pending
Acquisitions as "C" Corporations and includes a benefit of
approximately $6,000,000 related to the pro forma loss carryforward of
approximately $16,000,000 from the twelve months ended December 31,
1996. The above provision also reflects the non-deductibility of
approximately $12,000,000 of goodwill amortization, tax savings related
to the pro forma adjustments for the Financing and state taxes of
approximately $3,500,000.
(e) Represents the accretion on the Fifth Year Put Option issued to the
PACE Sellers in connection with the PACE Acquisition.
IX. PRO FORMA FOR THE FINANCING:
(a) Represents the elimination of existing interest expense for the Pending
Acquisitions.
(b) Reflects interest expense associated with the Notes at 9 1/8%, the
Proposed Credit Facility and other debt and deferred compensation costs
related to the Pending Acquisitions. The interest rate assumed in the
Proposed Credit Facility is 8% per annum. A one-quarter percent
increase or decrease in the assumed weighted average interest rate for
the credit facility would change the pro forma interest expense by
approximately $250,000. There can be no assurance that SFX
Entertainment will be able to enter into or borrow under the Proposed
Credit Facility on acceptable terms, or at all.
D-94
<PAGE>
SFX ENTERTAINMENT, INC.
UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, 1996
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
PRO FORMA FOR RECENT ACQUISITIONS
DELSENER/ -------------------------------------
SLATER MEADOWS/
ACQUISITION SUNSHINE PRO FORMA
(PREDECESSOR) ACQUISITIONS ADJUSTMENTS
I II VIII PRO FORMA
----------- ------------ ----------- ----------
<S> <C> <C> <C> <C>
Revenue................ $50,361 $54,423 $ -- $104,784
Operating expenses .... 50,686 46,632 (6,078)(a) 91,240
Depreciation &
amortization.......... 747 3,072 3,014 (b) 6,833
Corporate expenses (1). -- -- 1,000 (c) 1,000
----------- ------------ ----------- ---------
Operating income
(loss)................ (1,072) 4,719 2,064 5,711
(4,354)(d)
Interest expense....... 60 4,294 1,780 (e) 1,780
Other (income)
expenses.............. (198) (168) -- (366)
Equity (income) loss
from investments...... (525) -- -- (525)
----------- ------------ ----------- ---------
Income (loss) before
income tax expense .. (409) 593 4,638 4,822
Income tax expense
(benefit) ............ 106 1,155 893 2,154
----------- ------------ ----------- ---------
Net income (loss) .... $ (515) $ (562) $ 3,745 $ 2,668
=========== ============ =========== =========
Accretion on temporary
Equity................
Net loss applicable to
common shares ........
Net loss per common
share ................
Weighted average
common shares
outstanding (2) ......
</TABLE>
(RESTUBBED TABLE CONTINUED FROM ABOVE)
<TABLE>
<CAPTION>
PRO FORMA FOR PENDING ACQUISITIONS
----------------------------------------------------------------------------
PRO FORMA
PACE CONCERT/ ADJUSTMENTS
AND PAVILION CONTEMPORARY BGP NETWORK SOUTHERN PRO FORMA FOR THE
ACQUISITIONS ACQUISITION ACQUISITION ACQUISITION ACQUISITION ADJUSTMENTS FINANCING
III IV V VI VII VIII IX
------------ ------------ ----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Revenue................ $246,548 $71,545 $92,331 $24,556 $12,601 $ -- $ --
Operating expenses .... 237,429 64,320 84,466 18,403 9,679 -- --
Depreciation &
amortization.......... 5,336 1,334 1,474 268 69 22,481 (f) --
Corporate expenses (1). -- -- -- -- -- 2,000 (g) --
------------ ------------ ----------- ----------- ----------- ----------- -----------
Operating income
(loss)................ 3,783 5,891 6,391 5,885 2,853 (24,481) --
(7,391)(a)
Interest expense....... 5,456 383 1,258 294 -- -- 42,527 (b)
Other (income)
expenses.............. (265) (216) (584) (42) (47) (312)(i) --
Equity (income) loss
from investments...... (3,227) -- -- -- 38 312 (i) --
------------ ------------ ----------- ----------- ----------- ----------- -----------
Income (loss) before
income tax expense .. 1,819 5,724 5,717 5,633 2,862 (24,481) (35,136)
Income tax expense
(benefit) ............ (714) 35 1,272 303 -- (1,550)(h) --
------------ ------------ ----------- ----------- ----------- ----------- -----------
Net income (loss) .... $ 2,533 $ 5,689 $ 4,445 $ 5,330 $ 2,862 (22,931) $(35,136)
============ ============ =========== =========== =========== ===========
Accretion on temporary
Equity................ (3,300)(j)
-----------
Net loss applicable to
common shares ........ $(26,231)
===========
Net loss per common
share ................
Weighted average
common shares
outstanding (2) ......
</TABLE>
(RESTUBBED TABLE CONTINUED FROM ABOVE)
<TABLE>
<CAPTION>
PRO FORMA FOR THE RECENT
ACQUISITIONS, THE FINANCING,
THE PENDING ACQUISITIONS,
THE SPIN-OFF AND THE
SFX MERGER
----------------------------
<S> <C>
Revenue................ $552,365
Operating expenses .... 505,537
Depreciation &
amortization.......... 37,795
Corporate expenses (1). 3,000
----------------------------
Operating income
(loss)................ 6,033
Interest expense....... 44,307
Other (income)
expenses.............. (1,832)
Equity (income) loss
from investments...... (3,402)
----------------------------
Income (loss) before
income tax expense .. (33,040)
Income tax expense
(benefit) ............ 1,500
----------------------------
Net income (loss) .... (34,540)
Accretion on temporary
Equity................ (3,300)
----------------------------
Net loss applicable to
common shares ........ $(37,840)
============================
Net loss per common
share ................ $ (1.90)
============================
Weighted average
common shares
outstanding (2) ...... 20,400
============================
</TABLE>
- ------------
(1) Net of fees from Triathlon of $3,000,000. These fees will fluctuate based
on the level of acquisition and financing activities of Triathlon. SCMC
previously assigned its rights to receive fees payable under this
agreement to SFX. Pursuant to the terms of the Distribution Agreement,
SFX will assign its rights to receive such fees to SFX Entertainment.
Triathlon has previously announced that it is exploring ways of
maximizing stockholder value, including possible sale to a third party.
In the event that Triathlon were acquired by a third party, there can be
no assurance that the agreement would continue for the remainder of its
term.
(2) Includes 500,000 shares of SFX Entertainment Class A Common Stock to be
issued to the PACE Sellers in connection with the Fifth Year Put Option;
such shares are not included in calculating the net loss per common
share.
D-95
<PAGE>
NOTES TO PRO FORMA INCOME STATEMENTS:
I. Represents the actual operating results of Delsener/Slater, the
predecessor, for the year ended December 31, 1996. The Company acquired
Delsener/Slater on January 2, 1997.
EBITDA for the year ended December 31, 1996 was ($325,000) and
$43,828,000 for Delsener/Slater and SFX Entertainment on a pro forma
basis, respectively. EBITDA is defined as earnings before interest,
taxes, other income, net, equity income (loss) from investments and
depreciation and amortization. Although EBITDA is not a measure of
performance calculated in accordance with GAAP, SFX Entertainment
believes that EBITDA is accepted by the entertainment industry as a
generally recognized measure of performance and is used by analysts who
report publicly on the performance of entertainment companies.
Nevertheless, this measure should not be considered in isolation or as a
substitute for operating income, net income, net cash provided by
operating activities or any other measure for determining SFX
Entertainment's operating performance or liquidity which is calculated in
accordance with GAAP. Cash flows from operating, investing and financing
activities for Delsener/Slater for the year ended December 31, 1996 were
$4,214,000, $(435,000) and $(1,431,000), respectively.
There are other adjustments that could affect EBITDA but have not been
reflected herein. Had such adjustments been made, Adjusted EBITDA on a
pro forma basis would have been $58,200,000 for the year ended December
31, 1996. The adjustments include the elimination of non-recurring
charges including a litigation settlement recorded by PACE and Pavilion
Partners of $6,000,000, expected cost savings in connection with the
Pending Acquisitions associated with the elimination of duplicative
staffing and general and administrative expenses of $5,000,000, and
equity income from investments of $3,400,000. While management believes
that such cost savings are achievable, SFX Entertainment's ability to
fully achieve such cost savings is subject to numerous factors, certain
of which may be beyond SFX Entertainment's control.
II. Represents the actual operating results of the Meadows Music Theater and
Sunshine Promotions for the year ended December 31, 1996. SFX
Entertainment aquired the Meadows Music Theater and Sunshine Promotions
on March 20, 1997 and June 24, 1997, respectively.
III. PACE AND PAVILION ACQUISITIONS
Reflects the PACE Acquisition and the separate acquisitions of PACE's two
partners' interest in a partnership that owns certain amphitheaters operated
by PACE. The PACE Acquisition is not conditioned on the consummation of the
Pavilion Acquisition.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1996 (IN THOUSANDS)
---------------------------------------------------------------------------------------
PACE
PACE PAVILION PAVILION PAVILION PRO FORMA AND PAVILION
AS REPORTED (A) 1 MONTH (B) 11 MONTHS (B) AS REPORTED ADJUSTMENTS ACQUISITIONS
--------------- ----------- ------------- ------------- ------------- --------------
<S> <C> <C> <C> <C> <C> <C>
Revenue......................... $156,325 $5,259 $83,964 $89,223 $ 1,000(c) $246,548
Operating expenses.............. 155,533 5,199 77,267 82,466 (570)(d) 237,429
Depreciation & amortization .... 1,737 253 3,346 3,599 -- 5,336
Other expenses.................. 3,675 -- -- -- (3,675)(e) --
--------------- ----------- ------------- ------------- ------------- --------------
Operating (loss) income ........ (4,620) (193) 3,351 3,158 5,245 3,783
Interest expense................ 1,206 395 3,855 4,250 -- 5,456
Other income.................... (59) (123) (83) (206) -- (265)
Equity (income) loss from
investments.................... (3,048) 82 (129) (47) (132)(f) (3,227)
--------------- ----------- ------------- ------------- ------------- --------------
Income (loss) before income tax
expense........................ (2,719) (547) (292) (839) 5,377 1,819
Income tax (benefit)............ (714) -- -- -- -- (714)
--------------- ----------- ------------- ------------- ------------- --------------
Net (loss) income .............. $ (2,005) $ (547) $ (292) $ (839) $ 5,377 $ 2,533
=============== =========== ============= ============= ============= ==============
</TABLE>
D-96
<PAGE>
------------
PRO FORMA ADJUSTMENTS:
(a) Reflects PACE's audited operating results for fiscal year ended
September 30, 1996.
(b) Reflects Pavilion Partners' unaudited operating results for the one
month ended October 31, 1995 and the audited operating results for the
eleven months ended September 30, 1996. During 1996, Pavilion Partners
changed its fiscal year-end from October 31 to September 30.
PACE currently owns 33 1/3% in Pavilion Partners and has agreed to
acquire the remaining 66 2/3% interest from Pavilion Partners' two
partners, Blockbuster and Sony.
(c) To reflect non-cash revenue resulting from SFX Entertainment granting
Blockbuster naming rights to three venues for two years for, no future
consideration, as part of its agreement to acquire Blockbuster's
indirect 33 1/3% interest in Pavilion.
(d) Reflects the elimination of $570,000 of certain officers' salaries and
bonuses which will not be paid under SFX Entertainment's new employment
contracts. The amount of the pro forma adjustment to eliminate salaries
and bonuses is based on SFX Entertainment's agreements with the
affected employees that a bonus will not be paid unless there is a
significant improvement in the results of the PACE Acquisition.
Accordingly, no such bonus is reflected in the pro forma statement of
operations as should the PACE Acquisition's results, once acquired by
SFX Entertainment, be at a similar level to that in these pro forma
statements of operations no bonus would be paid, and SFX Entertainment
would not be contractually obligated to pay a bonus.
(e) Reflects the elimination of non-recurring restricted stock compensation
to PACE executives.
(f) To eliminate PACE's income from its 33 1/3% equity investment in
Pavilion Partners. PACE currently owns 33 1/3% in Pavilion and has
agreed to acquire the remaining 66 2/3% interest in Pavilion Partners
pursuant to the Blockbuster Acquisition and Sony Acquisition. There can
be no assurance that SFX Entertainment will be able to consummate the
acquisition of either or both of Blockbuster's and Sony's respective
interests in Pavilion Partners and, as a result, SFX Entertainment may
not obtain 100% ownership of Pavilion Partners. See "Agreements Related
to Pending Acquisitions--PACE Acquisition--Pavilion Acquisition."
IV. CONTEMPORARY ACQUISITION
Reflects the Contemporary Acquisition and the separate acquisition of the
remaining 50% interest in Riverport Amphitheater Partners, a partnership that
owns an amphitheater in St. Louis, Missouri that is operated by Contemporary.
The Contemporary Acquisition is not conditioned upon the consummation of the
acquisition of such 50% interest.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1996 (IN THOUSANDS)
-----------------------------------------------------------
CONTEMPORARY RIVERPORT PRO FORMA CONTEMPORARY
AS REPORTED AS REPORTED ADJUSTMENTS ACQUISITION
-------------- ------------- ------------- --------------
<S> <C> <C> <C> <C>
Revenue................................. $59,852 $11,693 $ -- $71,545
Operating expenses...................... 58,189 9,168 (3,037)(a) 64,320
Depreciation & amortization............. 567 767 -- 1,334
-------------- ------------- ------------- --------------
Operating income ....................... 1,096 1,758 3,037 5,891
Interest expense........................ 213 170 -- 383
Other income............................ (159) (57) -- (216)
Equity (income) loss from investments .. (822) -- 822 (b) --
-------------- ------------- ------------- --------------
Income (loss) before income tax
expense................................ 1,864 1,645 2,215 5,724
Income tax expense ..................... 35 -- 35
-------------- ------------- ------------- --------------
Net income.............................. $ 1,829 $ 1,645 $ 2,215 $ 5,689
============== ============= ============= ==============
</TABLE>
D-97
<PAGE>
------------
PRO FORMA ADJUSTMENTS:
(a) Reflects the elimination of certain officers' salaries and bonuses
which will not expected be paid under SFX Entertainment's new
employment and other contracts. The amount of the pro forma adjustment
to eliminate salaries and bonuses is based on SFX Entertainment's
agreements with the affected employees that a bonus will not be paid
unless there is a significant improvement in the results of the
Contemporary Acquisition. Accordingly, no such bonus is reflected in
the pro forma statement of operations as should the Contemporary
Acquisition's results, once acquired by SFX Entertainment, be at a
similar level to that in these pro forma statements of operations no
bonus would be paid, and SFX Entertainment would not be contractually
obligated to pay a bonus.
(b) Reflects the elimination of Contemporary's equity income in Riverport
Amphitheater Partners. Contemporary had entered into an agreement to
acquire its partners' 50% interest in this venture. If Contemporary is
unable to complete this acquisition of the remaining 50% interest in
Riverport Amphitheater Partners, the cash consideration paid by SFX
Entertainment for Contemporary will be reduced by $10,500,000.
The Contemporary Agreement provides that in the event the Contemporary
Acquisition is consummated prior to the consummation of the Spin-Off,
1,402,851 shares of preferred stock of SFX Entertainment will be issued to
the Sellers. Such preferred stock is to be converted into an equal number of
shares of SFX Entertainment's Class A Common Stock upon consummation of the
Spin-Off or, if the Spin-Off shall not have occurred prior to July 1, 1998,
such preferred stock is to be redeemed by SFX Entertainment at its fair
market value, but in no event less than $18,700,000. See "Agreements Related
to the Pending Acquisitions--Contemporary Acquisition."
V. BGP ACQUISITION
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1996 (IN THOUSANDS)
---------------------------------------------
PRO FORMA BGP
AS REPORTED (A) ADJUSTMENTS ACQUISITION
--------------- ------------- -------------
<S> <C> <C> <C>
Revenue.......................... $92,331 $ -- $92,331
Operating expenses............... 87,520 (3,054)(b) 84,466
Depreciation & amortization ..... 1,474 -- 1,474
--------------- ------------- -------------
Operating income ................ 3,337 3,054 6,391
Interest expense................. 1,258 -- 1,258
Other expense.................... (584) -- (584)
--------------- ------------- -------------
Income before income tax
expense......................... 2,663 3,054 5,717
Income tax expense .............. 1,272 -- 1,272
--------------- ------------- -------------
Net income ...................... $ 1,391 $ 3,054 $ 4,445
=============== ============= =============
</TABLE>
- ------------
PRO FORMA ADJUSTMENTS:
(a) Reflects BGP's audited operating results for the fiscal year ended
January 31, 1997.
(b) Reflects the elimination of certain officers' salaries and bonuses,
partnership life insurance, profit sharing and other expenses which
will not be paid under SFX Entertainment's new employment contracts.
The amount of the pro forma adjustment to eliminate salaries and
bonuses is based on SFX Entertainment's agreements with the affected
employees that a bonus will not be paid unless there is a significant
improvement in the results of the BGP Acquisition. Accordingly, no such
bonus is reflected in the pro forma statement of operations as should
the BGP Acquisition's results, once acquired by SFX Entertainment, be
at a similar level to that in these pro forma statements of operations
no bonus would be paid, and SFX Entertainment would not be
contractually obligated to pay a bonus.
VI. NETWORK ACQUISITION
The Network Acquisition consists of the separate acquisitions of Network
Magazine and SJS. Each of these acquisitions is conditioned on the concurrent
closing of the other.
D-98
<PAGE>
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1996 (IN THOUSANDS)
-------------------------------------------------------------
THE NETWORK
MAGAZINE SJS PRO FORMA NETWORK
AS REPORTED (A) AS REPORTED (A) ADJUSTMENTS ACQUISITION
--------------- --------------- ------------- -------------
<S> <C> <C> <C> <C>
Revenue.......................... $14,767 $11,375 $(1,586)(c) $24,556
Operating expenses............... 14,275 11,259 (5,545)(b) 18,403
(1,586)(c)
Depreciation & amortization ..... 184 84 -- 268
--------------- --------------- ------------- -------------
Operating income ................ 308 32 5,545 5,885
Interest expense................. 291 3 -- 294
Other income..................... (42) -- -- (42)
--------------- --------------- ------------- -------------
Income before income tax
expense......................... 59 29 5,545 5,633
Income tax expense .............. 212 91 -- 303
--------------- --------------- ------------- -------------
Net (loss) income ............... $ (153) $ (62) $ 5,545 $ 5,330
=============== =============== ============= =============
</TABLE>
- ------------
PRO FORMA ADJUSTMENTS:
(a) Reflects Network Magazine's audited operating results for fiscal year
ended September 30, 1996. SFX Entertainment's purchase agreement for
Network Magazine and SJS provides that the purchase price will be
increased by $4,000,000 if total 1998 EBITDA as defined equals
$9,000,000; by an additional $4 for each $1 increase in EBITDA between
$9,000,000 and $10,000,000 and by an additional $6 for each $1 increase
in EBITDA between $10,000,000 and $11,000,000 (maximum of $14,000,000
additional consideration). The additional consideration is payable is
stock or cash at SFX Entertainment's option. The pro forma statement of
operations assumes that no additional consideration is paid.
(b) Reflects the elimination of certain officers' salaries and bonuses
which will not be paid under SFX Entertainment's new employment
contracts. The amount of the pro forma adjustment to eliminate salaries
and bonuses is based on SFX Entertainment's agreements with the
affected employees that a bonus will not be paid unless there is a
significant improvement in the results of the Network Acquisitions.
Accordingly, no such bonus is reflected in the pro forma statement of
operations as should the Network Acquisitions' results, once acquired
by SFX Entertainment, be at a similar level to that in these pro forma
statements of operations no bonus would be paid, and SFX Entertainment
would not be contractually obligated to pay a bonus.
(c) Reflects the elimination of transactions between Network Magazine and
SJS.
VII. CONCERT/SOUTHERN ACQUISITION
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1996 (IN THOUSANDS)
-------------------------------------------
CONCERT/
PRO FORMA SOUTHERN
AS REPORTED ADJUSTMENTS ACQUISITION
------------- ------------- -------------
<S> <C> <C> <C>
Revenue.......................... $12,601 $ -- $12,601
Operating expenses............... 10,873 (1,194)(a) 9,679
Depreciation & amortization ..... 69 -- 69
------------- ------------- -------------
Operating income ................ 1,659 1,194 2,853
Investment income................ (47) -- (47)
Equity loss from investments .... 27 11 (b) 38
------------- ------------- -------------
Income before income tax
expense......................... 1,679 1,183 2,862
Income tax expense .............. -- -- --
------------- ------------- -------------
Net income ...................... $ 1,679 $ 1,183 $ 2,862
============= ============= =============
</TABLE>
D-99
<PAGE>
------------
PRO FORMA ADJUSTMENTS:
(a) Reflects the elimination of certain officers' salaries and bonuses
which will not be paid under SFX Entertainment's new employment
contracts. The amount of the pro forma adjustment to eliminate salaries
and bonuses is based on SFX Entertainment's agreements with the
affected employees that a bonus will not be paid unless there is a
significant improvement in the results of the Concert/Southern
Acquisition. Accordingly, no such bonus is reflected in the pro forma
statement of operations as should the Concert/Southern Acquisition's
results, once acquired by SFX Entertainment, be at a similar level to
that in these pro forma statements of operations no bonus would be
paid, and SFX Entertainment would not be contractually obligated to pay
a bonus.
(b) Reflects the elimination of equity loss of a non-entertainment
affiliated entity which is not being acquired by SFX Entertainment.
VIII. PRO FORMA ADJUSTMENTS:
(a) Reflects the elimination of non-recurring Delsener/Slater officers'
bonuses and wages which are not being paid under SFX Entertainment's
new employment contracts.
(b) Reflects the increase in depreciation and amortization related to the
Recent Acquisitions. SFX Entertainment amortizes goodwill over 15
years.
(c) To record corporate overhead charges of $4,000,000 related to the
Recent Acquisitions less the amount received in 1996 pursuant to the
Triathlon agreement of $3,000,000.
(d) Represents the elimination of existing interest expense for the Recent
Acquisitions.
(e) Reflects interest expense associated with the Meadows Music Theater and
Sunshine Promotions debt assumed.
(f) Reflects the increase in depreciation and amortization resulting from
the preliminary purchase accounting treatment of the Pending
Acquisitions. SFX Entertainment amortizes goodwill over 15 years.
(g) To record incremental corporate overhead charges associated with
incremental headquarters personnel that management estimates will be
necessary following completion of the Pending Acquisitions.
(h) Reflects estimated state and local income taxes. On a consolidated pro
forma basis, SFX Entertainment has a net operating loss for the year
ending December 31, 1996 of approximately $16,000,000 for which no
federal tax benefit has been provided.
(i) To reclassify the Delsener/Slater's equity income in the PNC Bank Arts
Center venue following the acquisition of Pavilion Partners, which owns
the other 50% equity interest in the venue.
(j) Represents the accretion on the Fifth Year Put Option issued to the
PACE Sellers in connection with the PACE Acquisition.
IX. PRO FORMA FOR THE FINANCING:
(a) Represents the elimination of existing interest expense for the Pending
Acquisitions.
(b) Reflects interest expense associated with the Notes at 9 1/8%, the
Proposed Credit Facility and other debt and deferred compensation costs
related to the Pending Acquisitions. The interest rate assumed for the
credit facility was 8% per annum. A one-quarter percent increase or
decrease in the assumed weighted average interest rate for the credit
facility would change the annual pro forma interest expense by
approximately $330,000. There can be no assurance that SFX
Entertainment will be able to enter into or borrow under the Proposed
Credit Facility on acceptable terms, or at all.
D-100
<PAGE>
SELECTED CONSOLIDATED FINANCIAL DATA OF SFX ENTERTAINMENT
(in thousands, except per share amounts)
The Selected Consolidated Financial Data of SFX Entertainment includes the
historical financial statements of Delsener/Slater and affiliated companies,
the predecessor of SFX Entertainment for each of the five years ended
December 31, 1996 and the nine months ended September 30, 1996, and the
historical financial statements of SFX Entertainment, for the nine months
ended September 30, 1997. The statement of operations data with respect to
Delsener/Slater for the years ended December 31, 1992 and 1993, and the
balance sheet data as of December 31, 1993 and 1994 is unaudited. The
financial information presented below should be read in conjunction with the
information set forth in "Unaudited Pro Forma Condensed Combined Financial
Statements" and the notes thereto and the historical financial statements and
the notes thereto of SFX Entertainment, the Recent Acquisitions and the
Pending Acquisitions included herein. The financial information has been
derived from the audited and unaudited financial statements of SFX
Entertainment, the Recent Acquisitions and the Pending Acquisitions. The pro
forma summary data as of September 30, 1997 and for the year ended December
31, 1996 and the nine months ended September 30, 1997 are derived from the
unaudited pro forma condensed combined financial statements, which, in the
opinion of management, reflect all adjustments necessary for a fair
presentation of the transactions for which such pro forma financial
information is given. Operating results for the nine months ended September
30, 1997 are not necessarily indicative of the results that may be achieved
for the fiscal year ending December 31, 1997.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------------------------------------
PREDECESSOR (ACTUAL)
---------------------------------------------------
1996 (1)
PRO FORMA
1992 1993 1994 1995 1996 (UNAUDITED)
--------- --------- --------- --------- --------- -----------
<S> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS
DATA:
Revenue.................... $38,017 $46,526 $92,785 $47,566 $50,362 $552,365
Operating expenses......... 36,631 45,635 90,598 47,178 50,687 505,537
Depreciation &
amortization.............. 758 762 755 750 747 37,795
Corporate expenses (2) .... -- -- -- -- -- 3,000
--------- --------- --------- --------- --------- -----------
Operating income (loss) ... 628 129 1,432 (362) (1,072) 6,033
Interest expense........... (171) (148) (144) (144) (60) (44,307)
Other income............... 74 85 138 178 198 1,832
Equity income (loss) from
investments .............. -- -- (9) 488 525 3,402
--------- --------- --------- --------- --------- -----------
Income (loss) before
income taxes.............. 531 66 1,417 160 (409) (33,040)
Income tax (provision)
benefit................... (32) (57) (5) (13) (106) (1,500)
--------- --------- --------- --------- --------- -----------
Net income (loss).......... $ 499 $ 9 $ 1,412 $ 147 $ (515) (34,540)
========= ========= ========= ========= =========
Accretion on temporary
equity (3)................ (3,300)
-----------
Net loss applicable to
common shares ............ $(37,840)
===========
Net loss per common share . $ (1.90)
===========
Weighted average common
shares outstanding (4) ... 20,400
===========
OTHER OPERATING DATA:
EBITDA (5)................. $ -- $ -- $ 2,187 $ 388 $ (325) $ 43,828
========= ========= ========= ========= ========= ===========
Cash flow from:
Operating activities .... $ -- $ -- $ 2,959 $ (453) $ 4,214 $ --
Investing activities .... -- -- 0 0 (435) --
Financing activities .... -- -- (477) (216) (1,431) --
Ratio of earnings to fixed
charges (6)............... 4.1x 1.4x 11.3x 2.1x -- --
</TABLE>
(RESTUBBED TABLE CONTINUED FROM ABOVE)
<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30,
--------------------------------------
PREDECESSOR
-------------
1997 (1)
1996 1997 PRO FORMA
ACTUAL ACTUAL (UNAUDITED)
------------- ---------- -----------
<S> <C> <C> <C>
STATEMENT OF OPERATIONS
DATA:
Revenue.................... $41,609 $74,396 $500,843
Operating expenses......... 42,930 63,045 440,266
Depreciation &
amortization.............. 744 4,041 28,378
Corporate expenses (2) .... -- 1,307 2,807
------------- ---------- -----------
Operating income (loss) ... (2,065) 6,003 29,392
Interest expense........... (60) (956) (33,186)
Other income............... 143 213 779
Equity income (loss) from
investments .............. 525 1,344 5,653
------------- ---------- -----------
Income (loss) before
income taxes.............. (1,457) 6,604 2,638
Income tax (provision)
benefit................... (80) (2,952) (3,500)
------------- ---------- -----------
Net income (loss).......... $(1,537) $ 3,652 (862)
============= ==========
Accretion on temporary
equity (3)................ (2,475)
-----------
Net loss applicable to
common shares ............ $ (3,337)
===========
Net loss per common share . $ (.17)
===========
Weighted average common
shares outstanding (4) ... 20,400
===========
OTHER OPERATING DATA:
EBITDA (5)................. $(1,321) $ 10,044 $57,770
============= ========== ===========
Cash flow from:
Operating activities .... $ 2,761 $ 789 $ --
Investing activities .... 0 (71,997) --
Financing activities .... 684 78,302 --
Ratio of earnings to fixed
charges (6)............... -- 8.4x 1.0x
</TABLE>
D-101
<PAGE>
SELECTED CONSOLIDATED FINANCIAL DATA OF SFX ENTERTAINMENT
(in thousands)
BALANCE SHEET DATA(7):
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------------------
PREDECESSOR (ACTUAL)
-------------------------------------
1993 1994 1995 1996
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Current assets.............. $1,823 $4,453 $3,022 $6,191
Property and equipment,
net........................ 4,484 3,728 2,978 2,231
Intangible assets, net ..... -- -- -- --
Total assets................ 6,420 8,222 6,037 8,879
Current liabilities......... 4,356 3,423 3,138 7,973
Long-term debt, including
current portion ........... -- 1,830 -- --
Temporary equity(3) ........ -- -- -- --
Stockholders' equity........ 6,420 2,969 2,900 907
</TABLE>
(RESTUBBED TABLE CONTINUED FROM ABOVE)
<TABLE>
<CAPTION>
SEPTEMBER 30, 1997
-----------------------
PRO FORMA
ACTUAL (UNAUDITED)(8)
-------- --------------
<S> <C> <C>
Current assets.............. $ 12,189 $117,326
Property and equipment,
net........................ 55,882 185,371
Intangible assets, net ..... 59,721 429,066
Total assets................ 135,470 773,614
Current liabilities......... 11,333 89,619
Long-term debt, including
current portion ........... 16,453 498,822
Temporary equity(3) ........ -- 16,500
Stockholders' equity........ 101,378 143,223(9)
</TABLE>
- ------------
(1) The Unaudited Pro Forma Statement of Operations Data for the year ended
December 31, 1996 and the nine months ended September 30, 1997 are
presented as if SFX Entertainment had completed the Recent
Acquisitions, the Financing, the Pending Acquisitions, the Spin-Off and
the SFX Merger as of January 1, 1996. There can be no assurance that
any of the Financing, the Pending Acquisitions, the Spin-Off and the
SFX Merger will be consummated on the terms assumed in preparing such
pro forma data or at all. See "Risk Factors--Risks Related to Pending
Acquisitions."
(2) Pro forma corporate expenses are reduced by $3,000,000 and $1,693,000
for fees earned from Triathlon for the year ended December 31, 1996 and
for the nine months ended September 30, 1997, respectively. The right
to receive such fees in the future are to be assigned to SFX
Entertainment by SFX in connection with the Spin-Off. Future fee may
vary, above the minimum fee of $500,000, depending upon the level of
acquisition and financing activities of Triathlon. See "Certain
Relationships and Related Transactions--Triathlon Fees."
(3) The PACE Agreement provides that each PACE Seller shall have a Fifth
Year Put Option, exercisable during a period beginning on the fifth
anniversary of the closing of the PACE Acquisition and ending 90 days
thereafter, to require SFX Entertainment to purchase up to one-third of
the SFX Entertainment Class A Common Stock received by that PACE Seller
(representing 500,000 shares in the aggregate) for a cash purchase
price of $33.00 per share. With certain limited exceptions, the Fifth
Year Put Option rights are not assignable by the PACE Sellers. The
maximum amount payable under the Fifth Year Put Option ($16,500,000)
has been presented as temporary equity on the pro forma balance sheet.
(4) Includes 500,000 shares of SFX Entertainment Class A Common Stock to be
issued to the PACE Sellers in connection with the Fifth Year Put
Option; these shares are not included in calculating the net loss per
common share.
(5) "EBITDA" is defined as earnings before interest, taxes, other income,
net, equity income (loss) from investments and depreciation and
amortization. Although EBITDA is not a measure of performance calculated
in accordance with GAAP, SFX Entertainment believes that EBITDA is
accepted by the entertainment industry as a generally recognized measure
of performance and is used by analysts who report publicly on the
performance of entertainment companies. Nevertheless, this measure
should not be considered in isolation or as a substitute for operating
income, net income, net cash provided by operating activities or any
other measure for determining SFX Entertainment's operating performance
or liquidity which is calculated in accordance with GAAP.
There are other adjustments that could effect EBITDA but have
not been reflected herein. Had such adjustments been made, Adjusted
EBITDA on a pro forma basis would have been approximately $58,200,000
for the year ended December 31, 1996 and $67,300,000 for the nine
months ended September 30, 1997. These adjustments include the
elimination of non-recurring charges including a litigation
settlement recovered by PACE and Pavilion Partners of $6,000,000 and
$0, expected cost savings in connection with the Pending Acquisitions
associated with the elimination of duplicative staffing and general
and administrative expenses of $5,000,000 and $3,800,000 and includes
SFX Entertainment's pro rata share of equity income from investments
of $3,400,000 and $5,700,000, for the year ended December 31, 1996
and the nine months ended September 30, 1997, respectively.
While management believes that such cost savings and the elimination of
non-recurring expenses are achievable, SFX Entertainment's ability to
fully achieve such cost savings and to eliminate the non-recurring
expenses is subject to numerous factors certain of which may be beyond
SFX Entertainment's control.
(6) For purposes of computing the ratio of earnings to fixed charges,
"earnings" consists of earnings before income taxes and fixed charges.
"Fixed charges" consists of interest on all indebtedness. Earnings were
insufficient to cover fixed charges by $393,000 for the year ended
December 31, 1996, $1,605,000 for the nine months ended September 30,
1996 and $32,420,000 on a pro forma basis for the year ended December
31, 1996.
(7) The required 1992 balance sheet data for Delsener/Slater has not been
included herein due to the difficulty in accumulating a verifiable
balance sheet as of that date coupled with management's belief that
such information would not be of substantial use to a potential
investor. The difficulty in preparing an accurate balance sheet is due
to the fact that (i) Delsener/Slater was not audited at such time, (ii)
Delsener/Slater included a number of companies with different fiscal
year ends and (iii) the unaudited balance sheets of Delsener/Slater and
its related entities were not prepared in strict accordance are with
GAAP reporting requirements as such entities were privately held. The
lack of usefulness of the information is due to the fact that (i)
Delsener/Slater is the predecessor of SFX Entertainment and therefore
its accounts were adjusted to a new basis upon its acquisition by SFX;
(ii) the balance sheet is principally comprised of cash, leasehold
improvements and accruals for bonuses to the prior owners and would not
include the operating lease for the Jones Beach Ampitheather, which
management believes is Delsener/Slater's most significant operating
agreement; and (iii) the balance sheet of Delsener/Slater as of
December 31 in any year contains a low level of assets relative to
operating income, as the concert business is seasonal (with most
concerts occurring in the summer), and the promotion business does not
require large amounts of capital investment.
(8) The Unaudited Pro Forma Balance Sheet data at September 30, 1997 is
presented as if SFX Entertainment had completed the Financing, the
Pending Acquisitions, the Spin-Off and the SFX Merger as of September
30, 1997.
(9) Retained earnings on a pro forma basis for the Financing, the Pending
Acquisitions, the Spin-Off and the SFX Merger have not been adjusted
for future charges to earnings which will result from the issuance of
stock and options granted to certain executive officers and other
employees of SFX Entertainment. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations--Liquidity
and Capital Resources--Future Charges to Earnings."
D-102
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion of the financial condition and results of
operations of SFX Entertainment should be read in conjunction with the
consolidated financial statements and related notes thereto. The following
discussion contains certain forward-looking statements that involve risks and
uncertainties. SFX Entertainment's actual results could differ materially
from those discussed herein. Factors that could cause or contribute to the
differences include, but are not limited to, risks and uncertainties relating
to SFX Entertainment's absence of a combined operating history, its potential
inability to integrate the Acquisition Businesses and risks related to the
Pending Acquisitions, control of the motor sports and theatrical businesses,
future acquisitions, inability to obtain future financings (including
borrowings under the Proposed Credit Facility), inability to successfully
implement operating strategies (including the achievement of cost savings),
SFX Entertainment's expansion strategy, its need for additional funds, its
control of venues, working capital adjustments, control by management,
dependence on key personnel, potential conflicts of interest, indemnification
agreements, seasonality, competition, regulatory matters, environmental
matters, economic conditions and consumer tastes and availability of artists
and events. See "Risk Factors." SFX Entertainment undertakes no obligation to
publicly release the results of any revisions to these forward-looking
statements that may be made to reflect any future events or circumstances.
The performance of entertainment companies, such as SFX Entertainment, is
measured, in part, by their ability to generate EBITDA. "EBITDA" is defined
as earnings before interest, taxes, other income, net equity income (loss)
from investments and depreciation and amortization. Although EBITDA is not a
measure of performance calculated in accordance with GAAP, SFX Entertainment
believes that EBITDA is accepted by the industry as a generally recognized
measure of performance and is used by analysts who report publicly on the
performance of entertainment companies. Nevertheless, this measure should not
be considered in isolation or as a substitute for operating income, net
income, net cash provided by operating activities or any other measure for
determining SFX Entertainment's operating performance or liquidity that is
calculated in accordance with GAAP.
SFX Entertainment's core business is the promotion and production of live
entertainment events, most significantly for concert and other music
performances in venues owned and/or operated by SFX Entertainment and in
third-party venues. In connection with all of its live entertainment events,
SFX Entertainment seeks to maximize related revenue streams, including the
sale of corporate sponsorships, the sale of concessions and the merchandising
of a broad range of products. On a pro forma basis giving effect to the
Pending Acquisitions, SFX Entertainment's music and ancillary businesses
comprised approximately 77%, theater comprised approximately 17% and
specialized motor sports comprised approximately 6% of SFX Entertainment's
total net revenues for the 12 months ended September 30, 1997.
Promotion of events involves booking talent, renting or providing the
event venue, marketing the event to attract ticket buyers and providing for
local services required in the production of the event such as security and
stage hands. Promoters generally receive revenues from the sale of tickets
and sponsorships. When an event is promoted at a venue owned or managed by
the promoter, the promoter also generally receives a percentage of revenues
from concessions, merchandising, parking and premium box seats. After the
consummation of the Pending Acquisitions, SFX Entertainment will earn
promotion revenues principally by promoting (a) music concerts, (b) Touring
Broadway Shows and (c) specialized motor sports events.
Production of events involves developing the event content, hiring
artistic talent and managing the actual production of the event (with the
assistance of the local promoter). Producers generally receive revenues from
guarantees and from profit sharing agreements with promoters, a percentage of
the promoters' ticket sales, merchandising, sponsorships, licensing and the
exploitation of other rights (including intellectual property rights) related
to the production. After the consummation of the Pending Acquisitions, SFX
Entertainment will earn producing revenues by producing (a) Touring Broadway
Shows, (b) specialized motor events and (c) other proprietary and
non-proprietary entertainment events.
D-103
<PAGE>
RECENT ACQUISITIONS
SFX Entertainment entered the live entertainment business with SFX's
acquisition of Delsener/ Slater, a New York-based concert promotion company,
in January 1997 for aggregate consideration of $27.6 million. Delsener/Slater
has long-term leases or is the exclusive promoter for many of the major
concert venues in the New York City metropolitan area, including the Jones
Beach Amphitheater, a 14,000-seat complex located in Wantagh, New York, and
the PNC Bank Arts Center (formerly known as the Garden State Arts Center), a
17,500-seat complex located in Holmdel, New Jersey. In March 1997,
Delsener/Slater acquired, for aggregate consideration of $23.8 million, a
37-year lease to operate the Meadows Music Theater, a 25,000-seat
indoor/outdoor complex located in Hartford, Connecticut. In June 1997, SFX
acquired Sunshine Promotions, a concert promoter in the Midwest, and certain
other related companies for an aggregate consideration of $61.5 million. As a
result of the acquisition of Sunshine Promotions, SFX Entertainment owns the
Deer Creek Music Theater, a 21,000-seat complex located in Indianapolis,
Indiana, the Polaris Amphitheater, a 20,000-seat complex located in Columbus,
Ohio, and has a long-term lease to operate the Murat Centre, a 2,700-seat
theater and 2,200-seat ballroom located in Indianapolis, Indiana.
PENDING ACQUISITIONS
In December 1997, SFX Entertainment entered into agreements to acquire
PACE, Pavilion Partners, Contemporary, BGP, the Network Group and
Concert/Southern, all of which are expected to close during the first quarter
of 1998. The following table summarizes the payment terms of each of the
acquisitions:
<TABLE>
<CAPTION>
VALUE OF SFX
ENTERTAINMENT
STOCK TO BE REPAYMENT
CASH PURCHASE PRICE ISSUED(A) OF DEBT(B) TOTAL CONSIDERATION
ACQUIRED BUSINESS (IN MILLIONS) (IN MILLIONS) (IN MILLIONS) (IN MILLIONS)
- ---------------------- ------------------- ------------------- ------------- -------------------
<S> <C> <C> <C> <C>
PACE .................. $109.5(c) $20.0 $25.5 $155.0
Pavilion Partners(d) 41.1 -- 49.8 90.9
Contemporary .......... 72.8(e) 18.7(e) -- 91.5(e)
BGP ................... 60.8(f) 7.5(f) --(g) 68.3
Network Group ......... 52.0(h) 10.0(h) --(i) 62.0
Concert/Southern ...... 16.6(j) -- --(j) 16.6
------------------- ------------------- ------------- -------------------
Total ............... $352.8 $56.2 $75.3 $484.3
=================== =================== ============= ===================
</TABLE>
- ------------
(a) The value ascribed to the SFX Entertainment Class A Common Stock in the
acquisition agreements is based on certain financial projections
developed jointly by SFX Entertainment and the sellers of the
Acquisition Businesses. There is presently no trading market for the
SFX Entertainment Class A Common Stock. There can be no assurance that
the assumptions underlying the valuation will, in fact, be correct or
that the valuation will approximate the actual trading price of the SFX
Entertainment Class A Common Stock.
(b) Represents debt as of September 30, 1997, which the SFX Entertainment
has agreed to repay. The actual amount of debt will vary at the time of
closing of the Pending Acquisitions.
(c) The cash portion of the purchase price will begin to bear interest at
an annual rate of 9% if the PACE Acquisition is not consummated before
April 1, 1998. If the Spin-Off has not been completed on or before July
1, 1998, each PACE Seller will have the option of requiring SFX
Entertainment to pay $13.33 in cash in lieu of each share of SFX
Entertainment's stock to which that seller was entitled. SFX
Entertainment has also granted the current owners of PACE the right to
require SFX Entertainment to repurchase up to one-third of the shares
of stock to be issued to them in the PACE Acquisition during a
specified period beginning five years after the closing date at a price
of $33.00 per share, for an estimated maximum obligation of $16.5
million. In certain circumstances, if the selling price of SFX
Entertainment Class A Common Stock is less than $13.33 per share, then
SFX Entertainment may be required to offer to provide an additional
cash payment or additional shares of SFX Entertainment Class A Common
Stock. In addition, the PACE Agreement provides that SFX Entertainment,
at PACE's request, will loan PACE up to $25.0 million prior to the
closing of the PACE Acquisition for specified acquisitions. Any loan
made pursuant to this requirement would be secured by the assets of the
acquired businesses. If the PACE Acquisition is not consummated, then,
under certain circumstances, the loan will convert
D-104
<PAGE>
into a five-year term loan. Although SFX Entertainment does not
currently anticipate having to extend this facility to PACE, there can
be no assurance that SFX Entertainment will have sufficient sources of
financing to extend the facility, if required to do so. See "Agreements
Related to the Pending Acquisitions--PACE Acquisition."
(d) Relates to the acquisition by SFX Entertainment of the indirect 66 2/3%
ownership interest of Blockbuster Sub and Sony Sub in Pavilion Partners
not currently held by PACE. There can be no assurance that SFX
Entertainment will be able to consummate the acquisition of either or
both of Blockbuster Sub's and Sony Sub's respective interests in
Pavilion Partners, and, as a result, SFX Entertainment may not obtain
100% ownership of Pavilion Partners. Although the consummation of the
PACE Acquisition is a condition precedent to the acquisition of Sony
Sub's interest, the consummation of the Pavilion Acquisition is not a
condition precedent to the closing of the PACE Acquisitions. See
"Agreements Related to the Pending Acquisitions--PACE
Acquisition--Pavilion Acquisition."
(e) If the Spin-Off is not completed before consummation of the
Contemporary Acquisition, then SFX Entertainment must issue shares of
its preferred stock that are convertible into shares of SFX
Entertainment Class A Common Stock at the Spin-Off (or, if not so
convertible by July 1, 1998, are redeemable for the stock's fair market
value, but no less than an aggregate of $18.7 million). If the
remaining 50% of Riverport Amphitheater Partnership is not acquired,
the purchase price will be reduced by $10.5 million. In addition,
pursuant to the terms of the Contemporary Agreement, SFX Entertainment
has agreed to make certain payments to any sellers who own shares of
SFX Entertainment Class A Common Stock on the second anniversary of the
closing of the Contemporary Acquisition, if the average trading price
of that stock over the 20-day period ending on that date is less than
$13.33 per share. See "Agreements Related to the Pending
Acquisitions--Contemporary Acquisition."
(f) SFX Entertainment has the option to pay up to $7.5 million in cash in
lieu of an equivalent value of SFX Entertainment Class A Common Stock.
SFX Entertainment may also be required, subject to certain conditions,
to repurchase the shares (or, in certain cases, options) to be issued
to the sellers, if the shares, by June 30, 1998, are not registered
with the SEC, are not listed with a nationally recognized exchange, or
are subject to a lock-up period. See "Agreements Related to the Pending
Acquisitions--BGP Acquisition."
(g) Although SFX Entertainment is assuming $12.2 million of long-term debt,
BGP is required to have working capital at least equal to the amount of
debt liabilities at the closing of the BGP Acquisition. The purchase
price will be reduced dollar-for-dollar to the extent that long-term
debt exceeds working capital. See "Agreements Related to the Pending
Acquisitions--BGP Acquisition."
(h) If the Spin-Off is not completed by June 30, 1998, the sellers will
have the option to require SFX Entertainment to pay $10.0 million in
cash in lieu of SFX Entertainment Class A Common Stock. In addition,
pursuant to the Network Agreement, SFX Entertainment has agreed to
increase the purchase price for Network Magazine and SJS based on
actual 1998 EBITDA (as defined therein) as follows: (a) by $4.0 million
if the 1998 EBITDA equals or exceeds $9.0 million; (b) by an additional
$4 for each $1 of additional 1998 EBITDA between $9.0 million and $10.0
million; and (c) by an additional $6 for each $1 of additional 1998
EBITDA between $10.0 million and $11.0 million. This contingent
consideration of up to $14.0 million is payable in stock or, in certain
circumstances, in cash no later than March 20, 1999. In addition, SFX
Entertainment expects to exercise its option to acquire an office
building and related property for $2.4 million. See "Agreements Related
to the Pending Acquisitions--Network Acquisition."
(i) Although SFX Entertainment has agreed to assume $1.4 million of debt
pursuant to the Network Agreement, Network has guaranteed SFX
Entertainment $500,000 in working capital to offset a portion of this
amount.
(j) The Concert/Southern Agreement requires SFX Entertainment to pay to the
sellers compensation for a deferred liability of $2.0 million in five
equal annual payments or, at the sellers' option, the present value of
the payments at closing (approximately $1.6 million). SFX Entertainment
expects the sellers to elect to receive the present value of the
liability at closing, and this amount has been included in the cash
purchase price. See "Agreements Related to the Pending
Acquisitions--Concert/Southern Acquisition."
The cash portion of the purchase price for each of the Pending
Acquisitions is subject to increase under certain circumstances, including,
in particular, if SFX Entertainment is unable to issue shares of its capital
stock to certain of the sellers by virtue of having failed to consummate the
Spin-Off or for any other reason. In that case, the aggregate cash
consideration that would be owed to the sellers in the Pending Acquisitions
would increase, in the aggregate, by approximately $56.2 million (plus
interest in certain cases), resulting in a corresponding increase in debt and
decrease in stockholders' equity. Although management believes that the
Spin-Off is likely to occur, the Spin-Off is subject to certain conditions,
some of which are outside of management's control. There can be no assurance
that the
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Spin-Off will be consummated on the terms presently contemplated, or at all.
In addition, the agreements relating to the Pending Acquisitions provide for
certain other purchase price adjustments and future contingent payments in
certain circumstances, certain of which could be material. There can be no
assurance that SFX Entertainment will be able to finance the payments. See
"Risk Factors--Risks Related to the Pending Acquisitions," "--Liquidity and
Capital Resources" and "Agreements Related to the Pending Acquisitions."
The Pending Acquisitions will be accounted for using the purchase method
of accounting, and the intangible assets created in the purchase transactions
will generally be amortized against future earnings over a 15-year period.
The amount of amortization will be substantial and will continue to affect
SFX Entertainment's operating results in the future. These expenses, however,
do not result in an outflow of cash by SFX Entertainment and do not impact
EBITDA.
SFX Entertainment expects to complete all of the Pending Acquisitions as
soon as practicable after completing the Financing and prior to the Spin-Off
and the SFX Merger. SFX Entertainment anticipates that it will consummate all
of the Pending Acquisitions in the first quarter of 1998. However, the timing
and completion of the Pending Acquisitions are subject to a number of
conditions, certain of which are beyond SFX Entertainment's control, and
there can be no assurance that the Pending Acquisitions will be completed
during that time period, on the terms described herein, or at all. See "Risk
Factors--Risks Related to Pending Acquisitions" and "Agreements Related to
the Pending Acquisitions."
SPIN-OFF AND SFX MERGER
SFX was formed in 1992 principally to acquire and operate radio
broadcasting stations. In August 1997, SFX agreed to the SFX Merger and to
the Spin-Off. Before consummating the SFX Merger, SFX intends (a) to
contribute its concert and other live entertainment operations to SFX
Entertainment and (b) to distribute all of the outstanding shares of common
stock of SFX Entertainment to the holders of common stock, Series D preferred
stock and certain warrants of SFX pursuant to the Spin-Off. SFX Entertainment
intends to enter into the Proposed Credit Facility and consummate the Pending
Acquisitions prior to consummation of the Spin-Off and the SFX Merger. SFX
intends to consummate the Spin-Off on or prior to the consummation of the SFX
Merger. The Spin-Off is subject to certain conditions, including (a) the
acceptance for listing or trading of the SFX Entertainment Class A Common
Stock, subject to official notice of issuance, on a national exchange or The
Nasdaq Stock Market and (b) the receipt of all necessary third-party and
stockholder consents to the Spin-Off as presently contemplated. There can be
no assurance that the conditions to the Spin-Off will be fulfilled, that the
Spin-Off will be consummated on the terms described in this Prospectus or at
all, or that the Pending Acquisitions will be consummated prior to the
Spin-Off on the terms described in this Prospectus or at all. See "Agreements
Between SFX Entertainment and SFX--Distribution Agreement."
Pursuant to the SFX Merger Agreement, if SFX fails or is otherwise unable
to consummate the Spin-Off prior to the consummation of the SFX Merger, then
SFX will be entitled to divest its interest in its live entertainment
business in an alternate type of transaction. If SFX fails to consummate the
Spin-Off or any alternate transaction prior to the SFX Merger, then SFX Buyer
may elect either to consummate the SFX Merger (increasing the amount of cash
consideration to be paid to SFX's stockholders in the SFX Merger by $42.5
million) or to terminate the SFX Merger Agreement. Additionally, part of the
aggregate consideration to be paid to the sellers in the Pending Acquisitions
is intended to consist of shares of SFX Entertainment Class A Common Stock.
If the Spin-Off does not occur, SFX Entertainment would be unable to issue
shares of its common stock to the sellers, and the aggregate cash
consideration to be paid in the Pending Acquisitions would increase by
approximately $56.2 million. Although management believes that the Spin-Off
is likely to occur, the Spin-Off is subject to certain conditions, some of
which are outside of management's control. There can be no assurance that the
conditions to the Spin-Off will be fulfilled or that the Spin-Off will be
consummated on the terms contemplated or at all. See "Risk Factors--Risks
Related to Pending Acquisitions" and "Agreements Related to the Pending
Acquisitions."
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RESULTS OF OPERATIONS
General
SFX Entertainment's operations currently consist primarily of concert
promotion and venue operation. After consummation of the Pending
Acquisitions, SFX Entertainment's operations will consist primarily of (a)
concert promotion and venue operation, (b) the promotion and production of
theatrical events, particularly Touring Broadway Shows, and (c) the promotion
and production of motor sports events. SFX Entertainment and the Acquisition
Businesses also engage in various other activities ancillary to their live
entertainment businesses.
On a pro forma basis, after giving effect to the Pending Acquisitions, SFX
Entertainment's revenues for the year ended December 31, 1996 and the nine
months ended September 30, 1997 would have been $552.4 million and $500.8
million, respectively. For the nine months ended September 30, 1997, the pro
forma revenue is comprised of $86.7 million from the Recent Acquisitions and
$414.1 million from the Pending Acquisitions, of which the PACE and Pavilion
Acquisitions represented 55%.
On a pro forma basis, after giving effect to the Pending Acquisitions,
operating expenses for the year ended December 31, 1996 and the nine months
ended September 30, 1997 would have been $505.5 million and $440.3 million,
respectively. Operating margins for these periods on a pro forma basis would
have been 8.5% and 12.1%, respectively. Pro forma operating expenses do not
reflect SFX Entertainment's expectation that it will be able to achieve
substantial economies of scale upon completion of the Pending Acquisitions
and reductions in operating expenses as a result of the elimination of
duplicative staffing and general and administrative expenses.
On a pro forma basis, after giving effect to the Pending Acquisitions, SFX
Entertainment's net loss for the year ended December 31, 1996 and the nine
months ended September 30, 1997 would have been $34.5 million and $862,000,
respectively. Net loss per share, after accretion of the Fifth Year Put
Option issued in connection with the PACE Acquisition, would have been $1.90
and $.17, respectively, for these same periods. The improvement is primarily
due to the improved operating results of PACE and Pavilion Partners and the
fact that SFX Entertainment generally recognizes lower revenues in its fourth
quarter as compared to its second and third quarters. The pro forma operating
results for both periods include the impact of significant non-cash
amortization expense arising in connection with the Pending Acquisitions and
interest expense relating to the Financing.
As of September 30, 1997, on a pro forma basis after giving effect to the
Pending Acquisitions, SFX Entertainment had net current assets of $27.7
million (included in net current assets is cash and cash equivalents of $62.5
million), property and equipment (principally concert venues) of $185.4
million, intangible assets of $429.1 million and long-term debt of $498.8
million. The long-term debt is comprised of $350.0 million of Notes,
borrowings of $132.3 million under the Proposed Credit Facility and other
debt obligations of $16.5 million. The Proposed Credit Facility consists of a
$150.0 million eight year term loan and a $150.0 million seven year reducing
revolving credit facility.
Concert Promotion/Venue Operation
SFX Entertainment's concert promotion and venue operation business consist
primarily of the promotion of concerts and operation of venues primarily for
use in the presentation of musical events. SFX Entertainment's primary source
of revenues from its concert promotion activities is from ticket sales at
events promoted by SFX Entertainment. As a venue operator, SFX
Entertainment's primary sources of revenue are sponsorships, concessions,
parking and other ancillary services, derived principally from events
promoted by SFX Entertainment.
Revenue from ticket sales is affected primarily by the number of events
SFX Entertainment promotes, the average ticket price and the number of
tickets sold. The average ticket price depends on the popularity of the
artist whom SFX Entertainment is promoting, the size and type of venue and
the general economic conditions and consumer tastes in the market where the
event is being held. Revenue and margins are also affected significantly by
the type of contract entered into with the artist or the artist's
representative. Generally, the promoter or venue operator will agree to pay
the artist the greater of a
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minimum guarantee or a profit sharing payment based on ticket revenue, less
certain show expenses. The promoter or venue operator assumes the financial
risk of ticket sales and is responsible for local production and advertising
of the event. However, in certain instances, the promoter agrees to accept a
fixed fee from the artist for its services, and the artist assumes all
financial risk. When the promoter or venue operator assumes the financial
risk, all revenue and expenses associated with the event are recorded. When
the artist assumes the risk, only the fee is recorded. As a result, operating
margins would be significantly greater for fee-based events as opposed to
events for which SFX Entertainment assumes the risk of ticket sales, although
profits per event would tend to be lower. Operating margins can vary from
period to period.
SFX Entertainment's most significant operating expenses are talent fees,
production costs, venue operating expenses (including rent), advertising
costs and insurance expense. The booking of talent in the concert promotion
business generally involves contracts for limited engagements, often
involving a small number of performances. Talent fees depend primarily on the
popularity of the artist, the ticket price that the artist can command at a
particular venue and the expected level of ticket sales. Production costs and
venue operating expenses have substantial fixed cost components and lesser
variable costs primarily related to expected attendance.
Theatrical
In the PACE Acquisition, SFX Entertainment will acquire the operations of
PACE. PACE's theatrical operations are directed mainly towards the promotion
and production of Touring Broadway Shows, which generate revenues primarily
from ticket sales and sponsorships. PACE may also participate in ancillary
revenues, such as concessions and merchandise sales, depending on its
agreement with a particular local promoter/venue operator. Revenue from
ticket sales is primarily affected by the popularity of the production and
the general economic conditions and consumer tastes in the particular market
and venue where the production is presented. In order to reduce its
dependency on the success of any single touring production, PACE sells
advance annual subscriptions that provide the purchaser with tickets for all
of the shows that PACE intends to tour in the particular market during the
touring season. For the twelve months ended September 30, 1997, approximately
28% of tickets for Touring Broadway Shows presented by PACE were sold through
advance annual subscriptions. Subscriptions for Touring Broadway Shows
typically cover approximately two-thirds of PACE's break-even cost point for
those shows.
Principal operating expenses related to touring shows include talent,
rent, advertising and royalties. Talent costs are generally fixed once a
production is cast. Rent and advertising expense may be either fixed or
variable based on the arrangement with the particular local promoter/venue
operator. Royalties are generally paid as a percentage of gross ticket sales.
PACE also makes minority equity investments in original Broadway
productions, principally as a means to obtain rights for touring shows, and
in certain Touring Broadway Shows. These investments are accounted for using
either the equity method or the cost method of accounting, based on the
relative size of the investment. PACE monitors the recoverability of these
investments on a regular basis, and SFX Entertainment may be required to take
write-offs if the original production closes or if SFX Entertainment
determines that the production will not recoup the investment. The timing of
any write-off could adversely affect operating results in a particular
quarter.
Motor Sports
SFX Entertainment does not currently have any substantial motor sports
activities. The Acquisition Businesses' motor sports activities consist
principally of the promotion and production of specialized motor sports,
which generate revenues primarily from ticket sales and sponsorships, as well
as merchandising and video rights associated with producing motor sports
events. Ticket prices for these events are generally lower than for
theatrical or music concert events, generally ranging from $5 to $30 in 1996.
Revenue from these sources is primarily affected by the type of event and the
general economic conditions and consumer tastes in the particular markets and
venues where the events are presented.
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Event-related revenues received prior to the event date are initially
recorded on the balance sheet as deferred revenue; after the event occurs,
they are recorded on the statement of operations as gross revenue. Expenses
are capitalized on the balance sheet as prepaid expenses until the event
occurs.
Operating expenses associated with motor sports activities include talent,
rent, track preparation costs, security and advertising. These operating
expenses are generally fixed costs that vary based on the type of event and
venue where the event is held.
Under certain circumstances, SFX Entertainment may be required to sell
either its motor sports or theatrical lines of business. See "Risk
Factors--Risks Related to Acquisitions" and "Agreements Related to the
Pending Acquisitions--PACE Acquisition--Becker Employment Agreement."
Other Businesses
SFX Entertainment's and the Acquisition Businesses' other principal
businesses include (a) the production and distribution of radio industry
trade magazines, (b) the production of radio programming content and
show-prep material and (c) the provision of radio air play and music retail
research services. The primary sources of revenues from these activities
include (a) the sale of advertising space in its publications and the sale of
advertising time on radio stations that carry its syndicated shows, (b)
subscription fees for its trade publications and (c) subscription fees for
access to its database of radio playlist and audience data. Revenues
generally vary based on the overall advertising environment and competition.
SFX Entertainment and the Acquisition Businesses also provide marketing
and consulting services pursuant to contracts with individual clients for
specific projects. Revenues from and costs related to these services vary
based on the type of service being provided and the incremental associated
costs.
HISTORICAL RESULTS
The following analysis of the historical operations of SFX Entertainment,
including the Recent Acquisitions, but excluding the Pending Acquisitions,
includes, for comparative purposes, the historical operations of
Delsener/Slater (SFX Entertainment's predecessor) for the nine months ended
September 30, 1996 and for the years ended December 31, 1994, 1995 and 1996.
Nine Months Ended September 30, 1997 Compared to the Nine Months Ended
September 30, 1996
SFX Entertainment's concert promotion revenue increased by 79% to $74.4
million for the nine months ended September 30, 1997, compared to $41.6
million for the nine months ended September 30, 1996, as a result of the
acquisitions of Sunshine Promotions and the Meadows Music Theater lease,
which increased concert promotion revenue by $37.9 million. On a pro forma
basis, assuming that those acquisitions had been completed as of January 1,
1997, concert promotion revenue for the nine months ended September 30, 1997
would have been $86.7 million.
Concert promotion operating expenses increased by 47% to $63.0 million for
the nine months ended September 30, 1997, compared to $42.9 million for the
nine months ended September 30, 1996, primarily as a result of the
acquisitions of Sunshine Promotions and the Meadows Music Theater lease,
which increased concert operating expenses revenue by $31.4 million, which
was offset in part by decreased officer salary expense paid to the former
owners of Delsener/Slater. On a pro forma basis, assuming that those
acquisitions had been completed as of January 1, 1997, concert operating
expenses would have been $75.3 million for the nine months ended September
30, 1997.
Depreciation and amortization expense increased to $4.0 million for the
nine months ended September 30, 1997, compared to $744,000 for the nine
months ended September 30, 1996, due to the inclusion of $2.3 million of
depreciation and amortization expense related to the acquisitions of Sunshine
Promotions and the Meadows Music Theater lease and the additional
depreciation and amortization recorded in 1997 related to the purchase of
Delsener/Slater on January 2, 1997. In 1997, SFX Entertainment recorded the
fixed assets of Delsener/Slater at fair value and recorded an intangible
asset equal to the excess of purchase price over the fair value of net
tangible assets of Delsener/Slater, which was amortized over a 15 year
period.
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Corporate, general and administrative expenses were $1.3 million for the
nine months ended September 30, 1997, net of $1.7 million in fees received
from Triathlon, compared to zero for the nine months ended September 30,
1996. These expenses represent the incremental costs of operating SFX
Entertainment's offices, and therefore did not exist in 1996. The fees
receivable from Triathlon are based on consulting services provided by or on
behalf of Sillerman Communications Management Corporation, a private
investment company in which Messrs. Sillerman and Tytel have economic
interests, that makes investments in and provides financial consulting
services to companies engaged in the media business ("SCMC"). The fees will
fluctuate (above the minimum annual fee of $500,000) based on the level of
acquisition and financing activities of Triathlon. SCMC previously assigned
its rights to receive fees payable from Triathlon to SFX, and SFX will assign
its rights to receive the fees to SFX Entertainment, pursuant to the
Distribution Agreement. Triathlon has previously announced that it is
exploring ways of maximizing stockholder value, including a possible sale to
a third party. If Triathlon is acquired by a third party, it is possible that
the consulting fees would not continue for the remainder of the agreement's
term. See "Certain Relationships and Related Transactions--Triathlon Fees."
Operating income was $6.0 million for the nine months ended September 30,
1997, compared to a loss of $2.0 million in the nine months ended September
30, 1996, due to the results discussed above.
Interest expense, net of investment income, was $743,000 in the nine
months ended September 30, 1997, compared to net interest income of $83,000
for the nine months ended September 30, 1996, primarily as a result of
assumption of additional debt related to the acquisitions of Sunshine
Promotions and the Meadows Music Theater lease.
Equity income in unconsolidated subsidiaries increased 148% to $1.3
million from $525,000, primarily as a result of the investment in the PNC
Bank Arts Center.
Income tax expense increased to $3.0 million for the nine months ended
September 30, 1997, compared to $80,000 for the nine months ended September
30, 1996, primarily as the result of higher operating income.
SFX Entertainment's net income increased to $3.7 million for the nine
months ended September 30, 1997, as compared to a net loss of $1.5 million
for the nine months ended September 30, 1996, due to the factors discussed
above.
EBITDA increased to $10.0 million for the nine months ended September 30,
1997, compared to a negative $1.3 million for the nine months ended September
30, 1996, as a result of the reduction in officers' salary expense and
improved operating results.
Year Ended December 31, 1996 Compared to the Year Ended December 31, 1995
SFX Entertainment's concert promotion revenue increased by 5.9% to $50.4
million for the year ended December 31, 1996, compared to $47.6 million for
the year ended December 31, 1995, primarily as a result of an increase in
concerts promoted and an increase in ticket prices.
Concert promotion operating expenses increased by 4.8% to $41.6 million
for the year ended December 31, 1996, compared to $39.7 million for the year
ended December 31, 1995, primarily as a result 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.
General and administrative expenses, including officers' salary expenses,
increased by 22% to $9.1 million for the year ended December 31, 1996,
compared to $7.5 million for the year ended December 31, 1995, primarily from
higher officers' salary expense.
SFX Entertainment's operating loss was $1.1 million for the year ended
December 31, 1996, compared to an operating loss of $362,000 for the year
ended December 31, 1995, due to the results discussed above.
Interest income, net of interest expense, increased by 306% to $138,000
for the year ended December 31, 1996, compared to $34,000 for the year ended
December 31, 1995.
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Equity income in unconsolidated subsidiaries increased 8% to $525,000
from $488,000, primarily as result of the investment in the PNC Bank Arts
Center, offset by lower income from SFX Entertainment's other equity
investments.
SFX Entertainment's state and local income tax expense increased to
$106,000 for the year ended December 31, 1996, compared to $13,000 for the
year ended December 31, 1995. This increase was primarily the result of the
higher operating income.
SFX Entertainment's net loss was $515,000 for the year ended December 31,
1996, compared to net income of $147,000 for the year ended December 31,
1995, due to the factors discussed above.
EBITDA was a negative $325,000 for the year ended December 31, 1996,
compared to $388,000 for the year ended December 31, 1995, primarily as a
result of higher officers' salary expense partially offset by lower general
and administrative expenses.
Year Ended December 31, 1995 Compared to the Year Ended December 31, 1994
SFX Entertainment's concert promotion revenue decreased by 49% to $47.6
million for the year ended December 31, 1995, compared to $92.8 million for
the year ended December 31, 1994, primarily as a result of the larger number
of major stadium tours promoted in 1994.
Concert promotion operating expenses decreased by 52% to $39.7 million for
the year ended December 31, 1995, compared to $83.4 million for the year
ended December 31, 1994, primarily as a result of the decrease in concert
activity described above.
Depreciation and amortization expense decreased by 1% to $750,000 for the
year ended December 31, 1995, compared to $755,000 for the year ended
December 31, 1994.
General and administrative expenses, including officers' salary expenses,
increased by 4% to $7.5 million for the twelve months ended December 31,
1995, compared to $7.2 million for the year ended December 31, 1994. This
increase resulted from higher general and administrative expenses partially
offset by lower officers' salary expense.
SFX Entertainment's operating loss was $362,000 for the year ended
December 31, 1995, compared to an operating income of $1.4 million for the
year ended December 31, 1994, due to the results discussed above.
Interest income, net of interest expense, was $34,000 in the year ended
December 31, 1995, compared to net interest expense of $6,000 for the year
ended December 31, 1994.
Equity income in unconsolidated subsidiaries increased to $488,000 from
negative $9,000, primarily as a result of improved operating results of
Broadway Concerts, Inc., which subleases a venue in New York City.
SFX Entertainment's state and local income tax expense increased to
$13,000 for the year ended December 31, 1995, compared to $5,000 for the year
ended December 31, 1994.
SFX Entertainment's net income decreased to $147,000 for the year ended
December 31, 1995, compared to net income of $1.4 million for the year ended
December 31, 1994, due to the factors discussed above.
EBITDA decreased by 82% to $388,000 for the year ended December 31, 1995,
compared to $2.2 million for the year ended December 31, 1994, primarily as a
result of decreased concert activity in 1995.
LIQUIDITY AND CAPITAL RESOURCES
Following consummation of the Pending Acquisitions, SFX Entertainment's
principal need for funds will be to fund interest and debt service payments,
future acquisitions, related working capital needs and, to a lesser extent,
capital expenditures. SFX Entertainment anticipates that its principal source
of funds will be the proceeds from the recent private placement of Notes,
borrowings under the Proposed Credit Facility and cash flows from operations.
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Historical Cash Flows
Net cash provided by operations was $789,000 for the nine months ended
September 30, 1997.
Net cash used in investing activities for the nine months ended September
30, 1997 was $72.0 million. Cash used in investing activities in 1997 related
primarily to the Recent Acquisitions.
Net cash provided by financing activities for the nine months ended
September 30, 1997 was $78.3 million. For the nine months ended September 30,
1997, cash provided by financing activities related primarily to the funding
of the Recent Acquisitions by SFX.
Recent Acquisitions
In 1997, SFX consummated the acquisitions of Delsener/Slater ($23.6
million in cash plus $4.0 million of deferred payments), the Meadows Music
Theater lease ($0.9 million in cash plus shares of SFX's Class A common stock
with a value at that time of approximately $7.5 million and the assumption of
approximately $15.4 million of debt) and Sunshine Promotions ($53.9 million
in cash plus $2.0 million in deferred payments, shares of SFX's Class A
common stock with a value of approximately $4.0 million and the assumption of
$1.6 million of debt). The present value of the future payments that SFX
Entertainment is required to pay in connection with the Recent Acquisitions
is approximately $3.5 million.
The foregoing includes a note in the original principal amount of $2.0
million, of which approximately $1.8 million is currently outstanding.
Pursuant to the SFX Merger Agreement, SFX Entertainment is responsible for
the payments owing under the note, which by its terms accelerates upon the
change of control of SFX resulting from the consummation of the SFX Merger.
Pending Acquisitions
The aggregate purchase price of the Pending Acquisitions is expected to be
approximately $484.3 million, consisting of approximately $352.8 million in
cash, $75.3 million in repaid debt and the issuance of approximately 4.2
million shares of SFX Entertainment Common Stock with an attributed
negotiated value of $56.2 million. In addition, SFX Entertainment expects to
incur approximately $5.5 million in fees and expenses related to the Pending
Acquisitions. SFX Entertainment has placed a deposit in connection with the
Pending Acquisitions of $2.0 million, which will be applied against the
applicable purchase price at closing. Each of the agreements relating to the
Pending Acquisitions provides that, if the Spin-Off is not completed on or
before July 1, 1998, then the sellers may require SFX Entertainment to
repurchase the shares at a price of $13.33 per share. In that event, the cash
needed to fund the Pending Acquisitions would increase by $56.2 million and
SFX Entertainment's stockholders' equity would decrease, and debt would
increase, by a corresponding amount. Although management believes that the
Spin-Off is likely to occur, the Spin-Off is subject to certain conditions,
some of which are outside of management's control. There can be no assurance
that the Spin-Off will be consummated on the terms presently contemplated, or
at all. In addition, the agreements relating to the Pending Acquisitions
provide for certain other purchase price adjustments and future contingent
payments. See "--Pending Acquisitions." The price ascribed to the SFX
Entertainment Class A Common Stock in the acquisition agreements is based on
certain financial projections developed jointly by SFX Entertainment and the
sellers. There is presently no trading market for the SFX Entertainment Class
A Common Stock. There can be no assurance that the assumptions underlying the
valuation will, in fact, be correct or that the valuation will approximate
the actual trading price of the SFX Entertainment Class A Common Stock.
SFX Entertainment has also granted the current owners of PACE the right to
require SFX Entertainment to repurchase up to one-third of the shares of
stock to be issued to them in the PACE Acquisition during a specified period
beginning five years after the closing date at a price of $33.00 per share
for an estimated maximum obligation of $16.5 million. In addition, SFX
Entertainment may be required to issue up to an additional $14.0 million of
shares of SFX Entertainment Class A Common Stock or, at SFX Entertainment's
option in certain circumstances, cash, if Network attains certain EBITDA
targets (as defined in the Network Agreement) for the year ended December 31,
1998. Further, SFX Entertainment may be required to pay additional cash
consideration to complete certain of the Pending Acquisitions, if the
transactions do not close by certain dates specified in the agreements. See
"Agreements Related to the Pending Acquisitions."
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The PACE Agreement requires SFX Entertainment to make available to PACE,
at any time up to the consummation of the PACE Acquisition, up to $25.0
million to be used by PACE to fund certain acquisitions. SFX Entertainment
does not currently anticipate that it will be required to extend this credit
to PACE; however, if SFX Entertainment is required to make the loan, there
can be no assurance that SFX Entertainment will have sufficient cash or other
sources of liquidity to provide the required funds. See "Agreements Related
to the Pending Acquisitions--PACE Acquisition--PACE Acquisition Facility."
The timing and completion of the Pending Acquisitions is subject to a
number of closing conditions, certain of which are beyond SFX Entertainment's
control. No assurance can be given that SFX Entertainment will be able to
complete any of the Pending Acquisitions by the closing dates specified in
the acquisition agreements, that the Spin-off will be completed on or before
July 1, 1998 or at all, or that SFX Entertainment will have sufficient cash
or other available sources of capital to make any or all of the future or
contingent payments described above. See "Agreements Related to the Pending
Acquisitions."
Spin-Off
SFX Entertainment expects to incur approximately $17.2 million in fees and
expenses in connection with the Spin-Off. In addition, pursuant to the SFX
Merger Agreement, SFX Entertainment has agreed to assume SFX's obligations
under the employment agreements of certain employees and senior management,
including the obligation to make change of control payments to Messrs.
Sillerman, Ferrel and Benson aggregating approximately $3.3 million, $1.5
million and $0.2 million, respectively. The assumed obligations will also
include the duty to indemnify Messrs. Sillerman and Ferrel for one-half of
any excise taxes that may be assessed against them in connection with the
change of control payments. It is also anticipated that Mr. Sillerman's
employment agreement with SFX Entertainment will provide for certain
indemnities relating to the SFX Merger. See "Certain Relationships and
Related Transactions--Assumption of Employment Agreements; Certain Change of
Control Payments" and "--Indemnification of Mr. Sillerman." In addition,
pursuant to the Distribution Agreement, SFX Entertainment will be required to
indemnify SFX and each of its directors, officers and employees for any
losses relating to SFX Entertainment's assets and liabilities. Pursuant to
the Tax Sharing Agreement, SFX Entertainment also will be responsible for any
taxes of SFX resulting from the Spin-Off, including any income taxes to the
extent that the income taxes result from gain on the distribution that
exceeds the net operating losses of SFX and SFX Entertainment available to
offset gain resulting from the Spin-Off. See "Agreements Between SFX
Entertainment and SFX." The actual amount of the indemnification payment by
SFX Entertainment to SFX will be based on the value of the SFX Entertainment
Common Stock on the date of the Spin-Off; this amount cannot be predicted
with accuracy at this time. It is possible that the amount of the
indemnification payment will be significant and will have a material adverse
effect on SFX Entertainment. Pursuant to the Distribution Agreement, these
payments will reduce the amount of Working Capital which may be transferred
from SFX to SFX Entertainment or increase the amount of Working Capital
payable by SFX Entertainment to SFX.
Meadows Repurchase
SFX Entertainment may assume the obligation to exercise an option held by
SFX to repurchase 250,838 shares of SFX's Class A Common Stock for an
aggregate purchase price of $8.3 million (the "Meadows Repurchase"). This
option was granted in connection with the acquisition of the lease for the
Meadows Music Theater. If the option were exercised by SFX, the exercise
would result in a reduction of Working Capital by approximately $8.3 million.
If the option were not exercised, Working Capital would decrease by
approximately $10.5 million.
Financing
SFX Entertainment expects to incur approximately $17.8 million in fees and
expenses related to the Financing.
Capital Expenditures
Capital expenditures totaled $2.4 million in the nine months ended
September 30, 1997. Capital expenditures in 1997 included cash paid for
building improvements, computer equipment, leasehold improvements and general
operating equipment. SFX Entertainment expects that capital expenditures in
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the fourth quarter of 1998 and in fiscal year 1998 will be substantially
higher than current levels, due to the planned capital expenditures of
approximately $17.0 million for 1998 at existing venues (including $14.0
million initially planned for the expansion and renovation of the Jones Beach
Amphitheater and $3.0 million planned for the expansion and renovation of the
PNC Bank Arts Center) and capital expenditures requirements of the
Acquisition Businesses, including $10.0 million for the construction of a new
amphitheater serving the Seattle, Washington market. SFX Entertainment
expects all other capital expenditures to total less than $12.0 million in
1998.
Future Charges to Earnings
SFX Entertainment anticipates entering into employment agreements with
certain of its executive officers before the Spin-Off. In connection with
these agreements, the Board, on the recommendation of its Compensation
Committee, agreed to grant the executive officers an aggregate of 650,000
shares of SFX Entertainment Class B Common Stock and 190,000 shares of SFX
Entertainment Class A Common Stock. The shares will be issued on or about the
Spin-Off Distribution Date. SFX Entertainment will record a non-cash
compensation charge at the date of the grant equal to the fair market value
of the shares.
In addition, the Board, on the recommendation of its Compensation
Committee, also has approved the issuance of stock options exercisable for an
aggregate of 245,000 shares of SFX Entertainment Class A Common Stock. The
options will vest over five years and will have an exercise price of $5.50
per share. SFX Entertainment will record non-cash compensation charges over
the five-year exercise period to the extent that the fair value of the
underlying SFX Entertainment Class A Common Stock exceeds the exercise price.
Further, the consummation of the Pending Acquisitions will result in
substantial charges to earnings relating to interest expense and the
recognition and amortization of goodwill.
Year 2000 Compliance
SFX Entertainment has addressed the risks associated with Year 2000
compliance with respect to its accounting and financial reporting systems and
is in the process of installing new accounting and reporting systems. These
systems are expected to provide better reporting, to allow for more detailed
analysis, to handle both the recent and Pending Acquisitions and to be Year
2000 compliant. SFX Entertainment anticipates that the cost of implementing
these systems will be approximately $1.4 million. SFX Entertainment is in the
process of examining Year 2000 compliance issues with respect to its vendors
and does not anticipate that it will be subject to a material impact in this
area.
Sources of Liquidity
As of September 30, 1997, SFX Entertainment's cash and cash equivalents
totaled $7.1 million. As a subsidiary of SFX, SFX Entertainment has incurred
and, as a stand-alone entity, will continue to incur substantial amounts of
indebtedness. As of September 30, 1997, SFX Entertainment's consolidated
indebtedness would have been approximately $498.8 million on a pro forma
basis giving effect to the Spin-Off, the Pending Acquisitions, the Financing
and the SFX Merger (assuming that all of these transactions occur on the
terms currently contemplated). The total amount of SFX Entertainment's
indebtedness could increase substantially if those transactions do not occur
on the terms currently contemplated as described above. In addition, SFX
Entertainment may incur indebtedness from time to time to finance
acquisitions, for capital expenditures or for other purposes.
On February 11, 1998, SFX completed the private placement of $350.0
million of 9 1/8% Senior Subordinated Notes due 2008. Interest is payable on
the Notes on February 1 and August 1 of each year. In addition, SFX
Entertainment anticipates borrowing approximately $132.3 million under the
Proposed Credit Facility for the uses described above. The Proposed Credit
Facility is expected to consist of a $150.0 million seven year reducing
revolving facility (the "Proposed Revolver") and a $150.0 million eight year
term loan (the "Proposed Term Loan"). Pursuant to the expected terms of the
Proposed Credit Facility, the maximum amount of funding available under the
facility on a pro forma basis for the 12 months ended September 30, 1997
would have been approximately $175.0 million. This amount, together with the
proceeds of the private placement of Notes, would be sufficient to (i)
consummate the
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Pending Acquisitions (approximately $428.1 million), (ii) pay certain fees
and expenses related to the Spin-Off, the Pending Acquisitions, the Financing
and certain consent solicitations related thereto (approximately $40.5
million), (iii) fund certain planned capital expenditures (approximately
$39.0 million), (iv) make various other payments in connection with the
Pending Acquisitions, certain change-of-control provisions contained in the
employment agreeements being assumed by SFX Entertainment and the exercise of
an option to acquire an office building and related property from Network
(approximately $12.7 million). However, pursuant to the expected terms of the
Proposed Credit Facility, pro forma for the twelve months ended September 30,
1997, the maximum amount of borrowing availability under the facility would
have been insufficient to fund the approximately $8.3 million payable in
connection with the Meadows Repurchase or to make the contingent payments
described above. While SFX Entertainment believes that expected improvements
in its cash flows will permit it to borrow sufficient funds under the
Proposed Credit Facility to fund the Meadows Repurchase, there can be no
assurance that SFX Entertainment will be able to achieve such increased cash
flow levels, or that other available sources of financing will be available
under terms acceptable to SFX Entertainment or permitted under the terms of
SFX Entertainment's applicable debt instruments or that the contingent
payments described above will not become payable. See "Risk Factors--Risks
Related to the Pending Acquisitions--Financing Matters" and "--Working
Capital Adjustments and Repayment of Advances" and "Description of
Indebtedness." In addition, the information relating to fees and expenses is
based on management's estimates, and may not be indicative of, and are likely
to vary from, the actual fees and expenses incurred by SFX Entertainment
relating to the Financing, the Pending Acquisitions, the Spin-Off and the SFX
Merger.
As required by the Distribution Agreement, by the time of the Spin-Off,
SFX will contribute to SFX Entertainment all of its concert and other live
entertainment assets. At that time, SFX Entertainment will assume all of
SFX's liabilities pertaining to the live entertainment businesses, along with
certain other liabilities. Immediately after the Spin-Off, SFX will
contribute to SFX Entertainment an allocation of working capital in an amount
estimated by SFX's management to be consistent with the proper operation of
SFX. At the time of the SFX Merger, SFX will pay its positive Working Capital
(if any) to SFX Entertainment. If Working Capital is negative, then SFX
Entertainment must pay the amount of the shortfall to SFX. As of September
30, 1997, SFX Entertainment estimates that Working Capital to be received by
SFX Entertainment would have been approximately $2.1 million (excluding the
Series E Adjustment), and that approximately $135.5 million of additional
assets and $34.1 million of liabilities related to the live entertainment
businesses would have been contributed to SFX Entertainment. The actual
amount of Working Capital as of the closing of the SFX Merger may differ
substantially from the amount as of September 30, 1997, and will be a
function of, among other things, the operating results of SFX through the
date of the SFX Merger, the actual cost of consummating the SFX Merger and
the related transactions SFX will also incur certain other significant
expenses prior to the consummation of the SFX Merger that could reduce
Working Capital, including the payment of interests and dividends on SFX's
debt and approximately $8.3 million payable in connection with the Meadows
Repurchase. Working Capital will also be reduced by at least $2.1 million
pursuant to the Series E Adjustment. In addition, at the time of the
Spin-Off, SFX Entertainment must repay sums advanced to it by SFX for certain
acquisitions or capital expenditures after August 24, 1997 and which have not
been repaid. As of January 31, 1998, SFX had advanced approximately $8.0
million to SFX Entertainment for use in connection with certain acquisitions
and capital expenditures. SFX Entertainment intends to repay these amounts
from the proceeds of the Financing. SFX may advance additional amounts to SFX
Entertainment for these purposes before the consummation of the Spin-Off. See
"Risk Factors--Working Capital Adjustments and Repayment of Advances,"
"Agreements Between SFX Entertainment and SFX--Distribution Agreement" and
"--Meadows Repurchase."
SFX Entertainment expects that the Proposed Revolver and Proposed Term
Loan will contain provisions providing that, at its option and subject to
certain conditions, SFX Entertainment may increase the amount of either the
Proposed Revolver or Proposed Term Loan by $50.0 million. The Proposed
Revolver and Proposed Term Loan are expected to contain usual and customary
covenants, including limitations on (a) line of business, (b) additional
indebtedness, (c) liens, (d) acquisitions, (e) asset sales, (f) dividends,
repurchases of stock and other cash distributions, (g) total leverage, (h)
senior leverage and
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(i) ratios of Operating Cash Flow (as defined herein) to pro forma interest
expense, debt service and fixed charges. SFX Entertainment's obligations
under the Proposed Revolver and Proposed Term Loan would be secured by
substantially all of its assets, including property, stock of subsidiaries
and accounts receivable and guaranteed by SFX Entertainment's subsidiaries.
The degree to which SFX Entertainment is leveraged will have material
consequences to SFX Entertainment. SFX Entertainment's ability to obtain
additional financing in the future for acquisitions, working capital, capital
expenditures, general corporate or other purposes will be subject to the
covenants contained in the instruments governing its indebtedness. A
substantial portion of SFX Entertainment's cash flow from operations will be
required to be used to pay principal and interest on its debt and will not be
available for other purposes. The agreements governing SFX Entertainment's
long-term debt will likely contain restrictive financial and operating
covenants, and the failure by SFX Entertainment to comply with those
covenants would result in an event of default under the applicable
instruments, which in turn would permit acceleration of the debt under the
instruments (and in some cases acceleration of debt under other instruments
that contain cross-default or cross-acceleration provisions). SFX
Entertainment will be more vulnerable to economic downturns and could also be
limited in its ability to withstand competitive pressures and in its
flexibility in reacting to changes in its industry and general economic
conditions. These consequences are not exhaustive; SFX Entertainment's
indebtedness could also have other adverse consequences. See "Risk
Factors--Substantial Leverage."
SFX Entertainment's ability to make scheduled payments of principal of, to
pay interest on or to refinance its debt depends on its future financial
performance, which, to a certain extent, is subject to general economic,
financial, competitive, legislative, regulatory and other factors beyond its
control, as well as the success of the businesses to be acquired and the
integration of these businesses into SFX Entertainment's operations. There
can be no assurance that SFX Entertainment will be able to make planned
borrowings (including under the Proposed Credit Facility), that SFX
Entertainment's business will generate sufficient cash flow from operations,
or that future borrowings will be available in an amount to enable SFX
Entertainment to service its debt and to make necessary capital or other
expenditures. SFX Entertainment may be required to refinance a portion of the
principal amount of its indebtedness prior to their respective maturities.
There can be no assurance that SFX Entertainment will be able to raise
additional capital through the sale of securities, the disposition of assets
or otherwise for any refinancing. See "Risk Factors."
SFX Entertainment intends to pursue additional expansion opportunities and
expects to continue to identify and negotiate with respect to substantial
acquisitions in the concert promotion and venue operation business, certain
of which may be consummated prior to the Spin-Off. However, it may be unable
to identify and acquire additional suitable businesses or obtain the
financing necessary to acquire the businesses. SFX Entertainment, in
connection with future acquisitions, may seek additional debt and equity
financing, the terms of which could affect the results of operations of SFX
Entertainment. Any debt financing would require payments of principal and
interest and would adversely impact SFX Entertainment's cash flows, and any
equity financing could be dilutive to the ownership interests of SFX
Entertainment's then-existing stockholders. There can be no assurance that
SFX Entertainment will be able to obtain financing on terms acceptable to SFX
Entertainment, or at all. Furthermore, any additional acquisitions may result
in charges to operations relating to interest expense or the recognition and
amortization of goodwill, which would increase SFX Entertainment's losses or
reduce or eliminate its earnings, if any.
Based on the current earnings of SFX Entertainment and the Acquisition
Businesses and anticipated cost savings and revenue growth, management
believes that, after consummating the Pending Acquisitions, cash flow from
operations and available cash (together with available borrowings under the
Proposed Credit Facility) will be adequate to meet SFX Entertainment's future
liquidity needs until at least the first quarter of 1999.
Seasonality
SFX Entertainment's operations and revenues are largely seasonal in
nature, with generally higher revenue generated in the second and third
quarters of the year. For example, on a pro forma basis for the
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Recent Acquisitions, SFX Entertainment generated approximately 70% of its
revenues in the second and third quarters for the 12 months ending September
30, 1997. SFX Entertainment's outdoor venues are primarily utilized in the
summer months and do not generate substantial revenue in the late fall,
winter and early spring. Similarly, the musical concerts that SFX
Entertainment promotes largely occur in the second and third quarters. To the
extent that SFX Entertainment's entertainment marketing and consulting relate
to musical concerts, they also predominantly generate revenues in the second
and third quarters. Therefore, the seasonality of SFX Entertainment's
business causes (and will probably continue to cause) a significant variation
in SFX Entertainment's quarterly operating results. These variations in
demand could have a material adverse effect on the timing of SFX
Entertainment's cash flows and, therefore, on its ability to service its
obligations with respect to its indebtedness. However, SFX Entertainment
believes that this variation may be somewhat offset with the acquisition of
typically non-summer seasonal businesses in the Pending Acquisitions, such as
motor sports (which is winter-seasonal) and Touring Broadway Shows (which
typically tour between September and May). See "Management's Discussion and
Analysis of Financial Condition and Results of Operations."
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MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
Pursuant to SFX Entertainment's Certificate of Incorporation and By-laws,
the business of SFX Entertainment is managed by the Board. The Board will
conduct its business through meetings of the board and its committees. The
standing committees of the Board are described below.
The By-laws of SFX Entertainment authorize the Board to fix the number of
directors from time to time. The initial number of directors of SFX
Entertainment is nine. All directors hold office until the next annual
meeting of stockholders following their election or until their successors
are elected and qualified. Officers of SFX Entertainment are to be elected
annually by the Board and serve at the Board's discretion. In the election of
directors, the holders of SFX Entertainment Class A Common Stock will be
entitled by class vote, exclusive of all other stockholders, to elect
two-sevenths (rounded up) of the directors to serve on the Board, with each
share of SFX Entertainment Class A Common Stock entitled to one vote.
Currently, the Board consists of the individuals who are currently serving
as directors of SFX. In addition, it is anticipated that, after the
consummation of the PACE Acquisition, Brian Becker, the Chief Executive
Officer and President of PACE, will be appointed as a Director, as an
Executive Vice President and, together with Messrs. Sillerman and Ferrel, as
a Member of the Office of the Chairman. All of the individuals who currently
serve as directors of SFX will cease to be directors of SFX at the time of
the consummation of the SFX Merger. If the SFX Merger Agreement is
terminated, Messrs. Dugan, Kramer and O'Grady have indicated that they will
promptly resign from their positions as directors of SFX Entertainment, and
the Board will appoint three new independent directors, to serve until the
next annual meeting of the stockholders of SFX Entertainment. The directors
of SFX Entertainment will hold office until the next annual meeting of
stockholders of SFX Entertainment or until their successors are duly elected
and qualified.
All of the executive officers of SFX Entertainment (the "Executive
Officers") consist initially of individuals currently responsible for the
management of SFX. It is anticipated that, prior to the Spin-Off, the
Executive Officers will enter into five year employment agreements with SFX
Entertainment that will be similar to their existing employment agreements
with SFX (except that Mr. Armstrong's employment agreement is expected to
provide that he will serve as an executive vice president of SFX
Entertainment but not as the chief operating officer). See "--Employment
Agreements and Arrangements with Certain Officers and Directors." These
employment agreements will become effective immediately at the time of
consummation of the SFX Merger. During the period following the Spin-Off and
prior to the consummation of the SFX Merger, the Executive Officers will
continue to devote as much time as they deem necessary to conduct the
operations of SFX Entertainment consistent with their obligations to SFX. If
the Merger Agreement is terminated for any reason, the Executive Officers
will continue to perform services to both SFX and SFX Entertainment until SFX
is able to hire suitable replacements for the Executive Officers. If the
Merger Agreement is terminated, SFX intends to seek another buyer for the
radio broadcasting business.
SFX and Messrs. Sillerman and Ferrel have reached agreements in principle
that Messrs. Sillerman and Ferrel will serve as officers and directors of SFX
Entertainment; however, if Proposal 3 in the attached Proxy Statement is not
approved, there can be no assurance that they will serve in any such
capacity, in which event SFX intends to pursue alternative means of disposing
of SFX Entertainment. See "Risk Factors--Dependence on Key Personnel."
It is expected that, after the consummation of the Pending Acquisitions,
current senior management of the Acquisition Businesses will remain largely
intact in order to preserve essential local relationships, reputations, names
and expertise, with senior management overseeing and coordinating operations
of
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SFX Entertainment as a whole. See "Agreements Related to the Pending
Acquisitions." The following table sets forth information as to the Directors
and the Executive Officers of SFX Entertainment:
<TABLE>
<CAPTION>
DIRECTOR AGE AS OF
POSITION(S) HELD WITH POSITION(S) HELD OF SFX DECEMBER 31,
NAME SFX ENTERTAINMENT WITH SFX SINCE 1997
- --------------------- ---------------------------- ----------------------------- ---------- --------------
<S> <C> <C> <C> <C>
Robert F.X. Sillerman Director, Executive Chairman Director and Executive 1992 49
and Member of the Office of Chairman
the Chairman
Michael G. Ferrel Director, President, Chief Director, President and Chief 1996 48
Executive Officer and Member Executive Officer
of the Office of the
Chairman
D. Geoffrey Armstrong Director and Executive Vice Director, Chief Operating 1993 40
President Officer and Executive Vice
President
Howard J. Tytel Director, General Counsel, Director, General Counsel, 1993 50
Secretary and Executive Vice Secretary and Executive Vice
President President
Thomas P. Benson Director, Vice President and Director and Chief Financial 1996 35
Chief Financial Officer Officer
Richard A. Liese Director, Vice President and Director, Vice President and 1995 45
Assistant General Counsel Assistant General Counsel
James F. O'Grady, Jr. Director Director 1993 69
Paul Kramer Director Director 1993 65
Edward F. Dugan Director Director 1996 63
*Brian Becker Director, Executive Vice None -- 41
President and Member of the
Office of the Chairman
</TABLE>
- ------------
* Anticipated to be appointed after the consummation of the PACE
Acquisition.
ROBERT F.X. SILLERMAN has served as the Executive Chairman of SFX since
July 1, 1995, and from 1992 through June 30, 1995, he served as Chairman of
the Board of Directors and Chief Executive Officer of SFX. Mr. Sillerman is
Chairman of the Board of Directors and Chief Executive Officer of SCMC, a
private 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 midwestern and western
United States. For the last twenty years, Mr. Sillerman has been a senior
executive of and principal investor in numerous entities operating in the
broadcasting business. In 1993, Mr. Sillerman became the Chancellor of the
Southampton campus of Long Island University.
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MICHAEL G. FERREL has been the President, Chief Executive Officer and a
Director of SFX since November 22, 1996. Mr. Ferrel served as President and
Chief Operating Officer of MMR, a wholly-owned subsidiary of SFX, and a
member of MMR's board of directors since MMR's inception in August 1992 and
as Co-Chief Executive Officer of MMR from January 1994 to January 1996, when
he became the Chief Executive Officer. From 1990 to 1993, Mr. Ferrel served
as Vice President of Goldenberg SFX, Inc. the former owner of radio station
WPKX-FM, Springfield, Massachusetts, which was acquired by MMR in July 1993.
D. GEOFFREY ARMSTRONG has been the Chief Operating Officer and an
Executive Vice President of SFX since November 22, 1996 and has served as a
Director of SFX since 1993. Mr. Armstrong became the Chief Operating Officer
of SFX in June 1996 and the Chief Financial Officer, Executive Vice President
and Treasurer of SFX in April 1995. Mr. Armstrong was Vice President, Chief
Financial Officer and Treasurer of SFX from 1992 until March 1995. He had
been Executive Vice President and Chief Financial Officer of Capstar, a
predecessor of SFX, since 1989. From 1988 to 1989, Mr. Armstrong was the
Chief Executive Officer of Sterling Communications Corporation.
HOWARD J. TYTEL has been a Director, General Counsel, Executive Vice
President and Secretary of SFX since 1992. Mr. Tytel is Executive Vice
President, General Counsel and a Director of SCMC and TSC and holds an
economic interest in those companies. Mr. Tytel is a Director and a founder
of Marquee and a founder of Triathlon. Mr. Tytel was a Director of Country
Music Television from 1988 to 1991. From March 1995 until March 1997, Mr.
Tytel was a Director of Interactive Flight Technologies, Inc., a
publicly-traded company providing computer-based in-flight entertainment. For
the last twenty years, Mr. Tytel has been associated with Mr. Sillerman in
various capacities with entities operating in the broadcasting business.
Since 1993, Mr. Tytel has been Of Counsel to the law firm of Baker &
McKenzie, which currently represents SFX, SFX Entertainment and other
entities with which Messrs. Sillerman and Tytel are affiliated, on various
matters.
THOMAS P. BENSON has been the Chief Financial Officer and a Director of
SFX since November 22, 1996. Mr. Benson became the Vice President of
Financial Affairs of SFX in June 1996. He was the Vice President--External
and International Reporting for American Express Travel Related Services
Company from September 1995 to June 1996. From 1984 through September 1995,
Mr. Benson worked at Ernst & Young LLP as a staff accountant, senior
accountant, manager and senior manager.
RICHARD A. LIESE has been a Director, Vice President and Assistant General
Counsel of SFX since 1995. Mr. Liese has also been the Assistant General
Counsel and Assistant Secretary of SCMC since 1988. In addition, from 1993
until April 1995, he served as Secretary of MMR.
JAMES F. O'GRADY, JR. has been President of O'Grady and Associates, a
media brokerage and consulting company, since 1979. Mr. O'Grady has been a
Director of Orange and Rockland Utilities, Inc. and of Video for Broadcast,
Inc. since 1980 and 1991, respectively. Mr. O'Grady has been the co-owner of
Allcom Marketing Corp., a corporation that provides marketing and public
relations services for a variety of clients, since 1985, and has been Of
Counsel to Cahill and Cahill, Brooklyn, New York, since 1986. He also served
on the Board of Trustees of St. John's University from 1984 to 1996, and has
served as a Director of Orange and Rockland Utilities, Inc. since 1980 and of
The Insurance Broadcast System, Inc. since 1994.
PAUL KRAMER has been a partner in Kramer & Love, financial consultants
specializing in acquisitions, reorganizations and dispute resolution, since
1994. From 1992 to 1994, Mr. Kramer was an independent financial consultant.
Mr. Kramer was a partner in the New York office of Ernst & Young LLP from
1968 to 1992, and from 1987 to 1992 was Ernst & Young's designated
Broadcasting Industry Specialist.
EDWARD F. DUGAN is President of Dugan Associates Inc., a financial
advisory firm to media and entertainment companies, which he founded in 1991.
Mr. Dugan was an investment banker with Paine Webber Inc., as a Managing
Director, from 1978 to 1990, with Warburg Paribas Becker Inc., as President,
from 1975 to 1978 and with Smith Barney Harris Upham & Co., as a Managing
Director, from 1961 to 1975.
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<PAGE>
BRIAN E. BECKER has served as Chief Executive Officer of PACE since 1994
and was appointed as President of PACE in 1996. He first joined PACE as the
Vice President and General Manager of PACE's theatrical division at the time
of that division's formation in 1982, and subsequently directed PACE's
amphitheater development efforts. He served as Vice Chairman of PACE from
1992 until he was named its Chief Executive Officer in 1994.
Audit Committee
The Audit Committee will review (and report to the Board prior to the
Spin-Off) on various auditing and accounting matters, including the
selection, quality and performance of SFX Entertainment's internal and
external accountants and auditors, the adequacy of its financial controls,
and the reliability of financial information reported to the public. The
Audit Committee will also review certain related-party transactions and
potential conflict-of-interest situations involving officers, directors or
stockholders of SFX Entertainment. The members of the Audit Committee are
Messrs. Kramer, O'Grady and Dugan.
Compensation Committee
The Compensation Committee will review and make recommendations with
respect to certain of SFX Entertainment's compensation programs and
compensation arrangements with respect to certain officers, including Messrs.
Sillerman, Ferrel, Armstrong, Tytel, Benson and Liese. The members of the
Compensation Committee are Messrs. Kramer, O'Grady and Dugan, none of whom is
a current or former employee or officer of SFX or SFX Entertainment.
Compensation Committee Interlocks and Insider Participation
The Compensation Committee is comprised of Messrs. Kramer, O'Grady and
Dugan. The Board has approved the issuance of shares of SFX Entertainment
Class A Common Stock to holders as of the Spin-Off Record Date of stock
options or SARs of SFX, whether or not vested. The issuance was approved to
allow the holders of these options and SARs to participate in the Spin-Off in
a similar manner to holders of SFX's Class A common stock. In connection with
this issuance, Messrs. Kramer, O'Grady and Dugan will receive 13,000, 13,000
and 3,000 shares of SFX Entertainment Class A Common Stock, respectively.
Stock Option Committee
The Stock Option Committee will grant options, determine which employees
and other individuals performing substantial services to SFX Entertainment
may be granted options and determine the rights and limitations of options
granted under SFX Entertainment's plans. The members of the Stock Option
Committee are Messrs. Kramer, O'Grady and Dugan.
Stock Option and Restricted Stock Plan
The Board and SFX, as sole stockholder of SFX Entertainment, have approved
and adopted the SFX Entertainment, Inc. 1998 Stock Option and Restricted
Stock Plan, providing for the issuance of up to 2,000,000 shares of SFX
Entertainment Class A Common Stock. The purpose of the plan is to provide
additional incentive to officers and employees of SFX Entertainment. Each
option granted under the plan will be designated at the time of grant as
either an "incentive stock option" or a "non-qualified stock option." The
plan will be administered by the Stock Option Committee.
Compensation of Directors
Directors employed by SFX Entertainment will receive no compensation for
meetings they attend. Each director not employed by SFX Entertainment will
receive a fee of $1,500 for each Board meeting he attends, in addition to
reimbursement of travel expenses. Each non-employee director who is a member
of a committee will also receive $1,500 for each committee meeting he attends
that is not held in conjunction with a Board meeting. If the committee
meeting occurs in conjunction with a Board meeting, each committee member
will receive an additional $500 for each committee meeting he attends. In
addition, SFX Entertainment will pay each director an annual retainer of
$30,000, of which one-half will be paid in cash and one-half will be paid in
shares of SFX Entertainment Class A Common Stock.
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<PAGE>
EXECUTIVE COMPENSATION
SFX Entertainment did not pay any compensation to the current Executive
Officers in 1997. SFX Entertainment anticipates that during 1998 its most
highly compensated executive officers will be Messrs. Sillerman, Ferrel,
Armstrong, Tytel and, after the consummation of the PACE Acquisition, Becker.
See "--Employment Agreements and Arrangements with Certain Officers and
Directors."
It is anticipated that compensation for the Executive Officers and for
other executives will consist principally of base salary, an annual incentive
bonus opportunity and long-term stock-based incentive awards. All direct and
indirect remuneration of all Executive Officers and certain other executives
will be approved by the Compensation and Stock Option Committees.
It is anticipated that the Board will, after the Spin-Off, grant shares of
SFX Entertainment Class A Common Stock to holders as of the Spin-Off Record
Date of stock options or SARs of SFX, whether or not vested. See "Certain
Relationships and Related Transactions--Issuance of Stock to Holders of SFX's
Options and SARs."
EMPLOYMENT AGREEMENTS AND ARRANGEMENTS WITH CERTAIN OFFICERS AND DIRECTORS
SFX Entertainment anticipates that it will enter into employment
agreements with all of the Executive Officers prior to the consummation of
the Spin-Off, and that the employment agreements (except for Mr. Becker's
employment agreement) will become effective immediately after the
consummation of the SFX Merger. It is anticipated that the employment
agreements will provide for annual base salaries of $500,000 for Mr.
Sillerman, $350,000 for Mr. Ferrel, $325,000 for Mr. Armstrong, $300,000 for
Mr. Tytel and $235,000 for Mr. Benson. Each executive officer is expected to
receive a bonus to be determined annually in the discretion of the Board, on
the recommendation of the Compensation Committee. Each employment agreement
will be for a term of five years, and unless terminated or not renewed by SFX
Entertainment or the employee, the term will continue thereafter on a
year-to-year basis on the same terms existing at the time of renewal. It is
anticipated that each of the agreements will provide for payments and other
benefits to be mutually agreed upon, if the employee's employment terminates
following a change of control.
In connection with entering into the employment agreements, the Board (on
the review and recommendation of the Compensation Committee) approved the
following restricted stock awards: 500,000 shares of SFX Entertainment Class
B Common Stock to Mr. Sillerman, 150,000 shares of SFX Entertainment Class B
Common Stock to Mr. Ferrel, 100,000 shares of SFX Entertainment Class A
Common Stock to Mr. Armstrong, 80,000 shares of SFX Entertainment Class A
Common Stock to Mr. Tytel and 10,000 shares of SFX Entertainment Class A
Common Stock to Mr. Benson. For a period of three years from issuance, the
restricted stock may not be transferred and will be subject to forfeiture if
an unwaived event of default is called on certain indebtedness, including the
Notes and the debt to be incurred under the Proposed Credit Facility. In
addition, in connection with entering into the employment agreements, the
Board (on the review and recommendation of the Compensation Committee) also
approved the issuance, effective upon consummation of the Spin-Off, of the
following stock options exercisable for shares of SFX Entertainment Class A
Common Stock: options to purchase 120,000 shares to Mr. Sillerman, options to
purchase 50,000 shares to Mr. Ferrel, options to purchase 40,000 shares to
Mr. Armstrong, options to purchase 25,000 shares to Mr. Tytel and options to
purchase 10,000 shares to Mr. Benson. The options will vest over five years
and will have an exercise price of $5.50 per share.
SFX Entertainment has entered into an employment agreement with Mr. Becker
(which will be effective at the time of consummation of the PACE
Acquisition), who will serve as a Director, Member of the Office of the
Chairman and Executive Vice President. Mr. Becker's employment agreement
provides for (a) an annual salary of $294,000 for the first year, $313,760
for each of the second and third years and $334,310 for each of the fourth
and fifth years, (b) an annual bonus in the discretion of the Board and (c)
the other terms described in "Agreements Related to the Pending
Acquisitions--PACE Acquisition--Becker Employment Agreement." In addition,
SFX Entertainment expects to enter into additional employment agreements with
certain of the existing officers of the Acquisition Businesses after the
consummation of the acquisitions. See "Agreements Related to the Pending
Acquisitions."
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<PAGE>
Until the closing date of the SFX Merger, the Executive Officers (other
than Mr. Becker) will continue to be employed by SFX (at SFX's expense), but
will devote as much time as they deem reasonably necessary, consistent with
their obligations to SFX, in support of SFX Entertainment on a basis
consistent with the time and scope of services that they devoted to the live
entertainment business prior to the Spin-Off. Effective immediately prior to
the consummation of the SFX Merger, SFX Entertainment will assume all
obligations arising under any employment agreement or arrangement (written or
oral) between SFX or any of its subsidiaries and the Executive Officers,
other than the rights, if any, of the Executive Officers to receive options
at the time of their termination following a change of control of SFX (as
defined in their respective employment agreements) and all existing rights to
indemnification. SFX Entertainment will assume the obligation to make change
of control payments under Messrs. Sillerman's, Ferrel's and Benson's existing
employment agreements with SFX of approximately $3.3 million, $1.5 million
and $0.2 million, respectively. SFX Entertainment will also indemnify SFX and
its subsidiaries from all obligations arising under the assumed employment
agreements or arrangements (except in respect of the termination options and
all existing rights to indemnification).
SFX Entertainment and SFX have also entered into certain agreements and
arrangements with their officers and directors from time to time in the past.
See "Certain Relationships and Related Transactions."
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<PAGE>
PRINCIPAL STOCKHOLDERS OF SFX ENTERTAINMENT
All of the outstanding SFX Entertainment Common Stock is currently held by
SFX. To the best of SFX Entertainment's knowledge, the following table sets
forth projected information regarding the beneficial ownership of shares of
SFX Entertainment Common Stock after the Spin-Off, and after the Spin-Off,
the Pending Acquisitions and stock grants, with respect to (a) each director
of SFX Entertainment, (b) certain executive officers of SFX Entertainment,
(c) the directors and executive officers of SFX Entertainment as a group and
(d) each person known by SFX Entertainment to own beneficially more than five
percent of the outstanding shares of any class of SFX's common stock. The
ownership information presented below with respect to all persons and
organizations is based on record ownership of SFX's common stock and certain
options and warrants to purchase SFX's common stock as of February 9, 1998
and assumes no change in record ownership of SFX's common stock and the
options and warrants.
<TABLE>
<CAPTION>
AFTER THE SPIN-OFF(1)
----------------------------------------------------
CLASS A CLASS B
COMMON STOCK COMMON STOCK(3)
---------------------- ------------------- --------
PERCENT
OF TOTAL
NAME AND ADDRESS OF NUMBER OF PERCENT NUMBER PERCENT VOTING
BENEFICIAL OWNER(4) SHARES OF CLASS OF SHARES OF CLASS POWER
- --------------------------- ------------ -------- --------- -------- --------
<S> <C> <C> <C> <C> <C>
Directors and
Executive Officers:
Robert F.X. Sillerman .... 1,287,437(5) 9.2% 1,024,168 97.8% 47.1%
Michael G. Ferrel ......... 12,132 * 22,869 2.2% 1.0%
*
D. Geoffrey Armstrong ..... 9,496 -- -- *
Howard J. Tytel(11) ....... 24,284 * -- -- *
Thomas P. Benson .......... -- -- -- -- *
Richard A. Liese .......... -- -- -- -- *
James F. O'Grady, Jr. .... 1,772 * -- -- *
Paul Kramer ............... 2,922 * -- -- *
Edward F. Dugan ........... 2,922 * -- -- *
Brian Becker .............. -- -- -- -- *
All directors and executive
officers as a group
(9 persons; 10 persons
after the PACE
Acquisition) .............. 1,340,965 9.9% 1,047,037 100.0% 48.3%
5% Stockholders:
The Goldman Sachs Group,
L.P. ...................... 689,574(18) 5.1% -- -- 2.8%
85 Broad Street
New York, NY 10004
</TABLE>
(RESTUBBED TABLE CONTINUED FROM ABOVE)
<TABLE>
<CAPTION>
AFTER THE SPIN-OFF, PENDING ACQUISITIONS AND
STOCK GRANTS(1),(2)
--------------------------------------------------------------
CLASS A CLASS B
COMMON STOCK COMMON STOCK(3)
---------------------------- ----------------------
PERCENT
OF TOTAL
NAME AND ADDRESS OF NUMBER OF PERCENT NUMBER OF PERCENT VOTING
BENEFICIAL OWNER(4) SHARES OF CLASS SHARES OF CLASS POWER
- --------------------------- ---------------- -------- ------------ -------- --------
<S> <C> <C> <C> <C> <C>
Directors and Executive
Officers:
Robert F.X. Sillerman .... 1,332,630(5),(6) 6.9% 1,524,168(7) 89.9% 45.7%
Michael G. Ferrel ......... 179,504(8) * 172,869(9) 10.1% 5.3%
D. Geoffrey Armstrong ..... 294,496(10) 1.6% -- -- *
Howard J. Tytel(11) ....... 137,891(11),(12) * -- -- *
Thomas P. Benson .......... 19,000(13) * -- -- *
Richard A. Liese .......... 9,500(14) * -- -- *
James F. O'Grady, Jr. .... 14,772(15) * -- -- *
Paul Kramer ............... 15,922(16) * -- -- *
Edward F. Dugan ........... 5,922(17) * -- -- *
Brian Becker .............. -- * -- -- *
All directors and executive
officers as a group
(9 persons; 10 persons
after the PACE
Acquisition) .............. 2,009,637 10.7% 1,697,037 100.0% 52.3%
5% Stockholders:
The Goldman Sachs Group,
L.P. ....................... 689,574(18) 3.6% -- -- 1.9%
85 Broad Street
New York, NY 10004
</TABLE>
- ------------
* Less than 1%
(1) Assumes that (a) all of the outstanding Class B Warrants and Unit
Purchase Options of SFX are exercised prior to the Spin-Off Record Date
and (b) SFX exercises a contractual right to purchase 250,838 shares of
SFX's Class A common stock prior to the Spin-Off Record Date. Does not
include 2,000,000 shares reserved for issuance pursuant to SFX
Entertainment's stock option and restricted stock plan.
(2) Assumes that (a) an aggregate of 4,216,680 shares of SFX Entertainment
Class A Common Stock are issued pursuant to the Pending Acquisitions,
(b) an aggregate of 793,633 shares of SFX Entertainment Class A Common
Stock are issued to the holders of stock options and SARs issued by SFX
and (c) an aggregate of 290,000 shares of SFX Entertainment Class A
Common Stock and 650,000 shares of SFX Entertainment Class B Common
Stock are issued pursuant to certain anticipated employment agreements.
See "Management--Employment Agreements and Arrangements with Certain
Officers and Directors" and "Certain Relationships and Related
Transactions--Issuance of Stock to Holders of SFX's Options and SARs."
(3) Assumes that the proposal to allow holders of SFX's Class B Common
Stock to receive SFX Entertainment Class B Common Stock in the Spin-Off
is approved at SFX's stockholders meeting.
(4) Unless otherwise set forth above, the address of each stockholder is
the address of SFX Entertainment, which is 650 Madison Avenue, 16th
Floor, New York, New York 10022. Pursuant to Rule 13d-3 of the Exchange
Act, as used in this table, (a) "beneficial ownership" means the sole
or shared power to vote, or to direct the disposition of, a security,
and (b) a person is deemed to have "beneficial
D-124
<PAGE>
ownership" of any security that the person has the right to acquire
within 60 days of February 9, 1998. Unless noted otherwise, (a)
information as to beneficial ownership is based on statements furnished
to SFX or SFX Entertainment by the beneficial owners, and (b)
stockholders possess sole voting and dispositive power with respect to
shares listed on this table. As of February 9, 1998, there were issued
and outstanding 9,517,663 shares of SFX's Class A common stock and
1,047,037 shares of SFX's Class B common stock.
(5) Includes 600,000 shares of SFX Entertainment Class A Common Stock to be
issued to SCMC in the Spin-Off pursuant to certain warrants held by
SCMC and an option, exercisable upon consummation of the Spin-Off, to
acquire an aggregate of 537,185 shares of SFX Entertainment Class A
Common Stock from a third party.
(6) Assumes that SFX Entertainment issues 45,193 shares of SFX
Entertainment Class A Common Stock to Mr. Sillerman (or entities
controlled by Mr. Sillerman) as a result of his ownership of options of
SFX. See "Certain Relationships and Related Transactions--Issuance of
Stock to Holders of SFX's Options and SARs." Includes 8,949 shares of
SFX Entertainment Class A Common Stock expected to be issued to TSC in
the Spin-Off. If the 1,524,168 shares of SFX Entertainment Class B
Common Stock to be held by Mr. Sillerman were included in calculating
his ownership of SFX Entertainment Class A Common Stock, then Mr.
Sillerman would beneficially own 2,856,705 shares of SFX Entertainment
Class A Common Stock, representing approximately 14% of the class. Does
not include options to purchase an aggregate of 120,000 shares of SFX
Entertainment Class A Common Stock that are expected to be issued to
Mr. Sillerman pursuant to his anticipated employment agreement. See
"Management--Employment Agreements and Arrangements with Certain
Officers and Directors."
(7) Includes 500,000 shares of SFX Entertainment Class B Common Stock that
are expected to be issued to Mr. Sillerman pursuant to his anticipated
employment agreement. See "Management--Employment Agreements and
Arrangements with Certain Officers and Directors."
(8) Assumes that SFX Entertainment issues 167,372 shares of SFX
Entertainment Class A Common Stock to Mr. Ferrel as a result of his
ownership of options of SFX. See "Certain Relationships and Related
Transactions--Issuance of Stock to Holders of SFX's Options and SARs."
If the 22,869 shares of Class B Common Stock held by Mr. Ferrel were
included in calculating his ownership of SFX Entertainment Class A
Common Stock, then Mr. Ferrel would beneficially own 352,371 shares of
SFX Entertainment Class A Common Stock, representing approximately 1.9%
of the class. Does not include options to purchase an aggregate of
50,000 shares of SFX Entertainment Class A Common Stock that are
expected to be issued to Mr. Ferrel pursuant to his anticipated
employment agreement. See "Management--Employment Agreements and
Arrangements with Certain Officers and Directors."
(9) Includes 150,000 shares of SFX Entertainment Class B Common Stock that
are expected to be issued to Mr. Ferrel pursuant to his anticipated
employment agreement. See "Management--Employment Agreements and
Arrangements with Certain Officers and Directors."
(10) Assumes that SFX Entertainment issues an aggregate of 285,000 shares of
SFX Entertainment Class A Common Stock to Mr. Armstrong pursuant to his
anticipated employment agreement and as a result of his ownership of
options of SFX. See "Management--Employment Agreements and Arrangements
with Certain Officers and Directors" and "Certain Relationships and
Related Transactions--Issuance of Stock to Holders of SFX's Options and
SARs."
(11) In addition to the shares that Mr. Tytel beneficially owns, he has
economic interests in a limited number of shares beneficially owned by
Mr. Sillerman. These interests do not impair Mr. Sillerman's ability to
vote and dispose of those shares. See "Certain Relationships and
Related Transactions--Arrangement Between Robert F.X. Sillerman and
Howard J. Tytel."
(12) Assumes that SFX Entertainment issues an aggregate of 113,614 shares of
SFX Entertainment Class A Common Stock to Mr. Tytel pursuant to his
anticipated employment agreement and as a result of his ownership of
options of SFX. Mr. Tytel has an economic interest in SCMC and TSC,
which together will beneficially own an aggregate of 608,949 shares of
SFX Entertainment Class A Common Stock, although he does not have
voting or dispositive power with respect to the shares beneficially
held by SCMC and TSC. See "Certain Relationships and Related
Transactions--Arrangement Between Robert F.X. Sillerman and Howard J.
Tytel." Does not include options to purchase an aggregate of 25,000
shares of SFX Entertainment Class A Common Stock that are expected to
be issued to Mr. Tytel pursuant to his employment agreement. See
"Management--Employment Agreements and Arrangements with Certain
Officers and Directors" and "Certain Relationships and Related
Transactions--Issuance of Stock to Holders of SFX's Options and SARs."
(13) Assumes that SFX Entertainment issues an aggregate of 19,000 shares of
SFX Entertainment Class A Common Stock to Mr. Benson pursuant to his
anticipated employment agreement and as a result of his ownership of
options of SFX. Does not include options to purchase an aggregate of
10,000 shares of SFX Entertainment Class A Common Stock that are
expected to be issued to Mr. Benson pursuant to his employment
agreement. See "Management--Employment Agreements and Arrangements with
Certain Officers and Directors" and "Certain Relationships and Related
Transactions--Issuance of Stock to Holders of SFX's Options and SARs."
(14) Assumes that SFX Entertainment issues 9,500 shares of SFX Entertainment
Class A Common Stock to Mr. Liese as a result of his ownership of
options of SFX. See "Certain Relationships and Related
Transactions--Issuance of Stock to Holders of SFX's Options and SARs."
(15) Assumes that SFX Entertainment issues 13,000 shares of SFX
Entertainment Class A Common Stock to Mr. O'Grady as a result of his
ownership of options and/or SARs of SFX. See "Certain Relationships and
Related Transactions--Issuance of Stock to Holders of SFX's Options and
SARs." Includes 922 shares issuable pursuant to SFX's director deferred
stock ownership plan.
(16) Assumes that SFX Entertainment issues 13,000 shares of SFX
Entertainment Class A Common Stock to Mr. Kramer as a result of his
ownership of options and/or SARs of SFX. See "Certain Relationships and
Related Transactions--Issuance of Stock to Holders of SFX's Options and
SARs." Includes 922 shares issuable pursuant to SFX's director deferred
stock ownership plan.
(17) Assumes that SFX Entertainment issues 3,000 shares of SFX Entertainment
Class A Common Stock to Mr. Dugan as a result of his ownership of
options and/or SARs of SFX. See "Certain Relationships and Related
Transactions--Issuance of Stock to Holders of SFX's Options and SARs."
Includes 922 shares issuable pursuant to SFX's director deferred stock
ownership plan.
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<PAGE>
(18) Based on information contained in Amendment No. 1 to Schedule 13D filed
with the SEC on September 24, 1997. As of September 19, 1997, The
Goldman Sachs Group, L.P., a holding partnership, beneficially owned
689,574 shares, of which 649,574 shares were beneficially owned by
Goldman, Sachs & Co., including 293,952 shares issuable upon conversion
of shares of Series D preferred stock. The Goldman Sachs Group, L.P. is
a general partner of (and owns a 99% interest in) Goldman, Sachs & Co.,
a broker dealer and an investment adviser under the Investment Advisers
Act of 1940.
POSSIBLE CHANGE IN CONTROL
Mr. Sillerman has pledged an aggregate of 793,401 of his shares of SFX's
Class B common stock as collateral for a line of credit, under which Mr.
Sillerman currently has no outstanding borrowings. The pledge extends to all
dividends payable on the pledged shares; accordingly, if the pledge agreement
is in effect at the time of the Spin-Off, and if Proposal 3 in the attached
Proxy Statement is approved, then 793,401 shares of SFX Entertainment Class B
Common Stock distributed to Mr. Sillerman will be subject to the pledge
agreement. Mr. Sillerman continues to be entitled to exercise voting and
consent rights with respect to the pledged shares, with certain restrictions.
However, if Mr. Sillerman defaults in the payment of any future loans
extended to him under the line of credit, the bank will be entitled to sell
the pledged shares. Although the SFX Entertainment Class B Common Stock has
10 votes per share in most matters, the pledged shares will automatically
convert into shares of SFX Entertainment 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 Entertainment Common Stock, and would therefore
be likely to result in a change of control of SFX Entertainment. See "Risk
Factors--Restrictions Imposed by SFX Entertainment's Indebtedness" and
"Description of Indebtedness--Proposed Senior Credit Facility."
D-126
<PAGE>
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
AGREEMENTS WITH SFX
SFX Entertainment and SFX have entered into various agreements with
respect to the Spin-Off and related matters. For a description of the
material terms of these agreements, see "Agreements Between SFX Entertainment
and SFX."
SFX ENTERTAINMENT COMMON STOCK TO BE RECEIVED IN THE SPIN-OFF
In the Spin-Off, the holders of SFX's Class A common stock, Series D
preferred stock and Warrants (upon exercise) will receive shares of SFX
Entertainment Class A Common Stock, whereas Messrs. Sillerman and Ferrel, as
the holders of SFX's Class B common stock (which is entitled to ten votes per
share on most matters), will receive shares of SFX Entertainment Class B
Common Stock (assuming approval of Proposal 3 in the attached Proxy
Statement). The SFX Entertainment Class A Common Stock and Class B Common
Stock have similar rights and privileges, except that the SFX Entertainment
Class B Common Stock differs as to voting rights generally to the extent that
SFX's Class A common stock and Class B common stock presently differ. See
"Description of Capital Stock." The issuance of SFX Entertainment Class B
Common Stock in the Spin-Off is intended to preserve Messrs. Sillerman's and
Ferrel's relative voting power after the Spin-Off. Mr. Sillerman is
anticipated to be deemed to beneficially own approximately 45.7% of the
combined voting power of SFX Entertainment after the Pending Acquisitions,
Spin-Off and stock grants to management. Similarly, Messrs. Sillerman and
Ferrel are anticipated to be deemed to beneficially own approximately 51.0%
of the combined voting power of SFX Entertainment after the Pending
Acquisitions, Spin-Off and stock grants to management. Accordingly, Mr.
Sillerman, alone and together with SFX Entertainment's current directors and
executive officers, will generally be able to control the outcome of the
votes of the stockholders of SFX Entertainment on most matters. SFX
Entertainment and Messrs. Sillerman and Ferrel have agreed in principle that
Messrs. Sillerman and Ferrel will serve as officers and directors of SFX
Entertainment; however, if Proposal 3 in the attached Proxy Statement is not
approved, there can be no assurance that they will serve in that capacity, in
which event SFX intends to pursue alternative means of disposing of SFX
Entertainment. See "The Spin-Off." SFX Entertainment expects, however, that
in such a case Messrs. Sillerman and Ferrel will assist in an orderly
transition of management.
In addition, in August 1997, the board of directors of SFX approved
amendments to the SCMC Warrants (which represent the right to purchase an
aggregate of 600,000 shares of SFX's Class A common stock). The SCMC Warrants
had previously been issued to SCMC, an entity controlled by Mr. Sillerman.
The amendments memorialize the original intent of the directors of SFX that
SCMC receive the aggregate number of shares of SFX Entertainment Class A
Common Stock that it would have received if it had exercised the SCMC
Warrants immediately prior to the Spin-Off Record Date.
ISSUANCE OF STOCK TO HOLDERS OF SFX'S OPTIONS AND SARS
The Board has approved the grant of shares of SFX Entertainment Class A
Common Stock to holders as of the Spin-Off Record Date of the stock options
or SARs of SFX, whether or not vested. These grants were approved by the
Board to allow holders of these options and SARs to participate in the
Spin-Off in a manner similar to holders of SFX's Class A common stock.
Additionally, many of the option and SAR holders will become officers,
directors or employees of SFX Entertainment. These grants will result in the
issuance of an aggregate of up to 793,633 shares of SFX Entertainment Class A
Common Stock. Among those receiving shares will be all members of the Board
other than Mr. Becker.
EMPLOYMENT AGREEMENTS
SFX Entertainment anticipates that it will enter into employment
agreements with each member of its senior management before consummating the
Spin-Off, and that the employment agreements (except for Mr. Becker's
employment agreement) will become effective immediately after the
consummation of the SFX Merger. SFX Entertainment anticipates that the
employment agreements will provide for annual base salaries of $500,000 for
Mr. Sillerman, $350,000 for Mr. Ferrel, $325,000 for Mr. Armstrong, $300,000
for Mr. Tytel and $235,000 for Mr. Benson. In addition, the employment
agreements are expected to
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<PAGE>
provide for certain stock and option grants. See "Management--Employment
Agreements and Arrangements with Certain Officers and Directors" and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Liquidity and Capital Resources--Future Charges to Earnings."
DELSENER/SLATER EMPLOYMENT AGREEMENTS
In connection with the Delsener/Slater Acquisition, SFX entered into
employment agreements in January 1997 with Ron Delsener and Mitch Slater
(collectively, the "Delsener/Slater Employment Agreements"), pursuant to
which each of Messrs. Delsener and Slater serve as co-Presidents and co-Chief
Executive Officers of Delsener/Slater. The Delsener/Slater Employment
Agreements will continue until December 31, 2001 unless terminated earlier by
SFX Entertainment for Cause (as defined in the Delsener/Slater Employment
Agreements) or voluntarily by Messrs. Delsener or Slater.
Rights to Repurchase (Or to Offer to Repurchase) Delsener/Slater
Pursuant to the Delsener/Slater Employment Agreements, if, before January
2, 2000, SFX's Board of Directors approves a Change of Control (as defined in
the Delsener/Slater Employment Agreements to include a transaction in which a
third party becomes the beneficial owner of 50% or more of the voting power
of SFX), then Messrs. Delsener and Slater will have the right to purchase the
outstanding capital stock of Delsener/Slater for Fair Market Value (as
defined in the Delsener/Slater Employment Agreements).
Under the Delsener/Slater Employment Agreements, Messrs. Delsener and
Slater each also have a 60-day right to negotiate with SFX to purchase the
capital stock or assets of Delsener/Slater if, before January 2, 2000, SFX
proposes to (a) commence an initial public offering of Delsener/Slater, (b)
sell or transfer capital stock of Delsener/Slater, resulting in SFX no longer
controlling Delsener/Slater, or (c) sell or transfer substantially all of the
assets of Delsener/Slater.
Rights to Receive Additional Cash Payments
In the case of a Return Event (as defined in the Delsener/Slater
Employment Agreements), which may be deemed to include the Spin-Off, the SFX
Merger and related transactions, Messrs. Delsener and Slater will have the
right to receive a portion of the excess of the proceeds of the Return Event,
less a fixed amount determined in reference to the original purchase price
for Delsener/Slater. Management believes that no payment will accrue to
Messrs. Delsener or Slater pursuant to these rights with respect to the
Spin-Off, the SFX Merger and related transactions.
Additionally, the Delsener/Slater Employment Agreements require Messrs.
Delsener and Slater to receive annual bonuses determined with reference to
Delsener/Slater Profits (as defined in the Delsener/Slater Employment
Agreements) for the immediately preceding year. Delsener/Slater Profits for
each year are required to be allocated as follows:
o the first $4.0 million of Delsener/Slater Profits will be retained by
SFX;
o the next $300,000 of Delsener/Slater Profits must be paid to Messrs.
Delsener and Slater; and
o all Delsener/Slater Profits above $4.3 million must be shared 80% by SFX
and 20% by Messrs. Delsener and Slater.
Management believes that no bonus was earned in 1997 pursuant to this
arrangement. However, any bonuses that may accrue to Messrs. Delsener and
Slater in the future will not be available for SFX Entertainment's use to
service its debt or for other purposes.
Possible Amendments to Delsener/Slater Employment Agreements
Messrs. Delsener and Slater and SFX Entertainment are in the process of
negotiating amendments to the Delsener/Slater Employment Agreements to
reflect, among other things, the changes to SFX Entertainment's business as a
result of the Pending Acquisitions and the Spin-Off. Messrs. Delsener and
Slater have agreed in principle to waive any rights to repurchase (or to
offer to repurchase)
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Delsener/Slater, and any rights to receive a portion of the proceeds of a
Return Event, that they might otherwise have in connection with the SFX
Merger or the Spin-Off. However, there can be no assurance that Messrs.
Delsener and Slater will waive these rights on terms acceptable to SFX
Entertainment or that, if not so waived, neither Mr. Delsener nor Mr. Slater
will exercise these rights. These rights may continue to apply in certain
circumstances to transactions after, or unrelated to, the Spin-Off and the
SFX Merger. SFX Entertainment also expects, in connection with the foregoing,
to negotiate mutually satisfactory amendments to certain of Messrs.
Delsener's and Slater's compensation arrangements, including bonus and
profit-sharing provisions. See "Risk Factors--Control of Delsener/Slater."
ASSUMPTION OF EMPLOYMENT AGREEMENTS; CERTAIN CHANGE OF CONTROL PAYMENTS
Pursuant to the terms of the Distribution Agreement, at the time of the
consummation of the SFX Merger, SFX Entertainment will assume all obligations
under any employment agreement or arrangement (whether written or oral)
between SFX or any of its subsidiaries and any employee of SFX Entertainment
(including Messrs. Sillerman and Ferrel), other than obligations relating to
Messrs. Sillerman's and Ferrel's Change of Control Options and existing
rights to indemnification. These assumed obligations include the obligation
to pay to Messrs. Sillerman, Ferrel and Benson, after the termination of
their employment with SFX, cash payments aggregating approximately $3.3
million, $1.5 million and $0.2 million, respectively. These payments will
become due to Messrs. Sillerman, Ferrel and Benson after the termination of
their employment with SFX following a change of control of SFX, pursuant to
their employment agreements with SFX. In addition, SFX Entertainment's
assumed obligations will include the duty to indemnify Messrs. Sillerman and
Ferrel (to the extent permitted by law) for one-half of the cost of any
excise tax that may be assessed against them for any change-of-control
payments made to them by SFX in connection with the SFX Merger.
INDEMNIFICATION OF MR. SILLERMAN
On August 24, 1997, Mr. Sillerman entered into an agreement with SFX, SFX
Buyer and SFX Buyer Sub to waive his right to receive indemnification (except
to the extent covered by directors' and officers' insurance) from SFX, its
subsidiaries, SFX Buyer and SFX Buyer Sub for claims and damages arising out
of the SFX Merger and related transactions. It is anticipated that, in any
employment agreement with Mr. Sillerman, SFX Entertainment will agree to
indemnify Mr. Sillerman for these claims and damages to the fullest extent
permitted by applicable law.
POTENTIAL CONFLICTS OF INTEREST
Marquee is a publicly-traded company that, among other things, acts as
booking agent for tours and appearances for musicians and other entertainers.
Messrs. Sillerman and Tytel have an aggregate equity interest of
approximately 9.2% in Marquee; Mr. Sillerman is the chairman of its board of
directors, and Mr. Tytel is one of its directors. SFX Entertainment
anticipates that, from time to time, it will enter into transactions and
arrangements (particularly, booking arrangements) with Marquee and Marquee's
clients, and it may compete with Marquee for specific concert promotion
engagements. In addition, SFX Entertainment could in the future compete with
Marquee in the production or promotion of motor sports or other sporting
events. These transactions or arrangements will be subject to the approval of
the independent committees of SFX Entertainment and Marquee, except that
booking arrangements in the ordinary course of business will be subject to
periodic review, but not approval of each particular arrangement.
TSC, an entity controlled by Mr. Sillerman and in which Mr. Tytel also has
an equity interest, provides financial consulting services to Marquee and
Triathlon. TSC's services are provided by certain directors, officers and
employees of SFX, who are anticipated to become directors, officers and
employees of SFX Entertainment at the time of consummation of the SFX Merger,
and who are not separately compensated for their services by TSC. Messrs.
Sillerman and Tytel have substantial equity interests in Triathlon. In any
transaction, arrangement or competition with Marquee or Triathlon, Messrs.
Sillerman and Tytel are likely to have conflicts of interest between their
duties as officers and directors of SFX Entertainment, on the one hand, and
their duties as directors of Marquee and their interests in TSC, Marquee and
Triathlon, on the other hand.
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RELATIONSHIP BETWEEN HOWARD J. TYTEL AND BAKER & MCKENZIE
Howard J. Tytel, who is the Executive Vice President, General Counsel,
Secretary and a Director of SFX Entertainment, is "of counsel" to the law
firm of Baker & McKenzie. Mr. Tytel is also an executive vice president, the
general counsel and a director of SFX. Baker & McKenzie serves as counsel to
SFX, SFX Entertainment and certain other affiliates of Mr. Sillerman. Baker &
McKenzie compensates Mr. Tytel based, in part, on the fees it receives from
providing legal services to SFX, other affiliates of Mr. Sillerman and other
clients introduced to the firm by Mr. Tytel.
ARRANGEMENT BETWEEN ROBERT F.X. SILLERMAN AND HOWARD J. TYTEL
Since 1978, Messrs. Sillerman and Tytel have been jointly involved in
numerous business ventures, including SCMC, TSC, MMR, Triathlon, Marquee, SFX
and SFX Entertainment. In consideration for certain services provided by Mr.
Tytel in connection with those ventures, Mr. Tytel has received from Mr.
Sillerman either a minority equity interest in the businesses (with Mr.
Sillerman retaining the right to control the voting and disposition of Mr.
Tytel's interest) or cash fees in an amount mutually agreed upon. Although
Mr. Tytel has not been compensated directly by SFX (except for ordinary fees
paid to him in his capacity as a director), he receives compensation from TSC
and SCMC, companies controlled by Mr. Sillerman, as well as from Mr.
Sillerman personally, with respect to the services he provides to various
entities affiliated with Mr. Sillerman, including SFX. In 1997, these cash
fees aggregated approximately $5.0 million, a portion of which were paid from
the proceeds of payments made by SFX to Mr. Sillerman or entities controlled
by Mr. Sillerman and the proceeds from Mr. Sillerman's exercise for tax
purposes of options granted to him by SFX and subsequent sale of the
underlying shares. It is anticipated that, in connection with the
consummation of the SFX Merger and certain related transactions, Mr. Tytel
will receive shares of SFX Entertainment and cash fees from TSC, SCMC and Mr.
Sillerman personally in an amount to be determined in the future. See
"--Assumption of Employment Agreements; Certain Change of Control Payments."
It is also anticipated that Mr. Tytel will enter into an employment agreement
directly with SFX Entertainment that will be effective at the time of
consummation of the SFX Merger. See "--Employment Agreements."
TRIATHLON FEES
SCMC, a corporation controlled by Mr. Sillerman and in which Mr. Tytel has
an equity interest, has an agreement to provide consulting and marketing
services to Triathlon, a publicly-traded company in which Mr. Sillerman is a
significant stockholder. Under the terms of the agreement, SCMC has agreed to
provide consulting and marketing services to Triathlon until June 1, 2005 for
an annual fee of $500,000, together with a refundable advance of $500,000 per
year against fees earned in respect of transactional investment banking
services. Fees paid by Triathlon for the year ended December 31, 1996 and for
the nine months ended September 30, 1997 were $3,000,000 and $1,693,000,
respectively. These fees will vary (above the minimum annual fee of $500,000)
depending on the level of acquisition and financing activities of Triathlon.
SCMC previously assigned its rights to receive fees payable under this
agreement to SFX. Pursuant to the terms of the Distribution Agreement, SFX
will assign its rights to receive these fees to SFX Entertainment. Triathlon
has previously announced that it is exploring ways of maximizing stockholder
value, including possible sale to a third party. If Triathlon were acquired
by a third party, the agreement might not continue for the remainder of its
term.
RELATIONSHIPS AND TRANSACTIONS WITH SFX
SFX has guaranteed certain payments in connection with the PACE
Acquisition, the Contemporary Acquisition and the Network Acquisition. See
"Agreements Related to the Pending Acquisitions."
Certain members of management of SFX (who are also members of SFX
Entertainment's management) have entered into a number of additional related
party agreements and transactions in connection with the SFX Merger and
certain related transactions. The section entitled "Proposal 1: The
Merger--Interests of Certain Persons in the Merger" in the attached Proxy
Statement describes these agreements and transactions.
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SHARES ELIGIBLE FOR FUTURE SALE
Prior to the Spin-Off, there has not been any public market for SFX
Entertainment Class A Common Stock, and there can be no assurance that a
significant public market for SFX Entertainment Class A Common Stock will
develop or continue after the Spin-Off. Sales of substantial amounts of SFX
Entertainment Class A Common Stock in the public market after the Spin-Off,
or the possibility that these sales may occur, could adversely affect market
prices for SFX Entertainment Class A Common Stock or the future ability of
SFX Entertainment to raise capital through an offering of equity securities.
After the Spin-Off, Pending Acquisitions and other transactions described
in this Prospectus, approximately 18.7 million shares of SFX Entertainment
Class A Common Stock and approximately 1.7 million shares of SFX
Entertainment Class B Common Stock will be outstanding. See "The Spin-Off,"
"Agreements Related to the Pending Acquisitions" and "Management." Shares
distributed in the Spin-Off will be freely tradeable in the public market
without restriction under the Securities Act, unless the shares are held by
"affiliates" of SFX Entertainment (as that term is defined in Rule 144 under
the Securities Act). Of the shares of SFX Entertainment Class A Common Stock
to be issued in conjunction with the Spin-Off, approximately 5,913,713 shares
will be issued to affiliates of SFX Entertainment. These shares held by
affiliates will be eligible for sale subject to compliance with the
provisions of Rule 144 or pursuant to an effective registration statement
filed with the SEC.
Under Rule 144, as recently amended, shares held by affiliates that are
not "restricted securities" may be sold in "brokers' transactions" or to
market makers, in a number of shares no larger within any three-month period
than the greater of (a) one percent of the number of shares of SFX
Entertainment Class A Common Stock then outstanding (approximately 187,000
shares at the time of completion of the Spin-Off, Pending Acquisitions and
other issuances described in this Prospectus) or (b) generally, the average
weekly trading volume in the SFX Entertainment Class A Common Stock during
the four calendar weeks preceding the required filing of a Form 144 with
respect to the sale. Sales under Rule 144 are also subject to certain
requirements pertaining to the availability of current public information
concerning SFX Entertainment. Under Rule 144(k), a person who is not deemed
to have been an affiliate of SFX Entertainment at any time during the 90 days
preceding a sale, and who has beneficially owned the shares proposed to be
sold for at least two years (including the holder of any prior owner other
than an affiliate from whom the shares were purchased), is entitled to sell
the shares without having to comply with the manner of sale, public
information, volume limitation or notice provisions of Rule 144. As an
alternative to sales under Rule 144, shares of SFX Entertainment Class A
Common Stock may be sold without any volume limitations pursuant to an
effective registration statement filed with the SEC.
The board of directors of SFX Entertainment has approved the grant of up
to 793,633 shares of SFX Entertainment Class A Common Stock to holders as of
the Spin-Off Record Date of stock options or SARs of SFX, whether or not
vested. See "Certain Relationships and Related Transactions--Issuance of
Stock to Holders of SFX's Options and SARs." These shares will be "restricted
securities" under Rule 144.
The aggregate of up to 4,216,680 shares of SFX Entertainment Class A
Common Stock issuable in connection with the Pending Acquisitions will be
"restricted securities" under Rule 144 of the Securities Act when issued, but
SFX Entertainment has obligations to register all or a portion of these
shares with the SEC for resale. See "Agreements Related to the Pending
Acquisitions."
In addition, SFX Entertainment anticipates granting options to purchase an
aggregate of approximately 245,000 shares of SFX Entertainment Class A Common
Stock, in conjunction with entering into employment agreements with SFX
Entertainment's executive officers. These options will vest over five years
and will have an exercise price of $5.50 per share. See
"Management--Employment Agreements and Arrangements with Certain Officers and
Directors."
SFX Entertainment has adopted a stock option plan providing for the
issuance of options to purchase up to 2,000,000 shares of SFX Entertainment
Class A Common Stock. No options have been granted to date under the plan.
SFX Entertainment anticipates that in the future it will file a registration
statement with the SEC to register the shares issuable upon exercise of
options granted under the plan.
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Furthermore, approximately 1.7 million shares of SFX Entertainment Class
B Common Stock will be outstanding after the Spin-Off and anticipated stock
grants, which may be converted at any time into shares of SFX Entertainment
Class A Common Stock.
DESCRIPTION OF CAPITAL STOCK
At the time of the Spin-Off, the authorized capital stock of SFX
Entertainment will consist of 110,000,000 shares of common stock (comprised
of 100,000,000 shares of SFX Entertainment Class A Common Stock and
10,000,000 shares of SFX Entertainment Class B Common Stock), par value $.01
per share, and 25,000,000 shares of preferred stock, par value $.01 per
share. The following descriptions of the common stock and the preferred stock
are summaries, and are qualified in their entirety by reference to the
detailed provisions of the SFX Entertainment Certificate (which is attached
as Annex E to the accompanying Proxy Statement) and the SFX Entertainment
By-laws (which were filed as an exhibit to the SFX Entertainment Registration
Statement). See "Additional Information."
COMMON STOCK
Shares Outstanding
As of February 13, 1998, there are issued and outstanding 1,000 shares of
SFX Entertainment Class A Common Stock and 1,000 shares of SFX Entertainment
Class B Common Stock. All of these shares are validly issued, fully paid and
nonassessable.
After the consummation of the Spin-Off, Pending Acquisitions and other
issuances described in this Prospectus, it is anticipated that there will be
issued and outstanding approximately 18,700,000 shares of SFX Entertainment
Class A Common Stock and 1,697,037 shares of SFX Entertainment Class B Common
Stock. All of these shares will be validly issued, fully paid and
nonassessable.
Dividends
Although no dividends are anticipated to be paid on the SFX Entertainment
Common Stock in the foreseeable future, holders of common stock are entitled
to receive any dividends (payable in cash, stock, or otherwise) that are
declared thereon by the Board at any time and from time to time out of funds
legally available for that purpose. No dividend may be declared or paid in
cash or property on either class of common stock, unless the same dividend is
simultaneously declared or paid on the other class of common stock. If
dividends are declared that are payable in shares of SFX Entertainment Common
Stock, then the stock dividends will be payable at the same rate on each
class of common stock and will be payable only in shares of SFX Entertainment
Class A Common Stock to holders of SFX Entertainment Class A Common Stock and
in shares of SFX Entertainment Class B Common Stock to holders of SFX
Entertainment Class B Common Stock. If dividends are declared that are
payable in shares of common stock of another corporation, then the shares
paid may differ as to voting rights to the extent that voting rights differ
among the SFX Entertainment Class A Common Stock and the SFX Entertainment
Class B Common Stock.
Voting Rights
Holders of SFX Entertainment Class A Common Stock and SFX Entertainment
Class B Common Stock vote as a single class on all matters submitted to a
vote of the stockholders, with each share of SFX Entertainment Class A Common
Stock entitled to one vote and each share of SFX Entertainment Class B Common
Stock entitled to ten votes, except (a) for the election of directors, (b)
with respect to any "going private" transaction between SFX Entertainment and
Robert F.X. Sillerman or any of his affiliates and (c) as otherwise provided
by law.
In the election of directors, the holders of shares of SFX Entertainment
Class A Common Stock, voting as a separate class, are entitled to elect two
sevenths of SFX Entertainment's directors (each, a "Class A Director"). Any
person nominated by the Board for election by the holders of SFX
Entertainment Class A Common Stock as a director of SFX Entertainment must be
qualified to be an
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"Independent Director" (as defined in the SFX Entertainment Certificate). If
a Class A Director dies, is removed or resigns before his term expires, then
that director's vacancy on the Board may be filled by any person appointed by
a majority of the directors then in office, although less than a quorum. Any
person appointed to fill the vacancy must, however, be qualified to be an
Independent Director. The holders of SFX Entertainment Class A Common Stock
and SFX Entertainment Class B Common Stock, voting as a single class, with
each share of SFX Entertainment Class A Common Stock entitled to one vote and
each share of SFX Entertainment Class B Common Stock entitled to ten votes,
are entitled to elect the remaining directors. The holders of SFX
Entertainment Common Stock are not entitled to cumulative votes in the
election of directors. Mr. Sillerman has agreed to abstain, and has agreed to
cause each of his affiliates to abstain, from voting in any election of Class
A Directors.
The initial Class A Directors are Messrs. Dugan, Kramer and O'Grady. If
the SFX Merger Agreement is terminated, each of these individuals has
indicated that he will promptly resign from his position as a director of SFX
Entertainment, and the board of directors of SFX Entertainment will appoint
three different Class A Directors, to serve until the next annual meeting of
the stockholders of SFX Entertainment.
The holders of the SFX Entertainment Class A Common Stock and SFX
Entertainment Class B Common Stock vote as a single class with respect to any
proposed "going private" transaction with Mr. Sillerman or any of his
affiliates, with each share of SFX Entertainment Class A Common Stock and SFX
Entertainment Class B Common Stock entitled to one vote.
Under Delaware law, the affirmative vote of the holders of a majority of
the outstanding shares of any class of common stock is required to approve,
among other things, a change in the designations, preferences or limitations
of that class of common stock.
Liquidation Rights
Upon liquidation, dissolution or winding-up of SFX Entertainment, after
distribution in full of any preferential amounts required to be distributed
to holders of preferred stock, the holders of SFX Entertainment Class A
Common Stock will be entitled to share ratably with the holders of SFX
Entertainment Class B Common Stock all assets available for distribution
after payment in full of creditors.
Conversion
Each share of SFX Entertainment Class B Common Stock is convertible at any
time, at the holder's option, into one share of SFX Entertainment Class A
Common Stock. Each share of SFX Entertainment Class B Common Stock converts
automatically into one share of SFX Entertainment Class A Common Stock (a) at
the time of its sale or transfer to a party not affiliated with SFX
Entertainment or (b) in the case of shares held by Mr. Sillerman or any of
his affiliates, at the time of Mr. Sillerman's death.
Other Provisions
The holders of SFX Entertainment Common Stock are not entitled to
preemptive or subscription rights. In any merger, consolidation or business
combination, the consideration to be received per share by holders of SFX
Entertainment Class A Common Stock must be identical to that received by
holders of SFX Entertainment Class B Common Stock, except that in any such
transaction in which shares of common stock are to be distributed, the
distributed shares may differ as to voting rights to the extent that voting
rights now differ among the SFX Entertainment Class A Common Stock and the
SFX Entertainment Class B Common Stock. SFX Entertainment may not subdivide
(by any stock split, reclassification, stock dividend, recapitalization, or
otherwise) or combine the outstanding shares of either class of SFX
Entertainment Common Stock unless the outstanding shares of both classes are
proportionately subdivided or combined.
Transfer Agent and Registrar
The transfer agent and registrar for the SFX Entertainment Class A Common
Stock and the SFX Entertainment Class B Common Stock is Chase Mellon
Shareholder Services, L.L.C.
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PREFERRED STOCK
As of February 13, 1998, there are no shares of SFX Entertainment's
preferred stock, par value $.01 per share, outstanding and there are 1,000
shares of preferred stock authorized. After the consummation of the Spin-Off
and the Pending Acquisitions, it is anticipated that SFX Entertainment will
have 25,000,000 shares of preferred stock authorized, with no shares of
preferred stock issued and outstanding. However, SFX Entertainment may, under
certain circumstances, be required to issue shares of preferred stock in
conjunction with the Contemporary Acquisition. See "Agreements Related to the
Pending Acquisitions--Contemporary Acquisition."
The Board has the authority to issue this preferred stock in one or more
series and to fix the number of shares and the relative designations and
powers, preferences, and rights, and qualifications, limitations, and
restrictions thereof, without further vote or action by the stockholders. If
shares of preferred stock with voting rights are issued, the voting rights of
the holders of SFX Entertainment Common Stock could be diluted by increasing
the number of outstanding shares having voting rights, and by creating class
or series voting rights. If the Board authorizes the issuance of shares of
preferred stock with conversion rights, the number of shares of common stock
outstanding could potentially be increased by up to the authorized amount.
Issuances of preferred stock could, under certain circumstances, have the
effect of delaying or preventing a change in control of SFX Entertainment and
may adversely affect the rights of holders of SFX Entertainment Common Stock.
Also, the preferred stock could have preferences over the common stock (and
other series of preferred stock) with respect to dividend and liquidation
rights. There are no shares of preferred stock outstanding, and SFX
Entertainment currently has no plans to issue any preferred stock, except in
connection with the Contemporary Acquisition.
WARRANTS AND OTHER SECURITIES OF SFX
IPO Warrants
MMR, a company previously controlled by Mr. Sillerman, granted the IPO
Warrants to the underwriters of its initial public offering in July 1993.
When SFX acquired MMR, the IPO Warrants converted into warrants to purchase
SFX's Class A common stock. Pursuant to the terms of the IPO Warrants, their
holders will be entitled to receive, upon exercise after the Spin-Off Record
Date, the number of shares of SFX Entertainment Class A Common Stock that
they would be entitled to receive if the IPO Warrants were exercised before
the Spin-Off Record Date. As of February 9, 1998, there are outstanding IPO
Warrants with the right to purchase an aggregate of 9,858 shares of SFX's
Class A common stock at an aggregate price per share of $22.36, which will
require the transfer of 9,858 shares of SFX Entertainment Class A Common
Stock into escrow at the time of the Spin-Off. See "The Spin-Off--Manner of
Effecting the Spin-Off."
SCMC Warrants
Prior to April 1996, SCMC, a corporation controlled by Mr. Sillerman,
provided advisory services to SFX from time to time with respect to specific
transactions. In April 1996, SFX and SCMC agreed to terminate the arrangement
pursuant to which SFX compensated SCMC for financial consulting services.
Pursuant to the termination agreement, among other things, SFX issued to SCMC
the SCMC Warrants to purchase up to 600,000 shares of SFX's Class A common
stock at an exercise price, subject to adjustment, of $33.75 per share (the
market price at the time of the termination agreement). A committee of SFX's
independent directors approved the termination transaction. A
nationally-recognized investment banking firm provided to the independent
directors its written opinion that, as of the date the termination agreement
was entered into, the consideration offered by SFX to SCMC pursuant to the
agreement was fair, from a financial point of view, to SFX. The SCMC Warrants
were subsequently amended to provide for the receipt of an aggregate of
600,000 shares of SFX Entertainment Class A Common Stock upon exercise. See
"Certain Relationships and Related Transactions--SFX Entertainment Common
Stock to Be Received in the Spin-Off." As of February 13, 1998, all of the
SCMC Warrants remain outstanding, and therefore 600,000 shares of SFX
Entertainment Class A Common Stock will be transferred into escrow at the
time of the Spin-Off. See "The Spin-Off--Manner of Effecting the Spin-Off."
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Director Deferred Stock Ownership Plan
SFX has adopted a director deferred stock ownership plan, in which Messrs.
Dugan, Kramer and O'Grady are the sole participants. Under this plan, each
participant receives an annual fee of $20,000, payable in shares of SFX's
Class A common stock to a bookkeeping account maintained for that person. As
of the date of this Prospectus, 922 shares of SFX's Class A common stock had
been credited to each participant's account. The plan provides that, if there
is a change in the capitalization of SFX (such as the Spin-Off), an
appropriate adjustment will be made to the number and kind of shares held in
the directors' accounts. On January 15, 1998, the committee overseeing the
plan determined that the adjustment occasioned by the Spin-Off would consist
of the issuance to each participant of one share of SFX Entertainment Class A
common stock per share of SFX's Class A common stock held in that
participant's account on the Spin-Off Record Date.
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DESCRIPTION OF INDEBTEDNESS
NOTES
The following is a summary of the material terms contained in the
Indenture. This summary is not complete. It is subject to the terms of the
Indenture, which was filed as an exhibit to the SFX Entertainment
Registration Statement. See "Additional Information."
On February 11, 1998, SFX Entertainment consummated the private placement
of $350.0 million in aggregate principal amount of 9 1/8% Senior Subordinated
Notes due 2008. The Notes bear interest at an annual interest rate of 9 1/8%,
and interest payments will be due semi-annually, commencing August 1, 1998.
The Notes will mature on February 1, 2008. The Proposed Notes do not contain
any sinking fund provision.
Ranking
The Notes are general unsecured obligations of SFX Entertainment,
subordinate in right to all Senior Debt (as defined in the Indenture),
whether outstanding on the date of the Indenture or thereafter incurred, of
SFX Entertainment and senior in right of payment to or pari passu with all
other indebtedness of SFX Entertainment. On a pro forma basis giving effect
to the Financing, the Pending Acquisitions, the Spin-Off and the SFX Merger,
SFX Entertainment would have had approximately $498.8 million of indebtedness
outstanding, of which $148.8 million would have been Senior Debt (excluding
letters of credit) at September 30, 1997. See "Capitalization."
Subsidiary Guarantees
SFX Entertainment's payment obligations under the Notes are jointly and
severally guaranteed on a senior subordinated basis by all of its current and
future domestic subsidiaries, with certain specified exceptions.
Optional Redemption
Except as noted below, the Notes are not redeemable at SFX Entertainment's
option before February 1, 2003. Thereafter, the Notes will be subject to
redemption at any time at the option of SFX Entertainment, in whole or in
part, at specified redemption prices plus accrued and unpaid interest and
Liquidated Damages (as defined in the Indenture), if any, thereon to the
applicable redemption date. In addition, at any time prior to February 1,
2001, SFX Entertainment may on any one or more occasions redeem up to 35.0%
of the original aggregate principal amount of Notes at a redemption price of
109.125% of the principal amount thereof, plus accrued and unpaid interest
and Liquidated Damages, if any, thereon to the date of redemption, with the
net proceeds of one or more offerings of common equity of SFX Entertainment.
However, at least 65.0% of the original aggregate principal amount of Notes
must remain outstanding immediately after each occurrence of redemption.
Change of Control
After the occurrence of a Change of Control (as defined in the Indenture),
SFX Entertainment will be required to make an offer to repurchase the Notes
at a price equal to 101% of their principal amount, together with accrued and
unpaid interest and Liquidated Damages, if any, to the date of purchase.
Certain Covenants
The Indenture contains certain covenants that, among other things, limit
the ability of SFX Entertainment and its subsidiaries to (a) incur additional
Indebtedness (as defined in the Indenture), (b) issue preferred stock, (c)
pay dividends, (d) make certain other restricted payments, (e) create certain
Liens (as defined in the Indenture), (f) enter into certain transactions with
affiliates, (g) sell assets of SFX Entertainment or its Restricted
Subsidiaries (as defined in the Indenture), (h) issue or sell Equity
Interests (as defined in the Indenture) of SFX Entertainment's Restricted
Subsidiaries or (i) enter into certain mergers and consolidations. In
addition, under certain circumstances, SFX Entertainment will be required to
offer to purchase Notes at a price equal to 100.0% of the principal amount
thereof, plus accrued and unpaid interest and Liquidated Damages, if any, to
the date of purchase, with the proceeds of certain Asset Sales (as defined in
the Indenture).
D-136
<PAGE>
Exchange Offer; Registration Rights
Pursuant to a registration rights agreement among SFX Entertainment and
the initial purchasers of the Notes, SFX Entertainment must use its best
efforts to file a registration statement with the SEC with respect to an
offer to exchange the Notes for a new issue of debt securities registered
under the Securities Act, with terms identical in all material respects to
those of the Notes. If (a) this exchange offer is not permitted by applicable
law or (b) any holder of Transfer Restricted Securities (as defined in the
Indenture) notifies SFX Entertainment that (i) it is prohibited by law or SEC
policy from participating in the exchange offer, (ii) it may not resell the
new issue of debt securities to be acquired by it in the exchange offer to
the public without delivering a prospectus, and the prospectus contained in
the registration statement is not appropriate or available for those resales,
or (iii) it is a broker-dealer and holds Notes acquired directly from SFX
Entertainment or an affiliate of SFX Entertainment, then SFX Entertainment
will be required to provide a shelf registration statement to cover resales
of the Notes by their holders. If SFX Entertainment fails to satisfy these
registration obligations, it will be required to pay Liquidated Damages to
the holders of Notes under certain circumstances.
Transfer Restrictions
The Notes have not been registered under the Securities Act, and may not
be offered or sold except pursuant to an exemption from (or in a transaction
not subject to) the registration requirements of the Securities Act.
PROPOSED CREDIT FACILITY
The following is a summary of the material terms expected to be contained
in the Proposed Credit Facility. This summary is not complete. It is subject
to, and qualified in its entirety by reference to, the Commitment Letter (as
defined below), which has been filed as an exhibit to the SFX Entertainment
Registration Statement. There can be no assurance that SFX Entertainment will
be able to enter into the Proposed Credit Facility on the terms described
herein, or at all. See "Additional Information."
SFX Entertainment has received a commitment letter (the "Commitment
Letter") from The Bank of New York ("BNY") to act as the Administrative Agent
for--and from BNY Capital Markets, Inc., Lehman Brothers Inc. and Goldman
Sachs Credit Partners L.P. to act as the Arrangers for--$300.0 million of
senior secured credit facilities. The Proposed Credit Facility is to be
comprised of (a) the Proposed Term Loan, a $150.0 million eight-year term
loan, and (b) the Proposed Revolver, a $150.0 million seven-year reducing
revolving credit facility. Subsequent to, and conditioned upon, the
consummation of the PACE Acquisition, SFX Entertainment anticipates the
execution and delivery of the definitive documents governing the Proposed
Credit Facility (the "Credit Facility Closing Date"). SFX Entertainment
currently anticipates that, on the Credit Facility Closing Date, the Proposed
Term Loan will be fully funded and that a portion of the Proposed Revolver
will be drawn. The following discussion summarizes the material terms and
conditions of the Commitment Letter; it is subject to the final provisions of
the definitive documents governing the Proposed Credit Facility.
General
The Proposed Credit Facility is expected to provide for borrowings in a
principal amount of up to $300.0 million, subject to certain covenants and
conditions. Borrowings under the Proposed Credit Facility may be used by SFX
Entertainment to finance Permitted Acquisitions (as defined in the Commitment
Letter), for working capital and for general corporate purposes. Up to $20.0
million of the Proposed Revolver will be available for the issuance of
standby letters of credit. Each Permitted Acquisition must be in the same
line of business (or other business incidental or related thereto) as SFX
Entertainment and, with the exception of the Pending Acquisitions, must have
the prior written consent of the Required Lenders (as defined in the
Commitment Letter) if the cost of the Permitted Acquisition exceeds $50.0
million.
Interest Rates; Fees
Loans outstanding under the Proposed Credit Facility will bear interest,
at SFX Entertainment's option, at certain spreads over LIBOR or the greater
of the Federal Funds rate plus 0.50% or BNY's
D-137
<PAGE>
prime rate. The interest rate spreads on the Proposed Term Loan and the
Proposed Revolver will be adjusted based on SFX Entertainment's Total
Leverage Ratio (as defined below). SFX Entertainment will pay an annual
commitment fee on unused availability under the Proposed Revolver of 0.50% if
SFX Entertainment's Total Leverage Ratio is greater than or equal to 4.0 to
1.0, and 0.375% if that ratio is less than 4.0 to 1.0. SFX Entertainment will
also pay an annual letter of credit fee equal to the Applicable LIBOR Margin
(as defined in the Commitment Letter) for the Proposed Revolver then in
effect.
Mandatory Prepayments and Commitment Reductions
Commitments to lend under the Proposed Revolver will be reduced in equal
quarterly installments commencing March 31, 2000 in annual percentages of the
borrowings under the Proposed Revolver as of December 31, 1999 according to
the following schedule: by 10.0% in 2000; by 15.0% in 2001; by 20.0% in 2002;
by 25.0% in 2003; by 25.0% in 2004; and by the remaining 5.0% upon final
maturity. The Proposed Term Loan will be reduced by $1.0 million per year
until final maturity, at which point the remaining balance will be due and
payable. Amounts outstanding under the Proposed Credit Facility will be
subject to, among others, the following mandatory prepayments, which will
also permanently reduce commitments: (a) 100.0% of the net cash proceeds
received from permitted Asset Sales (as defined in the Commitment Letter),
subject to standard reinvestment provisions; (b) 50.0% of Excess Cash Flow
(as defined in the Commitment Letter), calculated for each fiscal year
beginning with the year ending December 31, 2000; and (c) 50.0% of net
proceeds of any equity issuance, to the extent that the Total Leverage Ratio
is greater than or equal to 5.0 to 1.0.
Collateral and Guarantees
Each of SFX Entertainment's present and future direct and indirect
domestic subsidiaries (the "Senior Guarantors") must provide guarantees under
the Proposed Credit Facility. In order to secure its obligations under the
Proposed Credit Facility, SFX Entertainment and each of the Senior Guarantors
must also pledge to the lenders a continuing security interest in all of
their tangible assets (subject to certain non-material exceptions), all of
the capital stock of each Senior Guarantor and not less than 66-2/3% of the
capital stock of SFX Entertainment's present and future direct and indirect
foreign subsidiaries.
Conditions Precedent; Covenants
The lenders' obligations to extend credit under the Proposed Credit
Facility will be subject to the satisfaction of certain conditions precedent,
including:
o the contribution by SFX to SFX Entertainment of all of its existing
concert promotion and live entertainment businesses;
o the acquisition by SFX Entertainment or any Senior Guarantor of not
less than 85.0% of the capital stock of PACE on terms acceptable to the
Administrative Agent and the refinancing of all outstanding debt of
PACE; and
o the execution of definitive purchase agreements on terms acceptable to
the Administrative Agent for the purchase of BGP, Concert/Southern,
Network, Contemporary, 100.0% of the ownership interests in Pavilion
Partners and 100.0% of the ownership of Riverport Amphitheater.
The Proposed Credit Facility may contain various covenants that, subject to
certain specified exceptions, will restrict SFX Entertainment's and its
subsidiaries' ability to:
o incur additional indebtedness and other obligations;
o grant liens;
o consummate mergers, acquisitions, investments and asset dispositions;
o declare or pay Restricted Payments (as defined in the Commitment
Letter);
o declare or pay dividends, distributions and other prepayments or
repurchases of other indebtedness;
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<PAGE>
o amend certain agreements, including SFX Entertainment's organizational
documents, the Proposed Notes and the Proposed Indenture;
o enter into partnerships and joint ventures;
o engage in transactions with affiliates;
o form subsidiaries; and
o change lines of business.
The Proposed Credit Facility will also include covenants relating to
compliance with ERISA, environmental and other laws, payment of taxes,
maintenance of corporate existence and rights, maintenance of insurance and
financial reporting. In addition, the Proposed Credit Facility will require
SFX Entertainment to maintain compliance with certain specified financial
covenants relating to:
o a maximum ratio (the "Total Leverage Ratio") of (a) all outstanding
amounts under the Proposed Credit Facility and any other borrowed money
and similar type indebtedness (including capital lease obligations) of
SFX Entertainment and its subsidiaries, on a consolidated basis ("Total
Debt"), less cash and cash equivalents in excess of $5.0 million, to
(b) for the most recently completed four fiscal quarters, (i) revenues
less (ii) expenses (excluding depreciation, amortization other than
capitalized pre-production costs, interest expense and income tax
expense), plus (iii) non-recurring expense items or non-cash expense
items mutually agreed upon by SFX Entertainment and the Required
Lenders, plus (iv) the lesser of (A) the equity income from
Unconsolidated Investments (as defined in the Commitment Letter) and
(B) cash dividends and other cash distributions from Unconsolidated
Investments (however, the total amount determined under this clause
(iv) will not exceed 10.0% of Operating Cash Flow before overhead) (the
amount referred to in this clause (b), "Operating Cash Flow");
Operating Cash Flow is to be adjusted to reflect acquisitions and
dispositions consummated during the calculation period as if those
transactions were consummated at the beginning of the period;
o a maximum ratio (the "Senior Leverage Ratio") of (a) Total Debt less
the principal amount outstanding under the Proposed Notes to, less cash
and cash equivalents in excess of $5.0 million, to (b) Operating Cash
Flow;
o a minimum ratio (the "Pro Forma Interest Expense Ratio") of (a)
Operating Cash Flow to (b) the sum of all interest expense and
commitment fees calculated for the four fiscal quarters following the
calculation quarter, giving effect to the Total Debt outstanding and
the interest rates in effect as of the date of the determination and
the commitment reductions and debt amortization scheduled during that
period;
o a minimum ratio (the "Debt Service Ratio") of (a) Operating Cash Flow
to (b) the sum of (i) the sum of all interest expense and commitment
fees calculated for the four fiscal quarters following the calculation
quarter, giving effect to the Total Debt outstanding and the interest
rates in effect as of the date of the determination and the commitment
reductions and debt amortization scheduled during that period and (ii)
the scheduled current maturities of Total Debt and current commitment
reductions with respect to the Proposed Revolver, each measured for the
four fiscal quarters immediately succeeding the date of determination;
and
o a minimum ratio (the "Fixed Charges Ratio") of (a) the sum of Operating
Cash Flow (before any adjustments to reflect acquisitions, sales and
exchanges) to (b) the sum of, for the four most recently completed
fiscal quarters, the following paid during that period: (i) Interest
Expense (as defined in the Commitment Letter) plus the scheduled
maturities of Total Debt and current commitment reductions with respect
to the Proposed Revolver, (ii) cash income taxes, (iii) capital
expenditures (excluding certain special capital expenditures to be
mutually agreed upon) and (iv) Unconsolidated Investments (as defined
in the Commitment Letter).
It is anticipated that the Total Leverage Ratio may not at any time exceed
(a) 6.75x from the Credit Facility Closing Date to September 29, 1998, (b)
6.50x from September 30, 1998 to December 30, 1998,
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<PAGE>
(c) 6.25x from December 31, 1998 to June 29, 1999, (d) 5.75x from June 30,
1999 to December 30, 1999, (e) 5.25x from December 31, 1999 to December 30,
2000, (f) 4.50x from December 31, 2000 to December 30, 2001 and (g) 3.75x on
December 31, 2001 and thereafter.
The Senior Leverage Ratio may not at any time exceed (a) 3.75x from the
Credit Facility Closing Date to September 29, 1998, (b) 3.50x from September
30, 1998 to December 30, 1998, (c), 3.25x from December 31, 1998 to December
30, 1999, (d) 3.00x from December 31, 1999 to December 30, 2000 and (e) 2.50x
on December 31, 2000 and thereafter.
The Pro Forma Interest Expense Ratio may not at the end of any fiscal
quarter be less than (a) 1.50x from the Credit Facility Closing Date to
December 31, 1998 and (b) 2.00x on January 1, 1999 and thereafter.
The Pro Forma Debt Service Ratio may not at any fiscal quarter end be less
than (a) 1.25x from the Credit Facility Closing Date to December 31, 1998 and
(b) 1.50x on January 1, 1999 and thereafter.
The Fixed Charges Ratio may not at any quarter end be less than 1.00x.
The Proposed Credit Facility will also prohibit prepayment or defeasance
of the Notes.
Events of Default
The Proposed Credit Facility will contain customary events of default,
including payment defaults, the occurrence of a Change of Control (as defined
in the Commitment Letter), the invalidity of guarantees or security documents
under the Proposed Credit Facility, any Material Adverse Change (as defined
in the Commitment Letter), breach of any representation or warranty under the
Proposed Credit Facility and any cross-default to other indebtedness of SFX
Entertainment and its subsidiaries. The occurrence of any event of default
could result in termination of the commitments to extend credit under the
Proposed Credit Facility and foreclosure on the collateral securing those
obligations, each of which, individually, could have a material adverse
effect on SFX Entertainment.
OTHER DEBT
SFX Entertainment also has approximately $16.5 million of long-term debt
outstanding, which was incurred primarily in connection with its recently
completed acquisitions. See Note 5 to the notes to the Consolidated Financial
Statements of SFX Entertainment.
D-140
<PAGE>
ADDITIONAL INFORMATION
By the time of the Spin-Off, SFX Entertainment will be a reporting company
under the Exchange Act. SFX Entertainment has filed the SFX Entertainment
Registration Statement on Form S-1 under the Securities Act with the SEC with
respect to the SFX Entertainment Common Stock described in this Prospectus.
This Prospectus, which is part of the SFX Entertainment Registration
Statement, does not contain all of the information set forth in the SFX
Entertainment Registration Statement and the exhibits thereto. For further
information with respect to SFX Entertainment and its common stock offered
hereby, reference is hereby made to the SFX Entertainment Registration
Statement (No. 333-43287) and its exhibits, which may be inspected without
charge at the office of the SEC at 450 Fifth Street, NW, Washington, D.C.
20549 and at the regional offices of the SEC located at Seven World Trade
Center, 13th Floor, New York, New York 10048 and at 500 West Madison (Suite
1400), Chicago, Illinois 60661. Copies of this material may also be obtained
at prescribed rates from the Public Reference Section of the SEC at 450 Fifth
Street, N.W., Washington, D.C. 20549. The SEC maintains a Web site at
http://www.sec.gov that contains reports, proxy and information statements
and other information regarding issuers that file electronically with the
SEC. Statements contained in this Prospectus as to the contents of any
contract or other document referred to are not necessarily complete; in each
instance, reference is made to the copy of the contract or document filed as
an exhibit to the SFX Entertainment Registration Statement, and each such
statement is qualified in all respects by this reference.
In addition, SFX is a reporting company under the Exchange Act and
therefore files reports, proxy statements and other materials with the SEC.
SFX's reports, proxy statements and other filed materials are available as
discussed above for SFX Entertainment.
LEGAL MATTERS
The validity of the shares of SFX Entertainment Common Stock to be issued
in connection with the Spin-Off will be passed upon for SFX Entertainment by
Baker & McKenzie, New York, New York. Howard J. Tytel, who is an executive
officer and director of and is anticipated after the Spin-Off to have an
equity interest in SFX Entertainment, and who has an equity interest in SFX,
TSC and SCMC and is an executive officer and director of those entities, is
Of Counsel to Baker & McKenzie. See "Management," "Principal Stockholders of
SFX Entertainment" and "Certain Relationships and Related Transactions."
EXPERTS
The consolidated financial statements of SFX Entertainment, Inc. and
Subsidiaries as of September 30, 1997, and for the nine months ended
September 30, 1997; the combined financial statements of Delsener/Slater
Enterprises, Ltd. and Affiliated Companies (Predecessor) as of December 31,
1995 and 1996, and for the years ended December 31, 1994, 1995 and 1996; the
consolidated financial statements of PACE Entertainment Corporation and
Subsidiaries as of September 30, 1996, and for the years ended September 30,
1995 and 1996; the combined financial statements of Contemporary Group as of
September 30, 1996 and December 31, 1996, and for the nine months ended
September 30, 1997 and year ended December 31, 1996; the combined financial
statements of SJS Entertainment Corporation and Affiliated Company as of
December 31, 1996, and for the year ended December 31, 1996; the combined
financial statements of The Album Network, Inc. and Affiliated Companies as
of September 30, 1996 and 1997, and for the years ended September 30, 1996
and 1997; the consolidated financial statements of BG Presents, Inc. and
Subsidiaries as of January 31, 1996 and 1997 and for the years ended January
31, 1996 and 1997; and the combined financial statements of Concert/Southern
Promotions and Affiliated Companies as of September 30, 1997 and for the nine
months ended September 30, 1997, included in the Prospectus and Registration
Statement of SFX Entertainment have been audited by Ernst & Young LLP,
independent auditors, as set forth in their reports thereon appearing
elsewhere herein, and are included in reliance on such reports given on the
authority of such firm as experts in accounting and auditing.
Arthur Andersen LLP, independent public accountants, audited the following
financial statements (as set forth in their reports thereon appearing
elsewhere herein and in the SFX Entertainment
D-141
<PAGE>
Registration Statement), each appearing in this Prospectus and the SFX
Entertainment Registration Statement: the combined financial statements of
Connecticut Performing Arts, Inc. and Connecticut Performing Arts Partners as
of December 31, 1995 and 1996, and for the years ended December 31, 1994,
1995 and 1996; the combined financial statements of Deer Creek Partners, L.P.
and Murat Centre, L.P. as of December 31, 1995 and 1996, and for the years
ended December 31, 1994, 1995 and 1996 the consolidated financial statements
of PACE Entertainment Corporation and Subsidiaries as of September 30, 1997,
and for the year ended September 30, 1997; the consolidated financial
statements of Pavilion Partners as of September 30, 1997, and for the year
ended September 30, 1997, which are included in reliance on such reports
given on the authority of such firm as experts in accounting and auditing.
The financial statements of Pavilion Partners for the year ended October
31, 1995, for the eleven months ended September 30, 1996 and as of September
30, 1996 included in this Prospectus and the SFX Entertainment Registration
Statement have been so included in reliance on the report of Price Waterhouse
LLP, independent accountants, given on the authority of said firm as experts
in auditing and accounting.
The Board expects to appoint Ernst & Young LLP as SFX Entertainment's
independent auditors to audit SFX Entertainment's financial statements.
D-142
<PAGE>
INDEX TO DEFINED TERMS
<TABLE>
<CAPTION>
PAGE
--------
<S> <C>
Acquisition Businesses ................ D-4
Adjusted EBITDA ....................... D-13
AEP ................................... D-61
AKG ................................... D-F-124
Album Network ......................... D-72
Amphitheatre .......................... D-F-137
Becker Employment Agreement ........... D-65
Becker Right of First Refusal ......... D-65
Becker Second Year Option ............. D-65
BGE ................................... D-F-124
BGM ................................... D-F-124
BGP ................................... D-1,
D-F-124
BGP Acquisition ....................... D-6
BGP Acquisition Sub ................... D-70
BGP Agreement ......................... D-42
BGP Sellers ........................... D-70
BGPI .................................. D-F-124
Blockbuster Acquisition ............... D-64
Blockbuster Agreement ................. D-64
Blockbuster Group ..................... D-64
Blockbuster Sub ....................... D-36
BNY ................................... D-137
Board ................................. D-22
Broadcasting .......................... D-F-8,
D-F-26
Broadcasting Merger ................... D-F-8
Broadway Shows ........................ D-28
Buyer ................................. D-F-8
CCMI .................................. D-F-135
CDA ................................... D-F-13
Chastain Ventures ..................... D-F-135
CIC ................................... D-F-93
Class A Director ...................... D-132
CMI ................................... D-F-93
Commitment Letter ..................... D-137
D-F-25,
D-F-93,
D-F-112,
D-F-124,
Companies ............................. D-F-135
D-F-8,
D-F-25,
D-F-103,
D-F-112,
Company ............................... D-F-124
Concerts .............................. D-F-8
Concert/Southern ...................... D-1,
D-F-135
Concert/Southern Acquisition .......... D-6
Concert/Southern Agreement ............ D-43
Concert/Southern Asset Companies ..... D-74
Concert/Southern Joint Ventures ...... D-74
Concert/Southern Sale Companies ...... D-74
Concert/Southern Sellers .............. D-75
Contemporary .......................... D-1
Contemporary Acquisition .............. D-6
<PAGE>
Contemporary Agreement ................ D-42
Contemporary Asset Acquisition ....... D-66
Contemporary Group .................... D-F-93
Contemporary International ............ D-66
Contemporary Merger ................... D-66
Credit Facility Closing Date .......... D-137
Debt Service Ratio .................... D-139
Delsener/Slater ....................... D-6,
D-F-8
Delsener/Slater Employment Agreements D-128
DGCL .................................. D-26
Distribution Agent .................... D-10
Distribution Agreement ................ D-1
EBITDA ................................ D-13
Employee Benefits Agreement ........... D-50
Entertainment Business ................ D-1
Escrow Agent .......................... D-10
Estimated Working Capital ............. D-51
Excess Debt ........................... D-52
Exchange Act .......................... D-14
Executive Officers .................... D-118
FF .................................... D-F-124
Fifth Year Put Option ................. D-13
Final Working Capital ................. D-51
Financing ............................. D-1,
D-F-8
Fixed Charges Ratio ................... D-139
GAAP .................................. D-13
HSR Act ............................... D-17
Indenture ............................. D-16
IPO Warrants .......................... D-48
IRS ................................... D-F-114
Jones Beach Loan ...................... D-F-26
Marquee ............................... D-23
Master Account ........................ D-F-136
Meadows ............................... D-F-8
Meadows Repurchase .................... D-113
MMR ................................... D-48
Nasdaq National Market ................ D-1
Network ............................... D-1
Network 40 ............................ D-72
Network Acquisition ................... D-6
Network Agreement ..................... D-42
Network Cash Consideration ............ D-72
Network Earn-Out EBITDA ............... D-72
Network Magazine ...................... D-40
Network Sellers ....................... D-72
Network Stock Consideration ........... D-72
Network Sub ........................... D-72
Notes ................................. D-1
Operating Cash Flow ................... D-139
PACE .................................. D-1
PACE Acquisition ...................... D-6
D-143
<PAGE>
PAGE
--------
PACE Acquisition Facility ............. D-61
PACE Agreement ........................ D-41
PACE By-law Provisions ................ D-62
PACE Cash Payment ..................... D-59
PACE Damages .......................... D-60
PACE Material Adverse Effect Condition D-61
PACE Reps and Warranties Condition .... D-60
PACE Sellers .......................... D-59
PACE Sellers' Representative .......... D-61
PACE Stock Consideration .............. D-59
PACE Stock Options .................... D-61
PACE Term Loan ........................ D-61
PACE Term Loan Assets ................. D-61
Pavilion Acquisition .................. D-16
Pavilion Exclusivity Provision ....... D-16
Pavilion Partners Option .............. D-61
Pending Acquisitions .................. D-1
PNC Loan .............................. D-F-26
Pro Forma Interest Expense Ratio ..... D-139
Proposed Credit Facility .............. D-1
Proposed Revolver ..................... D-114
Proposed Term Loan .................... D-114
Recent Acquisitions ................... D-6
Riverport ............................. D-F-93
SAL ................................... D-F-124
SAP ................................... D-F-124
SCMC .................................. D-110
SCMC Warrants ......................... D-48
SEC ................................... D-50
Securities Act ........................ D-14
Senior Guarantors ..................... D-138
Senior Leverage Ratio ................. D-139
Series E Adjustment ................... D-53
Service ............................... D-F-129
SFX ................................... D-1,
D-F-137
SFX Buyer ............................. D-1
<PAGE>
SFX Buyer Sub ......................... D-7
SFX Employee Benefit Plans ............ D-56
SFX Entertainment ..................... D-1
SFX Entertainment By-laws ............. D-26
SFX Entertainment Certificate ......... D-26
SFX Entertainment Class A Common Stock D-1
SFX Entertainment Class B Common Stock D-1
SFX Entertainment Common Stock ....... D-1
SFX Entertainment Group ............... D-24
SFX Entertainment Preferred Stock .... D-66
SFX Entertainment Registration
Statement ............................ D-50
SFX Merger ............................ D-1
SFX Merger Agreement .................. D-1
SFX Merger Consideration Adjustment .. D-51
SJS ................................... D-40
Sony Agreement ........................ D-64
Sony Sub .............................. D-36
Spin-Off .............................. D-1,
D-F-8
Spin-Off Distribution Date ............ D-48
Spin-Off Record Date .................. D-1
Sunshine Promotions ................... D-6,
D-F-8
Tax Code .............................. D-57
Tax Sharing Agreement ................. D-24
Total Debt ............................ D-139
Total Leverage Ratio .................. D-139
Touring Broadway Shows ................ D-4
Triathlon ............................. D-13,
D-F-11
TSC ................................... D-50
Unaudited Pro Forma Condensed Combined
Financial Statements ................. D-80
Warrants .............................. D-48
Working Capital ....................... D-51
Working Capital Adjustment Amount ..... D-5
</TABLE>
D-144
<PAGE>
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
-----------
<S> <C>
SFX ENTERTAINMENT, INC. AND SUBSIDIARIES
Report of Independent Auditors............................................................. D-F-4
Consolidated Balance Sheet as of September 30, 1997 ....................................... D-F-5
Consolidated Statement of Operations for the nine months ended September 30, 1996
(Predecessor-unaudited) and 1997 ......................................................... D-F-6
Consolidated Statement of Cash Flows for the nine months ended September 30, 1996
(Predecessor-unaudited) and 1997 ......................................................... D-F-7
Notes to Consolidated Financial Statements................................................. D-F-8
DELSENER/SLATER ENTERPRISES, LTD. AND AFFILIATED COMPANIES (PREDECESSOR)
Report of Independent Auditors............................................................. D-F-20
Combined Balance Sheets as of December 31, 1995 and 1996 .................................. D-F-21
Combined Statements of Operations for the years ended December 31, 1994, 1995
and 1996 ................................................................................. D-F-22
Combined Statements of Cash Flows for the years ended December 31, 1994, 1995
and 1996.................................................................................. D-F-23
Combined Statements of Stockholders' Equity for the years ended December 31, 1994, 1995
and 1996.................................................................................. D-F-24
Notes to Combined Financial Statements..................................................... D-F-25
CONNECTICUT PERFORMING ARTS, INC. AND CONNECTICUT PERFORMING ARTS PARTNERS
Report of Independent Public Accountants................................................... D-F-29
Combined Balance Sheets as of December 31, 1995 and 1996................................... D-F-30
Combined Statements of Operations for the years ended December 31, 1994, 1995
and 1996.................................................................................. D-F-31
Combined Statements of Shareholders' Equity and Partners' Equity for the years ended
December 31, 1994, 1995 and 1996.......................................................... D-F-32
Combined Statements of Cash Flows for the years ended December 31, 1994, 1995 and 1996 ... D-F-33
Notes to Combined Financial Statements..................................................... D-F-34
DEER CREEK PARTNERS, L.P. AND MURAT CENTRE, L.P.
Report of Independent Public Accountants .................................................. D-F-42
Combined Balance Sheet as of December 31, 1995 and 1996.................................... D-F-43
Combined Statements of Operations and Partners' Equity for the years ended
December 31, 1994, 1995 and 1996.......................................................... D-F-45
Combined Statements of Cash Flows for the years ended December 31, 1994, 1995
and 1996.................................................................................. D-F-46
Notes to Combined Financial Statements..................................................... D-F-47
D-F-1
<PAGE>
PAGE
-----------
PACE ENTERTAINMENT CORPORATION AND SUBSIDIARIES
Report of Independent Public Accountants .................................................. D-F-53
Report of Independent Auditors............................................................. D-F-54
Consolidated Balance Sheets as of September 30, 1996 and 1997.............................. D-F-55
Consolidated Statements of Operations for the years ended September 30, 1995, 1996 and
1997...................................................................................... D-F-56
Consolidated Statements of Shareholders' Equity for the years ended September 30, 1995,
1996 and 1997............................................................................. D-F-57
Consolidated Statements of Cash Flows for the years ended September 30, 1995, 1996 and
1997...................................................................................... D-F-58
Notes to Consolidated Financial Statements................................................. D-F-59
PAVILION PARTNERS
Report of Independent Public Accountants .................................................. D-F-73
Report of Independent Accountants ......................................................... D-F-74
Consolidated Balance Sheets as of September 30, 1996 and 1997 ............................. D-F-75
Consolidated Statements of Income for the year ended October 31, 1995, eleven months ended
September 30, 1996 and year ended September 30, 1997 ..................................... D-F-76
Consolidated Statements of Partners' Capital for the year ended October 31, 1995, eleven
months ended September 30, 1996 and year ended September 30, 1997 ........................ D-F-77
Consolidated Statements of Cash Flows for the year ended October 31, 1995, eleven months
ended September 30, 1996 and year ended September 30, 1997 ............................... D-F-78
Notes to Consolidated Financial Statements ................................................ D-F-79
CONTEMPORARY GROUP
Report of Independent Auditors ............................................................ D-F-88
Combined Balance Sheets as of December 31, 1996 and September 30, 1997 .................... D-F-89
Combined Statements of Operations for the year ended December 31, 1996 and nine months
ended September 30, 1997 ................................................................. D-F-90
Combined Statements of Cash Flows for the year ended December 31, 1996 and nine months
ended September 30, 1997 ................................................................. D-F-91
Combined Statements of Stockholders' Equity for the year ended December 31, 1996 and nine
months ended September 30, 1997 .......................................................... D-F-92
Notes to Combined Financial Statements .................................................... D-F-93
SJS ENTERTAINMENT CORPORATION AND AFFILIATED COMPANY
Report of Independent Auditors ............................................................ D-F-97
Combined Balance Sheets as of December 31, 1996 and September 30, 1997 (unaudited) ....... D-F-98
Combined Statement of Operations and Retained Earnings for the year ended December 31,
1996 ..................................................................................... D-F-99
Combined Statements of Operations and Retained Earnings for the nine months ended
September 30, 1996 and 1997 (unaudited) .................................................. D-F-100
Combined Statement of Cash Flows for the year ended December 31, 1996 ..................... D-F-101
Combined Statements of Cash Flows for the nine months ended September 30, 1996 and 1997
(unaudited) .............................................................................. D-F-102
Notes to Combined Financial Statements .................................................... D-F-103
D-F-2
<PAGE>
PAGE
-----------
THE ALBUM NETWORK, INC. AND AFFILIATED COMPANIES
Report of Independent Auditors ............................................................ D-F-108
Combined Balance Sheets as of September 30, 1996 and 1997 ................................. D-F-109
Combined Statements of Operations and Stockholders' Deficit for the years ended September
30, 1996 and 1997 ........................................................................ D-F-110
Combined Statements of Cash Flows for the years ended September 30, 1996 and 1997 ......... D-F-111
Notes to Combined Financial Statements .................................................... D-F-112
BG PRESENTS, INC. AND SUBSIDIARIES
Report of Independent Auditors ............................................................ D-F-116
Consolidated Balance Sheets as of January 31, 1996 and 1997 ............................... D-F-117
Consolidated Balance Sheet as of October 31, 1997 (unaudited).............................. D-F-118
Consolidated Statements of Operations for the years ended January 31, 1996 and 1997 ...... D-F-119
Consolidated Statement of Operations for the nine months ended October 31, 1997
(unaudited)............................................................................... D-F-120
Consolidated Statements of Cash Flows for the years ended January 31, 1996 and 1997 ...... D-F-121
Consolidated Statement of Cash Flows for the nine months ended October 31, 1997
(unaudited)............................................................................... D-F-122
Consolidated Statements of Stockholders' Equity for the years ended January 31, 1996 and
1997 and the nine months ended October 31, 1997 (unaudited) .............................. D-F-123
Notes to Consolidated Financial Statements ................................................ D-F-124
CONCERT/SOUTHERN PROMOTIONS AND AFFILIATED COMPANIES
Report of Independent Auditors ............................................................ D-F-130
Combined Balance Sheet as of September 30, 1997 ........................................... D-F-131
Combined Statement of Operations for the nine months ended September 30, 1997 ............ D-F-132
Combined Statement of Cash Flows for the nine months ended September 30, 1997 ............ D-F-133
Combined Statements of Stockholders' Equity for the nine months ended
September 30, 1997 ....................................................................... D-F-134
Notes to Combined Financial Statements .................................................... D-F-135
</TABLE>
D-F-3
<PAGE>
REPORT OF INDEPENDENT AUDITORS
The Board of Directors
SFX Entertainment, Inc.
We have audited the accompanying consolidated balance sheet of SFX
Entertainment, Inc. and Subsidiaries as of September 30, 1997, and the
related consolidated statements of operations and cash flows for the nine
months then ended. These financial statements are the responsibility of
management. Our responsibility is to express an opinion on these financial
statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements.
An audit also includes assessing the accounting principles used and
significant estimates made by management as well as evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of SFX
Entertainment, Inc. and Subsidiaries at September 30, 1997, and the
consolidated results of its operations and its cash flows for the nine months
then ended, in conformity with generally accepted accounting principles.
ERNST & YOUNG LLP
New York, New York
January 16, 1998
D-F-4
<PAGE>
SFX ENTERTAINMENT, INC.
CONSOLIDATED BALANCE SHEET
SEPTEMBER 30, 1997
<TABLE>
<CAPTION>
<S> <C>
ASSETS
Current assets:
Cash and cash equivalents (Note 3)...................................... $ 7,094,000
Accounts receivable .................................................... 2,525,000
Prepaid expenses and other current assets .............................. 2,570,000
--------------
Total current assets .................................................... 12,189,000
Property and equipment, net ............................................. 55,882,000
Goodwill, net ........................................................... 59,721,000
Investment in unconsolidated subsidiaries ............................... 1,324,000
Note receivable from employee............................................ 900,000
Other assets (Note 3) ................................................... 5,454,000
--------------
Total assets ............................................................ $135,470,000
==============
LIABILITIES AND SHAREHOLDER'S EQUITY
Current liabilities:
Accounts payable ....................................................... $ 1,620,000
Accrued expenses ....................................................... 777,000
Deferred revenue ....................................................... 4,095,000
Income taxes payable ................................................... 4,107,000
Current portion of long-term debt ...................................... 922,000
Current portion of deferred purchase consideration ..................... 734,000
--------------
Total current liabilities ............................................... 12,255,000
Long-term debt, less current portion .................................... 15,531,000
Deferred purchase consideration, less current portion ................... 3,490,000
Deferred income taxes ................................................... 2,816,000
Commitment and contingencies (Notes 4 and 9)............................. --
Shareholder's equity:
Capital to be contributed by SFX Broadcasting (Note 1)................... 97,726,000
Preferred Stock, $.01 par value, 1,000 shares authorized, none issued
and outstanding ........................................................ --
Class A common stock, $.01 par value, 1,000 shares authorized, issued
and outstanding ........................................................ --
Class B common stock, $.01 par value, 1,000 shares authorized, issued
and outstanding ........................................................ --
Retained earnings ....................................................... 3,652,000
--------------
Total shareholder's equity .............................................. 101,378,000
--------------
Total liabilities and shareholder's equity .............................. $135,470,000
==============
</TABLE>
See accompanying notes.
D-F-5
<PAGE>
SFX ENTERTAINMENT, INC.
CONSOLIDATED STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
-----------------------------
PREDECESSOR
(UNAUDITED)
1996 1997
-------------- -------------
<S> <C> <C>
Concert revenue ................................................ $41,609,000 $74,396,000
OPERATING EXPENSES
Cost of concerts ............................................... 42,930,000 63,045,000
Depreciation and amortization .................................. 744,000 4,041,000
Corporate, general and administrative expenses, net of
Triathlon fees of $1,693,000 in 1997 .......................... -- 1,307,000
-------------- -------------
43,674,000 68,393,000
-------------- -------------
Income (loss) from operations .................................. (2,065,000) 6,003,000
OTHER INCOME (EXPENSE)
Interest income ................................................ 143,000 213,000
Interest expense ............................................... (60,000) (956,000)
Equity in pretax income of unconsolidated subsidiaries ........ 525,000 1,344,000
-------------- -------------
Income (loss) before provision for income taxes ................ (1,457,000) 6,604,000
Provision for income taxes ..................................... 80,000 2,952,000
-------------- -------------
Net income (loss) .............................................. $(1,537,000) $ 3,652,000
============== =============
</TABLE>
See accompanying notes.
D-F-6
<PAGE>
SFX ENTERTAINMENT, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
------------------------------
PREDECESSOR
(UNAUDITED)
1996 1997
-------------- --------------
<S> <C> <C>
OPERATING ACTIVITIES:
Net income (loss)................................................ $(1,537,000) $ 3,652,000
Adjustment to reconcile net income (loss) to net cash provided
by (used in) operating activities:
Depreciation and amortization .................................. 744,000 4,041,000
Equity in pretax income of unconsolidated subsidiaries, net
distributions received........................................ (148,000) 458,000
Changes in operating assets and liabilities, net of amounts
acquired:
Accounts receivable ........................................... (317,000) (1,019,000)
Prepaid expenses and other current assets ..................... (513,000) (2,419,000)
Other asset.................................................... 13,000 (275,000)
Accounts payable and accrued expenses ......................... 4,448,000 (311,000)
Income taxes payable........................................... -- 3,379,000
Deferred income taxes.......................................... -- (427,000)
Deferred revenue .............................................. 71,000 (6,290,000)
-------------- --------------
Net cash provided by (used in) operating activities.............. 2,761,000 789,000
INVESTING ACTIVITIES:
Purchase of concert promotion businesses, net of cash acquired -- (69,645,000)
Purchase of fixed assets ....................................... -- (2,352,000)
-------------- --------------
Net cash used in investing activities............................ -- (71,997,000)
FINANCING ACTIVITIES:
Capital to be contributed by SFX Broadcasting .................. -- 78,855,000
Payment of debt ................................................ -- (553,000)
Proceeds from issuance of Common Stock and capital
contributions ................................................. 613,000 --
Due to stockholder ............................................. 71,000 --
-------------- --------------
Net cash provided by financing activities ....................... 684,000 78,302,000
-------------- --------------
Net increase in cash and cash equivalents ....................... 3,445,000 7,094,000
Cash and cash equivalents at beginning of period ................ 2,905,000 0
-------------- --------------
Cash and cash equivalents at end of period....................... $ 6,350,000 $ 7,094,000
============== ==============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for interest........................................... $ 60,000 $ 897,000
============== ==============
Cash paid for income taxes....................................... $ 80,000 $ --
============== ==============
</TABLE>
SUPPLEMENTAL DISCLOSURE OF NON-CASH FINANCING ACTIVITIES:
o Issuance of 250,838 shares of Broadcasting's Class A Common Stock and
assumption of $15.4 million of debt in connection with the Meadows
acquisition and issuance of 62,792 shares of Broadcasting's Class A Common
Stock and assumption of $1.6 million in connection with the Sunshine
Promotions acquisition.
o The balance sheet includes certain assets and liabilities which have been
or will be contributed to the Company prior to the Spin-Off.
See accompanying notes.
D-F-7
<PAGE>
SFX ENTERTAINMENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. ORGANIZATION
SFX Entertainment, Inc. ("SFX" or the "Company") was formed as a
wholly-owned subsidiary of SFX Broadcasting, Inc. ("Broadcasting") in
December 1997 and as the parent company of SFX Concerts, Inc ("Concerts").
During 1997, the following acquisitions were made:
Delsener/Slater
In January 1997, Broadcasting acquired Delsener/Slater Enterprises, Ltd.
and affiliated companies ("Delsener/Slater"), a leading concert promotion
company, for an aggregate consideration of approximately $27,600,000,
including $2,900,000 for working capital and the present value of deferred
payments of $3,000,000 to be paid without interest over five years and
$1,000,000 to be paid without interest over ten years. Delsener/Slater has
long-term leases or is the exclusive promoter for seven of the major concert
venues in the New York City metropolitan area, including the Jones Beach
Amphitheater, a 14,000-seat complex located in Wantagh, New York, and the PNC
Bank Arts Center (formerly known as the Garden State Arts Center), a
17,500-seat complex located in Holmdel, New Jersey.
Meadows
In March 1997, the Company acquired the stock of certain companies which
own and operate the Meadows Music Theater (the "Meadows"), a 25,000-seat
indoor/outdoor complex located in Hartford, Connecticut for $900,000 in cash,
shares of Broadcasting Class A Common Stock with a value of approximately
$7,500,000 and the assumption of approximately $15,400,000 in debt.
Sunshine Promotions
In June 1997, the Company acquired the stock of Sunshine Promotions, Inc.
and certain other related Companies ("Sunshine Promotions"), one of the
largest concert promoters in the Midwest for $53,900,000 in cash, $2,000,000
payable over five years, shares of Broadcasting Class A Common Stock issued
and issuable over a two year period with a value of approximately $4,000,000
and the assumption of appoximately $1,600,000 of debt. Sunshine Promotions
owns the Deer Creek Music Theater, a 21,000-seat complex located in
Indianapolis, Indiana, and the Polaris Amphitheater ("Polaris"), a
20,000-seat complex located in Columbus, Ohio, and has a long-term lease to
operate the Murat Centre, a 2,700-seat theater and 2,200-seat ballroom
located in Indianapolis, Indiana.
The cash portion of these acquisitions were financed through intercompany
loans from Broadcasting and were accounted for under the purchase method of
accounting. The purchase prices have been preliminarily allocated to the
assets acquired and are subject to change.
Pending Spin-Off and Financing
In August 1997, Broadcasting agreed to the merger among SBI Holdings, Inc.
(the "Buyer"), SBI Radio Acquisition Corporation, a wholly-owned subsidiary
of the Buyer, and Broadcasting (the "Broadcasting Merger") and to the
spin-off of the Company to the shareholders of Broadcasting (the "Spin-Off").
The Company intends to consummate a senior credit facility and an offering of
senior subordinated notes (collectively, the "Financing") prior to the
consummation of the Spin-Off to finance certain pending acquisitions (see
Note 2). The Spin-Off is subject to certain conditions, including, among
others: (i) the satisfaction of the Board of Directors of Broadcasting that
Broadcasting's surplus would be sufficient to permit the Spin-Off under
Delaware law, (ii) the acceptance for listing or trading of the Class A
Common Stock of the Company, subject to official notice of issuance, on the
American Stock Exchange or Nasdaq Stock Market, (iii) receipt of all
necessary third party consents to the Spin-Off, and (iv) receipt of necessary
Broadcasting stockholder approvals.
D-F-8
<PAGE>
SFX ENTERTAINMENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
At or prior to the Spin-Off, pursuant to the Distribution Agreement,
Broadcasting will contribute to the Company all of its concert and other live
entertainment assets along with an allocation of working capital in an amount
estimated by management of Broadcasting to be consistent with the proper
operation of Broadcasting, and the Company will assume all of Broadcasting's
liabilities pertaining to the live entertainment businesses, as well as
certain other liabilities including the obligation to make change of control
payments to certain employees of Broadcasting of approximately $5,800,000 as
well as the obligation to indemnify one-half of certain of these employees'
excise tax. At the time of the Broadcasting Merger, Broadcasting will
contribute its positive Working Capital (as defined) to the Company. If
Working Capital is negative, the Company must pay the amount of the shortfall
to Broadcasting. Subsequent to September 30, 1997, Broadcasting advanced
approximately $6,500,000 to the Company for use in connection with certain
acquisitions and capital expenditures. Broadcasting may advance additional
amounts to the Company prior to the consummation of the Spin-Off.
The accompanying consolidated financial statements include the accounts of
Delsener/Slater, Sunshine Promotions, the Meadows and certain assets and
liabilities which have been or will be contributed by Broadcasting to the
Company prior to the Spin-Off under the terms of the Broadcasting Merger
agreement. Operating results associated with the assets and liabilities to be
contributed are included herein. Corporate expenses represent an allocation
from Broadcasting based on a method that management believes is reasonable.
Intercompany transactions and balances among these companies have been
eliminated in consolidation.
2. PENDING ACQUISITIONS
In December of 1997, the Company entered into agreements to acquire the
following live entertainment businesses:
PACE Entertainment Corporation ("PACE"), one of the largest diversified
producers and promoters of live entertainment in the United States, having
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 $155,000,000 (including issuance of 1,500,000 shares of the
Company's common stock valued by the parties at $20,000,000 and assumption
of approximately $25,500,000 of debt). Under the terms of the agreement,
additional cash consideration would be required if the deemed value of the
Company's common stock was less than $13.33 per share as a result of
changes in the consummation of acquisitions. In related transactions, the
Company has agreed to acquire, for total consideration of $90,900,000
including cash, assumed liabilities and the assumption of 100% of the
partnership's third party debt, the 66 2/3% ownership interests of
Blockbuster Entertainment Corporation and Sony Music Entertainment Inc. in
Amphitheater Entertainment Partnership, a partner of PACE in the Pavilion
Partners venue partnership. PACE will then own 100% of Pavilion Partners.
The PACE acquisition agreement further provides that each seller of PACE
shall have an option, exercisable during a period beginning on the fifth
anniversary of the closing of the PACE acquisition and ending 90 days
thereafter, to require the Company to purchase up to one-third of the PACE
consideration stock received by such PACE seller for a cash purchase price
of $33.00 per share. With certain limited exceptions, these option rights
are not assignable by the PACE sellers.
Under the terms of an employment agreement to be entered into by the
Company with an officer of PACE, the officer will have the right, two
years from the date of the acquisition, to purchase PACE's motor sports
division at fair value. If the motor sports division has been sold, he
would be entitled to purchase PACE's theatrical division for the fair
value. The Company has agreed to lend to PACE up to $25,000,000 for
potential PACE acquisitions whether or not the PACE Acquisition is
consummated.
D-F-9
<PAGE>
SFX ENTERTAINMENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The Contemporary Group ("Contemporary"), a fully-integrated live
entertainment and special event promoter and producer, venue owner and
operator and consumer marketer, for total consideration of approximately
$91,500,000 (including issuance of 1,402,851 shares of common stock of the
Company valued by the parties at $18,700,000) (the "Contemporary
Acquisition"). The cash consideration to be paid for Contemporary is
subject to a reduction of $10,500,000 should it not acquire the remaining
50% of Riverport Amphitheater Joint Venture. If any of the Contemporary
sellers owns any shares of Class A Common Stock of the Company received in
the Contemporary Acquisition on the second anniversary of the closing date
and the average trading price of such stock over the 20-day period ending
on such anniversary date is less than $13.33 per share, then the Company
will make a one-time cash payment to each individual holding any such
shares that is equal to the product of (i) the quotient of the difference
between (A) the actual average trading price per share over such 20-day
period and (B) $13.33 divided by two, multiplied by (ii) the number of
shares of Class A Common Stock of the Company received by such individual
in the Contemporary Acquisition and owned as of such anniversary date.
The Network Magazine Group ("Network Magazine"), a publisher of trade
magazines for the radio broadcasting industry, and SJS Entertainment
("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 $62,000,000 (including issuance of approximately 750,000
shares of common stock of the Company valued by the parties at
$10,000,000). The Company is also obligated to pay the sellers an
additional payment based on EBITDA, as defined, generated on a combined
basis by Network Magazine and SJS in 1998, up to a maximum of $14,000,000.
BG Presents ("BGP"), one of the oldest promoters of, and owner-operators
of venues for, live entertainment in the United States, and a leading
promoter in the San Francisco Bay area (the "BGP Acquisition"), for total
consideration of approximately $68,300,000 subject to adjustment based on
BGP's working capital and long-term debt (including issuance of
approximately 563,000 shares of common stock of the Company valued by the
parties at $7,500,000). The sellers of BGP have agreed to provide net
working capital (as defined) at the closing in an amount equal to or
greater than long-term debt.
Concert/Southern Promotions ("Concert/Southern"), a promoter of live
music events in the Atlanta, Georgia metropolitan area (the
"Concert/Southern Acquisition"), for total consideration of approximately
$16,600,000 (including payment of the present value of a $1,600,000
deferred liability).
The PACE Acquisition, the Contemporary Acquisition, the Network
Acquisition, the BGP Acquisition and the Concert/Southern Acquisition are
collectively referred to herein as the "Pending Acquisitions."
The Company expects to complete all of the Pending Acquisitions as soon as
practicable after the Financing and prior to the Broadcasting Merger. Each of
the Pending Acquisition agreements other than Concert/Southern provide that,
should the Spin-Off not occur prior to July 1, 1998, the sellers' may require
the Company to repurchase the shares of the Company's common stock issued to
the sellers for $13.33 each.
D-F-10
<PAGE>
SFX ENTERTAINMENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The following unaudited pro forma summary presents the consolidated
results of operations for the nine months ended September 30, 1997 and for
the year ended December 31, 1996 as if the acquisitions for any given period
and the subsequent period had occurred at the beginning of such period after
giving effect to certain adjustments, including amortization of goodwill and
interest expense on the acquisition debt. These pro forma results have been
prepared for comparative purposes only and do not purport to be indicative of
what would have occurred had the acquisitions been made as of that date or of
results which may occur in the future.
<TABLE>
<CAPTION>
PRO FORMA
IN THOUSANDS EXCEPT PER SHARE DATA
(UNAUDITED)
------------------------------------
NINE MONTHS
ENDED YEAR ENDED
SEPTEMBER 30, 1997 DECEMBER 31, 1996
------------------ -----------------
<S> <C> <C>
Revenues.......... $500,843,000 $552,365,000
================== =================
Net income
(loss)........... $ 625,000 $(32,557,000)
================== =================
</TABLE>
3. SUMMARY OF SIGNIFICANT ACCOUNTING PRINCIPLES
Cash and Cash Equivalents
The Companies consider all investments purchased with a maturity of three
months or less to be cash equivalents. Included in cash and cash equivalents
is $1,718,000 of cash which has been deposited in a separate account and will
be used to fund committed capital expenditures at PNC Bank Arts Center.
Property and Equipment
Land, buildings and improvements and furniture and equipment are stated at
cost. Depreciation is provided on a straight-line basis over the estimated
useful lives of the assets as follows:
Buildings and improvements .... 7-40 years
Furniture and equipment ........ 5-7 years
Leasehold improvements represents the capitalized costs to renovate the
Jones Beach Theatre. The costs to renovate the theatre included permanent
seats, a new stage and lavatory facilities. These costs are being amortized
over the term of the lease.
Goodwill
Goodwill as of September 30, 1997 was $59,721,000, which is net of
accumulated amortization of $1,789,000. Goodwill is being amortized using the
straight-line method over 15 years. Management reviews the carrying value of
goodwill against anticipated cash flows to determine whether the carrying
amount will be recoverable.
Other Assets
Other assets includes $5,093,000 of costs associated with acquiring the
right to receive fees from Triathlon Broadcasting Company ("Triathlon"), an
affiliate, for certain financial consulting, marketing and administrative
services provided by the Company to Triathlon. Under the terms of the
agreement, the Company has agreed to provide consulting and marketing
services to Triathlon for an annual fee of $500,000, together with a
refundable advance of $500,000 per year against fees to be earned in respect
of transactional investment banking services. These fees, which are recorded
as a reduction of corporate, general and administrative expenses, will
fluctuate based upon the level of acquisition and financing activity of
Triathlon. The cost of acquiring the fees is being amortized over the term of
the agreement which expires on June 1, 2005.
D-F-11
<PAGE>
SFX ENTERTAINMENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Revenue Recognition
The Company's operations and revenues are largely seasonal in nature, with
generally higher revenue generated in the second and third quarters of the
year. The Company's outdoor venues are primarily utilized in the summer
months and do not generate substantial revenue in the late fall, winter and
early spring. Similarly, the musical concerts that the Company promotes
largely occur in the second and third quarters. To the extent that the
Company's entertainment marketing and consulting relate to musical concerts,
they also predominantly generate revenues in the second and third quarters.
Revenue from ticket sales is recognized upon occurrence of the event.
Advance ticket sales are recorded as deferred revenue until the event occurs.
Risks and Uncertainties
Accounts receivable are due principally from ticket companies and venue
box offices. These amounts are typically collected within 20 days of a
performance. Generally, management considers these accounts receivable to be
fully collectible; accordingly, no allowance for doubtful accounts is
required. Certain other accounts receivable, arising from the normal course
of business, are reviewed for collectibility and allowances for doubtful
accounts are recorded as required. Management believes that no allowance for
doubtful accounts is required at September 30, 1997.
The Company had agreements with various trade unions which have expired.
The trade unions are currently working under the old agreements and the
Company and the unions are in the process of negotiating new agreements.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
Income Taxes
The Company accounts for income taxes in accordance with Statement of
Financial Accounting Standards No. 109, "Accounting for Income Taxes". This
statement requires a company to recognize deferred tax assets and liabilities
for the expected future tax consequences of events that have been recognized
in a company's financial statements or tax returns. Under this method,
deferred tax assets and liabilities are determined based on the difference
between the financial statement carrying amounts and the tax bases of assets
and liabilities.
Under a tax sharing agreement, the Company will agree to pay to
Broadcasting the amount of the tax liability of the combined Broadcasting/SFX
group to the extent properly attributable to the Company for the period up to
and including the Spin-Off, and will indemnify Broadcasting for any tax
adjustment made in subsequent years that relates to taxes properly
attributable to the Company during the period prior to and including the
Spin-Off. Broadcasting, in turn, will indemnify the Company for any tax
adjustment made in years subsequent to the Spin-Off that relates to taxes
properly attributable to Broadcasting (excluding any taxes relating to the
Company) during the period prior to and including the Spin-Off. The Company
will be responsible for any taxes of Broadcasting resulting from the Spin-Off
to the extent such taxes result from a gain on the distribution that exceeds
the available net operating loss carryforwards of Broadcasting and the
Company.
The Company calculates its tax provision on a separate company basis.
D-F-12
<PAGE>
SFX ENTERTAINMENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
4. CONNECTICUT DEVELOPMENT AUTHORITY ASSISTANCE AGREEMENT
On September 12, 1994, the Connecticut Development Authority ("CDA")
entered into a non-recourse assistance agreement with the Meadows whereby the
CDA provided grant funds for the construction and development of the Meadows
through the issuance of State of Connecticut General Fund Obligation Bonds
(GFO Bonds). The Meadows received bond proceeds of $8,863,000. Pursuant to
such agreement, the annual tax revenues derived from the operation of the
amphitheater are utilized to satisfy the annual debt service requirements
under the GFO Bonds. In the event that annual tax revenues derived from the
operation of the amphitheater do not equal annual debt service requirements
under the GFO Bonds, the Company must deposit the lesser of the operating
shortfall, as defined, or 10% of the annual debt service under the GFO Bonds.
An operating shortfall did not exist for the year ended December 31, 1996 and
is not expected to exist for the year ending December 31, 1997. The GFO Bonds
mature on October 15, 2024 and have an average coupon rate of 6.33%. Annual
debt service requirements, including interest, on the GFO Bonds for each of
the next five years and thereafter are as follows:
<TABLE>
<CAPTION>
YEAR AMOUNT
- ------------- ------------
<S> <C>
1997 ......... $ 185,000
1998 ......... 739,000
1999 ......... 737,000
2000 ......... 739,000
2001 ......... 740,000
Thereafter .. 16,585,000
------------
$19,725,000
============
</TABLE>
The assistance agreement requires an annual attendance of at least 400,000
for each of the first three years of operations. It will not be considered an
event of default if the annual attendance is less than 400,000 provided that
no operating shortfall exists for that year or if an operating shortfall
exists such amount has been deposited by the Company. If there is an event of
default, the CDA may foreclose on the construction mortgage loan (see Note
5). If the amphitheater's operations are relocated outside of Connecticut
during the ten year period subsequent to the assistance agreement or during
the period of the construction mortgage loan, the full amount of the grant
funds plus a penalty of 5% must be repaid to the State of Connecticut.
5. LONG-TERM DEBT
As of September 30, 1997, the Company's long-term debt consisted of the
following:
<TABLE>
<CAPTION>
<S> <C>
Meadows CDA Mortgage Loan ......... $ 7,440,000
Meadows Concession Agreement
Loans............................. 5,931,000
Meadows CDA Construction Loan .... 850,000
Murat notes payable................ 790,000
Meadows note payable .............. 694,000
Polaris note payable .............. 221,000
Capital Lease Obligations.......... 527,000
------------
16,453,000
Less Current Portion.............. (922,000)
------------
$15,531,000
============
</TABLE>
D-F-13
<PAGE>
SFX ENTERTAINMENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Meadows CDA Mortgage Loan
On September 12, 1994, the CDA entered into a construction mortgage loan
agreement for $7,685,000 with the Company. The purpose of the loan was to
finance a portion of the construction and development of the Meadows. The
loan agreement contains substantially the same covenants as the CDA
assistance agreement (see Note 4). The mortgage loan bears interest at 8.73%
and is payable in monthly installments of principal and interest. The
mortgage loan matures on October 15, 2019.
The loan is collateralized by a lien on the Meadows' assets. The loan was
secured by an irrevocable standby letter of credit issued by the Company in
the amount of $785,000.
Meadows Concession Agreement Loans
In connection with the Meadows' concession agreement, the concessionaire
loaned the Company $4,500,000 in 1995 to facilitate the construction of the
amphitheater. Principal and interest, at the rate of 7.5% per annum on the
note is payable via withholdings of the first $31,299 from each monthly
concession commission payment. As of September 30, 1997, the outstanding
balance was $4,355,000.
During 1995, the concessionaire loaned the Company an additional
$1,000,000. This loan bears interest at a rate of 9.75% per annum and is
payable via withholdings of an additional $11,900 of principal, plus
interest, from each monthly concession commission payment through December
20, 2002. As of September 30, 1997, the outstanding balance was $715,000.
The concession agreement also required the Company to supply certain
equipment to the concessionaire at the Company's expense. The cost of the
equipment purchased by the concessionaire was converted to a note payable for
$884,000. The note bears interest at the rate of 9.25% per annum and provides
for monthly principal and interest payments of $10,185. However, the Company
is not required to make any principal or interest payments to the extent that
5% of receipts, as defined, in any month are less than the amount of the
payment due. As of September 30, 1997, the outstanding balance was $861,000.
Meadows CDA Construction Loan
In March 1997, the Company entered into a $1,500,000 loan agreement with
the CDA of which $1,000,000 was funded in March 1997. Principal payments of
$150,000 are due on July 1 and October 1 of each year commencing July 1, 1997
through October 1, 2001. The note bears interest at the rate of 8.9% per
annum through February 1, 1998, and thereafter at the index rate, as defined,
plus 2.5%. In addition, the Company is required to make principal payments in
an amount equal to 10% of the annual gross revenue, as defined, in excess of
$13,000,000 on or before March 1 of each calendar year commencing March 1,
1998.
Murat Notes Payable
The Company has two loans payable to the Massachusetts Avenue Community
Development Corporation (MAC), an $800,000 non-interest bearing note and a
$1,000,000 note. Principal payments on the non-interest bearing note are the
lesser of $0.15 per ticket sold during fiscal year or remaining net cash
flow, as defined. Interest on the other note is calculated annually and is
equal to the lesser of (1) $0.10 per ticket sold during the fiscal year, (2)
prime plus 1% or (3) remaining net cash flow, as defined. Interest and
principal on the $1,000,000 note is payable at the lesser of $0.10 per ticket
sold during fiscal year or remaining net cash flow, as defined. The present
value of the two loans is $790,000 as of September 30, 1997.
D-F-14
<PAGE>
SFX ENTERTAINMENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Provisions of the $800,000 note payable requires the Murat to continue
making payments after the principal has been paid down equal to the lesser of
$0.15 per ticket sold during the fiscal year or remaining cash flow. These
payments are to be made to a not-for-profit foundation and will be designated
for remodeling and upkeep of the theatre.
Meadows Note Payable
Under the terms of a Meadows ticket and sales agreement, a vendor loaned
the Company $824,500 and pays the Company an annual fee of $140,000 for nine
years commencing in March 1996. Proceeds from the annual fee are used by the
Company to make the annual principal and interest payments. As of September
30, 1997, the outstanding balance was $694,000.
Polaris Note Payable
In 1994, a concessionaire advanced Sunshine Promotions $500,000 to be used
in the construction of the Polaris Amphitheater. The advance is interest free
and is payable in annual installments of $25,000 beginning in 1994 for a
period of 20 years. As of September 30, 1997, the net present value of the
advance was $221,000.
Capital Lease Obligations
The Company has entered into various equipment leases totaling $527,000.
Interest on the leases range from 6.5% to 18.67%.
Principal maturities of the long-term debt, notes payable and capital
lease obligations over the next five years as of September 30, 1997 are as
follows:
<TABLE>
<CAPTION>
LONG-TERM DEBT AND CAPITAL LEASE
SEPTEMBER 30, NOTES PAYABLE OBLIGATIONS
- --------------- ------------------ ---------------
<S> <C> <C>
1998............ $751,000 $171,000
1999 ........... 768,000 161,000
2000 ........... 747,000 121,000
2001 ........... 527,000 74,000
2002 ........... 558,000
</TABLE>
6. PROPERTY AND EQUIPMENT
The Company's property and equipment, net of accumulated amortization, as
of September 30, 1997 consisted of the following:
<TABLE>
<CAPTION>
<S> <C>
Land....................... $ 8,750,000
Building and improvements 40,484,000
Furniture and equipment .. 5,518,000
Leasehold improvements ... 2,676,000
-------------
57,428,000
Accumulated depreciation . (1,546,000)
-------------
$55,882,000
=============
</TABLE>
D-F-15
<PAGE>
SFX ENTERTAINMENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
7. INVESTMENTS IN UNCONSOLIDATED SUBSIDIARIES
The Company is a 49% partner in a general partnership which subleases a
theater located in New York City. Income associated with the promotion of
concerts at this theater is recorded as concert revenue. Any such promotion
revenue recognized reduces the Company's share of the partnership's profits.
The Company is also a one-third partner in GSAC Partners, a general
partnership through which it shares in the income or loss of the PNC Bank
Arts Center at varying percentages based on the partnership agreement. The
Company records these investments on the equity method.
The following is a summary of the unaudited financial position and results
of operations of the Company's equity investees as of and for the nine months
ended September 30, 1997:
<TABLE>
<CAPTION>
<S> <C>
Current assets.......................... $ 3,300,000
Property, plant and equipment .......... 1,217,000
Other assets ........................... 347,000
-------------
Total assets............................ $ 4,864,000
=============
Current liabilities..................... $ 1,150,000
Partners' capital ...................... 3,714,000
-------------
Total liabilities and partners'
capital................................ $ 4,864,000
=============
Revenue ................................ $18,622,000
Expenses ............................... 16,020,000
-------------
Net income.............................. $ 2,602,000
=============
</TABLE>
The equity income recognized by the Company represents the appropriate
percentage of investment income less amounts reported in concert revenues for
shows promoted by the Company at these theaters. Such concert revenues of
unconsolidated subsidiaries was approximately $81,000 for the nine months
ended September 30, 1997.
8. INCOME TAXES
The provision for income taxes for the nine months ended September 30,
1997 is summarized as follows:
<TABLE>
<CAPTION>
<S> <C>
CURRENT:
Federal.... $3,041,000
State...... 338,000
DEFERRED:
Federal.... (384,000)
State...... (43,000)
------------
Total....... $2,952,000
============
</TABLE>
D-F-16
<PAGE>
SFX ENTERTAINMENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Deferred income taxes reflect the tax effects of temporary differences
between the carrying amount of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. The significant
components of the Company's deferred tax liabilities as of September 30, 1997
are as follows:
<TABLE>
<CAPTION>
<S> <C>
Deferred tax liabilities:
Depreciable assets......... $2,755,000
Deferred compensation ..... 61,000
------------
Net deferred tax
liability................ $2,816,000
============
</TABLE>
The effective rate varies from the statutory Federal income tax rate as
follows:
<TABLE>
<CAPTION>
<S> <C>
Income taxes at the statutory rate .. $2,245,000
Nondeductible amortization........... 370,000
Travel and entertainment............. 13,000
State and local income taxes (net of
Federal benefit) ................... 324,000
------------
Total provision...................... $2,952,000
============
</TABLE>
9. COMMITMENTS, CONTINGENCIES AND OTHER MATTERS
Pursuant to the terms of the Spin-Off, upon the consummation of the
Broadcasting Merger, the Company will assume all obligations under any
employment agreements or arrangements between Broadcasting and any employee
of the Company.
While the Company is involved in several suits and claims in the ordinary
course of business, the Company is not now a party to any legal proceeding
that the Company believes would have a material adverse effect on its
business.
The Company's operating leases includes primarily leases with respect to
an amphitheater, office space and land. Total rent expense was $1,773,000 for
the nine months ended September 30, 1997. The lease terms range from 3 to 37
years. The future minimum rental payments for the next five years and
thereafter are as follows:
<TABLE>
<CAPTION>
YEARS ENDED
SEPTEMBER 30,
---------------
<S> <C>
1998................ $ 3,121,000
1999 ............... 3,812,000
2000 ............... 1,622,000
2001 ............... 1,630,000
2002 ............... 1,630,000
2003 and
thereafter......... 12,962,000
---------------
$24,777,000
===============
</TABLE>
The Company has committed to expansion projects at the Jones Beach Theater
and PNC Bank Arts Center which are expected to be completed in June 1998 and
to cost approximately $14,000,000 and $3,000,000, respectively.
As of September 30, 1997, outstanding letters of credit for $1,110,000
were issued by banks on behalf of the Company as security for loans and the
rental of theaters.
D-F-17
<PAGE>
SFX ENTERTAINMENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
In connection with the acquisition of Delsener/Slater, Broadcasting
entered into an employment agreement with each of Ron Delsener and Mitch
Slater pursuant to which each of Messrs. Delsener and Slater serve as
Co-Presidents and Co-Chief Executive Officers of Delsener/Slater. Each of the
employment agreements continue until December 31, 2001 unless terminated
earlier by the Company for cause or voluntarily by Mr. Delsener or Mr.
Slater.
In certain cases, Messrs. Delsener and Slater have rights to purchase the
outstanding capital stock of Delsener/Slater for fair market value as defined
in their employment agreements.
Additionally, in the case of a return event, as defined, which may be
deemed to include the Spin-Off, the Broadcasting Merger and related
transactions, Messrs. Delsener and Slater have the right to receive a portion
of the excess of the proceeds of the return event over a fixed amount
determined in reference to the original purchase price for Delsener/Slater,
all as calculated pursuant to the Delsener/Slater Employment Agreements.
Management believes that, with respect to the Spin-Off, the Broadcasting
Merger and related transactions, no payment will accrue to Mr. Delsener or
Mr. Slater pursuant to their employment agreements.
The employment agreements further provide that Messrs. Delsener and Slater
shall be paid annual bonuses determined with reference to Delsener/Slater
profits, as defined, for the immediately preceding year. Management believes
that no such bonus was earned for the nine months ended September 30, 1997.
However, the amount of any such bonuses which may accrue to Messrs. Delsener
and Slater in the future will not be available to the Company to apply to
debt service.
Messrs. Delsener and Slater and the Company are in the process of
negotiating amendments to their employment agreements to reflect, among other
things, the changes to the business of the Company as a result of the Pending
Acquisitions and the Spin-Off, and each of Messrs. Delsener and Slater have
agreed in principle to waive any rights which may accrue in connection with
the Broadcasting Merger or the Spin-Off. The Company also expects, in
connection with the foregoing, to negotiate mutually satisfactory amendments
to certain of Messrs. Delsener's and Slater's compensation arrangements,
including bonus and profit sharing provisions.
10. RELATED PARTY TRANSACTIONS
The Company's Executive Vice President, General Counsel and Director is Of
Counsel to the law firm of Baker & McKenzie. Baker & McKenzie serves as
counsel to the Company in certain matters. Baker & McKenzie compensates the
executive based, in part, on the fees it receives from providing legal
services to the Company and other clients originated by the executive.
11. CAPITAL STOCK
Subject to the approval of shareholders of Broadcasting, holders of Class
A Common Stock will be entitled to one vote and holders of Class B Common
Stock will be entitled to ten votes on all matters submitted to a vote of
shareholders except for (a) the election of directors, (b) with respect to
any "going private" transaction involving the Chairman and (c) as otherwise
provided by law.
The Board of Directors has the authority to issued preferred stock and
will fix the designations and rights at the time of issuance.
12. DEFINED CONTRIBUTION PLAN
The Company sponsors a 401(k) defined contribution plan in which most
full-time employees are eligible to participate. The Plan presently provides
for discretionary employer contributions. There were no contributions in
1997.
D-F-18
<PAGE>
SFX ENTERTAINMENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
13. SUBSEQUENT EVENTS (UNAUDITED)
During January 1998, the Board of Directors and Broadcasting, as sole
stockholder, approved and adopted a stock option and restricted stock plan
providing for the issuance of restricted shares of SFX Entertainment Class A
Common Stock and options to purchase shares of SFX Entertainment 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, agreed to grant the
executive officers an aggregate of 650,000 shares of the Company's Class B
Common Stock and 190,000 shares of the Company's Class A Common Stock. Such
shares will be issued on or about the effective date of the Spin-Off. A
substantial non-cash charge to earnings will be recorded by the Company at
the time of the Spin-Off based on the fair value of the shares issued.
In addition, the Board, upon recommendation of the Compensation Committee,
has approved the issuance of stock options exercisable for 245,000 shares of
the Company's Class A Common Stock. The options will vest over five years and
will have an exercise price of $5.50 per share. The Company will record
non-cash compensation charges over the five-year period to the extent that
the fair value of the Company's Class A Common Stock exceeds the exercise
price.
Further, the Board of Directors has approved the issuance of shares of the
Company's Class A Common Stock to holders of stock options or stock
appreciation rights ("SARs") of Broadcasting as of the Spin-Off record date,
whether or not vested. The issuance was approved to allow such holders of
these options or SARs to participate in the Spin-Off in a similar manner to
holders of Broadcasting's Class A Common Stock. Additionally, many of the
option holders will become officers, directors and employees of the Company.
D-F-19
<PAGE>
REPORT OF INDEPENDENT AUDITORS
The Board of Directors
Delsener/Slater Enterprises, Ltd.
We have audited the accompanying combined balance sheets of
Delsener/Slater Enterprises, Ltd. and Affiliated Companies as of December 31,
1996 and 1995, and the related combined statements of operations, cash flows
and stockholders' equity for each of the three years in the period ended
December 31, 1996. These financial statements are the responsibility of
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements.
An audit also includes assessing the accounting principles used and
significant estimates made by management as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the combined financial position of Delsener/Slater
Enterprises, Ltd. and Affiliated Companies at December 31, 1996 and 1995, and
the combined results of their operations and their cash flows for each of the
three years in the period ended December 31, 1996, in conformity with
generally accepted accounting principles.
ERNST & YOUNG LLP
New York, New York
October 2, 1997
D-F-20
<PAGE>
DELSENER/SLATER ENTERPRISES, LTD. AND
AFFILIATED COMPANIES
COMBINED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------
1995 1996
------------- -------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents .......................................... $ 2,905,449 $ 5,253,193
Accounts receivable ................................................ -- 158,748
Prepaid expenses and other current assets .......................... 116,613 778,768
------------- -------------
Total current assets ................................................ 3,022,062 6,190,709
Investments in unconsolidated subsidiaries, principally GSAC
partners in 1996 (Note 2) .......................................... 37,492 457,903
Property, plant and equipment:
Leasehold improvements ............................................. 6,726,317 6,726,317
Furniture and equipment ............................................ 132,445 130,846
------------- -------------
6,858,762 6,857,163
Accumulated depreciation and amortization .......................... (3,880,506) (4,626,531)
------------- -------------
2,978,256 2,230,632
------------- -------------
Total assets ........................................................ $ 6,037,810 $ 8,879,244
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accrued officers' salary expense ................................... $ 1,186,880 $ 5,950,123
Accounts payable and other accrued expenses ........................ 101,191 97,029
Advances and deferred income ....................................... 1,880 17,672
Prepaid memberships ................................................ 17,710 30,413
Due to stockholder (Note 3) ........................................ 1,830,000 1,877,465
------------- -------------
Total current liabilities ........................................... 3,137,661 7,972,702
Combined stockholders' equity (Note 4) .............................. 2,900,149 906,542
------------- -------------
Total liabilities and stockholders' equity .......................... $ 6,037,810 $ 8,879,244
============= =============
</TABLE>
See accompanying notes.
D-F-21
<PAGE>
DELSENER/SLATER ENTERPRISES, LTD. AND
AFFILIATED COMPANIES
COMBINED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------------------
1994 1995 1996
-------------- -------------- -------------
<S> <C> <C> <C>
OPERATING REVENUES
Concert revenue ....................... $92,785,420 $47,566,304 $50,361,556
Cost of concerts ...................... 83,360,563 39,690,805 41,584,365
-------------- -------------- -------------
9,424,857 7,875,499 8,777,191
OPERATING EXPENSES
Officers' salary expense .............. 4,254,292 3,963,940 6,388,247
Depreciation and amortization ......... 755,238 750,083 746,505
General and administrative expenses .. 2,983,740 3,523,569 2,714,099
-------------- -------------- -------------
7,993,270 8,237,592 9,848,851
-------------- -------------- -------------
(Loss) income from operations ......... 1,431,587 (362,093) (1,071,660)
OTHER INCOME (EXPENSE)
Interest income ....................... 137,966 177,561 198,052
Interest expense ...................... (144,000) (144,000) (60,000)
Equity income (loss) from investments (8,422) 488,372 524,544
-------------- -------------- -------------
Income before income taxes............. 1,417,131 159,840 (409,064)
INCOME TAXES
State and local taxes.................. 4,882 12,610 106,297
-------------- -------------- -------------
Net income (loss) ..................... $ 1,412,249 $ 147,230 $ (515,361)
============== ============== =============
</TABLE>
See accompanying notes.
D-F-22
<PAGE>
DELSENER/SLATER ENTERPRISES, LTD. AND
AFFILIATED COMPANIES
COMBINED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------------------
1994 1995 1996
------------- ------------- -------------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net income (loss) .................................... $1,412,249 $ 147,230 $ (515,361)
Adjustment to reconcile net income (loss) to net cash
provided by (used in) operating activities:
Depreciation and amortization ....................... 755,238 750,083 746,505
Equity in pretax income of partnerships, net of
distributions received ............................. 73,229 2,447 15,885
Changes in operating assets and liabilities:
Accounts receivable ................................ 240,973 384,154 (158,748)
Prepaid expenses and other current assets ......... (389,203) 378,770 (662,155)
Accrued officers' salary expense, accounts payable
and accrued expenses .............................. 1,291,936 (1,326,542) 4,759,546
Advances and deferred income........................ (545) (433,998) 15,792
Prepaid memberships................................. (7,816) (5,000) 12,703
Sponsors advances payable........................... (416,915) (350,000) --
------------- ------------- -------------
Net cash provided by (used in) operating activities .. 2,959,146 (452,856) 4,214,167
INVESTING ACTIVITIES
Investment in GSAC Partnership........................ -- -- (436,296)
Proceeds from disposals of fixed assets............... -- -- 1,119
------------- ------------- -------------
Net cash used in investing activities................. -- -- (435,177)
FINANCING ACTIVITIES
Proceeds from the issuance of common stock and
capital contribution ................................ 30,000 -- 151,993
Due to stockholder.................................... 30,000 -- 47,000
Distributions paid.................................... (536,596) (215,787) (1,630,239)
------------- ------------- -------------
Net cash used in financing activities................. (476,596) (215,787) (1,431,246)
------------- ------------- -------------
Net increase (decrease) in cash and cash equivalents . 2,482,550 (668,643) 2,347,744
Cash and cash equivalents at beginning of year ....... 1,091,542 3,574,092 2,905,449
------------- ------------- -------------
Cash and cash equivalents at end of year.............. $3,574,092 $ 2,905,449 $ 5,253,193
============= ============= =============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash paid for interest................................ $ 144,000 $ 144,000 $ 60,000
============= ============= =============
Cash paid for income taxes............................ $ 4,882 $ 12,610 $ 106,297
============= ============= =============
</TABLE>
D-F-23
<PAGE>
DELSENER/SLATER ENTERPRISES, LTD. AND
AFFILIATED COMPANIES
COMBINED STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1994, 1995 AND 1996
<TABLE>
<CAPTION>
<S> <C>
January 1, 1994 .......................................... $ 2,063,053
Distributions to stockholder ........................... (536,596)
Issuance of common stock (Note 4) ...................... 30,000
Net income ............................................. 1,412,249
-------------
December 31, 1994 ......................................... 2,968,706
Distribution to stockholder ............................ (215,787)
Net income ............................................. 147,230
-------------
December 31, 1995 ......................................... 2,900,149
Distributions to stockholder ........................... (1,630,239)
Issuance of common stock and capital contribution (Note
4) ................................................... 151,993
Net loss ............................................... (515,361)
-------------
December 31, 1996 ......................................... $ 906,542
=============
</TABLE>
See accompanying notes.
D-F-24
<PAGE>
DELSENER/SLATER ENTERPRISES, LTD. AND
AFFILIATED COMPANIES
NOTES TO COMBINED FINANCIAL STATEMENTS
DECEMBER 31, 1996
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING PRINCIPLES
Principles of Combination
The accompanying combined financial statements include the accounts of
Delsener/Slater Enterprises, Ltd. (the "Company," formerly known as Ron
Delsener Enterprises, Ltd.), Beach Concerts, Inc., Connecticut Concerts,
Inc., Ardee Productions, Ltd., Ardee Festivals NJ, Inc., Dumb Deal, Inc.,
In-House Tickets, Inc., Broadway Concerts, Inc. and Exit 116 Revisited, Inc.
(collectively, the "Companies"). Intercompany transactions and balances among
these companies have been eliminated in combination. The Companies are
presented on a combined basis to reflect common ownership by Ron Delsener.
The Companies principally promote musical events in the New York, New
Jersey and Connecticut area. Beach Concerts, Inc.'s principal income from
operations originates from the operation of the Jones Beach Theatre, located
in Wantagh, New York. The Companies earn promotion income in two ways: either
a fixed fee for organizing and promoting an event or an arrangement that
entitles them to a profit percentage based on a predetermined formula.
Broadway Concerts, Inc. is a 49% partner in a general partnership which
subleases a theater located in New York City. Income associated with the
promotion of concerts at this theater is recorded as concert revenue. Any
such promotion revenue recognized reduces the Company's share of the
partnership's profits. Exit 116 Revisited, Inc. is a one-third partner in
GSAC Partners, a general partnership through which it shares in the income or
loss of the PNC Bank Arts Center (formerly known as the Garden State Arts
Center) at varying percentages based on the partnership agreement. Exit 116
Revisited, Inc. invested $436,296 in 1996 for its share of GSAC Partners. The
Companies record these investments on the equity method.
Leasehold Improvements, Furniture and Equipment
Leasehold improvements represents the capitalized costs to renovate the
Jones Beach Theatre. The costs to renovate the theatre included permanent
seats, a new stage and lavatory facilities. These costs are being amortized
over the term of the lease. Furniture and equipment are valued at cost less
accumulated depreciation. Depreciation is provided on a straight-line basis
over the estimated useful lives of the assets.
Cash and Cash Equivalents
The Companies consider all highly liquid debt instruments purchased with a
maturity of three months or less to be cash equivalents.
Concentration of Risk
As of December 1996 and 1995, the Companies have cash equivalents of
approximately $3,461,000 and $1,070,000, respectively, primarily at an
uninsured financial institution. The Companies maintain a policy whereby
funds are transferred daily into uninsured municipal accounts.
Income Taxes
All of the Companies, except Ardee Festivals NJ, Inc. and In-House
Tickets, Inc., have elected to be taxed as S Corporations as provided in
Section 1362(a) of the Internal Revenue Code. As such, the corporate income
or loss and credits are passed to the stockholders and combined with their
personal income and deductions to determine taxable income on their
individual federal tax returns.
Business income of an S Corporation is subject to a corporate level tax on
income derived in New York, New Jersey and Connecticut. The corporate tax
rates for S Corporations in New York State, New Jersey and Connecticut are
approximately one and one-half percent (1.5%), approximately two and
D-F-25
<PAGE>
DELSENER/SLATER ENTERPRISES, LTD. AND
AFFILIATED COMPANIES
NOTES TO COMBINED FINANCIAL STATEMENTS (Continued)
four-tenths percent (2.4%) and eleven and one-half percent (11.5%),
respectively. New York City does not recognize S Corporation status.
Provisions of $106,297, $12,610 and $4,882 have been recorded for 1996, 1995
and 1994 for state and local income taxes, respectively.
Risks and Uncertainties
Accounts receivable are due from ticket vendors and venue box offices.
These amounts are typically collected within 20 days of a performance.
Management considers accounts receivable to be fully collectible;
accordingly, no allowance for doubtful accounts is required.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
2. INVESTMENTS IN UNCONSOLIDATED SUBSIDIARIES
The following is a summary of the unaudited financial position and results
of operations of the Companies' equity investees (GSAC Partners--1996 only)
as of and for the years ended December 31, 1994, 1995 and 1996:
<TABLE>
<CAPTION>
1994 1995 1996
------------- ------------- -------------
<S> <C> <C> <C>
Current assets .......................... $ 328,177 $ 214,947 $ 756,491
Property, plant and equipment ........... 138,467 121,620 239,290
Other assets ............................ -- -- 819,124
------------- ------------- -------------
Total assets ............................ $ 466,644 $ 336,567 $ 1,814,905
============= ============= =============
Current liabilities ..................... $ 398,620 $ 264,531 $ 1,534,380
Partners' capital ....................... 68,024 72,036 280,525
------------- ------------- -------------
Total liabilities and partners' capital $ 466,644 $ 336,567 $ 1,814,905
============= ============= =============
Revenue ................................. $2,505,595 $4,058,522 $16,037,410
Expenses ................................ 2,524,088 2,954,028 14,624,036
------------- ------------- -------------
Net income (loss) ....................... $ (18,493) $1,104,494 $ 1,413,374
============= ============= =============
</TABLE>
The equity income recognized by the Companies represents the appropriate
percentage of investment income less amounts reported in concert revenues for
shows promoted at these theaters. Such concert revenues of unconsolidated
subsidiaries were approximately $-0-, $110,000 and $205,000 for the years
ended December 31, 1994, 1995 and 1996, respectively.
3. DUE TO STOCKHOLDER
Due to stockholder represents the balance due to Ronald Delsener on his
advances to renovate the Jones Beach Theatre (the "Jones Beach Loan") and the
PNC Bank Arts Center (the "PNC Loan"). The Companies paid interest at 8% per
annum on the Jones Beach Loan, which was repaid in May 1996. The PNC Loan,
which was originated in 1996, was repaid in connection with the acquisition
by SFX Broadcasting, Inc. ("Broadcasting") in 1997. (See Note 7).
D-F-26
<PAGE>
DELSENER/SLATER ENTERPRISES, LTD. AND
AFFILIATED COMPANIES
NOTES TO COMBINED FINANCIAL STATEMENTS (Continued)
4. COMMON STOCK
The corporations' stock and tax status are as follows:
<TABLE>
<CAPTION>
TAX SHARES SHARES PAR
STATUS AUTHORIZED ISSUED VALUE
--------- ------------ -------- -------
<S> <C> <C> <C> <C>
Delsener/Slater Enterprises, Ltd. . S-Corp. 100 10 None
Beach Concerts, Inc. ............... S-Corp. 2,500 10 None
Connecticut Concerts, Incorporated S-Corp. 5,000 10 None
Ardee Productions, Ltd. ............ S-Corp. 100 10 None
Ardee Festivals NJ, Inc. ........... C-Corp. 2,500 10 None
Dumb Deal, Inc. .................... S-Corp. 100 10 $.01
In-House Tickets, Inc. ............. C-Corp. 200 10 None
Broadway Concerts, Inc. ............ S-Corp. 2,500 10 None
Exit 116 Revisited, Inc. ........... S-Corp. 200 10 None
</TABLE>
In 1994, there was an issuance of common stock for Broadway Concerts, Inc.
for $20,000 and Connecticut Concerts, Inc. for $10,000. In 1996, there was an
initial issuance of the common stock of Dumb Deal, Inc. for $100,109 and a
capital contribution of $51,884 by Ron Delsener into Connecticut Concerts,
Inc.
5. COMMITMENTS AND CONTINGENCIES
Leases
The Companies lease office facilities and concert venues under
noncancellable leases which expire at various dates through 1999. Such leases
contain various operating escalations and renewal options.
Total rent expense for the years ended December 31, 1996, 1995 and 1994
under operating leases was $875,000, $835,000 and $823,333, respectively.
Future minimum lease payments under noncancellable operating leases as of
December 31, 1996 are as follows:
<TABLE>
<CAPTION>
<S> <C>
1997 ... $ 837,500
1998 ... 775,000
1999 ... 820,000
-----------
$2,432,500
===========
</TABLE>
Unions
The Companies had agreements with various trade unions which have expired.
The trade unions are currently working under the old agreements and the
Companies and the unions are in the process of negotiating new agreements.
Other Matters
As of December 31, 1996, outstanding letters of credit for approximately
$400,000 were issued by banks on behalf of the Companies for the rental of
theaters.
6. SUBSEQUENT EVENTS
In January 1997, Broadcasting purchased 100% of the capital stock of the
Companies for aggregate consideration of approximately $26.6 million,
including $2.9 million for working capital and the present value of deferred
payments of $3 million to be paid, without interest, over five years, and $1
million to be paid, without interest, over ten years.
D-F-27
<PAGE>
DELSENER/SLATER ENTERPRISES, LTD. AND
AFFILIATED COMPANIES
NOTES TO COMBINED FINANCIAL STATEMENTS (Continued)
In March 1997, the Company consummated the acquisition of certain
companies which collectively own and operate the Meadows Music Theater in
Hartford, Connecticut for $0.9 million in cash, shares of Broadcasting's
Class A common stock with a value of approximately $7.5 million and the
assumption of approximately $15.4 million of debt.
D-F-28
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Shareholders of Connecticut Performing Arts, Inc. and
the Partners of Connecticut Performing Arts Partners:
We have audited the accompanying combined balance sheets of Connecticut
Performing Arts, Inc. and Connecticut Performing Arts Partners (collectively,
the Company) as of December 31, 1996 and 1995, and the related combined
statements of operations, shareholders' and partners' equity (deficit) and
cash flows for the years ended December 31, 1996, 1995 and 1994. These
combined financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements.
An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of the Company as of
December 31, 1996 and 1995, and the results of its operations and its cash
flows for the years ended December 31, 1996, 1995 and 1994 in conformity with
generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Hartford, Connecticut
March 21, 1997
D-F-29
<PAGE>
CONNECTICUT PERFORMING ARTS, INC. AND
CONNECTICUT PERFORMING ARTS PARTNERS
COMBINED BALANCE SHEETS
<TABLE>
<CAPTION>
AS OF DECEMBER 31,
----------------------------
1995 1996
------------- -------------
<S> <C> <C>
ASSETS:
Current assets:
Cash ........................................................... $ 63,061 $ 6,778
Accounts receivable............................................. 192,382 152,205
Accounts receivable--related party.............................. 124,700 226,265
Prepaid interest ............................................... 54,982 54,279
Prepaid insurance .............................................. 69,797 87,869
Other current assets ........................................... 21,156 60,784
Deposit ........................................................ -- 110,000
Subscription receivable ........................................ 100 100
------------- -------------
Total current assets ......................................... 526,178 698,280
------------- -------------
Plant and equipment:
Building and building improvements ............................. 14,127,632 14,208,153
Furniture, fixtures and equipment .............................. 1,899,041 1,973,911
Leasehold improvements ......................................... 1,221,069 1,224,071
------------- -------------
17,247,742 17,406,135
Less: Accumulated depreciation and amortization ................ (408,897) (1,620,297)
------------- -------------
16,838,845 15,785,838
------------- -------------
Other assets:
Deferred costs, net of accumulated amortization of $503,766 and
$165,300 in 1996 and 1995, respectively ....................... 2,453,553 2,115,087
Deposit ........................................................ 110,000 --
Other .......................................................... -- 2,332
------------- -------------
Total other assets ........................................... 2,563,553 2,117,419
------------- -------------
$19,928,576 $18,601,537
============= =============
LIABILITIES AND SHAREHOLDERS' AND PARTNERS' EQUITY (DEFICIT)
Current liabilities:
Accounts payable ............................................... $ 915,280 $ 908,986
Accrued expenses ............................................... 1,356,132 655,207
Deferred income ................................................ 679,476 737,440
Notes payable .................................................. 1,100,000 1,450,000
Current portion of long-term debt and capital lease obligations 493,362 824,800
------------- -------------
Total current liabilities .................................... 4,544,250 4,576,433
------------- -------------
Long-term debt and capital lease obligations,
less current portion .......................................... 13,398,700 13,982,196
------------- -------------
COMMITMENTS AND CONTINGENCIES
(Notes 2, 4, 5, 6, 9 and 10)
Shareholders' and Partners' Equity (Deficit):
Shareholders' equity--
Common stock................................................... 1,000 1,000
Series A Preferred Stock....................................... 1,346,341 1,372,174
Series B Preferred Stock....................................... 1,250,000 1,250,000
Accumulated deficit............................................ (273,114) (1,999,823)
Partners' equity (deficit)...................................... (338,601) (580,443)
------------- -------------
Total shareholders' and partners' equity (deficit) .......... 1,985,626 42,908
------------- -------------
$19,928,576 $18,601,537
============= =============
</TABLE>
The accompanying notes are an integral part of these combined financial
statements.
D-F-30
<PAGE>
CONNECTICUT PERFORMING ARTS, INC. AND
CONNECTICUT PERFORMING ARTS PARTNERS
COMBINED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------------
1994 1995 1996
------- -------------- -------------
<S> <C> <C> <C>
Operating revenues:
Concert revenue ............... $ -- $ 6,830,681 $ 8,122,797
Cost of concerts .............. -- (5,524,043) (6,191,777)
------- -------------- -------------
-- 1,306,638 1,931,020
Ancillary income .............. -- 1,431,577 2,052,592
------- -------------- -------------
-- 2,738,215 3,983,612
------- -------------- -------------
Operating expenses:
General and administrative .... -- 3,068,162 3,080,914
Depreciation and amortization -- 574,197 1,549,894
Other ......................... 32 20,046 33,577
------- -------------- -------------
32 3,662,405 4,664,385
------- -------------- -------------
Loss from operations......... (32) (924,190) (680,773)
Other income (expense):
Interest income................ -- 428,869 30,015
Interest expense............... -- (509,225) (1,274,660)
------- -------------- -------------
Loss before income taxes ... -- (1,004,546) (1,925,418)
Provision for income taxes ... 10,796 17,300
------- -------------- -------------
Net loss .................... $(32) $(1,015,342) $(1,942,718)
======= ============== =============
</TABLE>
The accompanying notes are an integral part of these combined financial
statements.
D-F-31
<PAGE>
CONNECTICUT PERFORMING ARTS, INC. AND
CONNECTICUT PERFORMING ARTS PARTNERS
COMBINED STATEMENTS OF SHAREHOLDERS'
AND PARTNERS' EQUITY (DEFICIT)
<TABLE>
<CAPTION>
SHAREHOLDERS' EQUITY (DEFICIT)
-------------------------------------- PARTNERS'
COMMON PREFERRED ACCUMULATED EQUITY
STOCK STOCK DEFICIT (DEFICIT)
-------- ------------ -------------- ---------
<S> <C> <C> <C> <C>
Balance, January 1, 1994................ $1,000 $ -- $ -- $ 500,000
Proceeds from sale of 125,000 shares of
Series A Preferred Stock............... -- 1,250,000 -- --
Proceeds from sale of 125,000 shares of
Series B Preferred Stock............... -- 1,250,000 -- --
Net loss................................ -- -- (32) --
-------- ------------ -------------- -----------
Balance, December 31, 1994.............. 1,000 2,500,000 (32) 500,000
Accretion of Series A Preferred Stock .. -- 96,341 (96,341) --
Net loss................................ -- -- (176,741) (838,601)
-------- ------------ -------------- -----------
Balance, December 31, 1995.............. 1,000 2,596,341 (273,114) (338,601)
Accretion of Series A Preferred Stock .. -- 25,833 (25,833) --
Net loss................................ -- -- (1,700,876) (241,842)
-------- ------------ -------------- -----------
Balance, December 31, 1996.............. $1,000 $2,622,174 $(1,999,823) $(580,443)
======== ============ ============== ===========
</TABLE>
The accompanying notes are an integral part of these combined financial
statements.
D-F-32
<PAGE>
CONNECTICUT PERFORMING ARTS, INC. AND
CONNECTICUT PERFORMING ARTS PARTNERS
COMBINED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------------------------
1994 1995 1996
------------- --------------- ---------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss ........................................... $ (32) $ (1,015,342) $ (1,942,718)
Adjustments to reconcile net loss to net cash (used
in) provided by operating activities:
Depreciation and amortization ..................... -- 574,197 1,549,894
Loss on disposal of equipment ..................... -- -- 1,031
Changes in operating assets and liabilities:
Accounts receivable ............................... -- (192,382) 40,177
Accounts receivable--related party ................ -- -- (101,565)
Prepaid expenses and other assets ................. (2,232) (143,703) (59,329)
Accounts payable .................................. -- -- (6,294)
Accrued expenses .................................. -- 505,199 150,008
Deferred income ................................... -- 679,476 57,964
------------- --------------- ---------------
Net cash (used in) provided by operating
activities ...................................... (2,264) 407,445 (310,832)
------------- --------------- ---------------
Cash flows from investing activities:
Purchases of plant and equipment .................. (3,873,286) (23,242,858) (159,452)
Grant proceeds..................................... 3,232,839 7,680,161 --
Deferred start-up costs ........................... (756,570) (264,975) --
Accounts receivable--related party................. (527,878) 827,170 --
Accounts payable................................... 1,353,630 (438,350) --
Accounts payable--related party.................... (489,302) -- --
Long term deposit.................................. (110,000) -- --
------------- --------------- ---------------
Net cash (used in) investing activities ........ (1,170,567) (15,438,852) (159,452)
------------- --------------- ---------------
Cash flows from financing activities:
Proceeds from borrowings on notes payable and
long-term debt ................................... -- 13,943,316 1,278,068
Repayments of notes payable, long-term debt and
capital lease obligations......................... -- (176,917) (864,067)
Proceeds from sales of common and preferred stock . 2,500,000 900 --
------------- --------------- ---------------
Net cash provided by financing activities ....... 2,500,000 13,767,299 414,001
------------- --------------- ---------------
Net increase (decrease) in cash .................... 1,327,169 (1,264,108) (56,283)
Cash, beginning of year ............................ -- 1,327,169 63,061
------------- --------------- ---------------
Cash, end of year................................... $ 1,327,169 $ 63,061 $ 6,778
============= =============== ===============
Supplemental Disclosures:
Cash Paid For--
Interest........................................... $ -- $ 554,342 $ 1,108,291
============= =============== ===============
Income taxes....................................... $ -- $ 10,796 $ 17,300
============= =============== ===============
Noncash Transactions--
Capital lease obligations.......................... $ -- $ 59,479 $ --
============= =============== ===============
Series A Preferred Stock accretion................. $ -- $ 96,341 $ 25,833
============= =============== ===============
Conversion of accrued expense for equipment
purchase to note payable.......................... $ -- $ -- $ 850,933
============= =============== ===============
</TABLE>
The accompanying notes are an integral part of these combined financial
statements.
D-F-33
<PAGE>
CONNECTICUT PERFORMING ARTS, INC. AND
CONNECTICUT PERFORMING ARTS PARTNERS
NOTES TO COMBINED FINANCIAL STATEMENTS
1. OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Operations --
Connecticut Performing Arts, Inc. (the Company) and Connecticut Performing
Arts Partners (the Partnership) were incorporated and formed, respectively,
in 1993 pursuant to the laws of the State of Connecticut. The Company's
shareholders and the Partnership's partners are Nederlander of Connecticut,
Inc. and Connecticut Amphitheater Development Corporation. The Company's
shareholders and the Partnership's partners changed in March 1997 (see Note
10). The Company and Partnership are engaged in the ownership and operation
of an amphitheater in Hartford, Connecticut. The construction of the
amphitheater commenced in December 1994 and amphitheater operations commenced
in July 1995.
Principles of combination --
The combined financial statements include the accounts of the Company and
the Partnership after elimination of intercompany accounts and transactions.
Use of estimates in the preparation of financial statements --
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Plant and equipment --
Plant and equipment is carried at cost. Major additions and betterments
are capitalized, while replacements, maintenance and repairs which do not
extend the lives of the assets are charged to operations as incurred. Upon
the disposition of plant and equipment, any resulting gain or loss is
recognized in the statement of operations as a component of income.
The Company received grant funds from the City of Hartford and Connecticut
Development Authority related to the construction of the amphitheater (see
Note 4). Such amounts have been accounted for as a reduction in the cost of
the amphitheater.
Depreciation of plant and equipment is provided for, commencing when such
assets become operational, using straight-line and accelerated methods over
the following estimated useful lives:
<TABLE>
<CAPTION>
USEFUL LIVES
----------------------
<S> <C>
Building and building improvements .... 39 years
Furniture, fixtures and equipment ..... 4-7 years
Leasehold improvements ................. Shorter of asset
life or lease term
</TABLE>
Effective January 1, 1996, the Company and Partnership adopted Statement
of Financial Accounting Standards No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to Be Disposed Of" which had no
effect upon adoption. This statement requires that long-lived assets and
certain identifiable intangible assets to be held and used by an entity be
reviewed for impairment whenever events or changes in circumstances indicate
that the carrying amount of an asset may not be recoverable.
D-F-34
<PAGE>
CONNECTICUT PERFORMING ARTS, INC. AND
CONNECTICUT PERFORMING ARTS PARTNERS
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
1. OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: (Continued)
Deferred costs --
Deferred costs consist of start-up costs being amortized over a period of
5 years and deferred financing costs being amortized over the term of the
related debt (24 years and 4 months). As of December 31, 1995 and 1996
deferred costs were as follows:
<TABLE>
<CAPTION>
1995 1996
------------ ------------
<S> <C> <C>
Deferred start-up .............. $1,452,669 $1,452,669
Deferred financing ............. 1,166,184 1,166,184
------------ ------------
2,618,853 2,618,853
Less: Accumulated amortization (165,300) (503,766)
------------ ------------
$2,453,553 $2,115,087
============ ============
</TABLE>
Deposit --
The deposit represents a deposit held by the City of Hartford related to
an employment agreement between the Partnership and the City of Hartford for
priority hiring of Hartford residents and utilization of minority business
enterprise or women business enterprise contractors and vendors in the future
operation of the amphitheater. The deposit will be returned to the
Partnership in December 1997 if the Partnership is in compliance with the
employment agreement. As of December 31, 1996, the Partnership has
compensated the City of Hartford for noncompliance with the terms of the
agreement in connection with the construction of the facility and the hiring
of contractors and the City of Hartford has agreed to make no additional
claims with respect to this matter.
Income taxes --
The Company accounts for income taxes in accordance with Statement of
Financial Accounting Standards No. 109, "Accounting for Income Taxes". This
statement requires a company to recognize deferred tax assets and liabilities
for the expected future tax consequences of events that have been recognized
in a company's financial statements or tax returns. Under this method,
deferred tax assets and liabilities are determined based on the difference
between the financial statement carrying amounts and the tax bases of assets
and liabilities and net operating loss carryforwards available for tax
reporting purposes, using the applicable tax rates for the years in which the
differences are expected to reverse. A valuation allowance is recorded on
deferred tax assets unless realization is more likely than not.
The income tax effects of the operations of the Partnership accrue to the
partners in accordance with the terms of the Partnership agreement and are
not reflected in the accompanying combined financial statements.
Revenue recognition --
Revenue from ticket sales is recognized upon occurrence of the event.
Advance ticket sales are recorded as deferred income until the event occurs.
Ticket revenue is recorded net of payments in lieu of taxes under the terms
of the City of Hartford lease (see Note 6) and admission taxes.
Advertising --
The Company expenses the cost of advertising when the specific event takes
place. Advertising expense was $639,424, $689,160 and $0 for the years ended
December 31, 1996, 1995 and 1994, respectively.
D-F-35
<PAGE>
CONNECTICUT PERFORMING ARTS, INC. AND
CONNECTICUT PERFORMING ARTS PARTNERS
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
2. SHAREHOLDERS' EQUITY:
Common stock --
The Company is authorized to issue 5,000 shares of common stock with no
par value. The subscription receivable of $100 as of December 31, 1996
represents the amount due from shareholders for 100 shares of common stock at
$10 per share, of which $900 was received in February 1995.
Preferred stock --
The Company is authorized to issue 295,000 shares of preferred stock at no
par value. As of December 31, 1996 and 1995, 125,000 of such shares have been
designated as Series A Preferred Stock and 125,000 of such shares have been
designated as Series B Preferred Stock. Series A and Series B Preferred Stock
are not entitled to dividends and have liquidation rights of $10 per share.
Series A Preferred Stock is mandatorily redeemable at the rate of 20,835
shares commencing December 31, 1995 (the Initial Redemption Date) and an
aggregate of 20,833 shares on each six month anniversary of the Initial
Redemption Date until all 125,000 shares of the Series A Preferred Stock have
been redeemed, at $11.445 per share. As of December 31, 1996, no shares of
Series A Preferred Stock had been redeemed. The Company is accreting the
difference between the redemption price and the proceeds per share over the
period from the issuance date to the respective scheduled redemption dates.
Series B Preferred Stock is mandatorily redeemable at a per share price of
$10 in whole or in part at the option of the Company at any such time as
legally available funds, as defined in the resolution establishing and
designating the preferred stock, are available. On the tenth anniversary of
the completion date of the amphitheater any Series B Preferred Stock
outstanding shall be redeemed by the Company at a per share price of $10.
The Series A and Series B Preferred Stock will not be redeemed if such
redemption would result in a violation of the provisions of the Connecticut
Development Authority assistance agreement (see Note 4) or the mortgage loan
agreement (see Note 5).
3. PARTNERS' EQUITY:
In 1993, Nederlander of Connecticut, Inc. and Connecticut Amphitheater
Development Corporation each made an initial capital contribution of
$250,000.
4. GRANT FUNDS:
Connecticut Development Authority (CDA) Assistance Agreement --
On September 12, 1994, the CDA entered into a non-recourse assistance
agreement with the Company whereby the CDA provided grant funds for the
construction and development of an amphitheater in the City of Hartford (the
Project) through the issuance of State of Connecticut General Fund Obligation
Bonds (GFO Bonds). The Company received bond proceeds of $8,863,000, which
amount is net of CDA bond issuance costs of $593,000 and withholdings of
$429,000 by the CDA to cover the expected operating shortfall, as discussed
below, through December 31, 1995. Commencing January 1, 1996, the annual tax
revenues derived from the operation of the amphitheater are utilized to
satisfy the annual debt service requirements under the GFO Bonds. In the
event that annual tax revenues derived from the operation of the amphitheater
do not equal annual debt service requirements under the GFO Bonds, the
Company must deposit the lesser of the operating shortfall, as defined, or
10% of the annual debt service under the GFO Bonds. An operating shortfall
did not exist for the year ended December 31, 1996. The GFO Bonds mature on
October 15, 2024 and have an average coupon rate of 6.33%. Annual debt
service requirements on the GFO Bonds for each of the next five years and
thereafter are as follows:
D-F-36
<PAGE>
CONNECTICUT PERFORMING ARTS, INC. AND
CONNECTICUT PERFORMING ARTS PARTNERS
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
4. GRANT FUNDS: (Continued)
<TABLE>
<CAPTION>
YEAR AMOUNT
- ------------- ------------
<S> <C>
1997.......... $ 740,556
1998 ......... 738,906
1999 ......... 736,656
2000 ......... 738,856
2001 ......... 740,293
Thereafter .. 17,140,363
------------
$20,835,630
============
</TABLE>
The assistance agreement requires an annual attendance of at least 400,000
for each of the first three years of operations. It will not be considered an
event of default if the annual attendance is less than 400,000 provided that
no operating shortfall exists for that year or if an operating shortfall
exists such amount has been deposited by the Company. If there is an event of
default, the CDA may foreclose on the construction mortgage loan (see Note
5). If the amphitheater's operations are relocated outside of Connecticut
during the ten year period subsequent to the assistance agreement or during
the period of the construction mortgage loan, the full amount of the grant
funds plus a penalty of 5% must be repaid to the State of Connecticut.
City of Hartford Grant Funds --
On February 15, 1995 the Company entered into an agreement with the City
of Hartford whereby the City of Hartford provided grant funds of $2,050,000
for the remediation and closure of a solid waste disposal area near the
amphitheater. As of December 31, 1995 all funds had been received by the
Company.
5. NOTES PAYABLE AND LONG-TERM DEBT:
Notes payable --
In October 1995, the Company entered into two notes payable with related
parties for an aggregate of $2,000,000. As of December 31, 1996 and 1995,
$1,450,000 and $1,100,000, respectively was outstanding on these notes. The
notes bear interest at 6.6% per annum and are payable upon demand.
CDA mortgage loan --
On September 12, 1994, CDA entered into a construction mortgage loan
agreement for $7,685,000 with the Company. The purpose of the loan was to
finance a portion of the construction and development of the amphitheater.
The loan agreement contains substantially the same covenants as the CDA
assistance agreement (see Note 4). As of December 31, 1995, proceeds of
$6,519,000, which amount is net of deferred financing costs of approximately
$1,166,000, had been received by the Company.
D-F-37
<PAGE>
CONNECTICUT PERFORMING ARTS, INC. AND
CONNECTICUT PERFORMING ARTS PARTNERS
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
5. NOTES PAYABLE AND LONG-TERM DEBT: (Continued)
The mortgage loan bears interest at 8.73% and is payable in monthly
installments of principal and interest. The mortgage loan matures on October
15, 2019. As of December 31, 1996, future principal payments are as follows:
<TABLE>
<CAPTION>
YEAR AMOUNT
- ------------- -----------
<S> <C>
1997.......... $ 111,667
1998 ......... 121,667
1999 ......... 131,667
2000 ......... 141,667
2001 ......... 152,500
Thereafter .. 6,854,498
-----------
$7,513,666
===========
</TABLE>
The loan is guaranteed by the Company's shareholders and is collateralized
by a lien on the Company's assets. As of December 31, 1996, the loan was
secured by an irrevocable standby letter of credit issued by a shareholder of
the Company in the amount of $785,000. The letter of credit was replaced in
March 1997 by a letter of credit issued by a new shareholder (see Note 10).
Ogden Entertainment, Inc. (OE) Concession Agreement --
In October 1994, the Partnership entered into a concession agreement with
OE which provides for the payment of concession commissions to the
Partnership. In connection with the concession agreement, OE loaned the
Partnership $4,500,000 in 1995 to facilitate the construction of the
amphitheater. On December 30, 1996, the concession agreement was amended and
restated retroactively to October 18, 1994. In accordance with the terms of
the amended agreement, which expires on July 7, 2025, interest only, at the
6-month LIBOR rate, through July 7, 1995 and principal and interest, at the
rate of 7.5% per annum, were due on the note payable via withholdings of the
first $41,716 from each monthly commission payment commencing July 20, 1995
through December 20, 1995. Effective January 2, 1996, and through the term of
the amended concession agreement, principal and interest, at the rate of 7.5%
per annum on the note is payable via withholdings of the first $31,299 from
each monthly commission payment.
OE loaned the Partnership an additional $1,000,000 during 1995. This loan
bears interest at a rate of 9.75% per annum and is payable via withholdings
of an additional $11,900 of principal, plus interest, from each monthly
commission payment through December 20, 2002. As of December 31, 1996,
aggregate future principal payments to OE are as follows:
<TABLE>
<CAPTION>
YEAR AMOUNT
- ------------- -----------
<S> <C>
1997.......... $ 190,722
1998 ......... 194,442
1999 ......... 198,451
2000 ......... 202,772
2001 ......... 207,427
Thereafter .. 4,218,234
-----------
$5,212,048
===========
</TABLE>
The concession agreement provided for the Partnership to supply certain
equipment to OE at the Partnership's expense. This equipment was installed
prior to the opening of the amphitheater (the Initial
D-F-38
<PAGE>
CONNECTICUT PERFORMING ARTS, INC. AND
CONNECTICUT PERFORMING ARTS PARTNERS
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
5. NOTES PAYABLE AND LONG-TERM DEBT: (Continued)
Equipment). The Initial Equipment was purchased by OE at a cost of $850,933
and the Partnership was obligated to reimburse OE for the cost of the
equipment. Accordingly, this amount was reflected as an accrued expense in
the accompanying combined balance sheet as of December 31, 1995. In 1996, in
connection with the amended concession agreement, the $850,933, and an
additional $33,067 related to 1996 equipment purchases, was converted to a
note payable for $884,000. The note bears interest at the rate of 9.25% per
annum and provides for monthly principal and interest payments of $10,185 to
OE, however, the Partnership is not required to make any principal or
interest payments to the extent that 5% of receipts, as defined, in any month
are less than the amount of the payment due. As of December 31, 1996, future
principal payments to OE by the Partnership are as follows:
<TABLE>
<CAPTION>
YEAR AMOUNT
- ------------- ---------
<S> <C>
1997.......... $ 42,210
1998 ......... 46,284
1999 ......... 50,751
2000 ......... 55,650
2001 ......... 61,022
Thereafter .. 628,083
---------
$884,000
=========
</TABLE>
Conn Ticketing Company (CTC) Promissory Note Payable --
On April 1, 1995, CTC (a company related to the Company and the
Partnership via common ownership) entered into a promissory note agreement
with ProTix Connecticut General Partnership (PTCGP). Under the terms of the
agreement, CTC borrowed $825,000 at 9.375% per annum from PTCGP. Principal
and interest are repayable by CTC in nine annual installments of $139,714
which commenced March 31, 1996. In May 1995, CTC loaned $824,500 to the
Company which is also repayable in nine annual installments of principal and
interest of $139,714. The PTCGP loan to CTC is secured by CTC's receivable
from the Company. As of December 31, 1996, future principal payments to CTC
by the Company are as follows:
<TABLE>
<CAPTION>
YEAR AMOUNT
- ------------- ---------
<S> <C>
1997.......... $ 68,217
1998 ......... 74,613
1999 ......... 81,608
2000 ......... 89,259
2001 ......... 97,627
Thereafter .. 351,306
---------
$762,630
=========
</TABLE>
In January 1995, the Partnership entered into a ticket and sales agreement
with PTCGP through December 31, 2004. Under the terms of the agreement, PTCGP
pays the Partnership an annual fee of $140,000 commencing in March 1996.
Proceeds from the annual fee for the first nine years will be used by the
Partnership to make the annual principal and interest payment to CTC.
Line of credit --
The Partnership has a line of credit in the amount of $2,000,000, which
bears interest at 8.25% per annum, with a bank. As of December 31, 1996,
$395,000 was outstanding on the line of credit.
D-F-39
<PAGE>
CONNECTICUT PERFORMING ARTS, INC. AND
CONNECTICUT PERFORMING ARTS PARTNERS
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
5. NOTES PAYABLE AND LONG-TERM DEBT: (Continued)
Capital lease obligations --
The Partnership entered into capital leases for certain office equipment.
The leases expire in 1998 and 2000. As of December 31, 1996 future principal
payments are as follows:
<TABLE>
<CAPTION>
YEAR AMOUNT
- ------- ---------
<S> <C>
1997 ... $16,984
1998 ... 13,905
1999 ... 4,550
2000 ... 4,213
---------
$39,652
=========
</TABLE>
6. LAND AND BUILDING LEASES:
Land lease agreement between the City of Hartford and the Partnership --
The Partnership entered into a 40 year lease agreement for certain land
with the City of Hartford, Connecticut on September 14, 1994. The lease
agreement provides for two successive options to extend the term of the lease
for a period of ten years each. The Partnership pays an annual basic rent of
$50,000 commencing July 1, 1995; and additional rent payments in lieu of real
estate taxes (PILOT) in an amount equal to 2% of all admission receipts, food
and beverage revenue, merchandise revenue and parking receipts that exceed
10% of the total admission receipts, which amount is to be net of any
surcharges and sales or like taxes levied by governmental authorities on the
price of such items.
Assignment of lease by the Partnership to the Company --
The above lease was subsequently assigned by the Partnership to the
Company on September 22, 1994 for consideration of $1.
Lease and sublease agreement between the Company and the Partnership --
On October 19, 1994, the Company subleased the land and buildings and
improvements thereon to the Partnership for a period of 40 years commencing
upon substantial completion of the amphitheater. The sublease agreement
provides for two successive options to extend the term of the lease for a
period of ten years each. The sublease agreement provides for the Partnership
to pay rent to the Company in amounts ranging from $804,000 to $831,100 per
annum for the first 25 years and $100,000 per annum thereafter including the
option periods. Additional rent of six semi-annual installments of $238,452
is also payable by the Partnership commencing six months after the start of
operations. Subsequent to the six semi-annual installments an aggregate of
$1,250,000 will be payable in semi-annual installments based on available
cash flow of the Partnership, as defined. Additionally, the Partnership is
also required to pay the annual basic rent ($50,000) and any additional
payments in lieu of taxes under the terms of the lease agreement between the
City of Hartford and the Partnership described above. The Partnership will
also pay additional rent equal to principal and interest payable by the
Company to the concession company for a previously arranged concessionaire
arrangement (see Note 5). The accompanying combined statement of operations
for the year ended December 31, 1996 includes rent expense of $50,000 which
represents the aggregate amount due to the City of Hartford under the terms
of the above agreements.
7. INCOME TAXES:
The provision for income taxes for the year ended December 31, 1996
represents minimum state income taxes for the Company. As of December 31,
1996, the Company has a net deferred tax asset of
D-F-40
<PAGE>
CONNECTICUT PERFORMING ARTS, INC. AND
CONNECTICUT PERFORMING ARTS PARTNERS
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
7. INCOME TAXES: (Continued)
approximately $750,000 primarily as a result of aggregate net operating
losses since inception. Usage of the net operating loss carryforwards is
restricted in the event of certain ownership changes. A valuation allowance
has been recorded for the same amount due to the uncertainty related to the
realization of this asset.
8. RELATED PARTY TRANSACTIONS:
Accounts receivable -related party as of December 31, 1996, includes net
amounts due from a shareholder of $121,265 and receivables from another
related party of $105,000.
9. CONTINGENCIES:
The Company and the Partnership are party to certain litigation arising in
the normal course of business. Management, after consultation with legal
counsel, believes the disposition of these matters will not have a material
adverse effect on the combined results of operations or financial condition.
10. SUBSEQUENT EVENTS:
Effective March 5, 1997, the Partnership and Company entered into a
$1,500,000 loan agreement with the CDA of which $1 million was funded in
March 1997. Principal payments of $150,000 are due on July 1 and October 1 of
each year commencing July 1, 1997 through October 1, 2001. The note bears
interest at the rate of 8.9% per annum through February 1, 1998, and
thereafter at the index rate, as defined, plus 2.5%. In addition, the
Partnership and Company are required to make principal payments in an amount
equal to 10% of the annual gross revenue, as defined, in excess of $13
million on or before March 1 of each calendar year commencing March 1, 1998.
In March 1997, three subsidiaries of SFX Broadcasting, Inc.
(Broadcasting), which were created for such purpose, were merged into
Nederlander of Connecticut, Inc., Connecticut Amphitheater Development
Corporation and QN Corp., a newly formed entity. In connection with the
merger, the name of Nederlander of Connecticut, Inc., was changed to NOC,
Inc. (NOC) and the directors of NOC, Inc., Connecticut Amphitheater
Development Corporation (CADCO) and QN Corp. (QN) were replaced with
directors of the Broadcasting acquisition subsidiaries. Each outstanding
share of stock of NOC, CADCO and QN was canceled and exchanged for an
aggregate of $1 million cash and shares of Broadcasting Class A Common Stock
valued at $9 million, subject to certain adjustments. The shares are subject
to a put provision between the second and seventh anniversary of the closing
whereby the holder can put each share back to Broadcasting for the per share
value of Broadcasting stock as of the merger closing date, as defined, less
10%. Additionally, the shares may be called by Broadcasting during the same
period for an amount equal to the per share value of the Broadcasting stock
as of the merger closing date, as defined, plus 10%. As consideration for
approval of the transaction, the CDA received shares of Broadcasting stock
valued at approximately $361,000.
D-F-41
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors and Shareholders
of SFX Broadcasting, Inc.:
We have audited the accompanying combined balance sheets of DEER CREEK
PARTNERS, L.P. (formerly Sand Creek Partners, L.P.) and MURAT CENTRE, L.P.,
as of December 31, 1996 and 1995, and the related combined statements of
operations and partners' equity (deficit) and cash flows for the years ended
December 31, 1996, 1995 and 1994. These financial statements are the
responsibility of the Partnerships' management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements.
An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the combined financial position of Deer Creek
Partners, L.P. and Murat Centre, L.P. as of December 31, 1996 and 1995, and
the combined results of their operations and their cash flows for the years
ended December 31, 1996, 1995 and 1994 in conformity with generally accepted
accounting principles.
ARTHUR ANDERSEN LLP
Indianapolis, Indiana
September 29, 1997.
D-F-42
<PAGE>
DEER CREEK PARTNERS, L.P. AND MURAT CENTRE, L.P.
COMBINED BALANCE SHEETS
AS OF DECEMBER 31, 1995 AND 1996
<TABLE>
<CAPTION>
1995 1996
------------- ------------
<S> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents.................. $ 1,894,533 $ 876,776
Accounts receivable........................ 138,548 155,929
Prepaid show expense....................... -- 42,114
Prepaid expenses........................... 91,919 118,152
------------- ------------
Total current assets..................... 2,125,000 1,192,971
------------- ------------
Property and equipment:
Land....................................... 2,428,770 2,428,770
Buildings.................................. 6,155,979 6,155,979
Site improvements.......................... 2,328,369 2,230,594
Leasehold improvements..................... 5,270,038 9,663,357
Furniture and equipment.................... 1,070,547 1,722,874
------------- ------------
17,253,703 22,201,574
Less: Accumulated depreciation............. 2,167,567 2,850,077
------------- ------------
Total property and equipment............. 15,086,136 19,351,497
------------- ------------
Other Assets:
Cash surrender value--life insurance
policy.................................... 62,819 71,815
Unamortized loan acquisition costs ....... 93,439 350,055
------------- ------------
Total other assets....................... 156,258 421,870
------------- ------------
TOTAL ASSETS ............................ $17,367,394 $20,966,338
============= ============
</TABLE>
The accompanying notes are an integral part of these statements.
D-F-43
<PAGE>
DEER CREEK PARTNERS, L.P. AND MURAT CENTRE, L.P.
COMBINED BALANCE SHEETS
AS OF DECEMBER 31, 1995 AND 1996
<TABLE>
<CAPTION>
1995 1996
------------- -------------
<S> <C> <C>
LIABILITIES AND PARTNERS' EQUITY
Current Liabilities:
Current portion of notes and capital lease
obligation........................................... $ 796,391 $ 611,127
Current portion of deferred ticket revenue............ 542,420 841,476
Accounts payable...................................... 472,365 520,663
Accrued interest...................................... 663,391 299,600
Accrued property taxes................................ 125,524 280,734
Current portion of loan payable....................... -- 34,200
Construction payable and other accrued liabilities .. 3,341,284 50,641
------------- -------------
Total current liabilities .......................... 5,941,375 2,638,441
------------- -------------
Long-term Liabilities:
Notes payable and capital lease obligation,
net of current portion............................... 12,998,738 17,266,768
Loan, net of current portion (Note 5)................. -- 99,200
Deferred ticket revenue, net of current portion ...... -- 168,833
------------- -------------
Total long-term liabilities......................... 12,998,738 17,534,801
------------- -------------
Partners' equity (deficit):
Contributed capital .................................. -- 2,200,000
Undistributed earnings (loss) ........................ (1,572,719) (1,406,904)
------------- -------------
(1,572,719) 793,096
------------- -------------
TOTAL LIABILITIES AND PARTNERS' EQUITY.............. $17,367,394 $20,966,338
============= =============
</TABLE>
The accompanying notes are an integral part of these statements.
D-F-44
<PAGE>
DEER CREEK PARTNERS, L.P. AND MURAT CENTRE, L.P.
COMBINED STATEMENTS OF OPERATIONS AND PARTNERS' EQUITY (DEFICIT)
FOR THE YEARS ENDED DECEMBER 31, 1994, 1995 AND 1996
<TABLE>
<CAPTION>
1994 1995 1996
-------------- -------------- --------------
<S> <C> <C> <C>
Operating revenues:
Concert revenue....................................... $ 9,258,015 $11,073,491 $14,194,502
Cost of concerts...................................... 8,018,336 8,939,022 10,724,059
-------------- -------------- --------------
1,239,679 2,134,469 3,470,443
Ancillary income:
Royalty commissions................................... 1,066,297 1,706,458 1,799,950
Corporate sponsorships................................ 987,362 959,518 1,056,161
Other ancillary income................................ 1,148,952 789,433 1,375,528
-------------- -------------- --------------
4,442,290 5,589,878 7,702,082
Operating expenses:
General & administrative.............................. 1,971,613 2,419,679 3,452,990
Depreciation & amortization........................... 340,753 343,567 783,167
Other operating expenses.............................. 211,428 249,812 471,126
-------------- -------------- --------------
2,523,794 3,013,058 4,707,283
Income from operations................................ 1,918,496 2,576,820 2,994,799
Other income (expense):
Interest income....................................... 56,919 86,034 84,123
Interest expense...................................... (1,648,956) (2,203,690) (1,549,579)
Professional fees related to attempted initial public
offering ............................................ (540,000) -- --
-------------- -------------- --------------
Net Income (Loss)................................... $ (213,541) $ 459,164 $ 1,529,343
Partners' Equity (Deficit) at beginning of year ..... $(1,161,815) $(1,857,603) $(1,572,719)
Contributions......................................... -- -- 2,200,000
Distributions......................................... (482,247) (174,280) (1,363,528)
-------------- -------------- --------------
Partners' Equity (Deficit) at end of year ............ $(1,857,603) $(1,572,719) $ 793,096
============== ============== ==============
</TABLE>
The accompanying notes are an integral part of these statements.
D-F-45
<PAGE>
DEER CREEK PARTNERS, L.P. AND MURAT CENTRE, L.P.
COMBINED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1994, 1995 AND 1996
<TABLE>
<CAPTION>
1994 1995 1996
------------- ------------- -------------
<S> <C> <C> <C>
Operating Activities:
Net income (loss).............................................. $ (213,541) $ 459,164 $ 1,529,343
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Depreciation and amortization................................. 412,182 461,678 783,167
Decrease (increase) in certain assets:
Accounts receivable........................................... (93,231) (45,317) (17,381)
Prepaid show expenses......................................... -- -- (42,114)
Prepaid expenses and other ................................... (836,929) 746,307 (33,381)
Increase (decrease) in certain liabilities:
Accounts payable, construction payable and other accrued
liabilities.................................................. 213,228 3,424,461 (3,087,135)
Deferred ticket revenue....................................... 1,329,022 (1,266,654) 467,889
Accrued interest.............................................. -- 389,251 (363,791)
Other......................................................... -- (75,407) 44,852
------------- ------------- -------------
Net cash provided by (used in) operating activities ........ 810,731 4,093,483 (718,551)
------------- ------------- -------------
Investing Activities:
Capital expenditures.......................................... (53,621) (6,713,889) (5,197,260)
------------- ------------- -------------
Net cash used by investing activities......................... (53,621) (6,713,889) (5,197,260)
------------- ------------- -------------
Financing Activities:
Net proceeds from borrowings.................................. -- 3,060,087 5,057,249
Capital contributions......................................... -- -- 2,200,000
Department of Metropolitan Development Grant.................. -- 761,014 338,986
Principal payments on notes and loan payable and capital
leases....................................................... (40,741) (20,308) (1,334,653)
Distributions to partners..................................... (482,247) (174,280) (1,363,528)
------------- ------------- -------------
Net cash provided by (used by) financing activities ........ (522,988) 3,626,513 4,898,054
------------- ------------- -------------
Net increase (decrease) in cash and cash equivalents .......... 234,122 1,006,107 (1,017,757)
Cash and cash equivalents:
Beginning of period........................................... 654,304 888,426 1,894,533
------------- ------------- -------------
End of period................................................. $ 888,426 $ 1,894,533 $ 876,776
============= ============= =============
Supplemental disclosures:
Cash paid for interest........................................ $1,685,494 $ 1,148,049 $ 1,912,494
Equipment acquired under capital leases....................... -- -- 139,000
============= ============= =============
</TABLE>
The accompanying notes are an integral part of these statements.
D-F-46
<PAGE>
DEER CREEK PARTNERS, L.P. AND MURAT CENTRE, L.P.
NOTES TO COMBINED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
a. Organization
Prior to 1997 (See Note 10) Deer Creek Partners, L.P. (the Deer Creek
Partnership) owned and operated Deer Creek Music Center (Deer Creek), a
concert amphitheater located in Hamilton County, near Indianapolis, Indiana
which commenced operations in 1989. Sand Creek Partners, L.P. (the general
partner) was a 50% general partner and is responsible for the management of
the Deer Creek Partnership. Conseco, Inc. (Conseco) was a 50% limited partner
of the Deer Creek Partnership. All distributable cash, as defined by the Deer
Creek partnership agreement, is to be distributed equally between the
Partners.
The Deer Creek Partnership was formed on January 5, 1996 as a result of
Conseco exercising its option to become a 50% owner of Deer Creek. Deer Creek
was previously 100% owned by Sand Creek Partners, L.P. This change in
ownership has been accounted for as a reorganization, and thus the carrying
value of the assets and liabilities related to Deer Creek remain unchanged as
a result of the reorganization.
Murat Centre, L.P. (Murat Partnership), formed on August 1, 1995, leases
and operates the Murat Theatre (Theatre), a renovated concert and
entertainment venue located in downtown Indianapolis, Indiana. The Theatre's
grand reopening was in March, 1996. The Theatre is currently owned by and was
previously operated by the Murat Temple Association, Inc. Murat Centre, Inc.
is the general partner and is responsible for management of the Theatre.
Profits and losses of the Murat Partnership are allocated 1% to the general
partner and 99% to the limited partners. Distributions to partners are
generally limited to the income taxes payable by the partners as a result of
taxable income generated by the Murat Partnership. To the extent that cash
flow for the applicable year exceeds all payment requirements as discussed in
Note 3, the excess shall be distributed to the partners.
In connection with reopening the Theatre, the Murat Partnership expended
approximately $11.7 million for renovations which began in 1995. Start-up and
organizational costs of approximately $85,000 in 1995 and $90,000 in 1996
were expensed as incurred and have been included in general and
administrative expenses in the combined statement of operations for the years
ended December 31, 1996 and 1995. The building is leased under a 50 year
operating lease with options for 5 additional consecutive 10 year periods
under the same terms and conditions as the initial 50 year lease.
b. Basis of Accounting
The financial statements have been prepared in accordance with generally
accepted accounting principles. Such principles require management to make
estimates and assumptions that affect the reported amounts of assets,
liabilities and disclosures of contingent assets and liabilities at the date
of financial statements and the amounts of income and expenses during the
reporting period. Actual results could differ from those estimated.
c. Property and Equipment
Property and equipment are carried at cost less accumulated depreciation.
Depreciation is provided using the straight-line method over the estimated
useful lives of the assets. Buildings are depreciated over forty years,
leasehold improvements over thirty years, site improvements over twenty
years, and furniture and equipment over five to seven years.
d. Loan Acquisition Costs
Loan acquisition costs represent agency and commitment fees paid to the
lenders, closing costs and legal fees incurred in connection with the notes
payable (see Note 2). These fees are being amortized on a straight-line basis
over a fifteen year period, which represented the approximate term of the
related debt.
D-F-47
<PAGE>
DEER CREEK PARTNERS, L.P. AND MURAT CENTRE, L.P.
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
e. Deferred Revenue
Deferred revenue includes individual show ticket revenue, season ticket
revenue, and corporate box seat revenue received in advance of events or the
next concert season and will be recognized over the period in which the shows
are held. A portion of the deferred revenue was derived from the bartering of
tickets for goods and services related to the Murat renovation. Barter
transactions are recorded at the estimated fair value of the materials or
service received.
f. Income Taxes
No provision for Federal or state income taxes is required because the
partners are taxed directly on their distributable shares of the
Partnerships' income or loss.
g. Cash Equivalents
The Partnerships consider all highly liquid investments with an original
maturity of three months or less to be cash equivalents.
h. Advertising and Promotion
Advertising and promotion costs are expensed at the time the related
promotional event is held. The costs were approximately $930,000 in 1996,
$595,000 in 1995 and $470,000 in 1994.
2. NOTES PAYABLE
Notes payable and capital lease obligations as of December 31, 1995 and
1996 consisted of the following:
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31,
1995 1996
-------------- --------------
<S> <C> <C>
MURAT PARTNERSHIP
- -------------------------------------------------------------------
Note payable to bank with 9.25% interest rate subject to adjustment
in 2001 and 2006; payable in monthly installments of $30,876,
including interest, in addition to annual contingent principal
payments based upon remaining net cash flow as defined in Note 3;
secured by assets of the Murat Partnership and guaranteed by two
of the limited partners for $375,000 each; balance due no later
than April 1, 2011. ............................................... $ -- $2,928,053
Note payable with 9% non-compounding interest rate through November
14, 1996, 12% non-compounding interest rate from November 15, 1996
through November 14, 1998, 18% non-compounding interest rate
thereafter; all interest is cumulative; principal and interest
payments are based upon remaining net cash flow as defined in Note
3; subordinate to above bank note payable. ........................ 2,647,165 3,000,000
Note payable with 0% interest rate; principal payments the lesser
of $.15 per ticket sold during fiscal year or remaining net cash
flow as defined in Note 3; subordinate to above bank note payable. -- 800,000
D-F-48
<PAGE>
DEER CREEK PARTNERS, L.P. AND MURAT CENTRE, L.P.
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, DECEMBER 31,
1995 1996
-------------- --------------
Note payable with interest calculated annually and is equal to the
lesser of (1) $.10 per ticket sold during fiscal year, (2) prime
plus 1% or (3) remaining net cash flow as defined in Note 3;
interest and principal is paid at the lesser of $.10 per ticket
sold during fiscal year or remaining net cash flow as defined in
Note 3; principal is also required to be paid down upon sale of
certain Partnership assets or the refinancing of certain
Partnership loans; subordinate to above bank note payable ........ $ -- $ 1,000,000
Other.............................................................. 90,940 --
DEER CREEK PARTNERSHIP
Note payable with interest calculated annually at 9.5%; payable in
quarterly installments of approximately $353,000, including
interest, through the year 2010; secured by substantially all of
the assets of the partnership and is guaranteed up to 50%, jointly
and severally, by two officers of Sunshine Promotions, Inc.
(Sunshine), and by Sunshine (See Note 6.).......................... -- 10,019,361
Note payable with interest at 11.18% payable in monthly
installments and contingent interest based upon net cash flow;
secured by substantially all of the assets of the Partnership;
principal due 1999 with the option for the holder to accelerate
the maturity date to 1996. ........................................ 11,041,024 --
Capital leases ..................................................... 16,000 130,481
-------------- --------------
Total notes payable and capital lease obligations................. 13,795,129 17,877,894
Less--Current portion ............................................ 796,391 611,127
-------------- --------------
$12,998,738 $17,266,768
============== ==============
</TABLE>
Principal payments made on the Murat Partnership bank term note during
1996 totaled $71,947. The Murat Partnership's 1996 net cash flow (see Note 3)
did not require additional principal payments to be made on its notes
payable. The bank term note contains cash flow and leverage ratio covenants.
The Murat Partnership was not in compliance with the cash flow covenant as of
December 31, 1996, but received a waiver dated March 31, 1997 for the
December 31, 1996 calculation. Provisions of the $800,000 note payable
require the Murat Partnership to continue making payments after the principal
has been paid down equal to the lesser of $.15 per ticket sold during the
fiscal year or remaining cash flow, as defined in Note 3. These payments are
to be made to a not-for-profit foundation and will be designated for
remodeling and upkeep of the Theatre.
Under the terms of the note payable in 1995 and 1994, the Deer Creek
Partnership incurred contingent interest, which was based on cash flow, of
$885,000 and $374,000, respectively. During 1995, Deer Creek Partnership's
current lender (a related party) purchased the note payable and entered into
an amended and restated loan agreement with the partnership on January 5,
1996. For each year until the Deer Creek loan is repaid, net cash flow (as
defined) in excess of $400,000 shall be paid as a principal payment on the
loan, not to exceed $400,000. In 1995 and 1996, the Deer Creek Partnership's
net cash flow was such that the maximum principal payment of $400,000 was
required for each year. In addition, the promotional management fee paid to
Sunshine (see Note 6) is subordinate to the quarterly loan payments.
D-F-49
<PAGE>
DEER CREEK PARTNERS, L.P. AND MURAT CENTRE, L.P.
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
Principal maturities of notes payable for the next 5 years, excluding
principal paydowns resulting from excess cash flow:
<TABLE>
<CAPTION>
<S> <C>
1997 ... $578,895
1998 ... 635,682
1999 ... 698,041
2000 ... 766,518
2001.... 841,712
</TABLE>
Future capital lease payments of principal and interest are as follows:
<TABLE>
<CAPTION>
<S> <C>
1997 ... $50,800
1998 ... 46,250
1999 ... 37,000
2000 ... 36,000
2001 ... 4,000
</TABLE>
3. MURAT CASH FLOW PAYMENTS
Each of the Murat Partnership's debt agreements require certain principal
and interest to be paid in April of each year based upon the Murat
Partnership's net cash flow for the preceding year. The Murat Partnership's
building lease agreement provides for lease payments to be made based upon
the same net cash flow calculation. Net cash flow, as defined in each
agreement, approximates net income, plus depreciation and amortization, less
capital expenditures and partnership distributions necessary to pay
applicable income taxes. Net cash flow in each year will be used by the Murat
Partnership to pay principal, interest and lease payments in the following
order of priority:
1. Payment of interest on $1,000,000 note equal to the lesser of (a) $.10 per
ticket sold, (b) prime plus 1% or (c) remaining net cash flow;
2. Additional principal payments on bank note so that the total principal
paid each month (including mandatory term payments discussed in Note 2)
equals up to, but not exceeding, $16,667. If cash flow in any fiscal year
is not sufficient to meet these additional principal payments, the
obligation carries forward to the subsequent year;
3. For 1997 and beyond, building operating lease payments not to exceed
$50,000 per year, non-cumulative;
4. Interest related to the $3 million note (including previous years'
cumulative amounts not paid);
5. Principal payment on the $3 million note until paid in full;
6. Principal payment on $800,000 note equal to lesser of $.15 per ticket sold
during fiscal year or remaining net cash flow;
If cash flow is such that only a portion is paid on the obligation in 2.
above, Sunshine, Inc.'s management fee (see Note 6.) could be reduced by the
amount paid in 1. in order to maximize the amount available to fully pay the
obligation in 2.
4. DMD GRANT
As part of the original financing for renovation of the Theatre, the
Department of Metropolitan Development (DMD) contributed approximately
$760,000 in 1995 and $340,000 in 1996 to the Murat Partnership. The DMD
stipulated that the grant was to be used for leasehold improvements on the
Theatre. As such, the grant has been recorded on the balance sheet as a
reduction of leasehold improvements and is being amortized over 30 years.
D-F-50
<PAGE>
DEER CREEK PARTNERS, L.P. AND MURAT CENTRE, L.P.
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
5. AGREEMENTS WITH OUTSIDE VENDORS
Effective February 1996, the Murat Partnership entered into a ten year
agreement with a caterer to provide exclusive catering services at the
Theatre. The Murat Partnership is entitled to a commission based upon a
percentage of the caterer's net sales. As part of the agreement the caterer
loaned the Murat Partnership $165,000, at a nominal interest rate, for
leasehold improvements necessary to provide catering services. In February
1996 the Murat Partnership began repaying the loan ratably over 5 years.
Effective February 1996, the Murat Partnership entered into a ten year
agreement with a concessionaire for the exclusive license to sell concession
food and beverages at Theatre events. The Murat Partnership is entitled to
royalty commissions based upon a percentage of the concessionaire's gross
receipts. The concessionaire has paid the Murat Partnership $50,000 to be
used for leasehold improvements (which are being depreciated over 30 years)
which will be used by the concessionaire. This payment has been recorded as
deferred income and is being amortized over the term of the agreement. On
March 28, 1997 the rights to the concession agreement were acquired by the
caterer under the same terms as the original concession agreement.
Effective March 1996, the Murat Partnership entered into a five year
agreement with a stagehand union allowing the union to provide services at
all ticketed shows held in the main theater other than the broadway series.
The agreement, among other items, sets minimum hours per show and hourly
wages to be paid to union members. It also sets forth duties which must be
performed solely by union members. A separate agreement between the stagehand
union and Pace Theatrical Group, Inc. (see Note 7) governs the use of union
stagehands for the broadway series.
Effective February 1996, the Murat Partnership entered into a one year
agreement granting another party the right to manage and operate the Theatre
parking lot.
In July 1988, the Deer Creek Partnership entered into a ten-year agreement
with a concessionaire for the exclusive license to sell food and beverages at
Deer Creek events. The Deer Creek Partnership is entitled to royalty
commissions based upon a percentage of the concessionaire's gross receipts.
The Deer Creek Partnership has an agreement with another concessionaire
for an exclusive license to sell consigned nonconsumable novelties and
programs at Deer Creek events. The agreement expires on October 31, 2001. The
Deer Creek Partnership is entitled to royalty commissions based on the
concessionaire's gross receipts.
Total revenues related to the Deer Creek and Murat Center Partnership's
vendor agreements were approximately $1.8 million, $1.7 million and $1.1
million in 1996, 1995 and 1994, respectively.
6. MANAGEMENT AGREEMENTS
The Deer Creek Partnership and Murat Partnership have entered into
agreements which expire in 2009 and 2015, respectively, with Sunshine whose
stockholders are also the limited partners of the general partner. Sunshine
provides the overall promotional management and booking of the entertainment
events held at respective venues, along with other general management
responsibilities. As compensation for Sunshine's services, the Deer Creek
Partnership pays Sunshine 4 percent of gross ticket sales, royalty income and
various other revenues. Total fees to Sunshine for these services were
approximately $501,000 in 1994, $581,000 in 1995 and $560,000 in 1996. The
Murat pays Sunshine an annual management fee of $300,000, adjusted annually
each January 1 by the greater of 4% or the annual increase in the consumer
price index. In 1996 no such fee was recognized by the Murat Partnership as
Sunshine permanently waived the $300,000 management fee due for 1996.
In June 1988, the Deer Creek Partnership entered into a ten-year agreement
with an unrelated management company to provide the on-site operations
management for Deer Creek. At the end of 1995, this agreement was terminated
by mutual consent of both parties. The Deer Creek Partnership entered
D-F-51
<PAGE>
DEER CREEK PARTNERS, L.P. AND MURAT CENTRE, L.P.
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
into a new agreement with the former management company whereby it agreed to
pay $75,000 in 1996, 1997 and 1998 and also to provide to the former
management company selected season tickets at Deer Creek in 1997 and 1998. In
return, for 1996, 1997 and 1998, the Deer Creek Partnership is to receive
advertising and promotion.
7. BROADWAY SERIES PARTNERSHIP
In 1996 the Murat Partnership entered into a 5 year partnership agreement
with Pace Theatrical Group, Inc. (Pace) and Broadway Series Management (BSMG)
to co-present a subscription series of touring Broadway type shows in
Indianapolis. This agreement calls for net profits and losses derived from
the series to be split, after the allocation of certain revenues to the Murat
Partnership and Pace, as follows: 45% Murat Partnership, 45% Pace, and 10%
BSMG. No capital was invested by any of the parties and all income has been
distributed to the parties. The Murat Partnership is responsible for the
local marketing and management of the series, while Pace is responsible for
booking, series management, and season ticket sales for the series. The Murat
Partnership recognized earnings related to this partnership of $270,000 in
1996.
8. RELATED PARTIES
In addition to the management agreement with Sunshine discussed in Note 6,
the Deer Creek Partnership and Murat Partnership have conducted business with
certain related parties in which the limited partners of the general partner
have significant interests. Fees paid to all other related parties for
catering, uniforms and marketing services totaled $204,000 in 1994, $249,000
in 1995 and $65,000 in 1996 from the Deer Creek Partnership and $46,000 in
1996 from the Murat Partnership.
9. ATTEMPTED INITIAL PUBLIC OFFERING
The Deer Creek Partnership was one of several commonly owned and managed
businesses which were involved in an attempted initial public offering during
1994. The offering was not completed. Approximately $900,000 of legal,
accounting, printing and other professional fees were incurred in
contemplation of the offering of which $540,000 was attributable to the
Deercreek Partnership. These costs are included in other expenses in the
combined statement of operations.
10. SALE OF MURAT PARTNERSHIP AND DEER CREEK PARTNERSHIP
In June 1997, the partners of the Murat Partnership and the Deer Creek
Partnership agreed to sell all of the assets of the Murat Partnership and
Deer Creek Partnership to SFX Broadcasting, Inc. (Broadcasting). The total
sales price to Broadcasting of the combined partnership assets was
approximately $33 million. As a part of the sale, Broadcasting assumed or
retired virtually all liabilities and acquired all assets of the Murat
Partnership and the Deer Creek Partnership.
D-F-52
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To PACE Entertainment Corporation:
We have audited the accompanying consolidated balance sheet of PACE
Entertainment Corporation and subsidiaries as of September 30, 1997, and the
related consolidated statements of operations, shareholders' equity and cash
flows for the year then ended. These consolidated financial statements are
the responsibility of the Company's management. Our responsibility is to
express an opinion on these consolidated financial statements based on our
audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements.
An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of PACE
Entertainment Corporation and subsidiaries as of September 30, 1997, and the
results of their operations and their cash flows for the year then ended in
conformity with generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Houston, Texas
December 15, 1997 (except with respect
to the matters discussed in
Note 12, as to which the date
is December 22, 1997)
D-F-53
<PAGE>
REPORT OF INDEPENDENT AUDITORS
Board of Directors and Shareholders
PACE Entertainment Corporation and Subsidiaries
We have audited the accompanying consolidated balance sheet of PACE
Entertainment Corporation and subsidiaries as of September 30, 1996, and the
related consolidated statements of operations, cash flows, and shareholders'
equity for each of the two years in the period ended September 30, 1996.
These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements.
An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of PACE
Entertainment Corporation and subsidiaries at September 30, 1996, and the
consolidated results of their operations and their cash flows for each of the
two years in the period ended September 30, 1996, in conformity with
generally accepted accounting principles.
ERNST & YOUNG LLP
Houston, Texas
December 13, 1996, except for
Note 10, as to which the
date is August 22, 1997
D-F-54
<PAGE>
PACE ENTERTAINMENT CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
SEPTEMBER 30
--------------------
1996 1997
--------- ---------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents ............................ $23,165 $23,784
Trade receivables, net ............................... 4,097 4,562
Accounts receivable, related parties ................. 1,010 1,007
Notes receivable ..................................... 3,040 386
Prepaid expenses ..................................... 6,106 9,967
Investments in theatrical productions ................ 2,489 4,402
Deferred tax asset ................................... 1,872 979
--------- ---------
Total current assets ................................ 41,779 45,087
INVESTMENTS IN UNCONSOLIDATED PARTNERSHIPS ............ 8,816 13,899
NOTES RECEIVABLE, related parties ..................... 6,958 8,024
INTANGIBLE ASSETS, net ................................ 17,244 17,894
OTHER ASSETS, net ..................................... 4,484 4,933
--------- ---------
Total assets ........................................ $79,281 $89,837
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable and accrued liabilities ............. $10,285 $11,078
Deferred revenue ..................................... 26,909 32,093
Current maturities of long-term debt ................. 2,576 2,394
--------- ---------
Total current liabilities ........................... 39,770 45,565
LONG-TERM DEBT ........................................ 21,863 23,129
OTHER NONCURRENT LIABILITIES .......................... 2,496 1,607
REDEEMABLE COMMON STOCK ............................... 3,264 2,456
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY:
Common stock, $1 par value; 500,000 shares
authorized, 2,579 shares issued as of September 30,
1996 and 1997 ....................................... 3 3
Additional paid-in capital ........................... 1,910 1,942
Retained earnings .................................... 10,115 15,275
Treasury stock, at cost, 544 shares .................. (140) (140)
--------- ---------
Total shareholders' equity .......................... 11,888 17,080
--------- ---------
Total liabilities and shareholders' equity ......... $79,281 $89,837
========= =========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
D-F-55
<PAGE>
PACE ENTERTAINMENT CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30
-------------------------------------
1995 1996 1997
----------- ----------- -----------
<S> <C> <C> <C>
GROSS REVENUES ..................... $ 150,385 $ 156,325 $ 176,046
COST OF SALES ...................... (131,364) (135,925) (148,503)
EQUITY IN EARNINGS OF
UNCONSOLIDATED PARTNERSHIPS AND
THEATRICAL PRODUCTIONS ............ 2,183 3,048 6,838
----------- ----------- -----------
Gross profit ..................... 21,204 23,448 34,381
SELLING, GENERAL AND ADMINISTRATIVE
EXPENSES .......................... (13,351) (15,951) (21,260)
STOCK COMPENSATION ................. (25) (3,675) (456)
LITIGATION SETTLEMENT .............. -- (3,657) --
DEPRECIATION AND AMORTIZATION ..... (1,223) (1,737) (1,896)
----------- ----------- -----------
Operating profit (loss) .......... 6,605 (1,572) 10,769
INTEREST INCOME, related parties .. 305 329 403
INTEREST INCOME, other ............. 147 176 60
INTEREST EXPENSE ................... (655) (1,206) (1,997)
----------- ----------- -----------
INCOME (LOSS) BEFORE INCOME TAXES
AND MINORITY INTEREST ............. 6,402 (2,273) 9,235
INCOME TAX (PROVISION) BENEFIT .... (2,575) 714 (3,529)
MINORITY INTEREST .................. (485) (446) (546)
----------- ----------- -----------
NET INCOME (LOSS) .................. $ 3,342 $ (2,005) $ 5,160
=========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
D-F-56
<PAGE>
PACE ENTERTAINMENT CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(IN THOUSANDS)
<TABLE>
<CAPTION>
ADDITIONAL TOTAL
COMMON PAID-IN RETAINED TREASURY SHAREHOLDERS'
STOCK CAPITAL EARNINGS STOCK EQUITY
-------- ------------ ---------- ---------- ---------------
<S> <C> <C> <C> <C> <C>
BALANCE AT SEPTEMBER 30, 1994 ................ $ 3 $1,465 $ 8,778 $(140) $10,106
Amortization of deferred stock compensation . -- 25 -- -- 25
Net income .................................. -- -- 3,342 -- 3,342
-------- ------------ ---------- ---------- ---------------
BALANCE AT SEPTEMBER 30, 1995 ................ 3 1,490 12,120 (140) 13,473
Issuance of restricted stock and
amortization of deferred stock compensation -- 420 -- -- 420
Net loss .................................... -- -- (2,005) -- (2,005)
-------- ------------ ---------- ---------- ---------------
BALANCE AT SEPTEMBER 30, 1996 ................ 3 1,910 10,115 (140) 11,888
Issuance of restricted stock and
amortization of deferred stock compensation -- 32 -- -- 32
Net income .................................. -- -- 5,160 -- 5,160
-------- ------------ ---------- ---------- ---------------
BALANCE AT SEPTEMBER 30, 1997 ................ $ 3 $1,942 $15,275 $(140) $17,080
======== ============ ========== ========== ===============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
D-F-57
<PAGE>
PACE ENTERTAINMENT CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30
---------------------------------
1995 1996 1997
--------- ---------- ----------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) ............................................... $ 3,342 $ (2,005) $ 5,160
Adjustments to reconcile net income (loss) to net cash provided
by (used in) operating activities-
Depreciation and amortization .................................. 1,223 1,737 1,896
Equity in earnings of unconsolidated partnerships ............. (1,624) (486) (4,912)
Distributions from unconsolidated partnerships ................. 1,297 1,090 2,354
Restricted stock compensation .................................. 25 3,675 456
Deferred income tax expense (benefit) .......................... 848 (4,541) 2,037
Changes in operating assets and liabilities-....................
Trade receivables ............................................. 447 (826) (465)
Notes receivable .............................................. (1,813) (1,227) 2,654
Prepaid expenses .............................................. (221) 1,466 (3,861)
Investments in theatrical productions ......................... 305 (335) (1,913)
Other assets .................................................. (37) (1,130) (421)
Accounts payable and accrued liabilities ...................... 947 (1,142) (920)
Deferred revenue .............................................. (1,082) (1,008) 5,184
Other liabilities ............................................. 171 1,601 (34)
--------- ---------- ----------
Net cash provided by (used in) operating activities ......... 3,828 (3,131) 7,215
--------- ---------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisitions, net of cash acquired .............................. -- (13,233) (2,215)
Capital expenditures ............................................ (728) (827) (1,008)
Loans and advances to related parties ........................... (2,301) (535) (2,295)
Contributions to unconsolidated partnerships .................... (1,212) (1,806) (2,162)
--------- ---------- ----------
Net cash used in investing activities ........................ (4,241) (16,401) (7,680)
--------- ---------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from debt additions .................................... 8,927 24,043 24,287
Payments on debt ................................................ (8,928) (6,512) (23,203)
--------- ---------- ----------
Net cash provided by (used in) financing activities ......... (1) 17,531 1,084
--------- ---------- ----------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS ........... (414) (2,001) 619
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR ................... 25,580 25,166 23,165
--------- ---------- ----------
CASH AND CASH EQUIVALENTS AT END OF YEAR ......................... $25,166 $ 23,165 $ 23,784
========= ========== ==========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Interest paid ................................................... $ 620 $ 1,117 $ 1,900
Income taxes paid ............................................... 2,276 2,804 2,103
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
D-F-58
<PAGE>
PACE ENTERTAINMENT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1997
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND BASIS OF PRESENTATION:
Description of Business
PACE Entertainment Corporation (referred to herein as PACE or the
Company), a Texas corporation, is a diversified live entertainment company
operating principally in the United States. The Company presents and produces
theatrical shows, musical concerts and specialized motor sports events.
Through certain unconsolidated partnerships, the Company also owns interests
in and operates amphitheaters, which are used primarily for the presentation
of live performances by musical artists.
Principles of Consolidation
The accompanying consolidated financial statements include the accounts of
PACE and its majority-owned subsidiaries. The Company accounts for its
investments in 50 percent or less owned entities, including theatrical
production partnerships, using the equity method. Intercompany balances are
eliminated.
The Company has various agreements related to the presentation of events
with other live entertainment organizations whereby the Company retains 50
percent to 80 percent of the profits from such events. The Company
consolidates the revenues and related costs from these events and records the
amounts paid to the other parties in cost of sales.
Cash Equivalents
The Company considers all highly liquid investments with a maturity of
three months or less when purchased to be cash equivalents. At September 30,
1997, the Company had restricted cash and cash equivalents of $2,950,000,
which secured letters of credit totaling $3,750,000.
Trade Receivables
Trade receivables are shown net of allowance for doubtful accounts of
$120,000 and $134,000 at September 30, 1996 and 1997, respectively.
Prepaid Expenses
Prepaid expenses include show advances and deposits, event advertising
costs and other costs directly related to future events. Such costs are
charged to operations upon completion of the related events.
As of September 30, 1996 and 1997, prepaid expenses included event
advertising costs of $1,337,000 and $1,498,000, respectively. The Company
recognized event advertising expenses of $13,818,000, $14,861,000 and
$13,802,000 in cost of sales for the years ended September 30, 1995, 1996 and
1997, respectively.
Investments in Theatrical Productions
Theatrical production partnerships are typically formed to invest in a
single theatrical production and, therefore, have limited lives which are
generally less than one year. Accordingly, the Company's investments in such
partnerships are generally shown as current assets. The partnerships amortize
production costs over the estimated life of each production based on the
percentage of revenues earned in relation to projected total revenues.
D-F-59
<PAGE>
PACE ENTERTAINMENT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Intangible Assets
Intangible assets consisted of the following (in thousands):
<TABLE>
<CAPTION>
SEPTEMBER 30
--------------------
1996 1997
--------- ---------
<S> <C> <C>
Goodwill .................................... $16,599 $17,851
Noncompete agreements and other intangibles 3,940 3,857
--------- ---------
20,539 21,708
Accumulated amortization .................... (3,295) (3,814)
--------- ---------
$17,244 $17,894
========= =========
</TABLE>
Goodwill, which represents the excess of costs of business acquisitions
over the fair value of net assets acquired, is being amortized on a
straight-line basis over periods not exceeding 40 years. The noncompete
agreements and other intangibles are being amortized on a straight-line basis
over periods generally not exceeding five years. The Company evaluates on an
ongoing basis whether events and circumstances indicate that the amortization
periods of intangibles warrant revision. Additionally, the Company
periodically assesses whether the carrying amounts of intangibles exceed
their expected future benefits and value, in which case an impairment loss
would be recognized. Such assessments are based on various analyses,
including cash flow and profitability projections.
Accounts Payable and Accrued Liabilities
Accounts payable and accrued liabilities consisted of the following (in
thousands):
<TABLE>
<CAPTION>
SEPTEMBER 30
-------------------
1996 1997
--------- --------
<S> <C> <C>
Accounts payable .......... $ 1,192 $ 1,866
Accrued payroll ........... 2,384 2,936
Other accrued liabilities 6,709 6,276
--------- --------
$10,285 $11,078
========= ========
</TABLE>
Revenue Recognition
Revenues from the presentation and production of an event, including
interest on advance ticket sales, are recognized upon completion of the
event. Deferred revenue relates primarily to advance ticket sales.
The Company barters event tickets and sponsorship rights for products and
services, including event advertising. These barter transactions are not
recognized in the accompanying consolidated financial statements and are not
material to the Company's financial position or results of operations.
Stock-Based Compensation
The Company adopted Statement of Financial Accounting Standards (SFAS) No.
123, "Accounting for Stock-Based Compensation," during the year ended
September 30, 1997, and implemented its disclosure provisions. While SFAS No.
123 encourages companies to recognize expense for stock options at estimated
fair value based on an option-pricing model, the Company has elected to
continue to follow Accounting Principles Board (APB) Opinion No. 25,
"Accounting for Stock Issued to Employees," and related interpretations in
accounting for its employee stock options.
D-F-60
<PAGE>
PACE ENTERTAINMENT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Financial Instruments
The carrying amounts of cash equivalents approximate fair value because of
the short maturities of these investments. The carrying amount of long-term
debt approximates fair value as borrowings bear interest at current market
rates.
Reclassifications
Certain 1995 and 1996 amounts have been reclassified to conform with the
1997 presentation.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires the Company to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
2. ACQUISITIONS:
On March 13, 1996, the Company acquired substantially all the assets of
SRO Motorsports (SRO), a division of Madison Square Garden, L.P., under an
asset purchase agreement for an aggregate initial purchase price of
approximately $13,300,000 in cash and $3,800,000 in assumed liabilities. The
agreement also provides for a contingent deferred purchase price not to
exceed $1,000,000, payable if annual earnings before interest, taxes,
depreciation and amortization of the Company's motor sports operations, as
defined, exceed $8,000,000 for any fiscal year through September 30, 2001. No
deferred purchase price costs had been incurred through September 30, 1997.
The acquisition of SRO was accounted for under the purchase method and the
assets acquired and liabilities assumed were recorded at fair value,
resulting in the recognition of $14,250,000 of goodwill and $400,000 of other
intangibles. The results of operations of SRO since March 13, 1996, have been
included in the accompanying consolidated financial statements.
The following unaudited pro forma information assumes that the Company had
acquired SRO as of October 1, 1994. The pro forma information includes
adjustments for interest expense that would have been incurred to finance the
acquisition, amortization of goodwill and other intangibles, the income tax
effects of the operations of SRO, and the elimination of certain intercompany
balances. The unaudited pro forma information, which is not necessarily
indicative of what actual results would have been, is as follows (in
thousands):
<TABLE>
<CAPTION>
YEAR ENDED
SEPTEMBER 30
----------------------
1995 1996
---------- ----------
(UNAUDITED)
<S> <C> <C>
Gross revenues ... $167,422 $172,952
Net income (loss) . 3,742 (257)
</TABLE>
D-F-61
<PAGE>
PACE ENTERTAINMENT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
3. INVESTMENTS IN UNCONSOLIDATED PARTNERSHIPS AND THEATRICAL
PRODUCTIONS:
Investments in unconsolidated partnerships and theatrical productions
consisted of the following (in thousands):
<TABLE>
<CAPTION>
SEPTEMBER 30
-------------------
1996 1997
--------- --------
<S> <C> <C>
Investment in--
Pavilion Partners ......................... $ 3,131 $ 4,810
Universal/PACE Amphitheaters Group, L.P. . 3,380 3,991
Other ..................................... 2,305 5,098
--------- --------
Investments in unconsolidated partnerships 8,816 13,899
Investments in theatrical productions ..... 2,489 4,402
--------- --------
$11,305 $18,301
========= ========
</TABLE>
The Company's share of earnings and the distributions received from these
investments were as follows (in thousands):
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30
----------------------------
1995 1996 1997
-------- -------- --------
<S> <C> <C> <C>
Equity in earnings (losses) of--
Pavilion Partners .................. $1,872 $ 103 $2,803
Universal/PACE Amphitheaters Group,
L.P. .............................. 551 871 645
Other .............................. (799) (488) 1,464
-------- -------- --------
Equity in earnings of unconsolidated
partnerships ....................... 1,624 486 4,912
Equity in earnings of theatrical
productions ........................ 559 2,562 1,926
-------- -------- --------
$2,183 $3,048 $6,838
======== ======== ========
Distributions received from--
Pavilion Partners .................. $ 992 $1,002 $1,124
Universal/PACE Amphitheaters Group,
L.P. .............................. 166 78 34
Other .............................. 139 10 1,196
-------- -------- --------
Distributions from unconsolidated
partnerships ....................... 1,297 1,090 2,354
Distributions from theatrical
productions ........................ 4,240 5,836 6,803
-------- -------- --------
$5,537 $6,926 $9,157
======== ======== ========
</TABLE>
D-F-62
<PAGE>
PACE ENTERTAINMENT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Pavilion Partners
Pavilion Partners is a Delaware general partnership between the Company
and Amphitheater Entertainment Partnership (AEP). AEP is a partnership
between Sony Music Entertainment Inc. (Sony) and Blockbuster Entertainment
Corporation (Blockbuster). Pavilion Partners owns and operates amphitheaters,
which are used primarily for the presentation of live performances by musical
artists. Pavilion Partners had interests in 10 and 11 amphitheaters at
September 30, 1996 and 1997, respectively. The Company owns a 33-1/3 percent
interest in, and is the managing partner of, Pavilion Partners.
In general, all of Pavilion Partners' income is allocated to the partners
in proportion to their respective ownership interests. The partnership
agreement generally restricts cash distributions to 35 percent of cash flow
after scheduled debt service. Additionally, PACE has been entitled to certain
priority allocations of net income based, in part, on the cash flow from one
of the amphitheaters it contributed to Pavilion Partners. During the periods
ended September 30, 1995, 1996 and 1997, the priority allocations of net
income included in the Company's equity in earnings of Pavilion Partners were
$771,000, $725,000 and $119,000, respectively. The cumulative amount of the
priority allocations of net income was limited; PACE is not entitled to any
future priority allocations. AEP is entitled to receive priority allocations
of net income once a loan related to an amphitheater contributed by
Blockbuster is repaid. The cumulative priority allocations of net income to
AEP is limited to $7,000,000. The loan is scheduled to mature in 2004 and no
such allocation has yet been made.
PACE also received booking fees of $323,000, $235,000 and $395,000 from
Pavilion Partners for the years ended September 30, 1995, 1996 and 1997,
respectively. In addition, the Company is reimbursed for certain costs of
providing management services to Pavilion Partners. These reimbursements
totaled $1,629,000, $1,824,000 and $1,968,000 during the periods ended
September 30, 1995, 1996 and 1997, respectively, and offset general and
administrative expenses.
Summarized financial information as of and for the years ended September
30, 1995, 1996 and 1997, for Pavilion Partners follows (in thousands):
<TABLE>
<CAPTION>
1995 1996 1997
--------- --------- ----------
<S> <C> <C> <C>
Current assets .......................... $15,787 $20,700 $ 30,178
Noncurrent assets ....................... 64,619 72,793 72,598
--------- --------- ----------
Total assets ........................... $80,406 $93,493 $102,776
========= ========= ==========
Current liabilities ..................... $ 9,467 $17,194 $ 19,748
Noncurrent liabilities .................. 51,578 58,695 59,166
Partners' capital ....................... 19,361 17,604 23,862
--------- --------- ----------
Total liabilities and partners' capital $80,406 $93,493 $102,776
========= ========= ==========
Gross revenues .......................... $69,372 $89,223 $100,209
========= ========= ==========
Gross profit ............................ $19,440 $27,993 $ 36,157
========= ========= ==========
Net income (loss) ....................... $ 3,104 $ (839) $ 6,986
========= ========= ==========
</TABLE>
D-F-63
<PAGE>
PACE ENTERTAINMENT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Universal/PACE
The Company owns a 32.5 percent interest in Universal/PACE Amphitheaters
Group, L.P. (Universal/PACE), a limited partnership between the Company and
Universal Concerts, Inc., which controls two amphitheaters. PACE earned
management fees of $167,000, $79,000 and $34,000 from Universal/PACE for the
years ended September 30, 1995, 1996 and 1997, respectively. Summarized
financial information as of and for the years ended September 30, 1995, 1996
and 1997, for Universal/ PACE follows (in thousands):
<TABLE>
<CAPTION>
1995 1996 1997
--------- --------- ---------
<S> <C> <C> <C>
Current assets .......................... $ 4,085 $ 3,420 $ 6,659
Noncurrent assets ....................... 14,654 14,185 14,156
--------- --------- ---------
Total assets ........................... $18,739 $17,605 $20,815
========= ========= =========
Current liabilities ..................... $ 6,599 $ 3,876 $10,221
Noncurrent liabilities .................. 6,467 5,618 602
Partners' capital ....................... 5,673 8,111 9,992
--------- --------- ---------
Total liabilities and partners' capital $18,739 $17,605 $20,815
========= ========= =========
Gross revenues .......................... $24,070 $20,336 $25,299
========= ========= =========
Gross profit ............................ $ 5,968 $ 6,361 $ 5,817
========= ========= =========
Net income .............................. $ 1,183 $ 2,438 $ 1,880
========= ========= =========
</TABLE>
Other
The Company also has investments in numerous theatrical production and
other unconsolidated partnerships. Summarized financial information as of and
for the years ended September 30, 1995, 1996 and 1997, for these
partnerships, excluding Pavilion Partners and Universal/PACE, follows (in
thousands):
<TABLE>
<CAPTION>
1995 1996 1997
---------- ---------- ----------
<S> <C> <C> <C>
Current assets .......................... $ 10,410 $ 12,433 $ 35,743
Noncurrent assets ....................... 5,668 7,267 14,050
---------- ---------- ----------
Total assets ........................... $ 16,078 $ 19,700 $ 49,793
========== ========== ==========
Current liabilities ..................... $ 7,539 $ 6,566 $ 19,134
Noncurrent liabilities .................. 2,315 2,250 2,957
Partners' capital ....................... 6,224 10,884 27,702
---------- ---------- ----------
Total liabilities and partners' capital $ 16,078 $ 19,700 $ 49,793
========== ========== ==========
Gross revenues .......................... $113,854 $111,715 $249,707
========== ========== ==========
Gross profit ............................ $ 221 $ 10,440 $ 34,454
========== ========== ==========
Net income (loss) ....................... $ (1,863) $ 9,823 $ 32,164
========== ========== ==========
</TABLE>
D-F-64
<PAGE>
PACE ENTERTAINMENT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
4. LONG-TERM DEBT:
Long-term debt consisted of the following (in thousands):
<TABLE>
<CAPTION>
SEPTEMBER 30
--------------------
1996 1997
--------- ---------
<S> <C> <C>
Term loan ................ $14,464 $12,322
Revolving line of credit 9,250 12,950
Other notes payable ..... 725 251
--------- ---------
24,439 25,523
Less-Current portion .... (2,576) (2,394)
--------- ---------
$21,863 $23,129
========= =========
</TABLE>
In March 1996, the Company entered into a new credit agreement with
certain financial institutions. The credit agreement provides for a term loan
and a revolving line of credit, both of which bear interest at either LIBOR
plus 2 percent or prime, at the option of the Company. At September 30, 1997,
the weighted average interest rate was 7.8 percent. The term loan is
scheduled to mature in March 2001 and is payable in quarterly installments of
$536,000 plus interest, with a balloon payment at maturity. The Company may
borrow $27,000,000 under the revolving line of credit until February 1998;
subsequently, borrowings are limited to $13,000,000 until March 2001, when
the revolving line of credit expires. The Company must pay a quarterly
commitment fee equal to 0.375 percent per annum on the average daily unused
portion of the revolving line of credit. The term loan and the revolving line
of credit are secured by substantially all of the Company's assets, including
pledges of the capital stock of its subsidiaries. The credit agreement
contains various restrictions and requirements relating to, among other
things, mergers, sales of assets, investments and maintenance of certain
financial ratios.
At September 30, 1997, scheduled maturities of long-term debt were as
follows (in thousands):
<TABLE>
<CAPTION>
<S> <C>
For the year ending September
30--
1998 ............................ $ 2,394
1999 ............................ 2,143
2000 ............................ 2,143
2001............................. 18,843
--------
$25,523
========
</TABLE>
D-F-65
<PAGE>
PACE ENTERTAINMENT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
5. INCOME TAXES:
Deferred taxes reflect the tax effects of temporary differences between
the financial statement carrying amounts and the tax bases of assets and
liabilities. Significant components of the Company's deferred tax assets and
liabilities were as follows (in thousands):
<TABLE>
<CAPTION>
SEPTEMBER 30
-----------------
1996 1997
-------- -------
<S> <C> <C>
Deferred tax assets--
Investments in unconsolidated partnerships
and theatrical productions .................. $ 286 $ 237
Accounts payable and accrued liabilities .... 1,014 1,480
Restricted stock compensation ................ 1,387 409
Other noncurrent liabilities ................. 1,717 --
Other ........................................ 107 281
-------- -------
Total deferred tax assets ................... 4,511 2,407
-------- -------
Deferred tax liabilities--
Investments in unconsolidated partnerships
and theatrical productions .................. 1,522 1,099
Prepaid expenses ............................. 907 1,237
Intangibles .................................. 646 672
-------- -------
Total deferred tax liabilities .............. 3,075 3,008
-------- -------
$1,436 $ (601)
======== =======
</TABLE>
Deferred taxes are included in the consolidated balance sheets as follows
(in thousands):
<TABLE>
<CAPTION>
SEPTEMBER 30
-------------------
1996 1997
-------- ---------
<S> <C> <C>
Current deferred tax assets . $1,872 $ 979
Other noncurrent liabilities (436) (1,580)
-------- ---------
$1,436 $ (601)
======== =========
</TABLE>
The income tax (provision) benefit consisted of the following (in
thousands):
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30
----------------------------------
1995 1996 1997
---------- ---------- ----------
<S> <C> <C> <C>
Current--
Federal ...................... $(1,251) $(2,817) $(1,319)
State ........................ (476) (1,010) (173)
Deferred--
Federal ...................... (692) 3,705 (1,777)
State ........................ (156) 836 (260)
---------- ---------- ----------
Total tax (provision) benefit $(2,575) $ 714 $(3,529)
========== ========== ==========
Effective tax rate ............ 44% 26% 41%
========== ========== ==========
</TABLE>
D-F-66
<PAGE>
PACE ENTERTAINMENT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The reconciliation of income tax computed at the U.S. federal statutory
rates to the income tax (provision) benefit is as follows (in thousands):
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30
-------------------------------
1995 1996 1997
---------- ------- ----------
<S> <C> <C> <C>
Tax at the federal statutory rate .... $(2,012) $ 924 $(2,954)
Increases resulting from--
State income taxes, net of federal
tax effect .......................... (417) (112) (286)
Nondeductible expenses ............... (60) (98) (185)
Other ................................ (86) -- (104)
---------- ------- ----------
Total income tax (provision) benefit $(2,575) $ 714 $(3,529)
========== ======= ==========
</TABLE>
6. REDEEMABLE COMMON STOCK:
At September 30, 1997, the Company had outstanding 155 shares of common
stock that are redeemable under conditions that are not solely within the
control of the Company. The Company granted this redeemable stock to certain
executives during the years ended September 30, 1996 and 1997. To the extent
that the grants related to prior service, the Company recognized compensation
costs on the grant date. Additionally, the Company recognizes compensation
costs for the change in value of certain shares that, as discussed below, the
Company may be required to purchase from the executives at fair market value.
Restricted stock compensation related to these grants totaled $3,260,000 and
$425,000 during the years ended September 30, 1996 and 1997, respectively.
The Company has the right of first refusal to purchase the redeemable common
stock at fair market value.
Agreements with one executive who received 140 shares of redeemable stock
provide that the Company will have call options to purchase these shares from
the executive for a total of $3,420,000. These agreements also provide that
the executive will have put options to sell such shares to the Company for
$3,420,000. The put and call options are only exercisable if the executive's
employment is terminated before an initial public offering of the Company's
common stock.
Of the redeemable stock granted to this executive, 123 shares were granted
during the year ended September 30, 1996, and vested during the year ended
September 30, 1997. Since the grant related to prior service, the Company
recognized compensation costs on the grant date. During the year ended
September 30, 1997, the Company executed a promissory note in the amount of
$1,232,000 with this executive. This note bears interest at 5.45 percent, is
secured by 140 shares of the Company's common stock, and is scheduled to
mature in October 2001. The proceeds of the note were used to pay the
executive's tax liability related to the 123 shares that vested during the
year ended September 30, 1997. Accordingly, the value of redeemable stock
outstanding has been reduced by this note receivable.
The remaining 17 shares of redeemable stock received by this executive
were granted during the year ended September 30, 1997, and vest ratably
during the years ending September 30, 1999 and 2000. To fund the executive's
tax liability related to these 17 shares, the Company may be required to
purchase up to 41 percent of the shares at fair market value when the shares
vest. The Company has similar agreements with the other executives who
received the remaining 15 shares of redeemable stock, which were granted
during the year ended September 30, 1996. In order to fund the executives'
tax liabilities related to these grants and related restricted common stock
grants, these 15 shares of redeemable stock must be purchased at fair market
value when the shares vest during the years ended September 30, 1998 and
1999. Although all 32 shares that the Company may be required to purchase in
order to satisfy executives' tax liabilities have future vesting
requirements, the Company recognized compensation costs on the grant dates to
the extent the grants related to prior service. The difference between such
expense recognition and recognition over the vesting periods is not material
to the Company's results of operations and financial position.
D-F-67
<PAGE>
PACE ENTERTAINMENT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
7. SHAREHOLDER'S EQUITY:
The Company granted 23 shares of restricted common stock to certain
executives during the year ended September 30, 1996. These shares vest
ratably during the years ended September 30, 1998 and 1999. Although the
shares have future vesting requirements, the Company recognized compensation
costs on the grant dates to the extent the grants related to prior service.
The difference between such expense recognition, which totaled $390,000 and
$6,000 during the years ended September 30, 1996 and 1997, respectively, and
recognition over the vesting periods is not material to the Company's results
of operations and financial position. The Company has the right of first
refusal to purchase at fair market value all of the shares granted during the
year ended September 30, 1996. Additionally, if the executives' employment is
terminated before an initial public offering of the Company's common stock,
the Company has a call option to purchase the vested shares at fair market
value.
Effective October 15, 1993, the Company and one of its officers entered
into an employment agreement which provided for the granting of 45 shares of
the Company's common stock. The shares vested over a five-year period and the
Company recorded related compensation expense of $25,000 for each of the
years ended September 30, 1995, 1996 and 1997.
8. STOCK OPTIONS:
The Company adopted the 1996 Stock Incentive Compensation Plan during the
year ended September 30, 1996. Under the plan, the Company may grant awards
based on its common stock to employees and directors. Such awards may
include, but are not limited to, restricted stock, stock options, stock
appreciation rights and convertible debentures. Up to 325 shares of common
stock may be issued under the plan. During the year ended September 30, 1996,
the Company granted options to purchase 117 shares of common stock at a
weighted average exercise price of $18,989 per share, which approximated fair
value on the date of grant. Such options vest and are generally exercisable
ratably over a four-year period. The options expire in 10 years.
An option to purchase 22 shares of common stock at $10,000 per share was
granted to an executive during the year ended September 30, 1994. This option
was canceled subsequent to September 30, 1997.
Because the exercise prices of the Company's employee stock options
equaled the fair market value of the underlying stock on the date of grant,
no compensation expense was recognized in accordance with APB Opinion No. 25.
Had compensation cost for the options been determined based on the fair value
at the grant date pursuant to SFAS No. 123, the Company's net income would
have decreased by $49,000 and $148,000 for the years ended September 30, 1996
and 1997, respectively. For this purpose, the fair value of the options was
estimated using the minimum value method assuming that the risk-free interest
rate was 6.7 percent and that no dividends will be paid.
9. RELATED-PARTY TRANSACTIONS:
The Company contracts with certain theatrical partnerships of which it is
a minority partner to obtain the rights to present theatrical productions in
the Company's markets. Approximately $20,000,000, $33,400,000 and $31,200,000
of expenses were incurred for such rights and included in cost of sales
during the years ended September 30, 1995, 1996 and 1997, respectively.
The Company contracts with certain unconsolidated partnerships to sell the
rights to present musical concerts. Approximately $2,446,000 of revenues was
earned from the sale of such rights during the year ended September 30, 1997.
No such rights were sold during the years ended September 30, 1995 and 1996.
As of September 30, 1997, notes receivable, related parties included
$6,453,000 due from executives and $1,571,000 due from other related parties.
Two of the notes receivable from executives are promissory notes from the
Company's principal shareholder. As of September 30, 1997, these two notes
totaled
D-F-68
<PAGE>
PACE ENTERTAINMENT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
$5,961,000, including accrued interest of $550,000. One note, in the original
principal amount of $2,911,000, bears interest at 5.83 percent, is secured by
254 shares of PACE common stock and matures on March 28, 1999. The other note
is for $2,500,000, bears interest at 6.34 percent, is secured by 246 shares
of PACE common stock and was scheduled to mature on November 3, 1997. This
note has been extended to mature on November 4, 2000. Interest income on
these two notes was approximately $300,000 for each of the years ended
September 30, 1995, 1996 and 1997. At September 30, 1997, the Company also
had a $583,000 receivable from its principal shareholder. The principal
shareholder has represented his intention to pay the outstanding loans and
receivable balance from personal assets or if necessary, the liquidation of
certain ownership interests in the Company.
At September 30, 1997, notes receivable from other related parties
included $945,000 due from a joint venture partner. The terms of the related
joint venture agreement provide for the Company to loan to the joint venture
partner any required capital contributions, to be repaid on a priority basis
from the profits allocated to the joint venture partner. The advances accrue
interest at the prime rate plus 4 percent (12.5 percent at September 30,
1997) and are secured by the joint venture partner's 50 percent interest in
the joint venture.
10. LITIGATION SETTLEMENT:
The Company was previously named as a defendant in a case filed in Wake
County, North Carolina (Promotion Litigation). There were several other
defendants named in the litigation, including Pavilion Partners, with various
causes of action asserted against one or more of each of the defendants,
including (a) breach of alleged contract, partnership, joint venture and
fiduciary duties between certain of the defendants and Pro Motion Concerts,
(b) constructive fraud, (c) interference with prospective advantage, (d)
unfair trade practices, (e) constructive trust and (f) unjust enrichment. The
essence of the plaintiffs' claims was that certain of the defendants agreed
to enter into a partnership with plaintiffs for the development and operation
of an amphitheater.
On May 1, 1997, the Promotion Litigation was settled. All defendants were
fully and finally released with prejudice from any and all claims and causes
of action. The defendants did not acknowledge or admit any liability. The
settlement called for payments from defendants totaling $4,500,000. The
Company was obligated to pay $1,500,000 immediately after the settlement and
is obligated to pay an additional $2,000,000 on or before May 1, 1998. To
guarantee payment of this $2,000,000 obligation, the Company had a standby
letter of credit outstanding at September 30, 1997. The remaining $1,000,000
of the settlement was paid by Pavilion Partners during the year ended
September 30, 1997. This expense and related legal expenses were charged to
operations for the year ended September 30, 1996.
D-F-69
<PAGE>
PACE ENTERTAINMENT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
11. COMMITMENTS AND CONTINGENCIES:
Leases
The Company leases office facilities under noncancelable operating leases
with future minimum rent payments as follows (in thousands):
<TABLE>
<CAPTION>
<S> <C>
For the year ending September 30--
1998 ............................ $1,006
1999 ............................ 417
2000 ............................ 215
2001 ............................ 193
2002 ............................ 195
Thereafter ....................... 33
--------
Total ........................... $2,059
========
</TABLE>
Rent expense was $676,000, $765,000 and $1,084,000 for the years ended
September 30, 1995, 1996 and 1997, respectively.
Change in Control Provisions
The Company and its unconsolidated partnerships, including Pavilion
Partners, have entered into numerous leases and other contracts in the
ordinary course of business. Certain of these agreements either contain
restrictions on their assignability or would require third-party approval of
a change in control of the Company.
Employment Agreements
The Company has employment agreements with certain key employees. Such
agreements generally provide for minimum salary levels, guaranteed bonuses
and incentive bonuses which are payable if specified financial goals are
attained. As of September 30, 1997, the Company's minimum commitment under
these agreements were as follows (in thousands):
<TABLE>
<CAPTION>
<S> <C>
For the year ending September 30--
1998 ............................ $4,463
1999 ............................ 3,825
2000 ............................ 2,789
2001 ............................ 1,430
2002 ............................ 743
</TABLE>
The Company is currently negotiating certain other employment agreements
that may result in additional future commitments.
Insurance
The Company carries a broad range of insurance coverage, including general
liability, workers' compensation, stop-loss coverage for its employee health
plan and umbrella policies. The Company carries deductibles of up to $10,000
per occurrence for general liability claims and is self-insured for annual
healthcare costs of up to $25,000 per covered employee and family. The
Company has accrued for estimated potential claim costs in satisfying the
deductible and self-insurance provisions of the insurance policies for claims
occurring through September 30, 1997. The accrual is based on known facts and
historical trends, and management believes such accrual to be adequate.
D-F-70
<PAGE>
PACE ENTERTAINMENT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Legal Proceedings
Various legal actions and claims are pending against the Company, most of
which are covered by insurance. In the opinion of management, the ultimate
liability, if any, which may result from these actions and claims will not
materially affect the financial position or results of operations of the
Company.
Guarantees
The Company has guaranteed a $2,438,000 debt of a partnership in which
Pavilion Partners holds a 50 percent interest. PACE has agreements with its
partners whereby they would assume approximately 50 percent of any liability
arising from this guarantee. The debt matures June 1, 2003. Management does
not believe that the guarantee will result in a material liability to the
Company.
Income Taxes
The Internal Revenue Service is examining several years of returns of a
majority-owned subsidiary. Management is currently discussing a possible
settlement of approximately $600,000, which has been accrued in the Company's
financial statements.
Subscription Agreement
During April 1995, the Company acquired an interest in a company
incorporated in the United Kingdom. Pursuant to a subscription agreement, the
Company made payments totaling $1,355,000 prior to September 30, 1997. The
Company has agreed to pay an additional pounds sterling239,000 in April 1998.
Construction Commitments
An unconsolidated partnership has committed to certain renovation work at
its amphitheater. The Company may be obligated to fund up to approximately
$7.3 million of these renovations. Through its investment in another
unconsolidated partnership, the Company has an interest in a performance hall
being constructed for musical and theatrical presentations. The Company had
funded $0.4 million of the performance hall construction costs through
September 30, 1997; the Company's estimated additional funding commitments
are approximately $2.0 million. In addition, the Company and several third
parties are currently negotiating definitive agreements to develop a
theatrical venue. The Company may be obligated to fund approximately $3.0
million of the costs of this development over an undetermined period of time.
Put Option Agreement
The Company has entered into put option agreements with two banks whereby
the Company may be required to repurchase a total of 1,000 shares of the
Company's common stock held by an affiliate that collateralizes the personal
loans of the Company's principal shareholder at a per share price of $1,500.
The put options are effective only in the event of a loan default of the
shareholder prior to July 31, 1999. At September 30, 1997, the loans were not
in default.
12. SUBSEQUENT EVENTS:
Subsequent to September 30, 1997, the Company entered into certain
agreements with an executive who previously had been granted an option to
purchase 22 shares of common stock at $10,000 per share. Pursuant to the new
agreements, the option was canceled and the executive was granted 22 shares
of restricted common stock.
In December 1997, the Company and its shareholders entered into an
agreement with SFX Entertainment, Inc. (SFX), whereby the shareholders would
sell their interests in the Company to SFX. The purchase price of $109
million in cash and 1,500,000 shares of SFX Class A Common Stock is subject
to adjustment prior to closing. Closing is subject to certain conditions,
including approval of certain third
D-F-71
<PAGE>
PACE ENTERTAINMENT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
parties. Concurrent with closing, the agreement requires, among other things,
the repayment of all outstanding loans and receivables due from the Company's
principal shareholder (see Note 9) and the repayment of the promissory note
received from an executive in connection with a stock grant (see Note 6).
Additionally, the agreement provides for the settlement of all restricted and
redeemable stock, as well as all outstanding stock options. This settlement
is expected to result in a one-time charge by the Company of approximately
$4.7 million, net of related tax effects. The agreement also requires SFX to
provide the Company with a $25 million line of credit to be used for certain
acquisitions being contemplated by the Company. If the acquisition of the
Company is not consummated, this line of credit will be converted to a term
loan in the amount of advances then outstanding or, under certain
circumstances, will become immediately due and payable. This bridge financing
is secured by the assets acquired and an option to purchase the Company's
interest in Pavilion Partners.
In December 1997, the Company entered into agreements to effectively
purchase substantially all of the assets of United Sports of America, a
producer and presenter of demolition derbies, thrill shows, air shows,
monster truck shows, tractor pull events, motorcycle racing and bull riding
in the United States and Canada. Pursuant to the agreements, the total
purchase price is $6,000,000 in cash of which an option amount of $500,000
was paid upon the execution of the agreement and closing is subject to the
satisfactory completion of due diligence by the Company. Management does not
expect this transaction to close until May 1998. In the event the transaction
does not close, the option amount will be forfeited if certain conditions are
not met.
In December 1997, the Company entered into an agreement to purchase
Blockbuster's 33 1/3 percent interest in Pavilion Partners for $4,171,000 in
cash, $2,940,000 in assumed liabilities and the assumption of certain
indemnification obligations of Blockbuster under the Pavilion Partners
Partnership Agreement. In addition, the Company has agreed to purchase a note
with a balance of $9,507,000, including accrued interest of $1,601,000, at
September 30, 1997. The transaction is contingent on, among other things,
obtaining acceptable financing including the release of Blockbuster from
certain debt obligations and the approval of Sony (Note 3)
On December 22, 1997, the Company entered into an agreement to purchase
Sony's 33 1/3 percent interest in Pavilion Partners for $27,500,000 in cash.
The transaction is contingent on, among other things, government approval and
obtaining acceptable financing including the release of Sony from certain
debt obligations. (see Note 3)
D-F-72
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Partners of Pavilion Partners:
We have audited the accompanying consolidated balance sheet of Pavilion
Partners, a Delaware general partnership, as of September 30, 1997, and the
related consolidated statements of income, partners' capital and cash flows
for the year then ended. These consolidated financial statements are the
responsibility of the partnership's management. Our responsibility is to
express an opinion on these consolidated financial statements based on our
audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements.
An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Pavilion
Partners as of September 30, 1997, and the results of its operations and its
cash flows for the year then ended in conformity with generally accepted
accounting principles.
ARTHUR ANDERSEN LLP
Houston, Texas
December 15, 1997 (except with
respect to the matters discussed
in Note 11, as to which the date
is December 22, 1997)
D-F-73
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Partners of Pavilion Partners
In our opinion, the accompanying consolidated balance sheet and the
related consolidated statements of income, of partners' capital and of cash
flows present fairly, in all material respects, the financial position of
Pavilion Partners and its subsidiaries (the Partnership) at September 30,
1996 and the results of their operations and their cash flows for the year
ended October 31, 1995 and the eleven months ended September 30, 1996, in
conformity with generally accepted accounting principles. These financial
statements are the responsibility of the Partnership's management; our
responsibility is to express an opinion on these financial statements based
on our audits. We conducted our audits of these statements in accordance with
generally accepted auditing standards which require that we plan and perform
the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on
a test basis, evidence supporting the amounts and disclosures in the
financial statements, assessing the accounting principles used and
significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for the opinion expressed above.
PRICE WATERHOUSE LLP
Houston, Texas
December 12, 1996
D-F-74
<PAGE>
PAVILION PARTNERS
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
<TABLE>
<CAPTION>
SEPTEMBER 30
---------------------
1996 1997
--------- ----------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents ........................................... $ 8,554 $ 17,898
Accounts receivable ................................................. 7,842 6,167
Accounts receivable, related parties ................................ 1,878 3,878
Notes receivable, related parties ................................... 1,218 1,218
Prepaid expenses and other current assets ........................... 1,208 1,017
--------- ----------
Total current assets ............................................. 20,700 30,178
Prepaid rent ........................................................ 7,075 6,938
Property and equipment, net ......................................... 61,292 59,938
Other assets ........................................................ 4,426 5,722
--------- ----------
Total assets ..................................................... $93,493 $102,776
========= ==========
LIABILITIES AND PARTNERS' CAPITAL
CURRENT LIABILITIES:
Accounts payable .................................................... $ 1,404 $ 1,193
Accounts payable, related parties ................................... 1,866 3,948
Accrued liabilities ................................................. 8,112 7,032
Deferred revenue .................................................... 3,602 5,081
Current portion of notes payable and capital lease obligation ...... 1,573 1,614
Current portion of note payable, related party ...................... 637 880
--------- ----------
Total current liabilities ........................................ 17,194 19,748
Notes payable ....................................................... 43,680 42,192
Note payable, related party ......................................... 7,268 7,025
Capital lease obligation ............................................ 6,130 5,989
Other liabilities and minority interests in consolidated
subsidiaries ....................................................... 1,617 3,960
--------- ----------
Total liabilities ................................................ 75,889 78,914
COMMITMENTS AND CONTINGENCIES
PARTNERS' CAPITAL .................................................... 17,604 23,862
--------- ----------
Total liabilities and partners' capital .......................... $93,493 $102,776
========= ==========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
D-F-75
<PAGE>
PAVILION PARTNERS
CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS)
<TABLE>
<CAPTION>
FOR THE
FOR THE ELEVEN MONTHS FOR THE
YEAR ENDED ENDED YEAR ENDED
OCTOBER 31, SEPTEMBER 30, SEPTEMBER 30,
1995 1996 1997
------------- --------------- ---------------
<S> <C> <C> <C>
TICKET REVENUES .................... $43,266 $50,151 $ 58,479
OTHER OPERATING REVENUES ........... 28,109 33,942 41,730
------------- --------------- ---------------
Total revenues ................... 71,375 84,093 100,209
COST OF SALES ...................... 49,226 57,723 64,052
------------- --------------- ---------------
Gross profit ..................... 22,149 26,370 36,157
SELLING, GENERAL AND ADMINISTRATIVE
EXPENSES .......................... 8,329 9,774 10,858
DEPRECIATION AND AMORTIZATION ..... 2,461 3,346 3,975
OTHER OPERATING COSTS .............. 5,345 7,390 8,531
LITIGATION EXPENSES AND SETTLEMENT -- 2,380 --
------------- --------------- ---------------
Operating profit ................. 6,014 3,480 12,793
INTEREST INCOME .................... 504 391 532
INTEREST EXPENSE ................... 2,793 3,855 4,413
------------- --------------- ---------------
INCOME BEFORE MINORITY INTEREST ... 3,725 16 8,912
MINORITY INTEREST .................. 276 308 1,926
------------- --------------- ---------------
NET INCOME (LOSS) .................. $ 3,449 $ (292) $ 6,986
============= =============== ===============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
D-F-76
<PAGE>
PAVILION PARTNERS
CONSOLIDATED STATEMENTS OF PARTNERS' CAPITAL
(IN THOUSANDS)
<TABLE>
<CAPTION>
AMPHITHEATER
ENTERTAINMENT
PARTNERSHIP SM/PACE, INC. TOTAL
--------------- --------------- ---------
<S> <C> <C> <C>
BALANCE, October 31, 1994 .. $13,108 $2,805 $15,913
Net income ................. 1,788 1,661 3,449
Distributions .............. -- (699) (699)
--------------- --------------- ---------
BALANCE, October 31, 1995 .. 14,896 3,767 18,663
Net income (loss) .......... (330) 38 (292)
Distributions .............. -- (767) (767)
--------------- --------------- ---------
BALANCE, September 30, 1996 14,566 3,038 17,604
Net income ................. 4,578 2,408 6,986
Distributions .............. -- (728) (728)
--------------- --------------- ---------
BALANCE, September 30, 1997 $19,144 $4,718 $23,862
=============== =============== =========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
D-F-77
<PAGE>
PAVILION PARTNERS
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
FOR THE
FOR THE ELEVEN MONTHS FOR THE
YEAR ENDED ENDED YEAR ENDED
OCTOBER 31, SEPTEMBER 30, SEPTEMBER 30,
1995 1996 1997
------------- --------------- ---------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) ............................... $ 3,449 $ (292) $ 6,986
Adjustments to reconcile net income (loss) to
net cash provided by operating activities--
Depreciation and amortization .................. 2,461 3,346 3,975
Minority interest .............................. 276 308 1,926
Changes in assets and liabilities--
Accounts receivable ........................... (1,455) (3,647) 1,669
Accounts receivable and payable, related
parties ...................................... 32 (756) 82
Prepaid expenses and other current assets .... 191 (296) 266
Accounts payable and accrued liabilities ..... (512) 1,695 (2,184)
Deferred revenue and other liabilities ....... 1,304 2,110 2,284
Other, net .................................... (785) (1,259) (1,548)
------------- --------------- ---------------
Net cash provided by operating activities ... 4,961 1,209 13,456
------------- --------------- ---------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Payments of preoperating costs .................. (1,318) (1,114) (59)
Capital expenditures ............................ (25,856) (7,483) (1,879)
------------- --------------- ---------------
Net cash used in investing activities ....... (27,174) (8,597) (1,938)
------------- --------------- ---------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Funding of capital commitments by partners ..... 4,046 -- --
Distributions to partner ........................ (699) (767) (728)
Proceeds from borrowings ........................ 24,322 8,323 -
Repayments of borrowings ........................ (639) (1,072) (1,446)
------------- --------------- ---------------
Net cash provided by (used in) financing
activities .................................. 27,030 6,484 (2,174)
------------- --------------- ---------------
NET INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS ..................................... 4,817 (904) 9,344
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 4,641 9,458 8,554
------------- --------------- ---------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD ...... $ 9,458 $ 8,554 $17,898
============= =============== ===============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
D-F-78
<PAGE>
PAVILION PARTNERS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. ORGANIZATION AND BASIS OF PRESENTATION:
Pavilion Partners (the Partnership) is a Delaware general partnership
between SM/PACE, Inc. (PACE), which is a wholly owned subsidiary of PACE
Entertainment Corporation, and Amphitheater Entertainment Partnership (AEP).
AEP is a partnership between a wholly owned subsidiary of Sony Music
Entertainment Inc. (Sony) and two wholly owned subsidiaries of Blockbuster
Entertainment Corporation (Blockbuster). PACE is the managing partner of the
Partnership. AEP owns a 66 2/3 percent interest in the Partnership, and PACE
owns a 33 1/3 percent interest in the Partnership.
In April 1990, Sony and PACE formed YM/PACE Partnership which changed its
name to the Sony Music/PACE Partnership. Effective April 1, 1994, the
partners entered into an agreement whereby Blockbuster obtained an indirect
33 1/3 percent interest in Sony Music/PACE Partnership, which was renamed
Pavilion Partners. In accordance with the agreement, Sony contributed an
interest-bearing note in the amount of $4,250,000 and its existing interest
in Sony Music/PACE Partnership to AEP. Concurrently, Blockbuster contributed
an interest-bearing note in the amount of $4,250,000 and its interest in
three existing amphitheaters to AEP. AEP in turn contributed these assets to
the Partnership. At the same time, PACE Entertainment Corporation contributed
its interest in two existing amphitheaters to the Partnership. Upon
completion of these contributions to the Partnership, AEP owned a 66 2/3
percent interest in the Partnership and PACE owned a 33 1/3 percent interest
in the Partnership.
The Partnership owns and operates amphitheaters, which are primarily used
for the presentation of live performances by musical artists. As of September
30, 1997, the Partnership owned interests in or leased 10 amphitheaters and
had a long-term management contract to operate an additional amphitheater.
All of the amphitheaters owned or operated by the Partnership are located in
the United States.
In April 1997, the Partnership entered into a new partnership agreement
with a third party to be known as Western Amphitheater Partners (WAP). The
Partnership contributed or licensed the assets and liabilities of the Glen
Helen Amphitheatre, and the other partner contributed or licensed the assets
and liabilities of the Irvine Meadows Amphitheatre. Each partner has a 50
percent interest in WAP. Under the terms of the Partnership agreement, the
partners are required to make an additional capital contribution of
approximately $850,000 each in WAP which was accrued by the Partnership at
September 30, 1997. The fiscal year-end for the WAP partnership will be
December 31.
During 1996, the Partnership changed its fiscal year-end from October 31
to September 30.
2. SIGNIFICANT ACCOUNTING POLICIES:
Principles of Consolidation
The consolidated financial statements of the Partnership include all of
its wholly owned subsidiaries and other partnerships in which Pavilion
Partners holds a controlling interest. All partnerships in which Pavilion
Partners holds less than a controlling interest are reported on the equity
method of accounting. All significant intercompany transactions have been
eliminated in consolidation.
Basis of Contributed Assets
All assets contributed to the Partnership by the partners were recorded at
the carrying values of the contributing entities.
Revenue Recognition
The Partnership records revenues from the presentation of events at the
completion of the related event. Advance ticket sales are classified as
deferred revenue until the event has occurred. Sponsorship and other revenues
that are not related to any single event are classified as deferred revenue
and amortized over each of the amphitheaters' various shows during the
operating season.
D-F-79
<PAGE>
PAVILION PARTNERS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The Partnership barters event tickets and sponsorship rights for products
and services, including event advertising. These barter transactions are not
recognized in the accompanying consolidated financial statements and are not
material to the Partnership's financial position or results of operations.
Income Taxes
No provision for federal or state income taxes is necessary in the
financial statements of the Partnership because, as a partnership, it is not
subject to federal or state income taxes and the tax effect of its activities
accrues to the partners.
Prepaid Expenses
Prepaid expenses include show advances and deposits, event advertising
costs and other costs directly related to future events. Such costs are
charged to operations upon completion of the related events.
As of September 30, 1996 and 1997, prepaid expenses included event
advertising costs of $160,000 and $137,000, respectively. The Partnership
recognized event advertising expenses of $5,815,000, $6,439,000 and
$6,569,000 in cost of sales for the year ended October 31, 1995, the eleven
months ended September 30, 1996, and the year ended September 30, 1997,
respectively.
Other Assets
The Partnership incurs certain costs in identifying and selecting
potential sites for amphitheater development. All costs incurred by the
Partnership during the initial site selection phase are expensed as incurred.
Certain incremental start-up costs that are incurred after a decision has
been made to develop a site are capitalized as preoperating costs. After an
amphitheater is fully developed, these preoperating costs are amortized on a
straight-line basis over a five-year period.
Contract acquisition costs include fees associated with securing a
contract with a booking agent for one of the Partnership's amphitheaters.
These costs are amortized on a straight-line basis over the life of the
contract which is 10 years.
Property and Equipment
Property and equipment is stated at cost. Repair and maintenance costs are
expensed as incurred. Interest incurred in connection with the construction
of an amphitheater is capitalized as part of the cost of the amphitheater.
During 1995 and 1996, the Partnership capitalized interest in connection with
the construction of amphitheaters of $645,000, $161,000, respectively. No
interest was capitalized in 1997.
Leasehold improvements are amortized on a straight-line basis over the
shorter of their estimated useful lives or the term of the lease. Other
property and equipment is depreciated on a straight-line basis over the
estimated useful lives of the assets. A summary of the principal ranges of
useful lives used in computing the annual provision for depreciation and
amortization is as follows:
<TABLE>
<CAPTION>
RANGE OF YEARS
--------------
<S> <C>
Buildings .............. 27-31.5
Leasehold improvements 5-31.5
Equipment .............. 3-7
Furniture and fixtures 5-10
</TABLE>
The Partnership evaluates on an ongoing basis whether events and
circumstances indicate that the estimated useful lives of property and
equipment warrant revision. The Partnership adopted Statement of Financial
Accounting Standard (SFAS) No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to Be Disposed Of," in 1997. The
adoption of SFAS No. 121 did not have a material effect on the Partnership's
financial position or results of operations.
D-F-80
<PAGE>
PAVILION PARTNERS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Fair Value of Financial Instruments
The carrying amounts of the Partnership's financial instruments
approximate their fair value at September 30, 1996 and 1997.
Statement of Cash Flows
The Partnership considers all highly liquid investments with an original
maturity of three months or less to be cash equivalents. Interest paid was
$2,319,000, $3,652,000 and $3,917,000 for 1995, 1996 and 1997, respectively.
During the year ended October 31, 1995, the Partnership issued a note payable
with a fair value of $1,300,000 to a vendor in exchange for certain equipment
with a fair value which approximated the amount of the note. During 1997, the
Partnership contributed or licensed the assets and liabilities of the Glen
Helen Amphitheatre into the new WAP Partnership in which it holds a 50
percent interest. The net book value of the investment made in the WAP
Partnership was $54,000.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires the Partnership to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
Reclassifications
Certain amounts in the 1995 and 1996 consolidated financial statements
have been reclassified to conform to the 1997 presentation.
3. PARTNERSHIP AGREEMENT:
The Partnership agreement provides, among other things, for the following:
Contributions and Project Loans
In addition to the initial contributions as discussed in Note 1, the
partners are obligated to contribute, in proportion to their respective
Partnership interests, any deficiency in the funding for the construction of
each approved amphitheater development or any operational shortfall, as
defined in the Partnership agreement. No such funding was required in 1995,
1996 or 1997.
In addition, AEP is responsible for providing project financing, as
defined, for each approved amphitheater development. To the extent AEP does
not fulfill this responsibility, AEP must indemnify, defend and hold harmless
the Partnership from all claims, demands, liabilities or other losses
(including the loss of any earnest money deposits and any reasonable
attorneys' fees) which might result from AEP's failure to provide such
project loan.
Income Allocation
In general, all of the Partnership's income is allocated to the partners
in proportion to their respective Partnership interests. However, PACE
receives a priority allocation of net income, as defined in the Partnership
agreement, until the cumulative amount of such allocations is equal to
$2,000,000 increased by 7 percent of the unpaid allocation on the last day of
each fiscal year. Any such allocation of net income to PACE is distributed in
the following year. The priority allocation of net income to PACE for 1995,
1996 and 1997 was approximately $767,000, $716,000 and $119,000,
respectively. This allocation obligation was fully satisfied with the
distribution of the fiscal 1997 income allocation amount during October 1997.
AEP is entitled to receive a priority allocation of net income once a loan
related to an amphitheater contributed by Blockbuster is repaid. At September
30, 1997, the loan balance is $7,905,000 and is payable in quarterly
installments with a balloon payment due at its maturity on April 1, 2004. The
priority allocation of net income is equal to 65 percent of the cash flow
attributable to the amphitheater, as defined in the Partnership agreement.
The cumulative priority allocation of net income to AEP is limited to
$7,000,000. No such allocation was made in 1995, 1996 or 1997.
D-F-81
<PAGE>
PAVILION PARTNERS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
On November 1 of each calendar year, the executive committee of the
Partnership determines if any excess cash exists in the Partnership's
accounts above what is necessary to fund future operations and obligations.
Any such excess cash may be distributed to the partners in proportion to
their respective interests in the Partnership. No distributions of excess
cash flow have been made.
4. PROPERTY AND EQUIPMENT:
The components of the Partnership's property and equipment are as follows
(in thousands):
<TABLE>
<CAPTION>
SEPTEMBER 30
-------------------
1996 1997
--------- --------
<S> <C> <C>
Property ....................................... $ 695 $ 695
Buildings ...................................... 10,817 10,817
Leasehold improvements ......................... 53,148 53,826
Equipment ...................................... 5,007 4,488
Furniture and fixtures ......................... 705 722
Construction in progress ....................... -- 786
--------- --------
70,372 71,334
Less--Accumulated depreciation and amortization 9,080 11,396
--------- --------
$61,292 $59,938
========= ========
</TABLE>
Depreciation and amortization expense associated with property and
equipment for 1995, 1996 and 1997 was $1,905,000, $2,693,000 and $3,179,000,
respectively.
Assets under capital lease included above are as follows (in thousands):
<TABLE>
<CAPTION>
SEPTEMBER 30
------------------
1996 1997
-------- --------
<S> <C> <C>
Building ...................... $5,333 $5,333
Furniture and equipment ...... 841 841
-------- --------
6,174 6,174
Less--Accumulated depreciation 2,068 2,237
-------- --------
$4,106 $3,937
======== ========
</TABLE>
Amortization expense associated with assets under capital lease for 1995,
1996 and 1997 was $169,000, $156,000 and $169,000, respectively.
D-F-82
<PAGE>
PAVILION PARTNERS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
5. OTHER ASSETS:
Other assets consist of the following (in thousands):
<TABLE>
<CAPTION>
SEPTEMBER 30
------------------
1996 1997
-------- --------
<S> <C> <C>
Preoperating costs, net of accumulated amortization of $2,092,000 and
$1,094,000, respectively................................................. $2,153 $1,709
Investment in unconsolidated partnerships ................................ 1,302 2,797
Contract acquisition costs, net of accumulated amortization of $45,000
and $129,000, respectively .............................................. 624 815
Other .................................................................... 347 402
-------- --------
$4,426 $5,723
======== ========
</TABLE>
During 1995, 1996 and 1997, the Partnership recognized equity in earnings
of unconsolidated partnerships of $263,000, $129,000 and $1,592,000,
respectively, which is included in other operating revenues.
6. ACCRUED LIABILITIES:
Accrued liabilities consist of the following (in thousands):
<TABLE>
<CAPTION>
SEPTEMBER 30
-----------------
1996 1997
-------- -------
<S> <C> <C>
Interest ........................... $ 544 $ 522
Rent ............................... 638 580
Taxes .............................. 748 613
Litigation expenses and settlement 1,873 --
Insurance .......................... 1,216 1,656
Other .............................. 3,093 3,660
-------- -------
$8,112 $7,031
======== =======
</TABLE>
Accrued liabilities do not include accrued interest on the notes payable
to Blockbuster (see Note 7). Such accrued interest, which is included in
accounts payable, related parties, was $1,082,000 and $1,601,000 as of
September 30, 1996 and 1997, respectively.
D-F-83
<PAGE>
PAVILION PARTNERS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
7. NOTES PAYABLE:
Notes payable to third parties consist of the following (in thousands):
<TABLE>
<CAPTION>
SEPTEMBER 30
--------------------
1996 1997
--------- ---------
<S> <C> <C>
Note payable to a bank, interest at LIBOR plus 0.18% (6% at
September 30, 1996 and 1997), payments due semiannually with a
balloon payment due on maturity in July 2005, guaranteed by
Sony .......................................................... $13,122 $12,573
Note payable to a bank, interest at 8.35% through July 2002 and
LIBOR plus 0.18% thereafter, due in July 2005, guaranteed by
Sony........................................................... 10,000 10,000
Note payable to a bank, interest at LIBOR plus 0.85% (6.78% at
September 30, 1996 and 1997), payments due annually with a
balloon payment due on maturity in December 2005, guaranteed
by Blockbuster and Sony........................................ 7,732 7,575
Note payable to a bank, interest at prime minus 105 basis
points (7.2% and 7.45% at September 30, 1996 and 1997,
respectively), payments due quarterly with a balloon payment
due on maturity in April 2000, guaranteed by Sony.............. 6,449 6,356
Note payable to a bank, interest at 9.46%, payments due
quarterly with a balloon payment due on maturity in December
1999, guaranteed by Sony....................................... 3,958 3,914
Note payable to a vendor, interest imputed at 8.98%, payments
due weekly through May 2005.................................... 1,826 1,671
Other notes payable to vendors, interest at fixed rates ranging
from 8.2% to 10.72%, due in equal installments with final
maturities ranging from December 1996 through February 2006 ... 2,040 1,591
--------- ---------
Total......................................................... 45,127 43,680
Less--Current maturities........................................ 1,447 1,488
--------- ---------
Noncurrent portion............................................ $43,680 $42,192
========= =========
Note payable to a related party consist of the following (in
thousands):
SEPTEMBER 30
--------------------
1996 1997
--------- ---------
Note payable to Blockbuster, interest at 7%, payments due
quarterly with a balloon payment due on maturity in April
2004, secured by property and equipment with a net book value
of $6,212 ..................................................... $ 7,905 $ 7,905
Less--Current maturities........................................ 637 880
--------- ---------
Noncurrent portion............................................ $ 7,268 $ 7,025
========= =========
</TABLE>
The terms of contracts with concessionaires such as food and beverage
vendors generally require the vendors to make a significant initial payment
to the Partnership at the time of the construction of an amphitheater. These
advances are repayable in periodic installments from amounts otherwise due to
the Partnership under the concession contracts. As of September 30, 1997, the
notes payable to vendors under
D-F-84
<PAGE>
PAVILION PARTNERS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
such arrangements had a weighted-average effective interest rate of 9.15
percent. The Partnership's weighted-average interest rate on notes payable to
banks was 7.3 percent on September 30, 1997.
Interest expense on the note payable to a related party was $547,000,
$489,000 and $519,000 for 1995, 1996 and 1997, respectively. Principal and
interest on the note payable to a related party have not been paid as
accounts receivable, related parties from Blockbuster remain outstanding.
As of September 30, 1997, scheduled maturities of notes payable were as
follows:
<TABLE>
<CAPTION>
<S> <C>
1998 ......... $ 2,368
1999 ......... 1,841
2000 ......... 11,560
2001 ......... 1,751
2002 ......... 1,811
Thereafter .. 32,254
--------
$51,585
========
</TABLE>
8. LEASE COMMITMENTS:
The Partnership leases various amphitheaters under operating and capital
leases. Initial lease terms are 25 to 60 years with varying renewal periods
at the Partnership's option on most leases. A number of the amphitheater
leases provide for escalating rent over the lease term. Rental expense on
operating leases is recognized on a straight-line basis over the life of such
leases. The majority of the amphitheater leases provide for contingent
rentals, generally based upon a percentage of gross revenues, as defined in
the respective lease agreements. Minimum rental expense associated with
operating leases for 1995, 1996 and 1997 was $648,000, $2,353,000 and
$2,612,000, respectively. Contingent rental expense associated with operating
leases for 1995, 1996 and 1997 was $2,407,000, $2,515,000 and $2,571,000,
respectively. Contingent rental expense associated with capital leases for
1995, 1996 and 1997 was $144,000, $155,000 and $149,000, respectively.
Minimum rental commitments on long-term capital and operating leases at
September 30, 1997, were as follows (in thousands):
<TABLE>
<CAPTION>
CAPITAL OPERATING
LEASES LEASES
--------- -----------
<S> <C> <C>
Year ending September 30--
1998 .................................... $ 757 $ 2,902
1999 .................................... 757 3,056
2000 .................................... 756 3,148
2001 .................................... 757 3,248
2002 .................................... 757 3,297
Thereafter .............................. 9,714 54,693
--------- -----------
13,498 $70,344
===========
Less--Amount representing interest ...... 7,383
---------
Present value of minimum rental payments 6,115
Less--Current portion .................... 126
---------
Noncurrent portion........................ $ 5,989
=========
</TABLE>
9. RELATED PARTIES:
The responsibility for the day-to-day business and affairs of the
Partnership has been delegated by the partners to a managing director and
support staff employed by PACE Entertainment Corporation and
D-F-85
<PAGE>
PAVILION PARTNERS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
its subsidiaries. PACE Entertainment Corporation and its subsidiaries provide
the Partnership with management and consulting services in connection with
the development, construction, maintenance and operation of amphitheaters
owned or leased by the Partnership. The Partnership paid $1,650,000,
$1,687,000 and $1,968,000 during 1995, 1996 and 1997, respectively, to PACE
Entertainment Corporation as reimbursement for the costs of these services.
The Partnership paid PACE Music Group (PMG), a subsidiary of PACE
Entertainment Corporation, $289,000, $225,000 and $395,000 during 1995, 1996
and 1997, respectively, for services provided by PMG as a local presenter at
one of the Partnership's amphitheaters.
Accounts receivable from and accounts payable to related parties at
September 30, 1997, of $3,878,000 and $3,948,000, respectively, relate to
amounts owed to and due from the partners arising from the formation of the
Partnership and general and administrative expenses paid by or on behalf of
the Partnership.
Notes receivable, related parties consist of two notes due from AEP which
bear interest at 5.62 percent per annum and matured April 1, 1997. Principal
payments on the notes are due upon request by the Partnership in order to
fund the construction of proposed amphitheaters. Interest on the partners'
notes amounted to $192,000, $63,000 and $68,000 for 1995, 1996 and 1997,
respectively.
10. COMMITMENTS AND CONTINGENCIES:
Commitments
The Partnership guarantees 50 percent of a $2,305,000 promissory note
issued by its 50 percent equity partner in the Starwood Amphitheater. The
note matures on June 1, 2003.
The Partnership has committed to fund certain renovation work at one of
its amphitheaters in proportion to its 66 2/3 percent partnership interest in
that amphitheater. The renovations are to include increasing seating capacity
and upgrading the amphitheater's concession plazas and parking facilities.
The total budget for these renovations is approximately $11.0 million of
which $5.0 million will be funded by the minority partner and a note payable
to vendor, therefore the Partnership's funding commitment is approximately
$6.0 million.
The Partnership maintains cash in bank deposit accounts which, at times,
may exceed federally insured limits. The Partnership has not experienced any
losses in such accounts. Management performs periodical evaluations of the
relative credit standards of the financial institutions with which it deals.
Additionally, the Partnership's cash management and investment policies
restrict investments to low-risk, highly liquid securities. Accordingly,
management does not believe that the Partnership is currently exposed to any
significant credit risk on cash and cash equivalents.
The Partnership is subject to other claims and litigation arising in the
normal course of its business. The Partnership does not believe that any of
these proceedings will have a material adverse effect on its financial
position or results of operations.
The Partnership was previously named as a defendant in a case filed in
Wake County, North Carolina (Promotion Litigation). There were several
defendants named in the litigation with various causes of action asserted
against one or more of each of the defendants, including (a) breach of
alleged contract, partnership, joint venture and fiduciary duties between
certain of the defendants and Pro Motion Concerts, (b) constructive fraud,
(c) interference with prospective advantage, (d) unfair trade practices, (e)
constructive trust and (f) unjust enrichment. The essence of the plaintiff's
claims was that certain of the defendants agreed to enter into a partnership
with the plaintiffs for the development and operation of an amphitheater. On
May 1, 1997, the Promotion Litigation was settled. All defendants were fully
and finally released with prejudice from any and all claims and causes of
action. Although the defendants believe that they would have prevailed at a
trial of the Promotion Litigation, the defendants chose to
D-F-86
<PAGE>
PAVILION PARTNERS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
settle rather than risk the uncertainties of a trial. The defendants did not
acknowledge or admit any liability. The settlement called for payments to
plaintiffs totaling $4.5 million, of which $1.0 million was paid by the
Partnership. The Partnership recorded litigation settlement expense of $1.0
million at September 30, 1996. The settlement was paid during May 1997.
Change in Control Provisions
The Partnership has entered into numerous leases and other contracts in
the ordinary course of business. Certain of these agreements either contain
restrictions on their assignability or would require third-party approval of
a change in control of the Partnership.
Employment Agreements
The Partnership has employment agreements with certain key employees. Such
agreements generally provide for minimum salary levels, guaranteed bonuses
and incentive bonuses which are payable if specified financial goals are
attained. As of September 30, 1997, the Company's minimum commitment under
these agreements were as follows (in thousands);
<TABLE>
<CAPTION>
<S> <C>
For the year ending September 30--
1998 ............................. $335
1999 ............................. 177
</TABLE>
Insurance
The Partnership carries a broad range of insurance coverage, including
general liability, workers' compensation, employee health coverage and
umbrella policies. The Partnership carries deductibles of up to $10,000 per
occurrence for general liability claims. The Partnership has accrued for
estimated potential claim costs in satisfying the deductible provisions of
the insurance policies for claims occurring through September 30, 1997. The
accrual is based on known facts and historical trends, and management
believes such accrual to be adequate.
11. SUBSEQUENT EVENTS:
In December 1997, the managing partner and its shareholders entered into
an agreement whereby the shareholders would sell their interests in PACE
Entertainment Corporation to SFX Entertainment, Inc. Closing is subject to
certain conditions, including the approval of third parties.
On December 19, 1997, the PACE Entertainment Corporation entered into an
agreement to purchase Blockbuster's 33 1/3 percent interest in the
Partnership for $4,171,000 in cash, $2,940,000 in assumed liabilities and the
assumption of certain indemnification obligations of Blockbuster under the
Partnership agreement. In addition, PACE Entertainment Corporation has agreed
to purchase the note payable to Blockbuster with a balance of $9,507,000,
including accrued interest of $1,601,000, at September 30, 1997. The
transaction is contingent on, among other things, obtaining acceptable
financing including the release of Blockbuster from certain debt obligations
and the approval of Sony.
On December 22, 1997, PACE Entertainment Corporation entered into an
agreement to purchase Sony's 33 1/3 percent interest in the Partnership for
$27,500,000 in cash. The transaction is contingent on, among other things,
government approval and obtaining acceptable financing including the release
of Sony from certain debt obligations (see Note 7).
D-F-87
<PAGE>
REPORT OF INDEPENDENT AUDITORS
The Boards of Directors
Contemporary Group
We have audited the accompanying combined balance sheets of Contemporary
Group as of September 30, 1997 and December 31, 1996 and the related combined
statements of operations, cash flows and stockholders' equity for each of the
nine months ended September 30, 1997 and year ended December 31, 1996. These
financial statements are the responsibility of management. Our responsibility
is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements.
An audit also includes assessing the accounting principles used and
significant estimates made by management as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the combined financial position of Contemporary
Group at September 30, 1997 and December 31, 1996 and the combined results of
their operations and their cash flows for the nine months ended September 30,
1997 and the year ended December 31, 1996, in conformity with generally
accepted accounting principles.
ERNST & YOUNG LLP
New York, New York
November 25, 1997
D-F-88
<PAGE>
CONTEMPORARY GROUP
COMBINED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
1996 1997
-------------- ---------------
<S> <C> <C>
ASSETS
Current assets:
Cash ............................................................ $ 2,972,409 $ 4,630,459
Accounts receivable ............................................. 4,067,444 8,369,802
Prepaid expenses and other current assets ....................... 272,105 374,952
-------------- ---------------
Total current assets ............................................. 7,311,958 13,375,213
Property and equipment, at cost, less accumulated depreciation
and amortization of $2,723,986 in 1996 and $3,222,296 in 1997 .. 2,438,210 2,837,790
Reimbursable event costs ......................................... 474,469 890,502
Deferred event expenses .......................................... 250,973 175,551
Investment in Riverport .......................................... 4,934,513 6,232,889
Other assets ..................................................... 120,256 130,674
-------------- ---------------
Total assets ..................................................... $15,530,379 $23,642,619
============== ===============
LIABILITIES AND COMBINED STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable ................................................ $ 1,733,676 $ 1,212,506
Accrued expenses and other current liabilities .................. 4,975,189 6,572,522
Current portion of note payable ................................. 592,138 --
-------------- ---------------
Total current liabilities ........................................ 7,301,003 7,785,028
Deferred revenue ................................................. 2,424,020 4,012,136
Other liabilities ................................................ 244,412 790,127
Deferred compensation ............................................ -- 588,122
Note payable, less current portion ............................... 1,578,171 1,578,171
Combined stockholders' equity .................................... 3,982,773 8,889,035
-------------- ---------------
Total liabilities and combined stockholders' equity ............. $15,530,379 $23,642,619
============== ===============
</TABLE>
See accompanying notes.
D-F-89
<PAGE>
CONTEMPORARY GROUP
COMBINED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
NINE MONTHS
YEAR ENDED ENDED
DECEMBER 31, SEPTEMBER 30,
1996 1997
-------------- ---------------
<S> <C> <C>
OPERATING REVENUES
Event promotion revenue ............. $38,023,454 $41,162,946
Marketing revenue ................... 12,969,621 21,132,035
Other event revenue ................. 8,859,218 8,846,167
-------------- ---------------
59,852,293 71,141,148
Cost of revenue ..................... 46,410,935 54,662,268
-------------- ---------------
13,441,358 16,478,880
OPERATING EXPENSES
Salary expense ...................... 8,010,991 7,936,131
Depreciation and amortization ...... 566,573 498,310
General and administrative expenses 3,767,111 4,165,336
-------------- ---------------
12,344,675 12,599,777
-------------- ---------------
Income from operations .............. 1,096,683 3,879,103
OTHER INCOME (EXPENSE)
Interest income ..................... 158,512 121,990
Interest expense .................... (213,658) (153,207)
Equity in income of Riverport ...... 822,716 1,298,376
-------------- ---------------
767,570 1,267,159
-------------- ---------------
Income before income taxes .......... 1,864,253 5,146,262
Federal and state taxes ............. 35,367 --
-------------- ---------------
Net income .......................... $ 1,828,886 $ 5,146,262
============== ===============
</TABLE>
See accompanying notes.
D-F-90
<PAGE>
CONTEMPORARY GROUP
COMBINED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
NINE MONTHS
YEAR ENDED ENDED
DECEMBER 31, SEPTEMBER 30,
1996 1997
-------------- ---------------
<S> <C> <C>
OPERATING ACTIVITIES
Net income ................................................... $ 1,828,886 $ 5,146,262
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization ............................... 566,573 498,310
Deferred revenue ............................................ 1,324,206 1,588,116
Non-cash compensation ....................................... -- 588,122
Equity in income of Riverport, net of distributions received (222,716) (1,298,376)
Changes in operating assets and liabilities:
Accounts receivable ........................................ (899,830) (4,302,358)
Prepaid expenses and other current assets .................. 225,754 (102,847)
Reimbursable event costs ................................... (207,355) (416,033)
Deferred event expenses .................................... (159,393) 75,422
Other assets ............................................... (29,923) (10,418)
Accounts payable ........................................... (186,876) (521,170)
Accrued expenses and other current liabilities ............ 2,605,182 1,597,333
Other liabilities .......................................... (1,061,570) 545,715
-------------- ---------------
Net cash provided by operating activities .................... 3,782,938 3,388,078
INVESTING ACTIVITIES
Purchase of property and equipment ........................... (1,159,382) (897,890)
-------------- ---------------
Net cash used in investing activities ........................ (1,159,382) (897,890)
FINANCING ACTIVITIES
Borrowings ................................................... 626,970 --
Payments of notes payable .................................... (34,832) (592,138)
Distributions paid ........................................... (2,993,000) (240,000)
-------------- ---------------
Net cash used in financing activities ........................ (2,400,862) (832,138)
-------------- ---------------
Net increase in cash ......................................... 222,694 1,658,050
Cash at beginning of period .................................. 2,749,715 2,972,409
-------------- ---------------
Cash at end of period ........................................ $ 2,972,409 $ 4,630,459
============== ===============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash paid for interest ....................................... $ 143,271 $ 112,429
============== ===============
Cash paid for income taxes ................................... $ 34,550 $ 23,618
============== ===============
</TABLE>
See accompanying notes.
D-F-91
<PAGE>
CONTEMPORARY GROUP
COMBINED STATEMENTS OF STOCKHOLDERS' EQUITY
YEAR ENDED DECEMBER 31, 1996 AND NINE MONTHS ENDED SEPTEMBER 30, 1997
<TABLE>
<CAPTION>
<S> <C>
Balance, January 1, 1996 ............................... $ 5,146,887
Distributions to stockholders .......................... (2,993,000)
Net income for the year ended December 31, 1996 ....... 1,828,886
-------------
Balance, December 31, 1996 ............................. 3,982,773
Distributions to stockholders .......................... (240,000)
Net income for the nine months ended September 30, 1997 5,146,262
-------------
Balance, September 30, 1997 ............................ $ 8,889,035
=============
</TABLE>
See accompanying notes.
D-F-92
<PAGE>
CONTEMPORARY GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS
DECEMBER 31, 1996
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING PRINCIPLES
Principles of Combination
The accompanying combined financial statements include the accounts of
Contemporary International Productions Corporation, Contemporary Productions
Incorporated, Contemporary Marketing, Inc. ("CMI"), Contemporary Sports,
Incorporated, Innovative Training and Education Concepts Corporation,
Contemporary Investments Corporation ("CIC"), Contemporary Investments of
Kansas, Inc., Continental Entertainment Associates, Inc., Dialtix, Inc., and
Capital Tickets L.P. (collectively, the "Contemporary Group" or the
"Companies"). Intercompany transactions and balances among these companies
have been eliminated in combination. The Companies are subject to common
ownership and to the transaction described in Note 7.
The Contemporary Group is a live entertainment and special events
producer, venue operator and consumer marketer. Income from operations
originates from the operation of the concert division which earns promotion
income in two ways: either a fixed fee for organizing and promoting an event
or an arrangement that entitles it to a profit percentage based on a
predetermined formula. The Companies recognize revenue from the promotion of
events when earned, which is generally upon exhibition. The Companies record
commissions on booking acts as well as sponsorship and concession income as
other event revenues.
Deferred revenue relates primarily to an advance on future concession
revenues which is evidenced by a noninterest bearing note payable and
advances on marketing services. Payments collected in advance are recognized
as income as events occur or services are provided. Reimbursable event costs
represent amounts paid by the Companies on behalf of co-promoters and other
parties with interests in the events which will be reimbursed by such
parties.
CIC is a 50% partner in Riverport Performing Arts Centre Joint Venture
("Riverport"), a Missouri general partnership which leases and operates a
20,000 seat outdoor amphitheater located in St. Louis, Missouri. The
investment in Riverport is recorded under the equity method of accounting.
Income Taxes
The Companies have been organized as either partnerships or corporations
which have elected to be taxed as "S Corporations" or incorporated as "C
Corporations." The "S Corporation" elections are valid for both federal and
state tax purposes. With respect to the partnerships and "S Corporations,"
all items of income, loss, deduction or credit are reported by the partners
or shareholders on their respective personal income tax returns. Accordingly,
no current or deferred federal or state taxes have been provided for in the
accompanying financial statements with regard to such entities.
For the year ended December 31, 1996, with respect to the "C
Corporations," the total provision for income taxes is $35,367. Certain of
the "C Corporations" filed elections to be treated as "S Corporations"
beginning January 1, 1997. Therefore, with respect to such corporations, no
provision for income taxes has been provided for during the nine months ended
September 30, 1997. The remaining "C Corporation" generated a tax loss of
approximately $52,000 for the nine months ended September 30, 1997. As such,
no provision for income taxes has been provided for.
Accounts Receivable
Accounts receivable consist of amounts due from ticket vendors, venue box
offices and customers of marketing services. Management considers these
accounts receivable as of September 30, 1997 and December 31, 1996 to be
collectible; accordingly, no allowance for doubtful accounts is recorded.
D-F-93
<PAGE>
CONTEMPORARY GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
Significant Customer
CMI produces marketing and sales programs for national consumer product
companies. Its most significant customer is AT&T, which provided
approximately 20% and 12% of the Companies' combined revenues for the nine
months ended September 30, 1997 and the year ended December 31, 1996,
respectively.
Advertising Costs
Advertising costs are expensed as incurred. For the nine months ended
September 30, 1997 and the year ended December 31, 1996, advertising costs
were $66,413 and $71,879, respectively
Property and Equipment
Property and equipment is recorded at cost. Depreciation is computed on
either the straight-line method or accelerated methods over the estimated
useful lives of the assets or the term of the related lease as follows:
<TABLE>
<CAPTION>
<S> <C>
Furniture, fixtures and equipment .... 5-7 years
Land improvements ..................... 15 years
Leasehold Improvements ................ 10 years
</TABLE>
Risks and Uncertainties
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
2. INVESTMENTS
The following is a summary of the financial position and results of
operations of Riverport as of and for the year ended December 31, 1996 and as
of and for the nine months ended September 30, 1997:
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
1996 1997
-------------- ---------------
<S> <C> <C>
Current assets .......................... $ 473,275 $ 2,603,349
Property and equipment .................. 11,815,552 11,355,439
Other assets ............................ 16,553 8,186
-------------- ---------------
Total assets ............................ $12,305,380 $13,966,974
============== ===============
Current liabilities ..................... $ 1,993,981 $ 1,022,327
Other liabilities ....................... 442,374 478,870
Partners' capital ....................... 9,869,025 12,465,777
-------------- ---------------
Total liabilities and partners' capital $12,305,380 $13,966,974
============== ===============
Revenue ................................. $11,693,138 $14,429,029
Net operating income .................... 1,970,887 4,684,284
Net income .............................. $ 1,645,431 $ 2,596,752
</TABLE>
During the year ended December 31, 1996, CIC received a cash distribution
of $600,000 from Riverport.
D-F-94
<PAGE>
CONTEMPORARY GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
3. NOTES PAYABLE
At September 30, 1997 and December 31, 1996, CIC held a $2,322,500 non
interest bearing note payable to its partner in Riverport. The note is
payable in installments through December 1, 2000 and is secured by CIC's
investment in Riverport. The carrying value of the note is $1,578,171 based
on an imputed interest rate of approximately 9%. Based on this rate, future
principal payments on the note as of September 30, 1997 are as follows:
<TABLE>
<CAPTION>
<S> <C>
1998 ... $ 683,970
1999 ... 426,296
2000 ... 467,905
-----------
$1,578,171
===========
</TABLE>
At December 31, 1996, the Companies had a $592,138 bank note payable which
bore an interest rate based on the prime lending rate (8.25% in 1996, 8.5% in
1997) and was repaid in full prior to September 30, 1997.
4. COMMON STOCK
The Companies' stock and tax status for 1997 are as follows:
<TABLE>
<CAPTION>
TAX SHARES SHARES PAR
STATUS AUTHORIZED ISSUED VALUE
------------- ------------ -------- -------
<S> <C> <C> <C> <C>
Contemporary International Productions
Corporation ............................... S-Corp. 30,000 10 $1
Contemporary Productions Incorporated ..... S-Corp. 30,000 100 $1
Contemporary Marketing, Inc. ............... S-Corp. 30,000 100 $1
Contemporary Sports, Incorporated .......... S-Corp. 30,000 100 $1
Innovative Training and Education Concepts
Corporation n/k/a Contemporary Group,
Inc........................................ S-Corp. 30,000 100 $1
Contemporary Investments Corporation ...... S-Corp. 30,000 200 $1
Contemporary Investments of Kansas, Inc. .. S-Corp. 30,000 30,000 $1
Continental Entertainment Associates, Inc. C-Corp. 300 6 $100
Dialtix, Inc. .............................. S-Corp. 30,000 6 $100
Capital Tickets L.P......................... Partnership N/A N/A N/A
</TABLE>
5. COMMITMENTS AND CONTINGENCIES
Leases
The Companies lease office facilities and concert venues under
noncancellable leases which expire at various dates through 2004. Such leases
contain various operating escalations and renewal options.
Total rent expense for the nine months ended September 30, 1997 and the
year ended December 31, 1996 was $754,395 and $818,123, respectively.
D-F-95
<PAGE>
CONTEMPORARY GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
Future minimum lease payments under noncancellable operating leases as of
September 30, 1997 are as follows:
<TABLE>
<CAPTION>
<S> <C>
1997 ......... $ 270,063
1998 ......... 858,757
1999 ......... 863,757
2000 ......... 440,050
2001 ......... 264,000
Thereafter .. 317,000
-----------
$3,013,627
===========
</TABLE>
Compensation
CMI has entered into an employment agreement with one of its employees
which provides her with rights to future cash payments based on the fair
value of CMI, as defined. These rights vest on January 1, 2002 or upon the
occurrence of certain transactions including a change of control. CMI
recorded related compensation expense for the nine months ended September 30,
1997 of $588,122 pursuant to this agreement.
Litigation
The Companies are party to various legal proceedings generally incidental
to their businesses. Although the ultimate disposition of these proceedings
is not presently determinable, management, based upon the advice of counsel,
does not expect the outcome of these proceedings to have a material adverse
effect on the financial condition of the Companies.
6. EMPLOYEE RETIREMENT PLAN
In January 1992, the Companies began a retirement plan for their employees
under Section 401(k) of the Internal Revenue Code. All employees are eligible
to participate once they obtain the minimum age requirement of 21 years and
have satisfied the service requirement of one year with the Companies.
Participant contributions are subject to the limitations of Section 402(g) of
the Internal Revenue Code. The Companies contribute to participant employees'
accounts at the rate of 25% of the first 5% of the participating employees'
contributions. During the nine months ended September 30, 1997 and the year
ended December 31, 1996, the Companies contributions totaled approximately
$23,700 and $25,600, respectively.
7. SUBSEQUENT EVENT
In December 1997, the owners of the Companies entered into an agreement to
transfer 100% of the capital stock of Contemporary International Productions
Corporation and the assets of the remaining companies comprising the
Contemporary Group, excluding cash and 1997 receivables, to SFX
Entertainment, Inc. for an aggregate consideration of $72,800,000 in cash and
the issuance of 1,402,851 shares of SFX Entertainment Class A Common Stock.
It is intended that prior to the sale, the Companies will acquire the
remaining 50% of Riverport. If it is unable to do so, the cash portion of the
purchase price would be reduced by $10,500,000.
D-F-96
<PAGE>
REPORT OF INDEPENDENT AUDITORS
The Board of Directors
SJS Entertainment Corporation
We have audited the accompanying combined balance sheet of SJS
Entertainment Corporation and Affiliated Company as of December 31, 1996, and
the related combined statements of operations and retained earnings and cash
flows for the year then ended. These financial statements are the
responsibility of management. Our responsibility is to express an opinion on
these financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements.
An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
In our opinion, combined financial statements referred to above present
fairly, in all material respects, the financial position of SJS Entertainment
Corporation and Affiliated Company at December 31, 1996 and the results of
their operations and their cash flows for the year then ended in conformity
with generally accepted accounting principles.
ERNST & YOUNG LLP
New York, New York
November 20, 1997
D-F-97
<PAGE>
SJS ENTERTAINMENT CORPORATION AND AFFILIATED COMPANY
COMBINED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
1996 1997
-------------- ---------------
(UNAUDITED)
<S> <C> <C>
ASSETS
Current assets:
Cash ............................................... $ 230,280 $ 633,001
Accounts receivable ................................ 2,257,110 3,644,176
Due from officers .................................. 616,177 --
Prepaid expenses ................................... 26,037 38,982
Employee loans ..................................... 1,925 9,108
-------------- ---------------
Total current assets ................................ 3,131,529 4,325,267
-------------- ---------------
Fixed assets, at cost:
Furniture, fixtures and office equipment .......... 309,756 375,390
Production equipment ............................... 95,317 172,641
Leasehold improvements ............................. 61,228 61,228
-------------- ---------------
466,301 609,259
Less, accumulated depreciation and amortization ... 187,546 275,142
-------------- ---------------
Net fixed assets .................................... 278,755 334,117
-------------- ---------------
Deferred tax asset .................................. -- 69,422
Other assets ........................................ 23,658 22,656
-------------- ---------------
Total assets ........................................ $3,433,942 $4,751,462
============== ===============
LIABILITIES AND COMBINED STOCKHOLDERS' EQUITY
Current liabilities:
Loans payable--bank ................................ $1,900,000 $ --
Accounts payable ................................... 694,055 1,008,718
Accrued expenses ................................... 619,427 2,754,965
Due to affiliate ................................... 15,989 15,989
Loans and exchanges ................................ 2,799 --
Deferred revenue ................................... 104,208 41,575
Due to officers .................................... -- 988,423
-------------- ---------------
Total current liabilities ........................... 3,336,478 4,809,670
-------------- ---------------
Combined stockholders' equity:
Common stock ....................................... 27,200 27,200
Retained earnings (deficit) ........................ 145,264 (10,408)
Treasury stock ..................................... (75,000) (75,000)
-------------- ---------------
Total combined stockholders' equity ................. 97,464 (58,208)
-------------- ---------------
Total liabilities and combined stockholders' equity $3,433,942 $4,751,462
============== ===============
</TABLE>
See accompanying notes.
D-F-98
<PAGE>
SJS ENTERTAINMENT CORPORATION AND AFFILIATED COMPANY
COMBINED STATEMENT OF OPERATIONS AND RETAINED EARNINGS
YEAR ENDED DECEMBER 31, 1996
<TABLE>
<CAPTION>
<S> <C>
Net sales, including management fees from related party (Note 2) $11,374,672
Cost of sales .................................................. 4,039,320
-------------
Gross profit ................................................... 7,335,352
-------------
Operating expenses:
Officers' base salaries ....................................... 490,353
Officers' salaries--bonus ..................................... 2,475,000
Employee payroll and taxes .................................... 2,211,372
Consulting fees ............................................... 272,233
Messengers and delivery expense ............................... 208,697
Telephone and utilities ....................................... 341,649
Transportation and automobile expenses ........................ 240,218
Advertising and promotion ..................................... 149,907
Rent expense, net ............................................. 182,012
Depreciation and amortization ................................. 84,001
Other, net .................................................... 648,128
-------------
7,303,570
-------------
Income from operations ......................................... 31,782
Interest expense--net .......................................... (3,229)
-------------
Income before provision for income taxes ....................... 28,553
Provision for income taxes ..................................... 91,197
-------------
Net loss ....................................................... (62,644)
Retained earnings at beginning of year ......................... 207,908
-------------
Retained earnings at end of year ............................... $ 145,264
=============
</TABLE>
See accompanying notes.
D-F-99
<PAGE>
SJS ENTERTAINMENT CORPORATION AND AFFILIATED COMPANY
COMBINED STATEMENTS OF OPERATIONS AND RETAINED EARNINGS
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
---------------------------
1996 1997
------------ -------------
(UNAUDITED)
<S> <C> <C>
Net sales, including management fees from related party (Note 2) $8,745,965 $10,736,887
Cost of sales .................................................. 3,076,955 3,439,414
------------ -------------
Gross profit ................................................... 5,669,010 7,297,473
------------ -------------
Operating expenses:
Officers' base salaries ....................................... 366,224 883,308
Officers' salaries--bonus ..................................... 2,085,000 2,116,692
Employee payroll and taxes .................................... 1,521,486 1,969,623
Consulting fees ............................................... 192,951 220,860
Messengers and delivery expense ............................... 157,075 192,097
Telephone and utilities ....................................... 248,866 316,473
Transportation and automobile expenses ........................ 165,811 242,895
Advertising and promotion ..................................... 128,005 279,758
Rent expense, net ............................................. 119,482 173,486
Start-up costs of SJS Research ................................ -- 216,944
Depreciation and amortization ................................. 59,500 87,596
Other, net .................................................... 439,024 665,881
------------ -------------
5,483,424 7,365,613
------------ -------------
Income (loss) from operations .................................. 185,586 (68,140)
Other income (expenses):
Other income .................................................. -- 77,510
Interest expense--net ......................................... (5,627) (30,540)
------------ -------------
Income (loss) before provision for income taxes ................ 179,959 (21,170)
Provision for income taxes ..................................... 88,859 134,502
------------ -------------
Net income (loss) .............................................. 91,100 (155,672)
Retained earnings at January 1 ................................. 207,908 145,264
------------ -------------
Retained earnings (deficit) at September 30 .................... $ 299,008 $ (10,408)
============ =============
</TABLE>
See accompanying notes.
D-F-100
<PAGE>
SJS ENTERTAINMENT CORPORATION AND AFFILIATED COMPANY
COMBINED STATEMENT OF CASH FLOWS
YEAR ENDED DECEMBER 31, 1996
<TABLE>
<CAPTION>
<S> <C>
CASH FLOW FROM OPERATING ACTIVITIES
Net loss ...................................................................... $ (62,644)
Adjustments to reconcile net loss to net cash provided by operating
activities:
Depreciation and amortization ............................................... 84,001
Changes in assets and liabilities:
Decrease in accounts receivable ............................................ 241,679
Decrease in due from affiliate ............................................. 6,134
Increase in prepaid expenses ............................................... (5,445)
Decrease in employee loans ................................................. 14
Decrease in security deposits .............................................. 4,737
Decrease in accounts payable ............................................... (130,667)
Increase in accrued expenses ............................................... 532,762
Increase in due to affiliate ............................................... 15,989
Decrease in loans and exchanges ............................................ (959)
Increase in deferred revenues .............................................. 104,208
-------------
Net cash provided by operating activities ..................................... 789,809
-------------
CASH FLOW FROM INVESTING ACTIVITIES
Cash used to acquire fixed assets ............................................. (184,132)
CASH FLOW FROM FINANCING ACTIVITIES
Officers' loans, net .......................................................... (2,204,564)
Repayments of bank loan ....................................................... (275,760)
Proceeds from new bank loans .................................................. 1,900,000
Payments towards treasury stock financing agreement ........................... (12,500)
-------------
Net cash used by financing activities ......................................... (592,824)
-------------
Net increase in cash .......................................................... 12,853
Cash at beginning of year ..................................................... 217,427
-------------
Cash at end of year ........................................................... $ 230,280
=============
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Interest paid during period ................................................... $ 9,003
=============
Income taxes paid during period ............................................... $ 180,636
=============
</TABLE>
See accompanying notes.
D-F-101
<PAGE>
SJS ENTERTAINMENT CORPORATION AND AFFILIATED COMPANY
COMBINED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
----------------------------
1996 1997
------------- -------------
(UNAUDITED)
<S> <C> <C>
CASH FLOW FROM OPERATING ACTIVITIES
Net income ................................................ $ 91,100 $ (155,672)
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation and amortization ........................... 59,500 87,596
Changes in assets and liabilities:
Increase in accounts receivable ........................ (347,582) (1,387,066)
Decrease in due from affiliate ......................... 6,134 --
(Increase) decrease in prepaid expenses ................ 4,316 (12,945)
(Increase) in employee loans ........................... (5,388) (7,183)
(Increase) in deferred tax asset ....................... -- (69,422)
(Increase) decrease in other assets .................... (1,354) 1,000
Increase in accounts payable ........................... 124,338 314,663
Increase in accrued expenses ........................... 1,491,531 2,135,538
Increase in due to affiliate ........................... 15,989 --
Decrease in loans and exchanges ........................ (3,758) (2,797)
Increase (decrease) in deferred revenues ............... 107,183 (62,633)
------------- -------------
Net cash provided by operating activities ................. 1,542,009 841,079
------------- -------------
CASH FLOW FROM INVESTING ACTIVITIES
Cash used to acquire fixed assets ......................... (161,079) (142,958)
CASH FLOW FROM FINANCING ACTIVITIES
Officers' loans, net ...................................... (848,077) 1,604,600
Repayments of bank loan ................................... (275,760) (1,900,000)
Payments towards treasury stock financing agreement ...... (12,500) --
------------- -------------
Net cash used by financing activities ..................... (1,136,337) (295,400)
------------- -------------
Net increase in cash ...................................... 244,593 402,721
Cash at January 1 ......................................... 217,427 230,280
------------- -------------
Cash at September 30 ...................................... $ 462,020 $ 633,001
============= =============
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Interest paid during period ............................... $ 8,239 $ 33,218
============= =============
Income taxes paid during period ........................... $ 133,088 $ 57,052
============= =============
</TABLE>
See accompanying notes.
D-F-102
<PAGE>
SJS ENTERTAINMENT CORPORATION AND AFFILIATED COMPANY
NOTES TO COMBINED FINANCIAL STATEMENTS
DECEMBER 31, 1996
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Combined Statements
The financial statements present the financial position and results of
operations of SJS Entertainment Corporation and Urban Entertainment Corp.
(collectively, the "Company") which are affiliated through common management
and ownership.
Nature of Business
The Company creates, produces and distributes music-related radio programs
and services which it barters or exchanges with radio broadcasters for
commercial air time, which is then sold to national network advertisers.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management use estimates based upon
available information, which directly affect reported amounts. Actual results
could differ from those estimates.
Depreciation and Amortization
Depreciation of furniture, fixtures and equipment is computed using the
straight-line and declining balance methods, at rates adequate to allocate
the cost of the applicable asset over its expected useful life. Amortization
of leasehold improvements is computed using the straight-line method over the
shorter of the lease term or the expected useful life of the asset.
Depreciation and amortization expense for the year ended December 31, 1996
totaled $84,001.
<TABLE>
<CAPTION>
<S> <C>
Estimated useful life ranges are as follows:
Furniture, fixtures and office equipment ...... 5-7 years
Production equipment ........................... 5 years
Leasehold improvements ......................... 5-10 years
</TABLE>
Intercompany Balances and Transactions
All intercompany balances and transactions have been eliminated in
combination.
Concentration of Credit Risk
The Company maintains bank balances with Sterling National Bank in excess
of the federally insured limit of $100,000.
Interim Financial Information
Financial information as of September 30, 1997 and for the nine months
ended September 30, 1997 and September 30, 1996 is unaudited. In the opinion
of management, all adjustments necessary for a fair presentation of the
results for such period have been included; all adjustments are of a normal
and recurring nature. Interim results are not necessarily indicative of
results for a full year.
2. RELATED PARTY TRANSACTIONS
Due from Officers
The Company maintains a running loan/exchange account with its officers in
order to satisfy the cash flow needs of operations. There is no interest
charged by either party on these temporary loans.
D-F-103
<PAGE>
SJS ENTERTAINMENT CORPORATION AND AFFILIATED COMPANY
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
At the beginning of the year, January 1, 1996, the Company owed its
officers $1,589,146. During the year, the officers loaned the Company an
additional $354,780, while the Company paid to its officers a total of
$2,560,103.
In addition, the Company pays its officers in total $2,000 per month
towards the business use of their home. These amounts are charged to rent
expense and totaled $24,000 for the year ended December 31, 1996.
Salaries and bonuses paid to officers is determined annually by the
Company's board of directors.
Management Services
The Company has arranged to manage the operations of a related company
which is 40% owned by the officers of the Company. In exchange for the
services provided, the Company receives managing fees of $40,000 per month.
In addition, the Company has subleased a portion of its premises to this
related company (see Note 4), and is also reimbursed for other direct
operating expenses (telephone, utilities, cleaning, bookkeeping and
administrative) and indirect overhead costs. This arrangement terminated at
the end of April 1997.
During the year ended December 31, 1996, the Company received the
following amounts from this related company:
<TABLE>
<CAPTION>
<S> <C>
Management fees ................. $480,000
Rental income ................... 69,780
Direct expense reimbursement ... 25,519
Indirect overhead reimbursement 108,000
-----------
$683,299
===========
</TABLE>
Management fees, rental income, the direct expense reimbursement and
indirect overhead reimbursement are reflected as an adjustment to the related
income or expense account in the accompanying statement of operations.
Due to Affiliate
The amount reflected as due to affiliate on the current liabilities
section of the balance sheet in the amount of $15,989, is a carryforward of a
prior year liability due to a related company of which 50% is owned by the
officers of the Company. This matter is currently in litigation, and there is
no legal opinion as to its probable settlement. However, management does not
expect any eventual monetary settlement to exceed this amount.
3. LOANS PAYABLE--BANK
At December 31, 1996, the Company owed to Sterling National Bank a term
loan of $1,600,000 which was secured by personal certificates of deposit
totaling the same amount held by the officers of the Company. On February 20,
1997 the certificates matured, at which time they were transferred into the
Company as an officers' loan repayment and used to pay-off the bank loan.
Interest charged to the Company was at the rate of prime plus 1%.
In addition to the term loan referred to above, the Company maintains a
$300,000 line-of-credit with Sterling National Bank, which is collateralized
by all corporate assets and guaranteed by the officers/ shareholders. At
December 31, 1996, there was an outstanding balance of $300,000. Interest is
charged at the rate of prime plus 1%. As of November 20, 1997, this loan has
been repaid.
In 1996, the Company repaid a $275,760 loan from Sterling National Bank,
which was outstanding at December 31, 1995.
D-F-104
<PAGE>
SJS ENTERTAINMENT CORPORATION AND AFFILIATED COMPANY
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
4. COMMITMENTS AND CONTINGENCIES
Automobile Lease
The Company leases automobiles with monthly payments of $1,834 due through
February, 1999.
Office and Audio Production Studio Leases
The Company maintains several offices for sales and administration
throughout the United States, as well as two production studios. The main
premises are located in New York City and is subject to an operating lease
expiring March 31, 2006. Other premises are subject to operating leases with
various terms ranging from month-to-month, to January 31, 2001.
Future minimum commitments for automobile, office and studio leases,
including two new leases entered into during 1997, are as follows:
<TABLE>
<CAPTION>
<S> <C>
1997 ......... $ 305,300
1998 ......... 311,200
1999 ......... 300,000
2000 ......... 267,000
2001 ......... 240,100
Thereafter .. 1,098,800
-----------
$2,522,400
===========
</TABLE>
Rent expense for offices and production studios, net of the subtenant
lease income (see below), totaled $182,012 for the year ended December 31,
1996, while the automobile lease cost was approximately $22,000.
Subtenant Lease
The Company has subleased a portion of its New York City premises to a
related company who is partially owned by the stockholders of the Company,
for approximately $5,800 per month. The lease terminated at the end of April,
1997.
Consulting Agreements
Urban Entertainment Corp. is a party to consulting agreements with two
individuals, requiring monthly payments totaling $9,583 to be paid through
December 31, 1999. The future commitment is as follows:
<TABLE>
<CAPTION>
<S> <C>
1997 ... $115,000
1998 ... 115,000
1999 ... 115,000
----------
$345,000
==========
</TABLE>
D-F-105
<PAGE>
SJS ENTERTAINMENT CORPORATION AND AFFILIATED COMPANY
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
5. SHAREHOLDERS' EQUITY
Shareholders' equity consists of the following:
<TABLE>
<CAPTION>
PAR ISSUED AND
COMPANY CLASS VALUE AUTHORIZED OUTSTANDING VALUE
- ------------------------------ --------------- ------- ------------ ------------- ---------
<S> <C> <C> <C> <C> <C>
SJS Entertainment Corporation -- None 1,000 1,000 $27,000
Urban Entertainment Corp. .... A (voting) None 840 840 100
B (nonvoting) None 160 160 100
---------
$27,200
=========
</TABLE>
Treasury stock represents the acquisition cost of 550 shares of Urban
Entertainment Corp. (420 Class A, and 130 Class B) in 1995. The Company paid
$12,500 of the total consideration for the stock in 1996.
Retained earnings at January 1, 1996 was adjusted to reflect the
underaccrual of $51,831 of state and local taxes related to 1995.
6. INCOME TAXES
Urban Entertainment Corp. has elected "S" Corporation status for both
federal and state tax purposes. Accordingly, all items of income, loss,
deduction or credit are reported by the stockholders on their respective
personal income tax returns. Therefore, no federal or state tax has been
provided.
SJS Entertainment Corporation is subject to corporate taxes at the federal
level and seven state and local jurisidictions.
The provision for income taxes for the year ended December 31, 1996 is as
follows:
<TABLE>
<CAPTION>
<S> <C>
Federal ......... $ 9,647
State and local . 81,550
---------
$91,197
=========
</TABLE>
On October 30, 1997, SJS Entertainment Corporation filed an election to be
treated as an "S" Corporation beginning January 1, 1998. Approval from the
Internal Revenue Service and various state revenue departments are pending.
7. EMPLOYEE RETIREMENT PLAN
The Company maintains a retirement plan for their employees under Section
401(k) of the Internal Revenue Code. All employees are eligible to
participate once they obtain the minimum age requirement of 21 years, and
have satisfied the service requirement of six months with the Company.
Participants may make voluntary contributions into the plan of up to 15% of
their compensation. The Company contributes to each participant's account an
amount equal to 25% of the participant's voluntary contribution, or $1,000,
whichever is less.
During the year ended December 31, 1996, employer contributions totaled
$6,979.
8. LEGAL MATTERS
The Company has been named in various lawsuits arising in the normal
course of business. It is not possible at this time to assess the probability
of any liability against the Company as a result of these lawsuits.
Management has stated that all cases will be vigorously defended.
D-F-106
<PAGE>
SJS ENTERTAINMENT CORPORATION AND AFFILIATED COMPANY
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
9. SUBSEQUENT EVENTS
In December 1997, the Company's shareholders entered into an agreement to
sell all of the issued and outstanding shares of the Company to SFX
Entertainment, Inc.
In December 1997, the Company borrowed $1,500,000 under a term loan with
Sterling National Bank (Unaudited).
D-F-107
<PAGE>
REPORT OF INDEPENDENT AUDITORS
The Board of Directors
The Album Network, Inc.
We have audited the accompanying combined balance sheets of The Album
Network, Inc. and Affiliated Companies as of September 30, 1997 and 1996, and
the related combined statements of operations and stockholders' deficit and
cash flows for the years then ended. These financial statements are the
responsibility of management. Our responsibility is to express an opinion on
these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements.
An audit also includes assessing the accounting principles used and
significant estimates made by management as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the combined financial position of The Album
Network, Inc. and Affiliated Companies at September 30, 1997 and 1996, and
the combined results of their operations and their cash flows for the years
then ended, in conformity with generally accepted accounting principles.
ERNST & YOUNG LLP
November 20, 1997
New York, New York
D-F-108
<PAGE>
THE ALBUM NETWORK, INC. AND AFFILIATED COMPANIES
COMBINED BALANCE SHEETS
<TABLE>
<CAPTION>
SEPTEMBER 30,
----------------------------
1996 1997
------------- -------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents .......................................... $ 160,453 $ 272,423
Accounts receivable, less allowance for doubtful
accounts of $153,728 in 1997and $95,450 in 1996 ................... 2,148,159 2,229,237
Officers' loans receivable ......................................... 423,447 390,794
Prepaid expenses and other current assets .......................... 125,558 234,914
------------- -------------
Total current assets ................................................ 2,857,617 3,127,368
Property, plant and equipment, at cost, less accumulated
depreciation of $1,056,689 in 1997 and $914,512 in 1996 ........... 278,898 303,614
Deferred software costs, less accumulated amortization of $106,639
in 1997 and $45,768 in 1996 ........................................ 172,302 262,061
Other noncurrent assets ............................................. 39,477 37,033
------------- -------------
Total assets ........................................................ $ 3,348,294 $ 3,730,076
============= =============
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities:
Accrued officers' bonuses .......................................... $ 1,200,000 $ 1,251,000
Accounts payable and other accrued expenses ........................ 1,081,469 1,208,424
Officers' loans payable ............................................ 650,000 489,085
Unearned subscription income ....................................... 530,255 406,529
Taxes payable and other current liabilities ........................ 351,551 304,011
Current portion of long-term debt .................................. 624,723 426,228
------------- -------------
Total current liabilities ........................................... 4,437,998 4,085,277
Long-term debt ...................................................... 1,294,133 1,051,881
Deferred income taxes ............................................... 279,434 114,178
Combined stockholders' deficit ...................................... (2,663,271) (1,521,260)
------------- -------------
Total liabilities and stockholders' deficit ......................... $ 3,348,294 $ 3,730,076
============= =============
</TABLE>
See accompanying notes.
D-F-109
<PAGE>
THE ALBUM NETWORK, INC. AND AFFILIATED COMPANIES
COMBINED STATEMENTS OF OPERATIONS AND
STOCKHOLDERS' DEFICIT
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30,
-----------------------------
1996 1997
-------------- -------------
<S> <C> <C>
OPERATING REVENUES
Advertising revenue ................................ $ 7,040,465 $ 7,619,751
Research services revenue .......................... 2,453,026 2,441,703
Direct mail & subscription revenue ................. 1,791,887 1,837,248
Broadcast revenue .................................. 2,085,714 2,235,788
Consulting revenue.................................. 720,000 470,000
Other revenue ...................................... 675,790 1,152,448
-------------- -------------
14,766,882 15,756,938
Direct costs of revenue ............................ 4,408,997 4,107,328
-------------- -------------
10,357,885 11,649,610
OPERATING EXPENSES
Officers' salary expense ........................... 3,384,870 3,662,427
Other salary expense ............................... 3,956,910 3,949,715
Depreciation and amortization ...................... 183,976 203,047
General and administrative expenses ................ 2,524,704 2,483,197
-------------- -------------
10,050,460 10,298,386
-------------- -------------
Income from operations ............................. 307,425 1,351,224
OTHER INCOME (EXPENSE)
Interest income--officers' loans ................... 35,000 41,600
Interest income--third party ....................... 6,961 1,295
Interest expense--officers' loans .................. (35,000) (55,940)
Interest expense--third party ...................... (256,164) (175,490)
-------------- -------------
Income before income taxes ......................... 58,222 1,162,689
INCOME TAXES
Provision for income taxes ......................... 211,832 20,678
-------------- -------------
Net income (loss) .................................. (153,610) 1,142,011
Combined stockholders' deficit at beginning of year (2,509,661) (2,663,271)
-------------- -------------
Combined stockholders' deficit at end of year ..... $(2,663,271) $(1,521,260)
============== =============
</TABLE>
See accompanying notes.
D-F-110
<PAGE>
THE ALBUM NETWORK, INC. AND AFFILIATED COMPANIES
COMBINED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30,
--------------------------
1996 1997
------------ ------------
<S> <C> <C>
OPERATING ACTIVITIES
Net income ......................................................... $(153,610) $1,142,011
Adjustment to reconcile net income to net cash (used in) provided
by operating activities:
Depreciation and amortization .................................... 183,976 203,047
Provision for doubtful accounts .................................. 13,584 58,278
Changes in operating assets and liabilities:
Accounts receivable ............................................. (246,873) (139,356)
Prepaid expenses and other current assets ....................... 154,120 (97,053)
Other non current assets ........................................ (3,378) 2,444
Accounts payable and accrued expenses ........................... 69,816 126,955
Unearned subscription income .................................... 101,623 (123,726)
Accrued officers' bonus ......................................... 639,000 51,000
Deferred income taxes ........................................... 39,268 (165,257)
Taxes payable and other current liabilities ..................... 143,423 (127,843)
------------ ------------
Net cash (used in) provided by operating activities ................ 940,949 930,500
------------ ------------
INVESTING ACTIVITIES
Purchase of property and equipment ................................. (65,731) (166,891)
Deferred software costs ............................................ (97,463) (150,630)
------------ ------------
Net cash used in investing activities .............................. (163,194) (317,521)
------------ ------------
FINANCING ACTIVITIES
Payments on long term debt ......................................... (860,236) (527,747)
Proceeds from additional debt borrowings ........................... 52,500 155,000
Proceeds from (repayments of) officers' loans, net ................. 61,355 (128,262)
------------ ------------
Net cash used in financing activities .............................. (746,381) (501,009)
------------ ------------
Net increase in cash and cash equivalents .......................... 31,374 111,970
Cash and cash equivalents at beginning of year ..................... 129,079 160,453
------------ ------------
Cash and cash equivalents at end of year ........................... $ 160,453 $ 272,423
============ ============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash paid for interest ............................................. $ 304,726 $ 190,168
============ ============
Cash paid for income taxes ......................................... $ 21,375 $ 26,316
============ ============
</TABLE>
See accompanying notes.
D-F-111
<PAGE>
THE ALBUM NETWORK, INC. AND AFFILIATED COMPANIES
NOTES TO COMBINED FINANCIAL STATEMENTS
SEPTEMBER 30, 1997
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING PRINCIPLES
Principles of Combination
The accompanying combined financial statements include the accounts of The
Album Network, Inc., The Network 40, Inc., The Urban Network, Inc. and
In-the-Studio (collectively, the "Companies"). Intercompany transactions and
balances among the Companies have been eliminated in combination.
On August 27, 1997, the board of directors and shareholders of the
Companies approved a plan of agreement and merger which provided that The
Urban Network, Inc. merge into The Album Network, Inc. (the "Company")
effective September 24, 1997. The Companies accounted for the transaction as
a merger of companies under common control.
The Companies publish six music trade magazines, produce rock, urban and
top 40 programming specials and manufacture compact disc samplers. They also
serve as product marketing advisors to contemporary music talent and their
managers in providing creative content and innovative marketing campaigns. In
addition, the Companies provide research services for radio station program
directors and record label executives. The Companies publishes five print
periodicals for rock and top 40 music broadcasters, retailers and music
industry executives. The weekly publications are the "Album Network" and the
"Network 40". The monthly publications are the "Virtually Alternative" and
"Totally Adult" and the quarterly publication is titled "AggroActive."
Additionally, "The Urban Network" trade magazine is published each week.
Revenue Recognition
The Companies' magazines generate revenue from advertising sales,
complemented by subscription sales and incremental direct mail revenue.
Unearned subscription income represents revenues on subscriptions for
which publications have not been delivered to customers as of the balance
sheet date. Unearned subscription income at September 30, 1996 also includes
unearned income on certain advertising and direct mail packages.
Revenue from research services is recognized straight-line over the
license term or upon the sale of computer software developed for licensees
and other customers. Advertising and broadcast revenues are recognized when
advertisements are run or aired.
Furniture and Equipment
Furniture and equipment are valued at cost less accumulated depreciation.
Depreciation is provided on the straight-line and declining balance methods
over the estimated useful lives of the assets, as follows:
<TABLE>
<CAPTION>
<S> <C>
Computer hardware ........... 5 years
Software .................... 5 years
Furniture and equipment .... 5-7 years
Leasehold improvements ..... 5 years
</TABLE>
Deferred Software Costs
Costs incurred to produce software masters and subsequent enhancements to
such software are capitalized and amortized over the remaining economic life
of the master (generally, five years). Costs of maintenance and customer
support are charged to expense when incurred.
Cash and Cash Equivalents
The Companies consider all highly liquid debt instruments purchased with a
maturity of three months or less to be cash equivalents.
Income Taxes
Each of the affiliated Companies file a separate tax return. The Album
Network, Inc. and the Urban Network, Inc. are "C Corporations." The Network
40, Inc. has elected to be taxed as an "S Corporation".
D-F-112
<PAGE>
THE ALBUM NETWORK, INC. AND AFFILIATED COMPANIES
NOTES TO COMBINED FINANCIAL STATEMENTS (Continued)
The "S Corporation" election is effective for both federal and state tax
purposes. Accordingly all items of income, loss, deduction or credit are
reported by the shareholders on their respective personal income tax returns.
The corporate tax rate for S Corporations in California is one and one-half
percent (1.5%).
Risks and Uncertainties
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
Concentration of Credit Risk
The Company maintains bank balances with City National Bank in excess of
the federally insured limit of $100,000.
2. RELATED PARTY TRANSACTIONS
Officers' Loans
The Companies have several loan agreements outstanding with its officers
in order to satisfy the cash flow needs of operations. The interest rates on
the loans to and from the officers range from approximately 10% to 12%.
At October 1, 1995, the officers owed the Companies $471,918 and the
Companies owed the officers $637,116. During the year ended September 30,
1996, the officers repaid $48,471 and loaned the Companies an additional
$12,884.
At October 1, 1996, the officers owed the Companies $423,447 and the
Companies owed the officers $650,000. During the year ended September 30,
1997, the officers repaid $32,653 to the Companies and the Companies repaid
$160,915 to the officers.
3. LONG-TERM DEBT
A summary of long-term debt as of September 30, 1997 and 1996 is as
follows:
<TABLE>
<CAPTION>
SEPTEMBER 30
-------------------------
1996 1997
------------ -----------
<S> <C> <C>
Note payable to City National Bank, collateralized by certain
equipment and personally guaranteed by the stockholders; payable
in monthly installments of $2,917 plus interest at 10.5%; due May
1999 ............................................................. $ 96,996 $ 62,740
Note payable to City National Bank, personally guaranteed by the
stockholders; payable in monthly installments of $41,233 plus
interest at 8.75% through January 22, 1997 and at 8.25%
thereafter; due December 2000.(A) ................................ 1,821,862 1,415,369
------------ -----------
1,918,856 1,478,109
Less current portion .............................................. 624,723 426,228
------------ -----------
Long-term debt .................................................... $1,294,133 $1,051,881
============ ===========
</TABLE>
- ------------
(A) In September 1995 The Album Network, Inc., The Network 40, Inc. and The
Urban Network, Inc. entered into a loan agreement with City National Bank
for $2,330,000 in connection with a redemption of common stock. Interest
was set at 8.75% per year and principal and interest were payable in
monthly installments of $57,846 through September 1999. In January 1997,
the loan agreement was revised. Interest was reset at 8.25% and monthly
payments of $41,233 were extended through December 2000. The principal
balance at the date of revision was $1,687,560.
D-F-113
<PAGE>
THE ALBUM NETWORK, INC. AND AFFILIATED COMPANIES
NOTES TO COMBINED FINANCIAL STATEMENTS (Continued)
4. COMMON STOCK
The Companies' stock and tax status at September 30, 1997 are as follows:
<TABLE>
<CAPTION>
SHARES
ISSUED
TAX SHARES AND
STATUS AUTHORIZED OUTSTANDING
------------- ------------ -------------
<S> <C> <C> <C>
The Album Network, Inc. . C-Corp. 1,000,000 220
The Network 40, Inc. ... S-Corp. 100,000 825
The Urban Network, Inc. . C-Corp. 100,000 825
In-the-Studio ........... Partnership n/a n/a
</TABLE>
5. COMMITMENTS AND CONTINGENCIES
Leases
The Companies lease an office facility under noncancellable leases which
expire in February 1998.
Total rent expense for the years ended September 30, 1997 and 1996 under
operating leases was $262,812 and $256,026, respectively.
Future minimum lease payments under noncancellable operating leases as of
September 30, 1997 total $121,155, all of which is payable in 1998.
Other Matters
As of September 30, 1997, approximately $80,000 was drawn on lines of
credit with City National Bank. There were no amounts drawn as of September
30, 1996.
6. INCOME TAXES
The Album Network has received a Statutory Notice of Deficiency from the
Internal Revenue Service ("IRS") for the years ended September 30, 1994, 1995
and 1996 asserting tax deficiencies resulting primarily from an IRS position
that compensation paid to officers was unreasonable and excessive. In total,
approximately $3.5 million of adjustments increasing taxable income have been
proposed. The total additional tax, penalties and interest through September
30, 1997 related to these adjustments would be approximately $1.8 million.
The company has analyzed these matters with tax counsel and believes it has
meritorious defenses to the deficiencies asserted by the IRS. The company has
filed a petition with the United States Tax Court contesting the asserted
liability. While the company believes that a successful defense of this case
may be made, in light of the economic burdens of the defense, the company may
entertain a settlement for up to $291,000. Accordingly, the company has
recorded reserves in such amount, including $23,000, $115,000 and $153,000
for the years ended September 30, 1997, 1996 and prior periods, respectively.
D-F-114
<PAGE>
THE ALBUM NETWORK, INC. AND AFFILIATED COMPANIES
NOTES TO COMBINED FINANCIAL STATEMENTS (Continued)
For the years ended September 30, 1996 and 1997 the provision for income
taxes is as follows:
<TABLE>
<CAPTION>
1996 1997
---------- -----------
<S> <C> <C>
Current:
Federal .. $129,911 $ 143,056
State ..... 17,710 42,878
---------- -----------
Total .... 147,621 185,934
---------- -----------
Deferred:
Federal .. 49,764 (150,383)
State ..... 14,447 (14,873)
---------- -----------
Total .... 64,211 (165,256)
---------- -----------
Total ...... $211,832 $ 20,678
========== ===========
</TABLE>
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amount of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. The significant
components of the Companies' deferred tax assets and liabilities as of
September 30, 1996 and 1997 are as follows:
<TABLE>
<CAPTION>
1996 1997
---------- ---------
<S> <C> <C>
Deferred tax assets:
Contributions carryforward .... $ 8,194 $ 10,078
Deferred tax liabilities:
Fixed assets ................... 12,280 11,830
Intangible assets .............. 275,346 112,424
---------- ---------
Total deferred tax liabilities 287,628 124,254
---------- ---------
Net deferred tax liabilities ... $279,434 $114,176
========== =========
</TABLE>
7. EMPLOYEE RETIREMENT PLAN
In January 1997, the Companies began a retirement plan for their employees
under Section 401(k) of the Internal Revenue Code. All employees are eligible
to participate once they obtain the minimum age requirement of 21 years, and
have satisfied the service requirement of one year with the Companies.
Participant contributions are subject to the limitations of Section 402 (g)
of the Internal Revenue Code. The Companies contribute monthly to
participating employees accounts at the rate of 10% of the participating
employees contributions. During the year ended September 30, 1997, the
Companies contributions totaled approximately $14,000.
8. SUBSEQUENT EVENTS
Subsequent to September 30, 1997, an additional $320,000 was drawn on the
lines of credit with City National Bank.
In December 1997, the shareholders of the Companies entered into an
agreement to sell all of the issued and outstanding shares of the Company and
all of the assets and liabilities of The Network 40, Inc. to SFX
Entertainment, Inc.
D-F-115
<PAGE>
REPORT OF INDEPENDENT AUDITORS
The Board of Directors
BG Presents, Inc.
We have audited the accompanying consolidated balance sheets of BG
Presents, Inc. and subsidiaries as of January 31, 1997 and 1996, and the
related consolidated statements of operations, cash flows and stockholders'
equity for the years then ended. These financial statements are the
responsibility of management. Our responsibility is to express an opinion on
these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the consolidated financial
statements are free of material misstatement. An audit includes examining, on
a test basis, evidence supporting the amounts and disclosures in the
financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management as well as
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of BG Presents,
Inc. and subsidiaries at January 31, 1997 and 1996, and the consolidated
results of their operations and their cash flows for the years then ended, in
conformity with generally accepted accounting principles.
ERNST & YOUNG LLP
New York, New York
December 18, 1997
D-F-116
<PAGE>
BG PRESENTS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
JANUARY 31
1996 1997
------------- -------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents ............................................. $ 7,431,899 $11,819,831
Accounts receivable--trade ............................................ 1,808,280 3,164,543
Accounts receivable--related parties .................................. 1,346,329 1,347,150
Investments ........................................................... 123,000 370,000
Inventories ........................................................... 228,294 236,078
Prepaid assets ........................................................ 929,274 450,883
Income tax receivable ................................................. 90,138 418,528
Deferred income taxes ................................................. 170,000 94,000
------------- -------------
Total current assets ................................................... 12,127,214 17,901,013
Property and equipment, net ............................................ 10,649,446 9,661,910
Goodwill, net........................................................... 1,668,800 1,549,600
Other assets ........................................................... 327 167
------------- -------------
Total assets............................................................ $24,445,787 $29,112,690
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Notes payable--current portion......................................... $ 591,755 $ 722,966
Lease commitment--current portion ..................................... 405,275 35,676
Accounts payable ...................................................... 2,254,539 5,116,133
Accrued liabilities ................................................... 1,567,788 1,834,670
Deferred revenue ...................................................... 982,785 1,362,533
------------- -------------
Total current liabilities .............................................. 5,802,142 9,071,978
------------- -------------
Lease commitment, less current portion ................................. 6,740,395 6,704,719
Notes payable, less current portion .................................... 5,140,676 5,233,709
Deferred income taxes .................................................. 2,648,000 2,617,000
Stockholders' equity:
Common stock, no par value; 10,000,000 shares authorized; 1,000,000
and 957,894 shares issued and outstanding in 1996 and 1997,
respectively........................................................... 1,220,000 1,198,947
Retained earnings ..................................................... 2,894,574 4,286,337
------------- -------------
Total stockholders' equity ............................................. 4,114,574 5,485,284
------------- -------------
Total liabilities and stockholders' equity.............................. $24,445,787 $29,112,690
============= =============
</TABLE>
See accompanying notes.
D-F-117
<PAGE>
BG PRESENTS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
(UNAUDITED)
October 31, 1997
<TABLE>
<CAPTION>
ASSETS
<S> <C>
Current assets:
Cash and cash equivalents..................................................... $10,709,619
Accounts receivable--trade.................................................... 4,666,132
Accounts receivable--related parties.......................................... 1,986,379
Inventories................................................................... 224,922
Prepaid assets................................................................ 1,171,624
-------------
Total current assets........................................................... 18,758,676
Property and equipment, net.................................................... 9,233,108
Goodwill, net.................................................................. 1,460,200
Other assets................................................................... 222,284
-------------
Total assets................................................................... $29,674,268
=============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Notes payable--current portion................................................ $ 868,482
Accounts payable.............................................................. 1,006,601
Accrued liabilities........................................................... 2,833,129
Deferred revenue.............................................................. 2,222,917
-------------
Total current liabilities...................................................... 6,931,129
Notes payable, less current portion............................................ 11,312,336
Deferred income taxes.......................................................... 2,617,000
Stockholders' equity:
Common stock, no par value; 10,000,000 shares authorized; 957,894 shares
issued and outstanding....................................................... 1,208,947
Retained earnings............................................................. 7,604,856
-------------
Total stockholders' equity..................................................... 8,813,803
-------------
Total liabilities and stockholders' equity..................................... $29,674,268
=============
</TABLE>
See accompanying notes.
D-F-118
<PAGE>
BG PRESENTS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED JANUARY 31
1996 1997
------------- -------------
<S> <C> <C>
OPERATING REVENUES
Concert revenues............... $62,996,606 $74,981,534
Contract management ........... 7,844,248 10,255,060
Concessions/merchandise ...... 5,536,287 7,094,593
------------- -------------
76,377,141 92,331,187
Cost of concerts .............. 54,383,763 69,916,840
------------- -------------
Gross profit .................. 21,993,378 22,414,347
------------- -------------
OPERATING EXPENSES
General and administrative ... 17,614,296 17,602,501
Depreciation and amortization 1,441,439 1,474,414
------------- -------------
Income from operations ........ 2,937,643 3,337,432
OTHER INCOME (EXPENSE)
Interest expense .............. (1,324,219) (1,257,758)
Interest income ............... 307,756 295,057
Miscellaneous, net ............ 535,191 289,222
------------- -------------
Income before income taxes ... 2,456,371 2,663,953
Provision for income taxes ... 1,160,718 1,272,190
------------- -------------
Net income .................... $ 1,295,653 $ 1,391,763
============= =============
</TABLE>
See accompanying notes.
D-F-119
<PAGE>
BG PRESENTS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF OPERATIONS
(UNAUDITED)
NINE MONTHS ENDED OCTOBER 31, 1997
<TABLE>
<CAPTION>
<S> <C>
OPERATING REVENUES
Concert revenues.............. $51,188,539
Contract management........... 9,141,625
Concessions/merchandise....... 5,117,576
-------------
65,447,740
Cost of concerts.............. 47,557,539
-------------
Gross profit.................. 17,890,201
-------------
OPERATING EXPENSES
General and administrative ... 11,753,765
Depreciation and
amortization................. 611,111
-------------
Income from operations........ 5,525,325
OTHER INCOME (EXPENSE)
Interest expense.............. (836,850)
Interest income............... 229,285
Miscellanous, net............. 534,705
-------------
Income before income taxes ... 5,452,465
Provision for income taxes ... 2,133,946
-------------
Net income.................... $ 3,318,519
=============
</TABLE>
See accompanying notes.
D-F-120
<PAGE>
BG PRESENTS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED JANUARY 31,
1996 1997
------------- -------------
<S> <C> <C>
OPERATING ACTIVITIES
Net income........................................... $ 1,295,653 $ 1,391,763
Adjustment to reconcile net income to net cash
(used in) provided by operating activities:
Depreciation and amortization...................... 1,441,439 1,474,414
Loss on sale of property and equipment............. 13,603 --
Changes in operating assets and liabilities:
Accounts receivable--trade........................ 524,566 (1,356,263)
Accounts receivable--related parties.............. (496,971) (821)
Inventories....................................... (228,294) (7,784)
Prepaid assets and other.......................... (322,524) 478,391
Income tax receivable............................. (50,888) (328,390)
Accounts payable and accrued expenses............. (491,982) 3,128,476
Deferred income taxes............................. 1,139,000 45,000
Deferred revenue.................................. (67,859) 379,748
Other............................................. 288,367 160
------------- -------------
Net cash provided by operating activities............ 3,044,110 5,204,694
INVESTING ACTIVITIES
Purchase of SAP limited partnership interest ........ (4,250,000) --
Proceeds from sale of equipment...................... 13,150 --
Purchase of property and equipment................... (469,447) (367,678)
Other................................................ (644,496) (247,000)
------------- -------------
Net cash used in investing activities................ (5,350,793) (614,678)
FINANCING ACTIVITIES
Payments of notes payable............................ (444,985) (775,756)
Payments of lease commitments........................ (395,330) (405,275)
Retirement of stock.................................. -- (21,053)
Proceeds from issuance of notes...................... -- 1,000,000
------------- -------------
Net cash used in financing activities................ (840,315) (202,084)
------------- -------------
Net increase (decrease) in cash and cash
equivalents......................................... (3,146,998) 4,387,932
Cash and cash equivalents at beginning of year ...... 10,578,897 7,431,899
------------- -------------
Cash and cash equivalents at end of year............. $ 7,431,899 $11,819,831
============= =============
Supplemental disclosure of cash flow information
Cash paid for interest............................... $ 1,324,219 $ 1,257,664
Cash paid for income taxes........................... 888,738 1,280,000
</TABLE>
See accompanying notes.
D-F-121
<PAGE>
BG PRESENTS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOW
(UNAUDITED)
NINE MONTHS ENDED OCTOBER 31, 1997
<TABLE>
<CAPTION>
<S> <C>
OPERATING ACTIVITIES
Net income....................................... $ 3,318,519
Adjustment to reconcile net income to net cash
used in operating activities:
Depreciation and amortization................... 611,111
Changes in operating assets and liabilities:
Accounts receivable--trade..................... (1,501,589)
Accounts receivable--related parties........... (639,229)
Inventories.................................... 11,156
Prepaid assets and other....................... (720,741)
Income tax receivable.......................... 418,528
Accounts payable and accrued expenses ......... (3,111,073)
Deferred income taxes.......................... 94,000
Deferred revenue............................... 860,384
Other.......................................... 147,883
-------------
Net cash used in operating activities............ (511,051)
INVESTING ACTIVITIES
Proceeds from sale of equipment.................. (92,909)
-------------
Net cash used in investing activities............ (92,909)
FINANCING ACTIVITIES
Proceeds from issuance of notes payable ......... 6,224,143
Payments of lease commitments.................... (6,740,395)
Proceeds from issuance of stock.................. 10,000
-------------
Net cash used in financing activities............ (506,252)
Net decrease in cash and cash equivalents ....... (1,110,212)
Cash and cash equivalents at beginning of year .. 11,819,831
-------------
Cash and cash equivalents at end of year ........ $10,709,619
=============
Supplemental disclosure of cash flow information
Cash paid for interest........................... $ 3,836,850
Cash paid for income taxes....................... 500,000
</TABLE>
See accompanying notes.
D-F-122
<PAGE>
BG PRESENTS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED JANUARY 31, 1997 AND 1996
AND NINE MONTHS ENDED OCTOBER 31, 1997
<TABLE>
<CAPTION>
<S> <C>
Balance--February 1, 1995.......................... $2,818,921
Net income for the year ended January 31, 1996 .... 1,295,653
------------
Balance--January 31, 1996.......................... 4,114,574
Net income for the year ended January 31, 1997 .... 1,391,763
Repurchase and retirement of stock................. (21,053)
------------
Balance--January 31, 1997.......................... $5,485,284
Net income for nine months ended December 31, 1997. 3,318,519
Issuance of stock.................................. 10,000
------------
Balance--October 31, 1997 (unaudited).............. $8,813,803
============
</TABLE>
See accompanying notes.
D-F-123
<PAGE>
BG PRESENTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING PRINCIPLES
Business and Principles of Consolidation
BG Presents, Inc. ("BGP" or the "Company") is a holding company for
various operating subsidiaries which principally promote and manage musical
and special events in the San Francisco Bay Area. In addition, the Company
owns the Shoreline Amphitheatre in Mountainview, California. Bill Graham
Enterprises, Inc. ("BGE"), Bill Graham Presents, Inc. ("BGPI"), Bill Graham
Management, Inc. ("BGM"), AKG, Inc. ("AKG"), Shoreline Amphitheatre, Ltd.
("SAL"), Fillmore Fingers, Inc. ("FF"), and Shoreline Amphitheatre Partners
("SAP" and collectively, the "Companies") are wholly-owned subsidiaries of
the Company. The accompanying consolidated financial statements include the
accounts of the Company and all of its wholly-owned subsidiaries.
Intercompany transactions and balances have been eliminated in consolidation.
BGE and BGPI earn promotion income in two ways: either a fixed fee for
organizing and promoting an event, or an arrangement that entitles them to a
profit percentage based on a predetermined formula. In addition, the
Companies earn revenue from merchandise and concessions sold during events
which they promote. BGM manages the careers of various artists and records a
percentage of the artists' gross sales from publishing rights, record sales,
and tours as contract management revenue.
AKG operates the Fillmore, Warfield, and Punchline theatres located in San
Francisco, which generate revenue from food and beverage sales, sponsorships,
and ticket sales. Bill Graham Special Events, a division of AKG, records
management/contract fees from organizing corporate and other parties at
various venues in the Bay Area. FF provides table service (food and beverage)
for two theatres owned by separate entities in Los Angeles.
Revenue Recognition
Revenue from talent management and the sales of tickets is recognized when
earned. Cash received from the sale of tickets for events not yet performed
is deferred. Revenue from the direct sale of compact discs is recognized upon
the date of sale. Revenue from distributor sales of compact discs is
recognized when the right of return no longer exists. The Company received
revenue from various sources, including $14,562,424 during the fiscal year
ended January 31, 1997 (16% of total revenue) from various gymnastics tours,
ice skating tours and television specials.
Cash and Cash Equivalents
The Company considers all investments purchased with an original maturity
date of three months or less to be cash equivalents. At January 31, 1997 and
1996, the Companies had cash balances in excess of the federally insured
limits of $100,000 per institution.
Use of Estimates
Generally accepted accounting principles require management to make
assumptions in estimates that affect the amount reported in the financial
statements for assets, liabilities, revenues, and expenses. In addition,
assumptions and estimates are used to determine disclosure for contingencies,
commitments, and other matters discussed in the notes to the financial
statements. Actual results could differ from those estimates.
Accounts Receivable
The Company's accounts receivable are principally due from ticket service
and merchandising companies in the San Francisco Bay Area. In addition,
related party receivables include amounts due from owners of the Company and
from affiliated companies. Management believes that all accounts receivable
as of January 31, 1997 and 1996 were fully collectible; therefore, no
allowance for doubtful accounts was recorded.
D-F-124
<PAGE>
BG PRESENTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Property and Equipment
Property and equipment are recorded at cost and depreciated over their
estimated useful lives, which range from 3 to 40 years. Leasehold
improvements are amortized on the straight-line basis over the shorter of the
lease term or estimated useful lives of the assets. Maintenance and repairs
are charged to expense as incurred.
Goodwill
The Company amortizes goodwill over a 15 year period.
Income Taxes
The Companies account for income taxes under the liability method, whereby
deferred tax assets and liabilities are determined based on differences
between financial reporting and tax bases of assets and liabilities and are
measured using enacted tax rates and laws that will be in effect when the
differences are expected to reverse.
Investments
Investment stock consists of trading securities that are traded on stock
exchanges. These securities, which are stated at fair value, are traded with
the intent to sell when market prices are favorable. Unrealized holding gains
or losses are recognized in the financial statements.
Inventories
Inventories, which consist principally of compact discs and beverage
items, are stated at first-in, first-out (FIFO) cost, which is not in excess
of market.
Interim Financial Information
Financial information as of October 31, 1997 and for the nine months ended
October 31, 1997 is unaudited. In the opinion of management, all adjustments
necessary for a fair presentation of the results for such period have been
included; all adjustments are of a normal and recurring nature. Interim
results are not necessarily indicative of results for a full year.
2. INCOME TAXES
The provisions for income taxes for the years ended January 31, 1996 and
1997 is summarized as follows:
<TABLE>
<CAPTION>
1996 1997
------------ -----------
<S> <C> <C>
Current:
Federal .. $ 848,600 $ 984,500
State ..... 246,400 285,800
------------ -----------
1,095,000 1,270,300
Deferred:
Federal .. 50,900 1,500
State ..... 14,800 400
------------ -----------
65,700 1,900
------------ -----------
$1,160,700 $1,272,200
============ ===========
</TABLE>
Deferred income taxes reflect the tax effects of temporary differences
between the carrying amount of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. The Company's net
deferred tax liabilities as of January 31, 1997 and 1996 are primarily the
result of the difference between the book basis of depreciable assets and the
related tax basis.
The difference between the tax provision at Federal statutory rates and
the effective rate is due to state taxes, amortization of goodwill and other
permanent items.
D-F-125
<PAGE>
BG PRESENTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
3. PROPERTY AND EQUIPMENT
Property and equipment as of January 31, 1996 and 1997 consists of the
following:
<TABLE>
<CAPTION>
1996 1997
-------------- --------------
<S> <C> <C>
Buildings.................... $ 8,206,766 $ 8,234,231
Leasehold improvements ..... 10,167,067 10,326,553
Equipment ................... 2,133,343 2,166,037
Office furniture ............ 612,359 693,068
Computer equipment .......... 263,247 330,367
Vehicle ..................... 61,007 61,211
-------------- --------------
21,443,789 21,811,467
Accumulated depreciation and
amortization ............... (11,428,296) (12,751,012)
-------------- --------------
10,015,493 9,027,957
Land ........................ 633,953 633,953
-------------- --------------
$ 10,649,446 $ 9,661,910
============== ==============
</TABLE>
4. PENSION PLAN
The Company sponsors a 401(k) Tax Advantage Savings Plan that covers
employees who have one year of service, have worked at least 1,000 hours, are
twenty-one years of age or older, and are not covered by a union contract. At
its discretion, the Company may contribute a percentage of gross pay to the
plan, up to a maximum gross pay of $150,000 per participant. In addition, the
Company makes a matching contribution of 25 percent of each participant's
account up to $400 of their salary deferral each year, for a maximum company
matching contribution of $100. Total contributions to the plan were
approximately $186,000 and $182,000 for the years ended January 31, 1997 and
1996, respectively.
5. NOTES PAYABLE
Notes payable as of January 31, 1996 and 1997 consists of the following:
<TABLE>
<CAPTION>
1996 1997
------------ -------------
<S> <C> <C>
Note payable to Continental Savings; monthly payments of $16,574,
including interest at bank's index rate plus 3.5% (8.4% and 8%
at January 31, 1997 and 1996, respectively; matures May 1, 2004;
secured by deed:................................................. $2,232,431 $2,215,001
Note payable to Sanwa Bank; quarterly payments range from $75,000
to $200,000, interest accrued monthly at the banks prime rate
plus 0.5% (8.75% and 9.5% at January 31, 1997 and 1996,
respectively; matures January 31, 2001: ......................... 3,500,000 2,925,000
Note payable to Sanwa Bank; monthly payments of $16,666,
including interest at a rate of London Inter-Bank Offered Rates
(LIBOR) plus 2.5% (8% at January 31, 1997); matures January 31,
2002; secured by assets of the Company (excluding the office
building): ...................................................... -- 816,674
------------ -------------
5,732,431 5,956,675
Less current portion ............................................. (591,755) (722,966)
------------ -------------
$5,140,676 $5,233,709
============ =============
</TABLE>
D-F-126
<PAGE>
BG PRESENTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The first note payable with Sanwa Bank also provided for a line-of-credit
of up to $1,000,000 that expired on April 30, 1997. At January 31, 1997,
there were no borrowings outstanding against this credit line.
The provisions of the second note payable to Sanwa Bank contain certain
restrictive financial covenants. The Company is in compliance with these
covenants at January 31, 1997.
At January 31, 1997, the Company has a $3,000,000 unused line-of-credit
with a bank to be drawn upon as needed, with interest at the bank's prime
rate plus 0.5%. In addition, the Company may use up to $1,500,000 of the line
for letters-of-credit. This line of credit is secured by the assets of the
Company (excluding the building) and a pledge of 100% of the outstanding
common stock.
Maturities of long-term debt are approximately as follows:
<TABLE>
<CAPTION>
<S> <C>
Year ended January 31:
1998 ................. $ 722,966
1999 ................. 721,407
2000 ................. 725,124
2001 ................. 1,669,018
2002 ................. 29,698
Thereafter ........... 2,088,462
-----------
$5,956,675
===========
</TABLE>
6. COMMITMENTS AND CONTINGENCIES
Leases
The Company leases storage space, nightclubs, and theaters pursuant to
noncancellable operating leases. Certain leases require contingent rentals to
be paid based on a percentage of gross sales of tickets, merchandise, and
food and beverage. These lease expire on various dates through June 2021.
As January 31, 1997 the future minimum operating lease payments under
noncancelable operating leases are as follows:
<TABLE>
<CAPTION>
<S> <C>
Year ended January 31:
1998.................. $ 404,467
1999 ................. 500,346
2000 ................. 504,203
2001 ................. 453,705
2002 ................. 451,694
Thereafter ........... 2,792,986
-----------
$5,107,401
===========
</TABLE>
Total minimum rental expense included in operating expenses for the years
ended January 31, 1997 and 1996 was $438,500 and $810,956, respectively, and
the contingent rental expense was $627,222 and $541, 334, respectively.
Included in cost of concerts is $6,349,115 and $6,078,042 of contingent
rentals paid based on gross sales for the years ended January 31, 1997 and
1996, respectively.
D-F-127
<PAGE>
BG PRESENTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Shoreline Amphitheater Lease and Agreement
The Shoreline Amphitheater Lease and Agreement, as amended, provides for,
among other things, the following:
The City of Mountain View, California (the "City") owns certain real
property ("the Site") which it has leased to the Company for the purpose of
constructing and operating the amphitheater. The lease terminates after
thirty-five years on November 30, 2021, and the Company has the option to
extend for three additional five-year periods.
The Company is obligated to pay as rent to the City a certain percentage
of "gross receipts" received annually by the Company and additional rent
based on the "net available cash" of the Company, as such terms are defined
in the agreement.
Rent expense charged to operations for the years ended January 31, 1997
and 1996 amounted to $396,789 and $594,002, respectively.
The Company is obligated to pay the City monthly, commencing August 1,
1986 and ending July 1, 2006, $93,200, which relates to the $9,500,000 of
funds provided the Company by the City and Community pursuant to the lease.
The Company has accounted for this obligation as a long-term liability
amortizable on a monthly basis over the 20-year period commencing August 1,
1986. The principal and interest (10.24%) on this liability are being
amortized monthly. At January 31, 1997 and 1996, the outstanding balances
amounted to $6,740,395 and $7,145,670, of which $35,676 and $405,275 is
current, respectively.
On March 7, 1997, the Company acquired a term loan, the proceeds of which
were used to retire the obligation described in the preceding paragraph (see
Note 10).
Employment Contracts
The Company has entered into employment contracts with certain key
employees which amount to $2,302,250 per year. These contracts are in effect
until the note payable to Sanwa Bank (See Note 7) of $4,000,000 is paid in
full or six years, whichever comes first. According to these agreements,
compensation and other benefits will cease if discharged with just cause,
death or disability, and resignation of employment. Benefits do not cease if
discharged without just cause.
Contingencies
The Company is involved in various legal and other matters arising in the
normal course of business. Based upon information available to management,
its review of these matters to date and consultation with counsel, management
believes that any liability relating to these matters, would not have a
material effect on the Company's financial position and results of
operations.
D-F-128
<PAGE>
BG PRESENTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
7. SUBSEQUENT EVENTS
Issuance of Long-Term Debt
On March 7, 1997, Shoreline Amphitheater Partners executed a term loan
agreement that provides for a $6,900,000 term loan. The proceeds of the new
loan were used to retire the City of Mountain View obligation described in
Note 8.
The term loan is payable monthly in principal installments plus interest
at a rate if LIBOR plus 2.1% through February 1, 2007, with the entire unpaid
principal balance due March 1, 2007. The loan is secured by a leasehold deed
of trust on the Amphitheater and is guaranteed by the Company. Maturities of
the loan are approximately as follows:
<TABLE>
<CAPTION>
<S> <C>
Year ended January 31:
1998 ................. $ 121,540
1999 ................. 155,928
2000 ................. 168,874
2001 ................. 182,890
2002 ................. 198,066
Thereafter ........... 6,072,702
-----------
$6,900,000
===========
</TABLE>
The term loan agreement also provides for, among other things,
restrictions on the payment of distributions, repurchase of partnership
interests, maintenance of certain financial ratios, and limitation on capital
expenditures.
Major Service Agreement
On September 7, 1997 the Company entered into a ticket service agreement
with a local ticket service company (the "Service"). The contract is in
effect through June 30, 2004. The Service sells approximately 70% of the
tickets sold to the events promoted by the Company.
Acquisition of Companies by SFX Entertainment, Inc.
In December 1997, the stockholders of the Company executed an agreement
with SFX Entertainment, Inc. to sell the Companies for a total purchase price
of approximately $68.3 million, including the issuance of common stock valued
at $7.5 million. The Company has agreed to have net working capital, as
defined, at the closing at least equal to the Company's debt.
D-F-129
<PAGE>
REPORT OF INDEPENDENT AUDITORS
The Board of Directors
Concert/Southern Promotions
We have audited the accompanying combined balance sheet of
Concert/Southern Promotions and Affiliated Companies as of September 30,
1997, and the related combined statements of operations, cash flows and
stockholders' equity for the nine months then ended. These financial
statements are the responsibility of management. Our responsibility is to
express an opinion on these financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements.
An audit also includes assessing the accounting principles used and
significant estimates made by management as well as evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the combined financial position of Concert/Southern
Promotions and Affiliated Companies at September 30, 1997, and the combined
results of their operations and their cash flows for the nine months then
ended, in conformity with generally accepted accounting principles.
ERNST & YOUNG LLP
New York, New York
November 14, 1997
D-F-130
<PAGE>
CONCERT/SOUTHERN PROMOTIONS AND AFFILIATED COMPANIES
COMBINED BALANCE SHEET
SEPTEMBER 30, 1997
<TABLE>
<CAPTION>
<S> <C>
ASSETS
Current assets:
Cash and cash equivalents .......................... $ 645,630
Accounts receivable ................................ 564,128
Due from owner (Note 3) ............................ 566,986
Prepaid expenses and other current assets ......... 143,932
------------
Total current assets ................................ 1,920,676
Investment in unconsolidated subsidiaries (Note 2) . 919,419
Property and equipment:
Land ............................................... 15,888
Leasehold improvements ............................. 286,998
Furniture and equipment ............................ 498,553
------------
801,439
Accumulated depreciation and amortization ......... 441,223
------------
360,216
------------
Total assets ........................................ $3,200,311
============
LIABILITIES AND COMBINED STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and other accrued expenses ....... $ 880,814
Due to owner (Note 3) .............................. 373,481
------------
Total current liabilities ........................... 1,254,295
Combined stockholders' equity (Note 4) .............. 1,946,016
------------
Total liabilities and combined stockholders' equity $3,200,311
============
</TABLE>
See accompanying notes.
D-F-131
<PAGE>
CONCERT/SOUTHERN PROMOTIONS AND AFFILIATED COMPANIES
COMBINED STATEMENT OF OPERATIONS
NINE MONTHS ENDED SEPTEMBER 30, 1997
<TABLE>
<CAPTION>
<S> <C>
OPERATING REVENUES
Concert revenue .............................. $13,092,956
Cost of concerts ............................. 8,558,759
-------------
4,534,197
-------------
OPERATING EXPENSES
Salaries--officers ........................... 276,500
Bonus--officers .............................. 564,767
Salaries--other .............................. 294,321
Rent expense ................................. 202,645
Legal and accounting fees .................... 115,109
Depreciation and amortization ................ 57,410
General and administrative expenses ......... 984,818
Legal settlement ............................. 100,000
-------------
2,595,570
-------------
Income from operations ....................... 1,938,627
OTHER INCOME
Interest income .............................. 57,189
Equity loss from unconsolidated subsidiaries (11,378)
-------------
Net income ................................... $ 1,984,438
=============
</TABLE>
See accompanying notes.
D-F-132
<PAGE>
CONCERT/SOUTHERN PROMOTIONS AND AFFILIATED COMPANIES
COMBINED STATEMENT OF CASH FLOWS
NINE MONTHS ENDED SEPTEMBER 30, 1997
<TABLE>
<CAPTION>
<S> <C>
OPERATING ACTIVITIES
Net income ......................................................................... $ 1,984,438
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization .................................................... 57,410
Equity in loss from unconsolidated subsidiaries, including distributions received 21,000
Changes in operating assets and liabilities:
Accounts receivable ............................................................. 622,090
Prepaid expenses and other current assets ....................................... 76,808
Accounts payable and accrued expenses ........................................... 296,143
-------------
Net cash provided by operating activities .......................................... 3,057,889
FINANCING ACTIVITIES
Due to owner ....................................................................... (352,605)
Distributions paid ................................................................. (2,900,129)
-------------
Net cash used in financing activities .............................................. (3,252,734)
-------------
Net decrease in cash and cash equivalents .......................................... (194,845)
Cash and cash equivalents at beginning of period ................................... 840,475
-------------
Cash and cash equivalents at end of period ......................................... $ 645,630
=============
</TABLE>
See accompanying notes.
D-F-133
<PAGE>
CONCERT/SOUTHERN PROMOTIONS AND AFFILIATED COMPANIES
COMBINED STATEMENT OF STOCKHOLDERS' EQUITY
NINE MONTHS ENDED SEPTEMBER 30, 1997
<TABLE>
<CAPTION>
<S> <C>
Balance, January 1, 1997 .... $ 2,861,707
Distributions to stockholder (2,900,129)
Net income ................... 1,984,438
-------------
Balance, September 30, 1997 . $ 1,946,016
=============
</TABLE>
See accompanying notes.
D-F-134
<PAGE>
CONCERT/SOUTHERN PROMOTIONS AND AFFILIATED COMPANIES
NOTES TO COMBINED FINANCIAL STATEMENTS
SEPTEMBER 30, 1997
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING PRINCIPLES
Principles of Combination
The accompanying combined financial statements include the accounts of
Southern Promotions, Inc., High Cotton, Inc., Buckhead Promotions, Inc.,
Northern Exposure, Inc., Pure Cotton, Inc., Cooley and Conlon Management,
Inc. ("CCMI") and Interfest, Inc. and their wholly-owned subsidiaries:
Concert/ Southern Chastain Promotions ("Concert/Southern"), Roxy Ventures,
Cotton Club and Midtown Music Festival (collectively, the "Companies").
Intercompany transactions and balances among these companies have been
eliminated in combination. The Companies are presented on a combined basis to
reflect common ownership by Alex Cooley, Peter Conlon and Stephen Selig III.
Concert/Southern is the predominant musical event promoter in the Atlanta,
Georgia region, and through Chastain Joint Ventures ("Chastain Ventures") is
the operator, pursuant to a long-term lease with the City of Atlanta, of the
Chastain Park Amphitheater. Chastain Ventures is owned equally by
Concert/Southern and the Atlanta Symphony Orchestra, and is accounted for by
Concert/Southern on the equity method. Buckhead Promotions and Northern
Exposure equally own Roxy Ventures which holds a long-term lease for the Roxy
Theatre, and Pure Cotton holds a long-term lease for the Cotton Club.
Interfest, Inc. promoted the three-day Midtown Music Festival held in
downtown Atlanta during 1997. In addition, High Cotton owns 15% of HC
Properties, Inc. a real estate investment company which is accounted for on
the equity method.
The Companies record revenue when earned. Concert revenue includes
ticketing, concession, and sponsorship revenue.
Property and Equipment
Land, leasehold improvements, and furniture and equipment are stated at
cost. Depreciation of furniture and equipment is provided primarily by the
straight-line method over the estimated useful lives of the respective
classes of assets. Leasehold improvements are amortized over the life of the
lease or of the improvement, whichever is shorter.
Income Taxes
The Companies have been organized as either partnerships or corporations
which have elected to be taxed as "S Corporations". The "S Corporation"
elections are effective for both federal and state tax purposes. Accordingly,
all items of income, loss, deduction or credit are reported by the partners
or shareholders on their respective personal income tax returns and,
therefore, no current or deferred federal or state taxes have been provided
in the accompanying combined financial statements.
The difference between the tax basis and the reported amounts of the
Companies' assets and liabilities was $12,820 at September 30, 1997.
Risks and Uncertainties
Accounts receivable are due from ticket vendors and venue box offices.
These amounts are typically collected within 20 days of a performance.
Management considers accounts receivable to be fully collectible;
accordingly, no allowance for doubtful accounts is required.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
D-F-135
<PAGE>
CONCERT/SOUTHERN PROMOTIONS AND AFFILIATED COMPANIES
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
2. INVESTMENT IN UNCONSOLIDATED SUBSIDIARIES
The following is a summary of the financial position and results of
operations of the Companies' equity investees as of and for the period ended
September 30, 1997:
<TABLE>
<CAPTION>
HC
CHASTAIN PROPERTIES
------------- -------------
<S> <C> <C>
Current assets .......................... $ 561,405 $ 31,675
Property and equipment .................. 581,853 798,984
Other assets ............................ -- 409,626
------------- -------------
Total assets ............................ $1,143,258 $1,240,285
============= =============
Current liabilities ..................... $ 319,709 $ 1,532
Partners' capital ....................... 823,549 1,238,753
------------- -------------
Total liabilities and partners' capital $1,143,258 $1,240,285
============= =============
Revenue ................................. $ 569,133 $ 7,509
Expenses ................................ 500,112 117,196
------------- -------------
Net income (loss) ....................... $ 69,021 $ (109,687)
============= =============
</TABLE>
The equity income recognized by the Companies represents the appropriate
percentage of investment income less amount reported less intercompany income
eliminations.
3. RELATED PARTY TRANSACTIONS
Due from/to Owner
The Companies have an arrangement with Stephen Selig III whereby the cash
receipts of Concert/Southern, Buckhead Promotions and Roxy Ventures are
transferred to the Selig Enterprises, Inc. Master Cash Account (the "Master
Account"). All subsequent payments made by the Companies are funded by the
Master Account. Accordingly, the Companies' cash held by the Master Account
is recorded as due from owner.
Due to owner represents amounts advanced to High Cotton and Northern
Exposure by each respective owner and an amount which represents an
overfunding of cash from the Master Account. The advances are repaid out of
company assets when available. The balances at September 30, 1997 were
$62,189, $217,518, and $93,774, respectively. No interest is charged by the
owners on their advances.
Due from/to Unconsolidated Subsidiary
The Companies have a net receivable balance with Chastain Ventures
totaling $55,154 at September 30, 1997, which has been recorded with accounts
receivable and accounts payable.
D-F-136
<PAGE>
CONCERT/SOUTHERN PROMOTIONS AND AFFILIATED COMPANIES
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
4. STOCKHOLDERS' EQUITY
The Companies' stocks are as follows:
<TABLE>
<CAPTION>
SHARES SHARES PAR
AUTHORIZED ISSUED VALUE
------------ -------- -------
<S> <C> <C> <C>
Southern Promotions 1,000,000 5,000 $1
High Cotton ......... 10,000 550 1
Buckhead Promotions 1,000,000 500 1
Northern Exposure .. 1,000,000 1,000 1
Pure Cotton ......... 100,000 500 1
CCMI ................ 10,000 1,000 1
Interfest ........... 100,000 500 1
--------
9,050
========
</TABLE>
5. COMMITMENTS AND CONTINGENCIES
Leases
The following is a schedule of future minimum rental payments under
operating leases (principally office and venue facilities) that have initial
or remaining lease terms in excess of one year as of September 30, 1997:
<TABLE>
<CAPTION>
<S> <C>
Year ended September 30:
1998.................... $ 222,539
1999 ................... 183,198
2000 ................... 188,991
2001 ................... 133,350
2002 ................... 136,350
Thereafter ............. 174,375
-----------
Total ................... $1,038,803
===========
</TABLE>
Certain office facilities have renewal and escalation clauses. Rental
expense was $202,645 for 1997.
Legal Matters
The Companies have been named in various lawsuits arising in the normal
course of business. It is not possible at this time to assess the probability
of any liability against the Companies as a result of these lawsuits.
Management has stated that all cases will be vigorously defended.
6. SUBSEQUENT EVENTS
In December 1997, the Companies' shareholders entered into an agreement to
sell all of the issued and outstanding shares of the Companies to SFX
Entertainment, Inc. ("SFX"). SFX will pay the sellers $15,000,000 in cash at
closing and an additional $2,000,000, payable, at the sellers option,
quarterly over the next five years or as a lump sum present value at closing.
In addition, SFX agreed with CCMI to finance a new 20,000 seat amphitheatre
(the "Amphitheatre") located in the city of Alpharetta, Georgia. SFX will
deposit $250,000 at the close for the purchase of the real estate in
Alpharetta, Georgia and will pay the sum of approximately $84,000 for costs
related to the Amphitheatre.
Prior to the sale of the Companies to SFX, the sole shareholder of High
Cotton will receive a distribution of High Cotton's interest in HC
Properties, LP.
D-F-137
<PAGE>
ANNEX E
FORM OF AMENDED AND RESTATED
CERTIFICATE OF INCORPORATION
OF
SFX ENTERTAINMENT, INC.
ARTICLE ONE: NAME
The name of the Corporation is SFX ENTERTAINMENT, INC. (the
"Corporation").
ARTICLE TWO: REGISTERED OFFICE
The address of the registered office of the Corporation in the State of
Delaware is 1013 Centre Road, New Castle County, Wilmington, Delaware 19805,
and the name of the registered agent at such address is Corporation Service
Company.
ARTICLE THREE: PURPOSES
The purpose for which the Corporation is organized is to engage in any and
all lawful acts and activities for which corporations may be organized under
the General Corporation Law of the State of Delaware. The Corporation will
have perpetual existence.
ARTICLE FOUR: CAPITAL STRUCTURE
4.1 AUTHORIZED SHARES. The total number of shares of stock which the
Corporation shall have authority to issue is 135,000,000 shares, consisting
of the following:
(a) 100,000,000 shares of Class A Common Stock, par value $.01 per share
(the "Class A Common Stock");
(b) 10,000,000 shares of Class B Common Stock, par value $.01 per share
(the "Class B Common Stock" and, together with the Class A Common Stock, the
"Common Stock"); and
(c) 25,000,000 shares of Preferred Stock, par value $.01 per share (the
"Preferred Stock").
4.2 DESIGNATIONS, PREFERENCES, ETC. The designations, preferences, powers,
qualifications, and special or relative rights, or privileges of the capital
stock of the Corporation shall be as set forth in ARTICLE FIVE and ARTICLE
SIX below.
ARTICLE FIVE: COMMON STOCK
5.1 IDENTICAL RIGHTS. Except as herein otherwise expressly provided in
this Restated Certificate of Incorporation, all shares of Common Stock shall
be identical and shall entitle the holders thereof to the same rights and
privileges.
5.2 DIVIDENDS.
(a) Subject to the prior rights and preferences, if any, applicable to
shares of the Preferred Stock or any series thereof, the holders of shares of
Common Stock shall be entitled to receive such dividends (payable in cash,
stock, or otherwise) as may be declared thereon by the Corporation's board of
directors (the "Board of Directors") at any time and from time to time out of
any funds of the Corporation legally available therefor, except that (i) if
dividends are declared that are payable in shares of Common Stock, then such
stock dividends shall be payable at the same rate on each class of Common
Stock and shall be payable only in shares of Class A Common Stock to holders
of Class A Common Stock and in shares of Class B Common Stock to holders of
Class B Common Stock and (ii) if dividends are declared that are payable in
shares of common stock of another corporation, then such shares may differ as
to voting rights to the extent that voting rights now differ among the Class
A Common Stock and the Class B Common Stock.
E-1
<PAGE>
(b) Dividends payable under this Paragraph 5.2 shall be paid to the
holders of record of the outstanding shares of Common Stock as their names
shall appear on the stock register of the Corporation on the record date
fixed by the Board of Directors in advance of declaration and payment of each
dividend. Any shares of Common Stock issued as a dividend pursuant to this
Paragraph 5.2 shall, when so issued, be duly authorized, validly issued,
fully paid and non-assessable, and free of all liens and charges.
(c) Notwithstanding anything contained herein to the contrary, no
dividends on shares of Common Stock shall be declared by the Board of
Directors or paid or set apart for payment by the Corporation at any time
that such declaration, payment, or setting apart is prohibited by applicable
law.
5.3 STOCK SPLITS. The Corporation shall not in any manner subdivide (by
any stock split, reclassification, stock dividend, recapitalization, or
otherwise) or combine the outstanding shares of one class of Common Stock
unless the outstanding shares of both classes of Common Stock shall be
proportionately subdivided or combined. This paragraph shall not, however,
apply to the reclassification and change of stock occurring upon the filing
of this Restated Certificate of Incorporation with the Secretary of State of
the State of Delaware.
5.4 VOTING RIGHTS.
(a) The holders of the Class A Common Stock and the Class B Common Stock
shall vote as a single class on all matters submitted to a vote of the
stockholders, with each share of Class A Common Stock being entitled to one
vote and each share of Class B Common Stock being entitled to ten votes,
except:
(i) for the election of directors, which shall be governed by
subparagraphs (b) and (c) below;
(ii) with respect to any Going Private Transaction (as such term is
defined below) between the Corporation and Robert F.X. Sillerman or any
Affiliate of Mr. Sillerman, which shall be governed by subparagraph (e)
below; and
(iii) as otherwise provided by law.
As used in this Certificate of Incorporation, the term "Affiliate"means,
as to any person, any (i) other person that, directly or indirectly, is in
control of, is controlled by or is under common control with such person,
(ii) corporation or organization (other than the Corporation or a
majority-owned subsidiary of the Corporation) of which such person is an
officer or partner or is, directly or indirectly, the beneficial owner of 10%
or more of any class of voting securities, or in which such person has a
substantial beneficial interest, (iii) trust or other estate in which such
person has a substantial beneficial interest or as to which such person
serves as a trustee or in a similar fiduciary capacity, or (iv) relative or
spouse of such person who has the same home as such person.
(b) In the election of directors, the holders of shares of Class A Common
Stock shall be entitled by class vote, exclusive of all other stockholders,
to elect that number of directors of the Corporation that equals two sevenths
( 2/7) of the total number of duly authorized directorships of the
Corporation then constituting the Board of Directors (including vacant and
newly-created directorships) or, if such number of directors is not a whole
number, the next higher whole number with each share of Class A Common Stock
entitled to one vote; provided, however, that each director so elected must
be qualified at the time of such election to be an "Independent Director,"
which is defined as a director of the Corporation who is not (i) an officer
or employee of the Corporation or a director, officer or employee of any of
its subsidiaries or any Affiliate of Mr. Sillerman or any individual who has
been employed in such capacity within the preceding three years, (ii) an
Affiliate of Mr. Sillerman, (iii) acting on a regular basis as an individual
or representative of an organization serving as a professional adviser, legal
counsel or consultant to management of the Corporation or its subsidiaries
if, in the opinion of the Board of Directors, such relationship is material
to the Corporation, the organization so represented, or such person, (iv) an
individual having a relationship which, in the opinion of the Board of
Directors, would interfere with the exercise of independent judgment in
carrying out the responsibilities of a director or (v) a member or a
representative of the immediate family of a person who, pursuant to clauses
(i) through
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(iv) above, is not qualified to serve as an Independent Director. The
holders of shares of Class A Common Stock shall be entitled by class vote,
exclusive of all other stockholders, to vote on the removal of any director
so elected, with each share of Class A Common Stock entitled to one vote.
(c) Except as otherwise provided in subparagraph (b) above, the holders of
shares of Class A Common Stock and Class B Common Stock, voting as a single
class, shall have the right to vote on the election or removal of all
directors of the Corporation (other than directors, if any, who may be
elected by the holders of Preferred Stock), with each share of Class A Common
Stock entitled to one vote and each share of Class B Common Stock entitled to
ten votes. The holders of Class A Common Stock and Class B Common Stock are
not entitled to cumulative votes in the election of any directors.
(d) In the event of the death, removal or resignation of a director
elected by the holders of Class A Common Stock (pursuant to subparagraph (b)
above) prior to the expiration of his term, the vacancy on the Board of
Directors created thereby may be filled by a majority of the directors then
in office, although less than a quorum, provided, however, that any person
appointed to fill a vacancy created by the death, removal or resignation of a
director elected by the holders of the Class A Common Stock (in accordance
with subparagraph (b) above) shall be an Independent Director. A director
elected in such manner to fill such vacancy shall hold office until his
successor has been duly elected and qualified at a meeting of the holders of
Class A Common Stock duly called for such purpose.
(e) With respect to any Going Private Transaction between the Corporation
and Mr. Sillerman or an Affiliate of Mr. Sillerman, the holders of Class A
Common Stock and Class B Common Stock shall vote as a single class, with each
share of Class A Common Stock and of Class B Common Stock entitled to one
vote. For purposes of this Paragraph 5.4, the term "Going Private
Transaction" shall mean any transaction that is a "Rule 13e-3 Transaction,"
as such term is defined in Rule 13e-3(a)(3), as amended from time to time,
promulgated under the Securities Exchange Act of 1934, as amended, provided,
however, that (i) the term Goin Private Transaction shall not include any
transaction exempt under Rule 13e-3(g), and (ii) the term "affiliate" as used
in Rule 13e-3(a)(3)(i) shall be deemed to include an Affiliate, as defined in
Paragraph 5.4 hereof.
(f) No holder of Common Stock shall be entitled to preemptive or
subscription rights.
(g) As long as any of the shares of Class A Common Stock shall be listed
and quoted on an exchange or other trading system (including the National
Association of Securities Dealers, Inc. Automated Quotation System), the
Board of Directors shall ensure, and shall have all powers necessary to
ensure, that the membership of the Board of Directors shall at all times be
consistent with the applicable rules and regulations, if any, for the Class A
Common Stock to be eligible for listing and quotation on such exchange or
other trading system.
5.5 CONVERSION RIGHTS.
(a) Voluntary Conversion. Each share of Class B Common Stock shall be
convertible at any time, at the option of its holder, into one fully paid and
non-assessable share of Class A Common Stock.
(b) Voluntary Conversion Procedure. At the time of a voluntary conversion,
the holder of shares of Class B Common Stock shall deliver to the office of
the Corporation or any transfer agent for the Class A Common Stock (i) the
certificate or certificates representing the shares of Class B Common Stock
to be converted, duly endorsed in blank or accompanied by proper instruments
of transfer, and (ii) written notice to the Corporation stating that such
holder elects to convert such share or shares and stating the name and
addresses in which each certificate for shares of Class A Common Stock issued
upon such conversion is to be issued. Conversion shall be deemed to have been
effected at the close of business on the date when such delivery is made to
the Corporation of the shares to be converted, and the person exercising such
voluntary conversion shall be deemed to be the holder of record of the number
of shares of Class A Common Stock issuable upon such conversion at such time.
The Corporation shall be justified in relying upon the information and the
certification contained in such notice and shall not be liable for the result
of any inaccuracy with respect thereto. The Corporation shall promptly
deliver certificates evidencing the appropriate number of shares of Class A
Common Stock to such person.
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(c) Automatic Conversion. Each share of Class B Common Stock shall
convert automatically into one fully paid and non-assessable share of Class A
Common Stock (i) upon its sale, gift, or other transfer, voluntary or
involuntary, to a party that is not an Affiliate of Mr. Sillerman or of the
Corporation or (ii) upon the death of Mr. Sillerman, in the case of any
shares of Class B Common Stock held by Mr. Sillerman or any Affiliate of Mr.
Sillerman. Each of the foregoing automatic conversion events shall be
referred to hereinafter as an "Event of Automatic Conversion."
(d) Automatic Conversion Procedure. Promptly upon the occurrence of an
Event of Automatic Conversion, the holder of such shares shall surrender the
certificate or certificates therefor, duly endorsed in blank or accompanied
by proper instruments of transfer, at the office of the Corporation, or of
any transfer agent for the Class A Common Stock, and shall give written
notice to the Corporation, at such office: (i) stating that the shares are
being converted pursuant to an Event of Automatic Conversion into Class A
Common Stock as provided in Paragraph 5.5(c) of this ARTICLE FIVE, (ii)
specifying the Event of Automatic Conversion (and, if the occurrence of such
event is within the control of the transferor, stating the transferor's
intent to effect an Event of Automatic Conversion), (iii) identifying the
number of shares of Class B Common Stock being converted, and (iv) setting
out the name or names (with addresses) and denominations in which the
certificate or certificates for shares of Class A Common Stock shall be
issued and shall include instructions for delivery thereof. Delivery of such
notice together with the certificates representing the Class B Common Stock
shall obligate the Corporation to issue certificates representing such Class
A Common Stock and the Corporation shall be justified in relying upon the
information and the certification contained in such notice. Thereupon the
Corporation or its transfer agent shall promptly issue and deliver at such
stated address to such holder or to the transferee of shares of Class B
Common Stock a certificate or certificates for the number of shares of Class
A Common Stock to which such holder or transferee is entitled registered in
the name of such holder, the designee of such holder or transferee as
specified in such notice. To the extent permitted by law, conversion pursuant
to an Event of Automatic Conversion shall be deemed to have been effected as
of the date on which the Event of Automatic Conversion has occurred (such
time being the "Conversion Date"). The person entitled to receive the shares
of Class A Common Stock issuable upon such conversion shall be treated for
all purposes as the record holder of such shares of Class A Common Stock at
and as of the Conversion Date, and the right of such person as a holder of
shares of Class B Common Stock shall cease and terminate at and as of the
Conversion Date, in each case without regard to any failure by the holder to
deliver the certificates or the notice required by this subparagraph (d).
(e) Unconverted Shares. In the event of the conversion of less than all of
the shares of Class B Common Stock evidenced by a certificate surrendered to
the Corporation in accordance with the procedures of Paragraph 5.5(b) or (d),
the Corporation shall execute and deliver to or upon the written order of the
holder of such certificate, without charge to such holder, a new certificate
evidencing the number of shares of Class B Common Stock not converted.
(f) Reissue of Shares. Shares of Class B Common Stock that are converted
into Class A Common Stock as provided herein shall be retired and canceled
and shall not be reissued.
(g) Reservation. The Corporation hereby reserves and shall at all times
reserve and keep available, out of its authorized and unissued shares of
Class A Common Stock, for the purpose of effecting conversions, such number
of duly authorized shares of Class A Common Stock as shall from time to time
be sufficient to effect the conversion of all outstanding shares of Class B
Common Stock. The Corporation covenants that all shares of Class A Common
Stock so issuable shall, when so issued, be duly and validly issued, fully
paid and non-assessable, and free from liens and charges with respect to the
issue. The Corporation will take all such action as may be necessary to
assure that all such shares of Class A Common Stock may be so issued without
violation of any applicable law or regulation, or of any requirements of any
national securities exchange or other trading system upon which the Class A
Common Stock may be traded.
5.6 LIQUIDATION RIGHTS. In the event of any voluntary or involuntary
liquidation, dissolution, or winding-up of the Corporation, after
distribution in full of the preferential amounts, if any, to be distributed
to the holders of shares of the Preferred Stock or any series thereof, the
holders of shares of
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the Common Stock shall be entitled to receive all of the remaining assets of
the Corporation available for distribution to its stockholders, ratably in
proportion to the number of shares of the Common Stock held by them. A
liquidation, dissolution, or winding-up of the Corporation, as such terms are
used in this Paragraph 5.6, shall not be deemed to be occasioned by or to
include any consolidation or merger of the Corporation with or into any other
corporation or corporations or other entity or a sale, lease, exchange, or
conveyance of all or a part of the assets of the Corporation.
5.7 CONSIDERATION ON MERGER, CONSOLIDATION, ETC. In any merger,
consolidation, or business combination, the consideration to be received per
share by the holders of Class A Common Stock and Class B Common Stock must be
identical for each class of stock, except that in any such transaction in
which shares of common stock are to be distributed, such shares may differ as
to voting rights to the extent that voting rights now differ among the Class
A Common Stock and the Class B Common Stock.
ARTICLE SIX: PREFERRED STOCK
6.1 ISSUANCE. The Preferred Stock may be issued from time to time in one
or more classes or series, the shares of each class or series to have such
designations and powers, preferences, and rights, and qualifications,
limitations, and restrictions thereof, as are stated and expressed herein and
in the resolution or resolutions providing for the issue of such class or
series adopted by the Board of Directors as hereafter prescribed.
6.2 AUTHORIZATION BY BOARD OF DIRECTORS. Authority is hereby expressly
granted to and vested in the Board of Directors to authorize the issuance of
the Preferred Stock from time to time in one or more classes or series, and
with respect to each class or series of the Preferred Stock, to fix and state
by the resolution or resolutions from time to time adopted providing for the
issuance thereof the following:
(a) whether or not the class or series is to have voting rights, full,
special, or limited, or is to be without voting rights, and whether or not
such class or series is to be entitled to vote as a separate class either
alone or together with the holders of one or more other classes or series of
stock;
(b) the number of shares to constitute the class or series and the
designations thereof;
(c) the preferences, and relative, participating, optional, or other
special rights, if any, and the qualifications, limitations, or restrictions
thereof, if any, with respect to any class or series;
(d) whether or not the shares of any class or series shall be redeemable
at the option of the Corporation or the holders thereof or upon the happening
of any specified event, and, if redeemable, the redemption price or prices
(which may be payable in the form of cash, notes, securities, or other
property), and the time or times at which, and the terms and conditions upon
which, such shares shall be redeemable and the manner of redemption;
(e) whether or not the shares of a class or series shall be subject to the
operation of retirement or sinking funds to be applied to the purchase or
redemption of such shares for retirement, and, if such retirement or sinking
fund or funds are to be established, the annual amount thereof, and the terms
and provisions relative to the operation thereof;
(f) the dividend rate, whether dividends are payable in cash, stock of the
Corporation, or other property, the conditions upon which and the times when
such dividends are payable, the preference to or the relation to the payment
of dividends payable on any other class or classes or series of stock,
whether or not such dividends shall be cumulative or noncumulative, and if
cumulative, the date or dates from which such dividends shall accumulate;
(g) the preferences, if any, and the amounts thereof which the holders of
any class or series thereof shall be entitled to receive upon the voluntary
or involuntary dissolution of, or upon any distribution of the assets of, the
Corporation;
(h) whether or not the shares of any class or series, at the option of the
Corporation or the holder thereof or upon the happening of any specified
event, shall be convertible into or exchangeable for, the shares of any other
class or classes or of any other series of the same or any other class or
classes of stock, securities, or other property of the Corporation and the
conversion price or prices or ratio or ratios or the
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rate or rates at which such exchange may be made, with such adjustments, if
any, as shall be stated and expressed or provided for in such resolution or
resolutions; and
(i) such other special rights and protective provisions with respect to
any class or series as may to the Board of Directors seem advisable.
6.3 SHARES IN CLASS OR SERIES. The shares of each class or series of the
Preferred Stock may vary from the shares of any other class or series thereof
in any or all of the foregoing respects. The Board of Directors may increase
the number of shares of the Preferred Stock designated for any existing class
or series by a resolution adding to such class or series authorized and
unissued shares of the Preferred Stock not designated for any other class or
series. The Board of Directors may decrease the number of shares of the
Preferred Stock designated for any existing class or series by a resolution
subtracting from such class or series authorized and unissued shares of the
Preferred Stock designated for such existing class or series, and the shares
so subtracted shall become authorized, unissued, and undesignated shares of
the Preferred Stock.
ARTICLE SEVEN: LIMITATION OF LIABILITY OF DIRECTORS
A director of the Corporation shall not be personally liable to the
Corporation or its stockholders for monetary damages for breach of fiduciary
duty as a director, except for liability (i) for any breach of the director's
duty of loyalty to the Corporation or its stockholders, (ii) for acts or
omissions not in good faith or which involve intentional misconduct or
knowing violation of law, (iii) under Section 174 of the Delaware General
Corporation Law, or (iv) for any transaction from which the director derived
an improper personal benefit. This ARTICLE SEVEN may not be amended or
modified to increase the liability of a director, or repealed, except upon
the affirmative vote of the holders of at least 75% of the combined voting
power of the outstanding shares of Common Stock. No such amendment,
modification, or repeal shall apply to or have any effect on the liability or
alleged liability of any director of the Corporation for or with respect to
any acts or omissions of such director occurring prior to such amendment,
modification, or repeal. In addition to the circumstances in which a director
of the Corporation is not personally liable as set forth in the foregoing
provisions of this ARTICLE SEVEN, a director shall not be liable to the
Corporation or its stockholders to the fullest extent permitted by any law
hereafter enacted, including without limitation any subsequent amendment to
the Delaware General Corporation Law.
ARTICLE EIGHT: INDEMNIFICATION
8.1 GENERAL. The Corporation shall indemnify any person who was, is, or is
threatened to be made a party to a proceeding (as hereinafter defined) by
reason of the fact that he or she (i) is or was a director or officer of the
Corporation or (ii) while a director or officer of the Corporation, is or was
serving at the request of the Corporation as a director, officer, partner,
venturer, proprietor, trustee, employee, agent, or similar functionary of
another foreign or domestic corporation, partnership, joint venture, sole
proprietorship, trust, employee benefit plan, or other enterprise, to the
fullest extent permitted under the Delaware General Corporation Law, as the
same exists or may hereafter be amended. Such right shall be a contract right
and as such shall run to the benefit of any director or officer who is
elected and accepts the position of director or officer of the Corporation or
elects to continue to serve as a director or officer of the Corporation while
this ARTICLE EIGHT is in effect. Any repeal or amendment of this ARTICLE
EIGHT shall be prospective only and shall not limit the rights of any such
director or officer or the obligations of the Corporation with respect to any
claim arising from or related to the services of such director or officer in
any of the foregoing capacities prior to any such repeal or amendment to this
ARTICLE EIGHT. Such right shall include the right to be paid by the
Corporation expenses incurred in defending any such proceeding in advance of
its final disposition to the maximum extent permitted under the Delaware
General Corporation Law, as the same exists or may hereafter be amended. If a
claim for indemnification or advancement of expenses hereunder is not paid in
full by the Corporation within 60 days after a written claim has been
received by the Corporation, the claimant may at any time thereafter bring
suit against the Corporation to recover the unpaid amount of the claim, and
if successful in whole or in part, the claimant shall also be entitled to be
paid the expenses of prosecuting such claim.
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It shall be a defense to any such action that such indemnification or
advancement of costs of defense are not permitted under the Delaware General
Corporation Law, but the burden of proving such defense shall be on the
Corporation. Neither the failure of the Corporation (including its Board of
Directors or any committee thereof, independent legal counsel, or
stockholders) to have made its determination prior to the commencement of
such action that indemnification of, or advancement of costs of defense to,
the claimant is permissible in the circumstances nor an actual determination
by the Corporation (including its Board of Directors or any committee
thereof, independent legal counsel, or stockholders) that such
indemnification or advancement is not permissible shall be a defense to the
action or create a presumption that such indemnification or advancement is
not permissible. In the event of the death of any person having a right of
indemnification under the foregoing provisions, such right shall inure to the
benefit of his or her heirs, executors, administrators, and personal
representatives. The rights conferred above shall not be exclusive of any
other right which any person may have or hereafter acquire under any statute,
by-law, resolution of stockholders or directors, agreement, or otherwise.
8.2 EMPLOYEES AND AGENTS. The Corporation may additionally indemnify any
employee or agent of the Corporation to the fullest extent permitted by law.
8.3 PROCEEDINGS. As used in this ARTICLE EIGHT, the term "proceeding"
means any threatened, pending, or completed action, suit, or proceeding,
whether civil, criminal, administrative, arbitrative, or investigative, any
appeal in such an action, suit, or proceeding, and any inquiry or
investigation that could lead to such an action, suit, or proceeding.
ARTICLE NINE: MANAGEMENT OF THE CORPORATION
The following provisions relate to the management of the business and the
conduct of the affairs of the Corporation and are inserted for the purpose of
creating, defining, limiting, and regulating the powers of the Corporation
and its directors and stockholders:
(a) The business and affairs of the Corporation shall be managed by and
under the direction of the Board of Directors.
(b) The number of directors which shall constitute the whole Board of
Directors shall be fixed in accordance with the by-laws of the Corporation
(the "By-Laws").
(c) The Board of Directors shall have the power to adopt, amend, and
repeal the By-Laws, except to the extent that the By-Laws otherwise provide.
(d) All corporate powers and authority of the Corporation (except as at
the time otherwise provided by statute, by this Certificate of Incorporation,
or by the By-Laws) shall be vested in and exercised by the Board of
Directors.
(e) The stockholders and directors shall have the power, if the By-Laws so
provide, to hold their respective meetings within or without the State of
Delaware and may (except as otherwise required by statute) keep the
Corporation's books outside the State of Delaware, at such places as from
time to time may be designated by the By-Laws or the Board of Directors.
(f) Directors of the Corporation need not be elected by written ballot
unless the By-Laws otherwise provide.
ARTICLE TEN: CERTAIN CONTRACTS OR TRANSACTIONS
No contract or transaction between the Corporation and one or more of its
directors, officers, or stockholders or between the Corporation and any
person (as used herein, "person" means other corporation, partnership,
association, firm, trust, joint venture, political subdivision, or
instrumentality) or other organization in which one or more of its directors,
officers, or stockholders are directors, officers, or stockholders, or have a
financial interest, shall be void or voidable solely for this reason, or
solely because the director or officer is present at or participates in the
meeting of the board or committee which authorizes the contract or
transaction, or solely because his, her, or their votes are counted for such
purpose, if:
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(i) the material facts as to his or her relationship or interest and as
to the contract or transaction are disclosed or are known to the Board of
Directors or the committee, and the Board of Directors or committee in
good faith authorizes the contract or transaction by the affirmative votes
of a majority of the disinterested directors, even though the
disinterested directors be less than a quorum;
(ii) the material facts as to his or her relationship or interest and as
to the contract or transaction are disclosed or are known to the
stockholders entitled to vote thereon, and the contract or transaction is
specifically approved in good faith by vote of the stockholders; or
(iii) the contract or transaction is fair as to the Corporation as of the
time it is authorized, approved, or ratified by the Board of Directors, a
committee thereof, or the stockholders.
Common or interested directors may be counted in determining the presence
of a quorum at a meeting of the Board of Directors or of a committee which
authorizes the contract or transaction.
* * *
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ANNEX F
DISTRIBUTION AGREEMENT
DATED AS OF , 1998
AMONG
SFX BROADCASTING, INC.,
SFX ENTERTAINMENT, INC.
AND
SBI HOLDING CORPORATION
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
---------
<S> <C>
ARTICLE 1
DEFINITIONS ........................................... F-2
SECTION 1.1 General.................................... F-2
ARTICLE 2
REORGANIZATION AND RELATED TRANSACTIONS ............... F-3
SECTION 2.1 The Reorganization......................... F-3
SECTION 2.2 Working Capital Adjustment................. F-4
SECTION 2.3 SFX Approval............................... F-7
ARTICLE 3
ASSUMPTION AND RETENTION OF LIABILITIES ............... F-7
SECTION 3.1 Assumed Liabilities........................ F-7
SECTION 3.2 Retained Liabilities....................... F-7
SECTION 3.3 Construction of Agreements................. F-7
ARTICLE 4
THE DISTRIBUTION ...................................... F-7
SECTION 4.1 The Distribution........................... F-7
SECTION 4.2 Fractional Shares.......................... F-8
SECTION 4.3 SFX Employees.............................. F-8
SECTION 4.4 SFX Board Action........................... F-8
SECTION 4.5 Registration and Listing; SEC Filings ..... F-9
SECTION 4.6 Third Party Consents....................... F-9
SECTION 4.7 Waivers.................................... F-9
SECTION 4.8 Termination of Merger Agreement. .......... F-9
ARTICLE 5
SURVIVAL; MUTUAL RELEASE AND INDEMNIFICATION ......... F-10
SECTION 5.1 Survival and Indemnification............... F-10
SECTION 5.2 Mutual Release, Etc. ...................... F-10
SECTION 5.3 Indemnification............................ F-11
SECTION 5.4 Procedure for Indemnification.............. F-11
ARTICLE 6
RELATED AGREEMENTS .................................... F-12
SECTION 6.1 Tax Sharing Agreement...................... F-12
SECTION 6.2 Employee Benefits Agreement................ F-13
ARTICLE 7
CERTAIN ADDITIONAL MATTERS ............................ F-13
SECTION 7.1 Conveyancing and Assumption Instruments ... F-13
SECTION 7.2 No Representations or Warranties .......... F-13
SECTION 7.3 Further Assurances; Subsequent Transfers .. F-13
F-i
<PAGE>
PAGE
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SECTION 7.4 Sales and Transfer Taxes................... F-14
SECTION 7.5 Change of Name............................. F-14
ARTICLE 8
ACCESS TO INFORMATION AND SERVICES .................... F-14
SECTION 8.1 Provision of Corporate Records............. F-14
SECTION 8.2 Access to Information...................... F-14
SECTION 8.3 Retention of Records....................... F-14
SECTION 8.4 Confidentiality............................ F-15
SECTION 8.5 Privileged Matters......................... F-15
ARTICLE 9
INSURANCE ............................................. F-15
SECTION 9.1 General.................................... F-15
SECTION 9.2 Certain Insured Claims..................... F-16
ARTICLE 10
CONDITIONS ............................................ F-16
SECTION 10.1 Conditions................................ F-16
ARTICLE 11
MEDIATION ............................................. F-16
SECTION 11.1 Mediation and Binding Arbitration ........ F-16
SECTION 11.2 Initiation................................ F-16
SECTION 11.3 Submission to Mediation................... F-17
SECTION 11.4 Selection of Mediator..................... F-17
SECTION 11.5 Mediation................................. F-17
SECTION 11.6 Selection of Arbitrator................... F-17
SECTION 11.7 Cost of Arbitration....................... F-17
ARTICLE 12
MISCELLANEOUS ......................................... F-17
SECTION 12.1 Complete Agreement........................ F-17
SECTION 12.2 Governing Law............................. F-17
SECTION 12.3 Notices................................... F-17
SECTION 12.4 Amendment and Modification................ F-18
SECTION 12.5 Termination............................... F-18
SECTION 12.6 Successor and Assigns..................... F-18
SECTION 12.7 No Third Party Beneficiaries.............. F-18
SECTION 12.8 Counterparts.............................. F-19
SECTION 12.9 Interpretation............................ F-19
SECTION 12.10 Annexes, Etc. ........................... F-19
SECTION 12.11 Legal Enforceability..................... F-19
Annex I Assumed Liabilities
Annex II Transferred Assets
</TABLE>
F-ii
<PAGE>
DISTRIBUTION AGREEMENT
DISTRIBUTION AGREEMENT, dated as of , 1998, by and between
SFX Broadcasting, Inc., a Delaware corporation ("SFX"), and SFX
Entertainment, Inc., a Delaware corporation and a wholly-owned subsidiary of
SFX ("Entertainment"). Capitalized terms used and not defined herein have the
respective meanings ascribed them in the Merger Agreement. Unless the context
requires otherwise, "SFX" refers to SFX and its subsidiaries (other than
Entertainment and its subsidiaries) and "Entertainment" refers to
Entertainment and its subsidiaries.
WHEREAS, SFX has entered into that Agreement and Plan of Merger dated as
of August 24, 1997, among SBI Holding Corporation, a Delaware corporation
("Parent"), SBI Radio Acquisition Corporation, a Delaware corporation and a
wholly owned subsidiary of Parent ("Sub"), and SFX pursuant to which SFX will
become a wholly-owned subsidiary of Parent (the "Merger Agreement");
WHEREAS, Entertainment has, among other endeavors, been engaged in the
business of venue ownership, operation and management and the booking,
promotion and/or production of entertainment events, including, without
limitation, related merchandising, concession management and Internet-based
marketing through its wholly owned subsidiary SFX Concerts, Inc., formerly
known as Delsener/Slater Enterprises, Inc., and its Subsidiaries and
Affiliates (the "Transferred Businesses"), which Transferred Businesses are
principally outside the scope of SFX's core radio broadcasting business;
WHEREAS, the Board of Directors of SFX has determined that the interests
of SFX's stockholders would be best served by restructuring the ownership of
the Transferred Businesses and ownership of the core radio broadcasting
business prior to the Merger as contemplated by Section 5.07 of the Merger
Agreement;
WHEREAS, SFX wishes to transfer and assign to Entertainment all of the
Transferred Assets as specified in this Agreement in exchange for the
assumption by Entertainment of the Assumed Liabilities as specified in this
Agreement;
WHEREAS, Entertainment is willing to assume such Assumed Liabilities;
WHEREAS, SFX intends to distribute all of the outstanding shares of the
Class A Common Stock, par value $.01 per share, of Entertainment (the
"Entertainment Class A Common Stock") and the Class B Common Stock of
Entertainment, par value $.01 per share (the "Entertainment Class B Common
Stock" and, together with the Entertainment Class A Common Stock, the
"Entertainment Common Stock"), owned by SFX to the holders of (i) the common
stock of SFX (the "SFX Common Stock"), (ii) the 6 1/2% Series D Cumulative
Convertible Exchangeable Preferred Stock due May 31, 2007 of SFX (the "Series
D Preferred Stock"), (iii) interests in the SFX Director Deferred Stock
Ownership Plan dated as of January 1, 1997 (the "SFX Director Deferred Stock
Ownership Plan") and (iv) certain warrants of SFX, with the holders of the
Class A Common Stock, par value $.01 per share, of SFX (the "SFX Class A
Common Stock"), the Series D Preferred Stock, interests in the SFX Director
Deferred Stock Ownership Plan and certain warrants of SFX receiving
Entertainment Class A Common Stock and the holders of the Class B Common
Stock, par value $.01 per share, of SFX (the "SFX Class B Common Stock")
receiving Entertainment Class B Common Stock (such distribution hereinafter
referred to as the "Distribution") on the Distribution Date (as hereinafter
defined);
WHEREAS, SFX and Entertainment have determined that it is necessary and
desirable to set forth the principal corporate transactions required to
effect the Distribution and to set forth other agreements that will govern
certain other matters in connection with the Distribution; and
WHEREAS, Parent has joined as a signatory and a party to this Agreement in
order to preserve and protect its rights under the Merger Agreement.
NOW, THEREFORE, in consideration of the premises and the mutual covenants
and agreements contained herein and intending to be legally bound hereby, SFX
and Entertainment hereby agree as follows:
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ARTICLE 1
DEFINITIONS
SECTION 1.1 General. As used in this Agreement, capitalized terms defined
immediately after their use shall have the respective meanings thereby
provided and the following terms shall have the following meanings (such
meanings to be equally applicable to both the singular and plural forms of
the terms defined):
Action: any action, claim, suit, arbitration, inquiry, proceeding or
investigation by or before any court, any governmental or other regulatory or
administrative agency or commission or any arbitration tribunal.
Affiliate: with respect to any specified person, a person that, directly
or indirectly, through one or more intermediaries, controls, or is controlled
by, or is under common control with, such specified person; provided,
however, that SFX and Entertainment shall not be deemed to be Affiliates of
each other for purposes of this Agreement.
Agent: ChaseMellon Shareholder Services, LLC, the distribution agent
appointed by SFX to distribute shares of Entertainment Common Stock pursuant
to the Distribution.
Assumed Liabilities: collectively, all of the Liabilities and other
obligations of SFX listed on Annex I hereto.
Books and Records: the books and records of SFX (or true and complete
copies thereof), including all computerized books and records owned by SFX,
which relate principally to the Transferred Businesses and are necessary for
Entertainment to operate the Transferred Businesses, including, without
limitation, all such books and records relating to Employees, the purchase of
materials, supplies and services, the sale of products by the Transferred
Businesses or dealings with customers of the Transferred Businesses and all
litigation files relating to any Action being assumed by Entertainment as
part of the Assumed Liabilities.
Code: the Internal Revenue Code of 1986, as amended.
Consent Solicitation Documents. The Consent Solicitation Statements mailed
to the holders of SFX's 12 5/8% Cumulative Exchangeable Series E Preferred
Stock and 10 3/4% Senior Subordinated Notes due 2006 on January 7, 1998 and
the Information Statement related thereto.
Conveyancing and Assumption Instruments: collectively, the various
agreements, instruments and other documents to be entered into in order to
effect the transfer to Entertainment of Transferred Assets, and the
assumption by Entertainment of the Assumed Liabilities in the manner
contemplated by this Agreement, each of which shall be in a form reasonably
satisfactory to Parent.
Distribution Date: the date as of which the Distribution shall be effected
as determined by the SFX Board of Directors which, in any event, shall be a
date on or prior to the Closing Date.
Distribution Employees: the employees of SFX listed on Section 5.07(h) of
the Company Disclosure Schedule to the Merger Agreement.
Employee: the Distribution Employees and any employee shown on the records
of SFX as being employed by SFX and assigned to the Transferred Businesses as
of the Distribution Date, including any laid-off Employee or any Employee on
leave of absence.
Exchange Act: the Securities Exchange Act of 1934, as amended.
Form 8-A: the registration statement on Form 8-A to be filed by
Entertainment with the SEC to effect the registration of the Entertainment
Class A Common Stock pursuant to the Exchange Act.
Guarantees: the guarantees provided by SFX in connection with the
following agreements: (i) Agreement and Plan of Merger and Asset Purchase
Agreement, dated as of December 10, 1997 by and among SFX Entertainment,
Inc., Contemporary Investments Corporation, Contemporary Investments of
Kansas, Inc., Contemporary International Productions Corporation, Steven F.
Schanman Living Trust,
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Irving P. Zuckerman Living Trust, Steven F. Schankman and Irving P.
Zuckerman, (ii) Stock and Asset Purchase Agreement, dated December 2, 1997,
by and among SFX Network Group, L.L.C. and SFX Entertainment, Inc., and Elias
N. Bird, individually and as Trustee under the Bird Family Trust, Gary F.
Bird, individually and as Trustee under the Gary F. Bird Corporation Trust,
Stephen R. Smith, individually and as Trustee under the Smith Family Trust,
June E. Brody, Steven A. Saslow, and The Network 40, Inc. and (iii) Stock
Purchase Agreement, dated as of December 12, 1997 by and among Pace
Entertainment Corporation and SFX Entertainment, Inc.
Indemnifiable Losses: with respect to any claim by an Indemnitee for
indemnification authorized pursuant to this Agreement, all losses,
Liabilities, claims, damages, obligations, payments, costs and expenses
(including, without limitation, the costs and expenses of any and all
Actions, demands, assessments, judgments, settlements and compromises
relating thereto and reasonable attorneys' fees and expenses in connection
therewith) suffered by such Indemnitee with respect to such claim.
Indemnifying Party: any party who is required to indemnify any other
person pursuant to this Agreement hereof.
Indemnitee: any party who is entitled to receive indemnification from an
Indemnifying Party pursuant to this Agreement hereof.
Indemnity Payment: the amount an Indemnifying Party is required to pay an
Indemnitee pursuant to this Agreement hereof.
Insurance Program: collectively, the series of property and casualty
policies pursuant to which various insurance carriers provide insurance
coverage to SFX (including Entertainment and its subsidiaries) in respect of
claims or occurrences relating to, without limitation, property damage,
business interruption, transit, fire, extended coverage, fiduciary, fidelity,
environmental impairment, employee crime, general liability, products'
liability, automobile liability and employer's liability. The term Insurance
Program shall not include any SFX Welfare Plan as such term is defined in the
Employee Benefits Agreement.
Liabilities: any and all debts, liabilities and obligations, whether or
not accrued, contingent, known or unknown, or reflected on a balance sheet,
including, without limitation, those arising under any law, rule, regulation,
Action, order or consent decree of any governmental entity or any judgment of
any court of any kind or any award of any arbitrator of any kind, and those
arising under any contract, commitment or undertaking.
Record Date: the date determined by the Board of Directors of SFX as the
record date for the Distribution.
Registration Statement: the registration statement on Form S-1 (Reg. No.
333-43287) filed by Entertainment with the SEC on December 24, 1997, as
amended, to effect the registration of the Entertainment Class A Common Stock
and Class B Common Stock pursuant to the Securities Act of 1933, as amended.
Related Agreements: the Tax Sharing Agreement and the Employee Benefits
Agreement.
Retained Liabilities: all Liabilities and obligations of SFX other than
the Assumed Liabilities.
SEC: the Securities and Exchange Commission.
Transferred Assets: collectively, all of the assets and properties of SFX
identified on Annex II hereto.
ARTICLE 2
REORGANIZATION AND RELATED TRANSACTIONS
SECTION 2.1 The Reorganization. Subject to the terms and conditions of
this Agreement, SFX and Entertainment shall use their respective best efforts
to cause, prior to the Distribution Date, all of SFX's right, title and
interest in and to the Transferred Assets to be conveyed, assigned,
transferred and delivered to Entertainment, free and clear of all liens or
encumbrances in favor of SFX or its subsidiaries,
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and all of SFX's duties, obligations and responsibilities under the Assumed
Liabilities to be assumed by Entertainment (the "Asset and Liability
Transfer"). Such transfer and assumption shall be effected by means of the
Conveyancing and Assumption Instruments which shall be executed and delivered
by each of SFX and Entertainment prior to the Distribution Date. Subject to
Section 7.3 hereof, to the extent that any such conveyances, assignments,
transfers and deliveries shall not have been so consummated on the
Distribution Date, SFX and Entertainment shall cooperate to effect such
consummation as promptly thereafter as shall be practicable, it nonetheless
being understood and agreed by SFX and Entertainment that neither shall be
liable in any manner to any person who is not a party to this Agreement for
any failure of any of the transfers contemplated by this Article 2 to be
consummated on or subsequent to the Distribution Date. Whether or not all of
the Transferred Assets or the Assumed Liabilities shall have been legally
transferred to, or assumed by, Entertainment as of the Distribution Date, SFX
and Entertainment agree that, as of the Distribution Date, Entertainment
shall have, and shall be deemed to have acquired, complete and sole
beneficial ownership over all of the Transferred Assets, together with all of
SFX's and its subsidiaries' rights, powers and privileges incident thereto,
and shall be deemed to have assumed all of the Assumed Liabilities and all of
SFX's and its subsidiaries' duties, obligations and responsibilities incident
thereto in accordance with the terms of this Agreement.
SECTION 2.2 Working Capital Adjustment.
(a) In the event that the Distribution occurs prior to the Closing Date,
then on the Distribution Date, the management of SFX shall make an allocation
of working capital between Entertainment and SFX, consistent with the proper
operation of SFX in its usual, regular and ordinary course and, immediately
after the effective time of the Distribution, SFX shall deliver to
Entertainment, in immediately available funds by wire transfer to such bank
account as Entertainment shall specify, any positive amount allocated to
Entertainment.
(b) Not less than five business days prior to the Closing Date, SFX shall
deliver to Entertainment and Parent a good faith estimate of Working Capital
(as defined in Section 2.3(d)) as of the Closing Date (the "Estimated Working
Capital") accompanied by a certificate by the Chief Executive Officer and
Chief Financial Officer of SFX certifying that the Estimated Working Capital
has been calculated in accordance with the Merger Agreement and this
Agreement. If the Estimated Working Capital is a positive number, then at the
Closing SFX shall deliver to Entertainment, in immediately available funds by
wire transfer to such bank account as Entertainment shall specify, an amount
of cash equal to the Estimated Working Capital. If the Estimated Working
Capital is a negative number, then at the Closing SFX shall cause
Entertainment to deliver, and Entertainment shall deliver to SFX, in
immediately available funds by wire transfer to such bank account as SFX
shall specify, an amount of cash equal to the Estimated Working Capital.
(c)(i) As soon as practicable after the Closing Date, SFX will prepare a
statement of Working Capital as of the Closing Date, which will be audited by
Ernst & Young LLP (the "Company's Working Capital Statement") at the expense
of SFX. SFX will deliver SFX's Working Capital Statement to Entertainment as
soon as practicable and in any event within ninety days after the Closing
Date. If within fifteen days following delivery of SFX's Working Capital
Statement to Entertainment, Entertainment has not given SFX notice of its
objection to SFX's Working Capital Statement (such notice must contain a
statement of the basis of such objection), then the Working Capital reflected
on SFX's Working Capital Statement shall be deemed final and conclusive and
shall be the "Final Working Capital." If Entertainment gives such notice of
objection within the fifteen day period, then the issues in dispute will be
submitted to a "big six" accounting firm (other than Ernst & Young LLP) to be
selected jointly by Entertainment and Parent within the following fifteen
days or, if they fail to agree, such accounting firm shall be Arthur Andersen
(Chicago office) (it being understood that the Chicago office of Arthur
Andersen was chosen because of representations made that neither Parent and
its Affiliates, SFX and its Affiliates nor Entertainment and its Affiliates
have a material relationship with such office and if any of such parties
prior to the calculation of the Final Working Capital develops a material
relationship with such office, the party having such a relationship shall
promptly notify the other party of such relationship and the parties will
select another office of Arthur Andersen or another "big six" accounting firm
with which none of such parties has a material relationship to serve as the
accountants) (the "Accountants"),
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for resolution and the Accountants shall determine the "Final Working
Capital" within thirty days after the dispute is submitted to them. If issues
in dispute are submitted to the Accountants for resolution, (A) each party
will furnish to the Accountants such work papers and other documents and
information relating to the disputed issues as the Accountants may request
and are available to that party or its Subsidiaries (or its independent
public accountants), and will be afforded the opportunity to present to the
Accountants any material relating to the determination and to discuss the
determination with the Accountants; (B) the determination by the Accountants
of Final Working Capital, as set forth in a notice delivered to both parties
by the Accountants, will be binding and conclusive on the parties; and (C)
Entertainment and SFX will each bear one-half of the fees and expenses of the
Accountants for such determination. SFX shall make its employees and books
and records available to Entertainment for purposes of verifying Final
Working Capital and shall cause Ernst & Young LLP to make its work papers
used in determining Final Working Capital available to Entertainment.
(ii) On the third business day following the determination of the Final
Working Capital (the "Payment Date"), (A) if the Working Capital Adjustment
Amount (as defined below) is a positive number, then SFX will pay such amount
to Entertainment in immediately available funds by wire transfer to such bank
account as Entertainment shall specify and (B) if the Working Capital
Adjustment Amount is a negative number, then Entertainment will pay such
amount to SFX in immediately available funds by wire transfer to a bank
account specified by SFX. Notwithstanding the foregoing, if Entertainment has
notified SFX in writing prior to the Payment Date that it wishes to have all
or any portion of the Final Working Capital (such amount, the "Consideration
Adjustment") treated as an adjustment to the Class A Common Stock Merger
Consideration and the Class B Common Stock Merger Consideration, the Class A
Common Stock Merger Consideration and the Class B Common Stock Merger
Consideration shall be increased by an amount equal to the quotient of the
Consideration Adjustment divided by the fully diluted number of shares of SFX
Common Stock outstanding immediately prior to the Effective Time, and SFX
shall (X) promptly distribute the appropriate amount to the appropriate
holders, immediately prior to the Effective Time, of SFX Common Stock and
Series D Preferred Stock, (Y) promptly distribute upon exercise the
appropriate amount to holders of Options, Warrants and Unit Purchase Options
unexercised immediately prior to the Effective Time, and (Z) promptly
distribute the appropriate amount to holders of Options, Warrants, and Unit
Purchase Options who exercised such securities on and after the Effective
Time and prior to the Payment Date; provided that as a condition precedent to
SFX's obligations under this sentence, Entertainment shall have paid to SFX
in immediately available funds by wire transfer to an account specified by
SFX the difference, if any, between the Consideration Adjustment and the
Working Capital Adjustment Amount so that the aggregate net amount to be paid
or received by SFX, as the case may be, pursuant to this sentence is equal to
the amount that would have been paid or received, as the case may be,
pursuant to the first sentence of this paragraph had the Consideration
Adjustment not been made.
(d) The term "Working Capital" shall mean, as of the point in time
immediately prior to the Effective Time, the sum of all current assets of SFX
and its consolidated Subsidiaries minus the sum of all current liabilities of
SFX and its consolidated Subsidiaries, each as determined in accordance with
GAAP applied on a basis consistent with the balance sheet of SFX as of June
30, 1997 included in Company SEC Documents (as defined in the Merger
Agreement) (provided that no liabilities or reserves reflected on such
balance sheet shall be reduced or eliminated except by reason of a payment or
credit occurring in the ordinary course of business and consistent with past
practices).
Notwithstanding the foregoing, Working Capital shall, without duplication
either in this computation or as between this computation and the computation
of Excess Debt, (i) be increased by the lesser of (A) 50% of all fees and
expenses incurred by SFX in connection with acquiring consents from holders
of the Series E Preferred Stock and the 2006 Notes in connection with the
transactions contemplated by the Merger Agreement and (B) $1,000,000, (ii) be
increased by, if a positive number, or decreased by, if a negative number,
the product of (A) the Class A Common Stock Merger Consideration and (B) the
difference between 15,589,083 less the sum of the fully diluted number of
shares of SFX Common Stock outstanding immediately prior to the Effective
Time (excluding the Meadows Shares (as defined below)) (calculated in a
manner consistent with Section 3.01(c)(i) of the Company Disclosure Schedule,
such
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calculation to include, without limitation, derivative securities that will
become issuable upon consummation of the transactions contemplated by the
Merger Agreement), (iii) be reduced by the difference between $84,554,649
less the sum of (A) the aggregate exercise price of all Options, Warrants and
Unit Purchase Options outstanding immediately prior to the Effective Time
plus (B) the aggregate exercise price of all Unit Purchase Option Warrants
underlying Unit Purchase Options outstanding immediately prior to the
Effective Time plus (C) the aggregate base price of all SARs outstanding
immediately prior to the Effective Time, (iv) be reduced by the product of
(A) $42 and (B) the aggregate number of shares of SFX Common Stock subject to
a right of repurchase in favor of SFX (the "Meadows Shares") granted pursuant
to that certain Agreement of Merger dated February 12, 1997 among SFX,
Nederlander of Connecticut, Inc. and the other parties thereto outstanding
immediately prior to the Effective Time, (v) be increased by all capital
expenditures paid by SFX and its Subsidiaries after June 30, 1997 and
immediately prior to the Effective Time permitted by Section 4.01(a)(vii) of
the Merger Agreement, (vi) be decreased by all accrued capital expenditures
of SFX as of immediately prior to the Effective Time (to the extent not
reflected in current liabilities), (vii) be increased by dividends that have
been accrued immediately prior to the Effective Date whose regularly
scheduled payment date has not then yet occurred, (viii) except as required
by clause (xi) below, exclude any liabilities attributable to Indebtedness,
(ix) exclude any liabilities included in clauses (i) through (v) of the
following sentence, (x) be decreased by unpaid costs, fees and expenses of
SFX arising out of, based upon or that will arise from the transactions
contemplated by the Merger Agreement (other than as a result of actions taken
by Sub) (including, without limitation, amounts related to the termination of
any employees, broker fees, legal, accounting and advisory fees and fees
incurred in connection with third party consents, waivers and amendments of
creditors or holders of Preferred Stock), and (xi) be reduced by the amount
of the Excess Debt, if a positive number, or be increased by the amount of
the Excess Debt, if a negative number, and (xii) be reduced by the amount of
the Series E Premium (as defined below).
The term "Series E Premium" shall mean the difference between (i) the
Average Trading Price times 142,032 and (ii) 14,203,200. The term "Average
Trading Price" shall mean the highest of the following averages: (i) the
average of the last sales price of the Series E Preferred Stock during the 15
consecutive business days ending on the Closing Date, or (ii) the average of
the last sales price of the Series E Preferred Stock during the 15
consecutive business days immediately preceding February 9, 1998.
(e) The term "Excess Debt" shall mean, as of immediately prior to the
Effective Time, the difference between the sum of the following and
$899,700,000: (i) the difference between (A) Indebtedness of SFX and its
consolidated Subsidiaries less (B) the difference between $70,000,000 and any
amounts (other than the reimbursement of expenses) actually received by SFX
and its consolidated subsidiaries after August 24, 1997 under agreements
relating to the sale or LMA (such LMA payments not to exceed $30,000 per
month) of its WVGO-FM and the sale or LMA of its Jackson/Biloxi radio
stations, less (C) any Indebtedness incurred to finance acquisitions approved
by Parent of stock of or substantially all of the assets of radio stations,
less (D) interest accrued as of immediately prior to the Effective Time that
is not then due and payable, (ii) the Series B Merger Consideration, (iii)
the Series C Merger Consideration, (iv) the liquidation preference amount of
the Series E Preferred Stock, and (v) Environmental Costs or Liabilities
accrued and not paid after June 30, 1997 to the extent they exceed $100,000
in the aggregate. "Working Capital Adjustment Amount" shall mean an amount
equal to the Final Working Capital, less the Estimated Working Capital,
together with interest on the absolute value of the difference at 10% per
annum beginning on the Closing Date and ending on the date of payment of the
Working Capital Adjustment Amount as provided in Section 2.02(c)(ii) hereof.
Notwithstanding the foregoing, Working Capital shall not include any asset
transferred to Entertainment or any of its Subsidiaries, any Liability
assumed by Entertainment, or any Liability to which none of SFX or any of its
Subsidiaries is a party immediately after the Effective Time and any such
computation shall assume that the Distribution has been consummated.
(f) All amounts loaned to Entertainment by SFX to (i) acquire (whether by
merger, stock or asset acquisition or otherwise) additional businesses
engaged in the business in which Entertainment is engaged or (ii) make
capital improvements on assets owned or leased by Entertainment, shall be
paid by Entertainment to SFX by wire transfer of immediately available funds
to a bank account specified by SFX on the Distribution Date and shall not be
considered for purposes of computing Working Capital under clause (b) of this
Section 2.3.
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(g) If the Merger Agreement is terminated for any reason in accordance
with its terms, than the working capital shall be allocated in accordance
with Section 2.3(a) above, and no further adjustments to working capital
shall be made.
SECTION 2.3 SFX Approval. Prior to the Distribution Date, SFX shall
cooperate with Entertainment in effecting, and if so requested by
Entertainment, SFX shall, as the sole stockholder of Entertainment, ratify
any actions which are reasonably necessary or desirable to be taken by
Entertainment to effectuate the transactions contemplated by this Agreement
in a manner consistent with the terms of this Agreement, including, without
limitation, the following: (a) the election or appointment of directors and
officers of Entertainment to serve in such capacities following the
Distribution Date, and (b) the preparation and implementation of appropriate
plans, agreements and arrangements for Employees (including, without
limitation, plans, agreements or arrangements pursuant to which Entertainment
Common Stock would be acquired by Employees).
ARTICLE 3
ASSUMPTION AND RETENTION OF LIABILITIES
SECTION 3.1 Assumed Liabilities. Upon the terms and subject to the
conditions set forth in this Agreement and in addition to any other
Liabilities otherwise expressly assumed by Entertainment pursuant to this
Agreement, the Related Agreements or any other agreement contemplated by this
Agreement, Entertainment assumes all Assumed Liabilities and agrees with SFX
to pay, perform and discharge in due course any and all Assumed Liabilities.
SFX shall use its commercially reasonable efforts to cause Entertainment and
its Subsidiaries to be released from all debt and accrued liabilities other
than the Assumed Liabilities, prior to the Effective Time.
SECTION 3.2 Retained Liabilities. Upon the terms and subject to the
conditions set forth in this Agreement and in addition to any other
Liabilities otherwise expressly retained by SFX pursuant to this Agreement,
the Related Agreements or any other agreement contemplated by this Agreement,
SFX hereby agrees with Entertainment that SFX shall pay, perform and
discharge in due course any and all Retained Liabilities.
SECTION 3.3 Construction of Agreements. Notwithstanding any other
provisions in this Agreement to the contrary, in the event and to the extent
there shall be a conflict between the provisions of this Agreement and the
Related Agreements (or any Conveyancing and Assumption Instrument or other
instrument of assumption entered into pursuant to this Agreement) and (a) the
provisions of the Merger Agreement then (i) prior to the Effective Time, the
provisions of the Merger Agreement shall control and (ii) subsequent to the
Effective Time, the provisions of this Agreement and the Related Agreements
(or any Conveyancing and Assumption Instrument or other instrument of
assumption entered into pursuant to this Agreement) shall control and (b) the
provisions of any other agreement entered into by SFX or Entertainment, the
provisions of this Agreement and the Related Agreements (and any Conveyancing
and Assumption Instrument or other instrument of assumption entered into
pursuant to this Agreement) shall control. In the event and to the extent
there shall be a conflict between the provisions of this Agreement and the
provisions of the Related Agreements, the provisions of the Related
Agreements shall control.
ARTICLE 4
THE DISTRIBUTION
SECTION 4.1 The Distribution.
(a) On or prior to the Distribution Date, SFX shall deliver to the Agent
for the benefit of holders of record of SFX Common Stock, Series D Preferred
Stock and interests in the SFX Director Deferred Stock Ownership Plan on the
Record Date, (i) certificates representing, in the aggregate, the number of
Entertainment Class A Common Stock equal to the sum of (A) the number of SFX
Class A Common Stock outstanding on the Record Date (B) the aggregate number
of shares of SFX Class A Common Stock credited pursuant to the SFX Director
Deferred Stock Ownership Plan and (C) the product of the number of Series D
Preferred Stock outstanding on the Record date multiplied by the Conversion
Rate (as defined in the certificate of designations governing the Series D
Preferred Stock) and (ii) certificates representing, in the aggregate, the
number of Entertainment Class B Common Stock equal to the number
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of SFX Class B Common Stock outstanding on the Record Date. SFX shall
instruct the Agent to distribute as promptly as practicable following the
Distribution Date to holders of the SFX Common Stock, Series D Preferred
Stock and interests in the SFX Director Deferred Stock Ownership Plan on the
Record Date (i) one share of Entertainment Class A Common Stock for every one
share of SFX Class A Common Stock, (ii) one share of Entertainment Class A
Common Stock for every one share of SFX Class A Common Stock credited
pursuant to the SFX Director Deferred Stock Ownership Plan, (iii) the number
of shares of Entertainment Class A Common Stock equal to the Conversion Rate
(as defined in the Certificate of Designations governing the Series D
Preferred Stock) for every one share of Series D Preferred Stock and (iv) one
share of Entertainment Class B Common Stock for every one share of SFX Class
B Common Stock. Simultaneously with the Distribution, SFX shall place that
number of shares of the Entertainment Class A Common in an escrow account
with an escrow agent selected by SFX and governed by an escrow agreement
reasonably acceptable to SFX and Parent for delivery to the holders of the
IPO Warrants, Huff Warrants and SCMC Warrants upon exercise of such warrants
that equals the number of shares of Entertainment Class A Common Stock that
the holders of such warrants would have been entitled to receive if they had
exercised all of their IPO Warrants, Huff Warrants and SCMC Warrants
immediately prior to the Record Date. SFX and Entertainment agree to provide
to the Agent sufficient certificates in such denominations as the Agent may
request in order to effect the Distribution. All of the shares of
Entertainment Common Stock issued in the Distribution shall be fully paid,
nonassessable and free of preemptive rights.
(b) The Distribution shall be deemed to be effective on the Distribution
Date.
SECTION 4.2 Fractional Shares. No certificate or scrip representing
fractional shares of Entertainment Common Stock shall be issued as part of
the Distribution and in lieu of receiving fractional shares, each holder of a
warrant who would otherwise be entitled to receive a fractional share of
Entertainment Common Stock upon exercise of such warrant, after aggregating
all shares of Entertainment Common Stock which such holder would be entitled
to receive under Section 4.1, will receive cash for such fractional share.
SFX and Entertainment agree that Entertainment shall instruct the Agent to
determine the number of whole shares and fractional shares of Entertainment
Common Stock allocable to each holder of record of such warrant as of the
date of exercise, to aggregate all such fractional shares into whole shares
and sell the whole shares obtained thereby in the open market at the then
prevailing prices on behalf of holders who otherwise would be entitled to
receive fractional shares interests and to distribute to each such holder
such holder's ratable share of the total proceeds of such sale promptly after
the date of exercise. SFX shall bear the costs of commissions incurred in
connection with such sale.
SECTION 4.3 SFX Employees. If the Distribution occurs prior to the Closing
Date, the Distribution Employees shall continue to be employed by SFX (at
SFX's expense), but shall devote such time as deemed reasonably necessary to,
consistent with their obligations to SFX, in support of the conduct of the
Entertainment Business by Entertainment on a basis consistent with the time
and scope of services that such employees devoted and provided to the
Entertainment Business prior to the Distribution. Effective immediately prior
to the Effective Time, Entertainment shall assume all obligations arising
under any employment agreement or arrangement (written or oral) between SFX
or any of its Subsidiaries and the Distribution Employees other than the
rights, if any, of the Distribution Employees to receive the options upon
termination following a change of control as defined in their respective
employment agreements (the "Termination Options") immediately prior to the
Effective Time (with such Termination Options being deemed granted as of such
time) and all existing rights to indemnification. SFX and its Subsidiaries,
effective as of the Effective Time (or effective as of the Distribution Date
as to any member of the Distribution Employees that devotes substantially all
of his or her business time to the Entertainment Business), shall be
indemnified by Entertainment in accordance with Article 5 hereof from all
obligations arising under such employment agreements or arrangements (except
in respect of the Termination Options and all existing rights to
indemnification). Neither party shall, directly or indirectly, solicit the
employment of any employees of the other party or its subsidiaries (other
than as a result of a general solicitation for employment); provided however
that Entertainment may offer to employ the Distribution Employees.
SECTION 4.4 SFX Board Action. The Board of Directors of SFX, in its
discretion, shall establish the Record Date and the Distribution Date and all
appropriate procedures in connection with the Distribution, subject to the
satisfaction or waiver of the conditions contained in Article 10.
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SECTION 4.5 Registration and Listing; SEC Filings.
(a) Prior to the Distribution Date:
(i) SFX and Entertainment shall register the Distribution under
applicable federal and state securities laws if such registration is
either required under applicable law or would otherwise be required to
cause the securities issued in connection with the Distribution to be
freely transferable by Persons not Affiliates with Entertainment. SFX and
Entertainment shall use reasonable efforts to cause the Registration
Statement to become effective under the Securities Act as promptly as
reasonably practicable. In connection with such registration,
Entertainment shall file a Form 8-A, if necessary, with the SEC.
(ii) The parties hereto shall use reasonable efforts to take all such
action as may be necessary or appropriate under state securities and blue
sky laws in connection with the transactions contemplated by this
Agreement.
(iii) Entertainment shall prepare, and Entertainment shall file and seek
to make effective, an application for the listing of the Entertainment
Class A Common Stock on the a national exchange, subject to official
notice of issuance, or for the inclusion of quotations for the
Entertainment Class A Common Stock on the Nasdaq Stock Market.
(iv) The parties hereto shall cooperate in preparing, filing with the SEC
and causing to become effective any registration statements or amendments
thereto which are necessary or appropriate in order to effect the
transactions contemplated hereby.
(b) Entertainment hereby represents and warrants to SFX that each of the
Registration Statement and the Consent Solicitation Documents and each
amendment or supplement thereto did not, at the time it became effective or
was mailed, contain any untrue statement of a material fact or omit to state
a material fact required to be stated therein or necessary to make the
statements therein, in light of the circumstances under which they were made,
not misleading; provided, however, that the foregoing shall not apply to the
extent that any such untrue statement or material omission was made by
Entertainment in reliance upon and in conformity with written information
furnished by Parent, its representatives or affiliates to Entertainment
specifically for use in such filing.
SECTION 4.6 Third Party Consents. SFX shall obtain all necessary third
party consents to the Distribution except where the failure to obtain such
consents, in the aggregate, would not (a) have a Material Adverse Effect on
SFX, (b) impair the ability of SFX to perform its obligations under the
Transaction Documents in any material respect or (c) delay in any material
respect or prevent the consummation of any of the transactions contemplated
by the Transaction Documents. The Distribution shall be effected in
compliance with SFX's certificate of incorporation and by-laws and in
material compliance with all applicable laws and shall be subject to
obtaining all applicable consents of Governmental Entities.
SECTION 4.7 Waivers. Prior to the Distribution Date, SFX and Entertainment
shall obtain from Ron Delsener and Mitch Slater a release or waiver of any
rights that either of them may have to purchase or acquire all of part of the
Delsener/Slater Group.
SECTION 4.8 Termination of Merger Agreement. If the Merger Agreement is
terminated for any reason in accordance with its terms, the Boards of
Directors of SFX and Entertainment shall appoint committees (the "Independent
Committees") composed solely of independent directors (none of whom shall
serve on both Boards of Directors) and shall authorize the Independent
Committees to negotiate with each other in good faith with respect to (a) the
Distribution Employees, (b) a lease arrangement for the office space of
Entertainment utilized by SFX and (c) any other matters which the Boards deem
necessary to effectuate the separation of the affairs of SFX and
Entertainment.
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ARTICLE 5
SURVIVAL; MUTUAL RELEASE AND INDEMNIFICATION
SECTION 5.1 Survival and Indemnification.
(a) Except as specifically provided herein to the contrary, all covenants
and agreements of the parties contained in this Agreement shall survive the
Distribution Date.
(b) Except as specifically provided herein, the indemnification provisions
of this Article 5 shall terminate and be of no further force and effect on
the sixth (6th) anniversary of the Distribution Date; provided, however, that
such provisions shall survive thereafter as to any claims for indemnification
asserted prior to the sixth (6th) anniversary of the Distribution Date. Such
termination shall in no way limit the obligations of Entertainment with
respect to the Assumed Liabilities or the obligations of SFX with respect to
the Retained Liabilities and related indemnification rights under this
Agreement, which shall survive indefinitely.
(c) The obligations of Entertainment and SFX under this Article 5 shall
survive the sale or other transfer by either of them of any assets or
businesses or the assignment by either of them of any Liabilities. To the
extent that SFX assigns any of its Retained Liabilities (except for such
amounts of Retained Liabilities which are not material individually or in the
aggregate), SFX shall cause such transferee of such Retained Liabilities to
assume specifically its obligations with respect thereto under this Agreement
and to fulfill its obligations related to such Retained Liabilities. To the
extent Entertainment transfers to another party other than a Subsidiary of
Entertainment any of the Assumed Liabilities (except for such amounts of
Assumed Liabilities which are not material individually or in the aggregate),
Entertainment will cause the transferee of such Assumed Liabilities to assume
specifically its obligations with respect thereto under this Agreement and
will cause such transferee to fulfill its obligations related to such Assumed
Liabilities. In the event the transferee of the Retained Liabilities or
Assumed Liabilities does not fulfill its obligations with respect thereto,
SFX and Entertainment, respectively, shall fulfill their obligations with
respect thereto.
SECTION 5.2 Mutual Release, Etc.
(a) Effective on the Distribution Date, and except for Claims arising from
or attributable to the transactions contemplated by the Transaction
Documents, this Agreement, the Related Agreements or Claims otherwise
asserted prior to the Effective Time, SFX does hereby, for itself and its
Subsidiaries (other than the Delsener/Slater Group), and anyone claiming
through SFX or its Subsidiaries, remise, release and forever discharge the
Delsener/Slater Group, their respective Affiliates (other than SFX and its
Subsidiaries), successors and assigns, the Executive Group, and all Persons
who at any time prior to the Distribution Date have been shareholders,
directors or agents or employees of any member of the Delsener/Slater Group
(in each case, in their respective capacities as such), and their respective
heirs, executors, administrators, successors and assigns, from any and all
Claims whatsoever, whether in law or in equity (including any right of
contribution), whether arising under any contract or arrangement, by
operation of law or otherwise, existing or arising from any acts or events
occurring or failing to occur aor alleged to have occurred or to have failed
to occur or any conditions existing or alleged to have existed on or before
the Distribution Date.
(b) Effective on the Distribution Date, and except for Claims arising from
or attributable to the transactions contemplated by the Transaction
Documents, this Agreement, the Related Agreements or Claims otherwise
asserted prior to the Effective Time, Entertainment does hereby, for itself
and its Subsidiaries, and anyone claiming through Entertainment or its
Subsidiaries, remise, release and forever discharge SFX, their respective
Affiliates (other than the Delsener/Slater Group), successors and assigns and
all Persons who at any time prior to the Distribution Date have been
shareholders, directors or agents or employees of any member of the SFX and
its Subsidiaries (in each case, in their respective capacities as such), and
their respective heirs, executors, administrators, successors and assigns,
from any and all Claims whatsoever, whether in law or in equity (including
any right of contribution), whether arising
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under any contract or arrangement, by operation of law or otherwise,
existing or arising from any acts or events occurring or failing to occur or
alleged to have occurred or to have failed to occur or any conditions
existing or alleged to have existed on or before the Distribution Date.
SECTION 5.3 Indemnification.
(a) SFX shall indemnify, defend and hold harmless the Delsener/Slater
Group from and against any and all Indemnifiable Losses (other than income
tax liabilities) to which the Delsener/Slater Group may be or become subject
that (i) relate to the Retained Liabilities, assets, business, operations,
debts or Liabilities of SFX or its Subsidiaries (other than the
Delsener/Slater Group) whether arising prior to, concurrent with or after the
Distribution or (ii) result from a breach by SFX or its Subsidiaries (other
than the Delsener/Slater Group) of any representation, warranty or covenant
contained in this Agreement or any Related Agreement. The rights of the
directors, officers and employees of the Delsener/Slater Group to seek
indemnity from SFX shall continue to be governed by the Merger Agreement or
any other existing agreement addressing such matter.
(b) Entertainment shall indemnify, defend and hold harmless SFX and its
Subsidiaries (other than the Delsener/Slater Group from and against any and
all Indemnifiable Losses (other than income tax liabilities) to which SFX or
any of its Subsidiaries (other than the Delsener/Slater Group) may be or
become subject that (i) relate to the Transferred Businesses, Transferred
Assets, assets, business, operations, debts or Liabilities of the
Delsener/Slater Group including, without limitation, Liabilities arising
under the Guarantees and Liabilities to be assumed by any member of the
Delsener/Slater Group as contemplated herein, whether arising prior to,
concurrent with or after the Distribution or as a result of the failure to
obtain all necessary third party consents to the Distribution or (ii) result
from a breach by a member of the Delsener/Slater Group of any representation,
warranty or covenant contained in this Agreement or any Related Agreement.
(c) The amount which any party (an "Indemnifying Party") is required to
pay to any other party (an "Indemnitee") pursuant to Section 5.3(a) or
Section 5.3(b) shall be reduced (including, without limitation,
retroactively) by any insurance proceeds and other amounts actually recovered
by such Indemnitee in reduction of the related Indemnifiable Loss. Amounts
required to be paid are hereafter sometimes collectively called "Indemnity
Payments" and are individually called an "Indemnity Payment." If an
Indemnitee shall have received an Indemnity Payment in respect of an
Indemnifiable Loss and shall subsequently actually receive insurance proceeds
or other amounts in respect of such Indemnifiable Loss, then such Indemnitee
shall pay to such Indemnifying Party a sum equal to the lesser of the amount
of such insurance proceeds or other amounts actually received or the net
amount of Indemnity Payments actually received previously. The Indemnitee
agrees that the Indemnifying Party shall be subrogated to such Indemnitee
under any insurance policy and that the Indemnitee shall not waive any right
of subrogation.
SECTION 5.4 Procedure for Indemnification.
(a) If an Indemnitee shall receive notice of the assertion by a person who
is not a party to this Agreement of any claim or of the commencement by any
such person of any Action (a "Third Party Claim") with respect to which an
Indemnifying Party is or may be obligated to make an Indemnity Payment, such
Indemnitee shall give such Indemnifying Party prompt notice thereof after
becoming aware of such Third Party Claim, specifying in reasonable detail the
nature of such Third Party Claim and the amount or estimated amount thereof
to the extent then feasible (which estimate shall not be conclusive of the
final amount of such claim); provided, however, that the failure of any
Indemnitee to give notice as provided in this Section 5.4 shall not relieve
the related Indemnifying Party of its obligations under this Article 5,
except to the extent that such Indemnifying Party is actually prejudiced by
such failure to give notice.
(b) An Indemnifying Party may elect to defend, at such Indemnifying
Party's own expense and by such Indemnifying Party's own counsel (which
counsel shall be reasonably satisfactory to the Indemnitee), any Third Party
Claim. If an Indemnifying Party elects to defend a Third Party Claim, it
shall, within 10 days of notice of such Third Party Claim (or sooner, if the
nature of such Third Party Claim so requires), notify the related Indemnitee
of its intent to do so, and such Indemnitee shall cooperate in the
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defense of such Third Party Claim. such Indemnifying Party shall pay such
Indemnitee's actual out-of-pocket expenses (other than officers' or
employees' salaries) reasonably incurred in connection with such cooperation.
After notice from an Indemnifying Party to an Indemnitee of its election to
assume the defense of a Third Party Claim, such Indemnifying Party shall not
be liable to such Indemnitee under this Article 5 for any legal or other
expenses subsequently incurred by such Indemnitee in connection with the
defense thereof; provided, however, that such Indemnitee shall have the right
to employ separate counsel to represent such Indemnitee if, in such
Indemnitee's reasonable judgment, a conflict of interest between such
Indemnitee and such Indemnifying Party exists in respect of such claim, and
in that event the reasonable fees and expenses of such separate counsel shall
be paid by such Indemnifying Party. Except as so provided, if an Indemnitee
desires to participate in the defense of a Third Party Claim, it may do so
but it shall not control the defense and such participation shall be at its
sole cost and expense. If an Indemnifying Party elects not to defend against
a Third Party Claim, or fails to notify an Indemnitee of its election as
provided in this Section 5.4, such Indemnitee may defend, compromise and
settle such Third Party Claim; provided, however, that no such Indemnitee may
compromise or settle any such Third Party Claim without prior written notice
to such Indemnifying Party and except by payment of monetary damages or other
money payments. No Indemnifying Party shall consent to entry of any judgment
or enter into any compromise or settlement which does not include as an
unconditional term thereof the giving by the claimant or plaintiff to such
Indemnitee of a release from all Liability in respect to such Third Party
claim.
(c) If an Indemnifying Party chooses to defend any claim, the Indemnitee
shall make available to such Indemnifying Party any personnel or any books,
records or other documents within its control that are necessary or
appropriate for such defense (the cost of copying thereof to be paid by the
Indemnifying Party).
(d) Notwithstanding the foregoing provisions of this Section 5.4, there
may be Third Party Claims which reasonably could result in both SFX and
Entertainment being liable to the other under indemnification provisions of
this Agreement. In any such events, the parties shall endeavor, acting
reasonably and in good faith, to agree upon a manner of conducting the
defense of or settlement of the Third Party Claim with a view to minimizing
the legal expenses and associated costs that might otherwise be incurred by
the parties, including to the use of the same legal counsel for the defense
of such claim.
(e) Except to the extent expressly provided otherwise in this Section 5.4,
the indemnification provided for by this Section 5.4 shall not inure to the
benefit of any third party or parties and shall not relieve any insurer who
would otherwise be obligated to pay any claim of the responsibility with
respect thereto or, solely by virtue of the indemnification provisions
hereof, provided any subrogation rights with respect thereto.
(f) Any claim on account of an Indemnifiable Loss which does not result
from a Third Party Claim shall be asserted by written notice given by the
related Indemnitee to the related Indemnifying Party. Such Indemnifying Party
shall have a period of 60 days within which to respond thereto. If such
Indemnifying Party does not respond within such 60-day period, such
Indemnifying Party shall be deemed to have accepted responsibility to make
payment and shall have no further right to contest the validity of such
claim. If such Indemnifying Party does respond within such 60-day period and
rejects such claim in whole or in party, such Indemnitee shall be free to
pursue mediation as provided in Article 10 hereof.
ARTICLE 6
RELATED AGREEMENTS
SECTION 6.1 Tax Sharing Agreement. Except as contemplated in this Section
6.1 hereof, any tax sharing agreement between any of the Delsener/Slater
Group and any of SFX and its Subsidiaries shall be terminated as of the
Distribution Date and will have no further effect for any taxable year
(whether the current year, a future year, or a past year). On or prior to the
Distribution Date, SFX and the Delsener/Slater Group shall enter into a Tax
Sharing Agreement in the form attached hereto as Exhibit A.
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SECTION 6.2 Employee Benefits Agreement. On or prior to the Distribution
Date, SFX and the Delsener/Slater Group shall enter into a Employee Benefits
Agreement in the form attached hereto as Exhibit B.
ARTICLE 7
CERTAIN ADDITIONAL MATTERS
SECTION 7.1 Conveyancing and Assumption Instruments. In connection with
the transfer, conveyance, assignment and delivery of the Transferred Assets
and the assumption of Liabilities contemplated by this Agreement, SFX and
Entertainment agree to execute or cause to be executed by the appropriate
parties and to deliver to each other, as appropriate, the Conveyancing and
Assumption Instruments.
SECTION 7.2 No Representations or Warranties. Entertainment understands
and agrees that SFX is not in this Agreement or in any other agreement or
document contemplated by this Agreement, nor shall SFX be deemed or implied
to be, representing or warranting in any way as to the value or freedom from
encumbrance of, or any other matter concerning, any Transferred Assets or the
Transferred Businesses or as to the legal sufficiency to convey title to any
Transferred Assets of the execution, delivery and filing of the Conveyancing
and Assumption Instruments, IT BEING AGREED AND UNDERSTOOD THAT ALL SUCH
ASSETS ARE BEING TRANSFERRED "AS IS, WHERE IS" and that Entertainment shall
bear the economic and legal risk that any conveyances of such assets shall
prove to be insufficient or that Entertainment's title to any such assets
shall be other than good and marketable and free from encumbrances.
SECTION 7.3 Further Assurances; Subsequent Transfers.
(a) Each of SFX and Entertainment will execute and deliver such further
instruments of conveyance, transfer and assignment and will take such other
actions as each of them may reasonably request of the other in order to
effectuate the purposes of this Agreement and to carry out the terms hereof.
Without limiting the generality of the foregoing, at any time and from time
to time after the Distribution Date, at the request of Entertainment, SFX
will execute and deliver to Entertainment such other instruments of transfer,
conveyance, assignment and confirmation and take such action as Entertainment
may reasonably deem necessary or desirable in order to more effectively
transfer, convey and assign to Entertainment and to confirm Entertainment's
title to all of the Transferred Assets, to put Entertainment in actual
possession and operating control thereof and to permit Entertainment to
exercise all rights with respect thereto (including, without limitation,
rights under contracts and other arrangements as to which the consent of any
third party to the transfer thereof shall not have previously been obtained)
and SFX will take such actions as Entertainment may reasonably request in
order to prepare and implement appropriate plans, agreements and arrangements
for the Employees and Entertainment will execute and deliver to SFX all
instruments, undertakings or other documents and take such other action as
SFX may reasonably request in order to have Entertainment properly assume and
discharge the Assumed Liabilities and relieve SFX of any Liability or
obligations with respect thereto and evidence the same to third parties.
Notwithstanding the foregoing, SFX and Entertainment shall not be obligated,
in connection with the foregoing, to expend monies other than reasonable
out-of-pocket expenses and attorneys' fees (which expenses and fees shall be
reimbursed by the requesting party).
(b) SFX and Entertainment will use their commercially reasonable efforts
to obtain any consent required to assign all agreements, leases, permits,
licenses and other rights of any nature whatsoever relating to the
Transferred Assets to Entertainment; provided, however, that SFX shall not be
obligated to pay any consideration therefor (except as provided in Section
2.2 and except for filing fees and other administrative charges) to the third
party from whom such consents, approvals and amendments are requested. In the
event and to the extent that SFX is unable to obtain any such required
consent, SFX shall continue to be bound thereby and unless not permitted by
law or the terms thereof, Entertainment shall pay, perform and discharge
fully all the obligations of SFX thereunder from and after the Distribution
Date and indemnify SFX for all Indemnifiable Losses arising out of such
performance by Entertainment in accordance with Article 5. SFX shall, without
further consideration therefor, pay, assign
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and remit to Entertainment promptly all monies, rights and other
considerations received in respect of such performance. SFX shall exercise or
exploit its rights and options under all such agreements, leases, licenses
and other rights and commitments referred to in this Section 7.3(b) only as
reasonably directed by Entertainment and at Entertainment's expense. If and
when any such consent shall be obtained or such agreement, lease, license or
other right shall otherwise become assignable or able to be novated, SFX
shall promptly assign and novate all its rights and obligations thereunder to
Entertainment without payment of further consideration and Entertainment
shall, without the payment of any further consideration therefore, assume
such rights and obligations.
SECTION 7.4 Sales and Transfer Taxes. Entertainment and SFX agree to
cooperate to determine the amount of sales, transfer or other taxes or fees
(including, without limitation, all real estate, patent, copyright and
trademark transfer taxes and recording fees) payable in connection with the
transactions contemplated by this Agreement (the "Transaction Taxes"). SFX
agrees to file promptly and timely the returns for such Transaction Taxes
with the appropriate taxing authorities and remit payment of the Transaction
Taxes, and Entertainment will join in the execution of any such tax returns
or other documentation.
SECTION 7.5 Change of Name. Within 10 business days after the consummation
of the Merger, SFX and each of its Subsidiaries, if necessary, shall file
certificates of amendment with the appropriate Secretary of State, amending
such company's certificate of incorporation to change the name of such
Company to any name which does not include the letters "SFX". At the closing
of the Merger, SFX will assign to Entertainment or its designee all right,
title and interest, including all the good will related thereto, in and to
the name "SFX" together with all causes of action and the right to recover
for past infringements of the name "SFX." As soon as commercially
practicable, but in no event later than six months from the consummation of
the Merger, SFX shall cease all use of the name "SFX" or other trademarks,
trade names or their identifiers owned by, licensed to, or transferred
pursuant to this Agreement to, Entertainment in all modes.
ARTICLE 8
ACCESS TO INFORMATION AND SERVICES
SECTION 8.1 Provision of Corporate Records. As soon as practicable after
the Distribution Date, SFX shall deliver to Entertainment all Books and
Records in its possession. Such Books and Records shall be the property of
Entertainment, but shall be retained and made available to SFX for review and
duplication until the earlier of notice from SFX that such records are no
longer needed by SFX or the 20th anniversary of the Distribution Date.
SECTION 8.2 Access to Information. From and after the Distribution Date,
SFX and Entertainment shall afford to each other and to each other's
authorized accountants, counsel and other designated representatives
reasonable access and duplicating rights (with copying costs to be borne by
the requesting party) during normal business hours to all Books and Records
and other data and information (collectively, "Information") within each
other's possession relating to the Transferred Assets, the Transferred
Businesses and the Employees, insofar as such access is reasonably required
by SFX or Entertainment, as the case may be (and shall use reasonable efforts
to cause persons or firms possessing relevant Information to give similar
access). Information may be requested under this Article 8 for, without
limitation, audit, accounting, claims, litigation and tax purposes, as well
as for purposes of fulfilling disclosure and reporting obligations.
SECTION 8.3 Retention of Records. Except as otherwise required for a
longer period by law or agreed to in writing, SFX and Entertainment shall
retain, for a period of at least 20 years following the Distribution Date,
all material Information relating to the Transferred Businesses.
Notwithstanding the foregoing, in lieu of retaining any specific Information,
SFX or Entertainment may offer in writing to deliver such Information to the
other and, if such offer is not accepted within 90 days, the offered
Information may be destroyed or otherwise disposed of at any time. If a
recipient of such offer shall request in writing prior to the scheduled date
for such destruction or disposal that any of the Information
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proposed to be destroyed or disposed of be delivered to such requesting
party, the party proposing the destruction or disposal shall promptly arrange
for delivery of such of the Information as was requested (at cost of
requesting party).
SECTION 8.4 Confidentiality. Each of SFX and Entertainment shall hold, and
shall cause its officers, employees, agents, consultants and advisors to
hold, in strict confidence, unless compelled to disclose by judicial or
administrative process or, in the opinion of its legal counsel, by other
requirements of law (including, without limitation, any requirements imposed
under state and federal securities laws and stock exchange rules), all
non-public Information concerning the other party furnished it by such other
party or its representatives pursuant to this Agreement (except to the extent
that such Information can be shown to have been available to such party on a
non-confidential basis prior to this disclosure by the other party, in the
public domain through no fault of such party or later lawfully acquired from
other sources by the party to which it was furnished), and each party shall
not release or disclose such Information to any other person, except its
auditors, attorneys, financial advisors, bankers and other consultants and
advisors who shall be bound by the provisions of this Section 8.4. Each party
shall be deemed to have satisfied its obligation to hold confidential
Information concerning or supplied by the other party if its exercises the
same care as it takes to preserve confidentiality for its own similar
Information. SFX and Entertainment agree with each other that each will
maintain, preserve and assert, unless waived in writing by the other, all
attorney-client and work product privileges applicable to documents and other
Information which relates, directly or indirectly, to the Transferred
Businesses for any period prior to the Distribution Date.
SECTION 8.5 Privileged Matters. Anything herein or in the Merger Agreement
notwithstanding, the transactions contemplated hereby and by the Merger
Agreement shall not be deemed to transfer to or vest in SFX any right to
waive, nor shall they be deemed to waive, any attorney-client privilege
between SFX and its legal counsel, with respect to legal advice concerning
the business or operations of Entertainment including, without limitation,
the transactions contemplated by the Merger Agreement, this Agreement and the
Related Agreements, in either case, concerning privileged communications (or
work product related thereto) at any time prior to the Closing Date. SFX
shall assign to Entertainment SFX's rights (if any) to any attorney-client
privilege with respect to legal advice concerning the business or operations
of Entertainment including, without limitation, the transactions contemplated
by the Merger Agreement, this Agreement and the Related Agreements,
concerning privileged communications (or work product related thereto) at any
time prior to the Closing Date. SFX and its successors and assigns shall not
be entitled to waive or have access, nor shall they attempt to waive or seek
access, to any privileged communications (or work product related thereto)
between Entertainment and its legal counsel with respect to legal advice
concerning the business or operations of Entertainment.
ARTICLE 9
INSURANCE
SECTION 9.1 General. SFX shall keep in effect all policies under its
Insurance Program in effect as of the date hereof insuring the Transferred
Assets and operations of the Transferred Businesses until the earlier of (i)
the Effective Time and (ii) 12:00 midnight on the Distribution Date, unless
Entertainment shall have earlier obtained appropriate coverage and notified
SFX in writing to that effect. In so far as any claims made or accrued under
policies under the Insurance Program prior to the Distribution Date relate to
Entertainment, SFX shall use its reasonable efforts to assure that
Entertainment can continue to make and/or pursue such claims under the
policies, or that SFX can continue to make and/or pursue such claims on
behalf of Entertainment, notwithstanding assignment or transfer of the
policies (provided that Entertainment shall reimburse SFX for any reasonable
out-of-pocket expenses incurred by SFX in connection therewith). From and
after the Distribution Date, Entertainment shall be responsible for obtaining
and maintaining insurance coverage for its own account. SFX shall, if so
requested by Entertainment, use reasonable efforts to assist Entertainment in
obtaining such initial insurance coverage for Entertainment from and after
the Distribution Date in such amounts as are agreed upon by SFX and
Entertainment. Following the Distribution Date, each of SFX and Entertainment
shall cooperate with and assist the other party in the prevention of
conflicts or gaps in insurance coverage and/or collection proceeds.
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SECTION 9.2 Certain Insured Claims. SFX will assert and pursue, for the
benefit of Entertainment, claims against the Insurance Program for any losses
resulting, directly or indirectly, from claims made or deemed made under the
applicable Insurance Program which relate to the Transferred Business and
which arise from or relate to events or occurrences prior to the Distribution
Date. Entertainment shall pay all costs incurred by SFX after the
Distribution Date in defending or pursuing any such claims under an insurance
policy relating to the Transferred Businesses, including the salaries of
employees based on the portion of time spent on such claims and Entertainment
shall make available to SFX such of its employees as SFX may reasonably
request as witnesses or deponents in connection with SFX's defense or pursuit
of any such claims, at Entertainment's sole cost and expense.
ARTICLE 10
CONDITIONS
SECTION 10.1 Conditions. The obligations of SFX and Entertainment to
consummate the Distribution shall be subject to the fulfillment or waiver of
each of the following conditions:
(a) the Board of Directors of SFX shall be satisfied that SFX's surplus
would be sufficient to permit under Delaware law the Distribution and shall
have formally approved the Distribution;
(b) the Registration Statement shall have been declared effective by the
SEC and no stop order shall have been issued or be pending with respect
thereto;
(c) the Entertainment Class A Common Stock shall have been accepted for
listing or trading, subject to official notice of issuance, on a national
exchange or the Nasdaq Stock Market;
(d) all necessary third party consents to the Distribution shall have been
obtained;
(e) the necessary stockholder approvals shall have been obtained to
consummate the Distribution as presently contemplated;
(f) no temporary restraining order, preliminary or permanent injunction or
other order issued by any court of competent jurisdiction or other legal
restraint or prohibition preventing the consummation of the Distribution
shall be in effect;
(g) SFX and Entertainment shall have entered into the Related Agreements;
and
(h) each of the covenants and provisions in this Agreement required to be
performed or complied with prior to the Distribution shall have been
performed or complied with.
Any determination by the Board of Directors of SFX on behalf of either
party hereto prior to the Distribution Date concerning the satisfaction or
waiver of any or all of the conditions set forth in this Section shall be
conclusive.
ARTICLE 11
MEDIATION
SECTION 11.1 Mediation and Binding Arbitration. If a dispute arises
between SFX and Entertainment as to the interpretation or the implementation
of this Agreement, the Related Agreements or any other agreement entered into
pursuant hereto (other than a dispute with respect to Working Capital which
shall be resolved in accordance with the provisions of Section 2.2. hereof),
including, without limitation, any matter involving an Indemnifiable Loss,
SFX and Entertainment agree to use the following procedures, in lieu of
either party pursuing other available remedies and as the sole remedy, to
resolve the dispute.
SECTION 11.2 Initiation. A party seeking to initiate the procedures shall
give written notice to the other party, describing briefly the nature of the
dispute. A meeting shall be held between the parties within 10 days of the
receipt of such notice, attended by individuals with decision-making
authority regarding the dispute, to attempt in good faith to negotiate a
resolution of the dispute.
F-16
<PAGE>
SECTION 11.3 Submission to Mediation. If, within 30 days after such
meeting, the parties have not succeeded in negotiating a resolution of the
dispute, they agree to submit the dispute to mediation in accordance with the
Commercial Arbitration Rules of the American Arbitration Association and to
bear equally the costs of the mediation.
SECTION 11.4 Selection of Mediator. The parties will jointly appoint a
mutually acceptable mediator, seeking assistance in such regard from the
American Arbitration Association or another mutually agreed-upon organization
if they have been unable to agree upon such appointment within 20 days from
the conclusion of the negotiation period.
SECTION 11.5 Mediation. The parties agree to participate in good faith in
the mediation and negotiations related thereto for a period of 30 days
following the initial mediation session. If the parties are not successful in
resolving the dispute through the mediation by the end of such 30-day period,
then the parties agree to submit the matter to binding arbitration in
accordance with the Commercial Arbitration Rules of the American Arbitration
Association, by a sole arbitrator selected in accordance with the provisions
of Section 11.6 hereof. The arbitration shall be governed by the United
States Arbitration Act, 9 U.S.C. Section 1-16, and judgment upon the award
rendered by the arbitrator may be entered by any court having jurisdiction
thereof.
SECTION 11.6 Selection of Arbitrator. The parties shall have 10 days from
the end of the mediation period to agree upon a mutually acceptable neutral
person not affiliated with either of the parties to act as arbitrator. If no
arbitrator has been selected within such time, an arbitrator shall be
selected for the Disputing Parties by the American Arbitration Association.
SECTION 11.7 Cost of Arbitration. The costs of arbitration shall be
apportioned between SFX and Entertainment as determined by the arbitrator in
such manner as the arbitrator deems reasonable taking into account the
circumstances of the case, the conduct of the parties during the proceeding,
and the result of the arbitration.
ARTICLE 12
MISCELLANEOUS
SECTION 12.1 Complete Agreement. Subject to Section 3.3 hereof , this
Agreement, including the Annexes and Exhibits and the agreements and other
documents referred to herein, shall constitute the entire agreement between
SFX and Entertainment with respect to the subject matter hereof and shall
supersede all previous negotiations, commitments and writings with respect to
such subject matter.
SECTION 12.2 Governing Law. This Agreement shall be governed by and
construed and enforced in accordance with the laws of the State of Delaware
(regardless of the laws that might otherwise govern under applicable
principles of conflicts law) as to all matters, including, without
limitation, matters of validity, construction, effect, performance and
remedies.
SECTION 12.3 Notices. All notices, requests, demands and other
communications under this Agreement shall be in writing and shall be deemed
to have been duly given on the date of service if served personally on the
part to whom notice is given, on the day of transmission if set via facsimile
transmission to the facsimile number given below, provided telephonic
confirmation of receipt is obtained promptly after completion of
transmission, on the business day after delivery to an overnight courier
service or the Express mail service maintained by the United States Postal
Service, provided receipt of delivery has been confirmed, or on the fifth day
after mailing provided receipt of delivery is confirmed, if mailed to the
party
F-17
<PAGE>
to whom notice is to be given, by first class mail, registered or certified,
postage prepaid, properly addressed and return-receipt requested, to the
party as follows:
If to SFX
<TABLE>
<CAPTION>
<S> <C>
prior to the effective time: SFX Broadcasting, Inc.
150 East 58th Street, 19th Floor
New York, New York 10155
Telecopy No.: (212)753-3188
Attention: Howard J. Tytel
with a copy to: Hicks, Muse, Tate & Furst
Incorporated
200 Crescent Court, Suite 1600
Dallas, Texas 75201
Telecopy No.: (214) 740-7313
Attention: Lawrence D. Stuart,
Jr.
after the effective time: Hicks, Muse, Tate & Furst
Incorporated
200 Crescent Court, Suite 1600
Dallas, Texas 75201
Telecopy No.: (214) 740-7313
Attention: Lawrence D. Stuart,
Jr.
if to entertainment: SFX Entertainment, Inc.
150 East 58th Street, 19th Floor
New York, New York 10155
Telecopy No.: (212)753-3188
Attention: Howard J. Tytel
with a copy to: Baker & Mckenzie
Two Allen Center
1200 Smith Street, Suite 1200
Houston, Texas 77002
Telecopy No.: (713) 427-5099
Attention: Amar Budarapu
</TABLE>
Any party may change its address by giving the other party written notice of
its new address in the manner set forth above.
SECTION 12.4 Amendment and Modification. This Agreement may be amended,
modified or supplemented only by written agreement of SFX and Entertainment
and with the consent of Parent, which consent shall not be unreasonably
withheld
SECTION 12.5 Termination. This Agreement may be terminated and the
Distribution abandoned at any time prior to the Distribution Date by and in
the sole discretion of SFX without the approval of Entertainment or Parent.
In the event of such termination, no party shall have any Liability of any
kind to any other party.
SECTION 12.6 Successor and Assigns. This Agreement and all of the
provisions hereof shall be binding upon and inure to the benefit of the
parties and their respective successors and permitted assigns, but neither
this Agreement nor any of the rights, interests or obligations hereunder
shall be assigned by either party without the prior written consent of the
other party.
SECTION 12.7 No Third Party Beneficiaries. Except for the indemnification
rights under this Agreement of any Indemnity in their capacity as such and
except for the mutual releases provided for in this Agreement, this
Agreement, the Exhibits hereto and the Related Agreements are solely for the
benefit of the parties hereto and are not intended to confer upon any other
person except the parties hereto any rights or remedies hereunder.
F-18
<PAGE>
SECTION 12.8 Counterparts. This Agreement may be executed in two or more
counterparts, each of which shall be deemed an original, but all of which
together shall constitute one and the same instrument.
SECTION 12.9 Interpretation. The Article and Section headings contained in
this Agreement are solely for the purpose of reference, are not part of the
agreement of the parties and shall not in any way affect the meaning or
interpretation of this Agreement. As used in this Agreement, the term
"person" shall mean and include an individual, a partnership, a joint
venture, a corporation, a trust, an unincorporated organization and a
government or any department or agency thereof.
SECTION 12.10 Annexes, Etc. The Annexes, Schedules and Exhibits shall be
construed with and as an integral part of this Agreement to the same extent
as if the same had been set forth verbatim herein.
SECTION 12.11 Legal Enforceability. Any provision of this Agreement which
is prohibited or unenforceable in any jurisdiction shall, as to such
jurisdiction, be ineffective to the extent of such prohibition or
unenforceability without invalidating the remaining provisions hereof. Any
such prohibition or unenforceability in any jurisdiction shall not invalidate
or render unenforceable such provision in any other jurisdiction.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed and delivered as of the day and year first above written.
SFX BROADCASTING, INC.
By:
Name:
Title:
SFX ENTERTAINMENT, INC.
By:
Name:
Title:
SBI HOLDING CORPORATION,
with respect to Section 12.4 only.
By:
Name:
Title:
F-19
<PAGE>
PROXY CARD FOR COMMON STOCK
SFX BROADCASTING, INC.
Proxy Solicited on Behalf of the Board of Directors for
the Special Meeting of Stockholders
March 26, 1998
The undersigned hereby appoint(s) Robert F.X. Sillerman and Michael G.
Ferrel, and each of them, as the undersigned's proxies, with full power of
substitution, to attend the Special Meeting of Stockholders of SFX
Broadcasting, Inc. (the "Company"), to be held at the offices of Baker &
McKenzie, 805 Third Avenue, 23rd Floor, New York, New York, on Thursday,
March 26, 1998, at 10:00 a.m., local time, and any adjournment or
postponement thereof, and to vote on all matters that may come before such
meeting the number of shares that the undersigned would be entitled to vote,
with all the power the undersigned would possess if present in person, as
indicated on the reverse side of this proxy card:
The Board of Directors recommends a vote FOR approval and adoption of the
merger agreement and the merger and the amendments to the Restated
Certificate of Incorporation. RETURNED PROXY CARDS WILL BE VOTED: (1) AS
SPECIFIED ON THE MATTERS LISTED ON THE REVERSE SIDE OF THIS PROXY CARD; (2)
IN ACCORDANCE WITH THE DIRECTORS' RECOMMENDATIONS WHERE A CHOICE IS NOT
SPECIFIED; AND (3) IN ACCORDANCE WITH THE JUDGMENT OF THE PROXIES ON ANY
OTHER MATTERS THAT PROPERLY COME BEFORE THE MEETING.
(CONTINUED ON OTHER SIDE)
<PAGE>
PLEASE MARK
YOUR VOTES AS
INDICATED IN
THIS EXAMPLE
[X]
PROPOSAL 1: To approve and adopt the Agreement and Plan of Merger, dated as
of August 24, 1997, as amended, among SBI Holding Corporation, SBI Radio
Acquisition Corporation and the Company, and the merger contemplated
thereby. The merger agreement is described in, and attached as Annex A to,
the accompanying Proxy Statement.
FOR AGAINST ABSTAIN
[ ] [ ] [ ]
PROPOSAL 2: To approve and adopt amendments to the Company's Restated
Certificate of Incorporation to allow the holders of shares of the Company's
Class B Common Stock to receive higher consideration per share in the merger
than the holders of shares of Class A Common Stock, as set forth in the
merger agreement.
FOR AGAINST ABSTAIN
[ ] [ ] [ ]
PROPOSAL 3: To approve and adopt amendments to the Restated Certificate of
Incorporation to permit holders of shares of Class B Common Stock to receive
shares of Class B common stock of a subsidiary of the Company in the proposed
spin-off of that subsidiary's shares.
FOR AGAINST ABSTAIN
[ ] [ ] [ ]
In their discretion with respect to such other matters as may properly come
before the Special Meeting or any adjournment or postponement thereof.
Your shares will not be voted unless your signed proxy card is returned to
the Company or you otherwise vote at the meeting.
Receipt of the Notice of Special Meeting of Stockholders and the related
Proxy Statement is hereby acknowledged.
Signature(s) Dated
-------------------------------------------------------------------------
Please sign as registered and return promptly in the enclosed envelope.
Executors, trustees and others signing in a representative capacity
should include their names and the capacity in which they sign.
<PAGE>
PROXY CARD FOR THE SERIES D PREFERRED STOCK
SFX BROADCASTING, INC.
PROXY SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS FOR
THE SPECIAL MEETING OF STOCKHOLDERS
March 26, 1998
The undersigned hereby appoint(s) Robert F.X. Sillerman and Michael G.
Ferrel, and each of them, as the undersigned's proxies, with full power of
substitution, to attend the Special Meeting of Stockholders of SFX
Broadcasting, Inc. (the "Company"), to be held at the offices of Baker &
McKenzie, 805 Third Avenue, 23rd Floor, New York, New York, on Thursday,
March 26, 1998, at 10:00 a.m., local time, and any adjournment or
postponement thereof, and to vote on all matters that may come before such
meeting the number of shares that the undersigned would be entitled to vote,
with all the power the undersigned would possess if present in person, as
indicated on the reverse side of this proxy card:
The Board of Directors recommends a vote FOR approval and adoption of the
merger agreement and the merger and the amendments to the Restated
Certificate of Incorporation. RETURNED PROXY CARDS WILL BE VOTED: (1) AS
SPECIFIED ON THE MATTERS LISTED ON THE REVERSE SIDE OF THIS PROXY CARD; (2)
IN ACCORDANCE WITH THE DIRECTORS' RECOMMENDATIONS WHERE A CHOICE IS NOT
SPECIFIED; AND (3) IN ACCORDANCE WITH THE JUDGMENT OF THE PROXIES ON ANY
OTHER MATTERS THAT PROPERLY COME BEFORE THE MEETING.
(CONTINUED ON OTHER SIDE)
<PAGE>
PLEASE MARK
YOUR VOTES AS
INDICATED IN
THIS EXAMPLE
[X]
PROPOSAL 2: To approve and adopt amendments to the Company's Restated
Certificate of Incorporation to allow the holders of shares of the Company's
Class B Common Stock to receive higher consideration per share in the merger
than the holders of shares of Class A Common Stock, as set forth in the
merger agreement. The merger agreement is
described in, and attached as Annex A to, the accompanying Proxy Statement.
FOR AGAINST ABSTAIN
[ ] [ ] [ ]
PROPOSAL 3: To approve and adopt amendments to the Restated Certificate of
Incorporation to permit holders of shares of Class B Common Stock to receive
shares of Class B common stock of a subsidiary of the Company in the proposed
spin-off of that subsidiary's shares.
FOR AGAINST ABSTAIN
[ ] [ ] [ ]
In their discretion with respect to such other matters as may properly come
before the Special Meeting or any adjournment or postponement thereof.
Your shares will not be voted unless your signed proxy card is returned to
the Company or you otherwise vote at the meeting.
Receipt of the Notice of Special Meeting of Stockholders and the related
Proxy Statement is hereby acknowledged.
Signature(s) Dated
-------------------------------------------------------------------------
Please sign as registered and return promptly in the enclosed envelope.
Executors, trustees and others signing in a representative capacity
should include their names and the capacity in which they sign.
