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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
FOR ANNUAL AND TRANSITION REPORTS
PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission File Number: 0-22486
SFX BROADCASTING, INC.
(Exact name of Registrant as Specified in its Charter)
Delaware 13-3649750
(State or other Jurisdiction (I.R.S. Employer Identification No.)
of Incorporation)
650 Madison Avenue, 16th Floor, New York, New York 10022
(Address of Principal Executive Offices) (Zip Code)
(212) 838-3100
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
CLASS A COMMON STOCK, $.01 PAR VALUE; CLASS B WARRANTS
(Title of Class)
Indicate by check mark whether the registrant: (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ ]
Aggregate market value as of the close of business on March 4, 1998 of
the common equity held by non-affiliates of the registrant was $866,391,868.
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The number of shares of the registrant's Class A Common Stock, $.01
par value, and Class B Common Stock, $.01 par value, outstanding as of March 4,
1998 was 9,556,924 and 1,047,037, respectively.
PART I
ITEM 1. BUSINESS.
An index of defined terms is located on page 71 of this Annual Report
on Form 10-K.
GENERAL
SFX Broadcasting, Inc., a Delaware corporation (the "Company"), was
incorporated in 1992 principally to acquire and operate radio stations. Upon
consummation of the Company's initial public offering in late 1993, the Company
owned and operated or provided programming to ten radio stations in six
markets. During the past four years, the Company has significantly expanded its
radio station operations. The Company is currently one of the largest radio
station groups in the United States and owns or operates, provides programming
to or sells advertising on behalf of 86 radio stations in 24 markets. The
Company'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. Upon consummation of the Pending Acquisitions and the
Pending Disposition (each as defined herein), the Company will own or operate,
provide programming to or sell advertising on behalf of 74 radio stations (57
FM and 17 AM stations) in 21 markets. In addition, the Company will rank number
one or two in 1997 combined market revenues in 15 of its 21 markets and will
own or operate two or more stations in 20 of these markets.
In addition to owning and operating radio stations, in 1997 the
Company, through its subsidiaries has become a significant operator of venues
for, and promoter of, music concerts and other live entertainment events. Prior
to the consummation of the 1998 Entertainment Acquisitions (as defined herein),
the Company owned and/or operated under lease or exclusive booking arrangement
a total of nine venues. In connection with the proposed Spin-Off (as defined
herein) the Company has contributed its live entertainment business to its
subsidiary SFX Entertainment, Inc. ("SFX Entertainment"). Giving effect to the
consummation of the 1998 Entertainment Acquisitions, SFX Entertainment is 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 is comprised of 40 venues (consisting of
amphitheaters, theaters and clubs) either directly owned or operated under
lease or exclusive booking arrangement. For a description of the business of
SFX Entertainment, see "Item 1. Business" of the Annual Report on Form 10-K for
the fiscal year ended December 31, 1997 of SFX Entertainment filed as Exhibit
99.1 hereto (the "SFX Entertainment 10-K") which is incorporated herein by
reference.
Merger and Spin-Off
On August 24, 1997, the Company entered into an Agreement and Plan of
Merger (as amended, the "Merger Agreement") with SBI Holding Corporation
("Buyer") and SBI Radio Acquisition Corporation ("Buyer Sub") pursuant to which
Buyer Sub will merge with and into the Company and the Company will become a
wholly-owned subsidiary of Buyer (the "Merger"). Pursuant to the Merger, each
outstanding share of the Company's (a) Class A Common Stock, par value $.01 per
share (the "Class A Common Stock"), will convert into the right to receive
$75.00 (the "Class A Merger Consideration"), (b) Class B Common Stock, par
value $.01 per share (the "Class B Common Stock"), will convert into the right
to receive $97.50 (the "Class B Merger Consideration") 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. In addition to the cash payment, the Merger Agreement also
provides for the spin-off of its live entertainment business now held by SFX
Entertainment (the "Spin-Off") to shareholders of the Company's common stock,
Series D Preferred Stock and holders of certain other Company securities. The
shares of SFX Entertainment will be issued in the Spin-Off as a taxable
dividend. It is anticipated that following the Spin-Off, SFX Entertainment's
Class A common stock will
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trade on the Nasdaq National Market or a national securities exchange. However
there can be no assurance that there will be an active market in such shares
after the Spin-Off. Except as set forth in "--Merger and Spin-Off," it is
anticipated that after the effectiveness of the Merger there will be no
substantial continuing business relationships between the Company and SFX
Entertainment, other than relationships that may be entered into from time to
time in the future after arm's-length negotiations between the Company (as
controlled by Buyer) and SFX Entertainment.
The Merger and the Spin-Off (as presently contemplated) is subject to
a number of conditions, including approval by the Company's stockholders. A
special meeting of stockholders is scheduled to be held on March 26, 1998 (the
"Special Stockholders Meeting"). A proxy statement and proxy card relating to
the Special Stockholders Meeting were mailed on or about February 17, 1998 to
shareholders of record on February 10, 1998, and Supplement No. 1 and a new
proxy card will be mailed on or about March 17, 1998. There can be no assurance
that either the Merger or Spin-Off will be consummated on the terms described
herein or at all. See "--The Merger and Spin-Off."
Radio Stations. The following chart sets forth certain information
with respect to the Company's stations after giving affect to the Pending
Acquisitions and the Pending Disposition:
<TABLE>
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NUMBER OF
STATIONS
OPERATED
NUMBER FOLLOWING 1997 1997
NUMBER OF OF PENDING COMBINED COMBINED COMBINED
STATIONS STATIONS ACQUISITIONS MARKET MARKET MARKET
MARKET CURRENTLY TO BE AND PENDING AUDIENCE REVENUE REVENUE
MARKET RANK (1) OPERATED(2) ACQUIRED DISPOSITION SHARE(1)(3) SHARE(1)(3) RANK(1)(3)
- --------------------------- ---------- ------------- ---------- --------------- ------------- ------------- ------------
AM FM
-- --
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NORTHEAST REGION
Providence, RI 31 3 -- 1 2 22.5% 30.3% 2
Hartford, CT 42 5 -- 1 4 29.4% 34.6% 2
Albany, NY 57 5 -- 2 3 25.1% 34.2% 1
Springfield/Northampton, MA 77 3 -- 1 2 20.8% 28.0% 1
New Haven, CT 95 2(4) -- -- 2 34.7% 54.4% 1
MID-SOUTH ATLANTIC REGION
Charlotte, NC 36 3 -- -- 3 24.0% 30.7% 2
Greensboro, NC 40 4 -- 2 2 16.0% 18.8% 4
Nashville, TN 44 2 3(5) -- 5 34.8% 39.7% 1
Greenville-Spartanburg, SC 58 4 -- 1 3 32.1% 46.5% 1
MID-ATLANTIC REGION
Pittsburgh, PA 20 5 -- 1 4 28.8% 35.9% 1
Milwaukee, WI 30 2 -- 1 1 9.8% 9.0% 4
Indianapolis, IN 37 3 -- 1 2 19.0% 27.2% 2
Raleigh-Durham, NC 48 4 -- -- 4 31.6% 39.2% 1
Richmond, VA 56 4 -- -- 4 26.8% 26.8% 2
SOUTHERN REGION
Jacksonville, FL 51 4 2(5) 2 4 36.5% 47.8% 1
Daytona Beach, FL 92 1 -- -- 1 10.3% 30.3% 2
SOUTHWEST REGION
Dallas, TX 6 2 -- -- 2 5.2% 3.5% 8
Houston, TX 9 4 -- 1 3 17.0% 14.7% 3
San Diego, CA 15 2 -- -- 2 10.1% 10.9% 4
Tucson, AZ 61 4 -- 2 2 27.7% 27.7% 1
Wichita, KS 89 3 -- 1 2 19.5% 19.4% 3
- -- - -
Total 69 5 17 57
</TABLE>
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(1) Based upon BIA Research, Inc.'s ("BIA") 1997 Market, Stations Revenues
and Ranking.
(2) Does not include twelve radio stations which are currently owned by
the Company which are to be transferred pursuant to the Chancellor
Exchange and the Jackson and Biloxi Disposition (each as defined
herein).
(3) Ranks radio stations currently operated and radio stations anticipated
to be operated by the Company upon the consummation of the Pending
Acquisitions and the Pending Disposition against radio stations
actually owned and operated in 1997 by other market participants.
(4) Includes one station which the Company does not own or operate but
sells advertising on behalf of pursuant to a joint sales agreement.
(5) The Company currently provides programming and sells advertising on
these stations pursuant to a local marketing agreement.
OPERATING STRATEGY
Operate Highly Ranked Stations. The Company believes that operating
highly ranked stations, measured in terms of combined market audience share,
provides important advantages because such stations are regarded as an
efficient means of targeting advertising dollars at well-defined audiences.
Such stations can better capitalize on the operating leverage inherent in the
radio industry because a significant portion of the total costs of operating a
radio station are fixed and, therefore, increased revenues generally result in
disproportionately larger increases in Broadcast Cash Flow (as defined herein).
Assemble Market Clusters with Regional Concentrations. The Company has
capitalized on the Telecommunications Act of 1996 (the "Telecom Act") by
assembling and operating a cluster of stations in each of its principal
markets. The Company believes that, by having a larger share of the total
advertising inventory in a particular market, it can offer advertisers
attractive packages of advertising options. The Company also believes that its
cluster approach will allow it to operate its stations with more highly skilled
local management teams and eliminate duplicative operating and overhead
expenses. By assembling market clusters with a regional concentration, the
Company believes that it will be able to increase revenues by targeting
regionally-based advertisers and capturing a larger share of their advertising
budgets. The Company believes that its cluster approach will allow it to
compete more effectively against other advertising mediums including newspaper
and television.
Enhance Revenues and Control Costs. The Company seeks to maximize
Broadcast Cash Flow by employing management techniques to enhance revenues
while maintaining strict cost controls. Key elements of the Company's strategy
include:
Aggressive Sales and Inventory Management. In each of its
market clusters, the Company utilizes sophisticated sales reporting
systems to monitor its sales activity and to formulate and implement
pricing strategies and inventory controls. The Company believes that
having a larger share of the total advertising inventory in a
particular market enhances its ability to identify market trends, as
well as to compete on a more equal basis with non-radio competitors
which now control approximately 90% of the advertising revenue in the
Company's markets.
Targeted Programming. The Company utilizes extensive market
research to refine the programming at each of its stations and to
position each of the stations within a particular cluster to maximize
the total audience share and market revenue of the cluster as a whole.
The Company's cluster approach is designed to afford it the
flexibility either to develop strong programming formats for its
market leading stations or to develop independently successful program
formats to meet the needs of particular market conditions.
Strict Cost Controls. The Company's management imposes strict
financial reporting requirements and expense budget limitations on
each of its stations. In addition, management maintains a centralized
accounting system which allows it to monitor the performance and
operations of each of its stations. Such centralization allows the
Company to achieve expense savings in certain areas, including
purchasing and administrative expenses. The Company also achieves
expense savings through the elimination of certain duplicative costs
within its markets and market clusters.
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Leverage Regional Management Structure. The Company emphasizes both
regional and local management of its radio stations. In 1996, in connection
with its rapid growth, the Company implemented a new regional management
structure. The regional operations are currently managed under the direction of
five regional vice presidents, each of whom reports directly to the Company's
Chief Executive Officer and Chief Operating Officer. Each of these regional
vice presidents is an experienced executive with over 15 years of radio
broadcasting experience. Through this regional management structure, the
Company believes that it will be able to more readily transfer the programming
and sales successes of individual stations and clusters to other stations and
clusters within the same region. The Company believes that regional management
and coordination will enable it to maximize the benefits of operating a large
number of radio stations in numerous markets while maintaining controls over
local operations. Local management is primarily responsible for building and
developing a sales team capable of converting the station's audience rankings
into revenues. The Company's general managers and sales managers are motivated
through incentive compensation based primarily upon their station's cash flow
performance.
Merger Agreement. The Merger Agreement contains certain restrictions
on the Company and its operations. In particular, the Company has agreed
without the consent of the Buyer not to, among other things, (a) acquire or
sell assets, (b) incur indebtedness or make loans, (c) modify or terminate any
material contract and (d) enter into a local marketing agreement ("LMA"), joint
sales agreement ("JSA") or similar agreement with any entity other than the
Buyer. These restrictions may impact the Company's ability to implement its
operating strategy. See "--The Merger and Spin-Off."
1997 AND 1998 ACQUISITIONS AND DISPOSITIONS--RADIO STATIONS
During 1997 through the date hereof, the Company acquired or entered
into agreements to acquire 21 stations in 9 markets, net of certain
dispositions. The major acquisitions and dispositions during this period were
as follows:
In January 1997, the Company purchased one radio station operating in
Albany, New York for $1.0 million (the "Albany Acquisition").
In February 1997, the Company purchased WWYZ-FM, operating in
Hartford, Connecticut, for a purchase price, including the payment of fees and
expenses, of $25.9 million (the "Hartford Acquisition"). The Hartford
Acquisition increased the number of stations the Company owns in the Hartford
market to five.
In March 1997, the Company acquired two radio stations operating in
Houston, Texas, for a purchase price of approximately $43.0 million, exclusive
of certain additional contingent liabilities which may become payable (the
"Texas Coast Acquisition"). The Texas Coast Acquisition increased the number of
stations the Company owns in the Houston market to four.
In March 1997, the Company exchanged one radio station operating in
Washington, D.C./Baltimore, Maryland, for two radio stations operating in
Dallas, Texas (the "CBS Exchange") and completed the sale of two radio stations
operating in the Myrtle Beach, South Carolina market for $5.1 million payable
in installments over a five year period (present value approximately $4.3
million). The CBS Exchange was structured as a substantially tax free exchange
of like-kind assets. The contract for the sale of the Myrtle Beach stations was
in place prior to the merger with Multi- Market Radio, Inc. (the "MMR Merger").
No gain or loss was recognized on these transactions as the Myrtle Beach
stations were recently acquired.
In April 1997, the Company acquired substantially all of the assets of
three radio stations in Indianapolis, Indiana and in June 1997 the Company
acquired substantially all of the assets of four stations in Pittsburgh,
Pennsylvania from Secret Communications Limited Partnership ("Secret
Communications") (the "Secret Communications Acquisition") for a total purchase
price of $255.0 million.
Also in April 1997, the Company sold one radio station operating in
Little Rock, Arkansas (the "Little Rock Disposition") to Triathlon Broadcasting
Company ("Triathlon"), a publicly traded radio broadcasting company. The
station was sold for $4.1 million, of which $3.5 million had been held as a
deposit by the Company since 1996. No gain or loss was recorded on the
transaction as the station was recently acquired.
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In July 1997, the Company acquired substantially all of the assets of
four radio stations operating in Richmond, Virginia for approximately $46.5
million, including payments made to buy out minority equity interests which the
Company had originally agreed to provide to certain of the sellers (the
"Richmond Acquisition").
In August 1997, the Company acquired two radio stations operating in
Pittsburgh, Pennsylvania and two radio stations in Milwaukee, Wisconsin for
$35.0 million (the "Hearst Acquisition").
In August 1997, the Company exchanged one radio station in Pittsburgh,
Pennsylvania, which the Company had recently acquired from Secret
Communications, and $20.0 million in cash for one radio station in Charlotte,
North Carolina (the "Charlotte Exchange"). The Company operated the radio
station in Charlotte, North Carolina pursuant to a local market agreement
during July 1997.
In January 1998, the Company sold WVGO in Richmond, Virginia for $4.3
million (the "WVGO Disposition"). No gain or loss was recognized on the sale as
the station was recently acquired.
PENDING ACQUISITIONS AND PENDING DISPOSITION--RADIO STATIONS
The following radio broadcasting transactions are expected to be
consummated after the consummation of the Merger.
Pursuant to separate agreements, the Company has agreed to: (i)
exchange four radio stations owned by the Company and located on Long Island,
New York, for two radio stations operating in Jacksonville, Florida, where the
Company currently owns four stations, and a cash payment of $11.0 million (the
"Chancellor Exchange"); (ii) acquire three radio stations operating in
Nashville, Tennessee, where the Company currently owns two radio stations, for
$35 million (the "Nashville Acquisition") for which the Company has deposited
$2 million in escrow; and (iii) sell six stations in Jackson, Mississippi and
two stations in Biloxi, Mississippi for $66.0 million (the "Jackson and Biloxi
Disposition"). The Chancellor Exchange and the Nashville Acquisition are
collectively referred to as the "Pending Acquisitions." The Jackson and Biloxi
Disposition is referred to herein as the "Pending Disposition."
The Company anticipates that it will consummate all of the Pending
Acquisitions and the Pending Disposition in the second and third quarters of
1998 after the consummation of the Merger, although such timing and completion
are subject to a number of conditions, certain of which are beyond the
Company's control. Each of the Pending Acquisitions and the Pending Disposition
is subject to the approval of the Federal Communications Commission (the
"FCC") and the Company's lenders. The Company has received FCC approval for
the Chancellor Exchange. However, the U.S. Department of Justice, Antitrust
Division (the "DOJ") is withholding its approval for the Chancellor Exchange
under the Hart-Scott-Rodino Antitrust Improvement Act of 1976, as amended (the
"HSR Act"). Generally, the DOJ has indicated its intention to review matters
related to the concentration of ownership within markets even when the
ownership in question is permitted under the provisions of the Telecom Act. DOJ
has brought suit alleging that the Chancellor Exchange is likely to reduce
competition. The complaint requests permanent injunctive relief preventing the
consummation of the acquisition of the Long Island stations by Chancellor Media
Corporation ("Chancellor"). The Company, Chancellor, an affiliate of Buyer, and
DOJ are currently involved in settlement discussions. If successfully concluded,
these settlement discussions will resolve all competitive issues raised by DOJ
and will terminate all investigations or litigation by DOJ with respect to the
Company, the Chancellor Exchange and the Merger. See "--The Merger--Regulatory
Approval." There can be no assurance that the settlement discussions will be
successful. If the Company fails to reach an acceptable settlement agreement
with DOJ, the Company intends to defend the suit vigorously. See "Item 3.
Legal Proceedings."
In the event that the Nashville Acquisition were to be consummated
prior to the Merger, the Company's ability to consummate the Nashville
Acquisition is also subject to the availability of funds under the Company's
$400.0 million senior credit facility (the "Credit Agreement") or pursuant to
other financing. There can be no assurance that any of the Pending Acquisitions
or Pending Disposition will be consummated as presently contemplated or at all.
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1997 ACQUISITIONS--LIVE ENTERTAINMENT
In January 1997, the Company purchased Delsener/Slater Enterprises,
Ltd. ("Delsener/Slater"), a concert promotion company based in New York City,
for an aggregate consideration of approximately $27.6 million, including $2.9
million for working capital and the present value of deferred payments of $3.0
million to be paid, without interest, over five years, and $1.0 million to be
paid, without interest, over ten years (the "Delsener/Slater Acquisition").
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.
In March 1997, the Company acquired the stock of certain companies
which own or operate the Meadows Music Theater, a 25,000-seat indoor/outdoor
complex located in Hartford, Connecticut (the "Meadows Acquisition") for $0.9
million in cash, 250,838 shares of Class A Common Stock with a value of
approximately $7.5 million and the assumption of approximately $15.4 million of
debt. The Company has the option to repurchase the 250,838 shares of Class A
Common Stock for an aggregate purchase price of $8.3 million.
In June 1997, the Company acquired the stock of Sunshine Promotions,
Inc., a concert promotion company based in Indianapolis, Indiana, and certain
related companies (collectively, "Sunshine Promotions"; the "Sunshine
Promotions Acquisition" and together with the Delsener/Slater Acquisition and
the Meadows Acquisition, the "1997 Entertainment Acquisitions"), for $53.9
million in cash, $2.0 million payable over 5 years, shares of Class A Common
Stock issued and issuable over a two year period with a value of approximately
$4.0 million and the assumption of approximately $1.6 million of debt. Sunshine
Promotions owns 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 Murat Centre, a
2,700-seat theater and 2,200-seat ballroom, located in Indianapolis, Indiana.
The stock and/or assets acquired in the 1997 Entertainment
Acquisitions have been contributed to SFX Entertainment.
1998 ENTERTAINMENT ACQUISITIONS
In February and March of 1998, SFX Entertainment consummated its
acquisitions (the "1998 Entertainment Acquisitions") of PACE Entertainment
Corporation (the "PACE Acquisition"), Pavilion Partners, The Contemporary Group
(the "Contemporary Acquisition"), BG Presents, Inc., The Network Group,
Concert/Southern Promotions and certain related entities for an aggregate
purchase of $506.1 million, consisting of $442.1 million in cash, repaid debt
and payments for working capital, $7.8 million of assumed debt and agreements
to issue, or the issuance of securities convertible into, an aggregate of
approximately 4.2 million shares of SFX Entertainment's common stock upon the
consummation of the Spin-Off with an attributed negotiated value of
approximately $56.2 million. In the event the Spin-Off does not occur, the
aggregate cash consideration for these acquisitions will increase by
approximately $56.2 million. For a description of these acquisitions, see "Item
1. Business--Recent Acquisitions" of the SFX Entertainment 10-K which is
incorporated herein by reference.
RADIO STATIONS
The following table summarizes certain information with respect to the
radio stations the Company will own and operate, provide programming to or sell
advertising on behalf of, after giving effect to the Pending Acquisitions and
the Pending Disposition.
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<TABLE>
<CAPTION>
1997 TOTAL
STATION RANK 1997 STATION NUMBER OF EXPIRATION
MARKET TARGET AMONG TARGET AUDIENCE REVENUE STATIONS IN DATE OF FCC
STATION(1) RANK(2) STATION FORMAT(2) DEMOGRAPHICS(3) DEMOGRAHPICS(2) SHARE(2) RANK(2) MARKET(2) AUTHORIZATION
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NORTHEAST REGION
Providence, RI 31
WSNE-FM Adult Contemporary Adults 25-54 6 7.5% 4 30 4/1/98(4)
WHJY-FM Album Oriented Rock Adults 18-34 1 10.0% 1 30 4/1/98(4)
WHJJ-AM News/Talk Adults 35-64 10 5.0% 9 30 4/1/98(4)
Hartford, CT 42
WHCN-FM Album Oriented Rock Adults 25-54 9 3.9% 9 26 4/1/98(4)
WMRQ-FM Modern Rock Adults 18-34 1 6.6% 8 26 4/1/98(4)
WPOP-AM News/Talk/Sports Adults 35-64 22 0.8% 14 26 4/1/98(4)
WWYZ-FM Country Adults 25-54 2 10.3% 3 26 4/1/98(4)
WKSS-FM Top 40 Adults 18-34 2 7.8% 4 26 4/1/98(4)
Albany, NY 57
WGNA-FM Country Adults 25-54 1 12.3% 1 41 6/1/98(4)
WGNA-AM Country Adults 25-54 28 0.3% 27 41 6/1/98(4)
WPYX-FM Album Oriented Rock Adults 18-34 4 8.1% 5 41 6/1/98(4)
WTRY-AM Oldies Adults 35-64 11 1.8% 15 41 6/1/98(4)
WTRY-FM Oldies Adults 25-54 8 2.6% 10 41 6/1/98(4)
Springfield/ 77
Northampton, MA (5)
WHMP-FM Alternative Adults 18-34 7 4.3% 6 16 4/1/98(4)
WHMP-AM Talk Adults 35-64 14 2.0% 8 16 4/1/98(4)
WPKX-FM Country Adults 25-54 4 14.5% 4 16 4/1/98(4)
New Haven, CT 95
WPLR-FM Album Oriented Rock Adults 18-34 4 19.7% 1 8 4/1/98(4)
WYBC-FM (6) Urban AC Adults 18-34 3 15.0% 4 8 4/1/98(4)
MID-SOUTH ATLANTIC
REGION
Charlotte, NC 36
WLYT-FM Adult Contemporary Adults 25-54 1 7.7% 4 42 12/1/03
WRFX-FM Album Oriented Rock Adults 25-54 2 9.3% 1 42 12/1/03
WKKT-FM (7) Country Adults 25-54 8 7.0% 6 42 12/1/03
Greensboro, NC 40
WMAG-FM Adult Contemporary Adults 25-54 3 7.7% 2 36 12/1/03
WTCK-AM Sports Adults 25-54 23 0.3% 18 36 12/1/03
WMFR-AM News/Talk Adults 25-54 29 1.6% 13 36 12/1/03
WHSL-FM Country Adults 25-54 6 6.4% 9 36 12/1/03
Nashville, TN 44
WSIX-FM Country Adults 25-54 1 15.6% 1 49 8/1/04
WRVW-FM Adult Contemporary Adults 18-34 4 7.2% 5 49 8/1/04
WJZC-FM (8) Smooth Jazz Adults 25-54 8 3.8% 13 49 8/1/04
WLAC-FM (8) Classic Rock Adults 25-54 11 4.1% 9 49 8/1/04
WLAC-AM (8) News/Talk/Sports Adults 35-64 8 4.1% 11 49 8/1/04
Greenville-
Spartanburg, SC 58
WSSL-FM Country Adults 25-54 2 13.8% 1 37 12/1/03
WMYI-FM Adult Contemporary Adults 25-54 4 8.1% 3 37 12/1/03
WGVL-AM Gospel Adults 25-54 NR 0.3% 19 37 12/1/03
WROQ-FM Classic Rock Adults 25-54 1 9.9% 2 37 12/1/03
MID-ATLANTIC REGION
Pittsburgh, PA 20
WDVE-FM Rock Adults 25-54 1 10.4% 1 49 8/1/98
WXDX-FM Alternative Adults 18-34 2 5.8% 9 49 8/1/98
WJJJ-FM Smooth Jazz Adults 25-54 10 4.2% 14 49 8/1/98
WDRV-FM(9) Alternative Adults 25-54 11 4.0% 5 49 8/1/98
WTAE-AM Sports/Talk Adults 25-54 14 4.4% 6 49 8/1/98
Milwaukee, WI 30
WLTQ-FM Adult Contemporary Adults 25-54 9 4.1% 8 35 12/1/04
WISN-AM Talk Adults 25-54 8 5.7% 7 35 12/1/04
Indianapolis, IN 37
WFBQ-FM Album Oriented Rock Adults 25-54 1 12.7% 1 30 8/1/04
WRZX-FM Alternative Adults 18-34 3 4.8% 7 30 8/1/04
WNDE-AM (10) News/Talk Adults 25-54 15 1.5% 18 30 8/1/04
</TABLE>
- 8 -
<PAGE>
<TABLE>
<CAPTION>
1997 TOTAL
STATION RANK 1997 STATION NUMBER OF EXPIRATION
MARKET TARGET AMONG TARGET AUDIENCE REVENUE STATIONS IN DATE OF FCC
STATION(1) RANK(2) STATION FORMAT(2) DEMOGRAPHICS(3) DEMOGRAPHICS(2) SHARE(2) RANK(2) MARKET(2) AUTHORIZATION
- ---------- ------- ----------------- --------------- --------------- -------- ------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Raleigh-
Durham, NC 48
WRSN-FM Adult Contemporary Adults 25-54 8 5.1% 10 36 12/1/03
WDCG-FM Contemporary Hit Radio Adults 18-34 2 10.8% 1 36 12/1/03
WRDU-FM Album Oriented Rock Adults 25-54 2 8.4% 3 36 12/1/03
WTRG-FM Oldies Adults 35-64 1 7.3% 5 36 12/1/03
Richmond, VA 56
WMXB-FM Adult Contemporary Adults 25-34 9 6.4% 5 28 10/1/03
WKLR-FM Classic Hits Adults 25-54 7 3.3% 10 28 10/1/03
WKHK-FM Country Adults 18-54 3 12.9% 1 28 10/1/03
WBZU-FM Alternative Adults 18-34 3 4.2% 9 28 10/1/03
SOUTHERN REGION
Jacksonville, FL 51
WKQL-FM Oldies Adults 25-54 3 7.1% 7 36 2/1/04
WMXQ-FM (11) Soft Rock Adults 25-54 8 4.4% 8 36 2/1/04
WOKV-AM News/Talk/Sports Adults 18-49 12 5.2% 5 36 2/1/04
WBWL-AM Sports Adults 50 & over 14 0.9% 17 36 2/1/04
WFYV-FM (12) Album Oriented Rock Adults 18-49 1 9.8% 1 36 2/1/04
WAPE-FM (12) Top 40 Adults 18-49 2 9.1% 3 36 2/1/04
Daytona Beach, FL 92
WGNE-FM Country Adults 25-54 5 10.3% 1 13 2/1/04
SOUTHWEST REGION
Dallas, TX 6
KTXQ-FM Album Oriented Rock Adults 25-49 15 2.9% 18 52 8/1/05
KBFB-FM (13) Soft Rock Adults 25-49 N/A 2.3% 22 52 8/1/05
Houston, TX 9
KODA-FM Adult Contemporary Adults 25-54 1 7.8% 1 55 8/1/05
KKRW-FM Classic Rock Adults 18-34 12 3.4% 11 55 8/1/05
KKPN-FM Modern Hits Adults 18-34 10 5.8% 16 55 8/1/97(14)
KQUE-AM Nostalgia Adults 35-64 18 NR NR 55 8/1/97(14)
San Diego, CA 15
KYXY-FM Adult Contemporary Adults 25-54 3 7.4% 1 39 12/1/97(15)
KPLN-FM Classic Rock Adults 25-54 13 2.7% 16 39 12/1/97(15)
Tucson, AZ 61
KRQQ-FM Contemporary Hit Radio Adults 18-34 1 10.1% 3 27 10/1/05
KWFM-FM Oldies Adults 25-54 6 5.8% 6 27 10/1/05
KCEE-AM Nostalgia Adults 64 & over 10 4.5% 13 27 10/1/05
KNST-AM News/Talk/Sports Adults 25-54 8 7.3% 5 27 10/1/05
Wichita, KS 89
KRZZ-FM Classic Rock Adults 18-34 1 6.8% 6 23 6/1/05
KKRD-FM Contemporary Hit Radio Adults 18-34 2 8.8% 4 23 6/1/05
KNSS-AM News/Talk/Sports Adults 25-54 13 3.9% 10 23 6/1/05
</TABLE>
- ------------------------------------
NR Not rated.
(1) Some stations are licensed to a different community located within the
market they serve.
(2) Based upon BIA's 1997 Station Share, Target Demo and Target Demo Ranking.
(3) Due to variations that may exist within the same-station programming
format, the demographic target may be
different even though the station program format is the same.
(4) Renewal applications were timely filed for these stations and remain
pending.
(5) Northampton is not separately rated by Arbitron, an independent rating
service, and, accordingly, the number of stations in the market
represents the number of stations in the combined
Springfield/Northampton, Massachusetts market.
(6) The Company sells advertising on WYBC-FM pursuant to a JSA. (7) WKKT-FM
changed its call letters from WTDR-FM.
(8) The Company has agreed to acquire these stations from Sinclair
Communications. The Company has been providing programming to and
selling advertising on WJZC-FM, WLAC-FM and WLAC-AM since November 1,
1997.
(9) WDRV-FM changed its call letter from WVTY.
(10) FCC records indicate that a complaint is pending at the FCC against
WNDE-AM concerning alleged interference with complainant's telephone
line.
- 9 -
<PAGE>
(11) WMXQ-FM changed its call letters from WIVY-FM.
(12) Pursuant to the Chancellor Exchange, the Company has agreed to acquire
WFYV-FM and WAPE-FM in exchange for four radio stations currently
owned by the Company (but not listed in the table) operating in Long
Island, New York. Chancellor currently provides programming to and
sells advertising on the four Long Island stations pursuant to an LMA
with the Company. The Company has been providing programming to and
selling advertising on WFYV-FM and WAPE-FM since August 1, 1996.
(13) KBFB-FM changed its call letters from KRRW-FM.
(14) Renewal applications for those stations were timely filed and remain
pending due to an informal objection being filed against the stations
regarding the grant of the renewal applications.
(15) Renewal applications for these stations were timely filed, but remain
pending at the FCC due to RF radiation issues.
BROADCASTING REVENUES
The primary source of the Company's revenues is the sale of
broadcasting time for local, regional and national advertising. A station's
sales staff generates most of the station's local and regional advertising
sales. To generate national advertising sales, the Company engages an
advertising representative for each of its stations who specializes in national
advertising sales and who is compensated on a commission-only basis. Most
advertising contracts are short-term and generally run only for a few weeks.
The Company believes that radio is an efficient and cost-effective
means for advertisers to reach specific demographic groups. Radio is a
precisely-targeted medium and is highly flexible due to the short lead time
between production and broadcast and due to the relative ease of production of
commercials. To ensure that an advertising message will be heard mainly by its
targeted customer base, an advertiser can choose to advertise on a station with
a format that appeals to a specific demographic group. In addition, radio can
more readily reach people in the workplace and in their cars than television
and other media.
Advertising rates charged by a radio station are based primarily on
the station's ability to attract audiences in the demographic groups targeted
by advertisers (as measured by ratings service surveys quantifying the number
of listeners tuned to the station at various times of the day and week) and on
the supply of and demand for radio advertising time, as well as competing forms
of advertising. Rates are generally highest during morning and afternoon
drive-time hours.
Depending on the format of a particular station, there are
predetermined numbers of advertisements that are broadcast each hour. The
Company endeavors to determine the number of advertisements broadcast per hour
that can maximize available revenue dollars without jeopardizing listening
levels. Although the number of advertisements broadcast during a given time
period may vary, the total number of slots available for broadcast advertising
on a particular station generally does not vary significantly from year to
year.
COMPETITION
The radio broadcasting industry is highly competitive and the
Company's stations are located in highly competitive markets. The financial
results of each of the Company's stations are dependent to a significant degree
upon its audience ratings and its share of the overall advertising revenue
within the station's geographic market. Each of the Company's stations competes
for audience share and advertising revenue directly with other FM and AM radio
stations, as well as with other media, within their respective markets. Radio
stations compete for listeners primarily on the basis of program content and by
hiring high-profile talent with appeal to a particular demographic group. The
Company competes for advertising revenues principally through effective
promotion of its stations' listener demographics and audience shares, and
through the number of listeners in a target group that can be reached for the
price charged for the air-time.
The Company's audience ratings and market share are subject to change,
and any adverse change in audience rating and market share in any particular
market could have a material and adverse effect on the Company's net revenues.
Although the Company competes with other radio stations with comparable
programming formats in most of its markets, if another station in the market
were to convert its programming format to a format similar to one of the
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<PAGE>
Company's radio stations, if a new radio station were to adopt a competitive
format, or if an existing competitor were to strengthen its operations, the
Company's stations could suffer a reduction in ratings or advertising revenue
and could require increased promotional and other expenses. In addition,
certain of the Company's stations compete, and in the future other stations may
compete, with groups of stations in a market operated by a single operator. As
a result of the Telecom Act, the radio broadcasting industry has become
increasingly consolidated, resulting in the existence of radio broadcasting
companies which are significantly larger, with greater financial resources,
than the Company. Furthermore, the Telecom Act will permit other radio
broadcasting companies to enter the markets in which the Company operates or
may operate in the future. Although the Company believes that each of its
stations is able to compete effectively in its market, there can be no
assurance that any of the Company's stations will be able to maintain or
increase its current audience ratings and advertising revenue market share.
The Company's stations also compete for advertising revenues with
other media, including newspapers, broadcast television, cable television,
magazines, billboard advertising, transit advertising and direct mail
advertising. By building in each of its markets a strong base of listeners
comprised of specific demographic groups, the Company is able to attract
advertisers seeking to reach those listeners. Other factors that affect a
station's competitive position include its authorized power, terrain, assigned
frequency, audience characteristics, local program acceptance and the number
and characteristics of other stations in the market area. The radio
broadcasting industry is also subject to competition from new media
technologies that are being developed or introduced, such as the delivery of
audio programming by cable television systems or the introduction of digital
audio broadcasting. See "--Federal Regulation of Radio Broadcasting--Proposed
Changes." The radio broadcasting industry historically has grown despite the
introduction of new technologies for the delivery of entertainment and
information, such as television broadcasting, cable television, audio tapes and
compact disks. There can be no assurance, however, that the development or
introduction in the future of any new media technology will not have an adverse
effect on the radio broadcasting industry.
SEASONALITY
The Company's revenues vary throughout the year. With respect to the
radio broadcasting industry, the company's first quarter generally reflects the
lowest revenues and its fourth quarter generally reflects the highest revenues
each year.
EMPLOYEES
As of March 14, 1998, the Company had approximately 1,550 full-time
and 640 part-time employees who were employed in the ownership and operation of
radio stations. Management believes that relations with employees are good.
Following consummation of the Pending Acquisitions and the Pending Disposition,
the Company anticipates that it will have approximately 1,440 full-time and 600
part-time employees employed in the ownership and operation of radio stations.
In addition, as of March 14, 1998, the Company had approximately 950 full-time
employees who were employed in the live entertainment businesses.
The Company employs several high-profile on-air personalities with
large, loyal audiences in their respective markets. The Company endeavors to
enter into employment agreements with those on-air personalities and station
general managers whose services are deemed by the Company to be important for
its continued success.
FEDERAL REGULATION OF RADIO BROADCASTING
Adoption of the Telecom Act in February 1996 eliminated the national
limits and liberalized the local limits on radio station ownership by a single
company. However, the DOJ has indicated that, in certain cases, ownership of
the number of radio stations permitted by the Telecom Act may result in the
undue concentration of ownership within a market or otherwise have an
anti-competitive effect. The DOJ is increasingly scrutinizing acquisitions of
radio stations and the entering into of JSAs and LMAs. In particular, the DOJ
has indicated that a prospective buyer of a radio station may not enter into an
LMA in connection with the acquisition of such station before expiration of the
applicable waiting period under the HSR Act. The DOJ has, in at least one
instance, also required the termination of a JSA that, in the opinion of the
DOJ, would have given a radio station owner, together with such owner's
proposed acquisition of other radio stations in the market, control over more
than 60% of the sales of radio advertising time in the market. The
- 11 -
<PAGE>
Chancellor Exchange is subject to a legal proceeding initiated by the DOJ and
the Merger has been the subject of inquiries from the DOJ. See "--Pending
Acquisitions and Pending Disposition--Radio Stations--Regulatory Approval."
There can be no assurance that future inquiries or policy and rule-making
activities of the FCC or the DOJ will not impact the Company's operations
(including existing stations or markets) and business strategy.
The ownership, operation and sale of radio stations are subject to the
jurisdiction of the FCC, which acts under authority granted by the
Communications Act of 1934, as amended (the "Communications Act"). Among other
things, the FCC assigns frequency bands for broadcasting; determines the
particular frequencies, locations and operating power of stations; issues,
renews, revokes and modifies station licenses; determines whether to approve
changes in ownership or control of station licenses; regulates equipment used
by stations; adopts and implements regulations and policies that directly or
indirectly affect the ownership, operation and employment practices of
stations; and has the power to impose penalties for violations of its rules or
the Communications Act.
The following is a brief summary of certain provisions of the
Communications Act and of specific FCC regulations and policies. Reference
should be made to the Communications Act, FCC rules and the public notices and
rulings of the FCC for further information concerning the nature and extent of
federal regulation of broadcast stations.
FCC Licenses. Radio stations operate pursuant to broadcasting licenses
that are granted by the FCC for maximum terms of eight years and are subject to
renewal upon application to the FCC. During certain periods when renewal
applications are pending, petitions to deny license renewals can be filed by
interested parties, including members of the public. The FCC will grant a
renewal application if it finds that the station has served the public
interest, convenience and necessity, that there have been no serious violations
by the licensee of the Communications Act or the rules and regulations of the
FCC, and that there have been no other violations by the licensee of the
Communications Act or the rules and regulations of the FCC that, when taken
together, would constitute a pattern of abuse.
Ownership Matters. The Communications Act prohibits the assignment of
a broadcast license or the transfer of control of a broadcast licensee without
the prior approval of the FCC. In determining whether to grant or renew a
broadcast license, the FCC considers a number of factors pertaining to the
licensee, including compliance with various rules limiting common ownership of
media properties, the "character" of the licensee and those persons holding
"attributable" interests therein and compliance with the Communications Act's
limitations on alien ownership.
To obtain the FCC's prior consent to transfer control of or assign a
broadcast license, appropriate applications must be filed with the FCC. If the
transfer or assignment application involves a "substantial change" in ownership
or control, the application is placed on public notice for a period of
approximately 30 days during which petitions to deny the application may be
filed by interested parties, including members of the public. If the transfer
or assignment application does not involve a "substantial change" in ownership
or control, it is a "pro forma" application. The "pro forma" application is
nevertheless subject to having informal objections filed against it. If the FCC
grants a transfer or assignment application, interested parties have
approximately 30 days from public notice of the grant to seek reconsideration
or review of that grant. The FCC normally has approximately an additional ten
days to set aside such grant on its own motion.
Pursuant to the Telecom Act, the limit on the number of radio stations
one entity may own nationally has been eliminated and the limits on the number
of radio stations one entity may own locally have been increased as follows:
(i) in a market with 45 or more commercial radio stations, an entity may own up
to eight commercial radio stations, not more than five of which are in the same
service (FM or AM), (ii) in a market with between 30 and 44 (inclusive)
commercial radio stations, an entity may own up to seven commercial radio
stations, not more than four of which are in the same service, (iii) in a
market with between 15 and 29 (inclusive) commercial radio stations, an entity
may own up to six commercial radio stations, not more than four of which are in
the same service and (iv) in a market with 14 or fewer commercial radio
stations, an entity may own up to five commercial radio stations, not more than
three of which are in the same service, except that an entity may not own more
than 50% of the stations in such market. FCC ownership rules continue to permit
an entity to own one FM and one AM station locally regardless of market size.
For the purposes of these rules, in general, a radio station being programmed
pursuant to an LMA by an entity is not counted as an owned station for purposes
of determining the programming entity's local ownership limits unless the
entity already owns a radio station in the market of the station with which the
entity has the LMA; a radio station whose
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<PAGE>
advertising time is being sold pursuant to a JSA is currently not counted as an
owned station of the entity selling the advertising time even if that entity
owns a radio station in the market of the station with which the entity has the
JSA. As a result of the elimination of the national ownership limits and the
liberalization of the local ownership limits effected by the Telecom Act, radio
station acquisitions are subject to increased scrutiny by the DOJ even if
approved by the FCC. The DOJ has articulated what it believes to be the
relevant market for competitive analysis in the radio broadcasting industry,
but no court has determined its validity. The DOJ has also indicated an
intention to review such acquisitions carefully.
The Communications Act and FCC rules also prohibit the common
ownership, operation or control (i) of a radio broadcast station and a
television broadcast station serving the same geographic market, subject to a
presumptive waiver of such prohibition for stations located in the largest
television markets if certain conditions are satisfied (the Telecom Act directs
the FCC to extend such waiver policy to the top 50 television markets), and
(ii) of a radio broadcast station and a daily newspaper serving the same
geographic market. Under these rules, absent waivers, the Company would not be
permitted to acquire any daily newspaper or television broadcast station (other
than low-power television) in any geographic market in which it owns broadcast
properties. The FCC has pending an inquiry to determine whether it should
liberalize its waiver policy with respect to common ownership of a daily
newspaper and one or more radio stations in the same market.
The FCC generally applies its ownership limits to "attributable"
interests held by an individual, corporation, partnership or other association.
In the case of corporations holding (or through subsidiaries controlling)
broadcast licenses, the interests of officers, directors and those who,
directly or indirectly, have the right to vote 5% or more of the corporation's
stock (or 10% or more of such stock in the case of insurance companies,
investment companies and bank trust departments that are passive investors) are
generally attributable except that, in general, no minority voting stock
interest will be attributable if there is a single holder of more than 50% of
the outstanding voting power of the corporation. The FCC has outstanding a
notice of proposed rulemaking that, among other things, seeks comment on
whether the FCC should modify its attribution rules by (i) restricting the
availability of the single majority stockholder exemption, (ii) attributing
under certain circumstances certain interests such as non-voting stock or debt,
and (iii) attributing JSAs under certain circumstances. The Company cannot
predict the outcome of this proceeding or how it will affect the Company's
business. Furthermore, the single majority stockholder exemption would no
longer apply to the Company if conversion of the Company's Series D Preferred
Stock into Class A Common Stock or any other event causes Robert F.X.
Sillerman's voting power in the Company to drop to 50% or less (an event that
would require prior FCC consent). In such event, all stockholders holding 5% or
more of the total voting power in the Company would have an attributable
interest in the Company, and their other media interests, if any, could
therefore adversely affect the Company's ability to acquire or to hold
interests in radio stations in particular markets. Also, under certain
circumstances, the FCC's "cross-interest" policy may prohibit one party from
acquiring an attributable interest in one media outlet (newspaper, radio and
television station) and a substantial non-attributable economic interest in
another media outlet in the same market.
Mr. Sillerman, the Executive Chairman of the Company, has non-voting
common and preferred stock interests in Triathlon, which has attributable
interests in radio stations in small and medium markets primarily located in
the Midwest and Western United States. Heretofore, the FCC has not considered
Mr. Sillerman's interest in Triathlon to be an attributable one. However, Mr.
Sillerman's non-voting stock interests in Triathlon are convertible into voting
stock interests under certain circumstances, including the receipt of necessary
FCC approval. The FCC is examining, through outstanding rulemaking and
adjudicatory proceedings, whether to change the criteria for considering an
interest to be attributable. Some commenters in the rulemaking proceedings have
urged that the test of attribution should not be voting power but rather
influence over the licensee. Fisher Wayland Cooper Leader & Zaragoza LLP, FCC
counsel to the Company, has advised the Company that, to the extent that the
FCC adopts this standard, certain contractual arrangements between Sillerman
Communications Management Company ("SCMC"), a corporation controlled by Mr.
Sillerman, and Triathlon may cause Mr. Sillerman's interest in Triathlon to be
attributable. If the FCC were to determine that Mr. Sillerman's interest in
Triathlon was attributable, then Mr. Sillerman may be required to reduce the
number of his attributable interests to the then-applicable permissible limits
contained in the FCC's ownership rules.
The Communications Act prohibits the issuance of a broadcast license
to, or the holding of a broadcast license by, any corporation of which more
than 20% of the capital stock is owned of record or voted by non-U.S. citizens
or their representatives or a foreign government or a representative thereof or
a corporation organized under the laws of
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<PAGE>
a foreign country ("Aliens"). The Communications Act also authorizes the FCC,
if the FCC determines that it would be in the public interest, to prohibit the
issuance of a broadcast license to, or the holding of a broadcast license by,
any corporation directly or indirectly controlled by any other corporation of
which more than 25% of the capital stock is owned of record or voted by Aliens.
The Company has been advised that the FCC staff has interpreted this provision
to require a finding that such a grant or holding would be in the public
interest before a broadcast license may be granted to or held by any such
corporation. The Company has also been advised that the FCC staff has made such
a finding only in limited circumstances. The FCC has issued interpretations of
existing law under which these restrictions in modified form apply to other
forms of business organizations, including partnerships. As a result of these
provisions, the licenses granted to the radio station subsidiaries of the
Company by the FCC could be revoked if, among other restrictions imposed by the
FCC, more than 25% of the Company's stock were directly or indirectly owned or
voted by Aliens. The Certificate of Incorporation contains limitations on Alien
ownership and control of the Company that are substantially similar to those
contained in the Communications Act.
Local Marketing Agreements. Over the past few years, a number of radio
stations, including certain of the Company's stations, have entered into what
have commonly been referred to as LMAs. While these agreements may take varying
forms, pursuant to a typical LMA, separately owned and licensed radio stations
agree to enter into cooperative arrangements of varying sorts, subject to
compliance with the requirements of antitrust laws and with the FCC's rules and
policies. Under these types of arrangements, separately-owned stations could
agree to function cooperatively in terms of programming, advertising sales,
etc., subject to the requirement that the licensee of each station shall
maintain independent control over the programming and operations of its own
station. One typical type of LMA is a programming agreement between two
separately-owned radio stations serving a common service area, whereby the
licensee of one station programs substantial portions of the broadcast day on
the other licensee's station, subject to ultimate editorial and other controls
being exercised by the latter licensee, and sells advertising time during such
program segments. Such arrangements are an extension of the concept of "time
brokerage" agreements, under which a licensee of a station sells blocks of time
on its station to an entity or entities which program the blocks of time and
which sell their own commercial advertising announcements during the time
periods in question.
The FCC has specifically revised its cross-interest policy to make
that policy inapplicable to time brokerage arrangements. Furthermore, over the
past few years, the staff of the FCC's Mass Media Bureau has held that LMAs are
not contrary to the Communications Act, provided that the licensee of the
station which is being substantially programmed by another entity maintains
complete responsibility for and control over programming and operations of its
broadcast station and assures compliance with applicable FCC rules and
policies.
The FCC's multiple ownership rules specifically permit radio station
LMAs to continue to be entered into and implemented, but provide that a station
brokering more than 15% of the time on another station serving the same market
will be considered to have an attributable ownership interest in the brokered
station for purposes of the FCC's multiple ownership rules. As a result, in a
market in which the Company owns a radio station, the Company would not be
permitted to enter into an LMA with another local radio station which it could
not own under the local ownership rules, unless the Company's programming
constitutes 15% or less of the other local station's programming time on a
weekly basis. The FCC's rules also prohibit a broadcast licensee from
simulcasting more than 25% of its programming on another station in the same
broadcast service (i.e., AM-AM or FM-FM) through a time brokerage or LMA
arrangement where the brokered and brokering stations which it owns or programs
serve substantially the same area.
Joint Sales Agreements. Under a typical JSA, the licensee of one radio
station sells the advertising time of another licensee's radio station.
Currently, JSAs are not deemed by the FCC to be attributable. However, the FCC
has outstanding a notice of proposed rule making concerning, among other
things, whether JSAs should be considered attributable interests under certain
circumstances. The attribution of radio station JSAs has become less of a
concern from the standpoint of compliance with the FCC multiple ownership rules
as a result of the general liberalization of the ownership limits on radio
stations authorized by the Telecom Act. If JSAs become attributable interests
as a result of such rule making, the Company would be required to terminate any
JSA it might have with a radio station with which the Company could not have an
LMA.
Programming and Operation. The Communications Act requires
broadcasters to serve the "public interest." The FCC gradually has relaxed or
eliminated many of the more formalized procedures it had developed in the past
to promote the broadcast of certain type of programming responsive to the needs
of a station's community of license. A
- 14 -
<PAGE>
licensee continues to be required, however, to present programming that is
responsive to issues of the station's community, and to maintain certain
records demonstrating such responsiveness. Complaints from listeners concerning
a station's programming often will be considered by the FCC when it evaluates
renewal applications of a licensee, although such complaints may be filed at
any time and generally may be considered by the FCC at any time. Stations also
must follow various rules promulgated under the Communications Act that
regulate, among other things, political advertising, sponsorship
identifications, the advertisement of contests and lotteries, obscene and
indecent broadcasts, and technical operations, including limits on radio
frequency radiation. In addition, licensees must develop and implement
affirmative action programs designed to promote equal employment opportunities,
and must submit reports to the FCC with respect to these matters on an annual
basis and in connection with a renewal application.
Failure to observe these or other rules and policies can result in the
imposition of various sanctions, including monetary forfeitures, the grant of
"short" (less than the maximum) renewal terms or, for particularly egregious
violations, the denial of a license renewal application or the revocation of a
license.
Proposed Changes. The U.S. Congress and/or the FCC have under
consideration, and in the future may consider and adopt, new laws, regulations
and policies regarding a wide variety of matters that could affect, directly or
indirectly, the operation, ownership and profitability of the Company's radio
broadcast stations, result in the loss of audience share and advertising
revenues for the Company's radio broadcast stations, and affect the ability of
the Company to acquire additional radio broadcast stations or finance such
acquisitions. Such matters may include: changes to the license renewal process;
spectrum use or other fees on FCC licensees; revisions to the FCC's equal
employment opportunity rules and other matters relating to minority and female
involvement in the broadcasting industry; proposals to change rules relating to
political broadcasting; technical and frequency allocation matters; proposals
to permit expanded use of FM translator stations; proposals to restrict or
prohibit the advertising of beer, wine and other alcoholic beverages on radio;
changes in the FCC's cross-interest, multiple ownership and attribution
policies; changes to broadcast technical requirements; delivery by telephone
companies of audio and video programming to the home through existing phone
lines; proposals to limit the tax deductibility of advertising expenses by
advertisers; and proposals to auction the right to use the radio broadcast
spectrum to the highest bidder.
The FCC has authorized the use of a new technology, digital audio
broadcasting ("DAB"), to deliver audio programming by satellite and is
considering terrestrial DAB. DAB will provide a medium for the delivery by
satellite or terrestrial means of multiple new audio programming formats to
local and national audiences. It is not presently known precisely how in the
future this technology may be used by existing radio broadcast stations either
on existing or alternate broadcasting frequencies.
The Company cannot predict what other matters might be considered in
the future by the FCC and/or Congress. The implementation of the Telecom Act or
any of these proposals or changes may have a material adverse impact on the
Company's business, competitive position or results of operations.
THE MERGER AND SPIN-OFF
On August 24, 1997, the Company entered into the Merger Agreement.
Pursuant to the Merger Agreement, upon the consummation of the Merger, the
Company 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 the Company'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) 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 each share of Series D Preferred Stock would have been convertible
immediately prior to the consummation of the Merger (the "Effective Time"). 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. In addition to
the cash payment, the Merger Agreement also provides for the spin-off of SFX
Entertainment to shareholders of the Company's common stock, Series D Preferred
Stock and holders of certain other Company securities. The shares of SFX
Entertainment will be issued in the Spin-Off as a taxable dividend. It is
anticipated that following the Spin-Off, SFX Entertainment's Class A common
stock will trade on the NASDAQ National Market or a national securities
exchange. However there can be no assurance that there will be an active market
in such shares after the Spin-Off. It is anticipated that after the
effectiveness of the Merger there will be no
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substantial continuing business relationships between the Company and SFX
Entertainment, other than relationships that may be entered from time to time
in the future after arm's-length negotiations between the Company (as
controlled by Buyer) and SFX Entertainment. See "--The Merger and the
Spin-Off."
Special Stockholders Meeting. The Company has called a Special
Stockholders Meeting, scheduled for March 26, 1998, to approve and adopt the
Merger Agreement and the Merger. At the Special Meeting, the Company's
stockholders will also be asked to (i) approve and adopt the Merger Agreement
("Proposal 1"), (ii) approve and adopt a charter amendment 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 ("Proposal 2") and (iii) adopt charter amendment to 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 ("Proposal 3").
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 Proposal 2 and
Proposal 3, so long as that approval is obtained by April 24, 1998).
The Merger and the Spin-Off (as presently contemplated) are subject to
a number of conditions, certain of which are beyond the Company's control.
There can be no assurances that either the Merger or Spin-Off will be
consummated as presently contemplated, if at all.
For more information about the Merger, see the definitive Proxy
Statement, dated February 13, 1998, of the Company included in the Schedule 14A
of the Company filed with the Securities and Exchange Commission (the "SEC") on
February 18, 1998 (and any supplements thereto).
THE MERGER
The following is a summary of certain of the material provisions of
the Merger Agreement and does not purport to be a complete description of the
Merger Agreement. The Merger Agreement is an exhibit to this Annual Report on
Form 10-K and is incorporated herein by reference.
If the Company's stockholders approve the Merger Agreement, the Merger
and the amendments to the Certificate of Incorporation contained in Proposal 2
at the Special Stockholders Meeting, 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 the Company, with the Company continuing as the surviving
corporation and a wholly-owned subsidiary of Buyer (the "Surviving
Corporation").
Warrants and Options
Each warrant to purchase shares of Class A Common Stock granted by the
Company (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 the Company
(including the stock options of MMR assumed by the Company 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 "Item 13. Certain
Relationships and Related Transactions--Consideration to be Received in the
Merger--Stock Options, Stock Appreciation Rights and SCMC Warrants."
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Spin-Off
In connection with the Merger and the Spin-Off, the Company and SFX
Entertainment will enter into a Distribution Agreement (the "Distribution
Agreement"), a Tax Sharing Agreement (the "Tax Sharing Agreement") and an
Employee Benefits Agreement (the "Employee Benefits Agreement"). The forms of
such agreements are exhibits to this Annual Report on Form 10-K. See "--The
Spin-Off."
Alternate Transaction
The Merger Agreement allows the Company to dispose of its live
entertainment business currently held by SFX Entertainment in any manner other
than the Spin-Off, if the Spin-Off would violate applicable law or any material
agreement to which the Company 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 the Company or Buyer than the Spin-Off. Any adverse financial
changes resulting from an Alternate Transaction must be appropriately reflected
in Working Capital (as defined in the Merger Agreement). 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.
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 of the Company outstanding
immediately prior to the Effective Time (an increase of approximately $2.73 in
each of the Class A and Class B Merger Consideration). The Company believes
that the value of its live entertainment business substantially exceeds $42.5
million. Notwithstanding the foregoing, if the Spin-Off does not occur prior to
the Closing, the Company 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 the Company'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.
Covenants
The Company 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 the Company, (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 the Company'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 the
Company'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 the Company
after the Closing and would not reasonably be expected to have a material
adverse effect on the Company 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.
The Company is obligated to obtain, or use its commercially reasonable
efforts to obtain, prior to the Effective Time, an agreement from holders of
options and stock appreciation rights ("SARs") issued by the Company. In this
agreement, the holders agree to cancel their options and SARs and will receive
in return a per share amount equal to
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the Merger Consideration, Class A or Class B, as the case may be, less the
exercise price per option or base price per SAR.
The Company 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 $909,000 of other indebtedness existed, which must be
retired by the Company prior to the Effective Time.
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 "Item 13. Certain Relationships and Related
Transactions--Consideration to be Received in the Merger."
Regulatory Approval
The Company 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 the Company's radio stations resulting from the Merger
and to file all documents required under the HSR Act. Without the prior written
consent of Buyer, the Company 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 the Company.
The DOJ has requested information from the Company concerning two
cities in which the Company and Capstar Broadcasting Partners, Inc. ("Capstar")
(an affiliate of the Buyer) operate radio broadcasting stations. The DOJ is
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. The Company believes that the
competitive circumstances in these cities can be satisfactorily addressed or
restructured and are not likely to prevent consummation of the Merger.
Additionally, the DOJ has attributed 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
the Buyer. A limited partnership associated with Hicks Muse III has a minority
equity interest in Chancellor which owns radio stations in a number of markets
where the Company operates radio stations, including Houston and Pittsburgh.
The DOJ is investigating whether in these two cities the relationships 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. The Company, Capstar and Chancellor are currently
involved in settlement discussions with the DOJ. In connection therewith,
Capstar has announced that, if and after the Merger is completed, it intends to
sell KKPN-FM in Houston and WTAE-AM in Pittsburgh to address competitive
concerns raised by the DOJ. If successfully concluded, these settlement
discussions will resolve all competitive issues raised by the DOJ and will
terminate all investigations involving the Merger. There can be no assurance
that the settlement discussions will be successful. See "--Pending Acquisitions
and Pending Dispositions--Radio Stations" and "Item 3. Legal Proceedings."
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 the
Company 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 the Company 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
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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 the Company or Buyer may extend the date of the Closing for
an additional 45 days. However, if (a) neither the Company 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, the Company, its
subsidiaries and their representatives are prohibited from soliciting,
initiating or encouraging the submission of certain takeover proposals (a
"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, the Company and
its 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 the Company 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 (as defined herein) 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 the Company's stockholders than
the Merger, if the Company 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) The Company'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 the Company's representations and warranties in the Merger
Agreement, (b) the Company'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 the Company'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
"--Alternate Transaction."
The obligations of the Company 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 the Company, Buyer and Buyer Sub.
(b) By either the Company or Buyer if the Company'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
Stockholders Meeting (or an adjournment thereof) or if no stockholder vote is
held before the Termination Date (unless
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the Merger is permanently enjoined or prohibited). If the Merger Agreement is
terminated as set forth in this paragraph, the Company must pay Buyer a
termination fee of $25.0 million (and an additional $25.0 million if, within 1
year of the termination, either the Company enters into a Takeover Proposal or
50% of the capital stock of the Company 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 the Company or Buyer if the Merger is not consummated on
or before the Termination Date. See "The Spin-Off--Closing Extension and
Adjustment to Merger Consideration."
(d) By either the Company or Buyer if the Merger is permanently
prohibited or enjoined. If the prohibition or injunction arises from litigation
involving the Company and its stockholders and the Merger Agreement is
terminated as set forth in this paragraph, then the Company must pay Buyer
$10.0 million (and an additional $40.0 million if, within 1 year of the
termination, either the Company enters into a Takeover Proposal or 50% of the
capital stock of the Company 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) the Company breaches any representation or
warranty contained in the Merger Agreement, unless the breach has no material
adverse effect on the Company, or (ii) the Company 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 the Company 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, the Company may not terminate
if the breach or failure to perform is cured within 30 days after notice.
(g) By the Company 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 the
Company to enter into an agreement relating to a Superior Proposal (as defined
in the Merger Agreement), (ii) the Company 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, the Company 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 the Company is commenced and the Board of Directors fails to
recommend that the Company'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, the Company 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 the Company 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 the Company and its stockholders); or (c) the Company
terminates the Merger Agreement as described in paragraph (f) above. The
release of the letter of credit to the Company 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
If Proposal 3 is approved, upon the consummation of the Spin-Off, the
holders of Class A Common Stock, Series D Preferred Stock, certain warrants and
interests under the Company'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 the Company's Class B Common Stock
will receive SFX Entertainment Class B common stock, having features similar to
the Company's Class B Common Stock. The economic rights of shares of Class A
Common Stock and Class B Common Stock of the Company 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 the purpose of effecting the Spin-Off and governing certain of the
relationships between the Company and SFX Entertainment after the Spin-Off, the
Company, SFX Entertainment and Buyer have entered or will enter into the
various agreements described below. Forms of the Distribution Agreement, the
Tax Sharing Agreement and a Employee Benefits Agreement have been filed as
exhibits to this Annual Report on Form 10-K. The following descriptions of the
material features of such agreements do not purport to be complete and are
qualified in their entirety by reference to the actual agreements.
The Spin-Off will be a taxable 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 Class A and Class B Common
Stock, Series D Preferred Stock, certain warrants and interests under the
Company's director deferred stock ownership plan and will be made as follows
(fractional shares of SFX Entertainment common stock will not be delivered in
the Spin-Off):
o holders of Class A Common Stock will receive one share of SFX
Entertainment Class A common stock per share of the Company's
Class A Common Stock held;
o holders of Class B Common Stock will receive one share of SFX
Entertainment Class B common stock per share of Class B
Common Stock held;
o 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);
o the Company 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 the Company to the underwriters
of MMR's initial public offering (the "IPO Warrants" and,
together with the SCMC Warrants (as defined herein), the
"Warrants") upon exercise of such Warrants and
o Messrs. Dugan, Kramer and O'Grady will receive an aggregate
of 2,766 shares of the Class A Stock as adjustments to their
interests under SFX Broadcasting's director deferred stock
ownership plan.
Transfer and Assumption of Assets and Obligations
The Distribution Agreement provides that, at the time of the Spin-Off,
SFX Entertainment will assume (i) certain of the Company's leases and
employment agreements, (ii) debt and liabilities incurred by SFX Entertainment
or its subsidiaries after the date of the Merger Agreement in connection with
acquisitions and capital expenditures, (iii) liabilities under an airplane
lease, (iv) liabilities under an agreement pursuant to which The Sillerman
Companies Inc. ("TSC") provides services to Triathlon and (v) any other debt
and liabilities that SFX Entertainment deems appropriate. The Company 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.
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SFX Entertainment will be entitled to all of the Company's accounts
receivable relating to Company's live entertainment business. The Company will
transfer to SFX Entertainment, prior to the Spin-Off:
o two airplane leases;
o fees payable by Triathlon for services provided by TSC;
o two real estate leases and assets located on the leased
property;
o a note receivable relating to the sale of the Company's
radio stations operating in Myrtle Beach, South Carolina;
o the employment agreements of certain employees of the
Company and
o all other assets used primarily by SFX Entertainment.
SFX Entertainment will assume all of the Company'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, as is
expected, the Company's senior management and certain other employees of the
Company 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, the Company. At the
time of consummation of the Merger, SFX Entertainment will assume all
obligations arising under any employment agreement or arrangement between the
Company 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
Merger Agreement is terminated, they will promptly resign from their position
as directors of SFX Entertainment, and continue to serve as directors of the
Company, and the Company and SFX Entertainment will appoint an independent
committee to negotiate in good faith with respect to all matters that they deem
necessary to effectuate the separation of the affairs of both companies.
Working Capital
Pursuant to the Distribution Agreement (and as required by the Merger
Agreement), SFX Entertainment and the Company have agreed to allocate funds
between them for working capital. If the Spin-Off occurs prior to the
consummation of the Merger, as is expected, then, immediately after the
Spin-Off, the Company's management will allocate working capital between SFX
Entertainment and the Company, consistent with the proper operation of the
Company in its usual, regular and ordinary course, and the Company will pay to
SFX Entertainment any positive amount allocated to SFX Entertainment. In
connection with the Merger, if Working Capital (as defined) is a positive
number, then the Company must pay to SFX Entertainment an amount equal to
Working Capital, and if Working Capital is a negative number, then SFX
Entertainment must pay to the Company an amount equal to the Working Capital.
For a description of the definition of Working Capital, see "Item 1.
Business--Agreements Relating to the Spin-Off--Distribution Agreement" of the
SFX Entertainment 10-K which is incorporated by reference herein.
Acquisitions and Capital Improvements
The Company and SFX Entertainment have agreed that SFX Entertainment
may until the date of the Spin-Off, from time to time, (i) acquire additional
businesses engaged in the entertainment business or (ii) make capital
improvements on assets owned or leased by it or its subsidiaries. In each case,
the Company 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. The Company may
increase the borrowing availability under its Credit Agreement for these
purposes, and must use its best efforts to obtain any required or
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desirable waivers, consents or modifications under any financing or other
agreement of the Company 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 the Company, 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 the Company and is unable to obtain financing
to repay the Company as of the date of the Spin-Off, SFX Entertainment and the
Company will be in breach of the Merger Agreement.
In February 1998, SFX Entertainment acquired certain entertainment
businesses and financed the acquisitions with the proceeds of the SFX
Entertainment Notes and borrowings under the SFX Entertainment Credit Facility.
See "Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations--Liquidity and Capital Resources--1998 Activity Regarding
Merger and Spin-Off."
In February 1998, the Company was reimbursed by SFX Entertainment
approximately $25.3 million for consent fees, certain acquisitions and capital
expenditures paid by the Company on behalf of SFX Entertainment. The Company
may advance and be reimbursed for additional amounts advanced to SFX
Entertainment for these or other purposes before the consummation of the
Spin-Off.
It is not anticipated that the Company will advance additional funds
to SFX Entertainment prior to the Spin-Off.
Release and Indemnification
Pursuant to the Distribution Agreement, the Company has agreed to
release SFX Entertainment and its subsidiaries and affiliates (other than the
Company and its subsidiaries that are not direct or indirect subsidiaries of
SFX Entertainment prior to the Spin-Off ("The SFX Entertainment Group")) and
all persons who at any time prior to the date of the Spin-Off were
stockholders, directors, agents or employees of the 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 the Company, its affiliates
(other than The SFX Entertainment Group and all persons who at any time prior
to the date of the Spin-Off were stockholders, directors, agents or employees
of the Company or its subsidiaries other than The SFX Entertainment Group) 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 the Company and its subsidiaries (other than 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 Company or any of its subsidiaries (other than The SFX
Entertainment Group) may be or become subject that (i) relate to the assets,
business, operations, debts or liabilities of The SFX Entertainment Group
(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 (ii) result from a breach by The SFX Entertainment Group of any
representation, warranty or covenant contained in the Distribution Agreement or
any related agreements.
The Distribution Agreement requires the Company 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 the Company 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 the Company or its subsidiaries (other
than The SFX Entertainment Group) of any representation, warranty or covenant
contained in the Distribution Agreement or any related agreements.
- 23 -
<PAGE>
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).
Conditions to the Spin-Off
Pursuant to the Distribution Agreement, the obligations of SFX
Entertainment and the Company to consummate the Spin-Off will be subject to the
fulfillment or waiver of certain conditions, including:
o the Company's Board of Directors must be satisfied that the
Company'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 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; and
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.
The Company'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 the Company 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
the Company 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
the Company and SFX Entertainment if the Merger Agreement is terminated in
accordance with its terms.
Amendment or Modification of the Distribution Agreement
The Company 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, the Company. In the event of such a termination, no party will
have any liability to any other party.
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<PAGE>
RELATED AGREEMENTS
The Company 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 the Company
and SFX Entertainment to enter into the Tax Sharing Agreement and Employee
Benefits Agreement on or before the date of the Spin-Off.
Tax Sharing Agreement
Prior to the Spin-Off, the Company and SFX Entertainment will enter
into the Tax Sharing Agreement. Under the Tax Sharing Agreement, SFX
Entertainment will agree to pay to the Company the amount of the tax liability
of the Company 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 the Company 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. The
Company, 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 Company during the period prior to and including the Spin-Off.
SFX Entertainment also will be responsible for any taxes of the
Company 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 the Company and SFX Entertainment available to offset gain
resulting from the Spin-Off. The actual amount of the indemnification payment
will be based largely on the excess of the value of SFX Entertainment's Common
Stock on the date of the Spin-Off over the tax basis of that stock. If the
Company's Common Stock was valued at approximately $15 per share, management
believes that no material indemnification payment would be required. Such
indemnification obligation would be approximately $4.0 million at $16 per share
and would increase by approximately $7.7 million for each $1.00 increase above
the per share valuation of $16. If SFX Entertainment's Common Stock was valued
at $22.50 per share (the last sales price of the Class A Common Stock (trading
on a when-issued basis) on the over-the-counter market on March 13, 1998),
management estimates that SFX Entertainment would have been required to pay
approximately $54.0 million pursuant to such indemnification obligation. It is
expected that such indemnity payment will be due on or about June 15, 1998.
The Employee Benefits Agreement
Prior to the Spin-Off, the Company and SFX Entertainment will enter
into an Employee Benefits Agreement. Pursuant to the Employee Benefits
Agreement, the Company 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 the Company (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 the Company to SFX Entertainment or who are otherwise
employed by SFX Entertainment upon the Spin-Off. With respect to employees
transferred from the Company to SFX Entertainment or who are otherwise employed
by SFX Entertainment upon the Spin-Off, the Company 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 the Company of employees being
transferred from the Company to SFX Entertainment or who are otherwise employed
by SFX Entertainment upon the Spin-Off are not distributed, the Company and SFX
Entertainment must take all actions necessary or appropriate to effect their
transfer to a 401(k) plan established by SFX Entertainment.
FORWARD-LOOKING INFORMATION
Except for the historical information contained in this Annual Report
on Form 10-K, certain items herein, including without limitation certain
matters discussed under Part I, Item 3, "Legal Proceedings" and under Part II,
Item 7, "Management's Discussion and Analysis of Financial Condition and
Results of Operations" (the "MD&A"), are
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<PAGE>
forward-looking statements. The matters referred to in such statements could be
affected by the risks and uncertainties involved in the Company's business,
including without limitation 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 detailed in
Part I, Item 1, "Competition" and "Federal Regulation of Radio Broadcasting"
and in Part II, Item 7, the MD&A.
ITEM 2. PROPERTIES.
The Company's corporate headquarters are located at 650 Madison
Avenue, 16th Floor, New York, New York 10022. The types of properties required
to support each of the Company's radio stations include offices, studios and
transmitter sites. The transmitter site for each station is generally located
so as to provide maximum market coverage consistent with the station's license.
All of the property owned by the Company, excluding properties held by SFX
Entertainment, secures the Company's borrowings under the Credit Agreement.
No single property is material to the Company's overall operations.
The majority of the Company's offices and studios used in connection with the
operations of the Company's radio stations are leased, with lease terms that
expire in one to eight years. The Company owns or leases all of its transmitter
antenna sites with lease terms that expire in one to fifty years. The Company
does not anticipate any difficulties in renewing those leases that expire
within the next five years or in leasing other space if required. The Company
owns substantially all of the equipment used in its radio broadcasting
business.
Management believes that its properties are in good condition and are
suitable for its operations, however, the Company continually looks for
opportunities to upgrade its properties.
For a description of the properties of SFX Entertainment, see "Item 2.
Properties" of the SFX Entertainment 10-K which is incorporated herein by
reference.
ITEM 3. LEGAL PROCEEDINGS.
On August 29, 1997, two lawsuits were commenced against the Company
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. The parties have agreed that the
lawsuits may be consolidated in one action entitled In Re SFX Broadcasting,
Inc. Shareholders Litigation (C.A. No. 15891).
On March 17, 1998, the parties entered into a Memorandum of
Understanding, pursuant to which the parties have reached an agreement
providing for a settlement of the action (the "Settlement"). Pursuant to the
Settlement, the Company has agreed not to seek an amendment to the Merger
Agreement to reduce the consideration to be received by the stockholders of the
Company in the Merger in order to offset SFX Entertainment's indemnity
obligations, including a tax indemnity obligation expected to be approximately
$54.0 million (based on the trading price (on a when-issued basis) of SFX
Entertainment's Class A common stock on March 13, 1998). See "Item 7.
Management's Discussion and Analysis of Financial Condition and Results of
Operations--Merger and Spin-Off--Potential Uses--Tax Indemnification
Arrangement." SFX Entertainment intends to seek alternative financing for such
payments. The Settlement also provides for the Company to pay plaintiffs'
counsel an aggregate of $950,000, including all fees and expenses as approved
by the court. The Settlement is conditioned on the (a) consummation of the
Merger, (b) completion of the confirmatory discovery and (c) approval of the
court. Pursuant to the Settlement, the defendants have denied, and continue to
deny, that they have acted in bad faith or breached any fiduciary duty. There
can be no assurance that the court will approve the Settlement on the terms and
conditions provided for therein, or at all.
As a component of the Chancellor Exchange, the Company would exchange
its stations on Long Island, New York (the "Long Island Exchange"), for
Chancellor's stations in Jacksonville, Florida. The Company is currently
programming Chancellor's stations in Jacksonville and Chancellor is currently
programming the Company's stations
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<PAGE>
on Long Island pursuant to an LMA. On November 6, 1997, the DOJ filed a
complaint in the United States District Court for the Eastern District of New
York (Civil Action No. 97-6497) 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 such litigation will not delay the Merger.
The Company, Capstar and Chancellor are currently involved in
settlement discussions with the DOJ. If successfully concluded, these
settlement discussions will resolve all competitive issues raised by the DOJ
and will terminate all investigations involving the Chancellor Exchange, the
Long Island Exchange and the Merger. (See "Item 1. Business--Pending
Acquisitions and Pending Dispositions--Radio Stations--The Merger--Regulatory
Approval"). The Company cannot, however, be certain that the settlement
discussions will be successful.
The Company, together with, in some instances, certain of its
directors and officers, is a defendant or co-defendant in various legal actions
involving employment related matters and various other claims incidental to the
conduct of its business. However, in the opinion of management, there are no
other material threatened or pending legal proceedings against the Company,
which if adversely decided, would have a material effect on the financial
condition or results of operations of the Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
There were no matters submitted to a vote of security holders of the
Company during the fourth quarter of the fiscal year ended December 31, 1997.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND STOCKHOLDER MATTERS.
MARKET INFORMATION FOR SECURITIES
The Company's Class A Common Stock and Class B Warrants ("Class B
Warrants") trade on the Nasdaq Stock Market under the symbols SFXBA and SFXBW,
respectively. The high and low sales for the Company's Class A Common Stock and
Class B Warrants for the years ended December 31, 1997 and 1996 were:
<TABLE>
<CAPTION>
CLASS A COMMON STOCK CLASS B WARRANTS(1)
---------------------------------------- ------------------------------------------
1997 1996 1997 1996
------ ------ ------ -----
QUARTER
ENDED HIGH LOW HIGH LOW HIGH LOW HIGH LOW
- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
March 31 $37 1/4 $27 $35 $25 1/2 $2 3/4 $1 7/8 $2 3/4 $1 7/16
June 30 42 3/8 27 9/16 39 1/4 31 1/2 4 2 3/8 2 9/16 1 1/2
September 30 74 3/4 40 48 37 1/2 11 3 1/2 2 11/16 1 15/16
December 31 80 1/2 72 1/2 48 1/4 24 3/4 12 15/16 10 1/8 6 1 7/8
</TABLE>
- ---------------
(1) The Company assumed the Class B Warrants from MMR pursuant to the
acquisition by the Company of MMR pursuant to the merger of MMR into a
wholly-owned subsidiary of the Company (the "MMR Merger"). Each Class
B Warrant is exercisable for .2983 shares of Class A Common Stock.
Prior to the MMR Merger the Class B Warrants traded under the symbol
"RDIOAZ."
As of March 4,1998, there were approximately 102 holders of record of
the Company's outstanding Class A Common Stock, and four holders of record of
the Company's outstanding Class B Common Stock.
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<PAGE>
The Company has not paid any dividends on its common stock. The
Company intends to retain future earnings for use in its business and does not
anticipate paying any cash or stock dividends on shares of its common stock in
the foreseeable future. In addition, the certificates of designations with
respect to the Series D Preferred Stock and the Company's Series E Preferred
Stock prevents the payment of dividends on the common stock unless all
dividends on the outstanding shares of Series D Preferred Stock and Series D
Preferred Stock have been paid. The Credit Agreement and the indenture
governing the Company's 2006 Notes also restrict the Company's ability to pay
cash dividends unless certain financial tests (including a ratio of debt to
cash flow) and an additional restricted payments test are met.
SALES OF UNREGISTERED SECURITIES
In March 1997, the Company issued 250,838 shares of Class A Common
Stock in connection with the acquisition of certain companies which
collectively own and operate the Meadows Music Theater and in June 1997, the
Company issued 62,792 shares of Class A Common Stock in connection with the
Sunshine Promotions Acquisition. The shares where issued in reliance on the
exemption from registration provided by Section 4(2) of the Securities Act of
1933, as amended. For a description of the sales of unregistered securities of
SFX Entertainment, see "Item 5. Market for Registrant's Common Equity and
Stockholder Matters--Recent Sales of Unregistered Securities" of the SFX
Entertainment 10-K which is incorporated herein by reference.
ITEM 6. SELECTED COMBINED FINANCIAL DATA OF SFX BROADCASTING
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
(DOLLARS IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
1993 1994 1995 1996 1997
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net revenues $34,233 $55,556 $76,830 $143,061 $270,364
Station operating expenses 21,555 33,956 51,039 92,816 167,063
Depreciation, amortization, duopoly integration costs and
acquisition related costs(1) 4,475 5,873 9,137 17,311 38,232
Corporate expenses 1,808 2,964 3,797 6,313 7,461
Non-recurring and unusual charges, including adjustments
to broadcast rights agreements(2) 13,980 -- 5,000 28,994 20,174
-------- ----------- -------- --------- ---------
Operating income (loss) (7,585) 12,763 7,857 (2,373) 37,434
Investment income (loss) 17 (121) 650 4,017 2,821
Interest expense (7,351) (9,332) (12,903) (34,897) (64,506)
Loss on sale of radio station -- -- -- (1,900) --
------------ ------------ ------------ ------------- ------------
Income (loss) before income taxes, operations to be
distributed to stockholders, extraordinary loss and
cumulative effect of a change in accounting principle (14,919) 3,310 (4,396) (35,153) (24,251)
Income tax expense 1,015 1,474 -- 480 810
Income from operations to be distributed to stockholders -- -- -- -- 3,814
Extraordinary loss on debt retirement 1,665 -- -- 15,219 --
Cumulative effect of a change in accounting principle 182 -- -- -- --
----------- ------------ ------------ --------------------------
Net income (loss) (17,781) 1,836 (4,396) (50,852) (21,247)
Redeemable preferred stock dividends and accretion(3) 557 348 291 6,061 38,510
----------- ----------- ----------- ----------- -----------
Net income (loss) applicable to common stockholders $(18,338) $1,488 $(4,687) $(56,913) $(59,757)
========== ========== ========= ========== ===========
Net income (loss) per share $ (7.08) $ 0.26 $ (0.71) $ (7.52) $ (6.27)
------------ ------- ----------- ---------- -----------
Weighted average common shares outstanding 2,589,285 5,792,385 6,595,728 7,563,600 9,526,429
--------- --------- --------- --------- ---------
OTHER OPERATING DATA:
Broadcast Cash Flow(4) $12,678 $21,600 $25,791 $50,245 $103,301
EBITDA(4) 10,870 18,636 21,994 43,932 95,840
Cash capital expenditures 569 1,951 3,261 3,224 12,409
Net cash provided by (used in) operating activities 76 1,174 499 (13,447) 5,047
Net cash used in by investing activities (56,568) (6,184) (25,697) (470,513) (499,051)
Net cash (used in) provided by financing activities 66,122 (2,083) 33,897 502,668 494,068
- 28 -
<PAGE>
BALANCE SHEET DATA:
Cash and cash equivalents $10,287 $3,194 $11,893 $10,601 $24,686
Working capital (deficit) 22,088 18,698 19,334 48,363 81,437
Intangible assets, net 107,290 102,152 129,543 664,103 1,033,564
Total assets 152,871 145,808 187,337 859,327 1,375,615
Total debt and capital lease obligations 81,627 81,516 81,850 481,460 764,702
Redeemable preferred stock 3,701 2,466 3,285 152,053 361,996
Shareholders' equity (deficit) 48,598 48,856 83,061 94,517 74,825
</TABLE>
- --------------------
(1) In 1995 costs of $1,380,000 relating to the integration of KYXY-FM
operating in San Diego and the reformatting of its duopoly partner, in
1996 costs of $785,000 related to the integration and reformatting of
the Charlotte stations and $352,000 related to the relocation of
certain corporate office functions, and in 1997 costs of $871,000
related primarily to the reformatting of the Dallas stations were
included in depreciation, amortization, duopoly integration costs and
acquisition related costs.
(2) In 1993, a non cash non-recurring and unusual charge was incurred
relating to the valuation of founders shares at the offering date and
certain pooling costs related to the Capstar merger. In 1995, a $5.0
million charge was incurred with respect to the diminished value of
the Texas Rangers contract. In 1996, non-recurring and unusual charges
of $28,994,000 in 1996 which consisted primarily of (i) payments in
excess of the fair market value of stock repurchased from the
Company's former president totaling $12,510,000 (ii) a write-off of
$2,330,000 a loan made to the Company's former president and accrued
interest thereon, (iii) $5,586,000 relating to a write-off of a $2.0
million loan to SCMC and accrued interest thereon and the issuance of
600,000 warrants to SCMC, (iv) $4,575,000 for the repurchase of Mr.
Armstrong's options, and (v) a charge of $1,600,000 related to the
termination of Texas Rangers. In 1997, the Company recorded
non-recurring and unusual charges of $20,174,000 which consisted
primarily of (i) $12,140,000 relating to bonuses paid to officers of
the Company, (ii) a write-off of a $2,500,000 loan made to the
Company's Chairman, (iii) charges relating to the Merger and the
Spin-Off of $1,713,000 relating to a the increase in value of certain
Stock Appreciation Rights and $3,821,000 of expenses, primarily legal,
accounting and regulatory fees.
(3) Includes preferred stock dividends and accretion on Series A, B, C, D
and E Redeemable Preferred Stock.
(4) EBITDA is defined as net revenues less station operating expenses and
corporate general and administrative expenses. Broadcast Cash Flow is
defined as EBITDA before corporate, general and administrative
expenses. Although EBITDA and Broadcast Cash Flow are not measures of
performance calculated in accordance with generally accepted
accounting principles ("GAAP"), the Company believes that EBITDA and
Broadcast Cash Flow 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. In
addition, EBITDA is the basis for determining compliance with several
covenants in the Indentures and the Credit Agreement.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
BASIS OF PRESENTATION
The following discussion of the financial condition and results of
operations of the Company should be read in conjunction with the consolidated
financial statements and related notes thereto. The following discussion
contains certain forward-looking statements that involve risks and
uncertainties. The Company's actual results could differ materially from those
discussed herein. Factors that could cause or contribute to such differences
include, but are not limited to, risks and uncertainties relating to leverage,
the need for additional funds, consummation of the Pending Acquisitions,
integration of the recently completed acquisitions, the ability of the Company
to achieve certain cost savings, the management of growth, the introduction of
new technology, changes in the regulatory environment, the popularity of radio
as a broadcasting and advertising medium and changing consumer tastes. The
Company undertakes no obligation to publicly release the results of any
revisions to these forward-looking statements that may be made to reflect any
future events or circumstances.
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<PAGE>
PENDING SPIN-OFF AND MERGER
In August 1997, the Company entered into the Merger Agreement pursuant
to which the Company will become a wholly owned subsidiary of Buyer. In the
Merger, holders of the Company's Class A Common Stock will receive $75.00 per
share and the holders of the Company's Class B Common Stock will receive $97.50
per share, subject to adjustment under certain circumstances. Pursuant to the
Merger Agreement, the Company has contributed its live entertainment businesses
to SFX Entertainment and, prior to the consummation of the Merger, the Company
intends to distribute all of the outstanding shares of common stock of SFX
Entertainment to the holders of the Company's common stock, Series D Preferred
Stock, interests in the Company's directors' deferred stock ownership plan and
certain warrants of the Company. The Merger and the Spin-Off are subject to
certain conditions, and there can be no assurance that either the Merger or the
Spin-Off will be consummated on the terms described herein or at all. For a
description of the Merger and Spin-Off, see "Item 1. Business--The Merger and
Spin-Off," and for a description of certain considerations with respect to the
Merger and Spin-Off, see "Certain Considerations" of the Proxy Statement of the
Company, dated as of February 13, 1998 (and Supplement No. 1 was mailed on or
about on March 17, 1998) filed as Exhibits 99.2 and 99.3 hereto (the "Proxy
Statement") which is incorporated herein by reference.
GENERAL
The Company currently owns or operates, provides programming to or
sells advertising on behalf of 86 radio stations located in 24 markets.
Following completion of the Pending Acquisitions and the Pending Dispositions,
the Company will own and operate, provide programming to or sell advertising on
behalf of 74 radio stations located in 21 markets.
The performance of a radio station group, such as the Company, is
customarily measured by its ability to generate Broadcast Cash Flow. Broadcast
Cash Flow is defined as net revenues less station operating expenses. Although
Broadcast Cash Flow is not a measure of performance calculated in accordance
with GAAP, the Company believes that Broadcast Cash Flow is accepted by the
broadcasting industry as a generally recognized measure of performance and is
used by analysts who report publicly on the performance of broadcasting
companies. Nevertheless, this measure should not be considered in isolation or
as a substitute for operating income, net income, net cash provided by
operating activities or any other measure for determining the Company's
operating performance or liquidity which is calculated in accordance with GAAP.
The primary source of the Company's revenue is the sale of advertising
time on its radio stations. The Company's most significant station operating
expenses are employee salaries and commissions, programming expenses and
advertising and promotional expenditures. The Company strives to control these
expenses by working closely with local station management.
The Company's revenues are primarily affected by the advertising rates
its radio stations can obtain in the face of competition from radio and other
media. The Company's advertising rates are in large part based on a station's
ability to attract audiences in the demographic groups targeted by its
advertisers, as measured principally by Arbitron (an independent rating
service) on a quarterly basis. Because audience ratings in local markets are
crucial to a station's financial success, the Company endeavors to develop
strong listener loyalty. The Company believes that the diversification of
formats on its stations helps to insulate it from the effects of changes in the
musical tastes of the public in any particular format. The number of
advertisements that can be broadcast without jeopardizing listening levels (and
the resulting ratings) is limited in part by the format of a particular
station. The Company's stations strive to maximize revenue by constantly
managing the number of commercials available for sale and adjusting prices
based upon local competitive conditions. In the broadcasting industry, radio
stations often utilize trade (or barter) agreements which exchange advertising
time for goods or services (such as travel or lodging), instead of for cash.
The Company seeks to minimize its use of such agreements. The Company's
advertising contracts are generally short-term. The Company generates most of
its revenue from local advertising, which is sold primarily by a station's
sales staff. In 1997, approximately 77% of the Company's revenues were from
local advertising. To generate national advertising sales, the Company engages
independent advertising sales representatives that specialize in national sales
for each of its stations.
The radio broadcasting industry is highly competitive and the
Company's stations are located in highly competitive markets. The financial
results of each of the Company's stations are dependent to a significant degree
upon
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<PAGE>
its audience ratings and its share of the overall advertising revenue within
the station's geographic market. Each of the Company's stations competes for
audience share and advertising revenue directly with other FM and AM radio
stations, as well as with other media, within their respective markets. The
Company's audience ratings and market share are subject to change, and any
adverse change in audience rating and market share in any particular market
could have a material and adverse effect on the Company's net revenues.
Although the Company competes with other radio stations with comparable
programming formats in most of its markets, if another station in the market
were to convert its programming format to a format similar to one of the
Company's radio stations, if a new radio station were to adopt a competitive
format, or if an existing competitor were to strengthen its operations, the
Company's stations could suffer a reduction in ratings or advertising revenue
and could require increased promotional and other expenses. In addition,
certain of the Company's stations compete, and in the future other stations may
compete, with groups of stations in a market operated by a single operator. As
a result of the Telecom Act, the radio broadcasting industry has become
increasingly consolidated, resulting in the existence of radio broadcasting
companies which are significantly larger, with greater financial resources,
than the Company. Furthermore, the Telecom Act will permit other radio
broadcasting companies to enter the markets in which the Company operates or
may operate in the future. Although the Company believes that each of its
stations is able to compete effectively in its market, there can be no
assurance that any of the Company's stations will be able to maintain or
increase current audience ratings and advertising revenue market share. The
Company's stations also compete with other advertising media such as
newspapers, television, magazines, billboard advertising, transit advertising
and direct mail advertising. Radio broadcasting is also subject to competition
from new media technologies that are being developed or introduced, such as the
delivery of audio programming by cable television systems or the introduction
of digital audio broadcasting. The Company cannot predict the effect, if any of
these new technologies may have on the radio broadcasting industry.
In addition to its radio station operations, the Company has become a
significant operator of venues for live entertainment and a promoter of music
concerts and other entertainment events. Pursuant to the Merger Agreement, the
Company plans to effect the Spin-Off of its live entertainment business now
held by SFX Entertainment to shareholders of the Company's common stock, Series
D Preferred Stock, interests in the Company's directors' deferred stock
ownership plan and holders of certain of the Company's warrants. The shares of
SFX Entertainment will be issued in the Spin-Off as a taxable dividend.
Seasonality
The Company's revenues are largely seasonal in nature. As is typical
in radio broadcasting, the Company's first calendar quarter generally produces
the lowest revenues from radio for the year, and the fourth calendar quarter
generally produces the highest revenues for the year. Operating results from
radio in any period may be affected by the incurrence of advertising and
promotion expenses that do not necessarily produce commensurate revenues until
the impact of the advertising and promotion is realized in future periods.
RESULTS OF OPERATIONS
The results of operations of the live entertainment business of SFX
Entertainment are included in the results of operations of the Company as
income from operations to be distributed to shareholders and, therefore, are
not included in the operating income of the Company. For a detailed analysis of
the results of operations, liquidity and capital resources of SFX
Entertainment, investors are referred to "Item 7. Management's Discussion and
Analysis of Financial Condition and Results of Operations" of the SFX
Entertainment 10-K which is incorporated herein by reference.
The Company's consolidated financial statements tend not to be
directly comparable from period to period due to acquisition activity. The
major acquisitions during the three years ended December 31, 1997, all of which
have been accounted for using the purchase method of accounting, were as
follows:
1995 Acquisitions: In April 1995, the Company acquired KYXY-FM in San
Diego, California, and in September 1995, the Company purchased KTCK-AM in
Dallas, Texas. The Company had been providing programming and selling
advertising pursuant to an LMA with KYXY-FM since January 1995 and KTCK-AM
since March 1995.
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In addition, the Company provided programming and sold advertising pursuant to
an LMA with WTDR-FM and WLYT-FM in Charlotte, North Carolina beginning April
1995.
1996 Acquisitions and Dispositions: In February 1996, the Company
acquired substantially all the assets of WTDR-FM and WLYT-FM in Charlotte,
North Carolina (the "Charlotte Acquisition"). In June 1996, the Company
acquired substantially all of the assets of WROQ-FM, Greenville, South Carolina
(the "Greenville Acquisition") and WTRG-FM and WRDU-FM, both operating in
Raleigh, North Carolina, and WMFR-AM, WMAG-FM and WTCK-AM (formerly WWWB-AM),
each operating in Greensboro, North Carolina (the "Raleigh-Greensboro
Acquisition").
The Company acquired from Prism (the "Prism Acquisition") (i),
substantially all of the assets used in the operation of eight FM and five AM
radio stations located in four markets: Jacksonville, Florida; Raleigh, North
Carolina; Tucson, Arizona and Wichita, Kansas, in July 1996, and (ii)
substantially all of the assets of three radio stations operating in
Louisville, Kentucky (the "Louisville Stations") in September 1996. In October
1996, the Company sold the Louisville Stations (the "Louisville Dispositions").
In July 1996, the Company acquired Liberty (the "Liberty
Acquisition"), a privately-held radio broadcasting company 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. In July 1996, the Company
sold three of the Liberty Stations operating in the Washington, DC/Baltimore,
Maryland market (the "Washington Dispositions").
In July 1996, the Company acquired substantially all of the assets of
WJDX-FM, Jackson, Mississippi and in August 1996, the Company acquired
substantially all of the assets of WSTZ-FM and WZRX-AM, each operating in
Jackson and Mississippi (collectively, the "Jackson Acquisitions").
In October 1996, the Company sold radio station KTCK-AM, Dallas, Texas
(the "Dallas Disposition").
In November 1996, the Company acquired MMR, a radio broadcasting
company which owned and operated, provided programming to or sold advertising
on behalf of sixteen FM stations and one AM station located in eight markets:
New Haven, Connecticut; Hartford, Connecticut; Springfield/ Northampton,
Massachusetts; Daytona Beach, Florida; Augusta, Georgia; Biloxi, Mississippi;
Myrtle Beach, South Carolina and Little Rock, Arkansas pursuant to the MMR
Merger. Of the seventeen stations, MMR had entered into agreements to sell two
stations operating in Myrtle Beach, South Carolina and one station operating in
Little Rock, Arkansas (the "MMR Dispositions"). MMR had also decided not to
renew its JSA with one station operating in Augusta, Georgia and its LMA with
one station operating in Myrtle Beach, South Carolina.
In December 1996, the Company acquired WHSL-FM operating in
Greensboro, North Carolina (the "Greensboro Acquisition").
Also, in December 1996, the company exchanged the assets of KRLD-FM
operating in Dallas, Texas, along with the Texas State Networks for the assets
of KKRW-FM operating in Houston, Texas (the "Houston Exchange").
The Charlotte Acquisition, the Greenville Acquisition, the
Raleigh-Greensboro Acquisition, the Prism Acquisition, the Liberty Acquisition,
the Washington Dispositions, the Jackson Acquisitions, the Dallas Disposition,
the MMR Merger, the Greensboro Acquisition and the Houston Exchange are
collectively herein referred to as the "1996 Radio Acquisitions."
1997 Acquisitions and Dispositions . In January 1997, the Company
purchased one radio station operating in Albany, New York.
In February 1997, the Company purchased WWYZ-FM, operating in
Hartford, Connecticut, for a purchase price, including the payment of fees and
expenses, of $25.9 million (the "Hartford Acquisition"). The Hartford
Acquisition increased the number of stations the Company owns in the Hartford
market to five.
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In March 1997, the Company acquired two radio stations operating in
Houston, Texas, for a purchase price of approximately $43.0 million, exclusive
of certain additional contingent liabilities which may become payable (the
"Texas Coast Acquisition"). The Texas Coast Acquisition increased the number of
stations the Company owns in the Houston market to four.
In March 1997, the Company exchanged one radio station operating in
Washington, D.C./Baltimore, Maryland, for two radio stations operating in
Dallas, Texas (the "CBS Exchange") and completed the sale of two radio stations
operating in the Myrtle Beach, South Carolina market for $5.1 million payable
in installments over a five year period (present value approximately $4.3
million). The CBS Exchange was structured as a substantially tax free exchange
of like-kind assets. The contract for the sale of the Myrtle Beach stations was
in place prior to the merger with Multi- Market Radio, Inc. (the "MMR Merger").
No gain or loss was recognized on these transactions as the Myrtle Beach
stations were recently acquired.
In April 1997, the Company acquired substantially all of the assets of
three radio stations in Indianapolis, Indiana and in June 1997 the Company
acquired substantially all of the assets of four stations in Pittsburgh,
Pennsylvania from Secret Communications Limited Partnership ("Secret
Communications") (the "Secret Communications Acquisition") for a total purchase
price of $255.0 million.
Also in April 1997, the Company sold one radio station operating in
Little Rock, Arkansas (the "Little Rock Disposition") to Triathlon Broadcasting
Company ("Triathlon"), a publicly traded radio broadcasting company. The
station was sold for $4.1 million, of which $3.5 million had been held as a
deposit by the Company since 1996. No gain or loss was recorded on the
transaction as the station was recently acquired.
In July 1997, the Company acquired substantially all of the assets of
four radio stations operating in Richmond, Virginia for approximately $46.5
million, including payments made to buy out minority equity interests which the
Company had originally agreed to provide to certain of the sellers (the
"Richmond Acquisition").
In August 1997, the Company acquired two radio stations operating in
Pittsburgh, Pennsylvania and two radio stations in Milwaukee, Wisconsin for
$35.0 million (the "Hearst Acquisition").
In August 1997, the Company exchanged one radio station in Pittsburgh,
Pennsylvania, which the Company had recently acquired from Secret
Communications, and $20.0 million in cash for one radio station in Charlotte,
North Carolina (the "Charlotte Exchange"). The Company operated the radio
station in Charlotte, North Carolina pursuant to a local market agreement
during July 1997.
In January 1998, the Company sold WVGO in Richmond, Virginia for $4.3
million (the "WVGO Disposition"). No gain or loss was recognized on the sale.
The Albany Acquisition, the Hartford Acquisition, the Texas Coast
Acquisition, the CBS Exchange, the Secret Communications Acquisition, the
Little Rock Disposition, the Richmond Acquisition, the Hearst Acquisition and
the Charlotte Exchange are collectively referred to as the "1997 Radio
Acquisitions," and, together with the 1996 Radio Acquisitions, the "1997 and
1996 Radio Acquisitions."
Results for the year ended December 31, 1996 include (i) WLYT-FM and
WKKT-FM (formerly WTDR-FM), Charlotte, North Carolina for which the Company had
provided programming and sold advertising time pursuant to an LMA prior to the
acquisition of such stations in March 1996, (ii) WHSL-FM in Greensboro, North
Carolina for which the Company had sold advertising pursuant to a JSA beginning
in the first quarter of 1996, and (iii) WAPE-FM and WFYV-FM, Jacksonville,
Florida (the "Jacksonville Stations"), for which the Company had provided
programming and sold advertising time pursuant to an LMA since July 1, 1996.
Results for the year ended December 31, 1997 include (i) the
Jacksonville Stations, for which the Company had provided programming and sold
advertising time pursuant to an LMA since July 1, 1996, (ii) the results for
WRFX-FM in Charlotte, North Carolina for which the Company had provided
programming and sold advertising time pursuant to an LMA during July 1997 and
(iii) the results for WJZC-FM, WLAC-FM and WLAC-AM in Nashville,
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Tennessee for which the Company had provided programming and sold advertising
time pursuant to an LMA since November 1, 1997.
Year Ended December 31, 1997 Compared to Year Ended December 31, 1996
For the year ended December 31, 1997, net revenues increased 89% to
$270,364,000 from $143,061,000 primarily as a result of the 1997 and 1996 Radio
Acquisitions which increased net revenues by $122,425,000. The 1996 Radio
Acquisitions increased net revenues since the radio stations were owned for a
full year in 1997 as compared to ownership for a partial year in 1996. In
addition, net revenue at radio stations owned for full years in both 1996 and
1997 increased as a result of strong radio advertising growth combined with
improved inventory management, ratings and other factors generally affecting
sales and rates. On a same station basis, assuming all stations owned and
operated as of December 31, 1997 were owned for all periods reported, net
revenues would have increased 9% from 1996.
Station operating expenses increased 80% to $167,063,000 from
$92,816,000 primarily due to the inclusion of expenses related to the 1997 and
1996 Radio Acquisitions of $73,784,000 and increases in variable expenses
related to the increases in net revenue at the existing stations.
Depreciation, amortization, duopoly integration costs and acquisition
related costs increased 121% to $38,232,000 from $17,311,000 due to the
inclusion of depreciation and amortization related to the 1997 and 1996 Radio
Acquisitions. Duopoly integration costs and acquisition related costs decreased
from $1,137,000 in 1996 to $871,000 in 1997.
Corporate expenses, including non-cash stock compensation, were
$7,461,000 and $6,313,000 for the years ended December 31, 1997 and 1996,
respectively. The increase reflects the growth in the Company's overall
operations, partially offset by the allocation of certain expenses and
Triathlon advisory fees to SFX Entertainment, which is included in operations
to be distributed to shareholders. As a percentage of total revenues, corporate
expenses declined from 4.4% to 2.8%. Corporate expenses in 1996 were net of
advisory fees received from MMR and Triathlon of $802,000.
In 1997, the Company recorded non-recurring and unusual charges of
$20,174,000 which consisted primarily of (i) $12,140,000 relating to bonuses
paid to officers of the Company, (ii) a write-off of a $2,500,000 loan made to
the Company's Chairman, (iii) charges relating to the Merger and the Spin-Off
of $1,713,000 relating to the increase in value of certain SARs, $3,821,000 of
expenses, primarily legal, accounting and regulatory fees.
In 1996, the Company recorded non-recurring and unusual charges of
$28,994,000 which consisted primarily of (i) $12,510,000 relating to payments
in excess of the fair market value of stock repurchased from the Company's
former president (ii) a write-off of a $2,330,000 loan made to the Company's
former president and accrued interest thereon, (iii) $5,586,000 relating to a
write-off of a $2.0 million loan to SCMC and accrued interest thereon and the
issuance of 600,000 warrants to SCMC, (iv) $4,575,000 for the repurchase of an
officer's options, and (v) a charge of $1,600,000 related to the termination of
Texas Rangers.
Operating income was $37,434,000 for the year ended December 31, 1997
compared to an operating loss of $2,373,000 for the same period in 1996 due to
the results discussed above.
Interest expense, net of interest income, increased 100% to
$61,685,000 from $30,880,000 in the year ended December 31, 1997, primarily due
to interest on the $450.0 million aggregate principal amount of 10 3/4% Senior
Subordinated Notes issued in May 1996 (the "2006 Notes") and interest on
borrowings under the Credit Agreement which were used primarily to fund the
1997 and 1996 Radio Acquisitions.
The Company recorded a loss on sale of KTCK-AM Dallas of $1,900,000 in
1996.
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The Company recorded an income tax expense of $810,000 in 1997, as
compared to an income tax expense of $480,000 in 1996, which were primarily
related to state income taxes. The increase is a result of the 1997 and 1996
Radio Acquisitions.
In 1997, net income of the live entertainment business of SFX
Entertainment of $3,814,000 was included in the results of operations of the
Company as income from operations to be distributed to shareholders. SFX
Entertainment's 1997 operating results consisted of $96,144,000 of concert
revenue, $5,090,000 of operating income and $4,304,000 of income before income
taxes.
The Company incurred an extraordinary loss totaling $15,219,000 for
the year ended December 31, 1996 which consisted primarily of payments of $9.0
million for the repurchase premium and consent payments related to the early
redemption of $79.4 million of the Company's 11 3/8% Senior Subordinated Notes
due 2000 (the "2000 Notes") in the tender offer and the related consent
solicitations and the write-off of $5.6 million of debt issue costs.
The Company's net loss was $21,247,000 in 1997 compared to a net loss
of $50,852,000 in 1996 due to the factors discussed above.
Net loss applicable to common stock increased to $59,757,000 in 1997
from $56,913,000 in 1996 due to dividends on the Series D Preferred Stock
issued in May 1996 (the "Series D Preferred Stock Offering"), dividends on the
Series E Preferred Stock issued in January 1997, partially offset by the
decrease in net loss discussed above.
Broadcast Cash Flow increased 106% to $103,301,000 for the year ended
December 31, 1997 from $50,245,000 for 1996. The increase was primarily a
result of the inclusion of the results of the 1997 and 1996 Radio Acquisitions
of $48,641,000 and as well as improved results at the Company's existing
stations. On a same station basis, assuming all stations owned and operated as
of December 31, 1997 were owned for all periods reported, Broadcast Cash Flow
would have increased approximately 19% from 1996.
Year Ended December 31, 1996 Compared to Year Ended December 31, 1995
For the year ended December 31, 1996, net revenues increased 86% to
$143,061,000 from $76,830,000 primarily as a result of the 1996 Radio
Acquisitions (excluding the Charlotte Acquisition which the Company operated
pursuant to an LMA prior to the acquisition) which increased net revenues by
$58,880,000. In addition, net revenue at existing the Company stations
(excluding the 1996 Radio Acquisitions and the Charlotte Acquisition which the
Company did not operate for the entire 1995 period) increased as a result of
strong radio advertising growth combined with improved inventory management,
ratings and other factors generally affecting sales and rates. On a same
station basis, assuming all stations owned and operated as of December 31, 1996
were owned for all periods reported, net revenues would have increased 10% from
1995.
Station operating expenses increased 82% to $92,816,000 from
$51,039,000 primarily due to the inclusion of expenses related to the 1996
Radio Acquisitions (excluding the Charlotte Acquisition) of $38,525,000 and to
increases in variable expenses related to the increases in net revenue at the
existing stations.
Depreciation, amortization, duopoly integration costs and acquisition
related costs increased 89% to $17,311,000 from $9,137,000 due to the inclusion
of depreciation and amortization related to the 1996 Radio Acquisitions.
Duopoly integration costs and acquisition related costs decreased from
$1,380,000 in 1995 to $1,137,000 in 1996.
Corporate expenses were $6,313,000 and $3,797,000 for the years ended
December 31, 1996 and 1995, respectively. The increase reflects the growth in
the Company's overall operations. Corporate expenses declined as a percentage
of net revenues. Included in corporate expenses in 1996 were fees received from
MMR and Triathlon of $802,000.
The Company recorded a loss on sale of KTCK-AM Dallas of $1,900,000 in
1996.
The Company recorded non-recurring and unusual charges of $28,994,000
in 1996 which consisted primarily of (i) $12,510,000 relating to payments in
excess of the fair market value of stock repurchased from the Company's former
president (ii) a write-off of a $2,330,000 loan made to the Company's former
president and accrued interest thereon, (iii) $5,586,000 relating to a
write-off of a $2.0 million loan to SCMC and accrued interest thereon and the
issuance of 600,000 warrants to SCMC, (iv) $4,575,000 for the repurchase of an
officer's options, and (v) a charge of
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$1,600,000 related to the termination of Texas Rangers. In 1995, the Company
recorded a $5.0 million charge related to the write down in value of the
Company's broadcast rights of Texas Rangers baseball.
Operating loss was $2,373,000 for the year ended December 31, 1996
compared to operating income of $7,857,000 for the same period in 1995 due to
the results discussed above.
Interest expense, net of interest income, increased 152% to
$30,880,000 from $12,253,000 in the year ended December 31, 1996, primarily due
to interest on the 2006 Notes. Additionally, interest on borrowings related to
the Charlotte Acquisition and the MMR Merger contributed to the increase.
The Company incurred an extraordinary loss totaling $15,219,000 for
the year ended December 31, 1996 which consisted primarily of payments of $9.0
million for the repurchase premium and consent payments related to the early
redemption of $79.4 million of the Company's 2000 Notes in the tender offer and
the related consent solicitations and the write-off of $5.6 million of debt
issue costs.
The Company recorded income tax expense of $480,000 for the year ended
December 31, 1996 related to state and local taxes. The Company did not record
income tax expense in 1995.
The Company's net loss was $50,852,000 in 1996 compared to a net loss
of $4,396,000 in 1995 due to the factors discussed above.
Net loss applicable to common stock increased to $56,913,000 in 1996
from $4,687,000 in 1995 due to dividends on the Series D Preferred Stock
Offering and the increase in the net loss discussed above.
Broadcast Cash Flow increased 95% to $50,245,000 for the year ended
December 31, 1996 from $25,791,000 for 1995. The increase was primarily a
result of the inclusion of the results of the 1996 Radio Acquisitions
(excluding the Charlotte Acquisitions) of $20,356,000 and as well as improved
results at the Company's existing stations. On a same station basis, assuming
all stations owned and operated as of December 31, 1996 were owned for all
periods reported, Broadcast Cash Flow would have increased approximately 26%
from 1995.
LIQUIDITY AND CAPITAL RESOURCES
The Company's principal need for funds has historically been to fund
the acquisition of radio stations and live entertainment businesses, including
related working capital needs, and, to a lesser extent, capital expenditures
and the redemption of outstanding securities and debt service. The Company's
principal sources of funds for these requirements have historically been the
proceeds from offerings of equity and debt securities, borrowings under credit
agreements and, to a significantly lesser extent, cash flows from operations.
Historic Cash Flows
Cash provided by operations for the year ended December 31, 1997 was
$4,042,000, as compared to cash used in operations of $13,447,000 in 1996 and
cash provided by operations of $499,000 in 1995. The increase in cash provided
by operations in 1997 as compared to 1996 was primarily attributable to
improved Broadcast Cash Flow and the greater impact of the non-recurring and
unusual charges in 1996. The cash used in operations in 1996 was primarily
attributable to the cash portion of the non-recurring and unusual charges and
to the required investment in working capital of radio stations acquired
without the related working capital. The decrease in 1996 as compared to 1995
was primarily attributable to higher investments in working capital of stations
acquired in 1996.
The Company used cash in investing activities for the years ended
December 31, 1997, 1996 and 1995 of $499,051,000, $470,513,000 and $25,697,000,
respectively. Cash used in investing activities in 1997 related primarily to
Secret Communications, Richmond, Texas Coast, Hearst and the Hartford
Acquisitions and the Charlotte Exchange and the 1997 Entertainment
Acquisitions. Cash used in investing activities in 1996 related primarily to
the Charlotte, Greenville, Raleigh-Greensboro, Liberty, Prism, Jackson,
Greensboro Acquisitions, and the MMR Merger. In addition, proceeds from sale of
radio stations in 1996 of $56.9 million was offset by deposits and other
payments for Pending
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Acquisitions of $30.8 million and capital expenditures of $3.2 million. Cash
used in 1995 was primarily attributable to the purchases of KYXY-FM in San
Diego and KTCK-AM in Dallas and the purchase of property and equipment, and was
partially offset by the sale of short term investments.
Cash provided by financing activities for the years ended December 31,
1997 and 1996 was $494,068,000 and $502,668,000, respectively. In 1997, cash
provided by financing activities related primarily to $283 million of net
borrowings under the Credit Agreement and $215,258,000 of proceeds from the
Series E Preferred Stock Offerings. In 1996, cash provided by financing
activities related primarily to $644,945,000 of proceeds from the Note Offering
and the Series D Preferred Stock Offering and borrowings under a credit
agreements partially offset by payments on subordinated debt, senior loans and
capital lease obligations of $110,396,000 during 1996. In 1995, cash provided
by financing activities related primarily to proceeds of the 1995 Stock
Offering. The Company used cash in financing activities for the year ended
December 31, 1995 of $2,083,000.
Cash flow from the operations to be distributed to shareholders in the
Spin-Off was $1,005,000 from operating activities, $73,296,000 of cash used
in investing activities and $823,000 of cash used in financing activities.
1997 Radio Station Acquisitions and Dispositions
During 1997, the Company paid $255.0 million, $46.5 million, $43.0
million, $35.0 million, $25.9 million, $20.0 million, and $1.0 million for the
Secret Acquisition, the Richmond Acquisition, the Texas Coast Acquisition, the
Hearst Acquisition, the Hartford Acquisitions, the Charlotte Exchange and the
Albany Acquisition, respectively. The primary sources of funds for these
acquisitions were proceeds from the Series E Preferred Stock Offering and
borrowings under the Credit Agreement. The primary sources of funds for these
acquisitions were proceeds from the Series E Preferred Stock Offering and the
Credit Agreement. In addition, the Company received $600,000 and $575,000 for
radio stations sold in Little Rock, Arkansas and Myrtle Beach, South Carolina,
respectively.
In August 1997, the Company also paid a $2.0 million deposit pursuant
to its agreement to purchase three radio stations in Nashville, Tennessee. The
primary source of funds was borrowings under the Credit Agreement.
In January 1998, the Company sold WVGO in Richmond, Virginia for $4.3
million. No gain or loss was recognized on the sale.
1997 Live Entertainment Acquisitions
In January 1997, the Company purchased Delsener/Slater Enterprises,
Ltd., a concert promotion company based in New York City, for an aggregate
consideration of approximately $27.6 million, including $2.9 million for
working capital and the present value of deferred payments of $3.0 million to
be paid, without interest, over five years, and $1.0 million to be paid,
without interest, over ten years. The deferred payments are subject to
acceleration in certain circumstances.
In March 1997, the Company acquired a 37-year lease to operate the
Meadows Music Theater, a 25,000-seat indoor/outdoor complex located in
Hartford, Connecticut for $0.9 million in cash, shares of Class A Common Stock
of the Company with a value of approximately $7.5 million and the assumption of
approximately $15.4 million of debt.
In June 1997, the Company acquired Sunshine Promotions, Inc., a
concert promotion company based in Indianapolis, Indiana, and certain related
companies, for $53.9 million in cash at closing, $2.0 million in note payable
over 5 years, shares of Class A Common Stock issued and issuable over a two
year period with a value of approximately $4.0 million and the assumption of
approximately $1.6 million of debt. Pursuant to the Merger Agreement, SFX
Entertainment is responsible for the payments owing under the Sunshine Note,
which by its terms accelerates upon the change of control of the Company
resulting from the consummation of the Merger.
1998 Activity Regarding Merger and Spin-Off
1998 SFX Entertainment Acquisitions. In February and March of 1998,
SFX Entertainment consummated its acquisitions of PACE Entertainment
Corporation, Pavilion Partners, The Contemporary Group, BG Presents, Inc., The
Network Group, Concert/Southern Promotions and certain related entities for an
aggregate purchase price of $506.1 million, consisting of $442.1 million in
cash, including repayment of debt and payments for working capital, $7.8
million of assumed debt and agreements to issue, or the issuance of securities
convertible into, an aggregate of
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approximately 4.2 million shares of SFX Entertainment's common stock upon the
consummation of the Spin-Off with an attributed negotiated value of
approximately $56.2 million. In the event the Spin-Off does not occur, the
aggregate cash consideration for these acquisitions will increase by
approximately $56.2 million.
SFX Entertainment financed these acquisitions with the proceeds from
its recent private placement of $350 million in aggregate principal amount of
91/8% Senior Subordinated Notes due 2008 (the "SFX Entertainment Notes") and
from borrowings under SFX Entertainment's credit facility, as described below.
SFX Entertainment Credit Agreement. On February 26, 1998, SFX
Entertainment, its subsidiaries and the lenders that are parties thereto
entered into a Credit and Guarantee Agreement (the "SFX Entertainment Credit
Facility") which provides for a $300 million senior secured credit facility
comprised of (i) a $150.0 million seven year revolving facility and (ii) a $150
million eight year term loan. Borrowings under the SFX Entertainment Credit
Facility are secured by substantially all the assets of SFX Entertainment,
including a pledge of the outstanding stock of substantially all of its
subsidiaries, and are guaranteed by substantially all of the Company's
subsidiaries. On February 27, 1998, SFX Entertainment borrowed $150.0 million
pursuant to the term loan in connection with the acquisitions described above.
Under certain circumstances, such facility may be increased by $50 million in
available borrowings.
Company Guarantee of SFX Entertainment Performance Under Certain
Acquisition Agreements. The Company guaranteed certain obligations of SFX
Entertainment in connection with certain of the 1998 Entertainment Acquisitions
("Company Guarantee of Entertainment Obligations"). In connection with the PACE
Acquisition, SFX Entertainment is required to issue 1.5 million shares of its
Class A common stock valued at approximately $20 million, upon consummation of
the Spin-Off. In the event that the Spin-Off has not been consummated on or
before July 1, 1998 and each third month thereafter, each selling stockholder
will have the option to require SFX Entertainment to pay $13.33 per share in
lieu of each share of SFX Entertainment Class A common stock (the "PACE
Option"). The Company has guaranteed the full and timely performance of all of
SFX Entertainment's obligations under the agreement relating to the PACE
Acquisition until shares of SFX Entertainment Class A common stock have been
delivered or the PACE Option shall have been exercised by all selling
stockholders. In connection with the Contemporary Acquisition, SFX
Entertainment issued shares of its Series A redeemable convertible preferred
stock (the "Series A Preferred Stock") valued at approximately $18.7 million
which, upon consummation of the Spin-Off, will automatically convert into
1,402,850.7 shares of SFX Entertainment's Class A common stock. If the Spin-Off
is not consummated by July 1, 1998, then the shares of Series A preferred stock
will be redeemed by SFX Entertainment for the greater of their fair market
value or $18.7 million. The Company has guaranteed the repayment of the
redemption price, which guarantee will terminate upon consummation of the
Spin-Off.
Consent Solicitations. To facilitate the Spin-Off, SFX Entertainment's
1998 acquisitions and its financing thereof, the Company sought and obtained
consents from the holders of its 2006 Notes and the holders of its 12 5/8%
Series E Cumulative Exchangeable Preferred Stock of the Company (the "Series E
Preferred Stock"). Fees and expenses of $18.0 million incurred by the Company
in connection with the consent solicitations were reimbursed by SFX
Entertainment with the proceeds of the SFX Entertainment Notes.
Pending Radio Station Acquisitions and Dispositions
Pursuant to separate agreements, the Company has agreed to: (i)
exchange four radio stations owned by the Company and located on Long Island,
New York, for two radio stations operating in Jacksonville, Florida, where the
Company currently owns four stations, and a cash payment of $11.0 million; (ii)
acquire three radio stations operating in Nashville, Tennessee, where the
Company currently owns two radio stations, for $35 million; and (iii) sell six
stations in Jackson, Mississippi and two stations in Biloxi, Mississippi for
$66.0 million. The DOJ has brought suit alleging that the Long Island Exchange,
a component of the Chancellor Exchange, is likely to reduce competition. The
complaint requests permanent injunctive relief preventing the consummation of
the acquisition of the Long Island stations by Chancellor. The Company,
Chancellor, an affiliate of Buyer and the DOJ are currently involved in
settlement discussions. If successfully concluded, these settlement discussions
will resolve all competitive issues raised by DOJ and will terminate all
investigations or litigation by DOJ with respect to the Merger and the
Chancellor Exchange. There can be no assurance that the settlement discussions
will be completed successfully. If the Company fails to reach an acceptable
settlement agreement with DOJ, the Company
- 38 -
<PAGE>
intends to defend the suit vigorously. See "Item 1. Business--Pending
Acquisitions and Pending Disposition--Radio Stations" and "Item 1.
Business--The Merger--Regulatory Approval."
The aggregate proceeds to be received from these transactions, net of
acquisitions, is approximately $42 million, of which the Company has deposited
$2.0 million in escrow to secure its obligations under these agreements. The
Company expects to record a pre-tax gain of approximately $20.0 million on the
Jackson and Biloxi Disposition. The Company does not expect to record a gain or
loss on the other transactions as the assets were recently acquired.
The Company anticipates that it will consummate all of the Pending
Acquisitions and the Pending Dispositions as follows:
<TABLE>
<CAPTION>
Cash (Purchase) Sale Anticipated Date of
Transaction Price (In Millions) (1) Consummation
- -----------------------------------------------------------------------------------------------------
<S> <C> <C>
Nashville Acquisition (35.0) 2nd quarter 1998
Chancellor Exchange 11.0 3rd quarter 1998
Jackson and Biloxi Disposition 66.0 3rd quarter 1998
</TABLE>
- -----------------
(1) Represents the gross cash sales or purchase price for the
corresponding transaction. Certain of these amounts do not reflect
amounts advanced or placed in escrow, payable over a period of time or
payable in stock of the Company.
The timing and completion of each of the above transactions are
subject to a number of closing conditions, certain of which are beyond the
Company's control. It is presently contemplated that the Pending Acquisitions
and Pending Disposition will be consummated after the consummation of the
Merger. In the event that the Nashville Acquisition is consummated prior to the
completion of the Merger, the Company intends to finance the Nashville
Acquisition from cash on hand and borrowings under the Credit Agreement. There
can be no assurance that the Company will be able to borrow under the Credit
Agreement to finance the Nashville Acquisition.
Capital Expenditures
Capital expenditures totaled $12,409,000 in 1997, $3,224,000 in 1996
and $3,261,000 in 1995. 1997 capital expenditures consisted primarily of the
consolidation of operations in Raleigh, Hartford, Houston and Charlotte and
upgrades to the Company's broadcasting, office and computer equipment in
various markets. 1996 capital expenditures consisted of upgrades to the
Company's broadcasting, office and computer equipment in various markets.
Capital expenditures in 1995 included (i) the consolidation of the operations
of WSIX-FM and WRVW-FM, including a real estate acquisition, building
improvements and the replacement of certain broadcast equipment, and (ii)
leasehold improvements and the replacement of certain broadcast equipment
related to the relocation of KRLD-AM and TSN to the ballpark in Arlington. The
Company expects that its capital expenditures for 1998 will be substantially
less than its capital expenditures in 1997.
Debt Maturities and Lease Payments
At December 31, 1997, the aggregate contractual maturities of
long-term debt for the years ended December 31, 1998, 1999, 2000, 2001, 2002
and thereafter are $509,000, $200,000, $766,000, $57,000,000, $72,000,000 and
$634,000,000, respectively. Future minimum payments for all noncancellable
capital leases with initial terms of one or more years for the years ended
December 31, 1998, 1999, 2000, 2001 and thereafter are $124,000, $86,000,
$43,000, $14,000 and $0, respectively. In the event that the Merger is not
consummated, the Company believes that to be able to make these payments,
together with capital expenditures and principal amortization payments under
the Credit Agreement, it will require additional financing in addition to funds
generated from its operations. There can be no assurance that the Company will
be able to obtain additional financing on terms acceptable to the Company or at
all.
- 39 -
<PAGE>
Merger and Spin-Off--Potential Uses
Merger. In the event the Merger Agreement is terminated, under certain
circumstances, the Company may be required to pay fees and expenses ranging
from $10 million to $52.5 million.
Spin-Off. In the event that the Spin-Off is not consummated, the
Company may be required to make certain payments. See "--Company Guarantee of
Entertainment Performance Under Certain Acquisition Agreements."
Tax Indemnification Arrangement. SFX Entertainment is subject to
certain indemnification obligations, including an obligation to indemnify the
Company for any taxes resulting from the Spin-Off, including income taxes to
the extent that such income taxes result from gain on the distribution that
exceeds the net operating losses of the Company available to offset such gain
(including net operating losses generated in the current year prior to the
Spin- Off). The actual amount of indemnification payment will be based largely
on the excess of the value of SFX Entertainment's Common Stock on the date of
the Spin-Off over the tax basis of that stock. Increases or decreases in the
value of the SFX Entertainment Common Stock subsequent to such date should not
effect the tax valuation. If SFX Entertainment's Common Stock was valued at
approximately $15 per share, management believes that no material
indemnification payment would be required. Such indemnification obligation
would be approximately $4.0 million at $16 per share and would increase by
approximately $7.7 million for each $1.00 increase above $16 per share. If SFX
Entertainment's Common Stock was valued at $22.50 per share (the last sales
price of the Class A Common Stock (trading on a when-issued basis) on the
over-the-counter market on March 13, 1998), management estimates that SFX
Entertainment would have been required to pay approximately $54.0 million
pursuant to such indemnification obligation. The Company expects that such
indemnity payment will be due on or about June 15, 1998. In the event that SFX
Entertainment were unable to finance its indemnification obligation, the
Company would be responsible for such income taxes.
Working Capital. As required by the Distribution Agreement and the
Merger Agreement, immediately after the Spin-Off, the Company will contribute
to SFX Entertainment an allocation of working capital in an amount estimated by
the Company's management to be consistent with the proper operation of the
Company. There can be no assurance that the working capital remaining with the
Company will be sufficient to finance its operations and planned expenditures.
Meadows Repurchase. Pursuant to the Merger Agreement, the Company is
obligated to exercise its option to repurchase 250,838 shares of its 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. SFX Entertainment may assume the
obligation to exercise the Meadows Repurchase option.
Interest and Dividends
The Company pays interest on the 2006 Notes of approximately $24
million semi-annually on each May 15 and November 15. The 2006 Notes are
guaranteed on a senior subordinated basis by each of the Company's
subsidiaries. The indenture governing the 2006 Noes contains certain covenants
which limit the ability of the Company and certain of its subsidiaries to,
among other things, incur additional indebtedness, pay dividends or make
certain other restricted payments, consummate certain asset sales, enter into
certain transactions with affiliates, incur indebtedness that is senior in
right of payment to the 2006 Notes, incur liens, impose restrictions on the
ability of a subsidiary to pay dividends or make certain payments to the
Company and its subsidiaries, merge or consolidate with any other person or
dispose of all or substantially all of the assets of the Company.
The interest incurred under the Credit Agreement is paid as each
short-term borrowing matures. The Company's current LIBOR based rate loans
mature in one to four months. As of March 28, 1998, the Company had outstanding
borrowings under the Credit Agreement of $313.0 million and the average
interest rate on these borrowings was 8.19%.
Dividends on the $225.0 million Series E Preferred Stock accrue at the
rate of 12.625% per annum and are payable in cash or additional shares of
Series E Preferred Stock on January 15 and July 15 of each year. Dividends may
be paid, at the Company's option, through January 15, 2000, in cash or
additional shares of Series E Preferred Stock.
- 40 -
<PAGE>
On July 15, 1997, the Company elected to pay a cash dividend. On January 15,
1998, the Company elected to pay a preferred stock dividend.
Dividends on the $149.5 million Series D Preferred Stock accrue at the
rate of 6.5% per annum and are payable on February 28, May 31, August 31 and
November 30 of each year.
The Company paid $1.0 million in November 1997 to redeem the
outstanding shares of Series B Preferred Stock. The $2.0 million Series C
Preferred Stock accrues dividends at the rate of 6.0% per annum which are
payable on January 1, April 1, July 1, and October 1 of each year.
Year 2000 Compliance
The Company has addressed the risks associated with Year 2000
compliance issues with respect to its accounting and financial reporting
systems and is in the process of installing new accounting and reporting
systems. These systems are expect to provide better reporting, to allow for
more detailed analysis, and to be in Year 2000 compliance. The Company
anticipates that the cost of implementing these systems will be approximately
$2.0 million. The Company is in the process of examining Year 2000 compliance
issues with respect to its vendors and does not anticipate that it will be
subject to a material impact in this area.
SOURCES OF LIQUIDITY
In May 1996, the Company issued 2006 Notes in an aggregate principal
amount of $450.0 million. Concurrently with the Note Offering, the Company sold
in a private placement 2,990,000 shares of Series D Preferred Stock aggregating
$149.5 million in liquidation preference in the Series D Preferred Stock
Offering. Dividends of $0.8125 per share of Series D Preferred Stock are
payable quarterly in cash. Accumulated unpaid dividends bear interest at the
annual rate of 6.5%. The shares of Series D Preferred Stock are convertible
into shares of Class A Common Stock at any time prior to May 31, 2007, unless
previously redeemed or repurchased, at a conversion price of $45.51 per share
(equivalent to a conversion rate of 1.0987 shares of Class A Common Stock per
share of Series D Preferred Stock), subject to adjustment in certain events.
The shares of Series D Preferred Stock are exchangeable in full (but not in
part), at the Company's option, subject to compliance with covenants contained
in the Company's debt agreements, for 6 1/2% Series D Exchange Notes due 2007.
The Certificate of Designations of the Series D Preferred Stock contains
certain covenants which, among other things, limit the ability of the Company
and its subsidiaries to engage in transactions with affiliates. The Company
used the proceeds from the sale of the 2006 Notes and the Series D Preferred
Stock primarily to consummate the 1996 Radio Acquisitions.
On November 22, 1996, the Company entered into the Credit Agreement,
as amended, a senior revolving credit facility providing for borrowings of up
to $400.0 million. The indebtedness under the Credit Agreement was incurred
primarily to finance the 1996 and 1997 Radio Acquisitions and the 1997
Entertainment Acquisitions. Borrowings under the Credit Agreement may be used
to finance permitted acquisitions, for working capital and general corporate
purposes, and for letters of credit up to $20.0 million. The credit facility
will be reduced by $18 million on a quarterly basis from March 31, 2000 to
December 31, 2004 and two final reductions of $20 million on March 31, 2005 and
June 30, 2005. Interest on the funds borrowed under the Credit Agreement is
based on a floating rate selected by the Company of either (i) the higher of
(a) the Bank of New York's prime rate and (b) the federal funds rate plus 0.5%,
plus a margin which varies from 0.25% to 1.5%, based on the Company's
then-current leverage ratio, or (ii) the LIBOR rate plus a margin which varies
from 1.5% to 2.75%, based on the Company's then-current leverage ratio. The
Company must prepay certain outstanding borrowings in advance of their
scheduled due dates in certain circumstances. The Company must also pay annual
commitment fees of 0.5% of the unutilized total commitments under the Credit
Agreement. The Company's obligations under the Credit Agreement are secured by
substantially all of its assets, including property, stock of subsidiaries and
accounts receivable (other than the entertainment business), and are guaranteed
by the Company's subsidiaries (other than the entertainment business).
On January 23, 1997, the Company completed the sale of $225.0 million
of Series E Preferred Stock. Dividends on the Series E Preferred Stock accrue
at the rate of 12.625% per annum and are payable on January 15 and July 15 of
each year. Dividends may be paid, at the Company's option, through January 15,
2000, in cash or additional shares of Series E Preferred Stock. The Company
used the net proceeds to complete the 1997 Radio Acquisitions.
- 41 -
<PAGE>
Subject to certain conditions, the shares of Series E Preferred Stock
are exchangeable in whole or in part on a pro rata basis, at the option of the
Company, on any dividend payment date, for the Company's 12 5/8% Senior
Subordinated Exchange Debentures due 2006 (the "Exchange Debentures"). The
Series E Preferred Stock is redeemable at the Company's option, in whole or in
part, at any time on or after January 15, 2002, at the redemption prices set
forth herein, plus accumulated and unpaid dividends to the date of redemption.
In addition, prior to January 15, 2000, the Company may, at its option and
subject to certain conditions, redeem up to 50% of the aggregate of (i) the
liquidation preference of the Series E Preferred Stock issued (whether
initially issued or issued in lieu of cash dividends) less the liquidation
preference of Series E Preferred Stock exchanged for Exchange Debentures and
(ii) the principal amount of Exchange Debentures issued (whether issued in
exchange for Series E Preferred Stock or in lieu of cash interest), with the
net proceeds of one or more common equity offerings at a redemption price of
112.625% of the liquidation preference or principal amount, as the case may be.
The Company is required, subject to certain conditions, to redeem all of the
Series E Preferred Stock outstanding on October 31, 2006, at a redemption price
equal to 100% of the liquidation preferences thereof, plus accumulated and
unpaid dividends to the date of redemption. Upon the occurrence of a Change of
Control (as defined therein), each holder of Series E Preferred Stock may
require the Company to offer to purchase all of that holder's shares of Series
E Preferred Stock at a price equal to 101% of the liquidation preference
thereof, plus accumulated and unpaid dividends to the date of purchase. The
Series E Preferred Stock will rank junior to the Series D Preferred Stock and
senior to all other outstanding classes or series of capital stock, with
respect to dividend rights and rights on liquidation of the Company.
As of December 31, 1997, the Company's consolidated indebtedness was
approximately $764,475,000 (excluding indebtedness related to SFX
Entertainment). The total amount of the Company's indebtedness would increase
substantially if the Spin-Off does not occur as presently contemplated.
As of March 10, 1998, the Company's cash and cash equivalents totaled
approximately $27.9 million, net of a deposit that the Company is obligated to
pay to a national advertising representative company. As of March 10, 1998 the
Company had limited additional borrowing available under the Credit Agreement.
It is currently anticipated that the Spin-Off , the Merger and the
Nashville Acquisition will be consummated in the second quarter with the
Nashville Acquisition occurring last. The Company believes that its cash on
hand will be sufficient to meet its anticipated scheduled liquidity needs prior
to the consummation of the Merger. However, in the event that the timing of the
transactions change so that the Nashville Acquisition occurs prior to the
consummation of the Merger, the Company will require additional borrowings
under the Credit Agreement. The Credit Agreement prohibits the Company from
borrowing unless the Company meets certain specified tests, such as total
leverage and senior leverage ratios and pro forma interest expense. The ability
of the Company to meet such tests is dependent on the cash flow of the Company,
giving effect to the consummation of pending acquisitions and dispositions. The
Company currently has limited borrowing availability under the Credit Agreement
which would not be sufficient to finance a substantial portion of the Nashville
Acquisition, for which the Company has deposited $2 million in escrow. There
can be no assurance that the Company will have adequate borrowing capacity
under the Credit Agreement to finance the Nashville Acquisition and certain
other payments described above (including, but not limited to, those described
in "--Capital Expenditures--Debt Maturities and Lease Payments" and "--Interest
and Dividends") in the event that the consummation of the Merger were delayed.
In such case the Company would require additional financing. There can be no
assurance that the Company would be able to obtain additional financing on
terms acceptable to the Company or at all.
In the event that the Spin-Off is not consummated or the Merger
Agreement is terminated the Company may, under certain circumstances, be
required to make certain payments. See "--Merger and Spin-Off Potential Uses."
In such event there can be no assurance that the Company would have cash on
hand, borrowing capacity under the Credit Agreement or that additional
financing would be available to fund such payments.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
Not applicable.
- 42 -
<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
See Index to Financial Statements on page F-1.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
There have been no changes in or disagreements with the Company's
accountants on accounting matters or financial disclosures.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
Directors and Executive Officers
Pursuant to the Company's Certificate of Incorporation and By-laws,
the business of the Company is managed by the Board. The By-laws of the Company
authorize the Board to fix the number of directors from time to time. The
current number of directors of the Company 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 the Company are elected
annually by the Board and serve at the Board's discretion.
The executive officers of the Company (the "Executive Officers") are
also currently executive officers of SFX Entertainment. It is anticipated that,
prior to the Spin-Off, the Executive Officers will enter into employment
agreements with SFX Entertainment that will be similar to their existing
employment agreements with the Company. The employment agreements with SFX
Entertainment will become effective at the time of consummation of the Merger.
Until the consummation of the Merger, the Executive Officers can be anticipated
to expend substantial time and effort in managing the business of SFX
Entertainment, which may detract from their performance with respect to the
Company. If the Merger Agreement is terminated for any reason, the Company
intends to seek another buyer for its radio broadcasting business and the
Executive Officers will continue to perform services to both the Company and
SFX Entertainment until the Company is able to hire suitable replacements for
the Executive Officers. See "--Employment Agreements."
The following table sets forth information as to the Directors and the
Executive Officers of the Company:
<TABLE>
<CAPTION>
AGE AS OF
DIRECTOR DECEMBER 31,
NAME POSITION(S) HELD SINCE 1997
- --------------------- ----------------------------- -------- ------------
<S> <C> <C> <C>
Robert F.X. Sillerman Director and Executive 1992 49
Chairman
Michael G. Ferrel Director, President and Chief 1996 48
Executive Officer
D. Geoffrey Armstrong Director, Chief Operating 1993 40
Officer and Executive Vice
President
Howard J. Tytel Director, General Counsel, 1993 50
Secretary and Executive Vice
President
Thomas P. Benson Director and Chief Financial 1996 35
Officer
- 43 -
<PAGE>
AGE AS OF
DIRECTOR DECEMBER 31,
NAME POSITION(S) HELD SINCE 1997
- --------------------- ----------------------------- -------- ------------
Richard A. Liese Director, Vice President and 1995 47
Assistant General Counsel
James F. O'Grady, Jr. Director 1993 69
Paul Kramer Director 1993 65
Edward F. Dugan Director 1996 63
</TABLE>
ROBERT F.X. SILLERMAN has served as the Executive Chairman of the
Company 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 the Company.
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 The
Sillerman Companies, Inc., 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 The
Marquee Group, Inc. ("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 Broadcasting Company, a publicly-traded company that owns and
operates radio stations in medium and small-sized markets in midwestern and
western United States. For the last twenty years, Mr. Sillerman has been a
senior executive of and principal investor in numerous entities operating in
the broadcasting business. In 1993, Mr. Sillerman became the Chancellor of the
Southampton campus of Long Island University.
MICHAEL G. FERREL has been the President, Chief Executive Officer and
a Director of the Company since November 22, 1996. Mr. Ferrel served as
President and Chief Operating Officer of MMR, a wholly-owned subsidiary of the
Company, 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 the Company since November 22, 1996 and has served
as a Director of the Company since 1993. Mr. Armstrong became the Chief
Operating Officer of the Company in June 1996 and the Chief Financial Officer,
Executive Vice President and Treasurer of the Company in April 1995. Mr.
Armstrong was Vice President, Chief Financial Officer and Treasurer of the
Company from 1992 until March 1995. He had been Executive Vice President and
Chief Financial Officer of Capstar, a predecessor of the Company, 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 the Company 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 the
Company, 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 the Company since November 22, 1996. Mr. Benson became the Vice President of
Financial Affairs of the Company in June 1996. He was the Vice
President--External and International Reporting for American Express Travel
Related Services Company from
- 44 -
<PAGE>
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 the Company since 1995. Mr. Liese has also been the
Associate 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 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.
Each officer and director of the Company has held the same position
with SFX Entertainment since its formation, except that Mr. Armstrong is not
nor will be the Chief Operating Officer of SFX Entertainment.
Section 16(a) Beneficial Ownership Reporting Compliance
Section 16(a) of the Securities Exchange Act of 1934, as amended (the
"Exchange Act") requires the Company's officers and directors, and person who
beneficially own more than ten percent of a registered class of the Company's
equity securities, to file reports of ownership and changes in ownership with
the Commission. Officers, directors and greater than ten percent beneficial
owners are required by Commission regulations to furnish the Company with
copies of all Section 16(a) forms filed by them.
Based solely on its review of copies of such forms furnished to the
Company, or written representations that no filings of Form 5 reports were
required, the Company believes that during the fiscal year ended December 31,
1997, the Company's officers, directors and greater than ten percent beneficial
owners complied with all Section 16(a) filing requirements applicable to them
except Messrs. Kramer, O'Grady and Dugan each failed to timely file a report
disclosing the purchase of shares of stock on the open market; Michael Ferrel
failed to timely file a report disclosing the sale of shares of stock acquired
through exercise of options granted pursuant to shareholder-approved stock
options plans; and Mr. Armstrong failed to timely file a report disclosing the
exercise of stock options granted pursuant to stockholder-approved stock option
plans.
ITEM 11. EXECUTIVE COMPENSATION.
Remuneration of Management
The following table sets forth certain information regarding all the
compensation awarded to, earned by or paid to the persons who served as Chief
Executive Officer of the Company, and the next most highly compensated
executive officers who received salary and bonus of at least $100,000, for the
fiscal year ended December 31, 1997, for services rendered in all capacities to
the Company and subsidiaries for the last three fiscal years. The Chief
Executive Officer and such executive officers are collectively referred to as
the "Named Executive Officers."
- 45 -
<PAGE>
The Named Executive Officers, Directors of the Company and other
members of senior management will (receive fees, bonuses and other compensation
in connection with the Spin-off and Merger, if either or both such transactions
are consummated. See "Item 13. Certain Relationships and Related
Transactions--Consideration to be Received in the Merger."
<TABLE>
<CAPTION>
SUMMARY COMPENSATION TABLE
FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
Long Term
Annual Compensation Compensation Awards
------------------- ------------- -------------------
Other
Annual Restricted Securities LTIP
Name and Principal Fiscal Compens- Stock Underlying Option Payouts All Other
Position(1) Year Annual Salary ($) Bonus($) ation ($)(2) Award($) (#) ($) Compensation ($)
- ------------------ ------ ----------------- -------- ------------ ---------- ----------------- ------- ----------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Robert F.X. Sillerman 1997 400,000 12,500,000(3) 0 0 150,000(4) 0 0
Executive 1996 307,000 0 0 0 175,000 0 0
Chairman 1995 300,000 0 0 0 60,000 0 0
Michael G. Ferrel 1997 315,000 1,000,000 0 0 65,000(4) 0 0
President and Chief 1996(5) 31,667 0 0 0 80,000 0 525,000
Executive Officer
D. Geoffrey 1997 243,101 1,200,000(7) 0 0 50,000(4) 0 37,500(6)
Armstrong 1996 212,500 0 0 0 50,000 0 4,612,500(7)
Executive Vice 1995 200,000 0 0 0 50,000 0 37,500
President and Chief
Operating Officer
Thomas P. Benson 1997 157,500 25,000 0 0 6,000(4) 0 0
Vice President and 1996(8) 77,885 0 0 0 3,000 0 25,000
Chief Financial
Officer
Richard A. Liese 1997 145,000 0 0 0 7,500(4) 0 0
Vice President and 1996 131,667 15,000 0 0 2,000 0 0
Associate General 1995 52,083 0 0 0 2,000 0 0
Counsel
</TABLE>
- --------------------
(1) Mr. Tytel does not receive any compensation from the Company for
serving as Executive Vice President, General Counsel and Secretary but
does receive fees for each Board of Directors meeting he attends. See
also "Item 13. Certain Relationships and Related Transactions--Other
Relationships--Arrangements Between Robert F.X. Sillerman and Howard
J. Tytel."
(2) For each of the last three fiscal years the aggregate amount of
perquisites and other personal benefits did not exceed the lesser of
$50,000 or 10% of the salary and bonus for each of the Named Executive
Officers.
(3) Includes a bonus of $10 million and loan forgiveness of $2.5 million.
See "Item 13. Certain Relationships and Related Transactions--Bonus
Payments and Loan Forgiveness."
(4) Such options, granted on April 17, 1997 at an exercise price of $28.00
per share, vest immediately upon such grant, and expire on April 17,
2007.
(5) Mr Ferrel became the Chief Executive Officer of the Company on
November 22, 1996 following the MMR Merger.
(6) A payment of $37,500 was made to Mr. Armstrong pursuant to his
employment agreement.
(7) Pursuant to Mr. Armstrong's employment agreement as amended, in 1996,
the Company paid Mr. Armstrong $4,575,000 to defer, and $1,200,000 (in
1997) in lieu of, certain change of control and termination payments.
(8) Mr. Benson became the Chief Financial Officer for the Company on
November 22, 1996 following the MMR Merger.
- 46 -
<PAGE>
OPTION/SAR GRANTS IN THE LAST FISCAL YEAR
The following table provides information with respect to stock options
granted during the fiscal year ended December 31, 1997 to the Named Executive
Officers.
<TABLE>
<CAPTION>
POTENTIAL REALIZABLE VALUE AT ASSUMED
ANNUAL RATES OF STOCK PRICE
INDIVIDUAL GRANTS APPRECIATION FOR OPTION TERM(1)
------------------------------------------------- -----------------------------------------
% OF TOTAL
OPTIONS/SARS
GRANTED TO EXERCISE OR
OPTIONS/SARS EMPLOYEES IN BASE PRICE EXPIRATION
NAME GRANTED (#)(2)(3) FISCAL YEAR ($/SH) DATE 5% ($) 10% ($)
- ---------------------------- ----------------- ----------------- ----------- ---------- --------- ----------
(A) (B) (C) (D) (E) (F) (G)
<S> <C> <C> <C> <C> <C> <C>
Robert F.X. Sillerman....... 150,000 35.71 28.00 04/15/07 6,841,500 10,893,000
Michael G. Ferrel........... 65,000 15.48 28.00 04/15/07 1,368,300 2,178,600
D. Geoffrey Armstrong....... 50,000 11.90 28.00 04/15/07 2,280,500 3,631,000
Thomas P. Benson............ 6,000 1.43 28.00 04/15/07 273,660 435,720
Richard A. Liese............ 7,500 1.79 28.00 04/15/07 342,075 544,650
</TABLE>
- -----------------
(1) As required by the rules of the SEC, the dollar amounts under columns (f)
and (g) represent the hypothetical gain or "option spread" that would
exist for the options based on assumed 5% and 10% annual compounded rate
of stock price appreciation over the full option term. The closing price
of the Class A Common Stock on April 15, 1997 was $28.00. These assumed
rates would result in a price per share of Class A Common Stock ("Class A
Share") on April 17, 2007 of $45.61 and $72.62, respectively. If these
price appreciation assumptions are applied to all outstanding Class A
Shares on the grant date, such Class A Shares would appreciate in the
aggregate by approximately $168,297,431 million and $426,429,948 million,
respectively, over the ten-year period ending on April 15, 2007. These
prescribed rates are not intended to forecast possible future
appreciation, if any, of the Class A Shares.
(2) These options were fully vested at the time of grant. The exercise price
of the options represented the fair market value of the underlying stock
on the date of grant.
(3) Options to purchase 420,000 shares were granted to employees on April 15,
1997.
- 47 -
<PAGE>
AGGREGATE OPTION/SAR EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR-END
OPTION/SAR VALUES
The following table provides information with respect to the stock
options exercised during 1997 and to the value as of December 31, 1997 of
unexercised "in-the-money" options held by the Named Executive Officers. The
value of unexercised in-the-money options at fiscal year end is the difference
between the option exercise price and the fair market value of a Class A Share
at fiscal year end, December 31, 1997, multiplied by the number of options.
<TABLE>
<CAPTION>
NUMBER OF UNEXERCISED VALUE OF UNEXERCISED
SHARES OPTIONS/SARS IN-THE-MONEY OPTIONS
ACQUIRED ON AT FY-END AT FY-END ($)(1)
NAME EXERCISE (#) VALUE REALIZED($) EXERCISABLE/UNEXERCISABLE EXERCISABLE/UNEXERCISABLE
- ------------------------------------ ------------ ----------------- ------------------------- -------------------------
(A) (B) (C) (D) (E)
<S> <C> <C> <C> <C>
Robert F.X. Sillerman............... 537,185 29,269,396(2) 6,663/38,440 240,690/706,957
Michael G. Ferrel................... 162,599 7,094,672 22,373/4,773 1,795,433/383,033
D. Geoffrey Armstrong............... 23,200 1,178,025 161,800/0 12,984,450/0
Thomas P. Benson.................... 0 0 9,000/0 722,250/0
Richard A. Liese.................... 0 0 8,700/2,800 698,175/224,700
</TABLE>
- ----------------
(1) Based on $80.25, the closing price on December 31, 1997 of an underlying
Class A Share.
(2) See "Item 13. Certain Relationships and Related Transactions--Other
Relationships--Robert F.X. Sillerman and Howard J. Tytel."
Employment Agreements
The Company has employment agreements with each of Messrs. Sillerman,
Ferrel, Armstrong and Benson.
As of January 1, 1997, the Company and Mr. Sillerman entered into an
amended and restated employment agreement (the "Amended Sillerman Agreement"),
pursuant to which Mr. Sillerman will continue in his position of Executive
Chairman and principal executive officer of the Company for a five-year term,
subject to renewal for an additional five-year term. Mr. Sillerman's annual
base pay under the agreement is $400,000, subject to periodic adjustments. Mr.
Sillerman is also entitled to receive an annual incentive bonus in accordance
with a formula to be determined by the Board, upon the recommendation of the
Compensation Committee. In addition, the Amended Sillerman Agreement provides
for a $2.5 million loan to Mr. Sillerman, which loan was a full-recourse
obligation of Mr. Sillerman and bore interest. Subsequently, the principal of
such loan was forgiven. Accrued interest at the time of forgiveness,
approximately $100,000, was paid by Mr. Sillerman. See "Item 13. Certain
Relationships and Related Transactions--Bonus Payments and Loan Forgiveness."
Michael G. Ferrel serves as the Company's President and Chief
Executive Officer pursuant to an employment agreement with the Company executed
in November 1996. Mr. Ferrel's base salary is $300,000, which increases 5% in
each subsequent year of employment. The agreement also provides for an annual
bonus equal to the greater of $75,000 or an amount determined by the Company's
Compensation Committee based upon the Company's achievement of certain
performance goals as set by the Board of Directors. The Company made an
interest-bearing loan to Mr. Ferrel of $300,000 which remains outstanding. The
loan is payable in full upon the termination of Mr. Ferrel's employment with
the Company. The Company also granted Mr. Ferrel options to purchase 30,000
shares of Class A Common Stock and agreed to grant to Mr. Ferrel, in each of
the next four succeeding years, fully-vested options to purchase up to 30,000
shares of the Company's Class A Common Stock at an exercise price equal to the
fair market value at the time of each grant.
Mr. Ferrel's employment agreement also provides that, upon the
termination of his employment due to death or Total Disability (as defined in
the employment agreement), Mr. Ferrel will receive all accrued but unpaid
salary and bonus in respect of the preceding fiscal year plus, for a period of
36 months or until the end of the contractual term (whichever is longer), base
salary in effect at the time of termination and an annual bonus in an amount
equal to the bonus which Mr. Ferrel had received in the most recent fiscal
year. In addition, if he exercises his right to terminate his employment upon a
Change of Control (as defined in the employment agreement), Mr. Ferrel will
receive, in
- 48 -
<PAGE>
addition to the compensation referred to above, fully-vested options to
purchase up to 100,000 shares of Class A Common Stock at an exercise price of
$13.75 per share. See "Item 13. Certain Relationships and Related
Transactions--Change of Control Arrangements."
D. Geoffrey Armstrong serves as the Company's Chief Operating Officer
and Executive Vice President pursuant to an employment agreement with the
Company executed April 1, 1995, as amended as of April 15, 1996. Mr.
Armstrong's base salary is $220,500, which increases 5% in each subsequent year
of employment. Mr. Armstrong's employment arrangements included a $1.2 million
payment for remaining with the Company through November 22, 1997. In an
addendum to Mr. Armstrong's employment agreement, he is to receive a deferred
compensation payment in the amount of $150,000, $37,500 of which remains to be
paid and accrues on April 1, 1998.
Under Mr. Sillerman's employment agreement, in the event that he is
(i) terminated "for cause" (as defined in the agreements) he is to receive his
base salary through the date of such termination and his respective bonus and
deferred compensation, if applicable, for the year in which he was terminated
pro rated over the time in which he was employed by the Company during such
year or (ii) terminated without cause or "constructively terminated without
cause" including upon a "change of control" (each as defined in the agreement)
he is to receive (1) the base salary accrued but not paid through termination,
(2) the base salary for a period of 36 months or until the end of the
contractual term (March 31, 2000), whichever is longer, provided that he shall
be entitled, at his option, to receive a lump sum payment of such amount
reduced by the present value of such payments using a discount rate of 75% of
the prime rate as published by The Wall Street Journal and (3) a bonus over the
balance of the term of employment (March 31, 2000), based on the bonus received
for the year prior to termination, and deferred compensation, if applicable,
provided that he shall be entitled, at his option, to receive a lump sum
payment of such amount reduced by the present value of such payments using a
discount rate of 75% of the prime rate as published by The Wall Street Journal.
In addition, Mr. Sillerman is entitled to options to purchase Class A Shares in
an amount equal to 75,000 shares multiplied by the number of years remaining on
the term of the agreement at an exercise price per share equal to the exercise
price of the last stock option granted prior to termination.
In the event that Mr. Sillerman is terminated without cause or there
is a "constructive termination without cause" following a "change of control"
(as defined in the employment agreements), he is to receive the amounts
referred to above for termination without cause or "constructive termination
without cause" in a lump sum without any discount. In addition, in the event
that these payments constitute a "parachute payment," he is to receive an
amount equal to 50% of any excise tax imposed by Section 4999 of the Internal
Revenue Code of 1986, as amended (the "Code"). He shall, however, forfeit any
rights as a result of a termination without cause or a constructive termination
following a change of control if he accepts an offer to remain with the
surviving company in an executive position (other than as a non-employee
director). In addition, upon termination for any reason, any options held by
Mr. Sillerman shall become immediately exercisable and may be exercised during
the balance of the term of each such outstanding option. In addition, Mr.
Sillerman shall receive ten-year options to purchase 350,000 shares of Class A
Common Stock, which shall be exercisable at the lowest per share exercise price
of any other options Mr. Sillerman shall own as of the date of the "change of
control."
Thomas P. Benson serves as the Vice President of Financial Affairs and
Chief Financial Officer pursuant to an employment agreement with the Company
executed in June 1996. Mr. Benson's base salary is $150,000, which increases 5%
in each subsequent year of employment. The agreement also provides for an
annual bonus at least $25,000 and, during each year of the term of his
employment agreement, options or stock appreciation rights to purchase a
minimum of 3,000 shares of Class A Common Stock at an exercise price equal to
the lowest exercise price of any options granted to any other employee of the
Company during each year of the term of his employment agreement.
Mr. Benson's employment agreement provides that, upon a "change of
control" of the Company, Mr. Benson has the right to terminate his employment
agreement and, in such an event, the Company must pay Mr. Benson a lump sum
payment equal to the total consideration he is entitled to receive during the
remainder of the term of the employment agreement. In addition, in such an
event, all of Mr. Benson's outstanding stock options shall immediately vest.
Consummation of the Merger will trigger certain "change of control"
provisions described above in Messrs. Sillerman's, Ferrel's, and Benson's
employment contracts which would entitle them to certain fees and other
- 49 -
<PAGE>
compensation. These payments for Messrs. Sillerman, Ferrel and Benson are
approximately $3.3 million, $1.5 million and $0.2 million, respectively, is to
be assumed by SFX Entertainment. In addition, as described above, Mr. Sillerman
and Mr. Ferrel were entitled to receive Change of Control Options (as defined
herein) upon consummation of the Merger. As part of the Merger negotiations,
Mr. Sillerman and Mr. Ferrel agreed to substantially reduce the number of
Change of Control Options that they would otherwise be entitled to receive. See
"Item 13. Certain Relationships and Related Transactions--Change of Control
Arrangements."
Employment Agreements and Arrangements with Certain Officers and
Directors--Merger and Spin-Off
The Company anticipates that prior to the consummation of the
Spin-Off, SFX Entertainment will enter into employment agreements with all of
the Executive Officers, and that such employment agreements will become
effective immediately after the consummation of the Merger. If the Merger
Agreement is terminated for any reason, the Company intends to seek another
buyer for its radio broadcasting business and the Executive Officers will
continue to perform services to both the Company and SFX Entertainment until
the Company is able to hire suitable replacements for the Executive Officers.
Until the closing date of the Merger, the Executive Officers will
continue to be employed by the Company (at its expense), but will devote as
much time as they deem reasonably necessary, consistent with their obligations
to the Company, 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
Merger, SFX Entertainment will assume all obligations arising under any
employment agreement or arrangement (written or oral) between the Company 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 the Company (as defined in their
respective employment agreements) and all existing rights to indemnification.
SFX Entertainment will also indemnify the Company and its subsidiaries from all
obligations arising under the assumed employment agreements or arrangements
(except in respect of the options issuable at termination and all existing
rights to indemnification).
SFX Entertainment and the Company have also entered into certain
agreements and arrangements with their officers and directors from time to time
in the past. See "Certain Relationships and Transactions."
Remuneration of Directors
Messrs. Sillerman, Ferrel, Armstrong, Benson, Tytel and Liese are
executive officers of the Company and, except for Mr. Tytel, receive
compensation from the Company in connection with such employment. See
"--Remuneration of Management." Directors employed by the Company receive no
compensation for meetings they attend. Each director not employed by the
Company receives a fee of $1,500 for each meeting of the Board he attends in
addition to reimbursement of travel expenses. Each such director who is a
member of a committee also receives $1,500 for each committee meeting he
attends which is not held in conjunction with a Board meeting. If such
committee meeting occurs in conjunction with a Board meeting, each committee
member receives an additional $500 for each committee meeting he attends.
In 1997, Messrs. Kramer and O'Grady each received a fee of $20,000 and
stock appreciation rights with respect to 5,000 Class A Shares; Mr. Dugan
received a fee of $20,000 and stock appreciation rights with respect to 3,000
Class A Shares. The stock appreciation rights entitle the holder thereof to
receive a cash payment equal to the difference between $28.00 and the closing
price of one Class A Share on that date multiplied by the respective number of
applicable SARs. Effective for 1997, the Company agreed to pay the independent
directors an annual fee of $40,000, one-half of which shall be paid in cash and
one-half of which shall be paid in Class A Shares which shall be credited on an
annual basis to a bookkeeping account maintained for each independent director
and which shall be delivered in the form of stock certificates at the time such
director ceases to be a member of the Board. In connection therewith each
independent director received 673 Class A Shares, valued at approximately
$29.72.
- 50 -
<PAGE>
In addition, in connection with the Merger, Messrs. Dugan, Kramer and
O'Grady comprised the Independent Committee (the "Independent Committee"). 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. In connection therewith, each member of the Independent
Committee is to receive fees of $50,000 for serving on the Independent
Committee. See "Item 13. Certain Relationships and Related
Transactions--Consideration to be Received in the Merger--Fees to the
Independent Committee."
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The following table gives information concerning the beneficial
ownership of the Company's capital stock as of March 4, 1998, by (i) each
person known by the Company to own beneficially more than 5% of any class of
the Company's voting stock, (ii) each Named Executive Officer (as defined
herein) who is still an employee of the Company and each director of the
Company and (iii) all executive officers and directors of the Company as a
group.
<TABLE>
<CAPTION>
CLASS A CLASS B
COMMON STOCK COMMON STOCK
------------------------- -----------------------
PERCENT
OF TOTAL
NAME AND ADDRESS NUMBER PERCENT NUMBER PERCENT VOTING
OF BENEFICIAL OWNER(1) OF SHARES OF CLASS OF SHARES OF CLASS POWER
- -------------------------------------- ----------- --------- ----------- --------- --------
<S> <C> <C> <C> <C> <C>
DIRECTORS AND EXECUTIVE OFFICERS:
Robert F.X. Sillerman 756,913 (2) 7.5% 1,024,168 97.8% 51.9%
Michael G. Ferrel 15,592 (3) * 22,869 2.2% 1.2%
D. Geoffrey Armstrong 161,800 (4) 1.7% -- -- *
Howard J. Tytel(5) 44,213 (6) * -- -- *
Thomas P. Benson 7,000 (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 999,068 9.6% 1,047,037 100.0% 53.2%
group (9 persons)
5% STOCKHOLDERS:
Franklin Resources, Inc................. 533,180(10) 5.6% -- -- 2.7%
777 Mariners Island Boulevard, 6th Floor
San Mateo, CA 94404
Goldman Sachs Group..................... 689,574 (11) 7.0% -- -- 2.0%
85 Broad Street
New York, NY 10004
Halcyon/Alan B. Slifka Management 538,800 (12) 5.6% -- -- 2.7%
Company, LLC...........................
477 Madison Avenue, 8th Floor
New York, NY 10022
Tudor Investment Corporation, et. al.... 532,800 (13) 5.6% -- -- 2.7%
One Liberty Plaza, 51st Floor
New York, NY 10006
</TABLE>
- 51 -
<PAGE>
- -------------
* less than 1%
(1) Unless otherwise set forth above, the address of each stockholder is the
address of the Company, which is 650 Madison Avenue, 16th Floor, New
York, New York 10022. Pursuant to Rule 13d-3 of the Exchange Act, as
used in this table (i) "beneficial ownership" means the sole or shared
power to vote, or to direct the disposition of, a security, and (ii) a
person is deemed to have "beneficial ownership" of any security that
such person has the right to acquire within 60 days of March 4, 1998. 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 such shares 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, (i) information
as to beneficial ownership is based on statements furnished to the
Company by the beneficial owners and (ii) stockholders possess sole
voting and dispositive power with respect to shares listed on this
table. As of March 4, 1998, there were issued and outstanding 9,556,924
shares of Class A Common Stock and 1,047,037 shares of Class B Common
Stock.
(2) Includes (i) 6,663 shares which may be acquired pursuant to the exercise
of options which have been vested or will vest in 60 days of March 4,
1998 and (ii) 600,000 shares issuable upon the exercise of the warrants
issued to SCMC. 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 15.9% of the class.
(3) Includes 4,773 shares which may be acquired pursuant to the exercise of
options which have vested or will vest within 60 days of March 4, 1998.
(4) Includes 161,800 shares which may be acquired pursuant to the exercise
of options which have vested or will vest within 60 days of March 4,
1998.
(5) 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 "Item 13. Certain Relationships
and Related Transactions--Other Relationships--Arrangement Between
Robert F.X. Sillerman and Howard J. Tytel."
(6) Includes 31,281 shares which may be acquired pursuant to the exercise of
options which have vested or will vest within 60 days of March 4, 1998.
(7) Consists of 7,000 shares which may be acquired pursuant to the exercise
of options within 60 days of March 4, 1998.
(8) Consists of 8,700 shares which may be acquired pursuant to the exercise
of options within 60 days of March 4, 1998.
(9) Does not include 922 shares underlying interests in the Company's
director deferred stock ownership plan.
(10) Based on information contained in Schedule 13G filed with the SEC on
February 9, 1998. Franklin Mutual Advisers, Inc., an Advisor Subsidiary
(as defined in the aforedescribed Schedule 13G) of Franklin Resources,
Inc., has sole voting and dispositive power with respect to 533,180
shares. Charles B. Johnson and Rupert H. Johnson, Jr. are identified as
principal shareholders of Franklin Resources, Inc.
(11) Based on information contained in Amendment No. 1 to Schedule 13D filed
with the SEC on September 24, 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.
(12) Based on information contained in Schedule 13G filed with the SEC on
February 18, 1998. Halcyon/Alan B. Slifka Management Company, LLC
("Halcyon"), an Investment Adviser registered under the Investment
Advisors Act of 1940, as amended, shares voting and dispositive power
with respect to 538,800 shares. Alan B. Slifka is identified as the
controlling stockholder of ABS & Co, Limited, the managing member of
Halcyon.
(13) Based on information contained in Schedule 13G filed with the SEC on
February 19, 1998 on behalf of Paul Tudor Jones, II, The Raptor Global
Fund L.P. ("Raptor"), The Raptor Global Fund Ltd., The Upper Mill
Capital Appreciation Fund Ltd., Tudor Arbitrage Partners L.P., Tudor BVI
Futures, Ltd., Tudor Global Trading, LLC, and Tudor Investment
Corporation
- 52 -
<PAGE>
("Tudor"). Mr. Jones, the Chairman and Chief Executive Officer of Tudor,
an international money management firm that provides investment advice
to the persons on behalf of whom the aforedescribed Schedule 13G was
filed, may be deemed to beneficially share voting and dispositive power
with respect to 532,800 shares. Tudor is also the sole general partner
of Raptor. Tudor and Raptor may be deemed to beneficially share voting
and dispositive power with respect to 488,500 shares and 211,700 shares,
respectively.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
Consideration to Be Received in the Merger
Assuming Proposal 2 is approved at the Special Stockholders Meeting,
the each share of the Company's Class B Common Stock is to receive in the
Merger $97.50 (subject to increase under certain circumstances), and each share
of the Company's Class A Common Stock is to receive in the Merger is $75.00
(subject to increase under certain circumstances). Robert F.X. Sillerman, the
Executive Chairman and Chairman of the Board of Directors of the Company, and
Michael G. Ferrel, the President, Chief Executive Officer and a Director of the
Company 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 (as defined herein).
Common Stock to Be Received in the Spin-Off
In the Spin-Off, the holders of the Company's Class A Common Stock,
Series D Preferred Stock, certain warrants to purchase common stock and
interests in the Company's director deferred stock ownership plan will receive
shares of SFX Entertainment Class A common stock, whereas, assuming Proposal 3
is approved at the Special Stockholders Meeting, 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.
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. 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 at the
Special Stockholders Meeting, there can be no assurance that they will enter
into any such agreements or continue to serve the Company or SFX Entertainment
in any such capacity. If Proposal 3 is not approved, the Company intends to
pursue alternative means of disposing of SFX Entertainment.
Sillerman Consulting and Non-Competition 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 the Company. 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 the Company, as of the Effective Time, and agreed that his
employment agreement with the Company would be terminated as of that time. Mr.
Sillerman agreed to release the Company, effective as of the Effective Time,
from all claims he may have then against the Company 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
the Company 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
- 53 -
<PAGE>
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 the
Company 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, the Company
will retain Mr. Sillerman as an adviser and consultant concerning the
management and operation of the Company 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 the
Company, except as necessary in connection with the rendering of advisory and
financial services to the Company, 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 and 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.
In the Consulting and Non-Competition Agreement, the Company agreed to
pay Mr. Sillerman, at the Effective Time, $2.0 million for his agreement to
provide consulting services to the Company and $23.0 million for his agreement
not to compete with the Company.
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, Mr.
Sillerman entered into a Stockholder Agreement, dated as of August 24, 1997
(the "Stockholder Agreement"), with Buyer, Buyer Sub and the Company.
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
the Company (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 the Company any change in the present
capitalization of the Company 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 the Company 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.
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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 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 litigation involving the
Company 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) the Company 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 the Company, will be void and
of no further force or effect.
If the Merger Agreement is terminated other than as described above,
Mr. Sillerman will remain obligated for one year after such termination to vote
against acquisition proposals and against the previously described changes in
the Company's Board of Directors, capitalization or Certificate of
Incorporation.
Change of Control Arrangements
Pursuant to Messrs. Sillerman's and Ferrel's employment agreements
with the Company, 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 the Company. 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. Mr. Benson is
entitled to receive change of control cash payments of approximately $0.2
million pursuant to his employment agreement.
In addition, pursuant to the Company'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 the Company's Class A Common Stock to a bookkeeping
account maintained for that director. Upon a change of control of the Company ,
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 hereof, 922 shares
of the Company's 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 the Company
(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 the Company's Class A
Common Stock held in that participant's account on the Spin-Off record date.
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Stock Options, Stock Appreciation Rights and SCMC Warrants
The Merger Agreement provides that, at the Effective Time, holders of
outstanding options granted under the Company's stock option plans and holders
of 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 date hereof, the Company'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 aggregate of
29,000 shares of the Company's 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 the Company's Class A Common Stock (the "SCMC Warrants")
which had previously been issued to SCMC, an entity controlled by Mr.
Sillerman. 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.
The Board of Directors of SFX Entertainment (the "SFX Entertainment
Board") 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
the Company, 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 the Company'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 the Company 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 the Company, including the Merger, was approved
by the Independent Committee, the Board of Directors or the stockholders of the
Company. On January 15, 1998, 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
Delaware General Corporation Law) the present and former directors, officers
and employees of the Company 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 the Company 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 the Company's directors' and
officers' liability insurance covering the directors and officers of the
Company 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 the Company's last annual premium.
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In addition, at the Effective Time, the Company and its subsidiaries
(other than SFX Entertainment and its subsidiaries) will release executive
officers and directors of the Company from all claims by the Company 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 the Company, its subsidiaries, Buyer and
Buyer Sub, except to the extent that the Company can be reimbursed under the
terms of its directors' and officers' liability 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 the Company (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 the
Company in connection with the Merger.
Management and Board of Directors of SFX Entertainment
The Company anticipates that, upon completion of the Spin-Off,
substantially all of the Company'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 the Company and SFX Entertainment.
Prior to the consummation of the Spin-Off, all of the Company'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 with a purchase price of $2.00
per share 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 the Company. If the Merger Agreement is terminated for any reason, these
executive officers will continue to perform services to both the Company and
SFX Entertainment until the Company 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 at the Special
Stockholders Meeting, there can be no assurance that they will serve in any
such capacity, in which event the Company intends to pursue alternative means
of disposing of SFX Entertainment.
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 the Company 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 the Company.
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In addition, all of the Company'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 and the Company and SFX Entertainment will
each appoint an independent committee to negotiate in good faith with respect
to all matters that they may deem necessary to effectuate the separation of the
affairs of both companies.
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 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 such a firm, which 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, (a) a study of total
compensation since 1993 of the top executives at 10 public radio broadcasting
companies, as compared to Mr. Sillerman's compensation, was performed, (b)
various financial indicators of these companies versus the Company, both in
terms of financial performance and stock price performance, through July 31,
1997, was analyzed and (c) the value to the Company 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 was reviewed. Based upon the 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 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. Interest accrued at the date of
forgiveness, approximately $100,000, was paid by Mr. Sillerman.
Agreements with SFX Entertainment
The Company and SFX Entertainment have entered into various agreements
with respect to the Spin-Off and related matters. See "Item 1. Business--The
Merger and the Spin-Off."
Guarantee of Obligations of SFX Entertainment
In connection with the 1998 Entertainment Acquisitions, the Company
guaranteed certain obligations of SFX Entertainment. The Company has guaranteed
the full and timely performance of all of SFX Entertainments's obligation under
the agreement relating to the PACE Acquisition until the shares of SFX
Entertainment Class A common stock is delivered upon consummation of the
Spin-off or cash in lieu of such shares have been paid to all selling
stockholders in the PACE Acquisition. In connection with the Contemporary
Acquisition, the Company has guaranteed the obligation of SFX Entertainment to
redeem its Series A preferred stock for the greater of its fair market value
(as determined in good faith by the Board of Directors of SFX Entertainment) or
$18.7 million.
OTHER RELATIONSHIPS
Relationship Between Howard J. Tytel and Baker & McKenzie
Howard J. Tytel, who is the Executive Vice President, General Counsel,
Secretary and a Director of the Company, is "Of Counsel" to the law firm of
Baker & McKenzie. Mr. Tytel is also an executive vice president, the general
counsel and a director of SFX Entertainment. Baker & McKenzie serves as counsel
to the Company, SFX
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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 the Company, other affiliates of Mr. Sillerman and other
clients introduced to the firm by Mr. Tytel. The Company paid Baker & McKenzie
$6,813,000 for legal services and disbursements during 1997.
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, the
Company 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 the Company (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 the Company. In 1997, these
cash fees aggregated approximately $5.0 million, a portion of which were paid
from the proceeds of payments made by the Company 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 the Company and subsequent sale of
the underlying shares. 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," "--Change of Control Arrangements" and "--Bonus
Payments and Loan Forgiveness." 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.
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 1997
were $3,000,000 and $1,794,000, respectively. These fees will vary (above the
minimum annual fee of $500,000) depending on the level of acquisition and
financing activities of Triathlon. SCMC previously assigned its rights to
receive fees payable under this agreement to the Company. Pursuant to the terms
of the Distribution Agreement, the Company 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.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.
(a) (1) The following consolidated financial statements of SFX
Broadcasting, Inc. and subsidiaries are filed as a part of this
report or are incorporated herein by reference:
Report of Independent Auditors
Consolidated Financial Statements
Consolidated Balance Sheets as of December 31, 1997 and 1996
Consolidated Statements of Operations for each of the three years
in the period ended December 31, 1997
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Consolidated Statements of Shareholders' Equity for each of
the three years in the period ended December 31, 1997
Consolidated Statements of Cash Flows for each of the three
years in the period ended December 31, 1997
Notes to Consolidated Financial Statements
(2) The following financial statement schedule of SFX
Broadcasting, Inc. and Subsidiaries is filed as a part of
this report or incorporated herein by reference:
Schedule II -- Valuation and Qualifying Accounts
All other schedules for which provision is made in the applicable
accounting regulations of the Securities and Exchange Commission are not
required under the related instructions or are inapplicable and therefore have
been omitted.
(3) Exhibits
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
<TABLE>
<CAPTION>
<S> <C>
3.1 Restated Certificate of Incorporation, as amended (incorporated by reference to Exhibit 3.1 to
Form 8-K (Commission File No. 0-22486) filed with the Commission on November 27, 1996).
3.2 By-laws, as amended (incorporated by reference to Exhibit 3.1 to Amendment No. 1 to
Registration Statement Form S-3 (Reg. No. 333-15469) filed with the Commission on
November 21, 1996).
4.1 Certificate of Designations for Series E Cumulative Exchangeable
Preferred Stock (incorporated by reference to Exhibit 4.1 to
Form 8-K of SFX Broadcasting, Inc. (Commission File No. 0-
22486) filed with the Commission on January 27, 1997).
4.2 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
(incorporated by reference to Exhibit 3.5 to Registration Statement Form S-4 (Reg. No.
333-06553) filed with the Commission on June 21, 1996).
4.3 Warrant Agreement, dated as of March 23, 1994, by and among MMR, American Stock
Transfer & Trust Company, as warrant agent and certain underwriters (incorporated by
reference to Exhibit 4.2 to Amendment No. 2 to Registration Statement on Form SB-2 (Reg. No.
33-74526) filed with the Commission on March 18, 1994).
4.4 Supplemental Warrant Agreement, dated as of November 22, 1996 (incorporated by reference
to Exhibit 4.2 to Form 8-K (Commission File No. 0-22080) filed with the Commission on
November 27, 1996).
4.5 Unit Purchase Options, dated March 23, 1994 (incorporated by reference to Exhibit 4.1 to
Amendment No. 2 to Registration Statement on Form SB-2 (Reg. No. 33-74526) filed with the
Commission on March 18, 1994).
4.6 Common Stock Purchase Warrant, dated July 29, 1993 (incorporated
by reference to Exhibit 10.38 to Form 10-KSB (Commission File
No. 0-22486) for the year ended December 31, 1994).
4.7 Common Stock Purchase Warrants dated November 22, 1996 (incorporated by reference to
Exhibit 4.2 to Form 8-K (Commission File No. 0-22080) filed with the Commission on
November 27, 1996).
4.8 Assumption of Warrants dated November 22, 1996 (incorporated by reference to Exhibit 4.2
to Form 8-K (Commission File No. 0-22080) filed with the Commission on November 27,
1996).
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EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
4.9 Indenture, dated as of May 31, 1996, among SFX Broadcasting, Inc., its subsidiary Guarantors
and Chemical Bank (incorporated by reference to Exhibit 4.3 of the Registration Statement on
Form S-4 (Reg. No. 333-06553) of SFX Broadcasting, Inc. filed with the Commission on June
21, 1996).
4.10 First Supplemental Indenture, dated as of November 25, 1996, by
and among SFX Broadcasting, Inc., its subsidiary Guarantors and
The Chase Manhattan Bank (incorporated by reference to Exhibit
4.2 to Form 8-K of SFX Broadcasting, Inc. (Commission File No.
0-22486) filed with the Commission on January 17, 1997).
4.11 Second Supplemental Indenture, dated as of January 10, 1997 by
and among SFX Broadcasting, Inc., its subsidiary Guarantors and
The Chase Manhattan Bank (incorporated by reference to Exhibit
4.3 to Form 8-K of SFX Broadcasting, Inc. (Commission File No.
0-22486) filed with the Commission on January 17, 1997).
4.12 Third Supplemental Indenture, dated as of January 13, 1997, by and among the subsidiary
Guarantors of SFX Broadcasting, Inc., and The Chase Manhattan Bank (incorporated by
reference to Exhibit 4.4 to Form 8-K of SFX Broadcasting, Inc. (Commission File No. 0-22486)
filed with the Commission on January 17, 1997).
4.13* Tenth Supplemental Indenture, dated as of February 2, 1998, by and among SFX Broadcasting,
Inc., its subsidiary Guarantors and The Chase Manhattan Bank.
4.14 Stock Certificate of 12-5/8% Series E Cumulative Exchangeable Preferred Stock of SFX
Broadcasting, Inc. (incorporated by reference to Exhibit 4.2 to Form 8-K of SFX Broadcasting,
Inc. (Commission File No. 0-22486) filed with the Commission on January 27, 1997).
4.15* Certificate of Amendment to the Certificate of Designations for the Series E Cumulative
Exchangeable Preferred Stock, as filed with the Delaware Secretary of State on February 10,
1998.
10.1 Amended and Restated Employment Agreement between the Company and Mr. Sillerman
(incorporated by reference to Exhibit 10.26 to Amendment No. 2 to Registration Statement
Form S-1 (Reg. No. 33-92086) filed with the Commission on June 26, 1995).
10.2 Amended and Restated Employment Agreement between the Company and Mr. Hicks
(incorporated by reference to Exhibit 10.27 to amendment No. 2 to Registration Statement Form
S-1 (Reg. No. 33-92086) filed with the Commission on June 26, 1995).
10.3 Amended and Restated Employment Agreement between the Company and Mr. Armstrong
(incorporated by reference to Exhibit 10.28 to Amendment No. 2 to Registration Statement
Form S-1 (Reg. No. 33-92086) filed with the Commission on June 26, 1995).
10.4 Asset Purchase Agreement between Trumper Communications of North Carolina Limited
Partnership and SFX Broadcasting of North Carolina, Inc. dated as of April 1, 1995
(incorporated by reference to Exhibit 10.29 to Amendment No. 2 to Registration Statement
Form S-1 (Reg. No. 33-92086) filed with the Commission on June 26, 1995).
10.5 Asset Purchase Agreement between Cardinal Communications Partners, L.P., SFX Broadcasting
of Texas (KTCK), Inc. and the Company, dated as of April 24, 1995 (incorporated by reference
to Exhibit 10.30 to Amendment No. 2 to Registration Statement Form S-1 (Reg. No. 33-92086)
filed with the Commission on June 26, 1995).
10.6 Senior Promissory Note of Sillerman Communications Management Corporation to the
Company in the amount of $2,000,000, dated as of January 23, 1995 (incorporated by reference
to Exhibit 10.31 to Amendment No. 2 to Registration Statement Form S-1 (Reg. No. 33-92086)
filed with the Commission on June 26, 1995).
10.7 First Amendment to Amended and Restated Credit Agreement between
the Company and The Bank of New York as Agents thereunder, dated
as of April 21, 1995 (incorporated by reference to Exhibit 10.32
to Amendment No. 2 to Registration Statement Form S-1 (Reg. No.
33-92086) filed with the Commission on June 26, 1995).
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EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
10.8 Stock Exchange Agreement between Equitable Deal Flow Fund, L.P., the Equitable Life
Assurance Society of the United States, Equitable Variable Life Insurance Company and the
Company, dated as of December 2, 1994 (incorporated by reference to Exhibit 10.33 to
Amendment No. 2 to Registration Statement Form S-1 (Reg. No. 33-92086) filed with the
Commission on June 26, 1995).
10.9 Stock Purchase Agreement among the Company, Liberty Broadcasting, Incorporated,
Josephthall, Littlejohn and Levy Fund, L.P., Michael Craven and James Thompson dated as of
November 15, 1995 (incorporated by reference to Exhibit 10.34 to Form 10-K (Commission
File No. 0-22486) for the year ended December 31, 1995).
10.10 Letter Agreement between SFX Broadcasting, Inc. and Multi-Market Radio, Inc. regarding
exchange of assets dated November 17, 1995 (incorporated by reference to Exhibit 10.35 to
Form 10-K (Commission File No. 0-22486) for the year ended December 31, 1995).
10.11 Joint Sales Agreement between SFX Broadcasting of Jackson, Inc. and Multi-Market Radio
Acquisition Corporation (incorporated by reference to Exhibit 10.36 to Form 10-K
(Commission File No. 0-22486) for the year ended December 31, 1995).
10.12 Joint Sales Agreement between SFX Broadcasting of South Carolina (WMYI), Inc. and
Multi-Market Radio Acquisition Corporation (incorporated by reference to Exhibit 10.37 to
Form 10-K (Commission File No. 0-22486) for the year ended December 31, 1995).
10.13 Joint Sales Agreement between Multi-Market Radio Acquisition
Corporation and the Company (incorporated by reference to
Exhibit 10.38 to Form 10-K (Commission File No. 0-22486) for the
year ended December 31, 1995).
10.14 Programming Agreement between the Company and Trumper Communications of North
Carolina Limited Partnership (incorporated by reference to Exhibit 10.39 to Form 10-K
(Commission File No. 0-22486) for the year ended December 31, 1995).
10.15 Asset Purchase Agreement between Prism Radio Partners, L.P. and the Company (incorporated
by reference to Exhibit 10.40 to Form 10-K (Commission File No. 0-22486) for the year ended
December 31, 1995).
10.16 Joint Sales Agreement between the Company and HMW Communications, Inc. (incorporated
by reference to Exhibit 10.42 to Form 10-K (Commission File No. 0-22486) for the year ended
December 31, 1995).
10.17 Asset Purchase Agreement between the Company and HMW Communications, Inc.
(incorporated by reference to Exhibit 10.42 to Form 10-K (Commission File No. 0-22486) for
the year ended December 31, 1995).
10.18 Asset Purchase Agreement between Texas Coast Broadcasters, Inc. and Multi-Market Radio,
Inc. (incorporated by reference to Exhibit 99.1 to Form 10-K (Commission File No. 0-22486)
for the year ended December 31, 1995).
10.19 Asset Purchase Agreement between Lewis Broadcasting Corporation
and Multi-Market Radio Acquisition Corporation (incorporated by
reference to Exhibit 99.2 to Form 10-K (Commission File No.
0-22486) for the year ended December 31, 1995).
10.20 Asset Purchase Agreement between ABS Greenville Partners, L.P. and Multi-Market Radio
Acquisition Corporation (incorporated by reference to Exhibit 99.3 to Form 10-K (Commission
File No. 0-22486) for the year ended December 31, 1995).
10.21 Asset Purchase Agreement between Multi-Market Radio, Inc. and Puritan Radiocasting
Company (incorporated by reference to Exhibit 10.1 to MMR's 10-Q (Commission File No.
0-22080) for the quarter ended March 31, 1996).
10.22 Asset Purchase Agreement between MMR and Wilks Broadcast Acquisitions, Inc. (incorporated
by reference to Exhibit 10.3 to MMR's 10-Q ( Commission File No. 0-22080) for the quarter
ended March 31, 1996).
10.23 Letter of Intent between MMR and Jones Eastern Radio of Augusta, Inc. (incorporated by
reference to Exhibit 10.5 to MMR's 10-Q ( Commission File No. 0-22080) for the quarter ended
March 31,1996).
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EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
10.24 Amended and Restated Agreement and Plan of Merger, dated April 15, 1996, among the
Company, SFX Merger Company and MMR (composite version incorporated by reference to
Annex B to the Joint Proxy Statement/Prospectus to Form S-4 (Commission File No.
333-13337) filed with the Commission on October 3, 1996).
10.25 Asset Purchase Agreement between HMW Communications, Inc. and Multi-Market Radio
Acquisition Corporation (incorporated by reference to Exhibit 99.4 to Form 10-K (Commission
File No. 0-22486) for the year ended December 31, 1995).
10.26 Joint Sales Agreement between HMW Communications, Inc. and Multi-Market Radio
Acquisition Corporation (incorporated by reference to Exhibit 99.6 to Form 10-K (Commission
File No. 0-22486) for the year ended December 31, 1995).
10.27 Termination and Assignment Agreement, dated as of April 15, 1996, between Sillerman
Communications Management Corporation and the Company (incorporated by reference to
Exhibit 10.1 to Form 8-K (Commission File No. 0-22486) filed with the Commission on April
18, 1996).
10.28 Warrant to purchase 300,000 shares of Class A Common Stock of the Company issued to
SCMC (incorporated by reference to Exhibit 10.3 to Form 8-K (Commission File No. 0-22486)
filed with the Commission on October 3, 1996).
10.29 Warrant to purchase 300,000 shares of Class A Common Stock of the Company issued to
SCMC (incorporated by reference to Exhibit 10.4 to Form 8-K (Commission File No. 0-22486)
filed with the Commission on October 3, 1996).
10.30 Agreement, dated as of April 16, 1996, between the Company and R. Steven Hicks
(incorporated by reference to Exhibit 10.2 to Form 8-K (Commission File No. 0-22486) filed
with the Commission on April 18, 1996).
10.31 Asset Purchase Agreement, dated May 1, 1996, among the Company, KIRO, Inc, and
Bonneville Holding Company (incorporated by reference to Exhibit 10.2 to Form 8-K
(Commission File No. 0-22486) filed with the Commission on May 9, 1996).
10.32 Letter Agreement, dated May 16, 1996, between the Company and the Bank of New York
(incorporated by reference to Exhibit 10.1 to Form 8-K (Commission File No. 0-22486) filed
with the Commission on May 24, 1996).
10.33 Consent Agreement, dated May 17, 1996, among The Huff Alternative Income Fund, L.P.,
Multi-Market Radio, Inc. and the Company (incorporated by reference to Exhibit 10.2 to
MMR's Form 8-K (Commission File No. 0-22080) filed with the Commission on September
10, 1996).
10.34 Asset Purchase Agreement, dated May 13, 1996, between SFX
Acquisition Corporation and Clear Channel Radio, Inc.
(incorporated by reference to Exhibit 10.2 to Form 8-K
(Commission File No. 0-22486) filed with the Commission on May
24, 1996).
10.34 Asset Purchase Agreement, dated May 13, 1996, between SFX Acquisition Corporation and
Regent Broadcasting of Louisville, Inc. (incorporated by reference to Exhibit 10.3 to Form 8-K
(Commission File No. 0-22486) filed with the Commission on May 24, 1996).
10.35 Amended and Restated Agreement, dated June 19, 1996, between the Company and R. Steven
Hicks (incorporated by reference to Exhibit 10.1 to Form 8-K (Commission File No. 0-22486)
filed with the Commission on June 21, 1996).
10.36 Amended and Restated Employment Agreement, dated June 19, 1996,
between the Company and Tom Benson (incorporated by reference to
Exhibit 10.1 to Form 8-K (Commission File No.
0-22486) filed with the Commission on June 21, 1996).
10.37 Time Brokerage Agreement between ABS Greenville Partners, L.P. and Multi-Market Radio
Acquisition Corporation (incorporated by reference to Exhibit 99.7 to Form 10-K (Commission
File No. 0-22486) for the year ended December 31, 1995).
10.38 Exchange Agreement, dated July 1, 1996, between Chancellor Radio Broadcasting Company
and SFX Broadcasting, Inc. (incorporated by reference to Exhibit 10.59 to Amendment No. 1
to the Form S-4 of SFX Broadcasting, Inc. (Commission File No. 333-06553) filed with the
Commission on July 16, 1996).
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EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
10.39 Asset Purchase Agreement between SFX Broadcasting of Texas (KTCK) Licensee, Inc., SFX
Broadcasting of Texas (KTCK), Inc. and KRBE Co. (incorporated by reference to Exhibit 10.58
to Amendment No. 1 to Form (Reg. No. 333-06553) filed with the Commission on July 16,
1996).
10.40 Asset Purchase Agreement between Jared Broadcasting Company of Albany, Incorporated
(incorporated by reference to Exhibit 2.13 to Form 10-Q (Commission File No. 0-22486) for
the quarter ended September 30, 1996).
10.42 Letter of Intent, dated August 9, 1996, between the Company,
Kenneth A. Brown, ABS Communications, Inc., ABS Communications,
L.L.C., ABS Richmond Partners, L.P., ABS Richmond Partners II,
L.P., EBF, Inc. and EBF Partners (incorporated by reference to
Exhibit 2.11 to Form 10-Q (Commission File No. 0-22486) for the
quarter ended September 30, 1996).
10.43 Letter of Intent, dated August 28, 1996, between SFX Broadcasting, Inc. and EZ
Communications, Inc. (incorporated by reference to Exhibit 2.3 to Form 8-K (Commission File
No. 0-22486) filed with the Commission on October 3, 1996).
10.44 Loan Agreement, dated September 4, 1996, between the Company and MMR (incorporated by
reference to Exhibit 2.4 to Form 8-K (Commission File No. 0-22486) filed with the Commission
on October 3, 1996).
10.45 Asset Exchange Agreement, dated as of September 24, 1996, among WHFS, Inc. Liberty
Broadcasting of Maryland Incorporated (incorporated by reference to Exhibit 2.5 to Form 8-K
(Commission File No. 0-22486) filed with the Commission on October 3, 1996).
10.46 Asset Purchase Agreement between Secret Communications Limited Partnership and the
Company (incorporated by reference to Exhibit 10.2 to Form 8-K (Commission File No.
0-22486) filed with the Commission on October 30, 1996).
10.47 Purchase and Sale Agreement among WWYZ, Inc., Great American Music Fest & Production
Co. (collectively the "Companies"), each of the shareholders of the Companies and SFX
Broadcasting, Inc. (incorporated by reference to Exhibit 10.4 to Form 8-K (Commission File
No. 0-22486) filed with the Commission on October 30, 1996).
10.48 Amendment to Asset Purchase Agreement between Texas Coast Broadcasters, Inc. and
Multi-Market Radio, Inc. (incorporated by reference to Exhibit 10.5 to Form 8-K (Commission
File No. 0-22486) filed with the Commission on October 30, 1996).
10.49 Stock Purchase Agreement between Concerts Enterprises, Ltd.,
Beach Concerts, Inc., Connecticut Concerts, Incorporated,
Broadway Concerts, Inc., Ardee Productions, Ltd., Ardee
Festivals NJ, Inc., In-House Tickets, Inc., Exit 116 Revisited,
Inc., Dumb Deal, Inc., Ron Delsener, Mitch Slater and SFX
Broadcasting, Inc. (incorporated by reference to Exhibit 10.3 to
Form 8-K (Commission File No. 0-22486) filed with the Commission
on October 30, 1996).
10.50 Second Amended and Restated Credit Agreement among the Company, its subsidiaries and the
Bank of New York, as agent for the lenders (incorporated by reference to Exhibit 10.1 to Form
8-K (Commission File No. 0-22486) filed with the Commission on November 27, 1996).
10.51 Agreement of Merger, dated February 12, 1997, among the Company,
NOC-Acquisition Corp., CADCO Acquisition Corp., QN-Acquisition
Corp., Nederlander of Connecticut, Inc., Connecticut
Amphitheater Development Corporation, QN Corp., Connecticut
Performing Arts Partners and certain stockholders (incorporated
by reference to Exhibit 10.51 to Form 10-K (Commission File No.
0-22486) for the year ended December 31, 1996).
10.52 Amendment No. 1 to Asset Purchase Agreement, dated January 21, 1997, between Secret
Communications Limited Partnership and the Company (incorporated by reference to Exhibit
10.52 to Form 10-K (Commission File No. 0-22486) for the year ended December 31, 1996).
10.53 Letter of Intent, dated March 4, 1997, between the Company and Sunshine Promotions, Inc.
(incorporated by reference to Exhibit 10.53 to Form 10-K (Commission File No. 0-22486) for
the year ended December 31, 1996).
10.54 Employment Agreement between the Company and Michael G. Ferrel (incorporated by
reference to Exhibit 10.54 to Form 10-K (Commission File No. 0-22486) for the year ended
December 31, 1996).
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EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
10.55 Fourth Supplemental Indenture, dated January 29, 1997, among
Concerts Enterprises, Ltd., Concerts Enterprises, Inc., In House
Tickets, Inc., Connecticut Concerts Incorporated, Ardee
Festivals N.J., Inc., Ardee Productions, Ltd., Exit 116
Revisited, Inc., Dumb Deal, Inc., Broadway Concerts, Inc. and
The Chase Manhattan Bank (incorporated by reference to Exhibit
10.55 to Form 10-K (Commission File No. 0-22486) for the year
ended December 31, 1996).
10.56 Form of Consent and Amendment to the Second Amendment and Restated Credit Agreement,
dated March 24, 1997, between the Company and the Lenders (incorporated by reference to
Exhibit 10.56 to Form 10-K (Commission File No. 0-22486) for the year ended December 31,
1996).
10.57 Form of Amendment No. 2 to Asset Purchase Agreement, dated between Secret
Communications, Inc. Limited Partnership and the Company (incorporated by reference to
Exhibit 10.57 to Form 10-K (Commission File No. 0-22486) for the year ended December 31,
1996).
10.58 Master Richmond Station Group Agreement, dated as of December 17, 1996, among the
Company, ABS Communications Incorporated, Kenneth Brown, EBF Partners, ABS
Communications, L.L.C., ABS Richmond Partners, L.P, ABS Richmond Partners II, L.P., ABS
Richmond Towers, L.P. and J. Edwin Conrad (incorporated by reference to Exhibit 10.58 to
Form 10-K (Commission File No. 0-22486) for the year ended December 31, 1996).
10.59 Convertible Note Agreement, dated as of December 17, 1996, between ABS Communications,
L.L.C., as borrower and the Company, as lender (incorporated by reference to Exhibit 10.59 to
Form 10-K (Commission File No. 0-22486) for the year ended December 31, 1996).
10.60 SFX Contribution Agreement, dated as of December 17, 1996, among Liberty Acquisition
Subsidiary Corporation, Liberty Broadcasting of Maryland II, the Company and ABS
Communications, L.L.C. (incorporated by reference to Exhibit 10.60 to Form 10-K
(Commission File No. 0-22486) for the year ended December 31, 1996).
10.61 Asset Exchange Agreement, dated as of May 1, 1996, by and
between SFX Broadcasting of Texas (KRLD), Inc.; SFX Broadcasting
of Texas (TSN), Inc.; SFX Broadcasting of Texas (TSN) Licensee,
Inc.; SFX Broadcasting of the Southwest, Inc.; SFX Broadcasting,
Inc. and CBS Inc. (incorporated by reference to Exhibit 10.3 to
Form 8-K of SFX Broadcasting, Inc. (Commission File No. 0-22486)
filed with the Commission on May 8, 1996).
10.62 Master Richmond Station Agreement, dated as of December 17,
1996, by and among SFX Broadcasting, Inc., ABS Communications
Incorporated, Kenneth A Brown, EBF Inc., EBF Partners, ABS
Communications, LLC., ABS Richmond Partners, L.P., ABS Richmond
Partners II, L.P., ABS Richmond Towers, L.P., and J. Edwin
Conrad (incorporated by reference to Exhibit 2.2 to Form 8-K of
SFX Broadcasting, Inc. (Commission File No. 0-22486) filed with
the Commission on January 17, 1997).
10.63 Stock Option Agreement, dated as of May 9, 1996, by and between SFX Broadcasting, Inc. and
Michael G. Ferrel (incorporated by reference to Exhibit 10.1 to Form 8-K of SFX Broadcasting,
Inc. (Commission File No. 0-22486) filed with the Commission on January 17, 1997).
10.64 Amendment No. 1, dated as of January 21, 1997 to Asset Purchase Agreement, dated as of
October 15, 1996, by and between Secret Communications Limited Partnership and SFX
Broadcasting, Inc. (incorporated by reference to Exhibit 10.1 to Form 8-K of SFX Broadcasting,
Inc. (Commission File No. 0-22486) filed with the Commission on January 27, 1997).
10.65 First Amendment to the Second Amended and Restated Credit
Agreement, dated as of January 22, 1997, by and among SFX
Broadcasting, Inc., certain subsidiaries of SFX Broadcasting,
Inc. and The Bank of New York, individually and as Agent for the
additional lenders (incorporated by reference to Exhibit 10.2 to
Form 8-K of SFX Broadcasting, Inc. (Commission File No. 0-
22486) filed with the Commission on January 27, 1997).
10.66 Amendment No. 2 to Asset Purchase Agreement, dated as of April 1, 1997, between Secret
Communications Limited Partnership and SFX Broadcasting, Inc. (incorporated by reference
to Exhibit 2.3 to Form 8-K of SFX Broadcasting, Inc. (Commission File No. 0-22486) filed with
the Commission on April 15, 1997).
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EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
10.67 Consent and Amendment to the Second Amendment and Restated Credit Agreement, dated as
of March 24, 1997, between SFX Broadcasting, Inc. and the Lenders (incorporated by reference
to Exhibit 10.6 to Form 10-Q of SFX Broadcasting, Inc. (Commission File No. 0-22486) for the
quarter ended March 31, 1997).
10.68 Amended and Restated Employment Agreement, dated as of January 1, 1997, between SFX
Broadcasting, Inc. and Robert F.X. Sillerman (incorporated by reference to Exhibit 10.8 to Form
10-Q of SFX Broadcasting, Inc. (Commission File No. 0-22486) for the quarter ended March
31, 1997).
10.69 First Amendment to the Second Amended and Restated Credit Agreement, dated as of January
22, 1997, by and between SFX Broadcasting, Inc., its Subsidiaries and the Lenders
(incorporated by reference to Exhibit 10.9 to Form 10-Q of SFX Broadcasting, Inc.
(Commission File No. 0-22486) for the quarter ended March 31, 1997).
10.70 Third Amended and Restated Credit Agreement, dated as of June 23, 1997, by and among SFX
Broadcasting, Inc., the subsidiaries of SFX Broadcasting, Inc. from time to time parties thereto,
The Bank of New York, individually and as agent for the lenders, and the lenders from time to
time parties thereto (incorporated by reference to Exhibit 10.1 to Form 8-K of SFX
Broadcasting, Inc. (Commission File No. 0-22486) filed with the Commission on July 11,
1997).
10.71 Agreement and Plan of Merger, dated as of August 24, 1997, by
and among SBI Holding Corporation, SBI Radio Acquisition
Corporation and SFX Broadcasting, Inc. (incorporated by
reference to Exhibit 2.1 to Form 8-K of SFX Broadcasting, Inc.
(Commission File No. 0-22486) filed with the Commission on
August 25, 1997).
10.72 Stockholder Agreement, dated as of August 24, 1997, among SBI
Holding Corporation, SBI Radio Acquisition Corporation, Robert
F.X. Sillerman and SFX Broadcasting, Inc. (incorporated by
reference to Exhibit 10.1 to Form 8-K of SFX Broadcasting, Inc.
(Commission File No. 0-22486) filed with the Commission on
August 25, 1997).
10.73 Consulting, Non-Compete and Termination Agreement, dated as of
August 24, 1997, among SBI Holding Corporation, SFX
Broadcasting, Inc. and Robert F.X. Sillerman (incorporated by
reference to Exhibit 10.4 to Form 10-Q of SFX Broadcasting, Inc.
(Commission File No. 0- 22486) for the quarter ended September
30, 1997).
10.74 SFX Broadcasting, Inc. Director Deferred Stock Ownership Plan (incorporated by reference to
Exhibit 10.5 to Form 10-Q of SFX Broadcasting, Inc. (Commission File No. 0-22486) for the
quarter ended March 31, 1997).
10.75 Agreement of Merger, dated as of February 14, 1997, by and among
SFX Broadcasting, Inc., NOC Acquisition Corp., Cadco Acquisition
Corp., QN-Acquisition Corp., Nederlander of Connecticut, Inc.,
Connecticut Amphitheater Development Corporation, QN Corp.,
Connecticut Performing Arts, Inc., Connecticut Performing Arts
Partners and the Stockholders of Nederlander of Connecticut,
Inc., Connecticut Amphitheater Development Corporation and QN
Corp. (incorporated by reference to Exhibit 10.14 to Form S-1 of
SFX Entertainment, Inc. (Commission File No. 333-43287) filed
with the Commission on December 24, 1997).
10.76 Second Amendment of Agreement of Merger, dated as of March 19, 1997, by and among SFX
Broadcasting, Inc., NOC Acquisition Corp., Cadco Acquisition Corp., QN-Acquisition Corp.,
Nederlander of Connecticut, Inc., Connecticut Amphitheater Development Corporation, QN
Corp., Connecticut Performing Arts, Inc., Connecticut Performing Arts Partners and the
Stockholders of Nederlander of Connecticut, Inc., Connecticut Amphitheater Development
Corporation and QN Corp. (incorporated by reference to Exhibit 10.15 to Form S-1 of SFX
Entertainment, Inc. (Commission File No. 333-43287) filed with the Commission on December
24, 1997).
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EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
10.77 Asset Purchase and Sale Agreement, dated as of June 23, 1997, by and among Sunshine
Concerts, L.L.C., SFX Broadcasting, Inc., Sunshine Promotions, Inc., P. David Lucas and
Steven P. Sybesma (incorporated by reference to Exhibit 10.6 to Form S-1 of SFX
Entertainment, Inc. (Commission File No. 333-43287) filed with the Commission on December
24, 1997).
10.78 Asset Purchase and Sale Agreement, dated as of June 23, 1997, by and among Suntex
Acquisition, L.P., SFX Broadcasting, Inc., Suntex, Inc., P. David Lucas, Steven P. Sybesma,
Greg Buttrey and John Valant (incorporated by reference to Exhibit 10.7 to Form S-1 of SFX
Entertainment, Inc. (Commission File No. 333-43287) filed with the Commission on December
24, 1997).
10.79 Asset Purchase and Sale Agreement, dated as of June 23, 1997, by
and among Deer Creek Amphitheater Concerts, L.P., SFX
Broadcasting, Inc., Deer Creek Partners, L.P., Sand Creek
Partners, L.P., Sand Creek, Inc., P. David Lucas and Steven P.
Sybesma (incorporated by reference to Exhibit 10.8 to Form S-1
of SFX Entertainment, Inc. (Commission File No. 333- 43287)
filed with the Commission on December 24, 1997).
10.80 Asset Purchase and Sale Agreement, dated as of June 23, 1997, by
and among Murat Centre Concerts, L.P., SFX Broadcasting, Inc.,
Murat Centre L.P., P. David Lucas and Steven P. Sybesma
(incorporated by reference to Exhibit 10.9 to Form S-1 of SFX
Entertainment, Inc. (Commission File No. 333-43287) filed with
the Commission on December 24, 1997).
10.81 Asset Purchase and Sale Agreement, dated June 23, 1997, by and
among Polaris Amphitheater Concerts, Inc., SFX Broadcasting,
Inc., Polaris Amphitheater Limited Partnership and certain of
the partners of Polaris Amphitheater Limited Partnership
(incorporated by reference to Exhibit 10.10 to Form S-1 of SFX
Entertainment, Inc. (Commission File No. 333-43287) filed with
the Commission on December 24, 1997).
10.82 Asset Purchase and Sale Agreement, dated as of June 23, 1997, by
and among Sunshine Design, L.P., SFX Broadcasting, Inc.,
Tourdesign, Inc., P. David Lucas and Steven P. Sybesma
(incorporated by reference to Exhibit 10.11 to Form S-1 of SFX
Entertainment, Inc. (Commission File No. 333-43287) filed with
the Commission on December 24, 1997).
10.83 Agreement and Plan of Merger and Asset Purchase Agreement, dated as of December 12, 1997,
by and among SFX Entertainment, Inc., Contemporary Investments Corporation, Contemporary
Investments of Kansas, Inc., Continental Entertainment Associates, Inc., Capital Tickets, LP,
Dialtix, Inc., Contemporary International Productions Corporation, Steven F. Schankman Living
Trust, dated 10/22/82, Irving P. Zuckerman Living Trust, dated 11/24/81, Steven F. Schankman
and Irving P. Zuckerman (incorporated by reference to Exhibit 10.17 to Form S-1 of SFX
Entertainment, Inc. (Commission File No. 333-43287) filed with the Commission on December
24, 1997).
10.84 Stock Purchase Agreement, dated as of December 11, 1997, among each of the shareholders of
BGP Presents, Inc. and BGP Acquisitions, LLC (incorporated by reference to Exhibit 10.19 to
Form S-1 of SFX Entertainment, Inc. (Commission File No. 333-43287) filed with the
Commission on December 24, 1997).
10.85 Stock and Asset Purchase Agreement, dated December 2, 1997, between and among SFX
Network Group, L.L.C. and SFX Entertainment, Inc., and Elias N. Bird, individually and as
Trustee under the Bird Family Trust u/d/o 11/18/92, Gary F. Bird, individually and as Trustee
under the Gary F. Bird Corporation Trust u/d/o 2/4/94, Stephen R. Smith, individually and as
Trustee under the Smith Family Trust u/d/o 7/17/89, June E. Brody, Steven A. Saslow and The
Network 40, Inc. (incorporated by reference to Exhibit 10.21 to Form S-1 of SFX
Entertainment, Inc. (Commission File No. 333-43287) filed with the Commission on December
24, 1997).
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EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
10.86 Purchase and Sale Agreement, dated as of December 15, 1997, by and among Alex Cooley, S.
Stephen Selig, III, Peter Conlon, Southern Promotions, Inc., High Cotton, Inc., Cooley and
Conlon Management, Inc., Buckhead Promotions, Inc., Northern Exposure, Inc., Pure Cotton,
Inc., Interfest, Inc., Concert/Southern Chastain Promotions Joint Venture, Roxy Ventures Joint
Venture and SFX Concerts, Inc. (incorporated by reference to Exhibit 10.22 to Form S-1 of SFX
Entertainment, Inc. (Commission File No. 333-43287) filed with the Commission on December
24, 1997).
10.87 Stock Purchase Agreement, dated as of December 12, 1997 by and
between Pace Entertainment Corporation and SFX Entertainment,
Inc. (incorporated by reference to Exhibit 10.23 to Form S-1 of
SFX Entertainment, Inc. (Commission File No. 333-43287) filed
with the Commission on December 24, 1997).
10.88 Purchase Agreement, dated as of December 19, 1997, by and among SM/PACE, Inc., PACE
Entertainment Corporation, Charlotte Amphitheater Corporation, The Westside Amphitheater
Corporation and Viacom Inc. (incorporated by reference to Exhibit 10.28 to Amendment No.
1 to Form S-1 of SFX Entertainment, Inc. (Commission File No. 333-43287) filed with the
Commission on January 22, 1998).
10.89 Letter Purchase Agreement, dated as of December 22, 1997, by and among SM/PACE, Inc.,
YM Corp. and PACE Entertainment Corporation (incorporated by reference to Exhibit 10.29
to Amendment No. 1 to Form S-1 of SFX Entertainment, Inc. (Commission File No. 333-
43287) filed with the Commission on January 22, 1998).
10.90 Amendment No. 1 to the Amended and Restated Employment Agreement, effective as of April
15, 1996, between D. Geoffrey Armstrong and the Company (incorporated by reference to
Exhibit 10.1 to Form 8-K of SFX Broadcasting, Inc. filed with the Commission on May 8,
1996).
10.91 Indenture, dated as of February 11, 1998, by and among SFX
Entertainment, Inc., certain of its subsidiaries, and The Chase
Manhattan Bank as Trustee (incorporated by reference to Exhibit
10.2 to Form 8-K of SFX Broadcasting, Inc. (Commission File No.
0-22486) filed with the Commission on February 9, 1998).
10.92 Registration Rights Agreement, dated as of February 11, 1998, by
and among SFX Entertainment, Inc., certain of its subsidiaries
as Guarantors, Lehman Brothers, Inc., Goldman Sachs & Co., BNY
Capital Markets, Inc. and ING Barings (incorporated by reference
to Exhibit 10.3 to Form 8-K of SFX Broadcasting, Inc.
(Commission File No. 0-22486) filed with the Commission on
February 9, 1998).
10.93 Form of Distribution Agreement between SFX Entertainment and SFX (incorporated by
reference to Annex F to Schedule 14A of SFX (File number 0-22486), filed with the
Commission on February 17, 1998).
10.94 Form of Tax Sharing Agreement between SFX Entertainment and SFX (incorporated by
reference to Exhibit 2.2 to Amendment No. 2 to the Registration Statement on Form S-1 of SFX
Entertainment, Inc. (Commission File No. 333-43287) filed with the Commission on February
2, 1998).
10.95 Form of Employee Benefits Agreement between SFX Entertainment and SFX (incorporated by
reference to Exhibit 2.3 to Amendment No. 2 to the Registration Statement on Form S-1 of SFX
Entertainment, Inc. (Commission File No. 333-43287) filed with the Commission on February
14, 1998).
10.96 Indenture, dated February 11, 1998, by and among SFX
Entertainment, Inc., certain of its subsidiaries and The Chase
Manhattan Bank (incorporated by reference to Exhibit 10.2 to the
Form 8-K of SFX Broadcasting, Inc. (Commission File No. 0-22486)
filed with the Securities and Exchange Commission on February
18, 1998).
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EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
10.97 Registration Rights Agreement, dated as of February 11, 1998,
relating to the 91/8% Senior Subordinated Notes due 2998 of SFX
Entertainment, Inc., by and among SFX Entertainment, Inc., the
subsidiaries of SFX Entertainment named therein, Lehman Brothers
Inc., Goldman, Sachs & Co., BNY Capital Markets, Inc. and ING
Barings (incorporated by reference to Exhibit 10.3 to the Form
8-K of SFX Broadcasting, Inc. (Commission File No. 0-22486)
filed with the Securities and Exchange Commission on February
18, 1998).
10.98 Credit and Guarantee Agreement, dated as of February 26, 1998,
by and among SFX Entertainment, the Subsidiary Guarantors party
thereto, the Lenders party thereto, Goldman Sachs Credit
Partners, L.P., as co-documentation agent, Lehman Commercial
Paper Inc., as co- documentation agent, and The Bank of New
York, as administrative agent (incorporated by reference to
Exhibit 10.2 to the Form 8-K of SFX Entertainment, Inc. filed
with the Securities and Exchange Commission on March 10, 1998).
10.99 Purchase Agreement, dated February 5, 1998, relating to the
9 1/8% Senior Subordinated Notes due 2008 of SFX Entertainment,
Inc., by and among SFX Entertainment, Inc., Lehman Brothers
Inc., Goldman, Sachs & Co., BNY Capital Markets, Inc. and ING
Barings (incorporated by reference to Exhibit 10.4 to the Form
8-K of SFX Entertainment, Inc. filed with the Securities and
Exchange Commission on March 10, 1998).
10.100 Amendment No. 1 dated February 9, 1998 to the Agreement and Plan
of Merger, dated August 24, 1997 by and among SBI Holding
Corporation, SBI Radio Acquisition Corporation and SFX
Broadcasting, Inc. (incorporated by reference to Exhibit 10.1 to
the Form 8-K of the Company filed with the Commission on May 8,
1996).
10.101* Amendment No. 2 dated as of March 9, 1998, to Agreement and Plan
of Merger, dated as of August 24, 1997, by and among SBI Holding
Corporation, SBI Radio Acquisition Corporation and SFX
Broadcasting, Inc.
11.1* Statement regarding computation of per share earnings.
21.1* Subsidiaries of the Company
23.1* Consent of Ernst & Young LLP.
23.2* Consent of Fisher Wayland Cooper Leader & Zaragoza LLP.
23.3* Consent of BIA Research, Inc.
27.1* Financial Data Schedule
99.1* Annual Report on Form 10-K of SFX Entertainment, Inc.
99.2 Proxy Statement, dated as of February 13, 1998, of SFX Broadcasting, Inc.(the "Proxy
Statement") (incorporated by reference to the Schedule 14A of the Company filed with the
Commission on February 18, 1998).
99.3 Supplement No. 1 to Proxy Statement (incorporated by reference to the Schedule 14A of the
Company filed with the Company on March 18, 1998).
</TABLE>
- --------------
*filed herewith
(b) The following reports on Form 8-K were filed during the fiscal
quarter ended December 31, 1997.
On December 11, 1997, the Company filed a Form 8-K under Item 5
("Other Events") which contained certain unaudited pro forma condensed combined
financial statements of the Company as of September 30, 1997 and for the nine
months ended September 30, 1997 and the year ended December 31, 1996. The pro
form financial statements gave effect to certain pending and completed
transactions by the Company.
On December 24, 1997, the Company filed a Form 8-K under Item 5
("Other Events") which described certain pending acquisitions by SFX
Entertainment.
- 69 -
<PAGE>
In addition, on December 11, 1997, the Company filed a Form 8-K/A
under Item 7 ("Financial Statements, Pro Forma Financial Information and
Exhibits"). The Form 8-K/A amended a Form 8-K filed by the Company on August
25, 1998 under Item 5 ("Other Events") which disclosed the execution of the
Merger Agreement. The Form 8-K/A added an additional document executed in
connection with the Merger Agreement as an exhibit to the Form 8-K filed on
August 25, 1997.
- 70 -
<PAGE>
INDEX OF DEFINED TERMS
1996 Radio Acquisitions...................................................32
1997 and 1996 Radio Acquisitions..........................................33
1997 Entertainment Acquisitions............................................7
1997 Radio Acquisitions...................................................33
1998 Entertainment Acquisitions............................................7
2000 Notes................................................................34
2006 Notes................................................................34
Albany Acquisition.........................................................5
Aliens....................................................................14
Alternate Transaction.....................................................17
Amended Sillerman Agreement...............................................48
BIA........................................................................4
Buyer......................................................................2
Buyer Sub..................................................................2
Capstar...................................................................18
CBS Exchange...............................................................5
Chancellor.................................................................6
Chancellor Exchange........................................................6
Change of Control Options.................................................55
Charlotte Acquisition.....................................................32
Charlotte Exchange.........................................................6
Class A Common Stock.......................................................2
Class A Merger Consideration...............................................2
Class A Share.............................................................47
Class B Common Stock.......................................................2
Class B Merger Consideration...............................................2
Class B Warrants..........................................................27
Closing...................................................................16
Code......................................................................49
Communications Act........................................................12
Company....................................................................2
Company Guarantee of Entertainment Obligations............................38
Consulting and Non-Competition Agreement..................................53
Contemporary Acquisition...................................................7
Credit Agreement...........................................................6
DAB.......................................................................15
Dallas Disposition........................................................32
Delsener/Slater............................................................7
Delsener/Slater Acquisition................................................7
Distribution Agreement....................................................17
DOJ........................................................................6
Effective Time............................................................15
Employee Benefits Agreement...............................................17
Exchange Act..............................................................45
Exchange Debentures.......................................................42
Executive Officers........................................................43
FCC........................................................................6
GAAP......................................................................29
Greensboro Acquisition....................................................32
Greenville Acquisition....................................................32
Halcyon...................................................................52
Hartford Acquisition.......................................................5
Hearst Acquisition.........................................................6
Hicks Muse III............................................................18
Houston Exchange..........................................................32
HSR Act....................................................................6
<PAGE>
Independent Committee.....................................................51
IPO Warrants..............................................................21
Jackson Acquisitions......................................................32
Jackson and Biloxi Disposition.............................................6
Jacksonville Stations.....................................................33
JSA........................................................................5
Liberty Acquisition.......................................................32
Little Rock Disposition....................................................5
LMA........................................................................5
Long Island Exchange......................................................26
Louisville Dispositions...................................................32
Louisville Stations.......................................................32
Marquee...................................................................44
MD&A......................................................................25
Meadows Acquisition........................................................7
Meadows Repurchase........................................................40
Merger.....................................................................2
Merger Agreement...........................................................2
MMR Dispositions..........................................................32
MMR Merger.................................................................5
Named Executive Officers..................................................45
Nashville Acquisition......................................................6
PACE Acquisition...........................................................7
PACE Option...............................................................38
Pending Acquisitions.......................................................6
Pending Disposition........................................................6
Prism Acquisition.........................................................32
Proposal 1................................................................16
Proposal 2................................................................16
Proposal 3................................................................16
Proxy Statement...........................................................30
Raleigh-Greensboro Acquisition............................................32
Raptor....................................................................52
Richmond Acquisition.......................................................6
SARs......................................................................17
SCMC......................................................................13
SCMC Warrants.............................................................56
SEC.......................................................................16
Secret Communications......................................................5
Secret Communications Acquisition..........................................5
Series A Preferred Stock..................................................38
Series D Preferred Stock...................................................2
Series D Preferred Stock Offering.........................................35
Series E Preferred Stock..................................................38
SFX Employee Benefit Plans................................................25
SFX Entertainment..........................................................2
SFX Entertainment 10-K.....................................................2
SFX Entertainment Board...................................................56
SFX Entertainment Credit Facility.........................................38
SFX Entertainment Notes...................................................38
Special Stockholders Meeting...............................................3
Spin-Off...................................................................2
Spin-Off Record Date......................................................21
Stockholder Agreement.....................................................54
Sunshine Promotions........................................................7
Sunshine Promotions Acquisition............................................7
- 71 -
<PAGE>
Surviving Corporation.....................................................16
Takeover Proposal.........................................................19
Tax Sharing Agreement.....................................................17
Telecom Act................................................................4
Termination Date..........................................................18
Texas Coast Acquisition....................................................5
The SFX Entertainment Group...............................................23
Triathlon..................................................................5
TSC.......................................................................21
Tudor.....................................................................53
Warrants..................................................................21
Washington Dispositions...................................................32
WVGO Acquisition...........................................................6
- 72 -
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
SFX BROADCASTING, INC.
By: /s/ Robert F.X. Sillerman
-----------------------------
Name: Robert F.X. Sillerman
Title: Executive Chairman
Date: March 17, 1998
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
/s/ Robert F.X. Sillerman Executive Chairman and Director March 17, 1998
--------------------- (principal executive officer)
Robert F.X. Sillerman
/s/ Michael G. Ferrel Chief Executive Officer and Director March 17, 1998
---------------------
Michael G. Ferrel
/s/ D. Geoffrey Armstrong Chief Operating Officer, Executive March 17, 1998
------------------------- Vice President and Director
D. Geoffrey Armstrong
/s/ Thomas P. Benson Chief Financial Officer, Treasurer March 17, 1998
-------------------- and Director (principal financial and
Thomas P. Benson accounting officer)
/s/ Howard J. Tytel Executive Vice President, Secretary March 17, 1998
------------------- and Director
Howard J. Tytel
/s/ James F. O'Grady Director March 17, 1998
--------------------
James F. O'Grady
/s/ Paul Kramer Director March 17, 1998
--------------------
Paul Kramer
/s/ Richard A. Liese Director March 17, 1998
--------------------
Richard A. Liese
/s/ Edward F. Dugan Director March 17, 1998
-------------------
Edward F. Dugan
</TABLE>
- 73 -
<PAGE>
SFX BROADCASTING, INC. AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND
FINANCIAL STATEMENT SCHEDULE
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
The following consolidated financial statements are included in Item 8:
Report of Independent Auditors F-2
Consolidated Balance Sheets as of December 31, 1997 and 1996 F-3
Consolidated Statements of Operations for each of the
Three Years in the Period Ended December 31, 1997 F-5
Consolidated Statements of Shareholders' Equity for each of the
Three Years in the Period Ended December 31, 1997 F-6
Consolidated Statements of Cash Flows for each of the
Three Years in the Period Ended December 31, 1997 F-7
Notes to Consolidated Financial Statements F-8
The following consolidated financial statement schedule is included in Item
14(a):
Schedule II - Valuation and Qualifying Accounts F-29
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT AUDITORS
Board of Directors
SFX Broadcasting, Inc.
We have audited the accompanying consolidated balance sheets of SFX
Broadcasting, Inc. and Subsidiaries as of December 31, 1997 and 1996, and the
related consolidated statements of operations, shareholders' equity, and cash
flows for each of the three years in the period ended December 31, 1997. Our
audits also included the financial statement schedule listed in the Index at
Item 14(a). These financial statements and the schedule are the responsibility
of the Company's management. Our responsibility is to express an opinion on
these financial statements and the schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to
above present fairly, in all material respects, the consolidated financial
position of SFX Broadcasting, Inc. and Subsidiaries at December 31, 1997 and
1996, and the consolidated results of their operations and their cash flows for
each of the three years in the period ended December 31, 1997 in conformity
with generally accepted accounting principles. Also, in our opinion, the
related financial statement schedule, when considered in relation to the basic
financial statements taken as a whole, presents fairly in all material respects
the information set forth therein.
ERNST & YOUNG LLP
New York, New York
March 5, 1998
F-2
<PAGE>
SFX BROADCASTING, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------------
1997 1996
---- ----
<S> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents $24,686 $10,601
Cash pledged for letters of credit -- 20,000
Accounts receivable less allowance for doubtful accounts of $2,264 in 1997
and $1,620 in 1996 71,241 47,275
Assets under contract for sale 42,883 8,352
Prepaid and other current assets 3,109 2,461
Receivable from SFX Entertainment 11,539 --
-------------- --------------
Total current assets 153,458 88,689
Property and equipment:
Land 6,169 6,791
Buildings and improvements 18,295 11,485
Broadcasting equipment and other 67,821 54,736
-------------- --------------
92,285 73,012
Less accumulated depreciation and amortization (17,456) (10,192)
-------------- --------------
Net property and equipment 74,829 62,820
Intangible Assets:
Broadcast licenses 913,887 558,640
Goodwill 131,601 98,165
Deferred financing costs 22,250 19,504
Other 5,406 4,727
-------------- --------------
1,073,144 681,036
Less accumulated amortization (39,580) (16,933)
-------------- --------------
Net intangible assets 1,033,564 664,103
Net assets to be distributed to shareholders 102,144 --
Deposits and other payments for pending acquisitions 5,830 31,692
Other assets 5,790 12,023
-------------- --------------
TOTAL ASSETS $ 1,375,615 $ 859,327
============== ==============
</TABLE>
See accompanying notes.
F-3
<PAGE>
SFX BROADCASTING, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS, EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------------
1997 1996
---- ----
<S> <C> <C>
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Accounts payable $ 8,665 $10,921
Accrued expenses 19,246 21,913
Payable to former national sales representative 23,025 --
Accrued interest and dividends 20,475 7,111
Current portion of long-term debt 509 231
Current portion of capital lease obligations 101 150
-------------- ---------------
Total current liabilities 72,021 40,326
Long-term debt, less current portion 763,966 480,875
Capital lease obligations, less current portion 126 204
Deferred income taxes 102,681 91,352
-------------- ---------------
Total liabilities 938,794 612,757
Redeemable preferred stock 361,996 145,999
Commitments and contingencies
Shareholders' Equity:
Class A Voting common stock, $.01 par value; 100,000,000 shares
authorized; and 9,508,379 issued and 9,477,934 outstanding at December 31,
1997 and 8,089,367 issued and 8,063,348 outstanding at December 31, 1996
95 81
Class B Voting convertible common stock, $.01 par value; 10,000,000 shares
authorized; 1,190,911 issued and 1,047,037 outstanding at December 31,
1997 and 1,208,810 issued and 1,064,936 outstanding at December 31, 1996
12 12
Additional paid-in capital 185,537 189,920
Treasury Stock; 174,319 and 170,192 shares at December 31, 1997 and 1996,
respectively (6,523) (6,393)
Accumulated deficit (104,296) (83,049)
-------------- ---------------
Total shareholders' equity 74,825 100,571
-------------- ---------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $1,375,615 $859,327
============== ===============
</TABLE>
See accompanying notes.
F-4
<PAGE>
SFX BROADCASTING, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(dollars in thousands, except per share amounts)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------------------------------
1997 1996 1995
---------------- ------------------ -------------
<S> <C> <C> <C>
Gross revenues $306,842 $162,011 $87,140
Less agency commissions (36,478) (18,950) (10,310)
---------------- ----------------- ----------
Net revenues 270,364 143,061 76,830
Station operating expenses 167,063 92,816 51,039
Depreciation, amortization, duopoly integration costs and acquisition
related costs 38,232 17,311 9,137
Corporate expenses, net of $2,206 allocated to SFX Entertainment in 1997,
including related party expenses of $151 in 1996 and $330 in 1995, net of 6,837 6,261 3,797
related party advisory fees of $802 in 1996
624 52 --
Non-cash stock compensation
Non-recurring and unusual charges, including adjustments to broadcast rights
agreement 20,174 28,994 5,000
---------------- ----------------- ----------
Total operating expenses 232,930 145,434 68,973
---------------- ----------------- ----------
Operating income (loss) 37,434 (2,373) 7,857
Investment income 2,821 4,017 650
Interest expense (64,506) (34,897) (12,903)
Loss on sale of radio station -- (1,900) --
---------------- ----------------- ----------
Loss before income taxes, operations to be distributed to shareholders and
extraordinary item (24,251) (35,153) (4,396)
Income tax expense 810 480 --
---------------- ----------------- ----------
Loss before operations to be distributed to shareholders and extraordinary item (25,061) (35,633) (4,396)
Income from operations to be distributed to shareholders, net of taxes 3,814 -- --
---------------- ----------------- ----------
Loss before extraordinary item (21,247) (35,633) (4,396)
Extraordinary loss on debt retirement -- 15,219 --
---------------- ----------------- ----------
Net loss (21,247) (50,852) (4,396)
Redeemable preferred stock dividends and accretion 38,510 6,061 291
---------------- ----------------- ----------
Net loss applicable to common stock $(59,757) $(56,913) $(4,687)
================ ================= ==========
Loss per common share from continuing operations $(6.67) $(5.51) $(0.71)
Income per common share from operations to be distributed to shareholders 0.40 -- --
---------------- ----------------- ----------
Loss per common share before extraordinary item $(6.27) $(5.51) $(0.71)
Extraordinary loss per common share on debt retirement -- (2.01) --
---------------- ----------------- ----------
Basic and diluted net loss per common share $(6.27) $(7.52) $(0.71)
================ ================= ==========
Weighted average common shares outstanding 9,526,429 7,563,600 6,595,728
================= ================== ===========
</TABLE>
See accompanying notes.
F-5
<PAGE>
SFX BROADCASTING INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1995, 1996, AND 1997
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
CLASS A CLASS B PAID-IN TREASURY ACCUMULATED
COMMON COMMON CAPITAL STOCK DEFICIT TOTAL
------- ------- ------- -------- ----------- -----
<S> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1994 $ 48 $ 9 $ 76,600 -- $ (27,801) $ 48,856
Public offering, net of expenses 17 39,149 39,166
Redemption of Class C Common (459) (459)
Accretion and dividends on
redeemable preferred stock
(291) (291)
Conversion of Class A Common to
Class B Common (1) 1 --
Decrease in unrealized holding
losses 185 185
Net loss (4,396) (4,396)
-------------------------------------------------------------------------------
Balance, December 31, 1995 $ 64 $ 10 $ 115,184 $ -- $ (32,197) $ 83,061
===============================================================================
Accretion and dividends on
redeemable preferred stock (6,061) (6,061)
Issuance upon exercise of stock
options 370 370
Issuance of warrants to SCMC 8,905 8,905
Issuance of equity securities for
MMR Merger 17 2 71,522 71,541
Repurchase of common stock (6,393) (6,393)
Net loss (50,852) (50,852)
-------------------------------------------------------------------------------
Balance, December 31, 1996 $ 81 $ 12 $ 189,920 $ (6,393) $ (83,049) $100,571
===============================================================================
Issuance upon exercise of stock
options 11 21,132 21,143
Issuance upon exercise of Class B
Warrants 2,476 2,476
Issuance of stock for acquisitions 3 9,519 9,522
Payment from shareholder 1,000 1,000
Accretion and dividends on redeemable
preferred stock (38,510) (38,510)
Repurchase of common stock (130) (130)
Net loss (21,247) (21,247)
-------------------------------------------------------------------------------
Balance, December 31, 1997 $ 95 $ 12 $185,537 $ (6,523) $ (104,296) $ 74,825
===============================================================================
</TABLE>
See accompanying notes.
F-6
<PAGE>
<TABLE>
<CAPTION>
SFX BROADCASTING, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
YEARS ENDED DECEMBER 31,
------------------------------------------------
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Operating activities:
Net loss $ (21,247) $ (50,852) $ (4,396)
Income from operations to be distributed to shareholders (3,814) -- --
Adjustments to reconcile net loss to net cash provided by (used
in) operating activities:
Depreciation 10,955 5,972 2,658
Amortization 26,406 10,202 5,099
Noncash portion of non-recurring and unusual charge 4,712 9,878 --
Extraordinary loss on debt repayment -- 15,219 --
Loss on sale of radio station and other noncash items -- 1,900 (207)
Deferred taxes -- (710) --
Changes in assets and liabilities, net of amounts acquired:
Accounts receivable (22,189) (13,839) (5,164)
Prepaid and other assets 2,599 (1,704) 2,052
Accrued interest and dividends 345 3,841 6
Accounts payable, accrued expenses and other liabilities 6,275 6,646 451
--------------- ---------------- ----------------
Cash provided by (used in) continuing operations 4,042 (13,447) 499
Cash from operating activities of SFX Entertainment 1,005 -- --
--------------- ---------------- ----------------
Net cash provided by (used in) operating activities 5,047 (13,447) 499
Investing activities:
Purchase of stations and related businesses, net of cash
acquired (408,788) (493,433) (26,057)
Proceeds from sales of stations and other assets 1,836 56,943 703
Deposits and other payments for pending acquisitions (3,594) (30,799) (3,000)
Purchase of property and equipment (12,409) (3,224) (3,261)
Sale of short-term investments -- -- 7,918
Loans and advances to related parties (2,800) -- (2,000)
--------------- ---------------- ----------------
Net cash used in investing activities (425,755) (470,513) (25,697)
Cash from investing activities of SFX Entertainment (73,296) -- --
--------------- ---------------- ----------------
Net cash used in investing activities (499,051) (470,513) (25,697)
Financing activities:
Payments on long-term debt, including prepayment preminums (73,863) (110,396) (22,521)
Additions to debt issuance costs (3,006) (19,505) (2,139)
Proceeds from issuance of senior and subordinated debt 356,500 501,500 22,000
Net proceeds from sales of preferred stock 215,258 143,445 --
Dividends paid on preferred stock (23,487) (4,983) --
Proceeds from issuance of common stock and shareholders 24,619 -- 39,166
Purchases of treasury stock (130) (6,393) --
Stock, redemptions, retirements and other (1,000) (1,000) (2,609)
--------------- ---------------- ----------------
Net cash provided by financing activities 494,891 502,668 33,897
Cash from financing activities of SFX Entertainment (823) -- --
--------------- ---------------- ----------------
Net cash provided by financing activities 494,068 502,668 33,897
Net increase in cash and cash equivalents 64 18,708 8,699
Cash and cash equivalents at beginning of period 30,601 11,893 3,194
Cash of SFX Entertainment at the end of period (5,979) -- --
--------------- ---------------- ----------------
Cash and cash equivalents at end of period 24,686 $ 30,601 $ 11,893
=============== ================ ================
</TABLE>
Supplemental disclosure of cash flow information (See NOTE 13).
See accompanying notes.
F-7
<PAGE>
SFX BROADCASTING, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997
NOTE 1 -- ORGANIZATION AND BASIS OF PRESENTATION
SFX Broadcasting, Inc. (the "Company"), a Delaware corporation, is one
of the largest radio station groups in the United States. At December 31, 1997,
the Company owned and operated, provided programming to or sold advertising on
behalf of sixty-three FM stations and nineteen AM stations serving the
following twenty-three markets: Dallas, Texas; Houston, Texas; Pittsburgh,
Pennsylvania; Milwaukee, Wisconsin; San Diego, California; Providence, Rhode
Island; Indianapolis, Indiana; Charlotte, North Carolina; Hartford,
Connecticut; Greensboro, North Carolina.; Nashville, Tennessee; Raleigh-Durham,
North Carolina; Jacksonville, Florida; Richmond, Virginia; Albany, New York;
Greenville-Spartanburg, South Carolina; Tucson, Arizona;
Springfield/Northampton, Massachusetts; Wichita, Kansas; Daytona Beach,
Florida; New Haven, Connecticut; Jackson, Mississippi and Biloxi, Mississippi.
In addition, in 1997, the Company, through the acquisitions of
Delsener/Slater Enterprises, Ltd. ("Delsener/Slater"), a concert promotion
company based in New York City, Sunshine Promotions, Inc., ("Sunshine
Promotions"), an Indianapolis concert promotion company which owns the Deer
Creek Music Theater and the Polaris Amphitheater and certain related companies,
and certain companies which collectively own and operate the Meadows Music
Theater, (the "Meadows"), a 25,000-seat indoor/outdoor complex located in
Hartford, Connecticut, became one of the largest live entertainment groups in
the United States.
As more fully described in Note 2, the Company has entered into an
Agreement and Plan of Merger and intends to distribute to its shareholders its
live entertainment business. Therefore, the live entertainment business has
been classified as net assets to be distributed to shareholders and income from
operations to be distributed to shareholders in the consolidated financial
statements. The Company has also recently completed substantial additional
acquisitions in the live entertainment business (see Note 14).
NOTE 2 - RECENT DEVELOPMENT; PENDING SPIN-OFF AND MERGER
On August 24, 1997, the Company entered into an Agreement and Plan of
Merger with SBI Holdings Corporation ("Buyer") and SBI Radio Acquisition
Corporation pursuant to which the Company will become a wholly owned subsidiary
of Buyer (the "Merger"). In the Merger, holders of the Company's Class A Common
Stock will receive $75.00 per share, Class B Common Stock will receive $97.50
per share, and the 6 1/2% Series D Cumulative Convertible Exchangeable
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 that share would convert immediately prior to the consummation of
the Merger; in each case, subject to adjustment under certain circumstances.
Pursuant to the merger agreement, the Company intends to spin-off (the
"Spin-Off") its live entertainment business ("SFX Entertainment") pro-rata to
its stockholders and the holders of certain warrants, options, and stock
appreciation rights prior to the effective time of the Merger.
Upon the consummation of the Spin-Off and prior to the Merger, senior
management of the Company will continue to serve in their present capacities
with the Company while devoting such time as they deem reasonably necessary to
conduct the operations of SFX Entertainment. Although SFX Entertainment has not
yet entered into employment agreements with such members of senior management,
it is anticipated that the members of existing management will become full-time
employees of SFX Entertainment and that Mr. Sillerman will become Executive
Chairman of SFX Entertainment upon consummation of the Merger.
SFX Entertainment is required to repay to the Company all amounts paid
in connection with its concert promotion acquisitions since the merger date and
capital improvements and SFX Entertainment will assume all the liabilities and
obligations related to such company's business. In February 1998, SFX
Entertainment reimbursed the Company $25.3 million related to these
obligations.
F-8
<PAGE>
At the time of the Spin-Off, management of the Company will make a
good-faith allocation of the working capital between the Company and SFX
Entertainment. Upon the consummation of the Merger, all net working capital of
the Company, as determined in accordance with the merger agreement, will be
paid to SFX Entertainment by the Company or any net negative working capital
will be paid to the Company by SFX Entertainment. As of December 31, 1997, the
Company estimates that the working capital to be received by the Company would
have been approximately $3.0 million. Even if the Merger does not occur for any
reason, the Company intends to consummate the Spin-Off.
The consummation of the Spin-Off and/or the Merger is subject to
certain conditions and the receipt of certain consents including, among other
things, the approval of the Company's common stock voting together as a single
class, the approval of each of the Class A Common Stock and Series D Preferred
Stock, voting separately as a class, and the consents of the holders of the
Series E Preferred Stock and certain of the Company's outstanding notes. In
addition, the Merger is subject to the receipt of certain regulatory approvals.
In February 1998, the Company received the consents of the holders of the
Series E Preferred Stock and certain of the Company's outstanding notes.
SFX Entertainment also will be responsible for any taxes of the
Company 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 the Company and the SFX Entertainment available to offset
gain resulting from the Spin-Off.
The actual amount of the tax indemnification payment will be based
largely on the excess of the value of SFX Entertainment's Common Stock on the
date of the Spin-Off over the tax basis of that stock. If SFX Entertainment's
Common Stock was valued at approximately $15 per share, management believes
that no material indemnification payment would be required. Such
indemnification obligation would be approximately $4.0 million at $16 per
share and would increase by approximately $7.7 million for each $1.00 increase
above the per share valuation of $16. If SFX Entertainment's Common Stock was
valued at $22 1/2 per share, (the last sales price of the Class A Common Stock
(trading on a when-issued basis) on the over the counter market on March 13,
1998), management estimates that SFX Entertainment would have been required to
pay approximately $54.0 million pursuant to such indemnification obligation.
SFX Entertainment expects that such indemnity payment will be due on or about
June 15, 1998.
The Company anticipates that the Merger will be consummated in the
second quarter of 1998 and that the Spin-Off will occur prior thereto. There
can be no assurance that the various approvals or consents will be given or
that the conditions to consummating the Merger will be met or that the Spin-Off
will occur as presently contemplated or at all.
The operations of SFX Entertainment have been presented in the
financial statements as operations to be distributed to shareholders pursuant
to the Spin-Off. During the year ended December 31, 1997, revenue and income
from operations for SFX Entertainment were $96,144,000 and $5,090,000,
respectively. Included in operating expenses is $2,206,000 of allocated
corporate expenses net of $1,794,000 of reimbursements from Triathlon (Note 9).
Additional, interest expense relating to the debt to be distributed to the
shareholders pursuant to the Spin-Off of $1,590,000 has been allocated to SFX
Entertainment. The Company provides various administrative services to SFX
Entertainment. It is the Company's policy to allocate these expenses on the
basis of direct usage. In the opinion of management, this method of allocation
is reasonable and allocated expenses approximate what SFX Entertainment would
have occurred on a stand-alone basis.
NOTE 3 -- ACQUISITIONS AND DISPOSITIONS
Radio Broadcasting Acquisitions. In August 1997, the Company acquired
two radio stations operating in Pittsburgh, Pennsylvania and two radio stations
in Milwaukee, Wisconsin for $35.0 million (the "Hearst Acquisition").
In August 1997, the Company exchanged one radio station in Pittsburgh,
Pennsylvania, which the Company had recently acquired from Secret
Communications Limited Partnership ("Secret Communications") (part of the
Secret Communications Acquisition, as defined below ), and $20.0 million
F-9
<PAGE>
in cash for one radio station in Charlotte, North Carolina (the "Charlotte
Exchange"). The Company operated the radio station in Charlotte, North Carolina
pursuant to a local market agreement during July 1997.
In July 1997, the Company acquired substantially all of the assets of
four radio stations operating in Richmond, Virginia for approximately $46.5
million, including payments made to buy out minority equity interests which the
Company had originally agreed to provide to certain of the sellers (the
"Richmond Acquisition").
In April 1997, the Company acquired substantially all of the assets of
three radio stations in Indianapolis, Indiana and in June 1997 the Company
acquired substantially all of the assets of four stations in Pittsburgh,
Pennsylvania from Secret Communications for a total purchase price of $255.0
million (collectively, the "Secret Communications Acquisition").
Also in April 1997, the Company sold one radio station operating in
Little Rock, Arkansas (the "Little Rock Disposition") to Triathlon Broadcasting
Company, a related party. The station was sold for $4.1 million, of which $3.5
million had been held as a deposit by the Company since 1996. No gain or loss
was recorded on the transaction as the radio station was recently acquired in
connection with the MMR Merger, as defined below.
In March 1997, the Company acquired two radio stations operating in
Houston, Texas, for a purchase price of approximately $43.0 million, exclusive
of certain additional contingent liabilities which may become payable (the
"Texas Coast Acquisition"). The Texas Coast Acquisition increased the number of
stations the Company owns in the Houston market to four.
In March 1997, the Company exchanged one radio station operating in
Washington, D.C./Baltimore, Maryland, for two radio stations operating in
Dallas, Texas (the "CBS Exchange") and completed the sale of two radio stations
operating in the Myrtle Beach, South Carolina market for $5.1 million payable
in installments over a five year period (present value approximately $4.3
million). The CBS Exchange was structured as a substantially tax free exchange
of like-kind assets. The contract for the sale of the Myrtle Beach stations was
in place prior to the merger with Multi-Market Radio, Inc. ("MMR"). No gain or
loss was recognized on the Myrtle Beach stations that were recently acquired in
the MMR Merger, as defined below.
Cost of $871,000 related to the reformatting of the Dallas stations
was included in depreciation, amortization, duopoly integration costs and
acquisition related costs in 1997.
In February 1997, the Company purchased WWYZ-FM, operating in
Hartford, Connecticut, for a purchase price of $25.9 million (the "Hartford
Acquisition"). The Hartford Acquisition increased the number of stations the
Company owns in the Hartford market to five.
In January 1997, the Company purchased one radio station operating in
Albany, New York, for $1.0 million (the "Albany Acquisition").
In December 1996, the Company acquired substantially all of the assets
of WHSL-FM, operating in Greensboro, North Carolina, for a purchase price of
$6.0 million (the "Greensboro Acquisition") and exchanged radio station
KRLD-AM, Dallas, Texas, and the Texas State Networks for radio station KKRW-FM,
Houston, Texas (the "Houston Exchange"). The Houston Exchange was structured as
a substantially tax free exchange of like kind assets. No gain or loss was
recorded on the Houston Exchange as the book values of KRLD-AM and the Texas
State Networks approximated the fair value of the assets of KKRW-FM.
In November 1996, the Company consummated its merger with MMR (the
"MMR Merger"), pursuant to which it acquired MMR in exchange for 1,631,450
shares of Class A Common Stock, 208,810 shares of Class B Common Stock and
other equity securities with a total market value for all securities issued of
approximately $71.5 million (Note 7). Concurrently with the consummation of the
MMR Merger, the Company paid approximately $43.0 million to satisfy outstanding
indebtedness of MMR. MMR was
F-10
<PAGE>
organized in 1992 by the Company's executive chairman and another officer and
director of the Company. The Company's executive chairman owned a substantial
equity interest in MMR which was exchanged for Class B Common Stock of the
Company upon the consummation of the MMR Merger. MMR owned and operated,
provided programming to or sold advertising on behalf of thirteen FM stations
and one AM station located in eight markets: New Haven, Connecticut; Hartford,
Connecticut; Springfield/Northampton, Massachusetts; Daytona Beach, Florida;
Augusta, Georgia; Biloxi, Mississippi; Myrtle Beach, South Carolina and Little
Rock, Arkansas. Prior to the MMR Merger, MMR had entered into agreements to
sell two stations operating in Myrtle Beach, South Carolina and one station
operating in Little Rock, Arkansas (the "MMR Dispositions"). The MMR
Dispositions, which were completed in 1997 as described above, are classified
as assets under contract for sale in the accompanying balance sheet at December
31, 1996. The Company also terminated a Joint Sales Agreement ("JSA") with one
station operating in Augusta, Georgia and its Local Marketing Agreement ("LMA")
with one station operating in Myrtle Beach, South Carolina in December 1996.
In October 1996, the Company sold radio station KTCK-AM, Dallas, Texas
for approximately $13.4 million, net of certain sale expenses (the "Dallas
Disposition"). The Company acquired the assets of KTCK-AM in Dallas, Texas (the
"Dallas Acquisition") in September 1995 from a third party for $8,633,000 in
cash (including $133,000 in transaction costs) and $2,000,000 of 6% current
coupon Series C Redeemable Preferred Stock (Note 6). The purchase agreement
contains a provision for a contingent payment not to exceed $7,500,000 payable
in 1998 if the Company's Dallas properties achieve certain ratings and
financial goals. In 1996, the Company recorded a loss of $1.9 million on
the Dallas Disposition, based on its estimate of the ultimate resolution of the
contingency. During 1997, the Company paid $3,000,000 to the Seller in
connection with this provision, leaving a remaining accrual at December 31, 1997
of approximately $300,000, and it is unable to reasonably estimate future
amounts due, if any. The Company had provided programming to KTCK-AM pursuant
to an LMA since March 1, 1995.
In July 1996, the Company acquired Liberty Broadcasting, Inc.
("Liberty Broadcasting") for a purchase price of approximately $239.7 million,
including $10.4 million for working capital (the "Liberty Acquisition").
Liberty Broadcasting was a privately-held radio broadcasting company which
owned and operated, provided programming to or sold advertising on behalf of
fourteen FM and six AM radio stations (the "Liberty Stations") located in six
markets: Washington, DC/Baltimore, Maryland; Nassau-Suffolk, New York;
Providence, Rhode Island; Hartford, Connecticut; Albany, New York and Richmond,
Virginia.
In July 1996, the Company sold three of the Liberty Stations operating
in the Washington, DC/Baltimore, Maryland market (the "Washington
Dispositions") for $25.0 million. No gain or loss was recognized on the
Washington Dispositions.
In July 1996, the Company acquired from Prism Radio Partners L.P.
("Prism"), substantially all of the assets used in the operation of eight FM
and five AM radio stations located in four markets: Jacksonville, Florida;
Raleigh, North Carolina; Tucson, Arizona and Wichita, Kansas. In September
1996, the Company also acquired from Prism substantially all of the assets of
three radio stations operating in Louisville, Kentucky (the "Louisville
Stations"), upon renewal of the Federal Communications Commission ("FCC")
licenses of such stations (the "Louisville Acquisition") (collectively the
"Prism Acquisition"). The total purchase price for the Prism Acquisition was
approximately $105.3 million. In October 1996, the Company sold the Louisville
Stations (the "Louisville Disposition") for $18.5 million. The Company
recognized no gain or loss on the Louisville Disposition.
In July 1996, the Company acquired substantially all of the assets of
WJDX-FM, Jackson, Mississippi for a purchase price of approximately $3.2
million. In addition, in August 1996, the Company acquired substantially all of
the assets of WSTZ-FM and WZRX-AM, each operating in Jackson, Mississippi, for
approximately $3.5 million (collectively, the "Jackson Acquisitions").
F-11
<PAGE>
In June 1996, the Company acquired substantially all of the assets of
WROQ-FM, Greenville, South Carolina, for approximately $14.0 million (the
"Greenville Acquisition") and WTRG-FM and WRDU-FM, both operating in Raleigh,
North Carolina, and WMFR-AM, WMAG-FM and WTCK-AM (formerly WWWB-AM), each
operating in Greensboro, North Carolina for approximately $36.8 million (the
"Raleigh-Greensboro Acquisition").
In February 1996, the Company acquired radio stations WTDR-FM and
WLYT-FM (formerly WEZC-FM), both operating in Charlotte, North Carolina (the
"Charlotte Acquisition"), for an aggregate purchase price of $24.3 million.
Costs of $785,000 related to the integration and reformatting of the Charlotte
stations were included in depreciation, amortization, duopoly integration costs
and acquisition related costs in 1996.
In April 1995, the Company acquired all of the outstanding stock of
Parker Broadcasting Company ("Parker"), the owner and licensee of radio station
KYXY-FM in San Diego, California (the "San Diego Acquisition"), for
approximately $17,424,000 (including transaction costs of $831,000 of which
$175,000 was paid to Sillerman Communications Management Company ("SCMC") for
providing or paying for legal services necessary in negotiating and documenting
the transaction), including a $650,000 three year covenant not to compete with
the former owners. In addition, costs of $1,380,000 related to the integration
of KYXY-FM and reformatting of its duopoly partner, KPLN-FM, were included in
depreciation, amortization, duopoly integration costs and acquisition related
costs in 1995. The Company had provided programming to and sold advertising on
behalf of KYXY-FM pursuant to an LMA since January 18, 1995.
For financial statement purposes, all of the acquisitions described
above were accounted for using the purchase method, with the aggregate purchase
price allocated to the tangible and identifiable intangible assets based upon
current estimated fair market values. Certain of the recent transactions are
based on preliminary estimates of the fair value of the net assets acquired and
subject to final adjustment. The assets and liabilities of these acquisitions
and the results of their operations for the period from the date of acquisition
have been included in the accompanying consolidated financial statements. The
following unaudited pro forma summary presents the consolidated results of
operations, excluding operations to be distributed to shareholders, for the
years ended December 31, 1997, 1996 and 1995 as if the acquisitions for any
given year and the subsequent year had occurred at the beginning of such year
after giving effect to certain adjustments, including amortization of goodwill
and interest expense on the acquisition debt. These pro forma results have been
prepared for comparative purposes only and do not purport to be indicative of
what would have occurred had the acquisition been made as of that date or of
results which may occur in the future.
<TABLE>
<CAPTION>
PRO FORMA
YEAR ENDED DECEMBER 31
IN THOUSANDS EXCEPT PER SHARE DATA
(UNAUDITED)
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Net revenues $309,049 $ 276,075 $189,595
================== ================== =================
Loss before extraordinary item $(23,436) $ (49,285) $(16,978)
================== ================== =================
Net loss $(23,436) $ (64,504) $(32,197)
================== ================== =================
Net loss applicable to common stock $(61,560) $ (102,628) $(42,153)
================== ================== =================
Net loss per common share $ (6.68) $ (11.24) $ (4.62)
================== ================== =================
Weighted average common shares outstanding 9,213,945 9,128,284 9,128,284
================== ================== =================
</TABLE>
F-12
<PAGE>
Pending Radio Broadcasting Transactions.
Pursuant to separate agreements, the Company has agreed to: (i)
exchange four radio stations owned by the Company and located on Long Island,
New York, for $11 million cash and two radio stations operating in
Jacksonville, Florida, where the Company currently owns four stations, (the
"Chancellor Exchange"); (ii) acquire three radio stations operating in
Nashville, Tennessee, where the Company currently owns two radio stations, for
$35 million (the "Nashville Acquisition"); and (iii) sell six stations in
Jackson, Mississippi and two stations in Biloxi, Mississippi for $66.0 million
in cash (the "Jackson and Biloxi Disposition"). The assets related to the
Jackson and Biloxi Deposition are classified as assets under contract for sale
in the accompanying balance sheet as of December 31, 1997. The Chancellor
Exchange and the Nashville Acquisition are collectively referred to as the
"Pending Acquisition." The Jackson and Biloxi Disposition is referred to herein
as the "Pending Disposition." The U.S. Department of Justice, Antitrust
Division (the "DOJ") has brought suit alleging that the Chancellor Exchange is
likely to reduce competition. The complaint requests permanent injunctive
relief preventing the consummation of the acquisition of the Long Island
stations by Chancellor Media Corporation ("Chancellor"). The Company,
Chancellor, an affiliate of Buyer, and DOJ are currently involved in settlement
discussions. If successfully concluded, these settlement discussions will
resolve all competitive issues raised by DOJ and will terminate all
investigations or litigation by DOJ with respect to the Company, the Merger,
the Pending Acquisitions and the Pending Disposition. The Company cannot,
however, be certain that the settlement discussions will be successful. If the
Company fails to reach an acceptable settlement agreement with DOJ, the Company
intends to defend the suit vigorously. At December 31, 1997, the Company had
capitalized $1.7 million of costs related to the acquisition of the
Jacksonville radio stations. In the event the Chancellor Exchange does not take
place the Company will be required to write-off such costs.
The aggregate proceeds to be received from these transactions, net of
acquisitions, is approximately $42 million. The Company has deposited $2.0
million in escrow to secure its obligations under these agreements. The Company
expects to record a pre-tax gain of approximately $20.0 million on the Jackson
and Biloxi Disposition. The Company does not expect to record a gain or loss on
the other transactions as the assets were recently acquired.
Concert Promotion Acquisitions. During 1997, the Company also acquired
the following concert promotion companies, which are expected to be contributed
to SFX Entertainment at the Spin-Off date.
In January 1997, the Company purchased Delsener/Slater for an
aggregate consideration of approximately $26.6 million, including $2.9 million
for working capital and the present value of deferred payments of $3.0 million
to be paid, without interest, over five years, and $1.0 million to be paid,
without interest, over ten years (the "Delsener/Slater Acquisition"). The
deferred payments are subject to acceleration in certain circumstances.
In March 1997, Delsener/Slater consummated the acquisition of certain
companies which collectively own and operate the Meadows (the "Meadows
Acquisition") for $900,000 in cash, 250,838 shares of SFX Class A Common Stock
with a value of approximately $7.5 million and the assumption of approximately
$15.4 million of debt.
SFX Entertainment may assume the obligation to exercise an option held
by the Company to repurchase 250,838 shares of the Company's Class A Common
Stock for an aggregate purchase price of $8.3 million (the "Meadows
Repurchase"). This option was granted in connection with the acquisition of
the Meadows Music Theater. If the option were exercised by the Company, the
exercise would result in a reduction of working capital in connection with the
Spin-Off by approximately $8.3 million. If the option were not exercised,
working capital would decrease by approximately $10.5 million.
F-13
<PAGE>
Also in March 1997, the Company, in partnership with Pavilion
Partners, entered into an a twenty-two year lease to operate the PNC Bank Arts
Center, a 10,800 seat complex located in Holmdel, New Jersey. The lease also
granted Pavilion Partners the right to expand the capacity to 17,500 prior to
the 1998 season.
In June 1997, the Company acquired Sunshine Promotions for $53.9
million in cash at closing, $2.0 million in cash payable over 5 years, 62,792
shares of Class A Common Stock issued and issuable over a two year period with
a value of approximately $4.0 million and the assumption of approximately $1.6
million of debt. The assets to be acquired include Deer Creek Music Center, a
21,000 seat complex located in Indianapolis, Indiana, the Polaris Amphitheater,
a 20,000 seat complex located in Columbus, Ohio and a 99 year lease to operate
Murat Centre, a 2,700 seat theater and 2,200 seat ballroom, located in
Indianapolis, Indiana.
For financial statement purposes, all of the concert acquisitions
described above were accounted for using the purchase method, with the
aggregate purchase price allocated to the tangible and identifiable intangible
assets based upon current estimated fair market values. The concert
acquisitions are based on preliminary estimates of the fair value of the net
assets acquired and subject to final adjustment. The assets and liabilities of
these acquisitions and the results of their operations for the period from the
date of acquisition have been included as net assets and income from operations
to be distributed to shareholders in the accompanying consolidated financial
statements.
NOTE 4 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Consolidation
The consolidated financial statements include the accounts of the
Company and its wholly-owned subsidiaries. All significant intercompany
accounts and transactions have been eliminated in consolidation. The Company
accounts for investments in which it has a 50% or less ownership interest under
the equity method.
Cash and Cash Equivalents
All highly liquid investments with an original maturity of less than
three months are classified as cash equivalents. The carrying amounts of cash
and cash equivalents reported in the balance sheet approximate their fair
values.
Property and Equipment
Property and equipment are stated at cost. Depreciation and
amortization is provided on the straight-line method over the estimated useful
lives of the assets a follows:
Buildings and improvements 7-20 years
Broadcasting equipment and other 5-7 years
Leasehold improvements are amortized over the shorter of the lease
term or estimated useful lives of the assets. Amortization of assets recorded
under capital leases is included in depreciation expense.
F-14
<PAGE>
Amortization of Intangible Assets
Broadcast licenses and goodwill are amortized using the straight-line
method over 40 years. Other intangible assets are being amortized using the
straight-line method over their estimated remaining useful lives from 1 to 10
years. Debt issuance costs and discounts are being amortized by the
straight-line method, which closely approximates the interest method, over the
life of the respective debt. Concert promotion goodwill was amortized using the
straight-line method over 15 years.
In 1996 the Company adopted FAS No. 121 "Accounting for the Impairment
of Long-Lived Assets". Under FAS No. 121, the carrying values of intangible
assets are reviewed if the facts and circumstances suggest that they may be
impaired. If this review indicates the intangible assets will not be
recoverable as determined based on the undiscounted cash flows of the Company
over the remaining amortization period, the Company's carrying value of the
intangible assets will be reduced to their estimated fair values, if lower than
the carrying value. The impact of this adoption had no effect on the
consolidated financial statements.
Payable to Former National Sales Representative
The Company is obligated to pay $23 million to a national advertising
representative company in 1998 in connection with switching its affiliations.
The amount is classified in the current liabilities section of the consolidated
balance sheets at December 31, 1997.
Revenue Recognition
The Company's primary source of revenue is the sale of airtime to
advertisers. Revenue from the sale of airtime is recorded when the
advertisements are broadcast.
Barter Transactions
The Company barters unsold advertising time for products and services.
Such transactions are recorded at the estimated fair value of the products or
services received or used. Barter revenue is recorded when commercials are
broadcast and related expenses are recorded when the product or service is
received or used. For the years ended December 31, 1997, 1996 and 1995, the
Company recorded barter revenue of $11,995,000, $8,029,000 and $4,961,000
respectively, and expenses of $11,281,000, $7,476,000 and $4,811,000
respectively.
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.
Local Marketing Agreements / Joint Sales Agreements
From time to time, the Company enters into LMAs and JSAs with respect
to radio stations owned by third parties including radio stations which it
intends to acquire. Terms of the agreements generally require the Company to
pay a monthly fee in exchange for the right to provide station programming and
sell related advertising time in the case of an LMA or sell advertising in the
case of a JSA. The agreements terminate upon the acquisition of the stations.
The fees are expensed as incurred. The Company classifies the LMA fees as
interest expense to the extent interest is imputed based on the purchase price
of the broadcast property. The Company accounts for payments received pursuant
to LMAs of owned stations as net revenue to the extent that the payment
received represents a reimbursement of the Company's ownership costs.
F-15
<PAGE>
Advertising Costs
Advertising costs are expensed as incurred and approximated
$9,789,000, $5,068,000 and $3,336,000 in 1997, 1996 and 1995, respectively.
Per Share Data
Effective December 31, 1997, the Company adopted FASB Statement No.
128, "Earnings per Share" ("FAS 128"), which established simplified standards
for computing and presenting earnings per share information. The adoption of
FAS 128 did not have any effect on the Company's financial statements.
Basic loss per common share is based upon the net loss applicable to
common shares after preferred dividend requirements and upon the weighted
average of common shares outstanding during the period. Diluted loss per common
share adjusts for the effect of convertible securities and stock options only
in the periods presented in which such effect would have been dilutive. Such
effect was not dilutive in any of the periods presented herein.
Concentration of Credit Risk
The Company's revenue and accounts receivable primarily relate to the
sale of advertising within the radio stations' broadcast areas. Credit is
extended based on an evaluation of a customer's financial condition, and
generally collateral is not required. Credit losses are provided for in the
financial statements and consistently have been within management's
expectations.
Reclassification
Certain amounts in 1995 and 1996 have been reclassified to conform to
the 1997 presentation.
NOTE 5 -- DEBT AND SUBORDINATED NOTES
Debt consists of the following at December 31, 1997 and 1996 (in thousands):
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
Senior subordinated notes $ 450,566 $ 450,566
Senior credit facility 313,000 30,000
Other 909 540
------------------ -----------------
764,475 481,106
Less: current portion (509) (231)
------------------ -----------------
$ 763,966 $ 480,875
================== =================
</TABLE>
The aggregate contractual maturities of long-term debt for the years
ending December 31 are as follows: 1998--$509,000; 1999--$200,000;
2000--$766,000 2001--$57,000,000; 2002--$72,000,000; thereafter--$634,000,000.
Included in 1997 interest expense is $431,000 and $300,000 related to
LMA fees associated with the Charlotte and Nashville Acquisitions,
respectively. Interest expense in 1996 included $385,000,
F-16
<PAGE>
$333,600 and $538,000 related to the LMA fees associated with the Greenville,
Charlotte and Jackson Acquisitions, respectively. Interest expense in 1995
included $2,542,000 and $323,000 related to the LMA fees associated with the
Charlotte and Dallas Acquisitions, respectively.
In May 1996, the Company completed the placement of $450.0 million in
aggregate principal amount of its 10.75% Senior Subordinated Notes due 2006
(the "Note Offering"). Interest is payable semi-annually on May 15 and November
15. The notes are unsecured obligations of the Company and are subordinate to
all senior debt of the Company. The Company incurred issuance costs totaling
$15.3 million related to the Note Offering which were recorded as deferred
financing costs. In addition to the Note Offering, the Company sold in a
private placement 2,990,000 shares of Series D Preferred Stock aggregating
$149.5 million in liquidation preference (the "Preferred Stock Offering").
Concurrently with the closings of the Note Offering and the Preferred
Stock Offering, the Company completed a tender offer (the "Tender Offer") and
related consent solicitation with respect to its 11.375% Senior Subordinated
Notes due 2000 (the "Old Notes"). SFX repurchased approximately $79.4 million
in principal amount of the $80.0 million in principal amount of the Old Notes
outstanding in the Tender Offer. The Company also entered into a supplemental
indenture amending the terms of the indenture pursuant to which the remaining
Old Notes were issued.
In March 1995, the Company entered into a $50.0 million senior credit
facility (the "Old Credit Facility") pursuant to which the Company made
borrowings to finance the Charlotte Acquisition and certain working capital
needs. On May 31, 1996 all amounts outstanding under the Old Credit Facility
were repaid with a portion of the proceeds of the Note Offering and the
Preferred Stock Offering.
In connection with the repurchase of the Old Notes and the repayment
of the Old Credit Facility, the Company recorded an extraordinary loss on debt
retirement of approximately $15.2 million to reflect the cost of prepayment
premiums and the write-off of debt issuance costs.
On November 22, 1996, the Company entered into a new credit facility,
as amended (the "New Credit Agreement"), a senior revolving credit facility
providing for borrowings of up to $400 million. Borrowings under the New Credit
Agreement may be used to finance permitted acquisitions, for working capital
and general corporate purposes, and for letters of credit up to $20.0 million.
The credit facility will be reduced by $18 million on a quarterly basis
commencing March 31, 2000 to December 31, 2004 and two final payments of $20
million will be paid on March 31, 2005 and June 30, 2005. Interest on the funds
borrowed under the New Credit Agreement is based on a floating rate selected by
the Company of either (i) the higher of (a) the Bank of New York's prime rate
and (b) the federal funds rate plus 0.5%, plus a margin which varies from 0.25%
to 1.5%, based on the Company's then-current leverage ratio, or (ii) the LIBOR
rate plus a margin which varies from 1.875% to 2.75%, based on the Company's
then-current leverage ratio. The Company must prepay certain outstanding
borrowings in advance of their scheduled due dates in certain circumstances,
including but not limited to achieving certain cash flow levels or receiving
certain proceeds from asset disposition as defined. The Company must also pay
annual commitment fees of 0.5% of the unutilized total commitments under the
New Credit Agreement. The Company's obligations under the New Credit Agreement
are secured by substantially all of its assets, including property, stock of
subsidiaries and accounts receivable, and are guaranteed by the Company's
subsidiaries. At December 31, 1997, the weighted average interest rate was
8.19%.
The New Credit Agreement and the indentures related to the Company's
subordinated notes contain covenants that impose certain restrictions on the
Company, such as total leverage, pro forma debt service and pro forma interest
expense ratios.
The fair value of the Company's senior subordinated notes was
$493,313,000 at December 31, 1997 based upon the quoted market price. The book
value of the Company's senior credit facility and other debt approximates fair
value, which was estimated using discounted cash flow analysis based on the
Company's incremental borrowing rate for similar types of borrowing
arrangements.
F-17
<PAGE>
NOTE 6 -- REDEEMABLE PREFERRED STOCK
Preferred stock consists of the following at December 31, 1997 and 1996
(dollars in thousands):
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
Preferred Stock of the Company, $.01 par value, 10,012,000
shares authorized:
Series B Redeemable, 0 and 1,000 shares issued and outstanding in
1997 and 1996, respectively. $ -- $917
Series C Redeemable, 2,000 shares issued and outstanding
in 1997 and 1996, includes accreted dividends of $197 in 1997
and $108 in 1996 1,725 1,636
Series D Cumulative Convertible Exchangeable Preferred Stock,
2,990,000 shares issued and outstanding, includes accreted issuance
costs of $878 in 1997 144,324 143,446
Series E Cumulative Exchangeable Preferred Stock, 2,250,000 shares
issued and outstanding, net of issuance costs, includes accreted
issuance costs of $951 in 1997 215,947 --
---------------- --------------
$ 361,996 $ 145,999
================ ===============
</TABLE>
The Series B Redeemable Preferred Stock which was non-voting and not
entitled to receive dividends was redeemed in October 1997 at the liquidation
value of $1,000 per share.
The shares of Series C Redeemable Preferred Stock receive cumulative
dividends equal to 6% per annum paid by the Company in arrears on a quarterly
basis. The shares are non-voting and are redeemable by the Company after
September 15, 1998 or by the holder after September 15, 2000, at the
liquidation value of $1,000 per share. The Series C Redeemable Preferred Stock
ranks senior to other preferred stock and to the Company's common stock as to
dividends and liquidation rights.
The shares of Series D Cumulative Convertible Exchangeable Preferred
Stock (the "Series D Preferred Stock") receive cumulative dividends equal to 6
1/2% per annum ($0.8125 per share) which are paid by the Company on a quarterly
basis. The shares of Series D Preferred Stock are redeemable at the option of
the Company on or after June 1, 1999, in whole or in part, at redemption prices
ranging from 104.5% in 1999 to 100.0% in 2006, plus accrued and unpaid
dividends to the redemption date. The Series D Preferred Stock is not subject
to any scheduled mandatory redemption prior to its maturity. The Series D
Preferred Stock will mature on May 31, 2007.
The Series D Preferred Stock is convertible at the option of the
holder into shares of Class A Common Stock of the Company at any time prior to
maturity at a conversion price of $45.51 per share
F-18
<PAGE>
(equivalent to a conversion rate of 1.0987 shares per $50 in Liquidation
Preference of Series D Preferred Stock), subject to adjustment in certain
events. The Series D Preferred Stock is exchangeable in full but not in part,
at the Company's option on any dividend payment date, for the Company's 6 1/2%
Convertible Subordinated Exchange Notes due 2007.
The Series D Preferred Stock ranks senior to the Company's common
stock as to dividends and liquidation rights.
The shares of Series E Cumulative Exchangeable Preferred Stock (the
"Series E Preferred Stock") receive cumulative dividends equal to the rate of
12 5/8% per annum which are paid by the Company on January 15 and July 15 of
each year. Dividends may be paid, at the Company's option, through January 15,
2002, in cash or additional shares of Series E Preferred Stock. Subject to
certain conditions, the shares of the Series E Preferred Stock are exchangeable
in whole or in part on a pro rata basis, at the option of the Company, on any
dividend payment date, for the Company's 12 5/8% Senior Subordinated
Exchangeable Debentures due 2006. The Company is required, subject to certain
conditions, to redeem all of the Series E Preferred Stock outstanding on
October 31, 2006. The semi-annual dividend payable on January 15, 1998 was paid
in additional shares of preferred stock.
NOTE 7 -- SHAREHOLDERS' EQUITY
Common Stock
The holders of Class A Common Stock are entitled to one vote per share
and the holders of Class B Common Stock are entitled to ten votes per share on
all matters to be voted on by stockholders, except (i) for the election of
directors, (ii) with respect to any "going private" transaction between the
Company and its Chairman, or any of his affiliates, and (iii) as otherwise
provided by law. The holders of Class A and Class B Common Stock share ratably
in all dividends and other distributions. As of December 31, 1997, 1,047,937
shares of Class A Common Stock, authorized but unissued, are reserved for
conversion of the Class B Common Stock. Shares of the Company's Class B Common
Stock convert on a share per share basis into the same number of Class A Common
Stock under certain circumstances.
In December 1995, 16,784 shares of non-voting Class C Common Stock
were repurchased and retired by the Company for $459,000. In May 1996, 26,318
shares of Class A Common Stock and 143,874 shares of Class B Common Stock were
repurchased from the Company's former President. In July 1997, the Company
repurchased 3,667 shares of Class A Common for $111,000. In addition, in
September 1997, the Company repurchased 460 shares of Class A Common Stock for
$19,000.
In July 1995, the Company completed an offering of 1,725,000 shares of
its Class A Common Stock for $24.50 per share. The net proceeds of the offering
were $39,166,000 after underwriting discounts, commissions and other costs of
the offering. The net proceeds were utilized to repay senior indebtedness of
$21,500,000 and to fund the Dallas Acquisition and a portion of the Charlotte
Acquisition.
SECURITIES ISSUED IN MMR MERGER
The following MMR warrants and options issued and outstanding at the
date of the merger were assumed by the Company and are now convertible into SFX
shares:
F-19
<PAGE>
<TABLE>
<CAPTION>
MMR SFX
# OF MMR EXERCISE # OF SFX EXERCISE
SECURITIES SHARES PRICE SECURITIES PRICE
- ---------- -------- -------- ---------- --------
<S> <C> <C> <C> <C>
Underwriters Warrants exercisable
through July 22, 1998 125,000 $9.10 37,288 $30.51
Class B Warrants exercisable
through March 22, 1999 749,460 11.50 217,162 $38.55
Unit Purchase Options exercisable
through March 22, 1999 (entitle
the holder to purchase one share
of MMR Common Stock, one MMR Class
A Warrant and one MMR Class B
Warrant) 160,000 $7.75-$11.50 47,728 $25.98-$38.55
Stock options exercisable at various
dates through November 22, 2006 305,000 $5.00-$10.50 90,982 $16.76-$35.20
Warrants issued to Huff Alternative
Income Fund, L.P. exercisable through
March 31, 2005 728,000 $7.75 223,564 $25.98
Sillerman Options 10,000 $2.50 2,983 $8.38
</TABLE>
The former MMR warrants and options are exercisable for that number
of shares of the Company's Class A Common Stock equal to the product of the
number of MMR shares covered by the security times 0.2983 and the per share
exercise price for the share of the Company's Class A Common Stock issuable
upon the exercise of each warrant and option is equal the quotient determined
by dividing the exercise price per share of the MMR shares specified for such
security by 0.2983.
During 1997, certain holders of the former MMR securities exercised
95,874, 215,344, 153,445, and 142,001 of Underwriters Warrants, Class B
Warrants, Unit Purchase Options and Stock Options, respectively, of the
securities described above. The warrants issued to the Huff Alternative Income
Fund, L.P. were excercised through election of cashless exercise provisions
whereby the Company issued 165,023 shares of the Company's Class A Common Stock.
STOCK OPTIONS
The Company has elected to follow Accounting Principles Board Opinion
No. 25, "Accounting for Stock Issued to Employees" ("APB25") and related
interpretations in accounting for its employee stock options, as opposed to the
fair value accounting provided for under FAS Statement No. 123, "Accounting for
Stock-Based Compensation"
Under stock option plans adopted annually since 1993, stock options to
acquire Class A Common Stock have been granted to certain officers, key
employees and other key individuals who perform services for the Company.
Options granted under these plans are generally granted at option prices equal
to the fair market value of the Class A Common Stock on the date of grant. As
such, under APB25, no expense is recorded in the statement of operations. Terms
of the options, determined by the Company, provided that
F-20
<PAGE>
the maximum term of each option shall not exceed ten years and the options
become fully exercisable within five years of continued employment with the
exception of certain options granted to executives which were fully vested upon
issuance.
In connection with the Merger, the Board has approved that all
outstanding options will vest immediately upon the date of such Merger.
At December 31, 1997, options outstanding had an average exercise
price of $22.04 and expiration dates ranging from December 1, 2003 to April 15,
2007. The table below does not include the MMR options described above.
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Options outstanding at beginning of year 910,000 748,000 500,000
Option price $13.00-$33.75 $13.00-$21.25 $13.00-$13.50
Options granted 420,000 349,000 248,000
Option price $28.00 $27.25-$33.75 $21.25
Options exercised 726,050 -- --
Option price $13.00-$33.75 -- --
Options repurchased -- 187,000 --
Option price -- $13.00-$21.25 --
Options expired or canceled -- -- --
Options outstanding at end of year 603,950 910,000 748,000
Option price $13.00-$28.75 $13.00-$33.75 $13.00-$21.25
Options exercisable at end of year 439,750 461,200 153,000
</TABLE>
Pro forma information regarding net loss and loss per share is
required by Statement 123, and has been determined as if the Company had
accounted for its employee stock options under the fair value method of that
statement. The fair value for options was estimated at the date of grant using
a Black-Scholes option pricing model with the following weighted-average
assumptions: risk-free interest rate of 5.99%, 6.43% and 5.58% for 1997, 1996
and 1995, respectively; no dividend yield for 1997, 1996 and 1995; volatility
factor of the expected market price of the Company's common stock of 0.784 for
1997 and 0.372 for 1996 and 1995; and a weighted-average expected life of the
option of 5 years for 1997 and 7 years for 1996 and 1995.
The Black-Scholes option valuation model was developed for use in
estimating the fair value of traded options which have no vesting restrictions
and are fully transferable. In addition, option valuation models require the
input of highly subjective assumptions including the expected stock price
volatility. Because the Company's employee stock options have characteristics
significantly different from those of traded options, and because changes in
the subjective input assumptions can materially affect the fair value
F-21
<PAGE>
estimate, in management's opinion, the existing models do not necessarily
provide a reliable single measure of the fair value of its employee stock
options.
For purposes of pro forma disclosures, the estimated fair value of the
options is amortized to expense over the options' vesting period. Therefore,
the impact on the pro forma results of operations in 1997, 1996 and 1995 may
not be representative of the impact in future periods should additional options
be granted. The Company's pro forma information follows (in thousands except
for loss per share information):
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Pro forma net loss applicable to common
stockholders $ (64,374) $ (59,792) $ (4,899)
Pro forma loss per common share $ (6.76) $ (7.91) $ (0.74)
</TABLE>
NOTE 8 -- INCOME TAXES
The provision for income taxes for the years ended December 31, 1997,
1996 and 1995 is summarized in thousands as follows:
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Current
Federal $ -- $ -- $ --
State 990 1,190 --
------------------ ------------------ ------------------
990 1,190 --
------------------ ------------------ ------------------
Deferred
Federal -- -- --
State (180) (710) --
------------------ ------------------ ------------------
(180) (710) --
------------------ ------------------ ------------------
$ 810 $ 480 $ --
================== ================== ==================
</TABLE>
The Company files a consolidated tax return for federal income tax
purposes. As a result of current losses, no federal tax provision was recorded
for the year ended December 31, 1997 and 1996. The current income tax expense
recorded during 1997 and 1996 is a result of current state and local income
taxes in certain states where subsidiaries file separate tax returns. Deferred
state tax benefit was recognized in 1997 and 1996 attributable to the
disposition of stations acquired in transactions in which associated deferred
tax liabilities were recorded in purchase accounting. As a result of current
losses and the deferred benefit associated with the losses, no current or
deferred expense or benefit was recorded for the year ended December 31, 1995.
At December 31, 1997, the Company had total net operating loss
carryforwards of approximately
F-22
<PAGE>
$69,000,000 that will expire from 2003 through 2012, including net operating
losses of acquired subsidiaries. Due to ownership changes related to the
acquisition of subsidiaries, the utilization of approximately $15,300,000 of
such losses is subject to various limitations. The future use of remaining net
operating loss carryforwards may be impacted and subject to additional
limitations as a result of the Merger.
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 Company's deferred tax assets and liabilities as
of December 31, 1997 and 1996 are as follows (in thousands):
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
DEFERRED TAX ASSETS:
Accounts receivable $ 860 $ 563
Net operating loss carryforwards 23,965 12,044
Management service contract 2,356 2,128
Other reserves 113 646
National sales representative contract settlement 8,740 --
Accrued bonuses and other compensation 1,563 997
------------------ ---------------------
Total deferred tax assets 37,597 16,378
Valuation allowance (21,876) (5,623)
------------------ ---------------------
Net deferred tax assets 15,721 10,755
DEFERRED TAX LIABILITIES:
Property, plant and equipment (684) (372)
Intangible assets (117,718) (101,658)
Other -- (77)
------------------ ---------------------
Total deferred tax liabilities (118,402) (102,107)
------------------ ---------------------
Net deferred tax liabilities $ (102,681) $ (91,352)
================== =====================
</TABLE>
The acquisition of radio station WWYZ resulted in the recognition of
deferred tax liabilities of approximately $10 million under the purchase method
of accounting. The amounts were based upon the excess of the financial
statement basis over the tax basis in assets, primarily intangibles.
The 1997, 1996 and 1995 effective tax rate varied from the statutory
Federal income tax rate as follows (in thousands):
F-23
<PAGE>
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Income taxes at the statutory rate $ (8,488) $ (16,924) $ (1,495)
Effect of non-recurring and unusual charges 6,781 6,875 --
Valuation allowance 13,977 9,859 1,434
Effect of nondeductible amortization of intangibles 295 264 198
Nonqualified stock options (12,380) -- --
State and local income taxes (net of Federal benefit) 535 317 (145)
Other 90 89 8
-----------------------------------------------
Total $ 810 $ 480 $ --
===============================================
</TABLE>
NOTE 9 -- RELATED PARTY TRANSACTIONS
Prior to April 1996, SCMC, where Robert F.X. Sillerman, the Company's
Executive Chairman, serves as Chairman of the Board of Directors and Chief
Executive Officer, had been engaged by the Company from time to time for
advisory services with respect to specific transactions. In April 1996, the
Company and SCMC entered into the SCMC Termination Agreement, pursuant to which
SCMC assigned to the Company its rights to provide services to, and receive
fees payable by each of, MMR and Triathlon in respect of such consulting and
marketing services to be performed on behalf of such companies, except for fees
related to certain transactions pending at the date of such agreement. In
addition, the Company and SCMC terminated the arrangement pursuant to which
SCMC performed financial consulting services for the Company. Upon consummation
of the MMR Merger, SCMC's agreement with MMR was terminated. Prior to
consummation of the MMR Merger, MMR paid an annual fee of $500,000 to SCMC and
Triathlon paid SCMC an annual fee of $300,000 (which increased to $500,000
effective January 1, 1997). In addition, Triathlon has agreed to advance to
SCMC an amount of $500,000 per year in connection with transaction-related
services to be rendered by SCMC. However, if the agreement between SCMC and
Triathlon is terminated or if an unaffiliated person acquires a majority of the
capital stock of Triathlon the unearned fees must be repaid. Pursuant to the
SCMC Termination Agreement, the Company has agreed to continue to provide
consulting and marketing services to Triathlon until the expiration of their
agreement on June 1, 2005, and not to perform any consulting or investment
banking services for any person or entity other than Triathlon in the radio
broadcasting industry or in any business which uses technology for the audio
transmission of information or entertainment. In consideration of the foregoing
agreements, the Company issued to SCMC warrants to purchase up to 600,000
shares of Class A Common Stock at an exercise price, subject to adjustment, of
$33.75 (the market price at the time the financial consulting arrangement was
terminated). The Company also forgave a $2.0 million loan made by the Company
to SCMC, plus accrued and unpaid interest thereon. Pursuant to such agreement,
the Chairman has agreed with the Company that he will supervise, subject to the
direction of the Board of Directors, the performance of the financial
consulting and other services previously performed by SCMC for the Company.
During 1996, the Company received fees of $292,000 from MMR and $511,000 from
Triathlon. During 1997, the Company received fees of $1,794,000 from Triathlon.
In connection with this agreement, the Company had a $44,000 receivable from
Triathlon at December 31, 1997. Pursuant to the Merger, the Company will
transfer the Triathlon consulting contract 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.
In 1996, the Company paid to SCMC advisory fees of $4.0 million in
connection with the Liberty Acquisition, the Prism Acquisition, the Greenville
Acquisition, the Jackson Acquisitions, the Greensboro Acquisition and the
Raleigh-Greensboro Acquisition. In addition, the Company paid SCMC, on behalf
of MMR, a non-refundable fee of $2.0 million for investment banking services
provided to MMR in connection with the MMR Merger.
F-24
<PAGE>
No pending transactions ,as described in Note 3, predate the SCMC
Termination Agreement, and therefore no fees are payable to SCMC.
Prior to June 1996, the Company held a non-recourse note receivable
from the Company's former President in the amount of $2,000,000 which was
secured by 133,333 shares of Class B Common Stock. The note bore interest at 6%
per annum. Interest income of $60,000 and $120,000 was accrued in 1996 and 1995
on the loan, respectively. The loan and interest accrued were forgiven in June
1996 pursuant to an agreement with the former President and are included in
non-recurring and unusual charges.
In January 1995, the Company paid a $1,000,000 fee to SCMC in
connection with the transfer of shares of the Company's Class C Common Stock.
During the last quarter of 1996, the Company consolidated all of its
corporate office functions in New York. Prior to such time, the Company had an
agreement with the Chairman related to the maintenance of the Company's New
York Office whereby the Company reimbursed SCMC for certain office expenses and
salaries for certain employees of SCMC who provided services on behalf of the
Company. In addition certain of the Company's employees performed certain
services for other entities affiliated with SCMC. In connection with SCMC
Termination Agreement and the consolidation of the Company's Corporate Office
in New York, SCMC employees who provided services on behalf of the Company
became employees of the Company. Total reimbursements paid to SCMC for office
expenses and salaries totaled approximately $1,082,000 and $530,000 for the
years ended December 31, 1996 and 1995. The reimbursements paid to SCMC in 1996
included $292,000 and $261,000 of fees paid by MMR and Triathlon, respectively,
directly to SCMC following the effective date of the SCMC Termination
Agreement. The timing of these payments during the year were such that the
Company had advanced amounts to SCMC of up to $230,000 during the period. As of
December 31, 1996 and 1997, there are no amounts due to or from SCMC.
The transactions above were not negotiated on an arms-length basis.
Accordingly, each transaction was approved by the Company's Board of Directors,
including the Company's independent directors, in accordance with the
provisions relating to affiliate transactions in the Company's by-laws, bank
agreements and Indenture, which provisions require a determination as to the
fairness of the transactions to the Company.
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. The Company paid
Baker & McKenzie $6,813,000, $4,886,000 and $793,000 for legal services during
1997, 1996 and 1995, respectively. During February 1998, the Company was
reimbursed by SFX Entertainment for approximately $2,948,000 of legal fees
related to concert acquisitions and the Spin-Off. As of December 31, 1997 and
1996, the Company accrued Baker & Mckenzie legal fees of approximately
$4,782,000 and $1,550,000, respectively.
NOTE 10 -- NON-RECURRING AND UNUSUAL CHARGES, INCLUDING ADJUSTMENTS TO
BROADCAST RIGHTS AGREEMENT
The Company recorded non-recurring and unusual charges related to the
Merger of SFX Broadcasting and the Spin-Off of SFX Entertainment of $20,174,000
in 1997 which consisted primarily of (i) $12,140,000 related to bonuses paid to
officers of the Company (ii) a write-off of a $2,500,000 loan made to the
Company's Executive Chairman (iii) $1,713,000 relating to an increase in value
of certain Stock Appreciation Rights and (iv) $3,821,000 of other expenses,
primarily legal, accounting and regulatory fees.
F-25
<PAGE>
The Company recorded non-recurring and unusual charges of $28,994,000
in 1996 which consisted primarily of payments in excess of the fair value of
stock repurchased totaling $12,461,000 to the company's former President and
the reserve by the Company of $2,330,000 relating to the loan and accrued
interest to the Company's former President, $5,586,000 related to the SCMC
Termination Agreement (Note 9), $4,575,000 for the repurchase of options and
rights to receive options held by the Chief Operating Officer, and a charge of
$1,600,000 related to the termination of the Company's contractual four-year
broadcast rights of Texas Rangers baseball and an adjustment in the value of
the contract for the 1996 season. In 1995, the Company recorded a $5 million
charge related to the write down in value of the Company's Texas Rangers
Rangers broadcast rights.
NOTE 11 -- COMMITMENTS AND CONTINGENCIES
The Company has entered into various operating leases, broadcast
rights agreements and employment agreements. Total rent expense was $5,403,000,
$2,903,000 and $1,506,000 for the years ending December 31, 1997, 1996 and
1995, respectively. The Company has entered into employment agreements with
certain officers and other key employees. Expenses under the contracts
approximated $19,748,000 for the year ended December 31, 1997. Future minimum
payments in the aggregate for all noncancelable operating leases including
broadcast rights agreements and employment agreements with initial terms of one
year or more consist of the following at December 31, 1997 (in thousands):
<TABLE>
<CAPTION>
SFX Broadcasting, Inc. SFX Entertainment, Inc.
---------------------- -----------------------
Operating Employment Operating Employment
Leases Agreements Leases Agreements
------ ---------- ------ ----------
<C> <C> <C> <C> <C>
1998 $ 11,186 $ 18,090 $ 3,366 $ 1,900
1999 7,232 12,394 3,823 1,864
2000 6,373 5,638 1,648 1,624
2001 4,084 2,133 1,666 1,534
2002 2,913 1,471 1,678 300
2003 and thereafter 7,725 1,159 14,117 --
-------------------- ------------------- ------------------- --------------
$ 39,513 $ 40,885 $ 26,298 $ 7,222
==================== =================== =================== ==============
</TABLE>
The future minimum payments pursuant to operating leases does not
include the New York offices as these facilities will be transferred to SFX
Entertainment.
Future minimum payments in the aggregate for all noncancelable capital
leases with initial terms of one year or more consist of the following at
December 31, 1997 (in thousands):
<TABLE>
<CAPTION>
CAPITAL
LEASES
-------
<C> <C>
1998 $ 124
1999 86
2000 43
2001 14
2002 and thereafter --
-----------------------
Total minimum lease payments 267
Less: amount representing interest (40)
-----------------------
Present value of future minimum lease payments 227
Less: current portion (101)
-----------------------
F-26
<PAGE>
Long-term capital lease obligations $ 126
=======================
</TABLE>
The Company is the subject of various claims and litigation
principally in the normal course of business. In the opinion of management, the
ultimate resolution of such matters will not have a material adverse impact on
the consolidated financial statements. SFX Entertainment has committed to
certain renovation and construction projects totaling $35.5 million.
NOTE 12 -- DEFINED CONTRIBUTION PLAN
The Company sponsors a 401(k) defined contribution plan in which most
of its employees were eligible to participate. The Plan presently provides for
discretionary employer contributions. The Company made no contributions in
1997, 1996 or 1995.
NOTE 13 - SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Cash paid during the year for:
Interest $65,184 $30,898 $ 12,903
Income taxes $ 1,059 $ 81 $ --
</TABLE>
Supplemental schedule of noncash investing and financing activities:
Issuance of equity securities, including deferred equity security issuance,
and assumption of debt in connection with certain acquisitions
(Note 3)
Agreements to pay future cash consideration in connection with certain
acquisitions (Note 3)
Exchange of radio stations (Note 3)
Issuance of warrants in connection with SCMC termination agreement (Note 9).
NOTE 14 -- SUBSEQUENT EVENTS
Radio Broadcasting. In January 1998, the Company sold one radio station
operating in Richmond, Virginia (the "Richmond Disposition") for $4.3 million.
Concert Promotion Acquisitions and Financing. In February and March 1998, SFX
Entertainment acquired the following live entertainment businesses which are
expected to be contributed to SFX Entertainment upon the Spin-Off.
PACE Entertainment Corporation ("PACE"), one of the largest
diversified producers and promoters of live entertainment in the United States,
having what SFX Entertainment 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
$156,056,000. In connection with the PACE Acquisition, SFX Entertainment
acquired 100% of Pavilion Partners, a partnership that owns interest in 10
venues ("Pavilion"), through the PACE Acquisition and directly from PACE's
various partners for $90,627,000. The Company has guaranteed the performance of
SFX Entertainment's obligation to PACE until PACE is issued the SFX
Entertainment stock it is entitled to under the acquisition agreement.
The Contemporary Group ("Contemporary"), a fully-integrated live
entertainment and special event promoter and producer, venue owner and operator
and consumer marketer, for total consideration of approximately $101,402,000.
F-27
<PAGE>
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 $66,784,000.
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 $80,327,000.
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.
On February 11, 1998, SFX Entertainment completed the private
placement of $350.0 million of 9 1/8% Senior Subordinated Notes (the "Notes")
due 2008. Interest is payable on the Notes on February 1 and August 1 of each
year.
On February 26, 1998, SFX Entertainment executed a Credit and
Guarantee Agreement (the "Credit Agreement") which established a $300.0 million
senior secured credit facility comprised of (i) a $150.0 million eight-year
term loan (the "Term Loan") and (ii) a $150.0 million seven-year reducing
revolving credit facility. Borrowings under the Credit Agreement are secured by
substantially all of the assets of SFX Entertainment , including a pledge of
the outstanding stock of substantially all of its subsidiaries and guaranteed
by all of SFX Entertainment 's subsidiaries. On February 27, 1998, SFX
Entertainment borrowed $150.0 million under the Term Loan. Together with the
proceeds from the Notes, the proceeds from the Term Loan were used to finance
the 1998 acquisitions discussed above.
Consent Solicitation. To facilitate the Spin-Off, SFX Entertainment's 1998
acquisitions and its financing thereof, the Company sought and obtained
consents from the holders of its Old Notes and the holders of
its Senior Subordinate Notes due 2006 and the holders of its 12 5/8%
Series E Preferred Stock. In connection with these consents, the Company
modified certain covenants. Management anticipates that the Company will be
in compliance with these covenants in the foreseeable future. Fees and
expenses of approximately $18.0 million were incurred by the Company in
connection with the consent solicitations and were reimbursed by SFX
Entertainment with the proceeds of the SFX Entertainment Notes.
Legal Proceedings
On August 29, 1997, two lawsuits were commenced against SFX and its
directors which allege that the consideration to be paid as a result of the
Merger to the holders of SFX Class A Common Stock is unfair and that the
individual defendants have breached their fiduciary duties.
On March 16, 1998, all of the parties entered into a Memorandum of
Understanding, pursuant to which they have reached an agreement providing for
a settlement of the action (the "Settlement"). The Settlement provides for
SFX to pay plaintiffs' counsel an aggregate of $950,000, including all fees
and expenses as approved by the court. SFX anticipates that a significant
portion of such payment will be funded by SFX's insurance. The Settlement
is conditioned on the (a) consummation of the Merger, (b) completion of the
confirmatory discovery and (iii) approval of the court.
F-28
<PAGE>
SFX BROADCASTING, INC. AND SUBSIDIARIES
SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS
(IN THOUSANDS)
<TABLE>
<CAPTION>
Additions
Charged
Balance at to Costs
Beginning and Balance at
Description of Year Expenses Deductions Acquisitions End of
- ----------- ---------- --------- ---------- ------------ ----------
<S> <C> <C> <C> <C> <C>
Allowance for doubtful accounts:
1995 $ 661 $ 658 $ 519 $ 122 $ 922
1996 922 922 528 304 1,620
1997 1,620 2,331 3,164 1,477 2,264
</TABLE>
F-29
<PAGE>
TENTH SUPPLEMENTAL INDENTURE (this "Supplemental Indenture"), dated as
of February 2, 1998, among SFX Broadcasting, Inc. (the "Company"), a Delaware
corporation; KJQY-FM Licensee, Inc., a Delaware corporation; SFX Broadcasting
of Texas (KTCK), Inc., a Delaware corporation; SFX Broadcasting of Texas
(KTCK), Licensee, Inc., a Delaware corporation; SFX Broadcasting of San Diego,
Inc., a Delaware corporation; Parker Broadcasting Company, a California
corporation; SFX Broadcasting of San Diego Licensee, Inc., a Delaware
corporation; Liberty Broadcasting, Incorporated, a Delaware corporation;
Liberty Broadcasting Group Incorporated, a Delaware corporation; Liberty
Broadcasting of New York Incorporated, a New York corporation; Liberty
Broadcasting of Albany Incorporated, a New York corporation; Liberty
Broadcasting of Maryland II Incorporated, a Maryland corporation; WHJJ, Inc., a
Rhode Island corporation; WHFM, Inc., a New York corporation; WHCN, Inc., a
Connecticut corporation; WHCN-FM, Inc., a Delaware corporation; WSNE, Inc., a
Rhode Island corporation; WSNE-FM, Inc., a Delaware corporation; WMXB, Inc., a
Virginia corporation; WPYX, Inc., a New York corporation; WHJY, Inc., a Rhode
Island corporation; WPOP, Inc., a Connecticut corporation; WGNA, Inc., a New
York corporation; WGNA-FM, Inc., a New York corporation; WGBB, Inc., a New York
corporation; Beck-Ross Communications, Inc., a Delaware corporation; WTRY,
Inc., a New York corporation; WYSR, Inc., a Connecticut corporation; WBLI,
Inc., a New York corporation; WBLI-FM, Inc., a Delaware corporation; WBAB,
Inc., a New York corporation; SFX Broadcasting of Hartford, Inc., a Delaware
corporation; Multi-Market Radio, Inc., a Delaware corporation; Southern Starr
Broadcasting Group, Inc., a Delaware corporation; Southern Starr of Arkansas,
Inc., an Arkansas corporation; General Communicorp, Inc., a Connecticut
corporation; General Broadcasting of Connecticut, Inc., a Connecticut
corporation; Southern Starr Communications, Inc., a Delaware corporation;
Southern Starr Limited Partnership, a partnership organized in Delaware;
Multi-market Radio of Augusta, Inc., a Delaware Corporation; Multi-market Radio
of Myrtle Beach, Inc., a Delaware corporation; Multi-market Radio of
Northampton, Inc., a Delaware corporation; Multi-market Radio of Hartford,
Inc., a Delaware corporation; Southern Starr Management, Inc., a Delaware
corporation; General Broadcasting of Florida, Inc., a Florida corporation;
General Broadcasting Corp., a Connecticut corporation; Delsener/Slater
Enterprises, Ltd., a New York corporation; SFX Concerts, Inc. (formerly known
as Delsener/Slater Enterprises, Inc.), a Delaware corporation; In House
Tickets, Inc., a New York Corporation; Connecticut Concerts Incorporated, a
Connecticut corporation; Ardee Festivals N.J., Inc., a New Jersey corporation;
Beach Concerts, Inc., a New York corporation; Ardee Productions, Ltd., a New
York corporation; Exit 116 Revisited, Inc., a New Jersey corporation; Dumb
Deal, Inc., a New York corporation; Broadway Concerts, Inc., a New York
corporation; SFX Broadcasting of Indiana, Inc., a Delaware corporation; FPI
Concerts, Inc., a Delaware corporation; Connecticut Amphitheater Development
Corporation, a Connecticut corporation; Connecticut Performing Arts, Inc., a
Connecticut corporation; Deer Creek Amphitheater Concerts, Inc., a Delaware
corporation; Great American Music Fest & Production co., a Connecticut
corporation; Irving Plaza Concerts, Inc., a Delaware corporation; Multi-market
Radio of Fayetteville, Inc., a Delaware corporation; Murat Center Concerts,
Inc., a Delaware corporation; NOC, Inc., a Connecticut corporation; Polaris
Amphitheater Concerts, Inc., a Delaware corporation; QN-Corp., Inc., a
Connecticut corporation; SFX Broadcasting of Arizona, Inc., a Delaware
corporation; SFX Broadcasting of California, Inc., a Delaware corporation; SFX
Broadcasting of Connecticut, Inc., a Delaware corporation; SFX Broadcasting of
Connecticut Licensee, Inc., a Delaware corporation; SFX Broadcasting of
Florida,
<PAGE>
Inc., a Delaware corporation; SFX Broadcasting of Hartford II, Inc., a Delaware
corporation; SFX Broadcasting of Kansas, Inc., a Delaware corporation; SFX
Broadcasting of Massachusetts, Inc., a Delaware corporation; SFX Broadcasting
of Massachusetts Licensee, Inc., a Delaware corporation; SFX Broadcasting of
New York, Inc., a Delaware corporation; SFX Broadcasting of Pennsylvania, Inc.,
a Delaware corporation; SFX Broadcasting of Rhode Island, Inc., a Delaware
corporation; SFX Broadcasting of the Midwest, Inc., a Delaware corporation; SFX
Broadcasting of Virginia, Inc., a Delaware corporation; SFX Broadcasting of
Wisconsin, Inc., a Delaware corporation; SFX Delaware, Inc., a Delaware
corporation; SFX GP, Inc., a Delaware corporation; SFX Holdings, Inc., a
Delaware corporation; SFX Operating Company of Mississippi, Inc., a Delaware
corporation; SFX Operating Company of North Carolina, Inc., a Delaware
corporation; SFX Operating Company of Tennessee, Inc., a Delaware corporation;
SFX Operating GP, Inc., a Delaware corporation; SFX Performance Marketing,
Inc., a Delaware corporation; SFX Texas Limited Partnership, a partnership
organized in Delaware; SFXAZ Limited Partnership, a partnership organized in
Delaware; SFXBX Limited Partnership, a partnership organized in Delaware; SFXFL
Limited Partnership, a partnership organized in Delaware; SFXIN Limited
Partnership, a partnership organized in Delaware; SFXKS Limited Partnership, a
partnership organized in Delaware; SFXMS Limited Partnership, a partnership
organized in Delaware; SFXNC Limited Partnership, a partnership organized in
Delaware; SFXPA Limited Partnership, a partnership organized in Delaware; SFXSC
Limited Partnership, a partnership organized in Delaware; SFXTN Limited
Partnership, a partnership organized in Delaware; SFXTX Limited Partnership, a
partnership organized in Delaware; SFXWI Limited Partnership, a partnership
organized in Delaware; Sunshine Designs, Inc., a Delaware corporation; Suntex
Acquisitions, Inc., a Delaware corporation; WWYZ, INC., a Connecticut
corporation; Murat Center Concerts, L.P., a Delaware limited partnership;
Sunshine Design, L.P., a Delaware limited partnership; Suntex Acquisition,
L.P., a Delaware limited partnership; Deer Creek Amphitheater Concerts, L.P., a
Delaware limited partnership; Sunshine Concerts, L.L.C., a Delaware limited
liability company; ABS Communications, L.L.C., a Virginia limited liability
company; SFX Indiana Limited Partnership, a Delaware limited partnership; SFX
Radio Network of North Carolina, Inc., a Delaware corporation; Northeast
Ticketing Company, a Connecticut corporation; Southeast Ticketing Company, a
Connecticut corporation; and SFX Entertainment, Inc., a Delaware corporation
(each of the above entities other than the Company, a "Guarantor"), and The
Chase Manhattan Bank (formerly known as Chemical Bank), as trustee under the
indenture referred to below (the "Trustee").
- 2 -
<PAGE>
RECITALS OF THE COMPANY AND THE GUARANTORS
WHEREAS, the Company and the Guarantors have heretofore executed and
delivered to the Trustee an indenture, dated as of May 31, 1996, as amended by
supplemental indentures, dated as of November 25, 1996, January 10, 1997,
January 13, 1997, January 29, 1997, May 15, 1997, July 8, 1997, October 9,
1997, October 10, 1997 and January 23, 1998 (collectively, the "Indenture"),
providing for the issuance of an aggregate principal amount of $450,000,000 of
10 3/4% Senior Subordinated Notes due 2006 (the "Notes");
WHEREAS, Sections 2.09 and 9.02 of the Indenture provide
that, except with respect to certain specified provisions of the Indenture, the
Indenture may be amended or supplemented with the consent of the Holders of a
majority in principal amount of the then outstanding Notes, other than Notes
owned by the Company, by any Guarantor or by any Person directly or indirectly
controlling or controlled by or under direct or indirect common control with
the Company or any Guarantor;
WHEREAS, the Company and the Guarantors wish to supplement
the Indenture to change certain provisions of the Indenture as set forth below,
and the Holders of a majority of the aggregate principal amount of the
outstanding Notes as of January 6, 1998, excluding Notes owned by the Company,
by any Guarantor or by any Person directly or indirectly controlling or
controlled by or under direct or indirect common control with the Company or
any Guarantor, have consented to the execution of this Tenth Supplemental
Indenture pursuant to the consent solicitation made by the Company pursuant to
that certain Consent Solicitation Statement, dated January 7, 1998, relating to
the Notes, as supplemented by Supplement No. 1 thereto dated January 28, 1998
(the "Consent Solicitation Statement"); and
WHEREAS, the Company and the Guarantors hereby covenant and
represent that all things necessary have been done to make this Supplemental
Indenture a legal, valid and binding agreement of the Company and the
Guarantors in accordance with the terms hereof and of the Indenture.
NOW THEREFORE, in consideration of the foregoing and for
other good and valuable consideration, the receipt of which is hereby
acknowledged, it is hereby agreed as follows:
ARTICLE ONE
DEFINITIONS AND OTHER PROVISIONS OF GENERAL APPLICATION
SECTION 101. Capitalized Terms.
Capitalized terms used herein and not otherwise defined herein are
used with the respective meanings ascribed to such terms in the Indenture.
- 3 -
<PAGE>
SECTION 102. Operative Time.
The amendments to provisions of the Indenture provided for in this
Tenth Supplemental Indenture shall become operative and shall bind the parties
hereto when the Company notifies the Trustee that the Operative Time (as such
term is defined in the Consent Solicitation Statement) has occurred.
SECTION 103. Incorporation of Supplemental Indenture into Indenture.
This Tenth Supplemental Indenture is executed by the Company, the
Guarantors and the Trustee pursuant to the provisions of Section 9.02 of the
Indenture, and the terms and conditions hereof shall be deemed to be part of
the Indenture for all purposes at and as of the Operative Time. The Indenture,
as amended and supplemented by this Tenth Supplemental Indenture, is in all
respects hereby adopted, ratified and confirmed.
SECTION 104. Effect of Headings.
The Article and Section headings herein are for convenience only and
shall not affect the construction hereof.
SECTION 105. Governing Law.
The internal law of the State of New York shall govern and be used to
construe this Tenth Supplemental Indenture.
SECTION 106. Counterparts.
This Tenth Supplemental Indenture may be executed in any number of
counterparts, each of which so executed shall be deemed to be an original, but
all such counterparts shall together constitute but one and the same
instrument.
SECTION 107. Recitals.
The recitals contained herein shall be taken as the statements of the
Company and the Guarantors, and the Trustee assumes no responsibility for their
correctness. The Trustee makes no representations as to the validity or
sufficiency of this Tenth Supplemental Indenture.
- 4 -
<PAGE>
ARTICLE TWO
AMENDMENTS TO PROVISIONS OF INDENTURE
SECTION 201. Definitions.
(a) The following new terms are hereby added to Section 1.01 of the
Indenture and inserted in alphabetical order in Section 1.01:
"Acquisition Agreements" means the acquisition agreements relating to
the Pending Acquisitions (as defined in the Consent Solicitation Statement of
the Company dated January 7, 1998, as supplemented by Supplement No 1. thereto
dated January 28, 1998) as they may be amended from time to time and all
transactions and agreements specifically contemplated thereby or by instruments
referred to therein.
"Class A Common Stock" means the Company's Class A Common Stock, par
value $.01 per share.
"Class B Common Stock" means the Company's Class B Common Stock, par
value $.01 per share.
"Consent Solicitations" means the consent solicitations of the Company
made pursuant to the Consent Solicitation Statements dated January 7, 1998, as
supplemented by Supplements No. 1 thereto dated January 28, 1998, to the
holders of the Notes and the holders of the Company's 125/8% Series E
Cumulative Exchangeable Preferred Stock due October 31, 2006 and the related
Information Statement.
"Entertainment Companies" means SFX Entertainment and any and all of
its direct and indirect Subsidiaries.
"Meadows Repurchase" means the redemption by the Company of up to
250,838 shares of Class A Common Stock for $33.00 per share, pursuant to the
Agreement of Merger, dated February 12, 1997, by and among the Company, NOC
Acquisition Corp., CAPCO Acquisition Corp., QN Acquisition Corp., Nederlander
of Connecticut, Inc., Connecticut Amphitheater Development Corporation, QN
Corp., Connecticut Performing Arts, Inc. and Connecticut Performing Arts
Partners and the stockholders of Nederlander of Connecticut, Inc., Connecticut
Amphitheater Development Corporation and QN Corp. listed on the signature page
thereto.
"Merger Agreement" means the Agreement and Plan of Merger, dated as of
August 24, 1997, as it may be amended from time to time, among the Company, SBI
Holding Corporation and SBI Radio Acquisition Corporation and all transactions
and agreements specifically contemplated thereby or by instruments referred to
therein.
- 5 -
<PAGE>
"SBI Merger" means a merger of SBI Radio Acquisition Corporation into
the Company pursuant to the Merger Agreement.
"SFX Entertainment" means SFX Entertainment, Inc., a subsidiary of the
Company, incorporated in Delaware, to which the Company will contribute cash
and all of the capital stock of SFX Concerts, Inc. (formerly known as
Delsener/Slater Enterprises, Inc.) that the Company directly or indirectly
owns.
"Spin-Off" means the distribution of SFX Entertainment common stock
pro rata to the holders of Class A Common Stock and Class B Common Stock (and
the transfer to an escrow account for delivery to the holders of certain
warrants to receive Class A Common Stock) or other disposition pursuant to, or
as permitted by, the Merger Agreement of all of the capital stock and assets of
the Entertainment Companies.
"Spin-Off Transactions" means the Spin-Off, the Pending Acquisitions
and the Merger Agreement as it relates to the transactions described or
referred to under the "Proposed Amendments" and "Spin-Off" sections of the
Consent Solicitation Statement of the Company dated January 7, 1998, as
supplemented by Supplement No. 1 thereto dated January 28, 1998, sent to
Holders of the Notes relating to this Indenture.
(b) The definition of "Consolidated Cash Flow" contained in Section
1.01 is hereby amended to read in its entirety as follows:
"Consolidated Cash Flow" means, with respect to any Person for any
period, the Consolidated Net Income of such Person for such period plus (i) an
amount equal to any extraordinary loss plus any net loss realized in connection
with an Asset Sale by such Person or any of its Subsidiaries during such period
(to the extent such losses were deducted in computing such Consolidated Net
Income), plus (ii) provision for taxes based on income or profits of such
Person and its Subsidiaries for such period, to the extent that such provision
for taxes was included in computing such Consolidated Net Income, plus (iii)
Consolidated Interest Expense of such Person for such period, to the extent any
such Consolidated Interest Expense was deducted in computing such Consolidated
Net Income, plus (iv) depreciation, amortization (including amortization of
goodwill and other intangibles but excluding amortization of prepaid cash
expenses that were paid in a prior period) and other non-cash charges
(excluding any such non-cash charge to the extent that it represents an accrual
of or reserve for cash charges in any future period) of such Person and its
Subsidiaries for such period to the extent that such depreciation, amortization
and other non-cash charges were deducted in computing such Consolidated Net
Income, plus (v) the Specified Charges (as defined in the Company's Consent
Solicitation Statement dated January 7, 1998, as supplemented by Supplement No.
1 thereto dated January 28, 1998 relating to the Indenture), plus (vi) to the
extent that such Consolidated Net Income was reduced thereby (a) amortization
of the expenses incurred in connection with the Consulting, Non-Compete and
Termination Agreement among the Company, SBI Holding Corporation and Robert
F.X. Sillerman dated as of August 24, 1997, (b) consent fees and expenses
directly related to the Consent Solicitations, (c) legal and other expenses
associated with pending or threatened litigation in connection with the SBI
Merger and (d)
- 6 -
<PAGE>
other unusual and nonrecurring charges paid or accrued in 1997 or 1998
(including, but not limited to, legal, accounting, investment banking,
severance and termination fees) relating to the SBI Merger, the Spin-Off, the
Pending Acquisitions or transactions related thereto; provided that the
aggregate amount of charges that may be added to Consolidated Net Income
pursuant to this clause (d) to determine Consolidated Cash Flow for any four
quarter period will not exceed $13.5 million (net of expenses reimbursed or
paid by SFX Entertainment) less (vii) all non-cash items increasing
Consolidated Net Income for such period (excluding any such non-cash income to
the extent it represents an accrual of cash income in any future period), in
each case, on a consolidated basis and determined in accordance with GAAP.
The definition of "Subsidiary" contained in Section 1.01 is hereby
amended to read in its entirety as follows:
"Subsidiary" means, with respect to any Person, (i) any corporation,
association or other business entity of which more than 50% of the total voting
power of shares of Voting Stock thereof is at the time owned or controlled,
directly or indirectly, by such Person or one or more of the other Subsidiaries
of that Person (or a combination thereof) and (ii) any partnership (a) the sole
general partner or the managing general partner of which is such Person or a
Subsidiary of such Person or (b) the only general partners of which are such
Person or of one or more Subsidiaries of such Person (or any combination
thereof); however, with respect to the Company, "Subsidiary" does not include
the Entertainment Companies.
SECTION 202. Covenants.
(a) Section 4.07 of the Indenture is hereby amended to read in
its entirety as follows:
SECTION 4.07 RESTRICTED PAYMENTS.
The Company shall not, and shall not permit any of its Subsidiaries
to, directly or indirectly: (i) declare or pay any dividend or make any other
payment or distribution on account of the Company's Equity Interests
(including, without limitation, any payment in connection with any merger or
consolidation involving the Company) or to the direct or indirect holders of
the Company's Equity Interests in their capacity as such (other than dividends
or distributions payable in Capital Stock (other than Disqualified Stock) of
the Company); (ii) purchase, redeem or otherwise acquire or retire for value
any Equity Interests of the Company or any direct or indirect parent of the
Company; (iii) make any principal payment on, or purchase, redeem, defease or
otherwise acquire or retire for value any Indebtedness that is subordinated to
the Notes, except at final maturity; or (iv) make any Restricted Investment
(all such payments and other actions set forth in clauses (i) through (iv)
above being collectively referred to as "Restricted Payments"), unless, at the
time of and after giving effect to such Restricted Payment:
(a) no Default or Event of Default shall have occurred and be
continuing or would occur as a consequence thereof; and
- 7 -
<PAGE>
(b) the Company would, at that time of such Restricted Payment and
after giving pro forma effect thereto as if such Restricted Payment had been
made at the beginning of the applicable four-quarter period, have been
permitted to incur at least $1.00 of additional Indebtedness (other than
Permitted Debt) pursuant to the Debt to Cash Flow Ratio test set forth in the
first paragraph of Section 4.09 hereof; and
(c) such Restricted Payment, together with the aggregate amount of all
other Restricted Payments declared or made after the date hereof (other than
Restricted Payments permitted by clauses (2), (4), (6), (11), (12) or (13) of
the following paragraph) shall not exceed, at the date of determination, the
sum of (1) an amount equal to the Company's Consolidated Cash Flow from the
date hereof to the end of the Company's most recently ended full fiscal quarter
for which internal financial statements are available, taken as a single
accounting period, less the product of 1.4 times the Company's Consolidated
Interest Expense from the date hereof to the end of the Company's most recently
ended full fiscal quarter, for which internal financial statements are
available, taken as a single accounting period, plus (2) an amount equal to the
net cash proceeds received by the Company from the issue or sale of Equity
Interests (other than (i) in the Preferred Stock Offering, (ii) sales of
Disqualified Stock and (iii) Equity Interests sold to any of the Company's
Subsidiaries) or of debt securities or Disqualified Stock (other than the
Series D Preferred Stock) of the Company that have been converted into such
Equity Interests plus (3) to the extent that any Restricted Investment that was
made after the date hereof is sold for cash or otherwise liquidated or repaid
for cash, the lesser of (A) the cash return of capital with respect to such
Restricted Investment (less the cost of disposition, if any) and (B) the
initial amount of such Restricted Investment.
If no Default or Event of Default shall have occurred and be
continuing immediately as a result thereof, the foregoing provisions shall not
prohibit: (1) the payment of any dividend within 60 days after the date of
declaration thereof, if at said date of declaration such payment would have
complied with the provisions hereof; (2) the redemption, repurchase, retirement
or other acquisition of any Equity Interests of the Company in exchange for, or
out of the proceeds of, the substantially concurrent sale (other than to a
Subsidiary of the Company) of other Equity Interests of the Company (other than
any Disqualified Stock); provided that the amount of any such net cash proceeds
that are utilized for any such redemption, repurchase, retirement or other
acquisition shall be excluded from clause (c)(2) of the preceding paragraph;
(3) cash payments made in respect of fractional shares of Capital Stock not to
exceed $100,000 in the aggregate in any fiscal year; (4) the issuance of the
Exchange Notes in exchange for the Series D Preferred Stock; provided that such
issuance is permitted by Section 4.09 hereof; (5) in the event that the Company
elects to issue the Exchange Notes in exchange for the Series D Preferred
Stock, cash payments made in lieu of the issuance of Exchange Notes having a
face amount less than $50 and any cash payments representing accrued and unpaid
liquidated damages and dividends in respect thereof, not to exceed $100,000 in
the aggregate in any fiscal year; (6) the defeasance, redemption or repurchase
of subordinated Indebtedness with the net cash proceeds from an incurrence of
Permitted Refinancing Debt or the substantially concurrent sale (other than to
a Subsidiary of the Company) of Equity Interests of the Company (other than
Disqualified Stock); provided that the amount of any such net cash proceeds
that are utilized for any such redemption, repurchase, retirement or other
acquisition shall be excluded from clause (c)(2) of the preceding paragraph;
(7) the payment of dividends on the Series
- 8 -
<PAGE>
D Preferred Stock in accordance with the terms thereof as in effect on the date
hereof; (8) the redemption by the Company of its Series B Preferred Stock in
accordance with the terms thereof as in effect on the date hereof; provided
that payments made by the Company to redeem the Series B Preferred Stock shall
not exceed $1.0 million in any fiscal year or $2.0 million in the aggregate
since the date hereof; (9) the redemption by the Company of its Series C
Preferred Stock in accordance with the terms thereof as in effect on the date
hereof in connection with the Dallas Disposition; (10) payments made by the
Company to SCMC for facilities maintenance and other services and
reimbursements pursuant to the Shared Facilities Agreement in accordance with
the terms thereof as in effect on the date hereof; (11) payments by the Company
pursuant to the Management Termination Agreements in accordance with the terms
thereof as in effect on the date hereof; (12) the Spin-Off Transactions and
(13) the Meadows Repurchase.
The amount of all Restricted Payments (other than cash) shall be the
Fair Market Value (evidenced by a resolution of the Board of Directors set
forth in an Officers' Certificate delivered to the Trustee) on the date of the
Restricted Payment of the asset(s) or securities proposed to be transferred by
the Company or such Subsidiary, as the case may be, pursuant to the Restricted
Payment. Not later than the date of making any Restricted Payment, the Company
shall deliver to the Trustee an Officers' Certificate stating that such
Restricted Payment is permitted and setting forth the basis upon which the
calculations required by this covenant were computed, which calculations may be
based upon the Company's latest available financial statements.
(b) Section 4.11 of the Indenture is hereby amended to read in its
entirety as follows:
SECTION 4.11 TRANSACTIONS WITH AFFILIATES.
The Company shall not, and shall not permit any of its Subsidiaries
to, make any payment to, or sell, lease, transfer or otherwise dispose of any
of its properties or assets to, or purchase any property or assets from, or
enter into or make or amend any contract, agreement, understanding, loan,
advance or guarantee with, or for the benefit of, any Affiliate (each of the
foregoing, an "Affiliate Transaction"), unless (i) such Affiliate Transaction
is on terms that are no less favorable to the Company or the relevant
Subsidiary than those that would have been obtained in a comparable transaction
by the Company or such Subsidiary with an unrelated Person and (ii) the Company
delivers to the Trustee (a) with respect to any Affiliate Transaction or series
of related Affiliate Transactions involving aggregate consideration in excess
of $1.0 million, a resolution of the Board of Directors set forth in an
Officers' Certificate certifying that such Affiliate Transaction complies with
clause (i) above and that such Affiliate Transaction has been approved by a
majority of the members of the Board of Directors that are disinterested as to
such Affiliate Transaction and (b) with respect to any Affiliate Transaction or
series of related Affiliate Transactions involving aggregate consideration in
excess of $5.0 million, an opinion as to the fairness to the Holders of Notes
of such Affiliate Transaction from a financial point of view issued by an
accounting, appraisal or investment banking firm of national standing; provided
that (1) transactions between or among the Company and/or its Wholly Owned
Subsidiaries, (2) the MMR Merger and transactions and agreements specifically
contemplated by the Agreement and Plan of Merger among the Company, SFX Merger
Company and MMR as in effect on the date hereof that are disclosed in the
Offering Memorandum
- 9 -
<PAGE>
under the caption "Agreements Relating to the Acquisitions and Dispositions,"
(3) the redemption or repurchase of the Existing MMR Indebtedness, (4)
transactions and agreements specifically contemplated by the Termination and
Assignment Agreement between the Company and SCMC as in effect on the date
hereof, (5) payments required by the terms of the joint lease among the
Company, SCMC and the landlord thereunder for the Company's corporate
headquarters located at 650 Madison Avenue, New York, New York and any
agreements directly related thereto, in each case, as the same are in effect on
the date hereof, (6) Restricted Payments and Permitted Investments that are
permitted by Section 4.07 hereof, (7) the transactions and agreements
specifically contemplated by the Merger Agreement, the Acquisition Agreements
or by instruments referred to in any such agreements and (8) any Spin-Off
Transaction, in each case, shall not be deemed to be Affiliate Transactions.
(c) Section 4.15 of the Indenture is hereby amended to read in its
entirety as follows:
SECTION 4.15 ADDITIONAL SUBSIDIARY GUARANTEES.
If, after the date hereof, the Company or any Guarantor, except any
Entertainment Company, shall acquire another Person which becomes a Subsidiary,
then the Company will cause such Subsidiary to (A) execute and deliver to the
Trustee a supplemental indenture substantially in the form of Exhibit D hereto
pursuant to which such Subsidiary shall unconditionally guarantee all of the
Company's obligations under the Notes on the terms set forth in such
supplemental indenture and (B) deliver to the Trustee an Opinion of Counsel
reasonably satisfactory to the Trustee that such supplemental indenture has
been duly executed and delivered by such Subsidiary. Immediately prior to any
incurrence by SFX Entertainment of Indebtedness pursuant to the Financing, each
Guarantor that is SFX Entertainment or is owned directly or indirectly by SFX
Entertainment will be forever released from its Guarantee of the Company's
obligations under the Notes.
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<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this
Tenth Supplemental Indenture as of the date first above written.
The Chase Manhattan Bank,
as Trustee
By: /s/ Francis Springer
------------------------
Name: Francis Springer
Title: Assistant Vice President
SFX Broadcasting, Inc.
KJQY-FM Licensee, Inc.
SFX Broadcasting of Texas (KTCK) Licensee, Inc.
SFX Broadcasting of San Diego, Inc.
Parker Broadcasting Company
SFX Broadcasting of San Diego Licensee, Inc.
Liberty Broadcasting, Incorporated
Liberty Broadcasting Group Incorporated
Liberty Broadcasting of New York Incorporated
Liberty Broadcasting of Albany Incorporated
Liberty Broadcasting of Maryland II Incorporated
WHJJ, Inc.
WHFM, Inc.
- 11 -
<PAGE>
WHCN, Inc.
WHCN-FM, Inc.
WSNE, Inc.
WSNE-FM, Inc.
WMXB, Inc.
WPYX, Inc.
WHJY, Inc.
WPOP, Inc.
WGNA, Inc.
WGNA-FM, Inc.
WGBB, Inc.
Beck-Ross Communications, Inc.
WTRY, Inc.
WYSR, Inc.
W.B.L.I., Inc.
WBLI-FM, Inc.
WBAB, Inc.
SFX Broadcasting of Hartford, Inc.
Multi-Market Radio, Inc.
Southern Starr Broadcasting Group, Inc.
Southern Starr of Arkansas, Inc.
General Communicorp, Inc.
- 12 -
<PAGE>
General Broadcasting of Connecticut, Inc.
Southern Starr Communications, Inc.
Southern Starr Limited Partnership
Multi-Market Radio of Augusta, Inc.
Multi-Market Radio of Myrtle Beach, Inc.
Multi-Market Radio of Northampton, Inc.
Multi-Market Radio of Hartford , Inc.
Ardee Festivals N.J., Inc.
Ardee Productions, Ltd.
Beach Concerts, Inc.
Broadway Concerts, Inc.
Connecticut Concerts Incorporated
Delsener/Slater Enterprises, Ltd.
SFX Concerts, Inc. (formerly known as
Delsener/Slater Enterprises, Inc.)
Dumb Deal, Inc.
Exit 116 Revisited, Inc.
In House Tickets, Inc.
SFX Broadcasting of Indiana, Inc.
FPI Concerts, Inc.
Connecticut Amphitheater Development Corporation
Connecticut Performing Arts, Inc.
Great American Music Fest & Production Co.
- 13 -
<PAGE>
Multi-Market Radio of Fayetteville, Inc.
NOC, Inc.
QN-Corp.
SFX Broadcasting of Arizona, Inc.
SFX Broadcasting of California, Inc.
SFX Broadcasting of Connecticut, Inc.
SFX Broadcasting of Connecticut Licensee, Inc.
SFX Broadcasting of Florida, Inc.
SFX Broadcasting of Hartford II, Inc.
SFX Broadcasting of Kansas, Inc.
SFX Broadcasting of Massachusetts, Inc.
SFX Broadcasting of Massachusetts Licensee, Inc.
SFX Broadcasting of New York, Inc.
SFX Broadcasting of Pennsylvania, Inc.
SFX Broadcasting of Rhode Island, Inc.
SFX Broadcasting of Virginia, Inc.
SFX Broadcasting of Wisconsin, Inc.
SFX Delaware, Inc.
SFX GP, Inc.
SFX Holdings, Inc.
SFX Operating Company of Mississippi, Inc.
SFX Operating Company of North Carolina, Inc.
- 14 -
<PAGE>
SFX Operating Company of Tennessee, Inc.
SFX Operating GP, Inc.
SFX Performance Marketing, Inc.
SFX Texas Limited Partnership
By: SFX Operating GP, Inc., as General Partner
SFXAZ Limited Partnership
By: SFX GP, Inc., as General Partner
SFXBX Limited Partnership
By: SFX GP, Inc., as General Partner
SFXFL Limited Partnership
By: SFX GP, Inc., as General Partner
SFXIN Limited Partnership
By: SFX GP, Inc., as General Partner
SFXKS Limited Partnership
By: SFX GP, Inc., as General Partner
SFXMS Limited Partnership
By: SFX GP, Inc., as General Partner
SFXNC Limited Partnership
By: SFX GP, Inc., as General Partner
SFXPA Limited Partnership
By: SFX GP, Inc., as General Partner
SFXSC Limited Partnership
By: SFX GP, Inc., as General Partner
SFXTN Limited Partnership
By: SFX GP, Inc., as General Partner
SFXTX Limited Partnership
By: SFX GP, Inc., as General Partner
SFXWI Limited Partnership
By: SFX GP, Inc., as General Partner
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<PAGE>
WWYZ, Inc.
Murat Center Concerts, L.P.
By: Murat Center Concerts, Inc., as General
Partner
Sunshine Design, L.P.
By: Sunshine Design, Inc., as General Partner
Suntex Acquisition, L.P.
By: Suntex Acquisition, Inc., as General Partner
Deer Creek Amphitheater Concerts, L.P.
By: Deer Creek Amphitheater Concerts, Inc., as
General Partner
Sunshine Concerts, L.L.C.
By: SFX Broadcasting of the Midwest, Inc.,
Authorized Member
ABS Communications, L.L.C.
By: SFX Broadcasting, Inc., Authorized Member
SFX Indiana Limited Partnership
SFX Broadcasting of Indiana, Inc. as General
Partner
SFX Radio Network of North Carolina, Inc.
Northeast Ticketing Company
Southeast Ticketing Company
SFX Entertainment, Inc.
Deer Creek Ampitheater Concerts, Inc.
Suntex Acquisitions, Inc.
Murat Center Concerts, Inc.
Polaris Amphitheater Concerts, Inc.
SFX Broadcasting of the Midwest, Inc.
Sunshine Designs, Inc.
- 16 -
<PAGE>
By: /s/ Howard J. Tytel
---------------------------------
Name: Howard J. Tytel
Title: Executive Vice President
Irving Plaza Concerts, Inc.
By: /s/ Bill Brusca
------------------
Name: Bill Brusca
Title: President
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<PAGE>
CERTIFICATE OF AMENDMENT
OF
CERTIFICATE OF DESIGNATIONS, PREFERENCES, AND RELATIVE RIGHTS,
QUALIFICATIONS, LIMITATIONS AND RESTRICTIONS
OF THE
12-5/8% SERIES E CUMULATIVE EXCHANGEABLE PREFERRED STOCK DUE
OCTOBER 31, 2006
OF
SFX BROADCASTING, INC.
-----------------------------------
(Pursuant to Section 242 of the General
Corporation Law of the State of Delaware)
SFX Broadcasting, Inc. (the "Company"), a corporation
organized and existing under and by virtue of the provisions of the General
Corporation Law of the State of Delaware, hereby certifies as follows:
FIRST: The Certificate of Incorporation of the Company
authorizes the issuance of Preferred Stock, and, further, authorizes the
issuance of shares of Preferred Stock from time to time in one or more series
as may from time to time be determined by the Board of Directors, each of said
series to be distinctly designated, and on such terms and for such
consideration as shall be fixed by the Board of Directors, and further, grants
to the Board of Directors of the Company the authority to fix by resolution or
resolutions adopted prior to the issuance of any shares of a particular series
of Preferred Stock, the voting powers, if any, and the designations,
preferences and relative, participating, optional, conversion and other special
rights, and the qualifications, limitations and restrictions of such series.
SECOND: The Board of Directors of the Company by unanimous
written consent dated January 17, 1997, did duly adopt a resolution authorizing
the creation and issuance of a series of said Preferred Stock to be known as
12-5/8% Series E Cumulative Exchangeable Preferred Stock (the "Shares") and
fixing the number, designations, preferences, rights and limitations of such
series of Preferred Stock.
THIRD: The Board of Directors of the Company by unanimous
written consents dated December 31, 1997 and January 27, 1998, did duly adopt a
resolution authorizing the amendment of the Certificate of Designations,
Preferences and Relative, Participating, Optional and Other Special Rights of
Preferred Stock and Qualifications, Limitations and Restrictions thereof of
12-5/8% Series E Cumulative Exchangeable Preferred Stock Due October 31, 2006
of SFX Broadcasting, Inc. (the "Certificate of Designations").
FOURTH: The amendment set forth in this Certificate of
Amendment has been duly adopted in accordance with the provisions of Section
242 of the General Corporation Law of the State of Delaware. The Board of
Directors of the Corporation has received the consent to the
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amendment set forth in this Certificate of Amendment of the Certificate of
Designations from the owners and holders of a majority of the outstanding
Shares.
FIFTH: The common stockholders approved the following
resolutions relating to the Shares in Written Consents of the Holder of a
Majority of the Combined Voting Power of the Common Stock of SFX Broadcasting,
Inc., dated January 6, 1998 and January 27, 1998:
RESOLVED, that the following new definitions be added to
Section 1 of the Certificate of Designations, and inserted in alphabetical
order in Section 1:
Acquisition Agreements. The term "Acquisition Agreements" shall mean
the acquisition agreements relating to the Pending Acquisitions (as defined in
the Consent Solicitation Statement of the Corporation dated January 7, 1998, as
supplemented by Supplement No. 1 thereto dated January 28, 1998) as they may be
amended from time to time and all transactions and agreements specifically
contemplated thereby or by instruments referred to therein.
Class A Common Stock. The term "Class A Common Stock" shall mean the
Corporation's Class A Common Stock, par value $.01 per share.
Class B Common Stock. The term "Class B Common Stock" shall mean the
Corporation's Class B Common Stock, par value $.01 per share.
Consent Solicitations. The term "Consent Solicitations" means the
consent solicitations of the Corporation made pursuant to the Consent
Solicitation Statements dated January 7, 1998, as supplemented by Supplements
No. 1 thereto dated January 28, 1998, to the holders of the Corporation's
103/4% Senior Subordinated Notes due 2006 and to the holders of Series E
Preferred Stock and the related Information Statement.
Entertainment Companies. The term "Entertainment Companies" shall mean
SFX Entertainment and any and all of its direct and indirect Subsidiaries.
Meadows Repurchase. The term "Meadows Repurchase" shall mean the
redemption by the Corporation of up to 250,838 shares of Class A Common Stock
for $33.00 per share, pursuant to the Agreement of Merger, dated February 12,
1997, by and among the Corporation, NOC-Acquisition Corp., CAPCO Acquisition
Corp., QN Acquisition Corp., Nederlander of Connecticut, Inc., Connecticut
Ampitheater Development Corporation, QN Corp., Connecticut Performing Arts,
Inc. and Connecticut Performing Arts Partners and the Stockholders of
Nederlander of Connecticut, Inc,. Connecticut Ampitheater Development
Corporation and QN Corp. listed on the signature page thereto.
Merger Agreement. The term "Merger Agreement" shall mean the Agreement
and Plan of Merger, dated as of August 24, 1997, as it may be amended from time
to time, among the Corporation, SBI Holding Corporation and SBI Radio
Acquisition Corporation and all transactions
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and agreements specifically contemplated thereby or by instruments referred to
therein.
SBI Merger. The term "SBI Merger" shall mean a merger of SBI Radio
Acquisition Corporation into the Corporation pursuant to the Merger Agreement.
SFX Entertainment. The term "SFX Entertainment" shall mean SFX
Entertainment, Inc., a subsidiary of the Corporation, newly formed in Delaware,
to which the Corporation will contribute cash and all of the capital stock of
SFX Concerts, Inc. (formerly known as Delsener/Slater Enterprises, Inc.) that
the Corporation directly or indirectly owns.
Spin-Off. The term "Spin-Off" shall mean the distribution of SFX
Entertainment common stock pro rata to the holders of Class A Common Stock and
the Class B Common Stock (and the transfer to an escrow account for delivery to
the holders of certain warrants to receive Class A Common Stock) or other
disposition pursuant to, or as permitted by, the Merger Agreement of all of the
capital stock and assets of the Entertainment Companies.
Spin-Off Transactions. The term "Spin-Off Transactions" shall mean the
Spin-Off, the Pending Acquisitions and the Merger Agreement as it relates to
the transactions described or referred to under the "Proposed Amendments" and
"Spin-Off" sections of the Consent Solicitation Statement of the Corporation
dated January 7, 1998, as supplemented by Supplement No. 1 thereto dated
January 28, 1998, relating to this Certificate of Designations.
RESOLVED, that the definition of "Consolidated Cash Flow" contained in
Section 1 be amended to read in its entirety as follows:
Consolidated Cash Flow. The term "Consolidated Cash Flow" shall mean,
with respect to any Person for any period, the Consolidated Net Income of such
Person for such period plus (i) an amount equal to any extraordinary loss plus
any net loss realized in connection with an Asset Sale by such Person or any of
its Subsidiaries during such period (to the extent such losses were deducted in
computing such Consolidated Net Income), plus (ii) provision for taxes based on
income or profits of such Person and its Subsidiaries for such period, to the
extent that such provision for taxes was included in computing such
Consolidated Net Income, plus (iii) Consolidated Interest Expense of such
Person for such period, to the extent any such Consolidated Interest Expense
was deducted in computing such Consolidated Net Income, plus (iv) depreciation,
amortization (including amortization of goodwill and other intangibles but
excluding amortization of prepaid cash expenses that were paid in a prior
period) and other non-cash charges (excluding any such non-cash charge to the
extent that it represents an accrual of or reserve for cash charges in any
future period) of such Person and its Subsidiaries for such period to the
extent that such depreciation, amortization and other non-cash charges were
deducted in computing such Consolidated Net Income, plus (v) the Specified
Charges (as defined in the Corporation's Consent Solicitation Statement dated
January 7, 1998, as supplemented by Supplement No. 1 thereto dated January 28,
1998, relating to the Series E Preferred Stock), plus (vi) to the extent that
such Consolidated Net Income was reduced thereby (a) amortization of the
expenses incurred in connection with the Consulting, Non-Compete and
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<PAGE>
Termination Agreement among the Corporation, SBI Holding Corporation and Robert
F.X. Sillerman dated as of August 24, 1997, (b) consent fees and expenses
directly related to the Consent Solicitations, (c) legal and other costs
associated with pending or threatened litigation in connection with the SBI
Merger and (d) other unusual and nonrecurring charges paid or accrued in 1997
or 1998 (including, but not limited to, legal, accounting, investment banking,
severance and termination fees) relating to the SBI Merger, the Spin-Off, the
Pending Acquisitions or transactions related thereto; provided that the
aggregate amount of charges that may be added to Consolidated Net Income
pursuant to this clause (d) to determine Consolidated Cash Flow for any
four-quarter period will not exceed $13.5 million (net of expenses reimbursed
or paid by SFX Entertainment) less (vii) all non-cash items increasing
Consolidated Net Income for such period (excluding any such non-cash income to
the extent it represents an accrual of cash income in any future period), in
each case, on a consolidated basis and determined in accordance with GAAP.
RESOLVED, that the definition of "Subsidiary" contained in Section 1
be amended to read in its entirety as follows:
Subsidiary. The term "Subsidiary" shall mean, with respect to any
person, (i) any corporation, association or other business entity of which more
than 50% of the total voting power of shares of Voting Stock thereof is at the
time owned or controlled, directly or indirectly, by such person or one or more
of the other Subsidiaries of that person (or a combination thereof) and (ii)
any partnership (a) the sole general partner or the managing general partner of
which is such person or a Subsidiary of such person or (b) the only general
partners of which are such person or of one or more Subsidiaries of such person
(or any combination thereof); however, with respect to the Corporation,
"Subsidiary" does not include the Entertainment Companies.
RESOLVED, that Section 8 of the Certificate of Designations be amended
to read in its entirety as follows:
8. Certain Covenants
(a) Restricted Payments. The Corporation shall not, and shall not
permit any of its Subsidiaries to, directly or indirectly: (i) declare or pay
any dividend or make any other payment or distribution on account of the
Corporation's Parity Securities or Junior Securities (including, without
limitation, any payment in connection with any merger or consolidation
involving the Corporation) or to the direct or indirect holders of the
Corporation's Parity Securities or Junior Securities in their capacity as such
(other than dividends or distributions payable in Capital Stock (other than
Disqualified Stock) of the Corporation); (ii) purchase, redeem or otherwise
acquire or retire for value any Parity Securities or Junior Securities of the
Corporation; (iii) make any payment on, or purchase, redeem, defease or
otherwise acquire or retire for value any Junior Securities, except payments of
the Liquidation Preference thereof at final maturity; or (iv) make any
Restricted Investment (all such payments and other actions set forth in clauses
(i) through (iv) above being collectively referred to as "Restricted
Payments"), unless, at the time of and after giving effect to such Restricted
Payment:
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<PAGE>
(a) no Voting Rights Triggering Event shall have occurred and be
continuing or would occur as a consequence thereof; and
(b) the Corporation would, at the time of such Restricted Payment and
after giving pro forma effect thereto as if such Restricted Payment had been
made at the beginning of the applicable four-quarter period, have been
permitted to incur at least $l.00 of additional Indebtedness (other than
Permitted Debt) pursuant to the Debt to Cash Flow Ratio test set forth below
under Section 8(b) hereof; and
(c) such Restricted Payment, together with the aggregate amount of all
other Restricted Payments declared or made after the Initial Issue Date (other
than Restricted Payments permitted by clauses (2), (5), (6), (10), (13) or (14)
of the following paragraph) shall not exceed, at the date of determination, the
sum of (1) an amount equal to the Corporation's Consolidated Cash Flow from the
Initial Issue Date to the end of the Corporation's most recently ended full
fiscal quarter for which internal financial statements are available, taken as
a single accounting period, less the product of 1.4 times the Corporation's
Consolidated Interest Expense from the Initial Issue Date to the end of the
Corporation's most recently ended full fiscal quarter for which internal
financial statements are available, taken as a single accounting period, plus
(2) an amount equal to the net cash proceeds received by the Corporation from
the issue or sale after the Initial Issue Date of Equity Interests of the
Corporation (other than (i) sales of Disqualified Stock and (ii) Equity
Interests sold to any of the Corporation's Subsidiaries) or of debt securities
or Disqualified Stock (other than the Series D Preferred Stock) of the
Corporation issued after the Initial Issue Date that have been converted into
such Equity Interests plus (3) to the extent that any Restricted Investment
that was made after the Initial Issue Date is sold for cash or otherwise
liquidated or repaid for cash, the lesser of (A) the cash return of capital
with respect to such Restricted Investment (less the cost of disposition, if
any) and (B) the initial amount of such Restricted Investment.
If no Voting Rights Triggering Event shall have occurred and be
continuing as a result thereof, the foregoing provisions will not prohibit: (1)
the payment of any dividend within 60 days after the date of declaration
thereof, if at said date of declaration such payment would have complied with
the provisions of this Certificate of Designations; (2) the redemption,
repurchase, retirement or other acquisition of any Equity Interests of the
Corporation in exchange for, or out of the proceeds of, the substantially
concurrent sale (other than to a Subsidiary of the Corporation) of other Equity
Interests of the Corporation (other than any Disqualified Stock); provided that
the amount of any such net cash proceeds that are utilized for any such
redemption, repurchase, retirement or other acquisition shall be excluded from
clause (c)(2) of the preceding paragraph; (3) cash payments made in respect of
fractional shares of Capital Stock not to exceed $100,000 in the aggregate in
any fiscal year; (4) the payment of dividends on the shares of Series D
Preferred Stock in accordance with the terms thereof as in effect on the
Initial Issue Date; (5) the issuance of Series D Exchange Notes in exchange for
the Series D Preferred Stock; provided that such issuance is permitted by
Section 8(b) hereof; (6) the issuance of Exchange Debentures in exchange for
the Series E Preferred Stock; provided that such issuance is permitted by
Section 8(b) hereof; (7) in the event that the Corporation elects to issue the
Series D Exchange Notes in exchange for the Series D Preferred Stock, cash
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<PAGE>
payments made in lieu of the issuance of Series D Exchange Notes having a face
amount less than $50 and any cash payments representing accrued and unpaid
dividends in respect thereof, not to exceed $100,000 in the aggregate in any
fiscal year; (8) in the event that the Corporation elects to issue Exchange
Debentures in exchange for Series E Preferred Stock, cash payments made in lieu
of the issuance of Exchange Debentures having a face amount less than $l,000
and any cash payments representing accrued and unpaid dividends in respect
thereof, not to exceed $100,000 in the aggregate in any fiscal year; (9)
payments made by the Corporation to SCMC for facilities maintenance and other
services and reimbursements pursuant to the Shared Facilities Agreement, as
amended from time to time, to the extent that such payments do not exceed the
amount of payments which would have been due if calculated in accordance with
the terms of the Shared Facilities Agreement as in effect on the Initial Issue
Date; (10) payments by the Corporation pursuant to the Management Termination
Agreements in accordance with the terms thereof as in effect on the Initial
Issue Date; (11) the redemption by the Corporation of its Series C Preferred
Stock in accordance with the terms thereof as in effect on the Initial Issue
Date; (12) the redemption by the Corporation of its Series B Preferred Stock in
accordance with the terms thereof as in effect on the Initial Issue Date;
provided that payments made by the Corporation to redeem the Series B Preferred
Stock shall not exceed $1.0 million in any fiscal year or $2.0 million in the
aggregate since the Initial Issue Date; (13) the Spin-Off Transactions; and
(14) the Meadows Repurchase.
The amount of all Restricted Payments (other than cash) shall be the
Fair Market Value (evidenced by a resolution of the Board of Directors set
forth in an Officers' Certificate delivered to the Board of Directors) on the
date of the Restricted Payment of the asset(s) or securities proposed to be
transferred by the Corporation or such Subsidiary, as the case may be, pursuant
to the Restricted Payment. Not later than the date of making any Restricted
Payment, the Corporation shall deliver to the Board of Directors an Officers'
Certificate stating that such Restricted Payment is permitted and setting forth
the basis upon which the calculations required by this covenant were computed,
which calculations may be based upon the Corporation's latest available
financial statements.
(b) Incurrence of Indebtedness and Issuance of Preferred Stock. The
Corporation shall not, and shall not permit any of its Subsidiaries to,
directly or indirectly, create, incur, issue, assume, guarantee or otherwise
become directly or indirectly liable, contingently or otherwise, with respect
to (collectively, "incur") any Indebtedness (including Acquired Debt) and that
the Corporation will not issue any Disqualified Stock and will not permit any
of its Subsidiaries to issue any shares of Preferred Stock; provided, however,
that (i) the Corporation may incur Indebtedness (including Acquired Debt) or
issue shares of Disqualified Stock and (ii) (A) the Subsidiaries may guarantee
Senior Debt and (B) the Subsidiaries may issue Preferred Stock other than
Disqualified Stock if, in either case, the Corporation's Debt to Cash Flow
Ratio at the time of incurrence of such Indebtedness or the issuance of such
Disqualified Stock or the Guarantee of such Senior Debt or the issuance of such
Preferred Stock, as the case may be, after giving pro forma effect to such
incurrence or issuance or Guarantee as of such date and to the use of proceeds
therefrom as if the same had occurred at the beginning of the most recently
ended four full fiscal quarter period of the Corporation for which internal
financial statements are available, would have been no greater than 7.0 to 1.
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The foregoing provisions will not apply to the incurrence of any of
the following Indebtedness (collectively, "Permitted Debt"):
(i) the incurrence by the Corporation and its Subsidiaries of
Indebtedness pursuant to one or more Bank Facilities, so long as the aggregate
principal amount of all Indebtedness outstanding under all Bank Facilities does
not, at the time of incurrence, exceed an amount equal to $225.0 million;
(ii) the incurrence by the Corporation and its Subsidiaries of the
Existing Indebtedness;
(iii) Indebtedness under the Exchange Debentures;
(iv) the issuance of Disqualified Stock by the Corporation that by its
items would not require or permit any payment of dividends or other
distributions that would violate the covenant Section 8(a) above;
(v) the incurrence by the Corporation or any of its Subsidiaries of
Indebtedness in connection with the acquisition of assets or a new Subsidiary;
provided that such Indebtedness was incurred by the prior owner of such assets
or such Subsidiary prior to such acquisition by the Corporation or one of its
Subsidiaries and was not incurred in connection with, or in contemplation of,
such acquisition by the Corporation or one of its Subsidiaries; and provided
further that, after giving pro forma effect to such incurrence of Indebtedness
as of such date and to the use of proceeds therefrom as if the same had
occurred at the beginning of the most recently ended four full fiscal quarter
period for which internal financial statements are available, the Corporation's
Debt to Cash Flow Ratio would have been no greater than 7.0 to 1.
(vi) the incurrence by the Corporation or any of its Subsidiaries of
Permitted Refinancing Debt in exchange for, or the net proceeds of which are
used to extend, refinance, renew, replace, defease or refund, Indebtedness that
was permitted by this Certificate of Designations to be incurred;
(vii) the incurrence by the Corporation or any of its Subsidiaries of
intercompany Indebtedness between or among the Corporation and any of its
Subsidiaries; provided, however, that (i) if the Corporation is the obligor on
such Indebtedness, such Indebtedness is expressly subordinate to the payment in
full of all Obligations with respect to the Exchange Debentures and (ii)(A) any
subsequent issuance or transfer of Equity Interests that results in any such
Indebtedness being held by a Person other than the Corporation or a Subsidiary
and (B) any sale or other transfer of any such Indebtedness to a Person that is
not either the Corporation or a Subsidiary shall be deemed, in each case, to
constitute an incurrence of such Indebtedness by the Corporation or such
Subsidiary, as the case may be;
(viii) the incurrence by the Corporation or any of its Subsidiaries of
Hedging Obligations that are incurred for the purpose of fixing or hedging
interest rate risk with respect to any floating rate Indebtedness that is
permitted by the terms of this Certificate of Designations to be outstanding;
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and
(ix) the incurrence by the Corporation and any of its Subsidiaries of
Indebtedness (in addition to Indebtedness permitted by any other clause of this
paragraph) in an aggregate principal amount (or accreted value, as applicable)
at any time outstanding not to exceed $10.0 million.
(c) Merger, Consolidation or Sale of Assets. The Corporation shall not
consolidate or merge with or into (whether or not the Corporation is the
surviving corporation), or sell, assign, transfer, lease, convey or otherwise
dispose of all or substantially all of its properties or assets in one or more
related transactions, to another corporation, Person or entity unless (i) the
Corporation is the surviving corporation or the entity or the Person formed by
or surviving any such consolidation or merger (if other than the Corporation)
or to which such sale, assignment, transfer, lease, conveyance or other
disposition shall have been made is a corporation organized or existing under
the laws of the United States, any states, any state thereof or the District of
Columbia; (ii) the Series E Preferred Stock shall be converted into or
exchanged for and shall become shares of such successor, transferee or
resulting Person, having in respect of such successor, transferee or resulting
Person the same powers, preferences and relative participating, optional or
other special rights and the qualifications, limitations or restrictions
thereon, that the Series E Preferred Stock had immediately prior to such
transaction; (iii) immediately after such transaction no Voting Rights
Triggering Event exists; (iv) such transaction will not result in the loss or
suspension or material impairment of any Material Broadcast License; and (v)
except in the case of a merger of the Corporation with or into a Wholly Owned
Subsidiary of the Corporation, the Corporation or the entity or Person formed
by or surviving any such consolidation or merger (if other than the
Corporation), or to which such sale, assignment, transfer, lease, conveyance or
other disposition shall have been made (A) will have Consolidated Net Worth
immediately after the transaction equal to or greater than the Consolidated Net
Worth of the Corporation immediately preceding the transaction and (B) will, at
the time of such transaction and after giving pro forma effect thereto as if
such transaction had occurred at the beginning of the applicable four-quarter
period, be permitted to incur at least $1.00 of additional Indebtedness
pursuant to the Debt to Cash Flow Ratio test set forth in Section 8(b) hereof.
(d) Transactions with Affiliates. The Corporation shall not, and shall
not permit any of its Subsidiaries to, make any payment to, or sell, lease,
transfer or otherwise dispose of any of its properties or assets to, or
purchase any property or assets from, or enter into or make or amend any
contract, agreement, understanding, loan, advance or guarantee with, or for the
benefit of, any Affiliate (each of the foregoing, an "Affiliate Transaction"),
unless (i) such Affiliate Transaction is on terms that are no less favorable to
the Corporation or the relevant Subsidiary than those that would have been
obtained in a comparable transaction by the Corporation or such Subsidiary with
an unrelated Person and (ii) the Corporation delivers to the Holders (a) with
respect to any Affiliate Transaction or series of related Affiliate
Transactions involving aggregate consideration in excess of $1.0 million, a
resolution of the Board of Directors set forth in an Officers' Certificate
certifying that such Affiliate Transaction complies with clause (i) above and
that such Affiliate Transaction has been approved by a majority of the members
of the Board of Directors that are disinterested as to such Affiliate
Transaction and (b) with respect to any Affiliate Transaction or series of
related Affiliate Transactions involving aggregate consideration in excess of
$5.0 million, an opinion as to
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the fairness to the Holders of such Affiliate Transaction from a financial
point of view issued by an accounting, appraisal or investment banking firm of
national standing; provided that (1) transactions between or among the
Corporation and/or its Wholly-Owned Subsidiaries, (2) the redemption or
repurchase of the Existing MMR Indebtedness, (3) transactions and agreements
specifically contemplated by the Termination and Assignment Agreement between
the Corporation and SCMC as in effect on the Initial Issue Date, (4) payments
required by the terms of the joint lease among the Corporation, SCMC and the
landlord thereunder for the Corporation's corporate headquarters located at 650
Madison Avenue, New York, New York and any agreements directly related thereto,
in each case, as the same are in effect on the Initial Issue Date, (5) payments
made by the Corporation to SCMC for the facilities maintenance and other
services and reimbursements pursuant to the Shared Facilities Agreement, (6)
payments and other transactions by the Corporation pursuant to the Management
Termination Agreements, (7) any Restricted Payments that are permitted by
Section 8(a) hereof and any Permitted Investments, (8) the transactions and
agreements specifically contemplated by the Merger Agreement, the Acquisition
Agreements or by instruments referred to in any such agreements and (9) any
Spin-Off Transaction, in each case, shall not be deemed to be Affiliate
Transactions.
(e) Payments for Consent. Neither the Corporation nor any of its
Subsidiaries shall, directly or indirectly, pay or cause to be paid any
consideration, whether by way of dividend or other distribution, fee or
otherwise, to any Holder of any Series E Preferred Stock for or as an
inducement to any consent, waiver or amendment of any of the terms or
provisions of this Certificate of Designations or the Series E Preferred Stock
unless such consideration is offered to be paid and is paid to all Holders of
the Series E Preferred Stock that consent, waive or agree to amend in the time
frame set forth in the solicitation documents relating to such consent, waiver
or agreement.
(f) Reports.
(i) Whether or not required by the rules and regulations of the
Securities and Exchange Commission (the "Commission"), so long as any shares of
Series E Preferred Stock are outstanding, the Corporation shall furnish to the
Holders of Series E Preferred Stock (i) all quarterly and annual financial
information that would be required to be contained in a filing with the
Commission on Forms 10-Q and 10-K if the Corporation were required to file such
Forms, including "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and, with respect to the annual information only, a
report thereon by the Corporation's certified independent accountants and (ii)
all current reports that would be required to be filed with the Commission on
Form 8-K if the Corporation were required to file such reports. In addition,
whether or not required by the rules and regulations of the Commission, the
Corporation shall file a copy of all such information and reports with the
Commission for public availability (unless the Commission will not accept such
a filing) and make such information available to securities analysts and
prospective investors upon request.
(ii) The Corporation shall deliver to the Holders, within 90 days
after the end of each fiscal year, an Officers' Certificate stating that a
review of the activities of the Corporation and its Subsidiaries during the
preceding fiscal year has been made under the supervision of the signing
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officers with a view to determining whether the Corporations has kept,
observed, performed and fulfilled its obligations under this Certificate of
Designations and further stating, as to each such officer signing such
certificate, that to the best of his or her knowledge the Corporation has kept,
observed, performed and fulfilled each and every covenant contained in this
Certificate of Designations and is not in default in the performance or
observance of any of the terms, provisions and conditions of this Certificate
of Designations (or, if any such default shall have occurred, describing all
such defaults of which he or she may have knowledge and what action the
Corporation is taking or proposes to take with respect thereto) and that to the
best of his or her knowledge no event has occurred and remains in existence by
reason of which payments on account of the Liquidation Preference of or
dividends, if any, on the Series E Preferred Stock is prohibited or if such
event has occurred, a description of the event and what action the Corporation
is taking or proposes to take with respect thereto.
(iii) So long as not contrary to the then current recommendations of
the American Institute of Certified Public Accountants, the year-end financial
statements delivered pursuant to Section 8(f)(i) above shall be accompanied by
a written statement of the Corporation's independent public accountants (who
shall be a firm of established national reputation) that in making the
examination necessary for certification of such financial statements, nothing
has come to their attention that would lead them to believe that the
Corporation has violated any provisions of this Certificate of Designations or,
if any such violation has occurred, specifying the nature and period of
existence thereof, it being understood that such accountants shall not be
liable directly or indirectly to any Person for any failure to obtain knowledge
of any such violation.
(iv) The Corporation shall, so long as any of the shares of Series E
Preferred Stock are outstanding, deliver to the Holders, forthwith upon any
Executive Officer of the Corporation becoming aware of any default under this
Certificate of Designations, an Officers' Certificate specifying such default
and what action the Corporation is taking or proposes to take with respect
thereto.
(g) Conflicts with By-laws. If any provisions of the Corporation's
By-laws conflict in any way with this Certificate of Designations, the
Corporation shall, so long as any of the shares of Series E Preferred Stock are
outstanding, take all necessary actions to amend such By-laws and thereby
resolve the conflict.
SIXTH: The Certificate of Designations, Preferences, and Relative
Rights, Qualifications, Limitations and Restrictions of the 12 5/8% Series E
Cumulative Exchangeable Preferred Stock Due October 31, 2006 is hereby amended
to read in its entirety as shown in Exhibit A, attached hereto.
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IN WITNESS WHEREOF, SFX Broadcasting, Inc. has caused this Certificate
of Amendment to be signed by Michael G. Ferrel, its President on February 10,
1998.
SFX BROADCASTING, INC
By: /s/ Michael G. Ferrel
------------------------
Michael G. Ferrel
President
ATTESTATION
The undersigned attests that the foregoing was executed on
the date indicated by Michael G. Ferrel, who is the duly elected and acting
President of SFX Broadcasting, Inc.
/s/ Howard J. Tytel
- -------------------
Howard J. Tytel
Secretary
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EXHIBIT A
CERTIFICATE OF DESIGNATIONS, PREFERENCES
AND RELATIVE, PARTICIPATING, OPTIONAL AND
OTHER SPECIAL RIGHTS OF PREFERRED
STOCK AND QUALIFICATIONS, LIMITATIONS
AND RESTRICTIONS THEREOF
OF
12 5/8% SERIES E CUMULATIVE EXCHANGEABLE PREFERRED
STOCK DUE OCTOBER 31, 2006
OF
SFX BROADCASTING, INC.
-------------------------
Pursuant to Section 151 of the
General Corporation Law of the State of Delaware
-------------------------
SFX Broadcasting, Inc. (the "Corporation"), a corporation
organized and existing under the General Corporation Law of the State of
Delaware, certifies that pursuant to the authority contained in Article 6 of
its Restated Certificate of Incorporation (the "Certificate of Incorporation")
and in accordance with the provisions of Section 151 of the General Corporation
Law of the State of Delaware, the Board of Directors of the Corporation by
unanimous written consent dated January 17, 1997 duly approved and adopted the
following resolution which resolution remains in full force and effect on the
date hereof:
RESOLVED, that pursuant to the authority vested in the Board
of Directors by its Certificate of Incorporation, the Board of Directors does
hereby designate, create, authorize and provide for the issue of 125/8% Series
E Cumulative Exchangeable Preferred Stock due October 31, 2006 (the "Series E
Preferred Stock"), par value $0.01 per share, with a liquidation preference of
$100.00 per share, consisting of 4,150,000 shares, having the following voting
powers, preferences and relative, participating, optional and other special
rights, and qualifications, limitations and restrictions thereof as follows:
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1. Certain Definitions.
Unless the context otherwise requires, the terms defined in
this Section 1 shall have, for all purposes of this resolution, the meanings
herein specified (with terms defined in the singular having comparable meanings
when used in the plural).
Acquired Debt. The term "Acquired Debt" shall mean, with
respect to any specified Person, (i) Indebtedness of any other Person existing
at the time such other Person is merged with or into or became a Subsidiary of
such specified Person, including, without limitation, Indebtedness incurred in
connection with, or in contemplation of, such other Person merging with or into
or becoming a Subsidiary of such specified Person, and (ii) Indebtedness
secured by a Lien encumbering any asset acquired by such specified Person.
Acquisition Agreements. The term "Acquisition Agreements"
shall mean the acquisition agreements relating to the Pending Acquisitions (as
defined in the Consent Solicitation Statement of the Corporation dated January
7, 1998, as supplemented by Supplement No. 1 thereto dated January 28, 1998) as
they may be amended from time to time and all transactions and agreements
specifically contemplated thereby or by instruments referred to therein.
Advertising Business. The term "Advertising Business" shall
mean any business deriving substantially all of its revenues from the (i) sale
of advertisements and (ii) sale of products or provision of services to any
business described in clause (i) above.
Affiliate. The term "Affiliate" of any specified Person shall
mean any other Person directly or indirectly controlling or controlled by or
under direct or indirect common control with such specified Person. For
purposes of this definition, "control" (including, with correlative meanings,
the terms "controlling," "controlled by" and "under common control with"), as
used with respect to any Person, shall mean the possession, directly or
indirectly, of the power to direct or cause the direction of the management or
policies of such Person, whether through the ownership of voting securities, by
agreement or otherwise; provided that beneficial ownership of 10% or more of
the voting securities of a Person shall be deemed to be control.
Affiliate Transaction. The term "Affiliate Transaction" shall
have the meaning set forth in Section 8(d) below.
Applicable Redemption Price. The term "Applicable Redemption
Price" shall mean a price per share equal to the following redemption prices
(expressed as a percentage of the Liquidation Preference thereof) during the
twelve-month periods commencing on January 15 of the years indicated:
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2002......................................106.313%
2003......................................104.734%
2004......................................103.156%
2005......................................101.578%
2006 and thereafter ......................100.000%
in each case, together with accrued and unpaid dividends (if any) thereon to
the Redemption Date.
Asset Sale. The term "Asset Sale" shall mean (i) the sale,
lease, conveyance or other disposition of any assets (including without
limitation, by way of a sale and leaseback or pursuant to an LMA or similar
arrangement); provided that the sale, lease, conveyance or other disposition of
all or substantially all of the assets of the Corporation and its Subsidiaries
taken as a whole will be governed by the Sections 7 and 8(c) hereof and (ii)
the issue or sale by the Corporation or any of its Subsidiaries of Equity
Interests of any of the Corporation's Subsidiaries, in the case of either
clause (i) or (ii), whether in a single transaction or a series of related
transactions (a) that have a Fair Market Value in excess of $5.0 million or (b)
for aggregate net proceeds in excess of $5.0 million. Notwithstanding the
foregoing: (i) the Pending Dispositions, the Chancellor Exchange and the CBS
Exchange, in each case as described in the Prospectus Supplement dated January
17, 1997, in all material respects, (ii) a transfer of assets by the
Corporation to a Wholly Owned Subsidiary or by a Wholly Owned Subsidiary to the
Corporation or to another Wholly Owned Subsidiary, (iii) an issuance of Equity
Interests by a Wholly Owned Subsidiary to the Corporation or to another Wholly
Owned Subsidiary, (iv) a Restricted Payment that is permitted under Section
8(a) hereof and (v) sales of obsolete equipment in the ordinary course of
business, will not be deemed to be Asset Sales.
Attributable Debt. The term "Attributable Debt" in respect of
a sale and leaseback transaction shall mean, at the time of determination, the
present value (discounted at the rate of interest implicit in such transaction,
determined in accordance with GAAP) of the obligation of the lessee for net
rental payments during the remaining term of the lease included in such sale
and leaseback transaction (including any period for which such lease has been
extended or may, at the option of the lessor, be extended).
Bank Facilities. The term "Bank Facilities" shall mean, with
respect to the Corporation, one or more debt facilities (including, without
limitation, the Credit Agreement) or commercial paper facilities with banks or
other institutional lenders providing for revolving credit loans, term loans,
receivables financing (including through the sale of receivables to such
lenders or to special purpose entities formed to borrow from such lenders
against such receivables) or letters of credit, in each case, as amended,
restated, modified, renewed, refunded, replaced or refinanced in whole or in
part from time to time. Indebtedness under Bank Facilities outstanding on the
date on which the Series E Preferred Stock is first issued under the
Certificate of Designations shall be deemed to have been incurred on such date
in reliance on the exception provided by clause (i) under Section 8(b).
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Broadcast Business. The term "Broadcast Business" shall mean
any business, the majority of whose revenues are derived from the broadcast of
radio programming.
Business Day. The term "Business Day" shall mean a day other
than a Saturday or Sunday or any federal holiday.
Capital Lease Obligation. The term "Capital Lease Obligation"
shall mean, at the time any determination thereof is to be made, the amount of
the liability in respect of a capital lease that would at such time be required
to be capitalized on a balance sheet in accordance with GAAP.
Capital Stock. The term "Capital Stock" shall mean (i) in the
case of a corporation, corporate stock, (ii) in the case of an association or
business entity, any and all shares, interests, participations, rights or other
equivalents (however designated) of corporate stock, (iii) in the case of a
partnership, partnership interests (whether general or limited) and (iv) any
other interest or participation that confers on a Person the right to receive a
share of the profits and losses of, or distributions of assets of, the issuing
Person.
Cash Equivalents. The term "Cash Equivalents" shall mean (i)
United States dollars, (ii) securities issued or directly and fully guaranteed
or insured by the United States government or any agency or instrumentality
thereof having maturities of not more than six months from the date of
acquisition, (iii) certificates of deposit and eurodollar time deposits with
maturities of six months or less from the date of acquisition, bankers'
acceptances with maturities not exceeding six months and overnight bank
deposits, in each case with any lender party to the Credit Agreement or with
any domestic commercial bank having capital and surplus in excess of $500.0
million and a Thomson Bank Watch Rating of "B" or better, (iv) repurchase
obligations with a term of not more than seven days for underlying securities
of the types described in clauses (ii) and (iii) above entered into with any
financial institution meeting the qualifications specified in clause (iii)
above and (v) commercial paper having the highest rating obtainable from
Moody's Investors Service, Inc. or Standard & Poor's Corporation and in each
case maturing within six months after the date of acquisition.
CBS Exchange. The term "CBS Exchange" shall mean the pending
exchange by the Corporation 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.
Chancellor Exchange. The term "Chancellor Exchange" shall
mean the pending exchange of the Corporation'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 the
Corporation of $11.0 million in cash.
Change of Control. The term "Change of Control" shall mean
the occurrence of any of the following: (i) the sale, lease, transfer,
conveyance or other disposition (other than by way of merger or consolidation),
in one or a series of related transactions, of all or substantially all of the
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assets of the Corporation and its Subsidiaries taken as a whole to any "person"
(as such term is used in Section 13(d)(3) of the Exchange Act) other than the
Principal or his Related Parties (as defined below), (ii) the adoption of a
plan relating to the liquidation or dissolution of the Corporation, (iii) the
consummation of any transaction (including, without limitation, any merger or
consolidation) the result of which is that any "person" (as defined above),
other than the Principal and his Related Parties, becomes the "beneficial
owner" (as such term is defined in Rule 13d-3 and Rule 13d-5 under the Exchange
Act, except that a person shall be deemed to have "beneficial ownership" of all
securities that such person has the right to acquire, whether such right is
exercisable immediately or only after the passage of time, upon the happening
of an event or otherwise), directly or indirectly, of Voting Stock of the
Corporation having more than 35% of the combined voting power of all classes of
Voting Stock of the Corporation then outstanding or (iv) the first day on which
a majority of the members of the Board of Directors of the Corporation are not
Continuing Directors.
Change of Control Offer. The term "Change of Control Offer"
shall have the meaning set forth in Section 7(a) below.
Change of Control Payment. The term "Change of Control
Payment" shall have the meaning set forth in Section 7(a) below.
Change of Control Payment Date. The term "Change of Control
Payment Date" shall have the meaning set forth in Section 7(d)(ii) below.
Class A Common Stock. The term "Class A Common Stock" shall
mean the Corporation's Class A Common Stock, par value $.01 per share.
Class B Common Stock. The term "Class B Common Stock" shall
mean the Corporation's Class B Common Stock, par value $.01 per share.
Common Equity. The term "Common Equity" shall mean all shares
now or hereafter authorized of any class of common stock of the Corporation,
including the Class A Common Stock and Class B Common Stock, and any other
stock of the Corporation, howsoever designated, authorized after the Initial
Issue Date, that have the right (subject always to prior rights of any class or
series of preferred stock) to participate in the distribution of the assets and
earnings of the Corporation without limit as to per share amount.
Consent Solicitations. The term "Consent Solicitations" means
the consent solicitations of the Corporation made pursuant to the Consent
Solicitation Statements dated January 7, 1998, as supplemented by Supplements
No. 1 thereto dated January 28, 1998, to the holders of the Corporation's
103/4% Senior Subordinated Notes due 2006 and to the holders of the Series E
Preferred Stock and the related Information Statement.
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Consolidated Cash Flow. The term "Consolidated Cash Flow"
shall mean, with respect to any Person for any period, the Consolidated Net
Income of such Person for such period plus (i) an amount equal to any
extraordinary loss plus any net loss realized in connection with an Asset Sale
by such Person or any of its Subsidiaries during such period (to the extent
such losses were deducted in computing such Consolidated Net Income), plus (ii)
provision for taxes based on income or profits of such Person and its
Subsidiaries for such period, to the extent that such provision for taxes was
included in computing such Consolidated Net Income, plus (iii) Consolidated
Interest Expense of such Person for such period, to the extent any such
Consolidated Interest Expense was deducted in computing such Consolidated Net
Income, plus (iv) depreciation, amortization (including amortization of
goodwill and other intangibles but excluding amortization of prepaid cash
expenses that were paid in a prior period) and other non-cash charges
(excluding any such non-cash charge to the extent that it represents an accrual
of or reserve for cash charges in any future period) of such Person and its
Subsidiaries for such period to the extent that such depreciation, amortization
and other non-cash charges were deducted in computing such Consolidated Net
Income, plus (v) the Specified Charges (as defined in the Corporation's Consent
Solicitation Statement dated January 7, 1998, as supplemented by Supplement No.
1 thereto dated January 28, 1998, relating to the Series E Preferred Stock),
plus (vi) to the extent that such Consolidated Net Income was reduced thereby
(a) amortization of the expenses incurred in connection with the Consulting,
Non-Compete and Termination Agreement among the Corporation, SBI Holding
Corporation and Robert F.X. Sillerman dated as of August 24, 1997, (b) consent
fees and expenses directly related to the Consent Solicitations, (c) legal and
other costs associated with pending or threatened litigation in connection with
the SBI Merger and (d) other unusual and nonrecurring charges paid or accrued
in 1997 or 1998 (including, but not limited to, legal, accounting, investment
banking, severance and termination fees) relating to the SBI Merger, the
Spin-Off, the Pending Acquisitions or transactions related thereto; provided
that the aggregate amount of charges that may be added to Consolidated Net
Income pursuant to this clause (d) to determine Consolidated Cash Flow for any
four-quarter period will not exceed $13.5 million (net of expenses reimbursed
or paid by SFX Entertainment) less (vii) all non-cash items increasing
Consolidated Net Income for such period (excluding any such non-cash income to
the extent it represents an accrual of cash income in any future period), in
each case, on a consolidated basis and determined in accordance with GAAP.
Consolidated Indebtedness. The term "Consolidated
Indebtedness" of any Person as of any date of determination shall mean the sum
(without duplication) of (i) the total amount of Indebtedness and Attributable
Debt of such Person and its Subsidiaries, plus (ii) the total amount of other
Indebtedness shown on the balance sheet of the primary obligor on such
Indebtedness, to the extent that such Indebtedness has been Guaranteed by such
Person or one of its Subsidiaries, plus (iii) the aggregate liquidation value
or redemption amount (if larger) of all Disqualified Stock of such Person and
all preferred stock of Subsidiaries of such Person, in each case, determined on
a consolidated basis in accordance with GAAP.
Consolidated Interest Expense. The term "Consolidated
Interest Expense" shall
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mean, with respect to any Person for any period, the sum of (i) the
consolidated interest expense of such Person and its Subsidiaries for such
period, whether paid or accrued (including, without limitation, amortization of
original issue discount, non-cash interest payments, the interest component of
any deferred payment obligations, the interest component of all payments
associated with Capital Lease Obligations, imputed interest with respect to
Attributable Debt, commissions, discounts and other fees and charges incurred
in respect of letter of credit or bankers' acceptance financings, and net
payments (if any) pursuant to Hedging Obligations) and (ii) the consolidated
interest expense of such Person and its Subsidiaries that was capitalized
during such period, and (iii) any interest expense on Indebtedness of another
Person that is guaranteed by such Person or one of its Subsidiaries or secured
by a Lien on assets of such Person or one of its Subsidiaries (whether or not
such Guarantee or Lien is called upon) and (iv) the product of (a) all cash
dividend payments (and non-cash dividend payments in the case of a Person that
is a Subsidiary) on any series of preferred stock of such Person, times (b) a
fraction, the numerator of which is one and the denominator of which is one
minus the then current combined federal, state and local statutory tax rate of
such Person, expressed as a decimal, in each case, on a consolidated basis and
in accordance with GAAP.
Consolidated Net Income. The term "Consolidated Net Income"
shall mean, with respect to any Person for any period, the aggregate of the Net
Income of such Person and its Subsidiaries for such period, determined on a
consolidated basis in accordance with GAAP; provided that (i) the Net Income
(but not loss) of any Person that is not a Subsidiary or that is accounted for
by the equity method of accounting shall be included only to the extent of the
amount of dividends or distributions paid in cash to the referent Person or to
a Wholly Owned Subsidiary thereof, (ii) the Net Income of any Subsidiary shall
be excluded to the extent that the declaration or payment of dividends or
similar distributions by that Subsidiary of that Net Income is not at the date
of determination permitted without any prior governmental approval (that has
not been obtained) or, directly or indirectly, by operation of the terms of its
charter or any agreement, instrument, judgment, decree, order, statute, rule or
governmental regulation applicable to that Subsidiary or its stockholders,
(iii) the Net Income of any Person acquired in a pooling of interests
transaction for any period prior to the date of such acquisition shall be
excluded and (iv) the cumulative effect of a change in accounting principles
shall be excluded.
Consolidated Net Worth. The term "Consolidated Net Worth"
shall mean, with respect to any Person as of any date, the sum of (i) the
consolidated equity of the common stockholders of such Person and its
consolidated Subsidiaries as of such date plus (ii) the respective amounts
reported on such Person's balance sheet as of such date with respect to any
series of preferred stock (other than Disqualified Stock) that by its terms is
not entitled to the payment of dividends unless such dividends may be declared
and paid only out of net earnings in respect of the year of such declaration
and payment, but only to the extent of any cash received by such Person upon
issuance of such preferred stock, less (x) all write-ups (other than write-ups
resulting from foreign currency translations and write-ups of tangible assets
of a going concern business made within 12 months after the acquisition of such
business) subsequent to the date of the Certificate of
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Designations in the book value of any asset owned by such Person or a
consolidated Subsidiary of such Person, (y) all investments as of such date in
unconsolidated Subsidiaries and in Persons that are not Subsidiaries (except,
in each case, Permitted Investments), and (z) all unamortized debt discount and
expense and unamortized deferred charges as of such date, all of the foregoing
determined in accordance with GAAP.
Continuing Directors. The term "Continuing Directors" shall
mean, as of any date of determination, any member of the Board of Directors of
the Corporation who (i) was a member of such Board of Directors on the Initial
Issue Date or (ii) was nominated for election or elected to such Board of
Directors with the approval of a majority of the Continuing Directors who were
members of such Board at the time of such nomination or election.
Credit Agreement. The term "Credit Agreement" shall mean that
certain credit agreement by and among the Corporation, the Corporation's
Subsidiaries, as guarantors, The Bank of New York, as agent, and the lenders
party thereto, providing for $225 million of revolving credit borrowings,
including any related notes, guarantees, collateral documents, and other
agreements executed in connection therewith, and in each case as amended,
modified, renewed, refunded, replaced or refinanced from time to time.
Debt to Cash Flow Ratio. The term "Debt to Cash Flow Ratio"
shall mean, as of any date of determination, the ratio of (a) the Consolidated
Indebtedness as of such date to (b) the Consolidated Cash Flow of the
Corporation and its Subsidiaries on a consolidated basis for the four most
recent full fiscal quarters ending immediately prior to such date for which
internal financial statements are available. For purposes of calculating
Consolidated Cash Flow for the computation referred to above, (i) acquisitions
that have been made by the Corporation or any of its Subsidiaries, including
through mergers or consolidations and including any related financing
transactions, during the four-quarter reference period or subsequent to such
reference period and on or prior to the date on which such Ratio is being
calculated (the "Calculation Date") shall be deemed to have occurred on the
first day of the four-quarter reference period and Consolidated Cash Flow for
such reference period shall be calculated without giving effect to clause (iii)
of the proviso set forth in the definition of Consolidated Net Income, and (ii)
the Consolidated Cash Flow attributable to discontinued operations, as
determined in accordance with GAAP, and operations or businesses disposed of
prior to the Calculation Date, shall be excluded.
Default. The term "Default" shall mean any event that is or
with the passage of time or the giving of notice or both would be an Event of
Default.
Disqualified Stock. The term "Disqualified Stock" shall mean
any Capital Stock that, by its terms (or by the terms of any security into
which it is convertible or for which it is exchangeable at the option of the
holder thereof), or upon the happening of any event, matures or is mandatorily
redeemable, pursuant to a sinking fund obligation or otherwise, or redeemable
at the option of the holder thereof, in whole or in part, on or prior to the
date that is 91 days after the
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mandatory redemption date of the Series E Preferred Stock.
Dividend Payment Date. The term "Dividend Payment Date" shall
have the meaning set forth in Section 2(a) below.
Dividend Period. The term "Dividend Period" shall mean the
period from, and including, the Initial Issue Date to, but not including, the
first Dividend Payment Date and thereafter, each period from, and including,
the preceding Dividend Payment Date to, but not including the next Dividend
Payment Date.
Entertainment Companies. The term "Entertainment Companies"
shall mean SFX Entertainment and any and all of its direct and indirect
Subsidiaries.
Equity Interests. The term "Equity Interests" shall mean
Capital Stock and all warrants, options or other rights to acquire Capital
Stock (but excluding any debt security that is convertible into, or
exchangeable for, Capital Stock).
Exchange Date. The term "Exchange Date" shall have the
meaning set forth in Section 5(b) below.
Exchange Debentures. The term "Exchange Debentures" shall
mean the Corporations's 12 5/8% Senior Subordinated Exchange Debentures due
October 31, 2006 issuable in exchange for the Corporation's Series E Preferred
Stock.
Exchange Indenture. The term "Exchange Indenture" shall mean
that certain indenture under which the Exchange Debentures would be issued and
which shall be substantially in the form attached as Annex A hereto.
Executive Officer. The term "Executive Officer" shall mean
any officer of the Corporation that would be deemed to be an "executive
officer" within meaning of the rules and regulations of the Securities and
Exchange Commission.
Existing Indebtedness. The term "Existing Indebtedness" shall
mean all Indebtedness of the Corporation and its Subsidiaries (other than
Indebtedness under the Credit Agreement) in existence on the Initial Issue
Date, until such amounts are repaid.
Existing MMR Indebtedness. The term "Existing MMR
Indebtedness" shall mean all Indebtedness of MMR and its Subsidiaries in
existence at the closing of the MMR Merger, until such amounts are repaid.
Fair Market Value. The term "Fair Market Value" shall mean,
with respect to any asset or property, the sale value that would be obtained in
an arm's length transaction between an
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informed and willing seller under no compulsion to sell and an informed and
willing buyer under no compulsion to buy.
GAAP. The term "GAAP" shall mean generally accepted
accounting principles set forth in the opinions and pronouncements of the
Accounting Principles Board of the American Institute of Certified Public
Accountants and statements and pronouncements of the Financial Accounting
Standards Board or in such other statements by such other entity as have been
approved by a significant segment of the accounting profession, which are in
effect on the Initial Issue Date.
Government Securities. The term "Government Securities" shall
mean direct obligations of, or obligations guaranteed by, the United States of
America for the payment of which obligations or guarantee the full faith and
credit of the United States of America is pledged.
Guarantee. The term "Guarantee" shall mean a guarantee (other
than by endorsement of negotiable instruments for collection in the ordinary
course of business), direct or indirect, in any manner (including, without
limitation, letters of credit and reimbursement agreements in respect thereof),
of all or any part of any Indebtedness.
Hedging Obligations. The term "Hedging Obligations" shall
mean, with respect to any Person, the obligations of such Person under (i)
interest rate swap agreements, interest rate cap agreements and interest rate
collar agreements and (ii) other agreements or arrangements designed to protect
such Person against fluctuations in interest rates.
Holder. The term "Holder" shall mean the record holder of one
or more shares of Series E Preferred Stock, as shown on the books and records
of the Transfer Agent.
Indebtedness. The term "Indebtedness" shall mean, with
respect to any Person, any indebtedness of such Person, whether or not
contingent, in respect of borrowed money or evidenced by bonds, notes,
debentures or similar instruments or letters of credit (or reimbursement
agreements in respect thereof) or banker's acceptances or representing Capital
Lease Obligations or the balance deferred and unpaid of the purchase price of
any property or payment obligations under an LMA or representing any Hedging
Obligations, except any such balance that constitutes an accrued expense or
trade payable, if and to the extent any of the foregoing (other than letters of
credit and Hedging Obligations) would appear as a liability upon a balance
sheet of such Person prepared in accordance with GAAP, as well as all
indebtedness of others secured by a Lien on any asset of such Person (whether
or not such indebtedness is assumed by such Person) and, to the extent not
otherwise included, the Guarantee by such Person of any indebtedness of any
other Person.
Initial Issue Date. The term "Initial Issue Date" shall mean
the date that shares of Series E Preferred Stock are first issued by the
Corporation.
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Investments. The term "Investments" shall mean, with respect
to any Person, all investments by such Person in other Persons (including
Affiliates) in the form of direct or indirect loans (including guarantees of
Indebtedness or other obligations), advances or capital contributions
(excluding commission, travel and similar advances to officers and employees
made in the ordinary course of business), purchases or other acquisitions for
consideration of Indebtedness, Equity Interests or other securities, together
with all items that are or would be classified as investments on a balance
sheet prepared in accordance with GAAP; provided that an acquisition of assets,
Equity Interests or other securities by the Corporation for consideration
consisting of Common Equity shall not be deemed to be an Investment. If the
Corporation or any Subsidiary of the Corporation sells or otherwise disposes of
any Equity Interests of any direct or indirect Subsidiary of the Corporation
such that, after giving effect to any such sale or disposition, such Person is
no longer a Subsidiary of the Corporation, the Corporation shall be deemed to
have made an Investment on the date of any such sale or disposition equal to
the Fair Market Value of the Equity Interests of such Subsidiary not sold or
disposed of.
Junior Securities. The term "Junior Securities" shall mean
any class of stock ranking junior to the Series E Preferred Stock as to the
payment of dividends and as to rights in liquidation, dissolution or winding up
of the affairs of the Corporation. The Corporation's Series A Preferred Stock,
Series B Preferred Stock and Series C Preferred Stock are expressly defined and
included as Junior Securities.
Lien. The term "Lien" shall mean, with respect to any asset,
any mortgage, lien, pledge, charge, security interest or encumbrance of any
kind in respect of such asset, whether or not filed, recorded or otherwise
perfected under applicable law (including any conditional sale or other title
retention agreement, any lease in the nature thereof, any option or other
agreement to sell or give a security interest in and any filing of or agreement
to give any financing statement under the Uniform Commercial Code (or
equivalent statutes) of any jurisdiction).
Liquidation Preference. The term "Liquidation Preference"
shall mean $100 per share of Series E Preferred Stock.
Local Marketing Agreement or LMA. The terms "Local Marketing
Agreement" or "LMA" shall mean a local marketing arrangement, sale agreement,
time brokerage agreement, management agreement or similar arrangement pursuant
to which a Person, subject to customary preemption rights and other limitations
(i) obtains the right to sell at least a majority of the advertising inventory
of a radio station of which a third party is the licensee, (ii) obtains the
right to broadcast programming and sell advertising time during a majority of
the air time of a radio station or (iii) manages the selling operations of a
radio station with respect to at least a majority of the advertising inventory
of such station.
Management Termination Agreements. The term "Management
Termination Agreements" shall mean each of (i) the termination agreement
between the Corporation and R.
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Steven Hicks, dated April 16, 1996, and (ii) the amendment to the employment
agreement between the Corporation and D. Geoffrey Armstrong, effective as of
April 15, 1996, in each case, as in effect on the Initial Issue Date.
Mandatory Redemption Date. The term "Mandatory Redemption
Date" shall have the meaning set forth in Section 4(a) below.
Material Broadcast License. The term "Material Broadcast
License" shall mean one or more authorizations issued by the Federal
Communications Commission for the operation of AM or FM radio stations that
individually or collectively are material to the financial condition, results
of operations or prospects of the Corporation and its Subsidiaries taken as a
whole.
Meadows Repurchase. The term "Meadows Repurchase" shall mean
the redemption by the Corporation of up to 250,838 shares of Class A Common
Stock for $33.00 per share, pursuant to the Agreement of Merger, dated February
12, 1997, by and among the Corporation, NOC-Acquisition Corp., CAPCO
Acquisition Corp., QN Acquisition Corp., Nederlander of Connecticut, Inc.,
Connecticut Ampitheater Development Corporation, QN Corp., Connecticut
Performing Arts, Inc. and Connecticut Performing Arts Partners and the
Stockholders of Nederlander of Connecticut, Inc,. Connecticut Ampitheater
Development Corporation and QN Corp. listed on the signature page thereto.
Merger Agreement. The term "Merger Agreement" shall mean the
Agreement and Plan of Merger, dated as of August 24, 1997, as it may be amended
from time to time, among the Corporation, SBI Holding Corporation and SBI Radio
Acquisition Corporation and all transactions and agreements specifically
contemplated thereby or by instruments referred to therein.
MMR. The term "MMR" shall mean Multi-Market Radio, Inc., a
Delaware corporation.
MMR Merger. The term "MMR Merger" shall mean the merger of
SFX Merger Company, a Wholly Owned Subsidiary of the Corporation, with and into
MMR, pursuant to which MMR became a Wholly Owned Subsidiary of the Corporation.
Net Income. The term "Net Income" shall mean, with respect to
any Person, the net income (loss) of such Person, determined in accordance with
GAAP and before any reduction in respect of preferred stock dividends,
excluding, however, (i) any gain (but not loss), together with any related
provision for taxes on such gain (but not loss), realized in connection with
(a) any Asset Sale (including, without limitation, dispositions pursuant to
sale and leaseback transactions) or (b) the disposition of any securities by
such Person or any of its Subsidiaries or the extinguishment of any
Indebtedness of such person or any of its Subsidiaries and (ii) any
extraordinary or nonrecurring gain (but not loss), together with any related
provision for taxes on such extraordinary or nonrecurring gain (but not loss).
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Net Proceeds. The term "Net Proceeds" shall mean the
aggregate cash proceeds received by the Corporation or any of its Subsidiaries
in respect of any Asset Sale (including, without limitation, any cash received
upon the sale or other disposition of any non-cash consideration received in
any Asset Sale), net of the direct costs relating to such Asset Sale
(including, without limitation, legal, accounting and investment banking fees,
and sales commissions) and any relocation expenses incurred as a result
thereof, taxes paid or payable as a result thereof (after taking into account
any available tax credits or deductions and any tax sharing arrangements),
amounts required to be applied to the repayment of Indebtedness (other than
Senior Debt) secured by a Lien on the asset or assets that were the subject of
such Asset Sale and any reserve for adjustment in respect of the sale price of
such asset or assets established in accordance with GAAP.
New Note Indenture. The term "New Note Indenture" shall mean
the indenture governing the Corporation's 10 3/4% Senior Subordinated Notes due
2006.
New Notes. The term "New Notes" shall mean the Corporation's
10 3/4% Senior Subordinated Notes due 2006.
Obligations. The term "Obligations" shall mean any principal,
interest, penalties, fees (including, but not limited to, reasonable fees and
expenses of counsel), indemnifications, reimbursements, damages and other
liabilities payable under the documentation governing any Indebtedness.
Officers' Certificate. The term "Officers' Certificate" shall
mean a certificate signed on behalf of the Corporation by two officers of the
Corporation, one of whom must be the Chief Executive Officer, the Chief
Financial Officer, the Treasurer or the principal accounting officer of the
Corporation that meets the requirements of Section 10 hereof.
Pari Passu Debt. The term "Pari Passu Debt" shall mean (i)
the New Notes and (ii) all other Indebtedness that ranks pari passu in right of
payment with the Exchange Debentures.
Parity Securities. The term "Parity Securities" shall mean
any class or series of stock of the Corporation authorized after the Initial
Issue Date that is entitled to receive payment of dividends and to receive
assets upon liquidation, dissolution or winding up of the affairs of the
Corporation on a parity with the Series E Preferred Stock.
Pending Dispositions. The term "Pending Dispositions" shall
mean, collectively, (i) the pending sale of KOLL-FM, operating in Little Rock,
Arkansas, and (ii) the pending sale of WYAK-FM and WMYB-FM, both operating in
Myrtle Beach, South Carolina.
Permitted Investments. The term "Permitted Investments" shall
mean (a) any Investment in the Corporation or any Subsidiary of the
Corporation; (b) any Investment in Cash
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Equivalents; (c) any Investment by the Corporation or any Subsidiary of the
Corporation in a Person, if after such Investment (i) such Person becomes a
Subsidiary of the Corporation or (ii) such Person is merged, consolidated or
amalgamated with or into, or transfers or conveys substantially all of its
assets to, or is liquidated into, the Corporation or a Subsidiary of the
Corporation; (d) any Restricted Investment made as a result of the receipt of
non-cash consideration from an Asset Sale that was made pursuant to and in
compliance with the Corporation's debt agreements; (e) obligations or shares of
Capital Stock received in connection with or as a result of a bankruptcy,
workout or reorganization of the issuer of such obligations or shares of
Capital Stock; (f) any Investment received involuntarily; (g) Investments in
any Person (other than an Affiliate of the Corporation that is not also a
Subsidiary of the Corporation) engaged in a Broadcast Business or an
Advertising Business which Investments have an aggregate Fair Market Value
(measured on the date each such Investment was made and without giving effect
to subsequent changes in value), when taken together with all other Investments
made pursuant to this clause (g) that are at the time outstanding, not to
exceed $20.0 million and (h) other Investments in any Person (other than an
Affiliate of the Corporation that is not also a Subsidiary of the Corporation)
having an aggregate Fair Market Value (measured on the date each such
Investment was made and without giving effect to subsequent changes in value),
when taken together with all other Investments made pursuant to this clause (h)
that are at the time outstanding, not to exceed $15.0 million.
Permitted Liens. The term "Permitted Liens" shall mean (i)
Liens securing Senior Debt of the Corporation or securing Indebtedness of any
Subsidiary that, in either case, was permitted by the terms of the Exchange
Indenture to be incurred; (ii) Liens in favor of the Corporation; (iii) Liens
on property of a Person existing at the time such Person is merged into or
consolidated with the Corporation or any Subsidiary of the Corporation;
provided that such Liens were in existence prior to the contemplation of such
merger or consolidation and do not extend to any assets other than those of the
Person merged into or consolidated with the Corporation; (iv) Liens on property
existing at the time of acquisition thereof by the Corporation or any
Subsidiary of the Corporation, provided that such Liens were in existence prior
to the contemplation of such acquisition and do not extend to any assets other
than such assets so acquired; (v) Liens existing on the Initial Issue Date;
(vi) Liens for taxes, assessments or governmental charges or claims that are
not yet delinquent or that are being contested in good faith by appropriate
proceedings promptly instituted and diligently concluded, provided that any
reserve or other appropriate provision as shall be required in conformity with
GAAP shall have been made therefor; and (vii) Liens incurred in the ordinary
course of business of the Corporation or any Subsidiary of the Corporation with
respect to obligations that do not exceed $10.0 million at any one time
outstanding and that (a) are not incurred in connection with the borrowing of
money or the obtaining of advances or credit (other than trade credit in the
ordinary course of business) and (b) do not in the aggregate materially detract
from the value of the property or materially impair the use thereof in the
operation of business by the Corporation or such Subsidiary.
Permitted Refinancing Debt. The term "Permitted Refinancing
Debt" shall mean any Indebtedness of the Corporation or any of its Subsidiaries
issued in exchange for, or the net proceeds
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of which are used to extend, refinance, renew, replace, defease or refund other
Indebtedness of the Corporation or any of its Subsidiaries; provided that: (i)
the principal amount (or accreted value, if applicable) of such Permitted
Refinancing Indebtedness does not exceed the principal amount (or accreted
value, if applicable) of the Indebtedness so extended, refinanced, renewed,
replaced, defeased or refunded (plus the amount of reasonable expenses incurred
in connection therewith); (ii) such Permitted Refinancing Debt has a final
maturity date later than the final maturity date of, and has a Weighted Average
Life to Maturity equal to or greater than the Weighted Average Life to Maturity
of, the Indebtedness being extended, refinanced, renewed, replaced, defeased or
refunded; (iii) if the Indebtedness being extended, refinanced, renewed,
replaced, defeased or refunded is subordinated in right of payment to the
Exchange Debentures, such Permitted Refinancing Debt has a final maturity date
later than the final maturity date of, and is subordinated in right of payment
to, the Exchange Debentures on terms at least as favorable to the Holders of
Exchange Debenture as those contained in the documentation governing the
Indebtedness being extended, refinanced, renewed, replaced, defeased or
refunded; and (iv) such Permitted Refinancing Debt is incurred either by the
Corporation or by the Subsidiary who was the obligor on the Indebtedness being
extended, refinanced, renewed, replaced, defeased or refunded.
Preferred Stock. The term "Preferred Stock," of any Person,
shall mean Capital Stock of such Person of any class or series (however
designated) that ranks prior, as to payment of dividends or as to the
distribution of assets upon any voluntary or involuntary liquidation,
dissolution or winding up of such Person, to shares of Capital Stock of any
other class or series of such Person.
Principal. The term "Principal" shall mean Robert F.X.
Sillerman.
Record Date. The term "Record Date" shall have the meaning
set forth in Section 2(a) below.
Redemption Date. The term "Redemption Date" shall have the
meaning set forth in Section 4(e) below.
Related Party. The term "Related Party" with respect to the
Principal shall mean (A) any spouse or immediate family member (in the case of
an individual) of the Principal or (B) any trust, corporation, partnership or
other entity, the beneficiaries, stockholders, partners, owners or persons (as
defined in "Change of Control") beneficially holding an 80% or more controlling
interest of which consist of the Principal and/or such other persons referred
to in the immediately preceding clause (A).
Restricted Investments. The term "Restricted Investment"
shall mean an Investment other than a Permitted Investment.
SBI Merger. The term "SBI Merger" shall mean a merger of SBI
Radio Acquisition
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Corporation into the Corporation pursuant to the Merger Agreement.
SCMC. The term "SCMC" shall mean Sillerman Communications
Management Corporation, a Delaware corporation.
Securities Act. The term "Securities Act" shall mean the
Securities Act of 1933, as amended.
Senior Securities. The term "Senior Securities" shall mean
(i) the Series D Preferred Stock and (ii) any class or series of stock of the
Corporation authorized after the Initial Issue Date ranking senior to the
Series E Preferred Stock in respect of the right to receive dividends and in
respect of the right to participate in any distribution upon liquidation,
dissolution or winding up of the affairs of the Corporation.
Series D Exchange Notes. The term "Series D Exchange Notes"
shall mean the Corporation's 6 1/2% Subordinated Convertible Exchange Notes due
2007 issuable in exchange for the Corporation's Series D Preferred Stock.
Series D Exchange Note Indenture. The term "Series D Exchange
Note Indenture" shall mean the indenture governing the Corporation's 6 1/2%
Subordinated Convertible Exchange Notes due 2007 issuable in exchange for the
Corporation's Series D Preferred Stock.
Series D Preferred Stock. The term Series D Preferred Stock
shall mean the Corporation's 6 1/2 Series D Cumulative Convertible Exchangeable
Preferred Stock due May 31, 2007.
SFX Entertainment. The term "SFX Entertainment" shall mean
SFX Entertainment, Inc., a subsidiary of the Corporation, newly formed in
Delaware, to which the Corporation will contribute cash and all of the capital
stock of SFX Concerts, Inc. (formerly known as Delsener/Slater Enterprises,
Inc.) that the Corporation directly or indirectly owns.
SFX Merger Company. The term "SFX Merger Company" shall mean
SFX Merger Company, a Delaware corporation.
Shared Facilities Agreement. The term "Shared Facilities
Agreement" shall mean the Shared Facilities Agreement between the Corporation
and SCMC, as in effect on the Initial Issue Date.
Significant Subsidiary. The term "Significant Subsidiary"
shall mean any Subsidiary that would be a "significant subsidiary" as defined
in Article 1, Rule 1-02 of Regulation S-X, promulgated pursuant to the
Securities Act, as such Regulation is in effect on the date hereof.
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Spin-Off. The term "Spin-Off" shall mean the distribution of
SFX Entertainment common stock pro rata to the holders of Class A Common Stock
and the Class B Common Stock (and the transfer to an escrow account for
delivery to the holders of certain warrants to receive Class A Common Stock) or
other disposition pursuant to, or as permitted by, the Merger Agreement of all
of the capital stock and assets of the Entertainment Companies.
Spin-Off Transactions. The term "Spin-Off Transactions" shall
mean the Spin-Off, the Pending Acquisitions and the Merger Agreement as it
relates to the transactions described or referred to under the "Proposed
Amendments" and "Spin-Off" sections of the Consent Solicitation Statement of
the Corporation dated January 7, 1998, as supplemented by Supplement No. 1
thereto dated January 28, 1998, relating to this Certificate of Designations.
Subsidiary. The term "Subsidiary" shall mean, with respect to
any person, (i) any corporation, association or other business entity of which
more than 50% of the total voting power of shares of Voting Stock thereof is at
the time owned or controlled, directly or indirectly, by such person or one or
more of the other Subsidiaries of that person (or a combination thereof) and
(ii) any partnership (a) the sole general partner or the managing general
partner of which is such person or a Subsidiary of such person or (b) the only
general partners of which are such person or of one or more Subsidiaries of
such person (or any combination thereof); however, with respect to the
Corporation, "Subsidiary" does not include the Entertainment Companies.
Transfer Agent. The term "Transfer Agent" shall mean the
entity designated from time to time by the Corporation to act as the registrar
and transfer agent for the Series E Preferred Stock.
Voting Stock. The term "Voting Stock" shall mean with respect
to any specified Person, Capital Stock with voting power, under ordinary
circumstances and without regard to the occurrence of any contingency, to elect
the directors or other managers or trustees of such Person.
Voting Rights Trigger Event. The term "Voting Rights Trigger
Event" shall have the meaning set forth in Section 6(b) below.
Weighted Average Life to Maturity. The term "Weighted Average
Life to Maturity" shall mean, when applied to any Indebtedness at any date, the
number of years obtained by dividing (i) the sum of the products obtained by
multiplying (a) the amount of each then remaining installment, sinking fund,
serial maturity or other required payments of principal, including payment at
final maturity, in respect thereof, by (b) the number of years (calculated to
the nearest one-twelfth) that will elapse between such date and the making of
such payment, by (ii) the then outstanding principal amount of such
Indebtedness.
Wholly Owned Subsidiary. The term "Wholly Owned Subsidiary"
of any Person means a Subsidiary of such Person all of the outstanding Capital
Stock or other ownership interests
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of which (other than directors' qualifying shares) shall at the time be owned
by such Person or by one or more Wholly Owned Subsidiaries of such Person and
one or more Wholly Owned Subsidiaries of such Person.
2. Dividends.
(a) The Holders of shares of the Series E Preferred Stock
shall be entitled to receive, when, as and if dividends are declared by the
Board of Directors out of funds of the Corporation legally available therefor,
cumulative preferential dividends from the date such shares of Series E
Preferred Stock are issued accruing at the rate per share of $12.625 per annum,
payable semi-annually in arrears on January 15 and July 15 in each year or, if
any such date is not a Business Day, on the next succeeding Business Day (each,
a "Dividend Payment Date"), to the Holders of record as of the next preceding
January 1 and July 1 (each, a "Record Date"). Dividends will be payable in
cash, except that on each Dividend Payment Date occurring on or prior to
January 15, 2002, dividends may be paid, at the Corporation's option, by the
issuance of additional shares of Series E Preferred Stock (including fractional
shares) having a aggregate Liquidation Preference equal to the amount of such
dividends. The first dividend payment will be payable on July 15, 1997.
Dividends payable on the Series E Preferred Stock will be computed on the basis
of a 360-day year of twelve 30-day months and will be deemed to accrue on a
daily basis.
(b) Dividends on the Series E Preferred Stock shall accrue
whether or not the Corporation has earnings or profits, whether or not there
are funds legally available for the payment of such dividends and whether or
not dividends are declared. Dividends will accumulate to the extent they are
not paid on the Dividend Payment Date for the period to which they relate.
Accumulated unpaid dividends will bear interest at the rate of 12 5/8% per
annum. The Corporation shall take all actions required or permitted under
Delaware law to permit the payment of dividends on the Series E Preferred
Stock.
(c) No dividend whatsoever shall be declared or paid upon, or
any sum set apart for the payment of dividends upon, any outstanding Series E
Preferred Stock with respect to any dividend period unless all dividends for
all preceding dividend periods have been declared and paid upon, or declared
and a sufficient sum set apart for the payment of such dividend upon, all
outstanding shares of Series E Preferred Stock. Unless full cumulative
dividends on all outstanding shares of Series E Preferred Stock due for all
past dividend periods shall have been declared and paid, or declared and a
sufficient sum for the payment thereof set apart, then: (i) no dividend (other
than a dividend payable solely in shares of any Junior Securities) shall be
declared or paid upon, or any sum set apart for the payment of dividends upon,
any shares of Junior Securities; (ii) no other distribution shall be made upon
or any sum set apart for the payment of any distribution upon, any shares of
Junior Securities; (iii) no shares of Junior Securities shall be purchased,
redeemed or otherwise acquired or retired for value (excluding an exchange for
shares of other Junior Securities) by the Corporation or any of its
Subsidiaries; and (iv) no monies shall be paid into or set apart or made
available for a sinking or other like fund for the purchase, redemption or
other acquisition or
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retirement for value of any shares of Junior Securities by the Corporation or
any of its Subsidiaries. Holders of the Series E Preferred Stock will not be
entitled to any dividends, whether payable in cash, property or stock, in
excess of the full cumulative dividends as herein described.
3. Distributions Upon Liquidation, Dissolution or Winding Up.
Upon any voluntary or involuntary liquidation, dissolution or winding
up of the affairs of the Corporation or reduction or decrease in its capital
stock resulting in a distribution of assets to the holders of any class or
series of the Corporation's Capital Stock (a "reduction or decrease in capital
stock"), each Holder of shares of the Series E Preferred Stock shall be
entitled to payment out of the assets of the Corporation available for
distribution of an amount equal to the Liquidation Preference per share of
Series E Preferred Stock held by such Holder, plus accrued and unpaid dividends
to the date fixed for liquidation, dissolution, winding up or reduction or
decrease in capital stock, before any distribution is made on any Junior
Securities, including, without limitation, Common Equity of the Corporation.
After payment in full of the Liquidation Preference and all accrued dividends
to which Holders of Series E Preferred Stock are entitled, such Holders will
not be entitled to any further participation in any distribution of assets of
the Corporation. However, neither the voluntary sale, conveyance, exchange or
transfer (for cash, shares of stock, securities or other consideration) of all
or substantially all of the property or assets of the Corporation nor the
consolidation or merger of the Corporation with or into one or more
corporations will be deemed to be a voluntary or involuntary liquidation,
dissolution or winding up of the Corporation or reduction or decrease in
capital stock, unless such sale, conveyance, exchange or transfer shall be in
connection with a liquidation, dissolution or winding up of the business of the
Corporation or reduction or decrease in capital stock.
4. Redemption by the Corporation
(a) On October 31, 2006 (the "Mandatory Redemption Date"),
the Corporation shall redeem (subject to the legal availability of funds
therefor) all outstanding shares of Series E Preferred Stock at a price in cash
equal to the Liquidation Preference thereof, plus accrued and unpaid dividends
to the date of redemption.
(b) Subject to Section 4(c) below, the Series E Preferred
Stock may not be redeemed at the option of the Corporation prior to January 15,
2002. The Series E Preferred Stock may be redeemed, in whole or in part, at the
option of the Corporation on or after January 15, 2002, at the Applicable
Redemption Price.
(c) In addition, prior to January 15, 2000, the Corporation
may, at its option, redeem up to 50% of the aggregate of (i) the Liquidation
Preference of the Series E Preferred Stock issued (whether initially issued or
issued in lieu of cash dividends) less the Liquidation Preference of Series E
Preferred Stock exchanged for Exchange Debentures and (ii) the principal amount
of Exchange Debentures issued (whether issued in exchange for Series E
Preferred Stock or in lieu of
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cash interest), with the net proceeds of one or more Common Equity offerings
received on or after the date of original issuance of the Series E Preferred
Stock at a redemption price of 112.625% of the Liquidation Preference or
principal amount, as the case may be, plus accumulated and unpaid dividends in
the case of Series E Preferred Stock and accrued and unpaid interest in the
case of Exchange Debentures; provided, that after any such redemption, if any
Series E Preferred Stock or Exchange Debentures remain outstanding, at least
$50 million in Liquidation Preference or principal amount, as applicable, of
the Series E Preferred Stock or Exchange Debentures, as the case may be, remain
outstanding; and provided further, that any such redemption shall occur within
75 days of the date of closing of such offering of Common Equity of the
Corporation.
(d) In case of redemption of less than all of the shares of
Series E Preferred Stock at the time outstanding, the shares to be redeemed
shall be selected pro rata or by lot as determined by the Corporation in its
sole discretion.
(e) Notice of any redemption shall be sent by or on behalf of
the Corporation not more than 60 days nor less than 30 days prior to the date
specified for redemption in such notice (including the Mandatory Redemption
Date, the "Redemption Date"), by first class mail, postage prepaid, to all
Holders of record of the Series E Preferred Stock at their respective last
addresses as they shall appear on the books of the Corporation; provided,
however, that no failure to give such notice or any defect therein or in the
mailing thereof shall affect the validity of the proceedings for the redemption
of any shares of Series E Preferred Stock except as to the Holder to whom the
Corporation has failed to give notice or except as to the Holder to whom notice
was defective. In addition to any information required by law or by the
applicable rules of any exchange upon which Series E Preferred Stock may be
listed or admitted to trading, such notice shall state: (i) the paragraph of
this Certificate of Designations pursuant to which the redemption is made; (ii)
the Redemption Date; (iii) the Applicable Redemption Price; (iv) the number of
shares of Series E Preferred to be redeemed and, if less than all shares held
by such Holder are to be redeemed, the number of such shares to be redeemed;
(v) the place or places where certificates for such shares are to be
surrendered for payment of the Applicable Redemption Price, including any
procedures applicable to redemptions to be accomplished through book-entry
transfers; and (vi) that dividends on the shares to be redeemed will cease to
accrue on the Redemption Date. Upon the mailing of any such notice of
redemption, the Corporation shall become obligated to redeem at the time of
redemption specified thereon all shares called for redemption.
(f) If notice has been mailed in accordance with Section 4(e)
above and provided that on or before the Redemption Date specified in such
notice, all funds necessary for such redemption shall have been set aside by
the Corporation, separate and apart from its other funds in trust for the pro
rata benefit of the Holders of the shares so called for redemption, so as to
be, and to continue to be available therefor, then, from and after the
Redemption Date, dividends on the shares of the Series E Preferred Stock so
called for redemption shall cease to accrue, and said shares shall no longer be
deemed to be outstanding and shall not have the status of shares of Series E
Preferred Stock, and all rights of the Holders thereof as stockholders of the
Corporation (except the
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right to receive from the Corporation the Applicable Redemption Price) shall
cease. Upon surrender, in accordance with said notice, of the certificates for
any shares so redeemed (properly endorsed or assigned for transfer, if the
Corporation shall so require and the notice shall so state), such shares shall
be redeemed by the Corporation at the Applicable Redemption Price. In case
fewer than all the shares represented by any such certificate are redeemed, a
new certificate or certificates shall be issued representing the unredeemed
shares without cost to the Holder thereof.
(g) Any funds deposited with a bank or trust company for the
purpose of redeeming Series E Preferred Stock shall be irrevocable except that:
(i) the Corporation shall be entitled to receive
from such bank or trust company the interest or other earnings, if any, earned
on any money so deposited in trust, and the Holders of any shares redeemed
shall have no claim to such interest or other earnings; and
(ii) any balance of monies so deposited by the
Corporation and unclaimed by the Holders of the Series E Preferred Stock
entitled thereto at the expiration of two years from the applicable Redemption
Date shall be repaid, together with any interest or other earnings earned
thereon, to the Corporation, and after any such repayment, the Holders of the
shares entitled to the funds so repaid to the Corporation shall look only to
the Corporation for payment without interest or other earnings.
(h) No Series E Preferred Stock may be redeemed except with
funds legally available for the purpose. The Corporation shall take all actions
required or permitted under Delaware Law to permit any such redemption.
(i) Notwithstanding the foregoing provisions of this Section
4, unless the full cumulative dividends on all outstanding shares of Series E
Preferred Stock shall have been paid or contemporaneously are declared and paid
for all past dividend periods, none of the shares of Series E Preferred Stock
shall be redeemed unless all outstanding shares of Series E Preferred Stock are
simultaneously redeemed.
(j) All shares of Series E Preferred Stock redeemed pursuant
to this Section 4 shall be restored to the status of authorized and unissued
shares of preferred stock, without designation as to series and may thereafter
be reissued as shares of any series of preferred stock other than shares of
Series E Preferred Stock.
5. Exchange.
(a) The Corporation may, at its option on any Dividend
Payment Date, exchange, in whole or in part, on a pro rata basis, the then
outstanding Series E Preferred Stock for Exchange Debentures; provided that
immediately after giving effect to any partial exchange, there shall be
outstanding Series E Preferred Stock with an aggregate liquidation preference
of not less than $50.0
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million and not less than $50.0 million in aggregate principal amount of
Exchange Debentures; and, provided further, that (i) on the date of such
exchange there are no accumulated and unpaid dividends on the Series E
Preferred Stock (including the dividend payable on such date) or other
contractual impediments to such exchange; (ii) there shall be legally available
funds sufficient therefor; (iii) such exchange would be permitted under the
terms of the Series D Preferred Stock, to the extent then outstanding, and,
immediately after giving effect to such exchange, no Default or Event of
Default (each as defined in the Exchange Indenture) would exist under the
Exchange Indenture, no default or event of default would exist under the Credit
Agreement, the New Note Indenture or the Series D Exchange Note Indenture and
no default or event of default under any material instrument governing
Indebtedness outstanding at the time would be caused thereby; (iv) the Exchange
Indenture has been qualified under the Trust Indenture Act, if such
qualification is required at the time of exchange; and (v) the Corporation
shall have delivered a written opinion to the Trustee (as defined herein) to
the effect that all conditions to be satisfied prior to such exchange have been
satisfied.
(b) The Exchange Debentures shall be issuable in all
appropriate denominations. Notice of the intention to exchange shall be sent by
or on behalf of the Corporation not more than 60 days nor less than 30 days
prior to the date fixed for the exchange (the "Exchange Date"), by first class
mail, postage prepaid, to each Holder of record of Series E Preferred Stock at
its respective last addresses as they shall appear on the books of the
Corporation; provided, however, that no failure to give such notice or any
defect therein or in the mailing thereof shall affect the validity of the
proceedings for the exchange of any shares of Series E Preferred Stock except
as to the Holder to whom the Corporation has failed to give notice or except as
to the Holder to whom notice was defective. In addition to any information
required by law or by the applicable rules of any exchange upon which Series E
Preferred Stock may be listed or admitted to trading, such notice shall state:
(i) the Exchange Date; (ii) the place or places where certificates for such
shares are to be surrendered for exchange, including any procedures applicable
to exchanges to be accomplished through book-entry transfers; and (iii) that
dividends on the shares of Series E Preferred Stock to be exchanged will cease
to accrue on the Exchange Date. Prior to giving the notice of intention to
exchange, the Corporation shall execute and deliver with a bank or trust
company (the "Trustee"), with capital, surplus and undivided profits of not
less than $100,000,000, selected by the Corporation, and qualify under the
Trust Indenture Act of 1939, as amended, the Exchange Indenture with such
changes as would not adversely affect any of the voting powers, preferences and
relative, participating, optional and other special rights of any holders of
Series E Preferred Stock as may be required by law or usage.
(c) A Holder delivering Series E Preferred Stock for exchange
will not be required to pay any taxes or duties in respect of the issue or
delivery of Exchange Debentures on exchange but will be required to pay any tax
or duty that may be payable in respect of any transfer involved in the issue or
delivery of the Exchange Debentures in a name other than that of the Holder of
the Series E Preferred Stock. Certificates representing Exchange Debentures
will not be issued or delivered unless all taxes and duties, if any, payable by
the Holder have been paid.
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(d) If notice of any exchange has been properly given, and if
on or before the Exchange Date the Exchange Debentures have been duly executed
and authenticated and an amount in cash equal to all accrued and unpaid
dividends thereon to the Exchange Date has been deposited with the Transfer
Agent, then on or after the close of business on the Exchange Date, the shares
of Series E Preferred to be exchanged will no longer be deemed to be
outstanding and may thereafter be issued in the same manner as the other
authorized but unissued preferred stock, but not as Series E Preferred Stock,
and all rights of the Holders thereof as stockholders of the Corporation will
cease, except the right of the Holders to receive upon surrender of their
certificates the Exchange Debentures and all accrued and unpaid dividends
thereon to the Exchange Date.
(e) As a condition to the exercise of the exchange rights
described in this Section 5, the Corporation shall deliver an opinion to the
Trustee as to the due authorization, execution, delivery and enforceability of
both the Exchange Debentures and the Exchange Debenture Indenture.
6. Voting Rights.
(a) The Holders of record of shares of Series E Preferred
Stock shall not be entitled to any voting rights except as hereinafter provided
in this Section 6 or as otherwise provided by law.
(b) If and upon:
(i) the accumulation of accrued and unpaid dividends
on the outstanding Series E Preferred Stock in an amount equal to
three (3) full semi-annual dividends (whether or not consecutive);
(ii) the failure of the Corporation to satisfy any
mandatory redemption or repurchase obligation (including, without
limitation, pursuant to any required Change of Control Offer) with
respect to the Series E Preferred Stock;
(iii) the failure of the Corporation to make a
Change of Control Offer on the terms and in accordance with the
provisions described below in Section 7 hereof;
(vi) the failure of the Corporation to comply with
any of the other covenants or agreements set forth in this Certificate
of Designations and the continuance of such failure for 60 consecutive
days or more; or
(v) default under any mortgage, indenture or
instrument under which there may be issued or by which there may be
secured or evidenced any Indebtedness for money borrowed by the
Corporation or any of its Subsidiaries (or the payment of which is
guaranteed by the Corporation or any of its Subsidiaries) whether such
Indebtedness or guarantee now exists, or is created after the Initial
Issue Date, which default (i) is caused by
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a failure to pay principal of or premium, if any, or interest on such
Indebtedness prior to the expiration of the grace period provided in
such Indebtedness on the date of such default (a "Payment Default") or
(ii) results in the acceleration of such Indebtedness prior to its
express maturity and, in each case, the principal amount of any such
Indebtedness, together with the principal amount of any other such
Indebtedness under which there has been a Payment Default or the
maturity of which has been so accelerated, aggregates $25.0 million or
more (each of the events described in clauses 6(b)(i) through (v)
being referred to herein as a "Voting Rights Trigger Event");
then the authorized number of members of the Corporation's Board of Directors
will be immediately and automatically increased by two, and the Holders of a
majority of the outstanding shares of Series E Preferred Stock, voting
separately as a class, shall be entitled to elect two directors of the
Corporation.
(c) Whenever such voting right shall have vested, such right
may be exercised initially either at a special meeting of the Holders of Series
E Preferred Stock, called as hereinafter provided, or at any annual meeting of
stockholders held for the purpose of electing directors, and thereafter at such
annual meetings or by the written consent of the Holders of Series E Preferred
Stock. Such right of the Holders of Series E Preferred Stock to elect directors
may be exercised until (i) all dividends in arrears shall have been paid in
full and (ii) all other Voting Rights Trigger Events have been cured or waived,
at which time the right of the Holders of Series E Preferred Stock to elect
such number of directors shall cease, the term of such directors previously
elected shall thereupon terminate, and the authorized number of directors of
the Corporation shall thereupon return to the number of authorized directors
otherwise in effect, but subject always to the same provisions for the renewal
and divestment of such special voting rights in the case of any such future
dividend default or defaults or any such failure to make redemption payments.
(d) At any time when such voting right shall have vested in
the Holders of Series E Preferred Stock and if such right shall not already
have been initially exercised, a proper officer of the Corporation shall, upon
the written request of Holders of record of 10% or more of the Series E
Preferred Stock then outstanding, addressed to the Secretary of the
Corporation, call a special meeting of Holders of Series E Preferred Stock.
Such meeting shall be held at the earliest practicable date upon the notice
required for annual meetings of stockholders at the place for holding annual
meetings of stockholders of the Corporation or, if none, at a place designated
by the Secretary of the Corporation. If such meeting shall not be called by the
proper officers of the Corporation within 30 days after the personal service of
such written request upon the Secretary of the Corporation, or within 30 days
after mailing the same within the United States, by registered mail, addressed
to the Secretary of the Corporation at its principal office (such mailing to be
evidenced by the registry receipt issued by the postal authorities), then the
Holders of record of 10% of the shares of Series E Preferred Stock then
outstanding may designate in writing a Holder of Series E Preferred Stock to
call such meeting at the expense of the Corporation, and such meeting may be
called by such person so designated upon the notice required for annual
meetings of stockholders
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and shall be held at the place for holding annual meetings of the Corporation
or, if none, at a place designated by such Holder. Any Holder of Series E
Preferred Stock that would be entitled to vote at such meeting shall have
access to the stock books of the Corporation for the purpose of causing a
meeting of stockholders to be called pursuant to the provisions of this
Section. Notwithstanding the provisions of this paragraph, however, no such
special meeting shall be called if any such request is received less than 90
days before the date fixed for the next ensuing annual or special meeting of
stockholders.
(e) If the directors so elected by the Holders of Series E
Preferred Stock shall cease to serve as a director before his term shall
expire, the Holders of Series E Preferred Stock then outstanding may, at a
special meeting of the Holders called as provided above, elect a successor to
hold office for the unexpired term of the director whose place shall be vacant.
(f) The Corporation shall not, without the affirmative vote
or consent of the Holders of a majority of the then outstanding shares of
Series E Preferred Stock (with shares held by the Corporation or any of its
Affiliates not being considered to be outstanding for this purpose) amend or
otherwise alter its Certificate of Incorporation in any manner that adversely
affects the rights of Holders of Series E Preferred Stock.
(g) Without the consent of each Holder affected, an amendment
or waiver may not (with respect to any shares of Series E Preferred Stock held
by a non-consenting Holder):
(i) alter the voting rights with respect to the
Series E Preferred Stock or reduce the number of shares of Series E
Preferred Stock whose Holders must consent to an amendment, supplement
or waiver;
(ii) reduce the Liquidation Preference of or change
the Mandatory Redemption Date of any share of Series E Preferred Stock
or alter the provisions with respect to the redemption of the Series E
Preferred Stock (other than provisions relating to the covenant
described above in Section 7 hereof);
(iii) reduce the rate of or change the time for
payment of dividends on any share of Series E Preferred Stock;
(iv) waive a default or event of default in the
payment of dividends or on the Series E Preferred Stock;
(v) make any share of Series E Preferred Stock
payable in any form other than that stated in this Certificate of
Designations;
(vi) make any change in the provisions of this
Certificate of Designations relating to waivers of the rights of
Holders of Series E Preferred Stock to receive the
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Liquidation Preference, dividends on the Series E Preferred Stock;
(vii) waive a redemption payment with respect to any
share of Series E Preferred Stock (other than a payment required by
the covenant described above in Section 7 hereof); or
(viii) make any change in the foregoing amendment
and waiver provisions.
(h) The Corporation shall not, without the consent of at
least 662/3% of the then outstanding shares of Series E Preferred Stock (with
shares held by the Corporation or its Affiliates not being considered to be
outstanding for this purpose), authorize, create (by way of reclassification or
otherwise) or issue any Senior Securities or any obligation or security
convertible or exchangeable into or evidencing a right to purchase, shares of
any class or series of Senior Securities.
(i) In addition, any amendment to the provisions of Section 7
hereof (including the related definitions) will require the consent of the
Holders of at least 75% of the shares of Series E Preferred Stock then
outstanding (with shares held by the Corporation or its Affiliates not being
considered to be outstanding for this purpose) if such amendment would
adversely affect the rights of Holders of Series E Preferred Stock.
(j) The Corporation in its sole discretion may without the
vote or consent of any Holders of the Series E Preferred Stock amend or
supplement this Certificate of Designations:
(i) to cure any ambiguity, defect or inconsistency;
(ii) to provide for uncertificated Series E
Preferred Stock in addition to or in place of certificated Series E
Preferred Stock; or
(iii) to make any change that would provide any
additional rights or benefits to the Holders of the Series E Preferred
Stock or that does not adversely affect the legal rights or benefits
under this Certificate of Designations of any such Holder.
7. Change of Control.
(a) Upon the occurrence of a Change of Control, each Holder
of Series E Preferred Stock shall have the right to require the Corporation to
repurchase all or any part of such Holder's shares of Series E Preferred Stock
(a "Change of Control Offer") at an offer price in cash equal to 101% of the
aggregate Liquidation Preference thereof plus accrued and unpaid dividends, if
any, thereon to the date of purchase (the "Change of Control Payment").
(b) The Change of Control Offer shall include all
instructions and materials necessary to enable Holders to tender their shares
of Series E Preferred Stock.
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(c) The Corporation shall comply with the requirements of
Rule 14e-1 under the Exchange Act and any other securities laws and regulations
thereunder to the extent such laws and regulations are applicable in connection
with the repurchase of the shares of Series E Preferred Stock as a result of a
Change of Control.
(d) Within 30 days following any Change of Control, the
Corporation shall mail a notice to each Holder stating:
(i) that the Change of Control Offer is being made
pursuant to this Section 7 and that all shares of Series E Preferred
Stock tendered will be accepted for payment;
(ii) the purchase price and the purchase date, which
shall be no earlier than 30 days nor later than 60 days from the date
such notice is mailed (the "Change of Control Payment Date");
(iii) that any share of Series E Preferred Stock not
tendered will continue to accrue dividends;
(iv) that, unless the Corporation fails to pay the
Change of Control Payment, all shares of Series E Preferred Stock
accepted for payment pursuant to the Change of Control Offer shall
cease to accrue dividends after the Change of Control Payment Date;
(v) that Holders electing to have any shares of
Series E Preferred Stock purchased pursuant to a Change of Control
Offer will be required to surrender the shares of Series E Preferred
Stock, with the form entitled "Option of Holder to Elect Purchase"
which shall be included with the Notice of Change of Control
completed, to the Paying Agent at the address specified in the notice
prior to the close of business on the third Business Day preceding the
Change of Control Payment Date;
(vi) that Holders will be entitled to withdraw their
election if the Paying Agent receives, not later than the close of
business on the second Business Day preceding the Change of Control
Payment Date, a telegram, telex, facsimile transmission or letter
setting forth the name of the Holder, the number of shares of Series E
Preferred Stock delivered for purchase, and a statement that such
Holder is withdrawing his election to have such shares purchased; and
(vii) the circumstances and relevant facts regarding
such Change of Control (including, but not limited to, information
with respect to pro forma historical financial information after
giving effect to such Change of Control and information regarding the
Person or Persons acquiring control).
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(e) On the Change of Control Payment Date, the Corporation
shall, to the extent lawful, (i) accept for payment all shares of Series E
Preferred Stock properly tendered pursuant to the Change of Control Offer, (ii)
deposit with the Paying Agent an amount equal to the Change of Control Payment
in respect of all shares of Series E Preferred Stock so tendered and (iii)
deliver or cause to be delivered to the Transfer Agent shares of Series E
Preferred Stock so accepted together with an Officers' Certificate stating the
aggregate Liquidation Preference of the shares of Series E Preferred Stock or
portions thereof being purchased by the Corporation. The Paying Agent shall
promptly mail to each Holder of Series E Preferred Stock so tendered the Change
of Control Payment for such Series E Preferred Stock and the Transfer Agent
will promptly authenticate and mail (or cause to be transferred by book-entry)
to each Holder a new certificate representing the shares of Series E Preferred
Stock equal in Liquidation Preference amount to any unpurchased portion of the
shares of Series E Preferred Stock surrendered, if any. The Corporation shall
publicly announce the results of the Change of Control Offer on or as soon as
practicable after the Change of Control Payment Date.
(f) Prior to complying with the provisions of this Section 7,
but in any event within 90 days following a Change of Control, the Corporation
shall either repay all outstanding Indebtedness or obtain the requisite
consents, if any, under all agreements governing outstanding Indebtedness, in
each case to the extent required to permit the repurchase of Series E Preferred
Stock required by this Section 7. If the Corporation fails to make such
repayment or obtain such consents within such time period, it will result in a
Voting Rights Triggering Event, but the obligation to commence and consummate a
Change of Control Offer will be suspended until such repayment is made or such
consents are obtained. If such consents are not obtained, the Corporation will
not repurchase any Series E Preferred Stock until the 91st day following the
retirement of the New Notes. The Corporation will publicly announce the results
of the Change of Control Offer on or as soon as practicable after the Change of
Control Payment Date.
(g) The Corporation shall not be required to make a Change of
Control Offer upon a Change of Control if a third party makes the Change of
Control Offer in the manner, at the times and otherwise in compliance with the
requirements set forth in this Section 7 applicable to a Change of Control
Offer made by the Corporation and purchases all shares of Series E Preferred
Stock validly tendered and not withdrawn under such Change of Control Offer.
8. Certain Covenants
(a) Restricted Payments. The Corporation shall not, and shall
not permit any of its Subsidiaries to, directly or indirectly: (i) declare or
pay any dividend or make any other payment or distribution on account of the
Corporation's Parity Securities or Junior Securities (including, without
limitation, any payment in connection with any merger or consolidation
involving the Corporation) or to the direct or indirect holders of the
Corporation's Parity Securities or Junior Securities in their capacity as such
(other than dividends or distributions payable in Capital Stock (other than
Disqualified Stock) of the Corporation); (ii) purchase, redeem or otherwise
acquire or
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retire for value any Parity Securities or Junior Securities of the Corporation;
(iii) make any payment on, or purchase, redeem, defease or otherwise acquire or
retire for value any Junior Securities, except payments of the Liquidation
Preference thereof at final maturity; or (iv) make any Restricted Investment
(all such payments and other actions set forth in clauses (i) through (iv)
above being collectively referred to as "Restricted Payments"), unless, at the
time of and after giving effect to such Restricted Payment:
(a) no Voting Rights Triggering Event shall have occurred and
be continuing or would occur as a consequence thereof; and
(b) the Corporation would, at the time of such Restricted
Payment and after giving pro forma effect thereto as if such Restricted Payment
had been made at the beginning of the applicable four-quarter period, have been
permitted to incur at least $l.00 of additional Indebtedness (other than
Permitted Debt) pursuant to the Debt to Cash Flow Ratio test set forth below
under Section 8(b) hereof; and
(c) such Restricted Payment, together with the aggregate
amount of all other Restricted Payments declared or made after the Initial
Issue Date (other than Restricted Payments permitted by clauses (2), (5), (6),
(10), (13) or (14) of the following paragraph) shall not exceed, at the date of
determination, the sum of (1) an amount equal to the Corporation's Consolidated
Cash Flow from the Initial Issue Date to the end of the Corporation's most
recently ended full fiscal quarter for which internal financial statements are
available, taken as a single accounting period, less the product of 1.4 times
the Corporation's Consolidated Interest Expense from the Initial Issue Date to
the end of the Corporation's most recently ended full fiscal quarter for which
internal financial statements are available, taken as a single accounting
period, plus (2) an amount equal to the net cash proceeds received by the
Corporation from the issue or sale after the Initial Issue Date of Equity
Interests of the Corporation (other than (i) sales of Disqualified Stock and
(ii) Equity Interests sold to any of the Corporation's Subsidiaries) or of debt
securities or Disqualified Stock (other than the Series D Preferred Stock) of
the Corporation issued after the Initial Issue Date that have been converted
into such Equity Interests plus (3) to the extent that any Restricted
Investment that was made after the Initial Issue Date is sold for cash or
otherwise liquidated or repaid for cash, the lesser of (A) the cash return of
capital with respect to such Restricted Investment (less the cost of
disposition, if any) and (B) the initial amount of such Restricted Investment.
If no Voting Rights Triggering Event shall have occurred and be
continuing as a result thereof, the foregoing provisions will not prohibit: (1)
the payment of any dividend within 60 days after the date of declaration
thereof, if at said date of declaration such payment would have complied with
the provisions of this Certificate of Designations; (2) the redemption,
repurchase, retirement or other acquisition of any Equity interests of the
Corporation in exchange for, or out of the proceeds of, the substantially
concurrent sale (other than to a Subsidiary of the Corporation) of other Equity
Interests of the Corporation (other than any Disqualified Stock); provided that
the amount of any such net cash proceeds that are utilized for any such
redemption, repurchase, retirement or other
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acquisition shall be excluded from clause (c)(2) of the preceding paragraph;
(3) cash payments made in respect of fractional shares of Capital Stock not to
exceed $100,000 in the aggregate in any fiscal year; (4) the payment of
dividends on the shares of Series D Preferred Stock in accordance with the
terms thereof as in effect on the Initial Issue Date; (5) the issuance of
Series D Exchange Notes in exchange for the Series D Preferred Stock; provided
that such issuance is permitted by Section 8(b) hereof; (6) the issuance of
Exchange Debentures in exchange for the Series E Preferred Stock; provided that
such issuance is permitted by Section 8(b) hereof; (7) in the event that the
Corporation elects to issue the Series D Exchange Notes in exchange for the
Series D Preferred Stock, cash payments made in lieu of the issuance of Series
D Exchange Notes having a face amount less than $50 and any cash payments
representing accrued and unpaid dividends in respect thereof, not to exceed
$100,000 in the aggregate in any fiscal year; (8) in the event that the
Corporation elects to issue Exchange Debentures in exchange for Series E
Preferred Stock, cash payments made in lieu of the issuance of Exchange
Debentures having a face amount less than $l,000 and any cash payments
representing accrued and unpaid dividends in respect thereof, not to exceed
$100,000 in the aggregate in any fiscal year; (9) payments made by the
Corporation to SCMC for facilities maintenance and other services and
reimbursements pursuant to the Shared Facilities Agreement, as amended from
time to time, to the extent that such payments do not exceed the amount of
payments which would have been due if calculated in accordance with the terms
of the Shared Facilities Agreement as in effect on the Initial Issue Date; (10)
payments by the Corporation pursuant to the Management Termination Agreements
in accordance with the terms thereof as in effect on the Initial Issue Date;
(11) the redemption by the Corporation of its Series C Preferred Stock in
accordance with the terms thereof as in effect on the Initial Issue Date; (12)
the redemption by the Corporation of its Series B Preferred Stock in accordance
with the terms thereof as in effect on the Initial Issue Date; provided that
payments made by the Corporation to redeem the Series B Preferred Stock shall
not exceed $1.0 million in any fiscal year or $2.0 million in the aggregate
since the Initial Issue Date; (13) the Spin-Off Transactions; and (14) the
Meadows Repurchase.
The amount of all Restricted Payments (other than cash) shall be the
Fair Market Value (evidenced by a resolution of the Board of Directors set
forth in an Officers' Certificate delivered to the Board of Directors) on the
date of the Restricted Payment of the asset(s) or securities proposed to be
transferred by the Corporation or such Subsidiary, as the case may be, pursuant
to the Restricted Payment. Not later than the date of making any Restricted
Payment, the Corporation shall deliver to the Board of Directors an Officers'
Certificate stating that such Restricted Payment is permitted and setting forth
the basis upon which the calculations required by this covenant were computed,
which calculations may be based upon the Corporation's latest available
financial statements.
(b) Incurrence of Indebtedness and Issuance of Preferred
Stock. The Corporation shall not, and shall not permit any of its Subsidiaries
to, directly or indirectly, create, incur, issue, assume, guarantee or
otherwise become directly or indirectly liable, contingently or otherwise, with
respect to (collectively, "incur") any Indebtedness (including Acquired Debt)
and that the Corporation will not issue any Disqualified Stock and will not
permit any of its Subsidiaries to issue
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any shares of Preferred Stock; provided, however, that (i) the Corporation may
incur Indebtedness (including Acquired Debt) or issue shares of Disqualified
Stock and (ii) (A) the Subsidiaries may guarantee Senior Debt and (B) the
Subsidiaries may issue Preferred Stock other than Disqualified Stock if, in
either case, the Corporation's Debt to Cash Flow Ratio at the time of
incurrence of such Indebtedness or the issuance of such Disqualified Stock or
the Guarantee of such Senior Debt or the issuance of such Preferred Stock, as
the case may be, after giving pro forma effect to such incurrence or issuance
or Guarantee as of such date and to the use of proceeds therefrom as if the
same had occurred at the beginning of the most recently ended four full fiscal
quarter period of the Corporation for which internal financial statements are
available, would have been no greater than 7.0 to 1. The foregoing provisions
will not apply to the incurrence of any of the following Indebtedness
(collectively, "Permitted Debt"):
(i) the incurrence by the Corporation and its
Subsidiaries of Indebtedness pursuant to one or more Bank Facilities, so long
as the aggregate principal amount of all Indebtedness outstanding under all
Bank Facilities does not, at the time of incurrence, exceed an amount equal to
$225.0 million;
(ii) the incurrence by the Corporation and its
Subsidiaries of the Existing Indebtedness;
(iii) Indebtedness under the Exchange Debentures;
(iv) the issuance of Disqualified Stock by the
Corporation that by its items
would not require or permit any payment of dividends or other distributions
that would violate the covenant Section 8(a) above;
(v) the incurrence by the Corporation or any of its
Subsidiaries of Indebtedness in connection with the acquisition of assets or a
new Subsidiary; provided that such Indebtedness was incurred by the prior owner
of such assets or such Subsidiary prior to such acquisition by the Corporation
or one of its Subsidiaries and was not incurred in connection with, or in
contemplation of, such acquisition by the Corporation or one of its
Subsidiaries; and provided further that, after giving pro forma effect to such
incurrence of Indebtedness as of such date and to the use of proceeds therefrom
as if the same had occurred at the beginning of the most recently ended four
full fiscal quarter period for which internal financial statements are
available, the Corporation's Debt to Cash Flow Ratio would have been no greater
than 7.0 to 1.
(vi) the incurrence by the Corporation or any of its
Subsidiaries of Permitted Refinancing Debt in exchange for, or the net proceeds
of which are used to extend, refinance, renew, replace, defease or refund,
Indebtedness that was permitted by this Certificate of Designations to be
incurred;
(vii) the incurrence by the Corporation or any of
its Subsidiaries of
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intercompany Indebtedness between or among the Corporation and any of its
Subsidiaries; provided, however, that (i) if the Corporation is the obligor on
such Indebtedness, such Indebtedness is expressly subordinate to the payment in
full of all Obligations with respect to the Exchange Debentures and (ii)(A) any
subsequent issuance or transfer of Equity Interests that results in any such
Indebtedness being held by a Person other than the Corporation or a Subsidiary
and (B) any sale or other transfer of any such Indebtedness to a Person that is
not either the Corporation or a Subsidiary shall be deemed, in each case, to
constitute an incurrence of such Indebtedness by the Corporation or such
Subsidiary, as the case may be;
(viii) the incurrence by the Corporation or any of
its Subsidiaries of Hedging Obligations that are incurred for the purpose of
fixing or hedging interest rate risk with respect to any floating rate
Indebtedness that is permitted by the terms of this Certificate of Designations
to be outstanding; and
(ix) the incurrence by the Corporation and any of
its Subsidiaries of Indebtedness (in addition to Indebtedness permitted by any
other clause of this paragraph) in an aggregate principal amount (or accreted
value, as applicable) at any time outstanding not to exceed $10.0 million.
(c) Merger, Consolidation or Sale of Assets. The Corporation
shall not consolidate or merge with or into (whether or not the Corporation is
the surviving corporation), or sell, assign, transfer, lease, convey or
otherwise dispose of all or substantially all of its properties or assets in
one or more related transactions, to another corporation, Person or entity
unless (i) the Corporation is the surviving corporation or the entity or the
Person formed by or surviving any such consolidation or merger (if other than
the Corporation) or to which such sale, assignment, transfer, lease, conveyance
or other disposition shall have been made is a corporation organized or
existing under the laws of the United States, any states, any state thereof or
the District of Columbia; (ii) the Series E Preferred Stock shall be converted
into or exchanged for and shall become shares of such successor, transferee or
resulting Person, having in respect of such successor, transferee or resulting
Person the same powers, preferences and relative participating, optional or
other special rights and the qualifications, limitations or restrictions
thereon, that the Series E Preferred Stock had immediately prior to such
transaction; (iii) immediately after such transaction no Voting Rights
Triggering Event exists; (iv) such transaction will not result in the loss or
suspension or material impairment of any Material Broadcast License; and (v)
except in the case of a merger of the Corporation with or into a Wholly Owned
Subsidiary of the Corporation, the Corporation or the entity or Person formed
by or surviving any such consolidation or merger (if other than the
Corporation), or to which such sale, assignment, transfer, lease, conveyance or
other disposition shall have been made (A) will have Consolidated Net Worth
immediately after the transaction equal to or greater than the Consolidated Net
Worth of the Corporation immediately preceding the transaction and (B) will, at
the time of such transaction and after giving pro forma effect thereto as if
such transaction had occurred at the beginning of the applicable four-quarter
period, be permitted to incur at least $1.00 of additional Indebtedness
pursuant to the Debt to Cash Flow Ratio test set forth in
32
<PAGE>
Section 8(b) hereof.
(d) Transactions with Affiliates. The Corporation shall not,
and shall not permit any of its Subsidiaries to, make any payment to, or sell,
lease, transfer or otherwise dispose of any of its properties or assets to, or
purchase any property or assets from, or enter into or make or amend any
contract, agreement, understanding, loan, advance or guarantee with, or for the
benefit of, any Affiliate (each of the foregoing, an "Affiliate Transaction"),
unless (i) such Affiliate Transaction is on terms that are no less favorable to
the Corporation or the relevant Subsidiary than those that would have been
obtained in a comparable transaction by the Corporation or such Subsidiary with
an unrelated Person and (ii) the Corporation delivers to the Holders (a) with
respect to any Affiliate Transaction or series of related Affiliate
Transactions involving aggregate consideration in excess of $1.0 million, a
resolution of the Board of Directors set forth in an Officers' Certificate
certifying that such Affiliate Transaction complies with clause (i) above and
that such Affiliate Transaction has been approved by a majority of the members
of the Board of Directors that are disinterested as to such Affiliate
Transaction and (b) with respect to any Affiliate Transaction or series of
related Affiliate Transactions involving aggregate consideration in excess of
$5.0 million, an opinion as to the fairness to the Holders of such Affiliate
Transaction from a financial point of view issued by an accounting, appraisal
or investment banking firm of national standing; provided that (1) transactions
between or among the Corporation and/or its Wholly-Owned Subsidiaries, (2) the
redemption or repurchase of the Existing MMR Indebtedness, (3) transactions and
agreements specifically contemplated by the Termination and Assignment
Agreement between the Corporation and SCMC as in effect on the Initial Issue
Date, (4) payments required by the terms of the joint lease among the
Corporation, SCMC and the landlord thereunder for the Corporation's corporate
headquarters located at 650 Madison Avenue, New York, New York and any
agreements directly related thereto, in each case, as the same are in effect on
the Initial Issue Date, (5) payments made by the Corporation to SCMC for the
facilities maintenance and other services and reimbursements pursuant to the
Shared Facilities Agreement, (6) payments and other transactions by the
Corporation pursuant to the Management Termination Agreements, (7) any
Restricted Payments that are permitted by Section 8(a) hereof and any Permitted
Investments, (8) the transactions and agreements specifically contemplated by
the Merger Agreement, the Acquisition Agreements or by instruments referred to
in any such agreements and (9) any Spin-Off Transaction, in each case, shall
not be deemed to be Affiliate Transactions.
(e) Payments for Consent. Neither the Corporation nor any of
its Subsidiaries shall, directly or indirectly, pay or cause to be paid any
consideration, whether by way of dividend or other distribution, fee or
otherwise, to any Holder of any Series E Preferred Stock for or as an
inducement to any consent, waiver or amendment of any of the terms or
provisions of this Certificate of Designations or the Series E Preferred Stock
unless such consideration is offered to be paid and is paid to all Holders of
the Series E Preferred Stock that consent, waive or agree to amend in the time
frame set forth in the solicitation documents relating to such consent, waiver
or agreement.
33
<PAGE>
(f) Reports.
(i) Whether or not required by the rules and
regulations of the Securities and Exchange Commission (the "Commission"), so
long as any shares of Series E Preferred Stock are outstanding, the Corporation
shall furnish to the Holders of Series E Preferred Stock (i) all quarterly and
annual financial information that would be required to be contained in a filing
with the Commission on Forms 10-Q and 10-K if the Corporation were required to
file such Forms, including "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and, with respect to the annual
information only, a report thereon by the Corporation's certified independent
accountants and
(ii) all current reports that would be required to
be filed with the Commission on Form 8-K if the Corporation were required to
file such reports. In addition, whether or not required by the rules and
regulations of the Commission, the Corporation shall file a copy of all such
information and reports with the Commission for public availability (unless the
Commission will not accept such a filing) and make such information available
to securities analysts and prospective investors upon request.
(iii) The Corporation shall deliver to the Holders,
within 90 days after the end of each fiscal year, an Officers' Certificate
stating that a review of the activities of the Corporation and its Subsidiaries
during the preceding fiscal year has been made under the supervision of the
signing officers with a view to determining whether the Corporations has kept,
observed, performed and fulfilled its obligations under this Certificate of
Designations and further stating, as to each such officer signing such
certificate, that to the best of his or her knowledge the Corporation has kept,
observed, performed and fulfilled each and every covenant contained in this
Certificate of Designations and is not in default in the performance or
observance of any of the terms, provisions and conditions of this Certificate
of Designations (or, if any such default shall have occurred, describing all
such defaults of which he or she may have knowledge and what action the
Corporation is taking or proposes to take with respect thereto) and that to the
best of his or her knowledge no event has occurred and remains in existence by
reason of which payments on account of the Liquidation Preference of or
dividends, if any, on the Series E Preferred Stock is prohibited or if such
event has occurred, a description of the event and what action the Corporation
is taking or proposes to take with respect thereto.
(iv) So long as not contrary to the then current
recommendations of the American Institute of Certified Public Accountants, the
year-end financial statements delivered pursuant to Section 8(f)(i) above shall
be accompanied by a written statement of the Corporation's independent public
accountants (who shall be a firm of established national reputation) that in
making the examination necessary for certification of such financial
statements, nothing has come to their attention that would lead them to believe
that the Corporation has violated any provisions of this Certificate of
Designations or, if any such violation has occurred, specifying the nature and
period of existence thereof, it being understood that such accountants shall
not be liable directly or
34
<PAGE>
indirectly to any Person for any failure to obtain knowledge of any such
violation.
(v) The Corporation shall, so long as any of the
shares of Series E Preferred Stock are outstanding, deliver to the Holders,
forthwith upon any Executive Officer of the Corporation becoming aware of any
default under this Certificate of Designations, an Officers' Certificate
specifying such default and what action the Corporation is taking or proposes
to take with respect thereto.
(g) Conflicts with By-laws. If any provisions of the
Corporation's By-laws conflict in any way with this Certificate of
Designations, the Corporation shall, so long as any of the shares of Series E
Preferred Stock are outstanding, take all necessary actions to amend such
By-laws and thereby resolve the conflict.
9. Payment.
(a) All amounts payable in cash with respect to the Series E
Preferred Stock shall be payable in United States dollars at the office or
agency of the Corporation maintained for such purpose within the City and State
of New York or, at the option of the Corporation, payment of dividends may be
made by check mailed to the Holders of the Series E Preferred Stock at their
respective addresses set forth in the register of Holders of Series E Preferred
Stock maintained by the Transfer Agent, provided that all cash payments with
respect to the Global Shares (as defined below) and shares of Series E
Preferred Stock the Holders of which have given wire transfer instructions to
the Corporation will be required to be made by wire transfer of immediately
available funds to the accounts specified by the Holders thereof. Unless
otherwise designated by the Corporation, the Corporation's office or agency in
New York shall be the office of the Paying Agent maintained for such purpose.
(b) Any payment on the Series E Preferred Stock due on any
day that is not a Business Day need not be made on such day, but may be made on
the next succeeding Business Day with the same force and effect as if made on
such due date.
(c) The Corporation has initially appointed the Transfer
Agent to act as the Paying Agent. The Corporation may at any time terminate the
appointment of any Paying Agent and appoint additional or other Paying Agents,
provided that until the Series E Preferred Stock has been delivered to the
Corporation for cancellation, or moneys sufficient to pay the Liquidation
Preference and accrued dividends on the Series E Preferred Stock have been made
available for payment and either paid or returned to the Corporation as
provided in this Certificate of Designations, it shall maintain an office or
agency in the Borough of Manhattan, The City of New York for surrender of
Series E Preferred Stock.
(d) Dividends payable on the Series E Preferred Stock on any
redemption date or repurchase date that is a Dividend Payment Date will be paid
to the Holders of record as of the
35
<PAGE>
immediately preceding Record Date.
(e) All moneys deposited with any Paying Agent or then held
by the Corporation in trust for the payment of the Liquidation Preference and
dividends on any shares of Series E Preferred Stock which remain unclaimed at
the end of two years after such payment has become due and payable will be
repaid to the Corporation, and the Holder of such shares of Series E Preferred
Stock will thereafter look only to Corporation for payment thereof.
10. Officers' Certificate.
Each Officers' Certificate provided for in this Certificate
of Designations shall include:
(a) a statement that the officer making such certificate or
opinion has read such covenant or condition;
(b) a brief statement as to the nature and scope of the
examination or investigation upon which the statements or opinions contained in
such certificate or opinion are based;
(c) a statement that, in the opinion of such officer, he or
she has made such examination or investigation as is necessary to enable him to
express an informed opinion as to whether or not such covenant or condition has
been satisfied; and
(d) a statement as to whether or not, in the opinion of such
officer, such condition or covenant has been satisfied.
11. Exclusion of Other Rights.
Except as may otherwise be required by law, the shares of
Series E Preferred Stock shall not have any voting powers, preferences and
relative, participating, optional or other special rights, other than those
specifically set forth in this Certificate of Designations (as such Certificate
of Designations may be amended from time to time) and in the Certificate of
Incorporation. The shares of Series E Preferred Stock shall have no preemptive
or subscription rights.
12. Headings of Subdivisions.
The headings of the various subdivisions hereof are for
convenience of reference only and shall not affect the interpretation of any of
the provisions hereof.
36
<PAGE>
13. Severability of Provisions.
If any voting powers, preferences and relative,
participating, optional and other special rights of the Series E Preferred
Stock and qualifications, limitations and restrictions thereof set forth in
this resolution (as such resolution may be amended from time to time) is
invalid, unlawful or incapable of being enforced by reason of any rule of law
or public policy, all other voting powers, preferences and relative,
participating, optional and other special rights of Series E Preferred Stock
and qualifications, limitations and restrictions thereof set forth in this
resolution (as so amended) which can be given effect without the invalid,
unlawful or unenforceable voting powers, preferences and relative,
participating, optional and other special rights of Series E Preferred Stock
and qualifications, limitations and restrictions thereof shall, nevertheless,
remain in full force and effect, and no voting powers, preferences and
relative, participating, optional or other special rights of Series E Preferred
Stock and qualifications, limitations and restrictions thereof herein set forth
shall be deemed dependent upon any other such voting powers, preferences and
relative, participating, optional or other special rights of Series E Preferred
Stock and qualifications, limitations and restrictions thereof unless so
expressed herein.
14. Form of Securities.
(a) The Series E Preferred Stock shall initially be issued in
the form of one or more Global Preferred Shares (the "Global Shares"). The
Global Shares shall be deposited on the Initial Issue Date with, or on behalf
of, The Depository Trust Company (the "Depository") and registered in the name
of Cede & Co., as nominee of the Depository (such nominee being referred to as
the "Global Share Holder").
(b) So long as the Global Share Holder is the registered
owner of any Series E Preferred Stock, the Global Share Holder will be
considered the sole Holder under this Certificate of Designations of any shares
of Series E Preferred Stock evidenced by the Global Shares. Beneficial owners
of shares of Series E Preferred Stock evidenced by the Global Shares shall not
be considered the owners or Holders thereof under this Certificate of
Designations for any purpose. The Corporation shall not have any responsibility
or liability for any aspect of the records of the Depositary relating to the
Series E Preferred Stock.
(c) Payments in respect of the Liquidation Preference,
dividends on any Series E Preferred Stock registered in the name of the Global
Share Holder on the applicable record date shall be payable by the Corporation
to or at the direction of the Global Share Holder in its capacity as the
registered Holder under this Certificate of Designations. The Corporation may
treat the persons in whose names Series E Preferred Stock, including the Global
Shares, are registered as the owners thereof for the purpose of receiving such
payments. The Corporation does not have nor will have any responsibility or
liability for the payments of such amounts to beneficial holders of Series E
Preferred Stock.
37
<PAGE>
(d) Any person having a beneficial interest in a Global Share
may, upon request to the Corporation, exchange such beneficial interest for
Series E Preferred Stock in the form of registered definitive certificates
("Certificated Securities"). Upon any such issuance, the Corporation shall
register such Certificated Securities in the name of, and cause the same to be
delivered to, such person or persons (or the nominee of any thereof). If (i)
the Corporation notifies the Holders in writing that the Depositary is no
longer willing or able to act as a depositary and the Corporation is unable to
locate a qualified successor within 90 days or (ii) the Corporation, at its
option, notifies the Holders in writing that it elects to cause the issuance of
Series E Preferred Stock in the form of Certificated Securities, then, upon
surrender by the Global Share Holder of its Global Shares, Series E Preferred
Stock in such form will be issued to each person that the Global Share Holder
and the Depositary identify as being the beneficial owner of the related Series
E Preferred Stock.
38
<PAGE>
AMENDMENT NO. 2
TO
AGREEMENT AND PLAN OF MERGER
AMONG
SBI HOLDING CORPORATION,
SBI RADIO ACQUISITION CORPORATION
AND
SFX BROADCASTING, INC.
<PAGE>
AMENDMENT NO. 2 TO AGREEMENT AND PLAN OF MERGER dated as of
March 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, Parent, Sub and the Company have entered into an
Agreement and Plan of Merger, dated as of August 24, 1997, which was
subsequently amended by Amendment No. 1 to Agreement and Plan of Merger, dated
as of February 9, 1998 (as amended, the "Merger Agreement"), pursuant to which,
among other things, the parties agreed to the merger of Sub with and into the
Company (the "Merger"), upon the terms and subject to the conditions set forth
in the Merger Agreement;
WHEREAS, the parties to the Merger Agreement desire to amend
certain terms and conditions thereof, as set forth herein; and
WHEREAS, capitalized terms used herein have the meanings
ascribed to them in the Merger Agreement;
NOW, THEREFORE, the parties to the Merger Agreement further
agree as follows:
1. Section 1.02 of the Merger Agreement is hereby amended and restated in its
entirety as follows:
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 to May 19, 1998.
2. Except to the extent expressly set forth in this Amendment No. 2 to
Agreement and Plan of Merger, no terms and conditions of the Merger Agreement
are amended or modified hereby, and all such terms and conditions shall remain
in full force and effect.
<PAGE>
IN WITNESS WHEREOF, Parent, Sub and the Company have caused
this Amendment No. 2 to the Merger 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 Neuman
Title: Vice President
SBI RADIO ACQUISITION CORPORATION
By: /s/ Eric Neuman
------------------------
Name: Eric Neuman
Title: Vice President
SFX BROADCASTING, INC.
By: /s/ Robert F.X. Sillerman
-------------------------
Name: Robert F.X. Sillerman
Title: Executive Chairman
<PAGE>
SFX BROADCASTING, INC. AND SUBSIDIARIES
EXHIBIT 11.1
STATEMENT REGARDING CALCULATION OF PER SHARE EARNINGS
(DOLLARS IN THOUSANDS, EXCEPT FOR PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
Year ended December 31,
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Primary and Fully Diluted:
Average shares outstanding 9,526,429 7,563,600 6,595,728
Net effect of dilutive stock options - based on the
treasury stock method using average market price -- -- --
------------- ------------ -----------
Total 9,526,429 7,563,600 6,595,728
============= ============ ===========
Net loss $ (21,247) $ (50,852) $ (4,396)
Less: preferred stock dividends and accretion 38,510 6,061 291
Net loss applicable to common stock $ (59,757) $ (56,913) $ (4,687)
------------- ------------ -----------
Net loss per common shares $ (6.27) $ (7.52) $ (0.71)
============= ============ ===========
</TABLE>
<PAGE>
SUBSIDIARIES OF SFX BROADCASTING, INC.
Name Jurisdiction of Formation
---- -------------------------
KJQY-FM Licensee, Inc. Delaware
SFX Broadcasting of Texas (KTCK) Licensee, Inc. Delaware
SFX Broadcasting of San Diego, Inc. Delaware
Parker Broadcasting Company California
SFX Broadcasting of San Diego Licensee, Inc. Delaware
Liberty Broadcasting, Incorporated Delaware
Liberty Broadcasting Group Incorporated Delaware
Liberty Broadcasting of New York Incorporated New York
Liberty Broadcasting of Albany Incorporated New York
Liberty Broadcasting of Maryland II Incorporated Maryland
WHJJ, Inc. Rhode Island
WHFM, Inc. New York
WHCN, Inc. Connecticut
WHCN-FM, Inc. Delaware
WSNE, Inc. Rhode Island
WSNE-FM, Inc. Delaware
WMXB, Inc. Virginia
WPYX, Inc. New York
WHJY, Inc. Rhode Island
WPOP, Inc. Connecticut
WGNA, Inc. New York
WGNA-FM, Inc. New York
WGBB, Inc. New York
Beck-Ross Communications, Inc. Delaware
WTRY, Inc. New York
WYSR, Inc. Connecticut
W.B.L.I., Inc. New York
WBLI-FM, Inc. Delaware
WBAB, Inc. New York
SFX Broadcasting of Hartford, Inc. Delaware
Multi-Market Radio, Inc. Delaware
Southern Starr Broadcasting Group, Inc. Delaware
Southern Starr of Arkansas, Inc. Arkansas
General Communicorp, Inc. Connecticut
General Broadcasting of Connecticut, Inc. Connecticut
- 1 -
<PAGE>
Southern Starr Communications, Inc. Delaware
Southern Starr Limited Partnership Delaware
Multi-Market Radio of Augusta, Inc. Delaware
Multi-Market Radio of Myrtle Beach, Inc. Delaware
Multi-Market Radio of Northampton, Inc. Delaware
Multi-Market Radio of Hartford , Inc. Delaware
Ardee Festivals N.J., Inc. New Jersey
Ardee Productions, Ltd. New York
Beach Concerts, Inc. New York
Broadway Concerts, Inc. New York
Connecticut Concerts Incorporated Connecticut
Concerts Enterprises, Ltd. New York
SFX Concerts, Inc. Delaware
Dumb Deal, Inc. New York
Exit 116 Revisited, Inc. New Jersey
In House Tickets, Inc. New York
SFX Broadcasting of Indiana, Inc. Delaware
FPI Concerts, Inc. Delaware
Connecticut Amphitheater Development Corporation Connecticut
Connecticut Performing Arts, Inc. Connecticut
Great American Music Fest & Production Co. Connecticut
Multi-Market Radio of Fayetteville, Inc. Delaware
NOC, Inc. Connecticut
QN-Corp. Connecticut
SFX Broadcasting of Arizona, Inc. Delaware
SFX Broadcasting of California, Inc. Delaware
SFX Broadcasting of Connecticut, Inc. Delaware
SFX Broadcasting of Connecticut Licensee, Inc. Delaware
SFX Broadcasting of Florida, Inc. Delaware
SFX Broadcasting of Hartford II, Inc. Delaware
SFX Broadcasting of Kansas, Inc. Delaware
SFX Broadcasting of Massachusetts, Inc. Delaware
SFX Broadcasting of Massachusetts Licensee, Inc. Delaware
SFX Broadcasting of New York, Inc. Delaware
SFX Broadcasting of Pennsylvania, Inc. Delaware
SFX Broadcasting of Rhode Island, Inc. Delaware
SFX Broadcasting of Virginia, Inc. Delaware
SFX Broadcasting of Wisconsin, Inc. Delaware
SFX Delaware, Inc. Delaware
SFX GP, Inc. Delaware
- 2 -
<PAGE>
SFX Holdings, Inc. Delaware
SFX Operating Company of Mississippi, Inc. Delaware
SFX Operating Company of North Carolina, Inc. Delaware
SFX Operating Company of Tennessee, Inc. Delaware
SFX Operating GP, Inc. Delaware
SFX Performance Marketing, Inc. Delaware
SFX Texas Limited Partnership Delaware
SFXAZ Limited Partnership Delaware
SFXBX Limited Partnership Delaware
SFXFL Limited Partnership Delaware
SFXIN Limited Partnership Delaware
SFXKS Limited Partnership Delaware
SFXMS Limited Partnership Delaware
SFXNC Limited Partnership Delaware
SFXPA Limited Partnership Delaware
SFXSC Limited Partnership Delaware
SFXTN Limited Partnership Delaware
SFXTX Limited Partnership Delaware
SFXWI Limited Partnership Delaware
WWYZ, Inc. Connecticut
Murat Center Concerts, L.P. Delaware
Sunshine Design, L.P. Delaware
Suntex Acquisition, L.P. Delaware
Deer Creek Amphitheater Concerts, L.P. Delaware
Sunshine Concerts, L.L.C. Delaware
ABS Communications, L.L.C. Virginia
SFX Indiana Limited Partnership Delaware
SFX Radio Network of North Carolina, Inc. Delaware
Northeast Ticketing Company Delaware
Southeast Ticketing Company Delaware
SFX Entertainment, Inc. Delaware
Deer Creek Amphitheater Concerts, Inc. Delaware
Suntex Acquisitions, Inc. Delaware
Murat Center Concerts, Inc. Delaware
Polaris Amphitheater Concerts, Inc. Delaware
SFX Broadcasting of the Midwest, Inc. Delaware
Sunshine Designs, Inc. Delaware
Irving Plaza Concerts, Inc. Delaware
SFX Broadcasting of Texas (KTCK), Inc. Delaware
General Broadcasting Corp. Connecticut
- 3 -
<PAGE>
General Broadcasting of Florida, Inc. Florida
Southern Starr Management, Inc. Delaware
SFX Broadcasting of South Carolina, Inc. Delaware
Westbury Music Fair, LLC New York
Connecticut Performing Arts Partners Connecticut
CONN Ticketing Company Connecticut
Pace Entertainment Corporation Delaware
Atlanta Concerts, Inc. Delaware
Southern Promotions, Inc. Georgia
High Cotton, Inc. Georgia
Cooley and Conlan Management Co. Georgia
SFX Network Group, LLC Delaware
The Album Network, Inc. California
SJS Entertainment Corporation Pennsylvania
Contemporary Group Acquisition Corp. Delaware
BGP Acquisition, LLC Delaware
PACE Entertainment Corporation Texas
PACE Music Group, Inc Texas
PACE Theatrical Group, Inc. Texas
PACE Motor Sports, Inc. Texas
PACE Touring, Inc. Texas
American Broadway, Inc. Texas
PACE Variety Entertainment, Inc. Texas
PACE Communications, Inc. Texas
PACE Entertainment GP Corp. Texas
PEC, Inc. Nevada
PACE Entertainment Charitable Foundation Texas
PACE Entertainment Group, Ltd. Texas
PACE Productions, Inc. Texas
PACE Concerts GP, Inc. Texas
Old PCI, Inc. Texas
SM/PACE, Inc. Texas
PACE Bayou Place, Inc. Texas
PACE Amphitheaters, Inc. Texas
PACE Amphitheater Management, Inc. Texas
PACE Milton Keynes, Inc. Texas
PACE U.K. Holding Corporation Texas
Concerts, Inc. Nevada
PACE Concerts, Ltd. Texas
PTG-Florida, Inc. Florida
- 4 -
<PAGE>
Entertainment Performing Arts, Inc. Texas
Touring Productions, Inc. (Dormant Sub) Texas
Festival Productions, Inc. Texas
Tuneful Company, Inc. (Dormant Sub) Texas
Pavilion Partners Delaware
GSAC Partners Delaware
PACE AEP Acquisition, Inc. Texas
PACE UK United
Walnut Creek Amphitheater Partnership Kingdom
Coral Sky Amphitheater Partnership New York
Delaware
Rugrats American Tour, Ltd. Texas
PTG Florida, Inc./BSMG Joint Venture Florida
Album Network, Inc. California
Contemporary Group, Inc. Missouri
Contemporary Marketing, Inc. Missouri
Contemporary Productions Incorporated Missouri
Contemporary Sports Incorporated Missouri
Cooley and Conlon Management Co. Georgia
High Cotton, Inc. Georgia
SJS Entertainment Corporation Pennsylvania
Southern Promotions, Inc. Georgia
BG Presents, Inc. California
Bill Graham Enterprises, Inc. California
Bill Graham Presents, Inc. California
Bill Graham Management, Inc. California
Shoreline Amphitheater, Ltd. California
Fillmore Fingers, Inc. California
AKG, Inc. California
Fillmore Corporation Delaware
Wolfgang Records California
Shoreline Amphitheatre Partners California
G123 Corp. California
- 5 -
<PAGE>
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
We consent to the reference to our firm under the caption "Experts" in
Registration Statements No. 333-15469 (Form S-3); No. 333-21127 (Form S-3); No.
333-06793 (Form S-3); No. 333-16995 (Form S-3); No. 333-29825 (Form S-3) and
No. 333-26611 (Form S-8) and to the incorporation by reference therein of our
report dated March 5, 1998 with respect to the consolidated financial
statements of SFX Broadcasting, Inc. and Subsidiaries at December 31, 1997 and
1996 and for each of the three years in the period ended December 31, 1997.
/s/Ernst & Young LLP
New York, New York
March 16, 1998
<PAGE>
CONSENT
We hereby consent to the use of our firm name in the SFX Broadcasting,
Inc. ("SFX") Annual Report on Form 10-K for the year ended December 31, 1997
and consent to the incorporation by reference in the Registration Statements of
SFX on Form S-3 (File Nos. 333-15669, 333-21127, 333-06793, 333-16995 and
333-29825) and on Form S-8 (File No. 333-26611).
/s/ Fisher Wayland Cooper Leader & Zaragoza L.L.P.
FISHER WAYLAND COOPER LEADER & ZARAGOZA L.L.P.
Dated: March 16, 1998
<PAGE>
March 12, 1998
SFX Broadcasting, Inc.
650 Madison Avenue
New York, NY 10022
Gentlemen:
BIA Research, Inc. hereby consents to the use of the radio station and market
data which has been or will be provided to you in connection with certain
periodic reports which will be filed with the Securities and Exchange
Commission.
Very truly yours,
BIA RESEARCH, INC.
By: /s/ Debra L. Metcalf
----------------------------------------
Debra L. Metcalf, Vice President
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> DEC-31-1997
<CASH> 24,686,000
<SECURITIES> 0
<RECEIVABLES> 73,505,000
<ALLOWANCES> 2,264,000
<INVENTORY> 0
<CURRENT-ASSETS> 153,458,000
<PP&E> 92,285,000
<DEPRECIATION> 17,456,000
<TOTAL-ASSETS> 1,375,615,000
<CURRENT-LIABILITIES> 72,021,000
<BONDS> 764,092,000
361,996,000
0
<COMMON> 107,000
<OTHER-SE> 74,718,000
<TOTAL-LIABILITY-AND-EQUITY> 1,375,615,000
<SALES> 0
<TOTAL-REVENUES> 270,364,000
<CGS> 0
<TOTAL-COSTS> 232,930,000
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 64,506,000
<INCOME-PRETAX> (24,251,000)
<INCOME-TAX> 810,000
<INCOME-CONTINUING> (25,061,000)
<DISCONTINUED> 3,814,000
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (21,247,000)
<EPS-PRIMARY> (6.27)
<EPS-DILUTED> (6.27)
</TABLE>
<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
Form 10-K
FOR ANNUAL AND TRANSITION REPORTS
PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT Of 1934
For the fiscal year ended December 31, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT Of 1934
For the transition period from to
COMMISSION FILE NUMBER: 333-43287
----------------
SFX ENTERTAINMENT, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 13-3977880
(State or other Jurisdiction (I.R.S. Employer
of Incorporation) Identification No.)
650 MADISON AVENUE, 16TH FLOOR 10022
NEW YORK, NEW YORK (Zip Code)
(Address of Principal Executive Offices)
(212) 838-3100
(Registrant's telephone number, including area code)
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:
NONE
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [ ] No [ X ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to
the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ X ]
Aggregate market value as of the close of business on March 16, 1998 of
the common equity held by non-affiliates of the registrant was $0. As of such
date, all of the registrant's common equity was held by SFX Broadcasting, Inc.,
the parent of the registrant.
The number of shares of the registrant's Class A Common Stock, $.01 par
value, and Class B Common Stock, $.01 par value, outstanding as of March 16,
1998 was 1,000 and 1,000, respectively.
DOCUMENTS INCORPORATED BY REFERENCE
None
<PAGE>
PART I
ITEM 1. BUSINESS.
GENERAL
SFX Entertainment, Inc. (the "Company") was formed as a wholly-owned
subsidiary of SFX Broadcasting, Inc. ("SFX Broadcasting") in December 1997 and
as the parent company of SFX Concerts, Inc. ("Concerts"). Concerts was formed
in January of 1997 to acquire and hold SFX Broadcasting's live entertainment
operations.
The Company is a leading promoter of, and operator of venues for, live
entertainment events. Management believes that the Company is the largest
diversified promoter and producer of live entertainment, including music
concerts, theatrical shows and specialized motor sports events. The Company
believes that it owns and/or operates the largest network of venues used
principally for music concerts and other live entertainment events in the
United States, with 39 venues either directly owned or operated under lease or
exclusive booking arrangements in 21 of the top 50 markets, including 9
amphitheaters in 6 of the top 10 markets. Through its large number of venues,
its strong market presence and the long operating histories of the Company and
the businesses acquired pursuant to the Recent and Completed Acquisitions (as
defined herein), the Company operates an integrated franchise that promotes and
produces a broad variety of live entertainment events locally, regionally and
nationally. During 1997, approximately 1.4 million people attended
approximately 210 events promoted and/or produced by the Company, including
approximately 200 music concerts. During the same year, approximately 25
million people attended 9,100 events promoted and/or produced by the Company
and the businesses acquired in the Recent Acquisitions (the "Acquired
Businesses"), including approximately 3,880 music concerts, 4,850 theatrical
shows and 188 specialized motor sports events. These events included: (a) music
concerts featuring artists such as The Rolling Stones, Phish, Fleetwood Mac,
Ozzy Osbourne and Alanis Morissette, (b) music festivals such as 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.
The Company's core business is the promotion and production of live
entertainment events, most significantly for concert and other music
performances in venues owned and/or operated by the Company and in third-party
venues. As promoter, the Company typically markets events and tours, sells
tickets, rents or otherwise provides event venues and arranges for local
production services (such as stage, set, sound and lighting). As producer, the
Company (a) creates tours for music concert, theatrical, specialized motor
sports and other events, (b) develops and manages Broadway-style touring
theatrical shows ("Touring Broadway Shows") and, (c) develops specialized motor
sports and other live entertainment events. In connection with its live
entertainment events, the Company also derives related revenue streams,
including from the sale of corporate sponsorships and advertising, the sale of
concessions and the merchandising of a broad range of products. On a pro forma
basis giving effect to the Recent Acquisitions, the Company's music and
ancillary businesses would have comprised approximately 78%; theater would have
comprised approximately 16%; and specialized motor sports would have comprised
approximately 6% of the Company's total net revenues for the 12 months ended
December 31, 1997.
SFX MERGER AND THE SPIN-OFF
SFX Broadcasting was formed in 1992 principally to acquire and operate
radio broadcasting stations. SFX Broadcasting currently operates in two lines
of business: radio broadcasting and live entertainment. In August 1997, SFX
Broadcasting agreed to merge (the "SFX Merger") its radio business with a
subsidiary of SBI Holdings Corporation ("SFX Buyer"). In connection with the
proposed Spin-Off (as defined herein), SFX Broadcasting (a) has contributed
its concert and other live entertainment operations to the Company and
(b) intends to distribute all of the outstanding shares of common stock of
the Company to the holders of common stock, Series D preferred stock,
interests in SFX Broadcasting's director deferred stock ownership plan and
certain warrants of SFX Broadcasting in a spin-off (the "Spin-Off").
The receipt of shares by stockholders of SFX Broadcasting pursuant to the
Spin-Off will be a taxable transaction. SFX Broadcasting 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 Class A Common Stock, subject to official notice of issuance,
on a national exchange or The Nasdaq Stock Market and (b) approval of the
Spin-Off as presently contemplated by the stockholders of SFX Broadcasting at
a special meeting of SFX Broadcasting scheduled to be held on March 26, 1998.
There can be no assurance that the conditions to the Spin-Off will be
satisfied. However, the Spin-Off is not conditioned on the consummation of
the SFX Merger. Management believes that the Spin-Off is likely
to be consummated 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. See "-- Agreements Relating to the Spin-Off."
1997 ACQUISITIONS
2
<PAGE>
Delsener/Slater
In January 1997, SFX Broadcasting acquired Delsener/Slater Enterprises,
Ltd. ("Delsener/Slater"), a leading concert promotion company, for an aggregate
consideration of approximately $27.6 million, including $2.9 million for
working capital and the present value of deferred payments of $3.0 million to
be paid without interest over five years and $1.0 million to be paid without
interest over ten years. Delsener/Slater has long-term leases or is the
exclusive promoter for 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 ("Meadows"), a 25,000-seat
indoor/outdoor complex located in Hartford, Connecticut for $900,000 in cash,
250,838 shares of SFX Broadcasting Class A Common Stock with a value of
approximately $7.5 million and the assumption of approximately $15.4 million in
debt.
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 SFX
Broadcasting for the per share value of SFX Broadcasting as of the acquisition
closing date, as defined, less 10%. Additionally the shares may be called by
SFX Broadcasting at any time after the merger date and before the seventh
anniversary of the closing for an aggregate purchase price of $8.3 million
(the "Meadows Repurchase"). If the option is not exercised, the Company will be
required to pay approximately $10.5 million. See "Management's Discussion and
Analysis of Results of Operations and Financial Condition--Liquidity and
Capital Resources--Meadows Repurchase."
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 $53.9 million in cash, $2.0 million
payable over five years, shares of SFX Broadcasting Class A Common Stock issued
and issuable over a two year period with a value of approximately $4.0 million
and the assumption of approximately $1.6 million of debt. Sunshine Promotions
owns the Deer Creek Music Theater, a 21,000-seat complex located in
Indianapolis, Indiana, and the Polaris Amphitheater ("Polaris"), a 20,000-seat
complex located in Columbus, Ohio, and has a long-term lease to operate the
Murat Centre, a 2,700-seat theater and 2,200-seat ballroom located in
Indianapolis, Indiana.
The acquisitions of Delsener/Slater, Meadows, and Sunshine Promotions are
collectively referred to herein as the "Completed Acquisitions." The cash
portion of the Completed Acquisitions was financed through capital
contributions from SFX Broadcasting.
1998 ACQUISITIONS
In February and March of 1998, the Company completed its acquisitions of
PACE Entertainment Corporation ("PACE"); Contemporary Group ("Contemporary");
BG Presents, Inc. ("BGP"); Album Network, Inc., SJS Entertainment Corporation
and The Network 40 (collectively, "Network"); Concert/Southern Promotions
("Concert/Southern") and certain related entities. The aggregate purchase price
of such acquisitions was approximately $506.1 million, consisting of
approximately $442.1 million in cash, repaid debt and payments for working
capital, $7.8 million in assumed debt and the agreement to issue, or the
issuance of securities convertible into, an aggregate of approximately 4.2
million shares of the Company's Class A Common Stock (the "Class A Common
Stock") with an attributed negotiated value of $56.2 million. Following is a
brief description of the Acquired Businesses. The following descriptions are
not intended to be complete descriptions of the terms of the acquisition
agreements and are qualified by reference to the acquisition agreements, copies
of which are attached hereto as exhibits and are incorporated herein by
reference.
BGP
On February 24, 1998, the Company acquired BGP for total consideration
of $80.3 million comprised of $60.8 million in cash, $12.0 million in repayment
of debt, which amount was at least equal to BGP's working capital (as defined
in the acquisition agreement) and options to purchase 562,640 shares of Class A
Common Stock upon consummation of the Spin-Off valued by the parties at $7.5
million. 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
3
<PAGE>
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.
PACE
On February 25, 1998, the Company acquired all of the outstanding capital stock
of PACE for a total purchase price of $150.1 million comprised of $109.5
million in cash, the repayment of $20.6 million of debt and the issuance upon
the Spin-Off of 1.5 million shares of Class A Common Stock valued by the
parties at approximately $20.0 million. PACE is one of the largest diversified
promoters and producers of live entertainment in the United States, having what
the Company believes to be the largest distribution network in each of its
music concerts, theatrical shows and motor sports events business segments. As
part of its distribution network for music concerts, PACE owns interests in and
manages the largest network of amphitheaters in the United States. During 1997,
more than 15 million people attended approximately 5,700 events produced or
presented by PACE. These events included: (a) music concerts featuring artists
such as Rod Stewart, Jimmy Buffett and Ozzy Osbourne; (b) theatrical shows such
as The Phantom of the Opera, Jekyll & Hyde, Rent and The Magic of David
Copperfield; and (c) specialized motor sports events featuring AMA Supercross
racing, monster trucks, demolition derbies and thrill acts. In 1997, PACE's
music division, PACE Music, presented 491 amphitheater events in the United
States, and 348 non-amphitheater events in over 40 markets. Its recently formed
touring division, PACE Touring, produces national tours of music events, having
produced two national music tours in 1997. In 1997, PACE's theatrical division,
PACE Theatrical, (a) presented approximately 300 weeks of theater in over 30
markets, including 31 subscription markets with approximately 220,000
subscribers, and (b) produced or had significant investments in the production
of 19 Broadway Shows and Touring Broadway Shows. In 1997, PACE Motor Sports
presented over 188 events in over 70 markets. In connection with the
acquisition of PACE, the Company has obtained 100% of Pavilion Partners, a
partnership that owns interests in 10 of the 41 venues to be owned by the
Company, by acquiring one-third of Pavilion Partners through the acquisition of
PACE and the remaining two-thirds of Pavilion Partners from YM Corp. ("Sony
Sub") and The Westside Amphitheater Corporation and Charlotte Amphitheater
Corporation, (collectively "Blockbuster Sub"), for a combined consideration of
$90.6 million (comprised of cash of $41.4 million, the repayment of $43.1
million of debt related to the two-thirds interest and the assumption of $6.1
million of debt related to a capital lease).
Under certain circumstances, the Company may be required to sell either
its motor sports or theatrical lines of business. See "Executive Compensation--
Employment Agreements and Arrangements with Certain Officers and Directors."
The agreement governing the partnership through which PACE holds its
interest in the Lakewood Amphitheater in Atlanta, Georgia contains a provision
that purports to restrict PACE and its affiliates from directly or indirectly
owning or operating another amphitheater in Atlanta. In management's view, this
provision will not materially affect the business or prospects of the Company.
However, the Company acquired an interest in the Chastain Park Amphitheater,
also in Atlanta, in the Concert/Southern acquisition described below. The
Company intends to seek a waiver of the restrictive provision; however, it is
possible that the Company will be unable to obtain the waiver.
Contemporary
On February 27, 1998, the Company acquired by merger and asset
acquisition, the music concert, live entertainment, event marketing,
computerized ticketing and related businesses of Contemporary and the 50%
interest in the Riverport Amphitheater Joint Venture not owned by Contemporary
for approximately $101.4 million comprised of $72.8 million in cash, a payment
for working capital of $9.9 million, and the issuance of preferred stock of the
Company which, upon consummation of the Spin-Off, will convert into 1,402,850
shares of Class A Common Stock 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.
4
<PAGE>
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.
Network
On February 27, 1998, the Company acquired Album Network, Inc., SJS
Entertainment, Inc. ("SJS") and The Network 40 for a total purchase price of
$66.8 million comprised of cash of $52.0 million, a payment for working capital
of $1.8 million, reimbursed seller's costs of $500,000, the purchase of an
office building and related property for $2.5 million and the issuance upon the
Spin-Off of 750,188 shares of Class A Common Stock upon consummation of the
Spin-Off valued by the parties at approximately $10.0 million. The $2.5 million
purchase of the office building and related property consists of cash of
$700,000 and the assumption of debt of $1.8 million. Network is engaged in
music marketing, research and artist development activities and is a publisher
of trade magazines for radio broadcasters, music retailers, performers and
record industry executives. Each magazine is focused on research and insight
common to a specific contemporary radio format. These publications, Album
Network, Network 40, Urban Network, Virtually Alternative, Totally Adult,
AggroActive and Educated Guess, derive revenue from advertising sales and
subscriptions. Network also publishes The Yellow Pages of Rock, which is a
reference book popular with people and companies doing business in the
broadcast music industry. Network is currently developing a consumer music
magazine that will be distributed free to customers at music retail locations.
Network also provides radio airplay and music retail research services to
record labels, artist managers, retailers and radio broadcasters. Network
gathers its information directly from nearly 1,100 radio programmers and
product buyers and, in 1996, had more than 300 clients for these services.
Annual fees during this period ranged from $2,500 to $250,000 per corporate
client.
Network and SJS are both creators and distributors of network radio
special events and live concert programming for over 400 music radio stations
in the top 200 United States radio markets. Additionally, SJS is an independent
creator, producer and distributor of music related programming, services and
research. SJS produces eight daily radio "show prep" services that stations use
to supplement in-house content production. In 1996, SJS delivered these
services to approximately 1,100 radio stations. Together, Network and SJS
barter or exchange these programs and services to radio broadcasters for
commercial inventory or airtime, which is in turn sold by SJS to national
network advertisers. Network also provides consulting and entertainment
marketing services to corporate clients with music business interests.
Concert/Southern
On March 4, 1998, the Company acquired Concert/Southern for a total cash
purchase price of $16.9 million (including a working capital payment of
$300,000). Concert/Southern is a promoter of live entertainment in the Atlanta
metropolitan area. During 1997, more than 555,000 people attended approximately
370 events promoted or produced by Concert/Southern. These events included
concerts featuring artists such as Celine Dion, James Taylor, Alanis
Morissette, ZZ Top, Bruce Springsteen, Bob Dylan, Harry Connick, Jr. and Gregg
Allman, in addition to a week-long engagement of the Broadway Show Stomp.
Concert/Southern also owns the rights to the Music Midtown Festival in downtown
Atlanta. This three day multi-stage music festival presents over 80 bands, and
in 1997 drew approximately 200,000 people to the downtown Atlanta area.
Concert/Southern is currently developing a Music Midtown Festival for June 1998
in Charlotte, North Carolina and has plans to export this festival to other
sites in future years.
The acquisitions of BGP, PACE, Contemporary, Network and Concert/Southern
are collectively referred to as the "Recent Acquisitions."
If the Spin-Off does not occur, the Company would be unable to issue
shares of its Class A Common Stock to the sellers in the Recent Acquisitions
and the aggregate cash purchase of the Recent Acquisitions would increase by
approximately $56.2 million. See "-- Risks Related to Recent Acquisitions" and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations-Liquidity and Capital Resources."
The approximately 4.2 million shares of the Class A Common Stock expected
to be issued in connection with certain of the Recent Acquisitions have been
valued by the applicable parties at $13.33 per share for purposes of
calculating the consideration to be given for the Recent Acquisitions. This
valuation is based on financial projections developed jointly by the Company
and the relevant sellers. There can be no assurance that the assumptions
underlying the valuation will, in
5
<PAGE>
fact, be correct or that the valuation will approximate the actual trading
price of the Class A Common Stock upon consummation of the Spin-Off.
The live entertainment businesses acquired by the Company pursuant to
the Recent Acquisitions are summarized in the following table:
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------------------
TOTAL SELECTED
COMPANY CONSIDERATION VENUES(2)
($ IN MILLIONS)(1) BUSINESS(ES)
-------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
PACE (INCLUDING $240.7 Music, theater and specialized motor sports American Theater
PAVILION PARTNERS) event promotion and production. PACE is one of Bayou Place Performance Hall
the largest diversified promoters and producers Blockbuster/SONY Music Entertainment
of live entertainment in the United States, Centre on the Waterfront
having what the Company believes is the largest Charlotte Blockbuster Pavilion
U.S. distribution network in each of its music, Cynthia Woods Mitchell Pavilion
theater and specialized motor sports businesses. Desert Sky Blockbuster Pavilion
Pavilion Partners is one of the leading owners Glen Helen Blockbuster Pavilion
of amphitheaters in the United States. Irvine Meadows Amphitheater
Lakewood Amphitheater
PNC Bank Arts Center
SONY Music/Blockbuster Coral Sky
Amphitheater
Star Lake Amphitheater
Starplex Amphitheater
Starwood Amphitheater
Walnut Creek Amphitheater
- --------------------------------------------------------------------------------------------------------------------------------
CONTEMPORARY $101.4 A fully-integrated live entertainment and Memorial Hall
special event promoter and producer, venue owner Riverport Amphitheater
and operator, ticket distributor and consumer Sandstone Amphitheater
marketer. Starlight Theater
West Fair Amphitheater
Westport Playhouse
Zoo Amphitheater
- --------------------------------------------------------------------------------------------------------------------------------
BGP $80.3 One of the oldest producers and promoters of, Concord Pavilion
and owner-operators of venues for, live Fillmore West Auditorium
entertainment in the United States, and a Greek Theater
leading promoter of live entertainment in the Punchline Comedy Club (Sacramento)
San Francisco Bay area. Punchline Comedy Club
(San Francisco)
Seattle, WA--Under construction.
Shoreline Amphitheater
Warfield Theater
- --------------------------------------------------------------------------------------------------------------------------------
NETWORK $66.8 Network, a leading publisher of trade magazines N/A
for the radio broadcasting industry, and
SJS, a leading independent creator,
producer and distributor of
music-related programming, services and
research.
- --------------------------------------------------------------------------------------------------------------------------------
CONCERT/ SOUTHERN $16.9 A promoter of live music events in the Atlanta, Chastain Park Amphitheater
Georgia metropolitan area. Cotton Club
Roxy Theater
- --------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Includes the cash portion of purchase price, the negotiated value of the
Class A Common Stock, if any, to be issued, and debt or other liabilities,
if any, which was assumed or repaid. Excludes certain potential contingent
consideration. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations-- Recent Acquisitions."
(2) Includes venues owned and/or operated under lease or under exclusive
booking arrangements.
THE COMPANY'S LIVE ENTERTAINMENT ACTIVITIES
The Company is engaged in (a) the booking, promotion and production of
live entertainment events and tours, (b) the ownership and/or operation of
concert and other entertainment venues and (c) the sale of corporate
sponsorships and advertising and provision of marketing and consulting services
to third parties.
Booking and Promotion
6
<PAGE>
The Company books and promotes music concert, theatrical, specialized
motor sports and other live entertainment events and tours such as music
festivals, comedy tours, figure skating shows, gymnastics tours, motivational
speaking tours and other special events. The Company books and promotes events
in a number of types of venues (including amphitheaters, theaters, clubs,
arenas and stadiums) that are owned and/or operated by the Company or by third
parties. See "-- Venue Operations." The Company primarily promotes concerts
performed by newer groups having widespread popularity (e.g., Phish, Dave
Matthews and Hootie & the Blowfish) and by more established groups having
relatively long-standing and more stable bases of popularity (e.g., James
Taylor and Jimmy Buffett). The Company believes that its large distribution
network will enable it to set an aggregate guarantee for a series of shows,
mitigating the risk of loss associated with a single show. The Company also
believes that the market research and audience demographics database that it
acquired in the Recent Acquisitions, when combined with its existing audience
data collection efforts, will permit highly-effective, targeted marketing, such
as direct-mail and subscription series campaigns, which the Company believes
will increase ticket pre-sales and overall sales in a cost-efficient manner. In
addition, the Company's Capital Tickets retail distribution outlets and Dialtix
interactive, voice-response automated phone ticket order system are currently
operating in three markets. The Company believes that expanding the markets
where it can utilize its own ticketing sources will permit the Company to
promote its live entertainment events more effectively. The following table
identifies artists whose events were recently promoted by the Company or the
Acquired Businesses:
- -------------------------------------------------------------------------------
Aerosmith Elton John Phil Collins
Alabama Fleetwood Mac* Pink Floyd
Alanis Morissette James Taylor Phish
Bette Midler Jerry Seinfeld* R.E.M.
Billy Joel Jimmy Buffett Rod Stewart
Brooks & Dunn John Secada The Rolling Stones
Chris Rock* Live Seal
Clint Black Melissa Etheridge Sheryl Crow
Crosby, Stills & Nash Metallica Smashing Pumpkins
Dave Matthews Michael Bolton Stone Temple Pilots
Depeche Mode Ozzy Osbourne* Tim Allen*
The Eagles Pearl Jam Tina Turner
Earth, Wind & Fire Peter Gabriel U2
- -------------------------------------------------------------------------------
*National tour produced.
Production
The Company is currently involved in the creation of tours for music
concert and other live entertainment events. The Company's production
activities include (a) the creation of tours for music concert, theatrical,
specialized motor sports and other live entertainment events, (b) the
development and management of Touring Broadway Shows and (c) the development of
specialized motor sports shows, proprietary characters and television
programming. The Acquired Businesses produce tours on a national or regional
basis and, in 1997, structured national tours for Fleetwood Mac and Ozzy
Osbourne, among others. The Company plans to increase its production of
national music tours. PACE (one of the Acquired Businesses) also produces
Touring Broadway Shows, acquiring the stage and touring rights from a show's
owner, assembling the touring cast, hiring a director and arranging for the
construction and design of sets and costumes. Touring Broadway Shows are
typically revivals of previous commercial successes or reproductions of
theatrical shows currently playing on Broadway in New York City. PACE also
produces and makes small investments (i.e., from approximately $150,000 to
$600,000) as a limited partner in the creation of a small number of original
Broadway Shows in exchange for obtaining touring rights and favorable
scheduling for those shows.
The Touring Broadway Show production and promotion industry is highly
fragmented. The Company believes it is the largest of six multiple-market
promoters of Touring Broadway Shows in the United States, and that the
remainder of the industry is made up of single-market promoters. The Company
competes with other producers and promoters to obtain presentation arrangements
with venues and performing arts organizations in various markets, including in
markets that have more than one venue suitable for presenting a Touring
Broadway Show. The Company's competitors, some of whom have also been partners
of PACE in certain theater investments from time to time, include a number of
New York-based production companies that also promote Touring Broadway Shows
and a number of regional promoters. On a pro forma basis giving effect to the
Recent Acquisitions, the Company would have had a producing interest or
investment in the following shows for 1997 and/or 1998:
7
<PAGE>
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------
SHOW TITLE TYPE THE COMPANY'S INVOLVEMENT
- ---------- ---- -------------------------
<S> <C> <C>
Big Touring Production
Damn Yankees Touring Production
David Copperfield Touring Production
Death Trap Touring Production
Funny Girl Touring Production
Harmony Development Production
Jekyll & Hyde Broadway Production
Kiss of the Spiderwoman Touring Production
Man of La Mancha Touring Production
Smokey Joe's Cafe Touring Production
The Sound of Music Touring Production
West Side Story Touring Production
A Chorus Line Touring (US & UK) Investment
Annie Broadway Investment
Carousel Touring Investment
Cirque Ingenieux Touring Investment
Grease Broadway & Touring Investment
Chicago Broadway & Touring Investment
How to Succeed in Business Broadway & Touring Investment
Martin Guerre West End (UK) Investment
Rent Broadway & Touring Investment
Steel Pier Broadway Investment
Triumph of Love Broadway Investment
West Side Story Touring (UK) Investment
- ------------------------------------------------------------------------------------------------------------------------------
</TABLE>
The Company believes that there are approximately 50 domestic markets
that can provide the potential audience and gross ticket revenues for a full
scale Touring Broadway Show to be profitable, and an additional 50 markets
where smaller scale productions with shorter runs can be presented profitably.
In most of these cities, there are a limited number of venues that can
accommodate a Touring Broadway Show.
The Company currently sells subscription series for its Touring Broadway
Shows in the following 31 of the approximately 60 markets that maintain active
touring schedules:
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Atlanta, GA Long Beach, CA Palm Beach, FL
Austin, TX Louisville, KY Phoenix, AZ
Baltimore, MD Miami, FL Pittsburgh, PA
Chicago, IL Milwaukee, WI Portland, OR
Cincinnati, OH Minneapolis, MN San Antonio, TX
Columbus, OH Myrtle Beach, SC Seattle, WA
Dallas, TX Nashville, TN Tampa, FL
Ft. Lauderdale, FL New Orleans, LA Ottawa, Canada
Green Bay, WI Omaha, NE Edmonton, Canada
Houston, TX Orange County, CA
Indianapolis, IN Orlando, FL
- ------------------------------------------------------------------------------------------------------------------------------
</TABLE>
Subscriptions historically have covered two-thirds of PACE's break-even
point for Touring Broadway Shows. In 1997,
8
<PAGE>
PACE had approximately 220,000 subscribers for its Touring Broadway Shows.
The Company also produces motor sports events such as monster truck
events, tractor pulls, mud races, demolition derbies and 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. The Company believes that it is the
largest participant in the industry, on a pro forma basis having produced 188
events in over 70 markets in 1997. The Company's two major specialized motor
sports competitors produce approximately 40 and 55 events each year,
respectively. The Company also competes with several regional specialized motor
sports companies, which each present only a small number of events, as well as
a number of local promoters that present only one or two events per year. See
"--Risk Factors--Control of Motor Sports and Theatrical Business."
In addition, the Company produces a variety of other forms of live
entertainment, including music festivals, radio programs, air shows, figure
skating shows, gymnastics tours, comedy tours, motivational speaking tours and
television programming based on certain of their events and other events.
Venue Operations
The Company's revenues from its venue operations are derived primarily
from corporate sponsorships and advertising, concessions, merchandise, parking
and other related items. A venue operator will typically receive for each event
it hosts a fixed fee or percentage of ticket sales for use of the venue, as
well as a fee representing between 40-50% of total concession sales from the
vendors and 10-25% of total merchandise sales from the performer. As a venue
owner, the Company typically receives 100% of sponsorship and advertising
revenues. Since few artists will play in every available market during a tour,
the Company competes with venues in other markets for dates of popular national
tours. The favorable cost structure of amphitheaters and their ability to draw
fans is often an important factor in the decision of a performer to choose to
perform in an amphitheater market. In certain cities, the Company also competes
with other venues to promote an artist in that city. The Company believes that
it owns and/or operates the largest network of venues used principally for
music concerts and other live entertainment events in the United States, with
39 venues either directly owned or operated under lease or exclusive booking
arrangements in 21 of the top 50 markets, including 9 amphitheaters in 6 of the
top 10 markets. The following chart sets forth certain information with respect
to the venues that are owned and/or operated by the Company:
<TABLE>
<CAPTION>
TOTAL AVG. NO. OF TOTAL SEATS
MARKET TYPE OF THE COMPANY'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
(formerly Garden State Arts amphitheater 22-year lease 17,500(2) 6,512 48 312,595
Center)(Holmdel, NJ)........ (expires October 31, 2017)
Jones Beach Marine
Amphitheater (Wantagh, amphitheater 10-year license agreement 14,000(2) 8,712 44 383,314
NY)..................... (expires December 31, 1999)
Roseland theater exclusive booking agent 3,200 2,765 57 157,605
Theater..................
Westbury Music theater 43-year lease (expires 2,870 2,026 190 384,917
Fair(Westbury, NY)...... December 31, 2034)
Los Angeles--Riverside--Orange 2
County:
Glen Helen Blockbuster
Pavilion (San Bernardino, amphitheater 50% partnership interest in 25,000(3) 9,842 25 246,039
CA)....................... 25-year ease (expires July 1, 2018)
Irvine Meadows Amphitheater
(Irvine, CA) ............. amphitheater 50% partnership interest in 20-year 15,500 8,505 32 272,162
20-year lease (expires
February 28, 2017)
9
<PAGE>
</TABLE>
<TABLE>
<CAPTION>
TOTAL AVG. NO. OF TOTAL SEATS
MARKET TYPE OF THE COMPANY'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>
San Francisco--Oakland--San 5
Jose:
Shoreline
Amphitheater...................... amphitheater facility owned; land leased for 35 25,000 10,306 37 381,315
years (expires November 30, 2021)
Concord
Pavilion.......................... amphitheater 10-year exclusive outside booking 12,500 6,002 42 252,070
agent (expires December 31, 2005)
Greek
Theater........................... theater 4-year lease (expires October 31, 8,500 5,572 10 55,718
1998)
Warfield
Theatre........................... theater 10-year lease (expires May 31, 2008) 2,250 1,727 56 96,726
Fillmore
Auditorium....................... theater 10-year lease (expires August 31, 1,249 913 146 133,279
2007)
Punchline Comedy
Club.......................... club 5-year lease (expires September 15, N/A N/A N/A N/A
2001)
Philadelphia--Wilmington-- 6
Atlantic City:
Blockbuster/SONY Music
Entertainment Centre on the
Waterfront(2).................... amphitheater 31-year lease (expires February 9, 25,000 7,111 48 341,319
2025)
Dallas--Ft. Worth: 9
Starplex
Amphitheater.................... amphitheater 32.5% partnership interest in 31 20,100 9,479 33 312,806
year lease (expires December 31,
2028)
Houston--Galveston--Brazoria: 10
Cynthia Woods Mitchell
Pavilion............ amphitheater 15-year management contract 13,000 9,178 36 258,364
(expires December 31, 2009)
Bayou Place Performance
Hall................. theater 50% partnership interest in 10-year 2,800 N/A N/A N/A
lease (expires December 31, 2007)
Atlanta: 12
Lakewood
Amphitheater.................... amphitheater 32.5% partnership interest in 19,000 9,768 22 214,896
35-year lease (expires January 1,
2019)
Chastain Park
Amphitheater..................... amphitheater 10-year lease (expires December 31, 7,000 5,732 28 160,492
2000)
Roxy
Theater.......................... theater 7-year lease (expires March 31, 1,600 673 92 61,960
2004)
Cotton
Club............................. theater 5-year lease (expires June 12, 2000) 650 321 152 48,751
St. Louis: 17
Riverport
Amphitheater..................... amphitheater facility owned 21,000 8,782 44 386,399
American
Theater.......................... theater 10-year lease (expires July 31, 2,000 1,485 22 32,662
2004)
Westport
Playhouse....................... theater 1-year lease (expires May 31, 1998) 1,100 897 22 19,724
Phoenix--Mesa: 18
Desert Sky Blockbuster
Pavilion(2).................... amphitheater 60-year.lease (expires June 30, 2049) 20,000 8,165 32 261,284
Pittsburgh: 19
Star Lake
Amphitheater................... amphitheater 45-year lease (expires December 31, 22,500 9,471 44 416,733
2034)
Kansas City: 24
Sandstone Amphitheater
(Kansas City,
KS)........................... amphitheater 10-year lease (expires December 31, 18,000 7,150 36 257,395
2002)
Starlight
Theater....................... theater annual exclusive booking agent 9,000 2,908 10 29,083
contract (1998 renewal under
negotiation)
Memorial
Hall.......................... theater 1998 contract renewal under 3,000 2,169 17 36,874
negotiation
Sacramento--Yolo: 26
Punchline Comedy
Club.......................... club 9-year lease (expires December 17, N/A N/A N/A N/A
1999)
10
<PAGE>
TOTAL AVG. NO. OF TOTAL SEATS
MARKET TYPE OF THE COMPANY'S SEATING ATTENDANCE EVENTS SOLD IN
MARKET AND VENUE RANK(1) VENUE INTEREST CAPACITY IN 1996 IN 1996 1996
---------------- -------- ----- -------- -------- ------- --------- ----------
Indianapolis: 28
Deer Creek Music
Center.................. amphitheater owned 21,000 10,187 38 387,119
Murat
Centre................. theater and 50-year lease (expires August 31, 2,700 1,900 85 161,500(4)
ballroom 2045)
Columbus: 30
Polaris amphitheater owned 20,000 6,751 38 256,553
Amphitheater...........
Charlotte--Gastonia--Rock 32
Hill:
Charlotte Blockbuster
Pavilion............... amphitheater owned 18,000 6,185 39 241,233
Hartford: 36
Meadows Music
Theater................ amphitheater facility owned; land leased for 37 25,000 6,914 38 262,741
years (expires September 13, 2034)
Rochester: 39
Finger Lakes
Amphitheater............ amphitheater co-promotion 12,700 4,203 15 63,044
Nashville: 41
Starwood
Amphitheater............ amphitheater one-half ownership 20,100 6,970 27 188,187
Oklahoma City: 43
Zoo
Amphitheatre............ amphitheater year-to-year exclusive booking agent 9,000 4,510 6 27,061
Raleigh--Durham--Chapel Hill: 50
Walnut Creek
Amphitheater............ amphitheater 66 2/3% partnership interest in 20,000 8,476 43 364,489
40-year lease (expires October 31,
2030)
West Palm Beach--Boca Raton: 50
SONY Music/Blockbuster Coral
Sky
Amphitheater............ amphitheater 75% partnership interest in 20,000 9,417 26 244,835
10-year lease (expires January 4,
2005)
Reno: 119
Reno Hilton
Amphitheater............. amphitheater operating agreement (renewal under 8,500 3,977 21 83,509
negotiation)
TOTAL.................... 490,319 5,829(5) 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) Assumes completion of current expansion projects, which are anticipated to
be completed by summer 1998.
(3) Additional seating of approximately 40,000 is available for certain
events.
(4) Numbers shown are for 1997. Numbers for 1996 are unavailable.
(5) Represents average attendance by venue. Average attendance in 1996 by
event was 4,585.
Because the Company operates a number of its venues under leasing or
booking agreements, the Company's long-term success will depend on its ability
to renew these agreements when they expire or terminate. There can be no
assurance that the Company will be able to renew these agreements on acceptable
terms or at all, or that it will be able to obtain attractive agreements with
substitute venues.
<PAGE>
Sponsorships and Advertising; Marketing and Other Services
In order to maximize revenues, the Company actively pursues the sale of
local, regional and national corporate sponsorships, including the naming of
venues (e.g., the PNC Bank Arts Center) and the designation of "official" event
or tour sponsors, concessions providers (e.g., beer and soda), credit card
companies, phone companies, film manufacturers and radio stations, among
others. Sponsorship arrangements can provide significant additional revenues at
negligible incremental cost, and
11
<PAGE>
many of the Company's venues currently have no sponsorship arrangements in many
of the available categories (including naming rights). The Company believes
that the national venue network assembled through the Recent Acquisitions will
likely (a) attract a larger number of major corporate sponsors and (b) enable
the Company to sell national sponsorship rights at a premium over local or
regional sponsorship rights. The Company also pursues the sale of corporate
advertising at its venues, and believes that it has substantial advertising
space available (e.g., billboard space) that it has not yet begun to utilize.
The Company also believes that (a) its relationships with advertisers will
enable it to better utilize available advertising space and (b) the aggregation
of its audiences nationwide will create the opportunity for advertisers to
access a nationwide market.
The Company provides a variety of marketing and consulting services
derived from or complementary to their live entertainment operations, including
(a) local, regional and national live marketing programs and (b) subscription
or fee based radio and music industry data compilation and distribution. Live
marketing programs are generally specialized advertising campaigns designed to
promote a client's product or service by providing samples or demonstrations in
a live format, typically including at malls and college campuses. For example,
Contemporary (one of the Acquired Businesses) presents live marketing events on
behalf of AT&T for the purposes of demonstrating the advantages of AT&T's long
distance service over that of its competitors. This program is in its third
year, and Contemporary is now the primary vendor for this service.
Additionally, the Company believes that Contemporary is one of the leading
producers of national mall touring events, producing over 65 events every year
in the country's top-rated shopping malls. These events, either in stores or
mall congregation areas, are designed to promote brand awareness and drive
follow-up sales. Contemporary recently had mall tour campaigns for Newsweek
magazine (the Newsweek Technology Tour) and for Radio Shack (The Rock and Roll
Hall of Fame/Radio Shack Tour). The Company believes that, along with mall
events, Contemporary is one of the industry leaders in events produced on
college campuses. Currently in its seventh year, the CBS College Tour will
appear at 40 colleges in the U.S. In addition to promoting the image of the CBS
Television Network, these tours also create value-added tie-in promotions and
marketing programs for the network's top advertisers. During each year,
Contemporary uses over 100 vehicles (including semi-trailer trucks, vans and
other vehicles) traveling nationwide in support of these programs, and draws on
over 1,000 independent marketing associates across the country with respect to
its marketing campaigns.
The Company is engaged in music marketing, research and artist development
activities, and is a publisher of trade magazines for radio broadcasters, music
retailers, performers and record industry executives. Each of the Company's
magazines focuses on research and insight common to a specific contemporary
radio format. The Company also provides radio airplay and music retail research
services to record labels, artist managers, retailers and radio broadcasters.
The Company gathers its information directly from nearly 1,100 radio
programmers and product buyers and in 1996 had more than 300 clients for these
services. Annual fees from these services during this period have ranged from
$2,500 to $250,000 per corporate client.
The Company, through Network (one of the Acquired Businesses), creates and
distributes network radio special events and live concert programming for over
400 music radio stations in the top 200 United States radio markets.
Additionally, the Company produces eight daily radio "show prep" services that
stations use to supplement in-house content production. In 1996, Network
delivered these services to approximately 1,100 radio stations in exchange for
commercial inventory or airtime, which in turn was sold to national network
advertisers. Network also provides consulting and entertainment marketing
services to corporate clients with music business interests.
OPERATING STRATEGY
The Company's principal objectives are (a) to maximize revenue and cash
flow growth opportunities by being a leading promoter and producer of live
entertainment and (b) to own and/or operate leading live entertainment venues
in the United States. The Company's specific strategies include the following:
Own and/or Operate Leading Live Entertainment Venues in Nation's Top 50
Markets
A key component of the Company's strategy is to own and/or operate a
network of leading live entertainment venues in the nation's top 50 markets.
The Company believes that this strategy will enable it to (a) utilize its
nationwide venue footprint, significant industry expertise and access to a
large aggregate audience to secure more events and distribute content on a
national scale, (b) sell additional products and maximize numerous other
related revenue sources, (c) position itself to produce national tours by
leading music performers in order to capture a greater percentage of revenues
from those tours and (d) encourage wider use by performers of the Company's
venues by providing centralized access to a nationwide network of venues. The
Company believes that it owns and/or operates the largest network of venues
used principally for music concerts and other live entertainment events in the
United States, with 39 venues either directly owned or operated under lease or
exclusive booking arrangements in 21 of the top 50 markets, including 9
amphitheaters in 6 of the top 10 markets.
12
<PAGE>
Maximize Related Revenue Opportunities
The Company intends to enhance revenues and cash flows by maximizing
revenue sources arising from and related to its leadership position in the live
entertainment business. These related revenues comprised approximately 19% of
the Company's total revenues for the year ended December 31, 1997. Management
believes that these related revenue sources generally have higher margins than
promotion and production revenues and include, among others, (a) the sale of
corporate sponsorship, naming and other rights, concessions, merchandise,
parking and other products and services and (b) the sale of rights to advertise
to the Company's large aggregate national audience. Categories available for
sponsorship arrangements include the naming of the venue itself (e.g., the PNC
Bank Arts Center) and the designation of "official" event or tour sponsors,
concessions providers (e.g., beer and soda), credit card companies, phone
companies, film manufacturers and radio stations, among others. Sponsorship
arrangements can provide significant additional revenues at negligible
incremental cost, and many of the Company's venues currently have no
sponsorship arrangements in many of the available categories (including naming
rights). The Company also intends to maximize related revenues by developing
and exploiting intellectual property rights associated with (a) its production
of musical concert tours and themed events (such as regional music festivals)
and (b) branded characters created as an integral part of the content,
marketing and merchandising of certain motor sports events.
Exploit Synergies of the Acquired Businesses
The Company plans to maximize revenues by exploiting synergies among its
existing businesses and the Acquired Businesses. The Company believes that it
can utilize the best business practices of the respective Acquired Businesses
on a national scale. For example, the Atlanta-based regional Music Midtown
Festival, created and promoted by Concert/Southern (one of the Acquired
Businesses), is a highly successful music festival concept that drew
approximately 200,000 attendees in 1997; the Company believes that it can use
the event as a model for other markets. In addition, the Company believes that
the radio industry trade publications of Network (another of the Acquired
Businesses) will enable the Company to introduce new acts and new musical
releases to radio programming directors nationwide. This exposure can enhance
recorded music sales and, in turn, music concert attendance, particularly for
artists having relationships with the Company.
Increase Use of Venues; Diversification of Acts and Venues
Typically, a venue is not utilized for many of the dates available for
live entertainment events in any given season. The Company believes that it
will be able to increase the utilization of its venues through its ability to
affect scheduling on a nationwide basis, its local knowledge, relationships and
expertise and its presentation of a variety of additional events, including
comedy acts, magic acts, motivational speeches, national figure skating and
gymnastics competitions and exhibitions and bull riding competitions, among
others. The Company believes that a diversified portfolio of performers, events
and venues reduces reliance on the commercial success of any one performer,
event or venue.
Innovative Event Marketing
The Company plans to use innovative event marketing to increase
admissions, sponsorship and advertising revenues, and, to a limited extent,
average ticket prices at its venues. In particular, the Company believes that
it can increase the profitability of its venues by offering premium ticket
packages, including (a) season ticket packages that include amenities such as
preferred seating, VIP parking, waiter service, private club and/or "upscale"
concession menus, (b) subscription series packages allowing customers to
purchase tickets for a set of performances and (c) preferred seating, such as
box seating and VIP seating areas, which typically generate higher revenues per
seat. Moreover, the market research and audience demographics databases that
the Company acquired through certain of the Recent Acquisitions, when combined
with the Company's existing audience data collection efforts, will permit
highly-effective targeted marketing, such as direct-mail and subscription
series campaigns, which the Company believes will increase ticket pre-sales and
overall sales in a cost-efficient manner.
Strict Cost Controls; Nationally Coordinated Booking, Marketing &
Accounting
The Company's senior management imposes strict financial reporting
requirements and expense budget limitations on all of its businesses, enabling
senior management to monitor the performance and operations of all of its
businesses, to eliminate duplicative administrative costs and to realize
expense savings. Moreover, the Company believes that its size as a result of
the Recent 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 Acquired Businesses, (b) establishing a
centralized marketing team to exploit ancillary revenue streams on local,
regional and national levels, including from sponsorship, advertising and
merchandising opportunities, and (c) implementing a centralized accounting
system.
13
<PAGE>
Pursue Complementary Acquisition Opportunities
The live entertainment business is characterized by numerous participants,
including booking agents, promoters, producers, venue owners and venue
operators, many of which are entrepreneurial, capital-constrained local or
regional businesses that do not achieve significant economies of scale from
their operations. The Company believes that the fragmented nature of the
industry presents attractive acquisition opportunities, and that its larger
size will provide it with improved access to the capital markets that will give
it a competitive advantage in implementing its acquisition strategy. Through
consolidation, the Company will be better able to coordinate negotiations with
performer and talent agents, addressing what the Company believes is a growing
desire among performers and talent agents to deal with fewer, more
sophisticated promoters. The Company intends to pursue additional strategic
acquisitions of (a) amphitheater and other live entertainment venues and (b)
local and regional promoters and producers of music concert, theatrical,
specialized motor sports and other live entertainment events. The Company may
also pursue acquisitions of other related or complementary venues or
businesses.
EMPLOYEES
As of March 3, 1998, the Company has approximately 950 full-time
employees. The Company will also, from time to time, hire or contract for
part-time or seasonal employees or independent contractors, although its
staffing needs will vary. Pursuant to the agreement relating to the SFX Merger
(the "SFX Merger Agreement"), the Company has agreed to assume all obligations
arising under any employment agreements or arrangements between SFX
Broadcasting or any of its subsidiaries and the employees identified in the
merger agreement. These employees include the members of senior management and
all other employees currently employed in SFX Broadcasting's corporate
headquarters in New York. Management believes that its relations with its
employees are good. A number of the employees to be retained by the Company are
covered by collective bargaining agreements. See "Executive Compensation."
POTENTIAL CONFLICTS OF INTEREST
The Marquee Group, Inc. ("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. The Company
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
the Company. These transactions or arrangements will be subject to the approval
of the independent committees of the Company and Marquee, except that booking
arrangements in the ordinary course of business will be subject to periodic
review but not the approval of each particular arrangement. Marquee also acts
as a promoter of various sporting events and sports personalities and the
Company produces ice skating and gymnastics events that may compete with events
in which Marquee is involved. See "Certain Relationships and Related
Transactions-- Potential Conflicts of Interest."
The Sillerman Companies, Inc. ("TSC"), an entity controlled by Mr.
Sillerman and in which Mr. Tytel also has an equity interest, provides
financial consulting services to Marquee and Triathlon Broadcasting Company
("Triathlon"). TSC's services are provided by certain directors, officers and
employees of SFX Broadcasting, who are anticipated to become directors,
officers and employees of the Company 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 the Company, on the one hand, and their
duties as directors of Marquee and their interests in TSC, Marquee and
Triathlon, on the other hand.
In addition, prior to the consummation of the SFX Merger, Mr. Sillerman
and other members of the Company's management team will have management
obligations to both SFX Broadcasting and the Company that may cause them to
have conflicts of interest. See "Executive Compensation" and "Certain
Relationships and Related Transactions-- Potential Conflicts of Interest."
Pursuant to the employment agreement entered into between Brian Becker and
the Company in connection with the acquisition of PACE, Mr. Becker has the
option, exercisable within 15 days after the second anniversary of the
consummation of the PACE Acquisition, to purchase the Company's then existing
motor sports line of business (or, if that line of business has been sold, the
Company's then existing theatrical line of business) at its then fair market
value. Mr. Becker's option may present a conflict of interest in his role as a
director of the Company in evaluating proposals for the acquisition of either
line of business. See
14
<PAGE>
"Executive Compensation."
SEASONALITY
The Company's operations and revenues are largely seasonal in nature, with
generally higher revenue generated in the second and third quarters of the
year. For example, on a pro forma basis for the Completed Acquisitions, the
Company generated approximately 68% of its revenues in the second and third
quarters for the twelve months ending December 31, 1997. The Company's outdoor
venues are primarily utilized in the summer months and do not generate
substantial revenue in the late fall, winter and early spring. Similarly, the
musical concerts that the Company promotes largely occur in the second and
third quarters. To the extent that the Company's entertainment marketing and
consulting relate to musical concerts, they also predominantly generate
revenues in the second and third quarters. Therefore, the seasonality of the
Company's business causes (and will probably continue to cause) a significant
variation in the Company's quarterly operating results. These variations in
demand could have a material adverse effect on the timing of the Company's cash
flows and, therefore, on its ability to service its obligations with respect to
its indebtedness. However, the Company believes that this variation may be
somewhat offset with the acquisition of typically non-summer seasonal
businesses in the Recent Acquisitions, such as motor sports (which is
winter-seasonal) and Touring Broadway Shows (which typically tour between
September and May). See "Management's Discussion and Analysis of Financial
Condition and Results of Operations."
COMPETITION
Competition in the live entertainment industry is intense, and competition
is fragmented among a wide variety of entities. The Company competes on a
local, regional and national basis with a number of large venue owners and
entertainment promoters for the hosting, booking, promoting and producing of
music concerts, theatrical shows, motor sports events and other live
entertainment events. Moreover, the Company's marketing and consulting
operations compete with advertising agencies and other marketing organizations.
The Company and the Acquired Businesses compete not only with other live
entertainment events, including sporting events and theatrical presentations,
but also with non-live forms of entertainment, such as television, radio and
motion pictures. A number of the Company's competitors have substantially
greater resources than the Company. Certain of the Company's competitors may
also operate on a less leveraged basis, and have greater operating and
financial flexibility, than the Company. In addition, many of these competitors
also have long standing relationships with performers, producers, and promoters
and may offer other services that are not provided by the Company. There can be
no assurance that the Company will be able to compete successfully in this
market or against these competitors.
REGULATORY MATTERS
The business of the Company is not generally subject to material
governmental regulation. However, if the Company seeks to acquire or construct
new venue operations, its ability to do so will be subject to extensive local,
state and federal governmental licensing, approval and permit requirements,
including, among other things, approvals of state and local land-use and
environmental authorities, building permits, zoning permits and liquor
licenses. Significant acquisitions may also be subject to the requirements of
the Hart-Scott-Rodino Act Antitrust Improvements Act of 1976, as amended (the
"HSR Act"). Other types of licenses, approvals and permits from governmental or
quasi-governmental agencies might also be required for other opportunities that
the Company may pursue in the future. There can be no assurance that the
Company will be able to obtain the licenses, approvals and permits it may
require from time to time in order to operate its business.
AGREEMENTS RELATING TO THE SPIN-OFF
Prior to the Spin-Off, the Company will amend and restate its certificate
of incorporation to, among other things, increase its authorized capital stock
and will issue to SFX Broadcasting, in exchange for the issued and outstanding
shares of the Company's Common Stock held by SFX Broadcasting, the number of
shares of the Company's Common Stock necessary to consummate the Spin-Off.
For the purpose of effecting the Spin-Off and governing certain of the
relationships between the Company and SFX Broadcasting after the Spin-Off, the
Company, SFX Broadcasting and SFX Buyer have entered or will enter into the
various agreements described below. The material features of the distribution
agreement to be entered into among the Company' SFX Broadcasting and SFX Buyer
(the "Distribution Agreement"), the tax sharing agreement to be entered into
among the Company' SFX Broadcasting and SFX Buyer (the "Tax Sharing Agreement")
and the employee benefits agreement to be entered into among the Company, SFX
Broadcasting and SFX Buyer (the "Employee Benefits Agreement"), are summarized
below. These agreements have been filed with the Securities and Exchange
Commission (the "SEC") as exhibits to the Company's Registration Statement on
Form S-1, File No. 333-43287 (as amended, the "SFX Entertainment Registration
Statement") and the following
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descriptions are qualified in their entirety by reference to the actual
agreements.
Distribution Agreement
Manner of Effecting the Spin-Off
The Distribution Agreement provides for the distribution of shares of
the Company's Common Stock to the holders of record on the record date for the
Spin-Off (the "Spin-Off Record Date") of SFX Broadcasting's common stock,
Series D preferred stock, interests in SFX Broadcasting's director deferred
stock ownership plan and, upon exercise, Warrants (as defined below) as
follows:
o holders of SFX Broadcasting's Class A common stock will receive 1
share of the Class A Common Stock per share held;
o holders of SFX Broadcasting's Class B common stock will receive 1
share of the Company's Class B Common Stock per share held
o holders of SFX Broadcasting's Series D preferred stock will receive
the number of shares of Class A Common Stock obtained by multiplying
the number of shares held by 1.0987 (rounded down to the next whole
share)
o SFX Broadcasting will place in escrow with Chase Mellon Shareholder
Services, L.L.C. as escrow agent an aggregate of 609,858 shares of
Class A Common Stock for delivery to the holders of the warrants
granted by SFX Broadcasting to Sillerman Communications Management
Corporation (the "SCMC Warrants") and to the underwriters of
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- The Company's 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 the Class A Common Stock as adjustments to their interests
under SFX Broadcasting's director deferred stock ownership plan.
Transfer and Assumption of Assets and Obligations
The Distribution Agreement provides that, at the time of the Spin-Off, the
Company will assume (a) certain of SFX Broadcasting's leases and employment
agreements, (b) debt and liabilities incurred by the Company or its
subsidiaries after the date of the SFX Merger Agreement in connection with
acquisitions and capital expenditures, (c) liabilities under an airplane lease,
(d) liabilities under an agreement pursuant to which TSC, a consulting company
of which Mr. Sillerman is the Chairman of the Board of Directors and Chief
Executive Officer, and of which Mr. Tytel is the Executive Vice President,
General Counsel and a Director, provides services to Triathlon and the right to
receive fees for such services provided to Triathlon and (e) any other debt and
liabilities that the Company deems appropriate. SFX Broadcasting is obligated
to use its commercially reasonable efforts to release the Company and its
subsidiaries from all other debt and accrued liabilities prior to the effective
time of the SFX Merger.
The Company will be entitled to all of SFX Broadcasting's accounts
receivable relating to SFX Broadcasting's live entertainment business. SFX
Broadcasting will transfer to the Company, prior to the Spin-Off:
o 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 Broadcasting's radio
stations operating in Myrtle Beach;
o the employment agreements of certain employees of SFX Broadcasting;
and
o all other assets used primarily by the Company.
The Company will assume all of SFX Broadcasting's and its subsidiaries'
obligations accruing after the date of the Spin-Off under the above agreements
and in connection with the transfer of assets and employees.
Transferred Employees
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If the Spin-Off occurs prior to the closing date of the SFX Merger, SFX
Broadcasting's senior management and certain other employees of SFX
Broadcasting will devote as much time as they deem reasonably necessary to
conduct the operations of the Company, while continuing to serve in their
present capacities with, and consistent with their obligations to, SFX
Broadcasting. At the time of consummation of the SFX Merger, the Company will
assume all obligations arising under any employment agreement or arrangement
between SFX Broadcasting or any of its subsidiaries and the employees who are
transferred to the Company other than rights, if any, under those employment
agreements to receive options after a change of control and all existing rights
of indemnification. Messrs. Dugan, Kramer and O'Grady have indicated that, if
the SFX Merger Agreement is terminated, they will promptly resign from their
position as directors of the Company, and the Board will appoint three new
independent directors to serve until the next annual meeting of the Company's
stockholders. See "Executive Compensation."
Working Capital
Pursuant to the Distribution Agreement (and as required by the SFX Merger
Agreement), the Company and SFX Broadcasting have agreed to allocate funds
between them for working capital. If the Spin-Off occurs prior to the
consummation of the SFX Merger, then, immediately after the Spin-Off, SFX
Broadcasting's management will allocate working capital between the Company and
SFX Broadcasting, and SFX Broadcasting will pay to the Company any positive
amount allocated to the Company. In any event, at least five business days
before the consummation of the SFX Merger, SFX Broadcasting must provide the
Company with a good faith estimate of Working Capital (as defined below) as of
the date of consummation of the SFX Merger (the "Estimated Working Capital").
If the Estimated Working Capital is a positive number, then SFX Broadcasting
must pay to the Company an amount equal to the Estimated Working Capital at the
time of consummation of the SFX Merger. On the other hand, if the Estimated
Working Capital is a negative number, then the Company must pay to SFX
Broadcasting an amount equal to the Estimated Working Capital at the time of
consummation of the SFX Merger.
As soon as practicable (and in any event within ninety days) after the SFX
Merger is consummated, SFX Broadcasting must deliver to the Company an audited
statement of Working Capital as of the date of consummation of the SFX Merger.
If the Company does not object to SFX Broadcasting's Working Capital statement
within fifteen days following delivery thereof, then the Working Capital
reflected on SFX Broadcasting's Working Capital statement will be the "Final
Working Capital." If the Company does so object, then the issues in dispute
will be submitted to a major national accounting firm for resolution and to
determine the "Final Working Capital."
On the third business day after the Final Working Capital is determined,
SFX Broadcasting or the Company, as the case may be, must pay to the other an
amount equal to the Final Working Capital, less the Estimated Working Capital
previously paid, together with interest on the absolute value of the difference
at an annual rate of 10% beginning on the date of consummation of the SFX
Merger and ending on the date of payment of the amount (the "Working Capital
Adjustment Amount"). However, if the Company notifies SFX Broadcasting prior to
the payment date that it wishes to have all or any portion of the Final Working
Capital (the "SFX Merger Consideration Adjustment") treated as an adjustment to
the consideration payable in connection with the SFX Merger, then the
consideration payable in connection with the SFX Merger will be increased by an
amount equal to the quotient of the SFX Merger Consideration Adjustment divided
by the fully diluted number of shares of SFX Broadcasting's common stock
outstanding immediately prior to the consummation of the SFX Merger, and SFX
Broadcasting must promptly distribute (a) the appropriate amount to the
appropriate holders, immediately prior to the consummation of the SFX Merger,
of SFX Broadcasting's common stock and Series D preferred stock, (b) upon
exercise, the appropriate amount to holders of options, warrants and unit
purchase options of SFX Broadcasting unexercised immediately prior to the
consummation of the SFX Merger and (c) the appropriate amount to holders of
options, warrants and unit purchase options of SFX Broadcasting who exercised
their securities on and after the consummation of the SFX Merger and prior to
the final payment date. If the Company elects to treat any portion of the Final
Working Capital as an SFX Merger Consideration Adjustment, then the Company
must pay SFX Broadcasting the difference, if any, between the SFX Merger
Consideration Adjustment and the Working Capital Adjustment Amount so that the
aggregate net amount to be paid or received (as the case may be) by SFX
Broadcasting is equal to the amount that would have been paid or received if
the SFX Merger Consideration Adjustment had not been made.
"Working Capital" means the sum of all current assets of SFX Broadcasting
and its consolidated subsidiaries minus the sum of all current liabilities of
SFX Broadcasting and its consolidated subsidiaries, as of the point in time
immediately prior to the consummation of the SFX Merger, adjusted (without
duplication) by:
(a) increasing Working Capital by 50% (up to $1.0 million) of all fees
and expenses incurred by SFX Broadcasting in connection with
acquiring consents from holders of SFX Broadcasting's Series E
preferred stock and certain of its outstanding notes in connection
with the transactions contemplated by the SFX Merger Agreement;
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(b) increasing (if a positive number) or decreasing (if a negative
number) Working Capital by the product of (A) $75.00 (or any other
amount payable to holders of SFX Broadcasting's Class A common stock)
and (B) the difference between 15,589,083 less the sum of the fully
diluted number of shares of SFX Broadcasting common stock outstanding
immediately prior to the time of consummation of the SFX Merger
(excluding up to 250,838 shares of SFX Broadcasting's common stock
subject to a right of repurchase granted by SFX Broadcasting in
connection with an acquisition);
(c) reducing Working Capital by the difference between $84,554,649 less
the sum of (A) the aggregate exercise price of all options, warrants
and unit purchase options of SFX Broadcasting outstanding immediately
prior to the SFX Merger consummation plus (B) the aggregate exercise
price of all warrants underlying unit purchase options of SFX
Broadcasting outstanding immediately prior to the SFX Merger
consummation plus (C) the aggregate base price of all SARs of SFX
Broadcasting outstanding immediately prior to the SFX Merger
consummation;
(d) reducing Working zCapital by the product of (A) $42 and (B) up to
250,838 shares of SFX Broadcasting's common stock subject to a right
of repurchase by SFX Broadcasting granted in connection with an
acquisition (see "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 Broadcasting and its subsidiaries after June
30, 1997 and immediately prior to the SFX Merger consummation;
(f) decreasing Working Capital by all accrued capital expenditures of SFX
Broadcasting as of immediately prior to the SFX Merger consummation
(to the extent not reflected in current liabilities);
(g) increasing Working Capital by accrued but not yet payable dividends;
(h) except as required by clause (i) below, excluding from Working
Capital any liabilities attributable to indebtedness of SFX
Broadcasting;
(i) excluding from Working Capital any liabilities included in clauses
(i) through (iv) of clause (k) below;
(j) reducing Working Capital by unpaid costs, fees and expenses of SFX
Broadcasting arising out of, based on or that will arise from the
transactions contemplated by the SFX Merger Agreement (other than as
a result of actions taken by SFX Buyer Sub) (including amounts
relating to the termination of any employees, broker fees, legal
fees, accounting fees, advisory fees and fees incurred in connection
with third party consents, waivers and amendments of creditors or
holders of SFX Broadcasting's preferred stock);
(k) reducing Working Capital by the amount of SFX Broadcasting's Excess
Debt (as defined below), if a positive number, or increasing Working
Capital by the amount of the Excess Debt, if a negative number.
"Excess Debt" means, as of immediately prior to the consummation of
the SFX Merger, the difference between the sum of the following and
$899.7 million:
(i) the difference between (A) indebtedness of SFX Broadcasting and its
subsidiaries, less (B) the difference between $70.0 million and any
amounts (other than the reimbursement of expenses) actually received
by SFX Broadcasting and its consolidated subsidiaries after August
24, 1997, under agreements relating to the sale or local marketing
arrangement (the local marketing payments may not exceed $30,000 per
month) of its WVGO-FM and the sale or local marketing arrangement of
its Jackson/Biloxi radio stations, less (C) any indebtedness incurred
to finance acquisitions approved by Buyer of stock of or
substantially all of the assets of radio stations, less (D) interest
accrued as of immediately prior to the consummation of the SFX Merger
that is not then due and payable,
(ii) the aggregate merger consideration payable to holders of SFX
Broadcasting's Series C preferred stock (which SFX Broadcasting
anticipates will be $2.0 million),
(iii) the aggregate liquidation preference amount of SFX Broadcasting's
Series E preferred stock, and
(iv) environmental costs or liabilities accrued and not paid after June
30, 1997, to the extent they exceed $100,000 in the aggregate; and
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(l) reducing Working Capital by the difference between (i) 142,032 times
the higher of (A) the average of the last sales price of SFX
Broadcasting's Series E preferred stock during the 15 business days
ending on the date of consummation of the SFX Merger, or (B) the
average of the last sales price of SFX Broadcasting's Series E
preferred stock during the 15 business days preceding February 9,
1998 ($115.08), and (ii) $14,203,200 (the "Series E Adjustment").
Working Capital will not include any asset transferred to the Company or
any of its subsidiaries, any liability assumed by the Company or any liability
to which none of SFX Broadcasting or any of its subsidiaries is a party
immediately after the consummation of the SFX Merger. Any computation of
Working Capital should assume that the Spin-Off has been consummated. As of
December 31, 1997, Working Capital payable by SFX Broadcasting to the Company
would have been approximately $3.0 million (excluding the Series E Adjustment).
The actual amount of Working Capital as of the closing of the SFX Merger may
differ substantially from the amount in existence as of December 31, and will
be a function of, among other things, the operating results of SFX Broadcasting
through the date of the SFX Merger, the actual cost of consummating the SFX
Merger and the related transactions and other obligations of SFX Broadcasting,
including the payment of dividends and interest on SFX Broadcasting's debt, the
Meadows Repurchase and the amount of any settlement paid by SFX Broadcasting in
connection with the SFX Merger shareholder litigation. Moreover, Working
Capital will be reduced by at least $2.1 million pursuant to the Series E
Adjustment. See "-Risk Factors--Working Capital Adjustments and Repayment of
Advances" and "Management's Discussion and Analysis of Financial Condition and
Results of Operations--Liquidity and Capital Resources-- Spin-Off."
Acquisitions and Capital Improvements
SFX Broadcasting and the Company have agreed that the Company may, from
time to time, (a) acquire additional businesses engaged in the same line of
business as the Company or (b) make capital improvements on assets owned or
leased by it or its subsidiaries. In each case, SFX Broadcasting must loan the
Company the funds with which to consummate the acquisitions and capital
improvements. However, all amounts so borrowed by the Company must be repaid on
the date of the Spin-Off. SFX Broadcasting may increase the borrowing
availability under its credit agreement for these purposes, and must use its
best efforts to obtain any required or desirable waivers, consents or
modifications under any financing or other agreement of SFX Broadcasting in
connection with the acquisitions or capital improvements.
If the Company makes such additional acquisitions or capital improvements
by borrowing funds from SFX Broadcasting, it will be required to obtain
financing to repay the amounts that it borrows from SFX Broadcasting , 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 the Company will be able to obtain such
financing on advantageous terms, or at all.
In February 1998, the Company reimbursed SFX Broadcasting approximately
$25.3 million for consent fees, capital expenditures, and other acquisition
related fees paid by SFX Broadcasting on behalf of the Company. SFX
Broadcasting may advance additional amounts to the Company prior to the
consummation of the Spin-Off.
Release and Indemnification
Pursuant to the Distribution Agreement, SFX Broadcasting has agreed to
release the Company and its subsidiaries and affiliates (other than SFX
Broadcasting and its subsidiaries) and all persons who at any time prior to the
date of the distribution of the Company's common stock in the Spin-Off (the
"Spin-Off Distribution Date") were stockholders, directors, agents or employees
of the Company or its subsidiaries from any and all claims arising from any
acts or events occurring or failing to occur or any conditions existing on or
before the Spin-Off Distribution Date (other than claims arising from
transactions contemplated by the Distribution Agreement, the SFX Merger
Agreement and certain related agreements). Similarly, the Company has agreed to
release SFX Broadcasting, its affiliates (other than the Company and its
subsidiaries) and all persons who at any time prior to the date of the Spin-Off
were stockholders, directors, agents or employees of SFX Broadcasting or its
subsidiaries from any and all claims arising from any acts or events occurring
or failing to occur or any conditions existing on or before the date of the
Spin-Off (other than claims arising from transactions contemplated by the
Distribution Agreement, the SFX Merger Agreement and certain related
agreements).
The Distribution Agreement requires the Company to indemnify, defend and
hold SFX Broadcasting and its subsidiaries (other than the Company and its
subsidiaries) and each of its directors, officers, employees and agents
harmless from and against any liabilities (other than income tax liabilities)
to which SFX Broadcasting or any of its subsidiaries (other than the Company
and its subsidiaries) may be or become subject that (a) relate to the assets,
business, operations, debts or liabilities of the Company and its subsidiaries
(including liabilities to be assumed by the Company as contemplated in the
Distribution Agreement and any liabilities arising under certain guarantees of
SFX Broadcasting in connection with the Recent Acquisitions), whether arising
prior
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to, concurrent with or after the Spin-Off or (b) result from a breach by
the Company or its subsidiaries of any representation, warranty, or covenant
contained in the Distribution Agreement or any related agreements.
The Distribution Agreement requires SFX Broadcasting to indemnify, defend
and hold the Company and its subsidiaries and each of its directors, officers,
employees and agents harmless from and against any liabilities (other than
income tax liabilities) to which the Company and its subsidiaries may be or
become subject that (a) relate to the assets, business, operations, debts or
liabilities of SFX Broadcasting or its subsidiaries (other than the Company and
its subsidiaries), whether arising prior to, concurrent with or after the
Spin-Off or (b) result from a breach by SFX Broadcasting or its subsidiaries
(other than 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
The Company has represented to SFX Broadcasting that the SFX Entertainment
Registration Statement and the consent solicitation documents sent to the
holders of certain of SFX Broadcasting's securities did not, at the time it
became effective or was mailed, contain any untrue statement of a material fact
or omit to state a material fact required to be stated in order to make the
statements in the SFX Entertainment Registration Statement and the consent
solicitation documents, in light of the circumstances under which they were
made, not misleading.
Related Agreements
SFX Broadcasting and the Company have agreed that any tax sharing
agreement to which they are parties must be terminated as of the effective date
of the Spin-Off. In addition, the Distribution Agreement requires SFX
Broadcasting and the Company to enter into the Tax Sharing Agreement and
Employee Benefits Agreement (as described below) on or before the date of the
Spin-Off.
Use of Names; Intellectual Property
At the closing of the SFX Merger, SFX Broadcasting will assign to the
Company or its designee the name "SFX," together with all causes of action and
the right to recover for past infringements of that name. As soon as
commercially practicable, but no later than six months from the consummation of
the SFX Merger, SFX Broadcasting must cease all use of the name "SFX" or other
trademarks, trade names or their identifiers owned by, licensed to, or
transferred pursuant to the Distribution Agreement to the Company.
Conditions to the Spin-Off
Pursuant to the Distribution Agreement, the obligations of the Company
and SFX Broadcasting to consummate the Spin-Off will be subject to the
fulfillment or waiver of each of the following conditions:
o SFX Broadcasting's board of directors must be satisfied that SFX
Broadcasting's surplus (as defined under Delaware law) would be
sufficient to permit the Spin-Off under Delaware law and must
formally approve the Spin-Off;
o the 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 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
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Spin-Off;
o the Company and SFX Broadcasting must enter into the Tax Sharing
Agreement and the Employee Benefits Agreement; and
o each of the covenants and provisions in the Distribution Agreement
required to be performed or complied with prior to the Spin-Off must
be performed or complied with.
SFX Broadcasting's board of directors is entitled to waive any of the above
conditions prior to the Spin-Off.
Expenses of Spin-Off
Pursuant to the Distribution Agreement, all fees and expenses incurred in
connection with the Spin-Off will be paid by the party incurring them.
Termination of the SFX Merger Agreement
If the SFX Merger Agreement is terminated in accordance with its terms for
any reason, the boards of directors of SFX Broadcasting and the Company will
each appoint a committee of independent directors (none of whom will serve on
both boards of directors) to negotiate in good faith with respect to all
matters that they deem necessary to effectuate the separation of the affairs of
SFX Broadcasting and the Company, including the employment of employees to be
transferred to the Company pursuant to the Distribution Agreement. No
adjustments will be made to the initial allocation of working capital between
SFX Broadcasting and the Company if the SFX Merger Agreement is terminated in
accordance with its terms.
Amendment or Modification
SFX Broadcasting and the Company can only amend the Distribution Agreement
by written agreement with the consent of SFX Buyer (which may not be
unreasonably withheld).
Termination
The Distribution Agreement may be terminated and the Spin-Off abandoned at
any time before the date of the Spin-Off by, and in the sole discretion of, SFX
Broadcasting . In the event of such a termination, no party will have any
liability to any other party.
Tax Sharing Agreement
Prior to the Spin-Off, SFX Broadcasting and the Company will enter into
the Tax Sharing Agreement. Under the Tax Sharing Agreement, the Company will
agree to pay to SFX Broadcasting the amount of the tax liability of SFX and the
Company combined, to the extent properly attributable to the Company for the
period up to and including the Spin-Off, and will indemnify SFX Broadcasting
for any tax adjustment made in subsequent years that relates to taxes properly
attributable to the Company during the period prior to and including the
Spin-Off. SFX Broadcasting , in turn, will indemnify the Company for any tax
adjustment made in years subsequent to the Spin-Off that relates to taxes
properly attributable to the SFX Broadcasting during the period prior to and
including the Spin-Off. The Company also will be responsible for any taxes of
SFX Broadcasting resulting from the Spin-Off, including any income taxes but
only to the extent that such income taxes result from gain on the distribution
that exceeds the net operating losses of SFX Broadcasting and the Company
available to offset such gain (including net operating losses generated in the
current year prior to the Spin-Off).
The actual amount of the gain will be based on the excess of the value
of the Company's Common Stock distributed on the date of the Spin-Off over
the tax basis of that stock. The Company believes that the value of the
Company's Common Stock for tax purposes will be determined by no later
than the first trading date following the date the stock is distributed in
the Spin-Off. Increases or decreases in the value of the Company's Common
Stock subsequent to such date will not effect the tax liability. If the
Company's Common Stock had a value of approximately $15 per share at the
time of the Spin-Off, management believes that no material indemnification
payment would be required. Such indemnification obligation would be
approximately $4.0 million at $16 per share and would increase by
approximately $7.7 million for each $1.00 increase above the per share
valuation of $16. If the Company's Common Stock was valued at $22 1/2 per
share, (the last sales price of the Class A Common Stock (trading on a
when-issued basis) on the over the counter market on March 13, 1998),
management estimates that the Company would have been required to pay
approximately $54.0 million pursuant to such indemnification obligation. The
Company expects
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that such indemnity payment will be due on or about June 15, 1998. See "-Risk
Factors-- Indemnification Arrangements."
EMPLOYEE BENEFITS AGREEMENT
Prior to the Spin-Off, SFX Broadcasting and the Company will enter
into an Employee Benefits Agreement. Pursuant to the Employee Benefits
Agreement, SFX Broadcasting and the Company will agree to take all actions
necessary or appropriate so that, as of the Spin-Off, the Company and its
subsidiaries will no longer be participating employers and sponsors of the
401(k), health, group term life insurance, long term disability insurance and
cafeteria plans maintained by SFX Broadcasting (collectively, the "SFX Employee
Benefit Plans"). The Employee Benefits Agreement will also provide for the
treatment of the benefits under the SFX Employee Benefit Plans of employees
being transferred from SFX Broadcasting to the Company or who are otherwise
employed by the Company upon the Spin-Off. With respect to employees
transferred from SFX Broadcasting to the Company or who are otherwise employed
by the Company upon the Spin-Off, SFX Broadcasting will have sole
responsibility for retaining and discharging any claims that are incurred on or
prior to the date of their transfer under SFX Employee Benefit Plans that are
not 401(k) plans. On or prior to the Spin-Off, the Company will continue to pay
premiums and contributions under the SFX Employee Benefit Plans in accordance
with its past practices and procedures, except that any premiums and
contributions for the month in which the Spin-Off occurs shall be paid as soon
as practicable after that month and pro-rated. To the extent the account
balances under the 401(k) plan maintained by SFX Broadcasting of employees
being transferred from SFX Broadcasting to the Company or who are otherwise
employed by the Company upon the Spin-Off are not distributed, SFX Broadcasting
and the Company must take all actions necessary or appropriate to effect their
transfer to a 401(k) plan established by the Company.
RISK FACTORS
Many of the statements, estimates, predictions and projections contained
in this "Business" section and "Management's Discussion and Analysis of
Financial Condition and Results of Operations" section of this Annual Report on
Form 10-K, in addition to certain statements contained elsewhere herein, are
"forward-looking statements" within the meaning of Section 27A of the
Securities Act and Section 21E of the Exchange Act. These forward-looking
statements are prospective, involving risks and uncertainties. While these
forward-looking statements, and any assumptions on which they are based, are
made in good faith and reflect the Company's current judgment regarding the
direction of its business, actual results will almost always vary, sometimes
materially, from any estimates, predictions, projections, assumptions or other
future performance suggested herein. The following risk factors should be
considered carefully in evaluating the Company and its business by investors in
the Company. The Company does not undertake to release publicly any revisions
to forward-looking statements that may be made to reflect events or
circumstances after the date of this Annual Report on Form 10-K or to reflect
the occurrence of unanticipated events.
ABSENCE OF COMBINED OPERATING HISTORY; POTENTIAL INABILITY TO INTEGRATE
ACQUIRED BUSINESSES
The business of the Company has been developed principally through the
acquisition of established live entertainment businesses, which have all been
acquired since January 1997. The Company consummated all of the Completed
Acquisitions in 1997 and the Recent Acquisitions in February and March of 1998.
Prior to their acquisition by the Company, these acquired companies operated
independently. In addition, each of the Acquired Businesses has significantly
increased the size and operations of the Company. The Company's prospects
should be considered in light of the numerous risks commonly encountered in
business combinations. Although the anticipated management of the Company has
significant experience in other industries, there can be no assurance that the
Company's management group will be able to effectively integrate the Acquired
Businesses. The Company's business, financial condition and results of
operations could be materially adversely affected if the Company is unable to
retain the key personnel that have contributed to the historical performances
of the Acquired Businesses or the Company. See "-- Dependence on Key Personnel"
and "Business."
RISKS RELATED TO RECENT ACQUISITIONS
Although management believes that the consummation of the Recent
Acquisitions was in the best interests of the Company, it involves substantial
risks on the part of the Company. There can be no assurance that the Recent
Acquisitions will yield the expected benefits to the Company or will not
materially adversely affect the Company's business, financial condition or
results of operations.
PACE Acquisition
The PACE acquisition agreement provides that each PACE seller will have an
option (the "Fifth Year Put Option"), exercisable for 90 days after the fifth
anniversary of the closing of the PACE Acquisition, to require the Company to
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repurchase up to one-third of the Class A Common Stock received by that seller
(representing 500,000 shares in the aggregate) for $33.00 in cash per share.
With certain limited exceptions, these option rights are not assignable by the
sellers. In certain circumstances, if the selling price of the Class A Common
Stock is less than $13.33 per share, the Company may be required to make an
offer to the sellers to provide an additional cash payment or additional shares
of the Class A Common Stock, which each seller will have the option of taking.
The agreement governing the partnership through which PACE holds its
interest in the Lakewood Amphitheater in Atlanta, Georgia contains a provision
that purports to restrict PACE and its affiliates from directly or indirectly
owning or operating another amphitheater in Atlanta. In management's view, this
provision will not materially affect the business or prospects of the Company.
The Company intends to seek a waiver of the restrictive provision; however, it
is possible that the Company will be unable to obtain the waiver.
Contemporary Acquisition
In addition, in the Contemporary acquisition agreement, the Company agreed
to make payments to any Contemporary sellers who own shares of the 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 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 Class A Common Stock will be $13.33 per share at that
time.
Network Acquisition
Pursuant to the Network Acquisition Agreement, the Company has agreed to
increase the purchase price for Network 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.
Although the Company and SFX Broadcasting have conducted a due diligence
investigation of the Acquired Businesses, the scope of their investigation was
limited. Although the agreements governing the Recent 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.
In addition, if the Company is unable to issue shares of its capital stock
to certain of the sellers prior to certain time periods, by virtue of having
failed to consummate the Spin-Off or for any other reason, the aggregate cash
consideration that would be owed to the sellers in the Recent 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
Recent Acquisitions provide for certain other purchase price adjustments and
future contingent payments in certain circumstances. There can be no assurance
that the Company 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 Recent Acquisitions. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Recent Acquisitions" and "-- Liquidity and Capital Resources" and
"Certain Relationships and Related Transactions-- Indemnification of Mr.
Sillerman."
FINANCING MATTERS
The Company will require additional financing in order to make all of the
payments described under "Management's Discussion and Analysis of Financial
Condition and Results of Operations- Liquidity and Capital Resources",
including the anticipated tax indemnification obligation to SFX Broadcasting
(approximately $54.0 million based on the trading price (on a when-issued
basis) of the Class A Common Stock on March 13, 1998)), planned capital
expenditures (approximately $38.0 million), fees and expenses related to the
Spin-Off (estimated to be approximately $18.0 million), certain change of
control payments to executive officers ($5.0 million) and the Meadows
Repurchase (at least $8.3 million). See "Indemnification Arrangements." The
Company's ability to issue preferred stock or debt securities or to borrow
under its senior secured credit facility (the "Credit Facility") may be
significantly impacted by the covenants in the Credit Facility and/or the
indenture (the
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"Indenture") relating to its 9 1/8% Senior Subordinated Notes due 2008 (the
"Notes"). To the extent that available borrowings are insufficient under the
Credit Facility, debt financing is not available or management determines that
debt financing or the issuance of preferred stock is inadvisable in view of the
Company's capital structure, management currently anticipates that upon
consummation of the Spin-Off, such obligations will be financed through a
public offering of not less than $125.0 million in value of Class A Common
Stock. If the Class A Common Stock were valued at $22 1/2 per share (the last
sales price of the Class A Common Stock (trading on a when-issued basis) on the
over-the-counter market on March 13, 1998), approximately 5.6 million shares of
Class A Common Stock would be issued in such offering. There can be no
assurance that the Company will be able to complete the offering or obtain
alternate financing on acceptable terms or at all. Any offering of Class A
Common Stock would be dilutive to the ownership interests of the Company's
then-existing stockholders and the trading price of the Class A Common Stock
may be adversely affected. Any debt financing would require payments of
principal and interest and would adversely impact the Company's cash flows.
Furthermore, certain agreements of the Company, including the Distribution
Agreement, the Tax Sharing Agreement, certain employment agreements and the
agreements relating to the Recent Acquisitions provide for tax and other
indemnities, purchase price adjustments and future contingent payments in
certain circumstances. There can be no assurance that the Company will have
sufficient sources of funds to make such payments should they come due. In
addition, consistent with its operating strategy, SFX Entertainment intends to
pursue additional expansion opportunities and expects to continue to identify
and negotiate with respect to substantial acquisitions in the live
entertainment business, certain of which may be consummated prior to the
Spin-Off. See "-- Risk Related to Recent Acquisitions" and "Management
Discussion and Analysis of Financial Condition and Results of Operations--
Liquidity and Capital Resources."
SUBSTANTIAL LEVERAGE
The Company is a highly leveraged company. As of December 31, 1997, on a
pro forma basis giving effect to the private placement of the Notes and $150.0
million in borrowings under the Credit Facility (the "Financing"), the Recent
Acquisitions and the Spin-Off, the Company's consolidated indebtedness would
have been approximately $517.6 million (of which $350.0 million would have
consisted of the Notes, and the balance would have consisted of $150.0 million
in debt under the Credit Facility and $17.6 million in pre-existing senior
debt), its temporary equity would have been approximately $16.5 million, and
its stockholders' equity would have been approximately $148.1 million. If the
Company is unable to issue shares of capital stock, and thus is obligated to
pay cash to the sellers in the Recent 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. 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
Recent Acquisitions provide for other purchase price adjustments and future
contingent payments in certain circumstances. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations--Recent
Acquisitions." In addition, the Company may incur substantial additional
indebtedness from time to time to finance future acquisitions, for capital
expenditures or for other purposes. See "--Financing Matters."
The Company'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 Acquired Businesses and their integration into the Company's
operations. There can be no assurance that the Company will be able to make
planned borrowings (including under the Credit Facility), that the Company's
business will generate sufficient cash flow from operations, or that future
borrowings will be available in an amount to enable the Company to service its
debt and to make necessary capital or other expenditures. The Company may be
required to refinance a portion of the principal amount of its indebtedness
prior to their respective maturities. There can be no assurance that the
Company will be able to raise additional capital through the sale of
securities, the disposition of assets or otherwise for any refinancing. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations-- Liquidity and Capital Resources."
The degree to which the Company is and will be leveraged could have
material consequences to the holders of shares of the Company's Common Stock,
including, but not limited to, (a) increasing the Company's vulnerability to
general adverse economic and industry conditions, (b) limiting the Company's
ability to obtain additional financing to fund future acquisitions, working
capital, capital expenditures and other general corporate requirements, (c)
requiring the dedication of a substantial portion of the Company's cash flow
from operations to the payment of principal of, and interest on, its
indebtedness, thereby reducing the availability of the cash flow to fund
working capital, capital expenditures or other general corporate purposes, (d)
limiting the Company's flexibility in planning for, or reacting to, changes in
its business and the industry and (e) placing the Company at a competitive
disadvantage to less leveraged competitors. In addition, the Indenture and the
Credit Facility
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contain, financial and other restrictive covenants that limit the ability of
the Company to, among other things, borrow additional funds. Failure by the
Company to comply with these covenants could result in an event of default
that, if not cured or waived, could have a material adverse effect on the
Company's business, financial condition and results of operations. The
indebtedness incurred under the Credit Facility is secured by a pledge of the
stock of its subsidiaries and by liens on substantially all of its and its
subsidiaries' tangible assets. In addition, the Notes and borrowings under the
Credit Facility are guaranteed by the Company's subsidiaries.
FUTURE CHARGES TO EARNINGS
Consummation of the Recent Acquisitions will result in substantial charges
to earnings relating to interest expense and the recognition and amortization
of goodwill; these charges will increase the Company's losses or reduce or
eliminate its earnings, if any. As of December 31, 1997 the Company had
goodwill of approximately $60.3 million. This balance will substantially
increase in 1998 due to the recent acquisitions. See "Management's Discussion
and Analysis of Financial Condition and Results of Operations-- Liquidity and
Capital Resources."
The Company anticipates entering into employment agreements with certain
of its executive officers before the Spin-Off. In connection with these
agreements, the Board, on the recommendation of its Compensation Committee,
agreed to sell the executive officers an aggregate of 650,000 shares of the
Company's Class B Common Stock and 190,000 shares of the Class A Common Stock
at a purchase price of $2.00 per share. The shares will be issued on or about
the Spin-Off Distribution Date. The Company will record a non-cash compensation
charge at the date of the grant equal to the fair market value of the shares
less the aggregate purchase price paid. See "Executive Compensation--
Employment Agreements and Arrangements with Certain Officers and Directors."
In addition, the Board, on the recommendation of its Compensation
Committee, also has approved the issuance of stock options exercisable for an
aggregate of 245,000 shares of the 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 exercise period to
the extent that the fair value of the underlying the Class A Common Stock
exceeds the exercise price.
FUTURE ACQUISITIONS
The Company expects to pursue additional acquisitions of live
entertainment businesses in the future, although the Company has no present
understandings, commitments or agreements with respect to any such
acquisitions. Future acquisitions by the Company could result in (a)
potentially dilutive issuance of equity securities, (b) the incurrence of
substantial additional indebtedness and/or (c) the amortization of expenses
related to goodwill and other intangible assets, any or all of which could
materially adversely affect the Company's business, financial condition and
results of operations. Acquisitions involve numerous risks, including
difficulties in the assimilation of the operations, technologies, services and
products of the acquired companies and the diversion of management's attention
from other business concerns. If any acquisition occurs, the Company's
business, financial condition and results of operations may be materially
adversely affected.
INDEMNIFICATION ARRANGEMENTS
In the Distribution Agreement, the Company will agree to indemnify, defend
and hold SFX Broadcasting and its subsidiaries harmless from and against
certain liabilities to which SFX Broadcasting or any of its subsidiaries may be
or become subject. These liabilities relate to the assets, business,
operations, employees (including under any employment agreement assumed by the
Company in the Spin-Off), debts or liabilities of the Company and its
subsidiaries (collectively, the "SFX Entertainment Group"). Although the
Company does not anticipate that any material liabilities for which it has
agreed to indemnify SFX Broadcasting and its subsidiaries will arise, it is
possible that the Company will become subject to these liabilities. Any of
these liabilities may have a material adverse effect on the Company's business,
financial condition or results of operations. See "-- Agreements Relating to
the Spin-Off-- The Distribution Agreement."
In addition, pursuant to the Tax Sharing Agreement, the Company also will
be responsible for certain taxes resulting from the Spin-Off, including income
taxes but only to the extent that such income taxes result from gain on the
distribution that exceeds the net operating losses of SFX Broadcasting
available to offset such gain (including net operating losses generated in
the current year prior to the Spin-Off). See "Agreements Relating to the
Spin-Off--Tax Sharing Agreement." The actual amount of the gain will be based
on the excess of the value of the Company's Common Stock distributed in the
Spin-Off over the tax basis of that stock.
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The Company believes that the value of the Company's Common Stock for tax
purposes will be determined by no later than the first trading day following
the date on which the Company's Common Stock is distributed in the Spin-Off.
Increases or decreases in the value of the Company's Common Stock subsequent to
such date will not effect the tax liability. If the Company's Common Stock
had a value of approximately $15 per share at the time of the Spin-Off,
management believes that no material indemnification payment would be
required. Such indemnification obligation would be approximately $4.0 million
at $16 per share and would increase by approximately $7.7 million for each
$1.00 increase above the per share valuation of $16. If the Company Common
Stock were valued at $22 1/2 per share (the last price of the Class A Common
Stock (trading on a when issued basis) on the over-the-counter market on
March 13, 1998), management estimates that the Company would have been
required to pay approximately $54.0 million pursuant to such indemnification
obligation. The Company expects that such indemnity payment will be due on
or about June 15, 1998.
Concurrently with the execution of the SFX Merger Agreement, Mr. Sillerman
waived his right to receive indemnification from SFX Broadcasting, its
subsidiaries, SFX Buyer Sub and SFX Buyer, after the effective time of the SFX
Merger with respect to claims or damages relating to the SFX Merger Agreement
and the transactions contemplated thereby, except to the extent that SFX
Broadcasting can be reimbursed under the terms of its directors' and officers'
liability insurance. It is anticipated that, after the Spin-Off, the Company
will agree to indemnify (to the extent permitted by law) Mr. Sillerman for any
such claims or damages. In addition, pursuant to Messrs. Sillerman's and
Ferrel's existing employment agreements with SFX Broadcasting (which will be
assumed by the Company pursuant to the SFX Merger Agreement), the Company will
be obligated to indemnify them (to the extent permitted by law) for one-half of
the cost of any excise tax that may be assessed against them for any
change-of-control payments made to them by SFX Broadcasting in connection with
the SFX Merger. See "Certain Relationships and Related Transactions--
Assumption of Employment Agreements; Certain Change of Control Payments" and
"-- Indemnification of Mr. Sillerman."
FAILURE TO APPROVE SPIN-OFF PROPOSAL
If a proposal that will allow holders of shares of SFX Broadcasting's
Class B Common Stock to receive shares of the Company's Class B Common Stock in
the Spin-Off (the "Spin-Off Proposal") is not approved at SFX Broadcasting's
upcoming stockholders' meeting scheduled to be held on March 26, 1998, that
failure could result in a "Change of Control" pursuant to the terms of the
Credit Facility. In that event, there can be no assurance that the Company
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 the Company's business, results of operations and financial condition. The
Company's ability to borrow under the Credit Facility or to obtain other
financing is restricted by the terms of the Indenture.
CONTROL OF MOTOR SPORTS AND THEATRICAL BUSINESSES
Pursuant to the employment agreement entered into between Brian Becker and
the Company in connection with the PACE acquisition, Mr. Becker has the option,
exercisable within 15 days after February 25, 2000 to acquire the Company's
then existing motor sports line of business (or, if that line of business has
previously been sold, the Company's then existing theatrical line of business)
at its then fair market value. Mr. Becker's exercise of this option could have
a material adverse effect on the Company's business, financial condition and
results of operations. In addition, 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 "Executive Compensation-
Employment Agreements and Arrangements with Certain Officers." On a pro forma
basis giving effect to the Recent Acquisitions, specialized motor sports would
have comprised approximately 6%, and theater would have comprised approximately
16%, of the Company's total net revenues for the 12 months ended December 31,
1997.
BGP RIGHT OF FIRST REFUSAL
The Company has agreed that it will not sell all, or substantially all, of
BGP's assets prior to February 24, 2001 without offering the BGP sellers the
opportunity to purchase the assets on the same terms as those included in any
bona fide offer received by the Company from any third party.
CONTROL OF CONCERTS
After the consummation of the Spin-Off or the SFX Merger, the senior
management of Concerts may have the right pursuant to their employment
agreements (a) to purchase the outstanding capital stock of Concerts (a
subsidiary of the Company holding a significant amount of the assets of the
Company) for Fair Market Value (as defined in their employment
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agreements) or (b) to receive a cash payment equal to 15% of the amount by
which the Fair Market Value of Concerts exceeds the fixed payment portion of
the cash purchase price of the acquisition of Concerts, plus 20% interest
thereon. The senior management of Concerts and SFX Broadcasting have reached an
agreement in principle to waive any of the above rights in connection with the
Spin-Off, the SFX Merger and related transactions; however, there can be no
assurance that the rights will be waived on terms acceptable to SFX
Broadcasting and the Company or at all. In addition, although the Company is in
the process of negotiating amendments to these agreements, these and certain
other rights described in the agreements may continue to apply to transactions
after, or unrelated to, the Spin-Off or the SFX Merger. See "Certain
Relationships and Related Transactions--Delsener/Slater Employment Agreements."
EXPANSION STRATEGY; NEED FOR ADDITIONAL FUNDS
The Company intends to pursue additional expansion opportunities. However,
it may be unable to identify and acquire additional suitable businesses or
obtain the financing necessary to acquire the businesses. Each acquisition may
also be subject to the prior approval of the Company's lenders. Any debt
financing would require payments of principal and interest and would adversely
impact the Company's cash flow. Additional financing for future acquisitions
may be unavailable and, depending on the terms of the proposed acquisitions and
financing, may be restricted by the terms of the Credit Facility and the
Indenture. See "-Financing Matters" and "Management's Discussion and Analysis
of Financial Condition and Results of Operations--Liquidity and Capital
Resources." Furthermore, future acquisitions may result in potentially dilutive
issuances of equity securities as well as charges to operations relating to
interest expense or the recognition and amortization of goodwill; these charges
would increase the Company's losses or reduce or eliminate its earnings, if
any. Acquisitions also involve numerous risks, including difficulties in the
assimilation of operations, technologies, services and products of the acquired
companies and the diversion of management's attention from other business
concerns. If any additional acquisition occurs, the Company's business,
financial condition and results of operations might be materially adversely
affected.
ECONOMIC CONDITIONS AND CONSUMER TASTES
The Company's operations are affected by general economic conditions and
consumer tastes. The demand for live entertainment tends to be highly sensitive
to consumers' disposable incomes, and thus a decline in general economic
conditions that generally reduces consumers' disposable incomes can, in turn,
materially adversely affect the Company's revenues. In addition, the
profitability of events promoted or produced by the Company is directly related
to the ancillary revenues generated by those events, and the ancillary revenues
decrease with lower attendance levels. The success of a music concert,
theatrical show or motor sports event depends on public tastes, which are
unpredictable and susceptible to change, and may also be significantly affected
by the number and popularity of competitive productions, concerts or events as
well as other forms of entertainment. It is impossible for the Company to
predict the success of any music concert, theatrical show or motor sports
event. In addition, decreased attendance, a change in public tastes or an
increase in competition could have a material adverse effect on the Company's
business, financial condition and results of operations.
AVAILABILITY OF ARTISTS AND EVENTS
The Company's success and ability to sell tickets (including
subscriptions) is highly dependent on the availability of popular musical
artists, Touring Broadway Shows and specialized motor sports talent, among
other performers of live entertainment. The Company's and the Acquired
Businesses' results of operations have been adversely affected in periods where
fewer popular musical artists and/or popular theatrical productions were
available for presentation. There can be no assurance that popular musical
artists, theatrical shows or specialized motor sports talent will be available
to the Company in the future. The lack of availability of these artists and
productions could have a material adverse effect on the Company's business,
financial condition and results of operations.
CONTROL OF VENUES
The Company operates a number of its live entertainment venues under
leasing or booking agreements, and accordingly the Company's long-term success
will depend in part on its ability to renew these agreements when they expire
or terminate. There can be no assurance that the Company will be able to renew
these agreements on acceptable terms or at all, or that it will be able to
obtain attractive agreements with substitute venues. See "Business-- The
Company's Live Entertainment Activities-- Venue Operations."
RESTRICTIONS IMPOSED BY THE COMPANY'S INDEBTEDNESS
The Indenture and the Credit Facility contain a number of significant
covenants that, among other things, restrict the ability of the Company and its
subsidiaries to dispose of assets, incur additional indebtedness, repay other
indebtedness, pay
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dividends, make certain investments or acquisitions, repurchase or redeem
capital stock, engage in mergers or consolidations, or engage in certain
transactions with subsidiaries and affiliates and otherwise restrict corporate
activities. These restrictions may adversely affect the Company's ability to
finance its future operations or capital needs or to engage in other business
activities that may be in the interest of the Company. In addition, the
Indenture and the Credit Facility require the Company to maintain compliance
with certain financial ratios, such as a maximum total leverage ratio, a
maximum senior leverage ratio, a minimum fixed charges ratio, a minimum pro
forma interest expense ratio and a minimum debt service ratio. The Company's
ability to comply with these ratios and limits may be affected by events beyond
its control. A breach of any of these covenants or the inability of the Company
to comply with the required financial ratios or limits could result in an event
of default under the Credit Facility. Such an event of default could permit the
lenders to declare all borrowings outstanding to be due and payable, to require
the Company to apply all of its available cash to repay its borrowings or to
prevent the Company from making debt service payments on certain portions of
its outstanding indebtedness. If the Company were unable to repay any
borrowings when due, the lenders could proceed against their collateral. The
Credit Facility requires the Company and its subsidiaries to grant the lenders
thereunder a continuing security interest in all of their tangible assets and
in the capital stock of the guaranteeing subsidiaries. If the Company's
indebtedness were to be accelerated, there can be no assurance that the assets
of the Company would be sufficient to repay its indebtedness in full.
In addition, if the Spin-Off Proposal is not approved and the Spin-Off or
an alternative disposition of the Company is nevertheless consummated, then
these events would likely result in a "Change of Control" pursuant to the terms
of the Credit Facility. Furthermore, Mr. Sillerman has pledged certain shares
of SFX Broadcasting's Class B Common Stock that, if sold, could result in such
a "Change of Control." See "Security Ownership of Certain Beneficial Owners and
Management Possible Change of Control." In the event of such a "Change of
Control," the Company 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
the Company's business, results of operation and financial condition.
WORKING CAPITAL ADJUSTMENTS AND REPAYMENT OF ADVANCES
Pursuant to the Distribution Agreement, the Company must pay SFX
Broadcasting any net negative Working Capital at the time of consummation of
the SFX Merger. Alternatively, SFX Broadcasting must pay to the Company any net
positive Working Capital. Therefore, the capitalization of the Company will
depend, to a large extent, on the operating results of SFX Broadcasting through
the date of the SFX Merger. As of December 31, 1997, the Company estimates that
Working Capital to be received by the Company would have been approximately
$3.0 million (excluding the Series E Adjustment). The actual amount of Working
Capital as of the closing of the SFX Merger may differ substantially from the
amount as of December 31, 1997, and will be a function of, among other things,
the operating results of SFX Broadcasting through the date of the SFX Merger,
the actual cost of consummating the SFX Merger and the related transactions.
SFX will also incur certain other significant expenses prior to the
consummation of the SFX Merger that could reduce Working Capital, including the
payment of dividends and interest on SFX Broadcasting's debt, the Meadows
Repurchase and the amount of any settlement paid by SFX Broadcasting in
connection with the SFX Merger shareholder litigation. Moreover, Working
Capital will be reduced by at least $2.1 million pursuant to the Series E
Adjustment. If the Company is required to make Working Capital payments to SFX
Broadcasting, there can be no assurance that the Company will have the funds to
do so or that it will have sufficient funds to conduct its operations after
making the required payments.
In addition, at the time of the Spin-Off, the Company must repay sums
advanced to it by SFX Broadcasting for certain acquisitions or capital
expenditures after August 25, 1997 and not repaid at or before the closing of
the Spin-Off. In February 1998, the Company reimbursed SFX Broadcasting
approximately $25.3 million for consent fees, capital expenditures and other
acquisition related expenses funded by SFX Broadcasting. SFX Broadcasting may
advance additional amounts to the Company for these purposes before the
consummation of the Spin-Off. See "Agreements Relating to the Spin-Off--
Distribution Agreement" and "Management's Discussion and Analysis of Financial
Condition and Results of Operations-- Liquidity and Capital Resources."
CONTROL BY MANAGEMENT; STOCK ISSUED TO MANAGEMENT
At the time of completion of the Spin-Off (assuming that the Spin-Off
Proposal is approved), and after the grant of additional shares as described in
"Executive Compensation--Employment Agreements and Arrangements with Certain
Officers and Directors" and "Certain Relationships and Related
Transactions--Issuance of Stock to Holders of SFX Broadcasting's Options and
SARs," it is anticipated that Mr. Sillerman will beneficially own approximately
45.7% of the total voting power of the Company's Common Stock, and that all
directors and executive officers together will beneficially own approximately
52.2% of the total voting power of the Company's Common Stock. Accordingly,
these persons will have substantial influence
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over the affairs of the Company, including the ability to control the election
of a majority of the board of directors of the Company (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 the Company's Common
Stock to certain members of senior management of the Company in connection with
their employment with the Company will result in substantial non-cash charges
to operations, which could increase the Company's losses or reduce or eliminate
its earnings, if any. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations," "Executive Compensation" and "Security
Ownership of Certain Beneficial Owners and Management."
DEPENDENCE ON KEY PERSONNEL
The success of the Company depends substantially on the abilities and
continued service of certain of its (and its subsidiaries') executive officers
and directors. In particular, the Company will depend on the continued services
of Robert F.X. Sillerman, Michael G. Ferrel, Brian Becker, Geoffrey Armstrong,
Howard J. Tytel and Thomas P. Benson. Although these individuals generally have
greater experience in the radio broadcasting business than the live
entertainment industry, they do have significant expertise in selecting,
negotiating and financing acquisitions and in operating and managing public
companies. In addition, most of the Company's directors and executive officers
are also currently acting as directors and executive officers of SFX
Broadcasting. Until the consummation of the SFX Merger, these directors and
executive officers can be anticipated to expend substantial time and effort in
managing the business of SFX Broadcasting (which may detract from their
performance with respect to the Company). If the SFX Merger is not consummated,
there can be no assurance that the Company will be able to retain the services
of these directors and executive officers. See "Executive Compensation." The
Company and Messrs. Sillerman and Ferrel have reached agreements in principle
that those individuals will serve as officers and directors of the Company.
However, if the Spin-Off Proposal is not approved, there can be no assurance
that they will serve in that capacity, in which event SFX Broadcasting intends
to pursue alternative means of disposing of the Company.
Messrs. Sillerman and Tytel are also officers and directors of, and have
an aggregate equity interest of approximately 9.2% in Marquee, a company
involved in various aspects of the sports, news and other entertainment
industries, and own a substantial equity interest in Triathlon, a company that
owns and operates radio stations. In addition, they provide consulting services
to both companies through an affiliated entity. Messrs. Sillerman and Tytel
devote time to both Marquee and Triathlon, and the amount of time they continue
to devote to those companies could detract from their duties as officers and
directors of the Company. However, neither Mr. Sillerman nor Mr. Tytel has an
employment agreement with Marquee or Triathlon, and they do not anticipate
devoting significant amounts of time to Marquee or Triathlon. See "Business--
Potential Conflicts of Interest."
Furthermore, the operations of each of the Acquired Businesses are local
in nature and depend to a significant degree on the continued services of
between one to three individuals at each business. See "Executive Compensation"
and "Certain Relationships and Related Transactions." The loss of any of these
individual's services could have a material adverse effect on the Company's
business, financial condition and results of operations.
ENVIRONMENTAL MATTERS
The Company has real property relating to its business, consisting of fee
interests, leasehold interests and other contractual interests. The Company's
properties are subject to foreign, federal, state and local environmental laws
and regulations regarding the use, storage, disposal, emission, release and
remediation of hazardous and non-hazardous substances, materials or wastes,
including laws relating to noise emissions (which may affect, among other
things, the hours of operation of the Company's venues). Further, under certain
of these laws and regulations, the Company could be held strictly, jointly and
severally liable for the remediation of hazardous substance contamination at
its facilities or at third-party waste disposal sites, and could also be held
liable for any personal or property damage related to any contamination. The
Company believes that it is in substantial compliance with all of these laws
and regulations, and has performed preliminary environmental assessments of all
of the properties that are wholly-owned, without identifying material
environmental hazards. Although the level of future expenditures cannot be
determined with certainty, the Company does not anticipate, based on currently
known facts, that its environmental costs are likely to have a material adverse
effect on the Company's business, financial condition and results of
operations.
FRAUDULENT CONVEYANCE
The Board of Directors of SFX Broadcasting does not intend to consummate
the Spin-Off unless it is satisfied that SFX Broadcasting is solvent before and
will be solvent following the Spin-Off and that the Spin-Off is otherwise
permissible under applicable law. There is no certainty, however, that a court
would find the facts relied on and the judgments made by the
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Board of Directors of SFX Broadcasting to be binding on creditors of SFX or
that a court would reach the same conclusions as the Board of Directors of SFX
Broadcasting in determining that SFX Broadcasting is solvent at the time of,
and after giving effect to, the Spin-Off. If a court in a lawsuit filed by an
unpaid creditor or representative of unpaid creditors, such as a trustee in
bankruptcy, were to find that, at the time the Spin-Off is consummated or after
giving effect thereto, SFX Broadcasting (a) was insolvent, (b) was rendered
insolvent by reason of the Spin-Off, (c) was engaged in a business or
transaction for which the remaining assets of SFX Broadcasting constituted
unreasonably small capital or (d) intended to incur, or believed it would
incur, debts beyond its ability to pay as the debts matured, then the court
might void the Spin-Off (in whole or in part) as a fraudulent conveyance and
require SFX Broadcasting's stockholders to return the shares of the Company
distributed in the Spin-Off (in whole or in part) to SFX Broadcasting or
require the Company to fund certain liabilities of SFX Broadcasting for the
benefit of SFX Broadcasting's creditors. If the assets of the Company were
recovered as fraudulent transfers by a creditor or trustee of SFX
Broadcastings, the relative priority of right to payment between any financing
and any fraudulent transfer claimant would be unclear, and the Company could be
rendered insolvent. In addition, under applicable corporate law, a corporation
generally makes distributions to its stockholders only out of its surplus (net
assets minus capital) and not out of capital. The foregoing consequences would
also apply were a court to find that the Spin-Off was not made out of SFX
Broadcasting's surplus. Indebtedness of the Company was incurred to finance the
Recent Acquisitions, to refinance certain indebtedness of the Company and the
Recent Acquisitions, to pay related fees and expenses, and for general
corporate purposes. Management believes that the indebtedness of the Company
incurred in the Financing was incurred for proper purposes and in good faith,
and that, based on present forecasts and other financial information, after the
consummation of the Spin-Off, the Company will be solvent, will have sufficient
capital for carrying on its business and will be able to pay its debts as they
mature.
The Company believes that, in accordance with the facts examined in
connection with the Spin-Off and the Financing, (a) SFX Broadcasting and the
Company will be solvent at the time of the Spin-Off, (b) the Company was
solvent at the time of the Financing and (c) the Spin-Off will be made entirely
out of SFX Broadcasting surplus in accordance with applicable law. However, the
Company cannot predict what standard a court might apply in evaluating these
matters, and it is possible that the court would disagree with the Company's
conclusions.
ANTI-TAKEOVER EFFECTS
The Amended and Restated Certificate of Incorporation of the Company (the
"SFX Entertainment Certificate"), the By-laws of the Company (the "SFX
Entertainment By-laws") and the Delaware General Corporation Law (the "DGCL")
contain several provisions that could have the effect of delaying, deferring or
preventing a change of control of the Company in a transaction not approved by
the Board. The SFX Entertainment Certificate provides for the issuance of
shares of the Company's Class B Common Stock (with 10 votes per share in most
matters), and the holders of these shares will generally be able to prevent a
change of control of the Company if they so desire. In addition, the SFX
Entertainment Certificate authorizes the Board to issue up to 25,000,000 shares
of preferred stock in one or more series and to fix the number of shares and
the relative designations and powers, preferences, and rights, and
qualifications, limitations, and restrictions thereof, without further vote or
action by the stockholders. Issuances of preferred stock could, under certain
circumstances, have the effect of delaying or preventing a change in control of
the Company and may adversely affect the rights of holders of the Company's
Common Stock. Furthermore, the Company is subject to the anti-takeover
provisions of Section 203 of the DGCL, which prohibit the Company from engaging
in a "business combination" with an "interested stockholder" for three years
after the date of the transaction in which the person became an interested
stockholder (unless the business combination is approved in a prescribed
manner). The application of Section 203 could also have the effect of delaying
or preventing a change in control of the Company. The Board has also adopted
certain other programs, plans and agreements with the Company's management
and/or employees that may make a change of control more expensive. See
"Executive Compensation."
ITEM 2. PROPERTIES.
The Company's executive offices are located at 650 Madison Avenue, 16th
Floor, New York, New York 10022. Pursuant to the Distribution Agreement, SFX
Broadcasting has agreed to transfer certain leases relating to its offices to
the Company prior to the Spin-Off. In addition to the properties described in
"--The Company's Live Entertainment Activities-- Venue Operations," the Company
leases office space in New York, New York Austin and Houston, Texas; Atlanta,
Georgia; Chicago, Illinois; Indianapolis, Indiana; Miami, Florida;
Gaithersburg, Maryland; Santa Monica, California; Seattle, Washington; London,
England; and St. Louis, Missouri and owns office buildings in Burbank and San
Francisco, California. These properties are generally leased for terms of 1 to
10 years. See "Business-- Agreements Relating to the Spin-Off."
ITEM 3. LITIGATION.
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Although the Company is involved in several suits and claims in the
ordinary course of business, it is not currently a party to any legal
proceeding that it believes would have a material adverse effect on its
business, financial condition or results of operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to the Company's stockholders during the fourth
quarter.
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND STOCKHOLDER MATTERS
UPON THE CONSUMMATION OF THE SPIN-OFF
The Company has applied to list the Class A Common Stock upon the
consummation of the Spin-Off on the Nasdaq National Market but may seek listing
on an exchange even if such application is approved. A when-issued trading
market (one in which shares can be traded before certificates are actually
available or issued) has developed in the Class A Common Stock on the
over-the-counter market (symbol SFXV). However, such trading prices may not
necessarily be indicative of the trading price of the Class A Common Stock
subsequent to the Spin-Off. The Company's Class B Common Stock is not expected
to be publicly traded.
On the Spin-Off Distribution Date, SFX Broadcasting will distribute
approximately 13,400,000 shares to approximately 150 holders of record of the
SFX Broadcasting 's Class A common stock, Series D preferred stock and
interests in SFX Broadcasting's director deferred stock ownership plan,
assuming the exercise of outstanding warrants of SFX Broadcasting before the
Spin-Off Record Date and based on the number of holders of record of SFX
Broadcasting 's Class A common stock, Series D preferred stock and interests in
SFX Broadcasting's director deferred stock ownership plan on March 10, 1998.
The Transfer Agent and Registrar for the Class A Common Stock will be Chase
Mellon Shareholder Services, L.L.C. In addition, the board of directors of the
Company has approved the grant of up to 793,633 shares of the Class A Common
Stock to holders as of the Spin-Off Record Date of stock options or SARs of SFX
Broadcasting, whether or not vested. It is anticipated that the Company will
grant an aggregate of 190,000 shares of the Class A Common Stock pursuant to
employment agreements. See "Executive Compensation-- Employment Agreements and
Arrangements with Certain Officers and Directors" and "Certain Relationships
and Related Transactions-- Issuance of Stock to Holders of SFX Broadcasting's
Options and SARs."
Shares of the Class A Common Stock distributed to SFX Broadcasting
stockholders in the Spin-Off will be freely transferable, except for shares
received by persons who may be deemed to be "affiliates" of the Company under
the Securities Act. See "Security Ownership of Certain Beneficial Owners and
Management." Persons who may be deemed to be affiliates of the Company
generally include individuals or entities that control, are controlled by or
are under common control with the Company, and may include certain officers and
directors of the Company as well as principal stockholders of the Company, if
any. Persons who are affiliates of the Company may sell their shares of the
Company's Common Stock only pursuant to an effective registration statement
under the Securities Act or an exemption from the registration requirements of
the Securities Act, such as the exemptions afforded by Section 4(2) of the
Securities Act and Rule 144 thereunder.
DIVIDEND POLICY
The Company has no present plans to declare any dividends on the Class A
Common Stock. The terms of the Indenture and Credit Facility restrict the
Company's ability to pay dividends on the Class A 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.
RECENT SALES OF UNREGISTERED SECURITIES
On February 11, 1998, the Company sold $350.0 million in aggregate
principal amount of its 9 1/8% Senior Subordinated Notes dues 2008. Lehman
Brothers, Goldman Sachs, & Co., BNY Capital Markets, Inc. and ING Barings (the
"Initial Purchasers") were the purchasers of the Notes and resold the Notes (i)
to certain "qualified institutional buyers," as defined in Rule 44A of the
Securities Act of 1933, as amended (the "Securities Act") and (ii) outside the
United States to certain persons in reliance upon Regulation S promulgated
under the Securities Act. The aggregate cash offering price of the Notes was
$350.0 million and the aggregate discounts and commissions related to the sale
were $10.5 million. The Company relied upon an exemption from registration
under Section 4(2) of the Securities Act as a transaction not involving a
public offering. The
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Company has agreed to register the Notes (or a new series of securities
identical in all respects to the Notes) under the Securities Act within a
certain time period.
On February 24, 1998, the Company consummated its acquisition of BGP. In
connection with such acquisition, the Company issued to the sellers of BGP
options to purchase an aggregate of 562,640 shares of Class A Common Stock upon
consummation of the Spin-Off.
On February 25, 1998, the Company consummated its acquisition of PACE. In
connection with such acquisition, the Company has agreed to issue to the
sellers of PACE 1.5 million shares of Class A Common Stock upon consummation of
the Spin-Off.
On February 27, 1998, the Company consummated its acquisition of
Contemporary. In connection with such acquisition, the Company issued to the
sellers of Contemporary shares of the Company's series A redeemable convertible
preferred stock which will automatically convert into 1,402,850 shares of Class
A Common Stock upon consummation of the Spin-Off.
On February 27, 1998, the Company consummated its acquisition of Network.
In connection with such acquisition, the Company has agreed to issue to the
sellers of Network 750,188 shares of Class A Common Stock upon consummation of
the Spin-Off.
The sales of securities to the sellers of BGP, PACE, Contemporary and
Network were private transactions not involving a public offering and were
exempt from the registration provisions of the Securities Act pursuant to
Section 4(2) thereof. Each of these sales was made without the use of an
underwriter.
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ITEM 6. SELECTED COMBINED FINANCIAL DATA OF THE COMPANY
SELECTED CONSOLIDATED FINANCIAL DATA OF THE COMPANY
(in thousands, except per share amounts)
The Selected Consolidated Financial Data of the Company includes the
historical financial statements of Delsener/Slater and affiliated companies,
the predecessor of the Company, for each of the four years ended December 31,
1996 and the historical financial statements of the Company for the year ended
December 31, 1997. The statement of operations data with respect to
Delsener/Slater for the year ended December 31, 1993 and the balance sheet data
as of December 31, 1993 and 1994 is unaudited. The financial information has
been derived from the audited and unaudited financial statements of the Company
and Delsener/Slater, and should be read in conjunction therewith,
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------------------------------------------------------------------
Predecessor
-------------------------------------------------------------------------
1993 1994 1995 1996 1997
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenue.......................... $46,526 $92,785 $47,566 $50,362 $96,144
Operating expenses............... 45,635 90,598 47,178 50,686 83,417
Depreciation & amortization...... 762 755 750 747 5,431
Corporate expenses (1)........... -- -- -- -- 2,206
-------------- ---------- --------- --------- ----------
Operating income (loss).......... 129 1,432 (362) (1,071) 5,090
Interest expense................ (148) (144) (144) (60) (1,590)
Other income, net................ 85 138 178 198 295
Equity income (loss) from investments -- (9) 488 524 509
-------------- ---------- --------- --------- ----------
Income (loss) before income taxes.. 66 1,417 160 (409) 4,304
Income tax (provision) benefit..... (57) (5) (13) (106) 490
-------------- ---------- --------- --------- ----------
Net income (loss).................. $ 9 $ 1,412 $ 147 $ (515) $ 3,814
============== ========== ========= ========= ==========
OTHER OPERATING DATA:
EBITDA (2)........................ $ 2,187 $ 388 $ (324) $10,521
============== ========== ========= ========= ==========
CASH FLOW FROM:
Operating activities............. $ 2,959 $ (453) $ 4,214 $ 1,005
Investing activities............. -- -- (435) (73,296)
Financing activities............. (477) (216) (1,431) 78,270
BALANCE SHEET DATA:
Current assets..................... $1,823 $4,453 $3,022 $6,191 $11,220
Property and equipment, net........ 4,484 3,728 2,978 2,231 59,685
Intangible assets, net............. -- -- -- -- 60,306
Other assets....................... 113 41 37 458 15,731
-------------- ---------- --------- --------- ----------
Total assets....................... 6,420 8,222 6,037 8,880 146,942
============== ========== ========== ========= ==========
Current liabilities................ 4,356 3,423 3,138 7,973 22,437
Long-term debt, including current
portion....................... -- 1,830 -- -- 16,178
Temporary equity................... -- -- -- -- --
Stockholders' equity............... 6,420 2,969 2,900 907 102,144
</TABLE>
(1) Corporate expenses were reduced by $1,794,000 for fees earned from
Triathlon Broadcasting Company ("Triathlon") for the year ended December
31, 1997. The right to receive such fees in the future is to be assigned
to the Company by SFX Broadcasting in connection with the Spin-Off. Future
fees
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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."
(2) "EBITDA" is defined as earnings before interest, taxes, other income, net,
equity income (loss) from investments and depreciation and amortization.
Although EBITDA is not a measure of performance calculated in accordance
with generally accepted accounting principals ("GAAP"), the Company
believes that EBITDA is accepted by the entertainment industry as a
generally recognized measure of performance and is used by analysts who
report publicly on the performance of entertainment companies.
Nevertheless, this measure should not be considered in isolation or as a
substitute for operating income, net income, net cash provided by
operating activities or any other measure for determining the Company's
operating performance or liquidity which is calculated in accordance with
GAAP.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion of the financial condition and results of
operations of the Company should be read in conjunction with the consolidated
financial statements and related notes thereto. The following discussion
contains certain forward-looking statements that involve risks and
uncertainties. The Company's actual results could differ materially from those
discussed herein. Factors that could cause or contribute to the differences
include, but are not limited to, risks and uncertainties relating to the
Company's absence of a combined operating history, its potential inability to
integrate the Acquired Businesses and other risks related to the Recent
Acquisitions, control of the motor sports and theatrical businesses, future
acquisitions, inability to obtain future financings, inability to successfully
implement operating strategies (including the achievement of cost savings), the
Company's expansion strategy, its need for additional funds, its control of
venues, working capital adjustments, control by management, dependence on key
personnel, potential conflicts of interest, indemnification agreements,
seasonality, competition, regulatory matters, environmental matters, economic
conditions and consumer tastes and availability of artists and events. See
"Business--Risk Factors." The Company undertakes no obligation to publicly
release the results of any revisions to these forward-looking statements that
may be made to reflect any future events or circumstances.
The performance of entertainment companies, such as the Company, is
measured, in part, by their ability to generate EBITDA. "EBITDA" is defined as
earnings before interest, taxes, other income, net equity income (loss) from
investments and depreciation and amortization. Although EBITDA is not a measure
of performance calculated in accordance with GAAP, the Company believes that
EBITDA is accepted by the industry as a generally recognized measure of
performance and is used by analysts who report publicly on the performance of
entertainment companies. Nevertheless, this measure should not be considered in
isolation or as a substitute for operating income, net income, net cash
provided by operating activities or any other measure for determining the
Company's operating performance or liquidity that is calculated in accordance
with GAAP.
The Company's core business is the promotion and production of live
entertainment events, most significantly for concert and other music
performances in venues owned and/or operated by the Company and in third-party
venues. In connection with all of its live entertainment events, the Company
seeks to maximize related revenue streams, including the sale of corporate
sponsorships, the sale of concessions and the merchandising of a broad range of
products. On a pro forma basis giving effect to the Recent Acquisitions, the
Company's music and ancillary businesses comprised approximately 78%, theater
comprised approximately 16% and specialized motor sports comprised
approximately 6% of the Company's total net revenues for the year ended
December 31, 1997.
Promotion of events involves booking talent, renting or providing the
event venue, marketing the event to attract ticket buyers and providing for
local services required in the production of the event such as security and
stage hands. Promoters generally receive revenues from the sale of tickets and
sponsorships. When an event is promoted at a venue owned or managed by the
promoter, the promoter also generally receives a percentage of revenues from
concessions, merchandising, parking and premium box seats. The Company earns
promotion revenues principally by promoting (a) music concerts, (b) Touring
Broadway Shows and (c) specialized motor sports events.
Production of events involves developing the event content, hiring
artistic talent and managing the actual production of the event (with the
assistance of the local promoter). Producers generally receive revenues from
guarantees and from profit sharing agreements with promoters, a percentage of
the promoters' ticket sales, merchandising, sponsorships, licensing and the
exploitation of other rights (including intellectual property rights) related
to the production. The Company earns producing revenues by producing (a)
Touring Broadway Shows, (b) specialized motor events and (c) other proprietary
and non-proprietary entertainment events.
COMPLETED ACQUISITIONS
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The Company entered the live entertainment business with SFX
Broadcasting's acquisition of Delsener/ Slater, a New York-based concert
promotion company, in January 1997 for aggregate 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
Broadcasting acquired Sunshine Promotions, a concert promoter in the Midwest,
and certain other related companies for an aggregate consideration of $61.5
million. As a result of the acquisition of Sunshine Promotions, the Company
owns the Deer Creek Music Theater, a 21,000-seat complex located in
Indianapolis, Indiana, the Polaris Amphitheater, a 20,000-seat complex located
in Columbus, Ohio, and has a long-term lease to operate the Murat Centre, a
2,700-seat theater and 2,200-seat ballroom located in Indianapolis, Indiana.
See "Certain Relationships and Related Transactions-- Delsener/Slater
Employment Agreements."
RECENT ACQUISITIONS
In February 1998, the Company acquired BGP, PACE, Pavilion Partners,
Contemporary, and the Network Group and in March 1998, the Company acquired
Concert/Southern. See "Business-- Recent Acquisitions."
Acquisition of BGP
On February 24, 1998, the Company, through the Company's wholly-owned
subsidiary, BGP Acquisition, LLC acquired all of the outstanding capital stock
of BGP, for a total consideration of $80.3 million, including $60.8 million in
cash, $12.0 million in repayment of debt, which amount was at least equal to
BGP's working capital (as defined in the acquisition agreement), and options to
purchase 562,640 shares of Class A Common Stock of the Company. Such shares
were valued by the parties at $13.33 per share, for a total share value of $7.5
million (the "BGP Acquisition"). The options shall become exercisable for no
additional consideration upon consummation of the Spin-Off. If the Spin-Off
shall not have occurred by June 30, 1998, the option holders may elect to sell
the options to the Company at $13.33 per option plus interest from the closing
date. The purchase price was financed from the proceeds of an offering exempt
from the registration requirements of the Securities Act of the Notes, which
was consummated on February 11, 1998 (the "Offering").
Acquisition of PACE
On February 25, 1998, the Company acquired all of the outstanding capital
stock of PACE (the "PACE Acquisition"). In connection with the PACE
Acquisition, the Company acquired 100% of Pavilion Partners, a partnership that
owns interests in 10 venues ("Pavilion"), one-third through the acquisition of
PACE and two-thirds through separate agreements between PACE and Viacom Inc.
and certain of its affiliates ("Blockbuster") and between PACE and YM Corp.
("Sony") (the acquisition of such two-thirds interest, the "Pavilion
Acquisition"). The total consideration for the PACE Acquisition was
approximately $150.1 million, comprised of $109.5 million in cash, the
repayment of approximately $20.6 million of debt and the issuance of 1.5
million shares of the Class A Common Stock. Such shares were valued by the
parties at $13.33 per share for a total shares value of $20 million and will be
issued upon consummation of the Spin-Off. The total consideration for the
Pavilion Acquisition was approximately $90.6 million, comprised of $41.4
million in cash and the repayment of $43.1 million of debt and the assumption
of approximately $6.1 million of debt related to a capital lease. The purchase
price was financed from the proceeds of the Offering. In the event that the
Spin-Off has not been consummated on or before July 1, 1998 and each third
month thereafter, each selling stockholder in the PACE Acquisition will have
the option to require the Company to pay $13.33 per share in cash in lieu of
each share of the Class A Common Stock (the "PACE Option"). SFX Broadcasting
has guaranteed the full and timely performance of all of the Company's
obligations under the agreement relating to the PACE Acquisition until the
shares of Class A Common Stock have been delivered or the PACE Option shall
have been exercised by each selling stockholder in the PACE Acquisition.
Acquisition of Contemporary
On February 27, 1998, the Company acquired Contemporary Group (the
"Contemporary Acquisition"). The Contemporary Acquisition involved the merger
of Contemporary International Productions Corporation with and into the
Company, the acquisition by a wholly-owned subsidiary of the Company of
substantially all of the assets, excluding certain cash and receivables, of the
remaining members of Contemporary and the acquisition of the 50% interest in
the Riverport Amphitheatre Joint Venture not owned by Contemporary. The total
consideration of the Contemporary Acquisition was approximately $101.4 million,
comprised of $72.8 million in cash, a payment for working capital of $9.9
million, and $18.7
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million in aggregate liquidation preference of shares of the Company's series A
redeemable convertible preferred stock (the "Series A Preferred Stock") which,
upon consummation of the Spin-Off, will automatically convert into 1,402,850
shares of the Class A Common Stock. Such shares of Class A Common Stock were
valued by the parties at $13.33 per share. In the event that the Spin-Off is
not consummated by July 1, 1998 the shares of Series A Preferred Stock will be
redeemed by the Company for $18.7 million. SFX Broadcasting has guaranteed the
repayment of the $18.7 million redemption price, which guarantee will terminate
upon consummation of the Spin-off. The purchase price was financed by the
borrowings under the Credit Facility and with the proceeds of the Offering.
Acquisition of Network
On February 27, 1998, the Company and its wholly-owned subsidiary, SFX
Network Group, LLC ("SFX Network") acquired Network (the "Network
Acquisition"). In the Network Acquisition, the Company, through SFX Network,
acquired all of the outstanding capital stock of each of The Album Network,
Inc. and SJS Entertainment Corporation and purchased substantially all of the
assets and properties and assumed substantially all of the liabilities and
obligations of The Network 40, Inc. The total purchase price was approximately
$66.8 million, comprised of $52.0 million cash, a payment for working capital
of $1.8 million, reimbursed seller's costs of $500,000, the purchase of an
office building and related property for approximately $2.5 million and the
issuance of approximately 750,188 shares of the Class A Common Stock upon
consummation of the Spin-Off. Such shares were valued by the parties at $13.33
per share, for a total share value of $10 million. If the Spin-Off does not
occur prior to June 30, 1998, at the option of the selling stockholders in the
Network Acquisition, the Company may be required to pay $ 10 million (plus
interest at a rate of 10% per annum from the date of closing) in lieu of
issuance of the Class A Common Stock. In addition, the purchase price is
subject to increase based on actual 1998 EBITDA (as defined) by $4.0 million if
such EBITDA equals or exceeds $9.0 million to $14 million if EBITDA is greater
than $11 million, and is payable in stock, or in certain circumstances in cash,
no later than March 20, 1999. The $2.5 million purchase of the office building
and related property used in connection with Network's business was comprised
of cash of $700,000 and the assumption of debt of $1.8 million. The purchase
price was financed by the borrowings under the Credit Facility. In connection
with the Network Acquisition, the selling stockholders were reimbursed working
capital (as defined in the acquisition agreement) in excess of $500,000. SFX
Broadcasting has guaranteed the payment to the Network sellers of any such
excess working capital.
Acquisition of Concert/Southern
On March 4, 1998, the Company, through its wholly-owned subsidiary, SFX
Concerts, Inc., acquired Concert/Southern Promotions, a promoter of live music
entertainment in the Atlanta metropolitan area, for a total consideration of
$16.9 million (including the payments of the $1.6 million representing the
present value of a deferred purchase obligation and $300,000 for the working
capital adjustment.) The purchase price was financed by the borrowings under
the Credit Facility.
The foregoing descriptions do not purport to be complete descriptions of
the terms of the acquisition agreements and are qualified by reference to the
acquisition agreements, copies of which are attached hereto as exhibits and
incorporated herein by reference. Pursuant to the acquisition agreements and
the agreements related thereto, the Company, (i) under certain circumstances
may be required to repurchase shares of its Class A Common Stock or make
additional payments in connection therewith, (ii) has granted certain rights of
first refusal certain of which are exercisable at 95% of the proposed purchase
price, and (iii) in connection with the PACE Acquisition, has granted Brian
Becker, the Executive Vice President, of the Office of the Chairman, and a
director of the Company, the option to acquire, after the second anniversary of
the consummation of the PACE Acquisition, the Company's then existing motor
sports line of business (or, if that business has previously been sold, the
Company's then existing theatrical line of business) at its then fair market
value See "Business--Risk Factors--Control of Motor Sports and Theatrical
Business".
The approximately 4.2 million shares of the Class A Common Stock expected
to be issued in connection with these acquisitions have been valued by the
applicable parties at $13.33 per share for purposes of calculating the
consideration to be given for the acquisitions. Such valuation is based upon
certain financial projections developed jointly by the Company and the relevant
sellers. 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 the Class A Common Stock upon
consummation of the Spin-Off.
The cash portion of the purchase price for each of the Recent Acquisitions
is subject to increase under certain circumstances, including, in particular,
if the Company 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 Recent 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
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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 Recent
Acquisitions provide for certain other purchase price adjustments and future
contingent payments in certain circumstances, certain of which could be
material. There can be no assurance that the Company will be able to finance
the payments. See "Risk Factors-- Risks Related to the Recent Acquisitions--
Liquidity and Capital Resources."
The Recent Acquisitions were accounted for using the purchase method of
accounting, and the intangible assets created in the purchase transactions will
generally be amortized against future earnings over a 15-year period. The
amount of amortization will be substantial and will continue to affect the
Company's operating results in the future. These expenses, however, do not
result in an outflow of cash by the Company and do not impact EBITDA.
SPIN-OFF AND SFX MERGER
SFX Broadcasting was formed in 1992 principally to acquire and operate
radio broadcasting stations. SFX Broadcasting currently operates in two lines
of business: radio broadcasting and live entertainment. In August 1997, SFX
Broadcasting agreed to merge its radio business with a subsidiary of SFX Buyer.
Pursuant to the Merger Agreement, SFX Broadcasting (a) has contributed its live
entertainment businesses to the Company and prior to the consummation of the
SFX Merger (b) intends to distribute all of the outstanding shares of common
stock of the Company to the holders of common stock, Series D preferred stock
interest in SFX Broadcasting's director deferred stock ownership plan and
certain warrants of SFX Broadcasting in the Spin-Off. The receipt of shares by
stockholders of SFX Broadcasting pursuant to the Spin-Off will be a taxable
transaction. SFX Broadcasting 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 Class A
Common Stock, subject to official notice of issuance, on a national exchange or
The Nasdaq Stock Market and (b) approval of the Spin-Off as presently
contemplated by the stockholders of SFX Broadcasting scheduled to be held on
March 26, 1998 There can be no assurance that the conditions to the Spin-Off
will be satisfied. However, the Spin-Off is not conditioned on the consummation
of the SFX Merger. Management believes that the Spin-Off is likely to be
consummated 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.
See "Business--Agreements Relating to the Spin-Off."
Pursuant to the SFX Merger Agreement, if SFX Broadcasting fails or is
otherwise unable to consummate the Spin-Off prior to the consummation of the
SFX Merger, then SFX Broadcasting will be entitled to divest its interest in
its live entertainment business in an alternate type of transaction. If SFX
Broadcasting 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 Recent Acquisitions is intended to consist of shares of the
Class A Common Stock. If the Spin-Off does not occur, the Company would be
unable to issue shares of its common stock to the sellers, and the aggregate
cash consideration to be paid in the Recent 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 "Business-- Risk Factors--
Risks Related to Recent Acquisitions" and "Business--Agreements Relating to the
Spin-Off."
RESULTS OF OPERATIONS
General
The Company's operations consist primarily of (a) concert promotion and
venue operation, (b) the promotion and production of theatrical events,
particularly Touring Broadway Shows, and (c) the promotion and production of
motor sports events. The Company and the Acquired Businesses also engage in
various other activities ancillary to their live entertainment businesses.
Concert Promotion/Venue Operation
The Company's concert promotion and venue operation business consist
primarily of the promotion of concerts and operation of venues primarily for
use in the presentation of musical events. The Company's primary source of
revenues from its concert promotion activities is from ticket sales at events
promoted by the Company. As a venue operator, the Company's primary sources of
revenue are sponsorships, concessions, parking and other ancillary services,
derived principally from events promoted by the Company.
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Revenue from ticket sales is affected primarily by the number of events
the Company promotes, the average ticket price and the number of tickets sold.
The average ticket price depends on the popularity of the artist whom the
Company is promoting, the size and type of venue and the general economic
conditions and consumer tastes in the market where the event is being held.
Revenue and margins are also affected significantly by the type of contract
entered into with the artist or the artist's representative. Generally, the
promoter or venue operator will agree to pay the artist the greater of a
minimum guarantee or a profit sharing payment based on ticket revenue, less
certain show expenses. The promoter or venue operator assumes the financial
risk of ticket sales and is responsible for local production and advertising of
the event. However, in certain instances, the promoter agrees to accept a fixed
fee from the artist for its services, and the artist assumes all financial
risk. When the promoter or venue operator assumes the financial risk, all
revenue and expenses associated with the event are recorded. When the artist
assumes the risk, only the fee is recorded. As a result, operating margins
would be significantly greater for fee-based events as opposed to events for
which the Company assumes the risk of ticket sales, although profits per event
would tend to be lower. Operating margins can vary from period to period.
The Company's most significant operating expenses are talent fees,
production costs, venue operating expenses (including rent), advertising costs
and insurance expense. The booking of talent in the concert promotion business
generally involves contracts for limited engagements, often involving a small
number of performances. Talent fees depend primarily on the popularity of the
artist, the ticket price that the artist can command at a particular venue and
the expected level of ticket sales. Production costs and venue operating
expenses have substantial fixed cost components and lesser variable costs
primarily related to expected attendance.
Theatrical
The Company's theatrical operations are directed mainly towards the
promotion and production of Touring Broadway Shows, which generate revenues
primarily from ticket sales and sponsorships. The Company may also participate
in ancillary revenues, such as concessions and merchandise sales, depending on
its agreement with a particular local promoter/venue operator. Revenue from
ticket sales is primarily affected by the popularity of the production and the
general economic conditions and consumer tastes in the particular market and
venue where the production is presented. In order to reduce its dependency on
the success of any single touring production, the Company sells advance annual
subscriptions that provide the purchaser with tickets for all of the shows that
the Company intends to tour in the particular market during the touring season.
For the year ended December 31, 1997, approximately 34% of ticket sales for
Touring Broadway Shows presented by the Company were sold through advance
annual subscriptions. Subscriptions for Touring Broadway Shows typically cover
approximately two-thirds of the Company's break-even cost point for those
shows.
Principal operating expenses related to touring shows include talent,
rent, advertising and royalties. Talent costs are generally fixed once a
production is cast. Rent and advertising expense may be either fixed or
variable based on the arrangement with the particular local promoter/venue
operator. Royalties are generally paid as a percentage of gross ticket sales.
The Company also makes minority equity investments in original Broadway
productions, principally as a means to obtain rights for touring shows, and in
certain Touring Broadway Shows. These investments are accounted for using
either the equity method or the cost method of accounting, based on the
relative size of the investment. The Company monitors the recoverability of
these investments on a regular basis, and the Company may be required to take
write-offs if the original production closes or if the Company determines that
the production will not recoup the investment. The timing of any write-off
could adversely affect operating results in a particular quarter.
Motor Sports
The Company's motor sports activities consist principally of the promotion
and production of specialized motor sports, which generate revenues primarily
from ticket sales and sponsorships, as well as merchandising and video rights
associated with producing motor sports events. Ticket prices for these events
are generally lower than for theatrical or music concert events, generally
ranging from $5 to $30 in 1996. Revenue from these sources is primarily
affected by the type of event and the general economic conditions and consumer
tastes in the particular markets and venues where the events are presented.
Event-related revenues received prior to the event date are initially recorded
on the balance sheet as deferred revenue; after the event occurs, they are
recorded on the statement of operations as gross revenue. Expenses are
capitalized on the balance sheet as prepaid expenses until the event occurs.
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Operating expenses associated with motor sports activities include
talent, rent, track preparation costs, security and advertising. These
operating expenses are generally fixed costs that vary based on the type of
event and venue where the event is held.
Under certain circumstances, the Company may be required to sell either
its motor sports or theatrical lines of business. See "Business-- Risk
Factors-- Control of Motor Sports and Theatrical Businesses."
Other Businesses
The Company's other principal businesses include (a) the production and
distribution of radio industry trade magazines, (b) the production of radio
programming content and show-prep material and (c) the provision of radio air
play and music retail research services. The primary sources of revenues from
these activities include (a) the sale of advertising space in its publications
and the sale of advertising time on radio stations that carry its syndicated
shows, (b) subscription fees for its trade publications and (c) subscription
fees for access to its database of radio playlist and audience data. Revenues
generally vary based on the overall advertising environment and competition.
The Company also provides marketing and consulting services pursuant to
contracts with individual clients for specific projects. Revenues from and
costs related to these services vary based on the type of service being
provided and the incremental associated costs.
Seasonality
The Company's operations and revenues are largely seasonal in nature, with
generally higher revenue generated in the second and third quarters of the
year. For example, on a pro forma basis for the Completed Acquisitions, the
Company generated approximately 68% of its revenues in the second and third
quarters for the twelve months ended December 31, 1997. The Company's outdoor
venues are primarily utilized in the summer months and do not generate
substantial revenue in the late fall, winter and early spring. Similarly, the
musical concerts that the Company promotes largely occur in the second and
third quarters. To the extent that the Company's entertainment marketing and
consulting relate to musical concerts, they also predominantly generate
revenues in the second and third quarters. Therefore, the seasonality of the
Company's business causes (and will probably continue to cause) a significant
variation in the Company's quarterly operating results. These variations in
demand could have a material adverse effect on the timing of the Company's cash
flows and, therefore, on its ability to service its obligations with respect to
its indebtedness. However, the Company believes that this variation may be
somewhat offset with the acquisition of typically non-summer seasonal
businesses in the Recent Acquisitions, such as motor sports (which is
winter-seasonal) and Touring Broadway Shows (which typically tour between
September and May).
HISTORICAL RESULTS
The following analysis of the historical operations of the Company,
including the Completed Acquisitions, but excluding the Recent Acquisitions,
includes, for comparative purposes, the historical operations of
Delsener/Slater (the Company's predecessor) for the years ended December 31,
1995, 1996 and 1997.
Year Ended December 31, 1997 Compared to the Year Ended December 31, 1996
The Company's concert promotion revenue increased by 91% to $96.1 million
for the year ended December 31, 1997, compared to $50.4 million for the year
ended December 31, 1996, as a result of the acquisitions of Sunshine Promotions
and the Meadows Music Theater, which increased concert promotion revenue by
$45.5 million. On a pro forma basis, assuming the acquisitions had been
completed as of January 1, 1997, concert promotion revenue for the year ended
December 31, 1997 would have been $110.4 million.
Concert promotion operating expenses increased by 65% to $83.4 million for
the year ended December 31, 1997, compared to $50.6 million for the year ended
December 31, 1996, primarily as a result of the acquisitions of Sunshine
Promotions and the Meadows Music Theater, which increased concert operating
expenses revenue by $37.1 million, which was offset in part by decreased
officer salary expense paid to the former owners of Delsener/Slater. On a pro
forma basis, assuming that those acquisitions had been completed as of January
1, 1997, concert operating expenses would have been $96.7 million for the year
ended December 31, 1997.
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Depreciation and amortization expense increased to $5.4 million for
the year ended December 31, 1997, compared to $747,000 for the year ended
December 31, 1996, due to the inclusion of $2.6 million of depreciation and
amortization expense related to the acquisitions of Sunshine Promotions and the
Meadows 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, the Company recorded the fixed assets of Delsener/Slater at fair value
and recorded an intangible asset equal to the excess of purchase price over the
fair value of net tangible assets of Delsener/Slater, which was amortized over
a 15 year period.
Corporate expenses were $2.2 million for the year ended December 31, 1997,
net of $1.8 million in fees received from Triathlon, compared to zero for the
year ended December 31, 1996. These expenses represent the incremental costs
of operating the Company's corporate offices, and therefore did not exist in
1996. The fees receivable from Triathlon are based on consulting services
provided by or on behalf of Sillerman Communications Management Corporation, a
private investment company in which Messrs. Sillerman and Tytel have economic
interests, that makes investments in and provides financial consulting
services to companies engaged in the media business ("SCMC"). The fees will
fluctuate (above the minimum annual fee of $500,000) based on the level of
acquisition and financing activities of Triathlon. SCMC previously assigned
its rights to receive fees payable from Triathlon to SFX Broadcasting, and
SFX Broadcasting will assign its rights to receive the fees to the Company,
pursuant to the Distribution Agreement. Triathlon has previously announced
that it is exploring ways of maximizing stockholder value, including a
possible sale to a third party. If Triathlon is acquired by a third party,
it is possible that the consulting fees would not continue for the remainder
of the agreement's term. See "Certain Relationships and Related Transactions--
Triathlon Fees."
Operating income was $5.1 million for the year ended December 31, 1997,
compared to a loss of $1.1 million for the year ended December 31, 1996, due to
the results discussed above.
Interest expense, net of investment income, was $1.3 million in the year
ended December 31, 1997, compared to net interest income of $138,000 for the
year ended December 31, 1996, primarily as a result of assumption of additional
debt related to the acquisitions of the Meadows Music Theater and Sunshine
Promotions.
Equity income in unconsolidated subsidiaries decreased 3% to $509,000 from
$524,000.
Income tax expense increased to $490,000 for the year ended December 31,
1997, compared to $106,000 for the year ended December 31, 1996, primarily as a
result of higher operating income.
The Company's net income increased to $3.8 million for the year ended
December 31, 1997, as compared to a net loss of $515,000 for the year ended
December 31, 1996, due to the factors discussed above.
EBITDA increased to $10.5 million for the year ended December 31, 1997,
compared to a negative $324,000 for the year ended December 31, 1996, as a
result of the Completed Acquisitions, the reduction in officers' salary expense
and improved operating results.
YEAR ENDED DECEMBER 31, 1996 COMPARED TO THE YEAR ENDED DECEMBER 31, 1995
The Company's concert promotion revenue increased by 5.9% to $50.4 million
for the year ended December 31, 1996, compared to $47.6 million for the year
ended December 31, 1995, primarily as a result of an increase in concerts
promoted and an increase in ticket prices.
Concert promotion operating expenses increased by 7.2% to $50.6 million
for the year ended December 31, 1996, compared to $47.2 million for the year
ended December 31, 1995, primarily as a result of an increase in concert
activity.
Depreciation and amortization expense decreased slightly to $747,000 for
the year ended December 31, 1996, compared to $750,000 for the year ended
December 31, 1995.
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The Company's operating loss was $1.1 million for the year ended
December 31, 1996, compared to an operating loss of $362,000 for the year ended
December 31, 1995, due to the results discussed above.
Interest income, net of interest expense, increased by 306% to $138,000
for the year ended December 31, 1996, compared to $34,000 for the year ended
December 31, 1995.
Equity income in unconsolidated subsidiaries increased 8% to $524,000 from
$488,000, primarily as result of the investment in the PNC Bank Arts Center,
offset by lower income from the Company's other equity investments.
The Company's state and local income tax expense increased to $106,000 for
the year ended December 31, 1996, compared to $13,000 for the year ended
December 31, 1995. This increase was primarily the result of the higher
operating income.
The Company's net loss was $515,000 for the year ended December 31, 1996,
compared to net income of $147,000 for the year ended December 31, 1995, due to
the factors discussed above.
EBITDA was a negative $324,000 for the year ended December 31, 1996,
compared to $388,000 for the year ended December 31, 1995, primarily as a
result of higher officers' salary expense partially offset by lower general and
administrative expenses.
LIQUIDITY AND CAPITAL RESOURCES
The Company's principal need for funds is to fund interest and debt
service payments, future acquisitions, working capital needs, to make certain
payments in connection with the Spin-Off and, to a lesser extent, capital
expenditures. The Company anticipates that its principal source of funds will
be the proceeds from the recent private placement of $350.0 million 9 1/8%
Senior Subordinated Notes, borrowings under the Credit Facility, cash flows
from operations and proceeds from an anticipated equity offering.
Historical Cash Flows
Net cash provided by operations was $1.0 million for the year ended
December 31, 1997.
Net cash used in investing activities for the year ended December 31, 1997
was $73.3 million. Cash used in investing activities in 1997 related primarily
to the acquisitions of Delsener/Slater, Sunshine and the Meadows and capital
expenditures.
Net cash provided by financing activities for the year ended December 31,
1997 was $78.3 million. For the year ended December 31, 1997, cash provided by
financing activities related primarily to the funding of the Completed
Acquisitions by the Company.
Completed Acquisitions
In 1997, SFX Broadcasting consummated the acquisitions of Delsener/Slater
($23.6 million in cash plus $4.0 million of deferred payments), certain
companies which own and operate the Meadows Music Theater ($0.9 million in cash
plus shares of SFX Broadcasting's Class A common stock with a value at that
time of approximately $7.5 million and the assumption of approximately $15.4
million of debt) and Sunshine Promotions ($53.9 million in cash plus $2.0
million in deferred payments, shares of SFX Broadcasting's Class A common stock
with a value of approximately $4.0 million and the assumption of $1.6 million
of debt). The present value of the future payments that the Company is required
to pay in connection with the Completed Acquisitions is approximately $6.2
million.
The foregoing includes a note in the original principal amount of $2.0
million, of which approximately $1.6 million is currently outstanding. Pursuant
to the SFX Merger Agreement, the Company is responsible for the payments owing
under the note, which by its terms accelerates upon the change of control of
SFX Broadcasting resulting from the consummation of the SFX Merger.
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Recent Acquisitions
The aggregate purchase price of the Recent Acquisitions was approximately
$506.1 million, consisting of approximately $442.1 million in cash, including
repayment of debt and payments for working capital, $7.8 million of assumed
debt and the issuance of approximately 4.2 million shares of the Company's
Common Stock with an attributed negotiated value of $56.2 million. In addition,
in February 1998, the Company reimbursed SFX Broadcasting approximately $25.3
million for consent fees, capital expenditures, and other expenses related to
the Recent Acquisitions, the Financing and the Spin-Off funded by SFX
Broadcasting. The Company financed the Recent Acquisitions with the proceeds of
the Offering and $150.0 million in borrowings under the Credit Facility. The
Company incurred approximately $6.0 million in fees and expenses related to the
Recent Acquisitions. Each of the agreements relating to the Recent Acquisitions
provides that, if the Spin-Off is not completed on or before July 1, 1998, then
the sellers may require the Company to increase the cash portion of the
consideration by $56.2 million and the Company'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. The price ascribed to the Class A
Common Stock in the acquisition agreements is based on certain financial
projections developed jointly by the Company and the sellers. 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
Class A Common Stock.
In addition, the agreements relating to the Recent Acquisitions provide
for certain other purchase price adjustments and future contingent payments.
The Company granted the current owners of PACE the right to require the Company
to repurchase up to one-third of the shares of stock to be issued to them in
the PACE Acquisition during a specified period beginning five years after the
closing date at a price of $33.00 per share for an estimated maximum obligation
of $16.5 million. In certain circumstances, if the selling price of the Class A
Common Stock is less than $13.33 per share, the Company may be required to make
an offer to the sellers to provide an additional cash payment or additional
shares of the Class A Common Stock, which each seller will have the option of
taking. Pursuant to the terms of the Becker Employment Agreement, during the
period between December 12, 1999 and December 27, 1999, Mr. Becker will have
the option to, among other things, require the Company to purchase any stock or
portion thereof (including vested and unvested options) granted to him by the
Company and/or pay him an amount equal to the present value of the compensation
payable during the remaining term of his employment agreement. See "Executive
Compensation-- Employment Agreements and Arrangements with Certain Officers and
Directors." In addition, in the Contemporary Acquisition agreement, the Company
agreed to make payments to any Contemporary sellers who own shares of the 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 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 Class A Common Stock will be $13.33 per share at that
time. In addition, the Company may be required to issue up to an additional
$14.0 million of shares of the Class A Common Stock or, at the Company's option
in certain circumstances, cash, if Network attains certain EBITDA targets (as
defined in the Network Agreement) for the year ended December 31, 1998. No
assurance can be given that the Spin-off will be completed on or before July 1,
1998 or at all, or that the Company will have sufficient cash or other
available sources of capital to make any or all of the future or contingent
payments described above. See " Business-- Risk Factors-Risks Related to Recent
Acquisitions."
Future Acquisitions
The Company intends to pursue additional expansion opportunities and
expects to continue to identify and negotiate with respect to substantial
acquisitions in the live entertainment business and related business, certain
of which may be consummated prior to the Spin-Off.
Spin-Off
Pursuant to the Tax Sharing Agreement, the Company will be responsible for
any taxes of SFX Broadcasting resulting from the Spin-Off, including any income
taxes but only to the extent that the income taxes result from gain on the
distribution that exceeds the net operating losses of SFX Broadcasting
available to offset such gain (including net operating losses generated in the
current year prior to the Spin-Off). See "Business-- Agreements Relating to the
Spin-Off." The actual amount of the indemnification gain will be based on the
excess of the value of the Company's Common Stock distributed in the Spin-Off
over the tax basis of that stock. The Company believes that the value of the
Company's Common Stock for tax purposes will be determined by no later than
the first trading day following the date on which the Company's Common Stock
is distributed in the Spin-Off. Increases or decreases in the value of the
Company's Common Stock subsequent to such date
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will not effect the tax liability. If the Company's Common Stock had a value of
approximately $15 per share at the time of the Spin-Off, management believes
that no material indemnification payment would be required. Such
indemnification obligation would be approximately $4.0 million and would
increase by approximately $7.7 million for each $1.00 increase above the per
share valuation of $16. If the Company's Common Stock was valued at $22 1/2 per
share, (the last sales price of the Class A Common Stock (trading on a
when-issued basis) on the over the counter market on March 13, 1998),
management estimates that the Company would have been required to pay
approximately $54.0 million pursuant to such indemnification obligation. The
Company expects that such indemnity payment will be due on or about June 15,
1998.
The Company also expects to incur approximately $18.0 million in fees and
expenses in connection with the Spin-Off. In addition, pursuant to the SFX
Merger Agreement, the Company has agreed to assume SFX Broadcasting's
obligations under the employment agreements of certain employees and senior
management, including the obligation to make change of control payments to
Messrs. Sillerman, Ferrel and Benson aggregating approximately $3.3 million,
$1.5 million and $0.2 million, respectively. The assumed obligations will also
include the duty to indemnify Messrs. Sillerman and Ferrel for one-half of any
excise taxes that may be assessed against them in connection with the change of
control payments. It is also anticipated that Mr. Sillerman's employment
agreement with the Company will provide for certain indemnities relating to the
SFX Merger. See "Certain Relationships and Related Transactions--Assumption of
Employment Agreements; Certain Change of Control Payments" and
"--Indemnification of Mr. Sillerman." In addition, pursuant to the Distribution
Agreement, the Company will be required to indemnify SFX Broadcasting and each
of its directors, officers and employees for any losses relating to the
Company's assets and liabilities.
In addition, pursuant to the Distribution Agreement, the Company will
assume certain obligations of SFX Broadcasting, including two real estate
leases on its executive offices. Such leases provide for annual rent of
approximately $1.4 million. See "Agreements relating to the Spin-Off--
Distribution Agreements."
Working Capital
As required by the Distribution Agreement, by the time of the Spin-Off,
SFX Broadcasting will contribute to the Company all of its concert and other
live entertainment assets. At that time, the Company will assume all of SFX
Broadcasting 's liabilities pertaining to the live entertainment businesses,
along with certain other liabilities. Immediately after the Spin-Off, SFX
Broadcasting will contribute to the Company an allocation of working capital in
an amount estimated by SFX Broadcasting's management to be consistent with the
proper operation of SFX Broadcasting. At the time of the SFX Merger, SFX
Broadcasting will pay its positive Working Capital (if any) to the Company. If
Working Capital is negative, then the Company must pay the amount of the
shortfall to SFX Broadcasting. As of December 31, 1997, the Company estimates
that Working Capital to be received by the Company would have been
approximately $3.0 million (excluding the Series E Adjustment and the tax
liability on the Spin-Off). The actual amount of Working Capital as of the
closing of the SFX Merger may differ substantially from the amount as of
December 31, 1997, and will be a function of, among other things, the operating
results of SFX Broadcasting through the date of the SFX Merger, the actual cost
of consummating the SFX Merger and the related transactions. SFX Broadcasting
will also incur certain other significant expenses prior to the consummation of
the SFX Merger that could reduce Working Capital, including the payment of
interests and dividends on SFX Broadcasting's debt, approximately $8.3 million
payable in connection with the Meadows Repurchase and the amount of any
settlement paid by SFX Broadcasting in connection with the SFX Merger
shareholder litigation. Working Capital will also be reduced by at least $2.1
million pursuant to the Series E Adjustment. In addition, prior to or at the
time of the Spin-Off, the Company must repay sums advanced to it by SFX
Broadcasting for certain acquisitions or capital expenditures after August 24,
1997 and which have not been repaid. In February 1998, the Company reimbursed
SFX Broadcasting approximately $25.3 million for consent fees, capital
expenditures and other acquisition related fees previously funded by SFX
Broadcasting. The Company intends to repay these amounts from the proceeds of
the Financing. SFX Broadcasting may advance additional amounts to the Company
for these purposes before the consummation of the Spin-Off. See "Business--
Risk Factors--Working Capital Adjustments and Repayment of Advances,"
"Business--Agreements Relating to the Spin-Off-- Distribution Agreement" and
"-- Meadows Repurchase."
Meadows Repurchase
The Company may assume the obligation to exercise an option held by SFX
Broadcasting to repurchase 250,838 shares of SFX Broadcasting's Class A Common
Stock for an aggregate purchase price of $8.3 million (the "Meadows
Repurchase"). This option was granted in connection with the acquisition of the
Meadows Music Theater. If the option were exercised by SFX Broadcasting, the
exercise would result in a reduction of Working Capital by approximately $8.3
million. If the option were not exercised, Working Capital would decrease by
approximately $10.5 million.
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Interest on Notes and Borrowings Under the Credit Facility
On February 11, 1998, the Company completed the private placement of
$350.0 million of 9 1/8% Senior Subordinated Notes. Interest is payable on the
Notes on February 1 and August 1 of each year. In addition, the Company
borrowed $150.0 million under the Credit Facility at an interest rate of
approximately 8.07%. See "-- Sources of Liquidity."
The degree to which the Company is leveraged will have material
consequences to the Company. The Company's ability to obtain additional
financing in the future for acquisitions, working capital, capital
expenditures, general corporate or other purposes are subject to the covenants
contained in the instruments governing its indebtedness. A substantial portion
of the Company's cash flow from operations will be required to be used to pay
principal and interest on its debt and will not be available for other
purposes. The Indenture and the credit agreement with respect to the Credit
Facility (the "Credit Agreement") contain restrictive financial and operating
covenants, and the failure by the Company to comply with those covenants would
result in an event of default under the applicable instruments, which in turn
would permit acceleration of the debt under the instruments (and in some cases
acceleration of debt under other instruments that contain cross-default or
cross-acceleration provisions). The Company will be more vulnerable to economic
downturns and could also be limited in its ability to withstand competitive
pressures and in its flexibility in reacting to changes in its industry and
general economic conditions. These consequences are not exhaustive; the
Company's indebtedness could also have other adverse consequences. See
"Business-- Risk Factors-- Substantial Leverage."
The Company's ability to make scheduled payments of principal of, to pay
interest on or to refinance its debt depends on its future financial
performance, which, to a certain extent, is subject to general economic,
financial, competitive, legislative, regulatory and other factors beyond its
control, as well as the success of the businesses to be acquired and the
integration of these businesses into the Company's operations. There can be no
assurance that the Company will be able to make planned borrowings (including
under the Credit Facility), that the Company's business will generate
sufficient cash flow from operations, or that future borrowings will be
available in an amount to enable the Company to service its debt and to make
necessary capital or other expenditures. The Company may be required to
refinance a portion of the principal amount of its indebtedness prior to their
respective maturities. There can be no assurance that the Company will be able
to raise additional capital through the sale of securities, the disposition of
assets or otherwise for any refinancing. See "Business-- Risk Factors."
Capital Expenditures
Capital expenditures totaled $2.1 million in the year ended December 31,
1997. Capital expenditures in 1997 included cash paid for expansion and
renovations at the Jones Beach Amphitheater, improvements at other venues and
computer and other operating equipment. The Company expects that capital
expenditures in fiscal year 1998 will be substantially higher than current
levels, due to the planned capital expenditures of approximately $26.0 million
for 1998 at existing venues (including $14.0 million initially planned for the
expansion and renovation of the Jones Beach Amphitheater and $12.0 million
planned for the expansion and renovation of the PNC Bank Arts Center) and
capital expenditures requirements of the Acquired Businesses, including $10.0
million for the construction of a new amphitheater serving the Seattle,
Washington market.
Future Charges to Earnings
The Company anticipates entering into employment agreements with certain
of its executive officers before the Spin-Off. In connection with these
agreements, the Board, on the recommendation of its Compensation Committee,
agreed to sell to the executive officers an aggregate of 650,000 shares of the
Company's Class B Common Stock and 190,000 shares of the Class A Common Stock
at a purchase price of $2.00 per share. The shares will be issued on or about
the Spin-Off Distribution Date. The Company will record a non-cash compensation
charge at the date of the grant equal to the fair market value of the shares
less the aggregate purchase price paid for such shares. See "Executive
Compensation-Employment Agreements and Arrangements with Certain Officers and
Directors."
In addition, the Board, on the recommendation of its Compensation
Committee, also has approved the issuance of stock options exercisable for an
aggregate of 245,000 shares of the 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 exercise period to
the extent that the fair value of the underlying the Class A Common Stock
exceeds the exercise price less the aggregate purchase price.
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Further, the consummation of the Recent Acquisitions and other future
acquisitions will result in substantial charges to earnings relating to
interest expense and the recognition and amortization of goodwill. As of
December 31, 1997, the Company's goodwill was approximately $60.3 million. This
balance will substantially increase in 1998 due to the Recent Acquisitions.
Goodwill is being amortized using the straight line method over 15 years.
Year 2000 Compliance
The Company has addressed the risks associated with Year 2000 compliance
with respect to its accounting and financial reporting systems and is in the
process of installing new accounting and reporting systems. These systems are
expected to provide better reporting, to allow for more detailed analysis, to
handle both the Recent and the Completed Acquisitions and to be Year 2000
compliant. The Company anticipates that the cost of implementing these systems
will be approximately $2.0 million. The Company is in the process of examining
Year 2000 compliance issues with respect to its vendors and does not anticipate
that it will be subject to a material impact in this area.
Sources of Liquidity
As of December 31, 1997, the Company's cash and cash equivalents totaled $
5.9 million. As a subsidiary of SFX Broadcasting, the Company has incurred and,
as a stand-alone entity, will continue to incur substantial amounts of
indebtedness. In February of 1998, the Company received net proceeds of $339.5
million from its private placement of the Notes and borrowed $150.0 million
under the Credit Facility (the "Financing"). The proceeds from the Financing
were used to consummate the Recent Acquisitions, including the cash purchase
price, debt repayments, and working capital payments of approximately $442.1
million, and to pay approximately $6.0 million of certain fees and expenses
related to the Recent Acquisitions . The Company's cash and cash equivalents as
of March 4, 1998 were $80.8 million.
As of December 31, 1997, the Company's consolidated indebtedness would
have been approximately $517.7 million on a pro forma basis giving effect to
the Spin-Off, the Recent Acquisitions, the Financing and the SFX Merger
(assuming that the Spin-Off and the SFX Merger occur on the terms currently
contemplated). The total amount of the Company's indebtedness could increase
substantially if the Spin-Off does not occur on the terms currently
contemplated as described above. In addition, the Company may incur
indebtedness from time to time to finance acquisitions, for capital
expenditures or for other purposes. See "Business-- Risk Factors-- Substantial
Leverage."
The Credit Facility consists of a $150.0 million seven year reducing
revolving facility (the "Revolver") and a $150.0 million eight year term loan
(the "Term Loan"). The Company's ability to make significant borrowings under
the Credit Agreement will depend upon its ability to increase cash flows or to
acquire assets from its existing operations which generate significant cash
flows. Loans outstanding under the Credit Facility will bear interest, at the
Company's option, at 1.875 to 2.375 percentage points over LIBOR or the greater
of the Federal Funds rate plus 0.50% or BNY's prime rate. The interest rate
spreads on the Term Loan and the Revolver will be adjusted based on the
Company's Total Leverage Ratio (as defined in the Credit Agreement). The
Company will pay a per annum commitment fee on unused availability under the
Revolver of 0.50% to the extent that the Company's Leverage Ratio is greater
than or equal to 4.0 to 1.0, and 0.375% if such ratio is less than 4.0 to 1.0
and a per annum letter of credit fee equal to the Applicable LIBOR Margin (as
defined in the Credit Agreement) for the Revolver then in effect. The Revolver
and Term Loan contain provisions providing that, at its option and subject to
certain conditions, the Company may increase the amount of either the Revolver
or Term Loan by $50.0 million. The Revolver and Term Loan contain usual and
customary covenants, including limitations on (a) line of business, (b)
additional indebtedness, (c) liens, (d) acquisitions, (e) asset sales, (f)
dividends, repurchases of stock and other cash distributions, (g) total
leverage, (h) senior leverage and (i) ratios of Operating Cash Flow (as defined
in the Credit Agreement) to pro forma interest expense, debt service and fixed
charges. The Company's obligations under the Revolver and Term Loan are by
substantially all of its assets, including property, stock of subsidiaries and
accounts receivable and guaranteed by the Company's subsidiaries.
The Company will require additional financing in order to make all of the
payments described above, including the anticipated tax indemnification
obligation to SFX (approximately $54.0 million based on the trading price (on a
when-issued basis) of the Class A Common Stock on March 13, 1998), planned
capital expenditures (approximately $38.0 million), fees and expenses related
to the Spin-Off (estimated to be approximately $18.0 million), certain change
of control payments to executive officers ($5.0 million) and the Meadows
Repurchase (at least $8.3 million). The Company's ability to issue preferred
stock or debt securities or to borrow under its Credit Facility may be
significantly impacted by the covenants in the Credit Facility and/or
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the Indenture relating to the Notes. To the extent that available borrowings
are insufficient under the Credit Facility, debt financing is not available or
that management determines that debt financing or the issuance of preferred
stock is inadvisable in view of the Company's capital structure, management
currently anticipates that, upon the consummation of the Spin-Off, such
obligations will be financed through a public offering of not less than $125
million of Class A Common Stock. If the Class A Common Stock were valued at $22
1/2 per share (the last sales price of Class A Common Stock (trading on a
when-issued basis) on the over-the-counter market on March 13, 1998),
approximately 5.6 million shares of Class A Common Stock would be issued in
such offering. There can be no assurance that SFX Entertainment will be able to
complete the offering or obtain alternative financing on acceptable terms or at
all. Any offering of Class A Common Stock would be dilutive to the ownership
interests of the Company's then-existing stockholders and the trading price of
the Class A Common Stock may be adversely affected. Any debt financing would
require payments of principal and interest and would adversely impact the
Company's cash flows.
Furthermore, certain agreements of the Company, including the Distribution
Agreement, the Tax Sharing Agreement, certain employment agreements and the
agreements relating to the Recent Acquisitions provide for tax and other
indemnities, purchase price adjustments and future contingent payments in
certain circumstances. There can be no assurance that the Company will have
sufficient sources of funds to make such payments should they come due. In
addition, consistent with its operating strategy, the Company intends to pursue
additional expansion opportunities and expects to continue to identify and
negotiate with respect to substantial acquisitions in the live entertainment
business, certain of which may be consummated prior to the Spin-Off. See
"Business-- Risk Related to Recent Acquisitions."
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
See Index to Consolidated Financial Statements on page F1.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
There have been no changes in or disagreements with the Company's
accountants on accounting matters or financial disclosure.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
DIRECTORS AND EXECUTIVE OFFICERS
Pursuant to the Company's Certificate of Incorporation and By-laws, the
business of the Company is managed by the Board. The Board will conduct its
business through meetings of the board and its committees. The standing
committees of the Board are described below.
The By-laws of the Company authorize the Board to fix the number of
directors from time to time. The initial number of directors of the Company is
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 the Company are to be elected annually by the Board and serve at
the Board's discretion. In the election of directors, the holders of the Class
A Common Stock will be entitled by class vote, exclusive of all other
stockholders, to elect two-sevenths (rounded up) of the directors to serve on
the Board, with each share of the Class A Common Stock entitled to one vote.
Currently, the Board consists of the individuals who are currently serving
as directors of SFX Broadcasting and Brian Becker who was appointed to the
Board upon the consummation of the PACE Acquisition. All of the individuals who
currently serve as directors of SFX Broadcasting will cease to be directors of
SFX Broadcasting at the time of the consummation of the SFX Merger. If the SFX
Merger Agreement is terminated, Messrs. Dugan, Kramer and O'Grady have
indicated that they will promptly resign from their positions as directors of
the Company, and the Board will appoint three new independent directors, to
serve until the next annual meeting of the stockholders of the Company. The
directors of the Company will hold office until the next annual meeting of
stockholders of the Company or until their successors are duly elected and
qualified.
All of the executive officers of the Company other than Mr. Becker (the
"Executive Officers") are currently responsible for the management of SFX
Broadcasting. It is anticipated that, prior to the Spin-Off, such Executive
Officers will enter into five year employment agreements with the Company that
will be similar to their existing employment agreements with SFX
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Broadcasting (except that Mr. Armstrong's employment agreement is expected to
provide that he will serve as an executive vice president of the Company 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 who currently serve as officers of
SFX Broadcasting will continue to devote as much time as they deem necessary to
conduct the operations of the Company consistent with their obligations to SFX
Broadcasting. If the Merger Agreement is terminated for any reason, such
Executive Officers will continue to perform services to both SFX Broadcasting
and the Company until SFX Broadcasting is able to hire suitable replacements
for these Executive Officers. If the SFX Merger Agreement is terminated, SFX
Broadcasting intends to seek another buyer for the radio broadcasting business.
SFX Broadcasting and Messrs. Sillerman and Ferrel have reached agreements
in principle that Messrs. Sillerman and Ferrel will serve as officers and
directors of the Company; however, if the Spin-Off Proposal is not approved,
there can be no assurance that they will serve in any such capacity, in which
event SFX Broadcasting intends to pursue alternative means of disposing of the
Company. See "Business-- Risk Factors-- Dependence on Key Personnel."
The following table sets forth information as to the Directors and the
Executive Officers of the Company:
<TABLE>
<CAPTION>
DIRECTOR
NAME OF SFX AGE AS OF
POSITION(S) HELD WITH POSITION(S) HELD WITH SFX BROADCASTING DECEMBER 31,
THE COMPANY BROADCASTING SINCE 1997
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Robert F.X. Sillerman Director, Executive Chairman and Director and Executive 1992 49
Member of the Office of the Chairman Chairman
Michael G. Ferrel Director, President, Chief Director, President and Chief 1996 48
Executive Officer and Member of the Executive Officer
Office of the Chairman
Brian Becker Director, Executive Vice President None -- 41
and Member 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 Chief Director and Chief Financial 1996 35
Financial Officer Officer
Richard A. Liese Director, Vice President and Director, Vice President and 1995 47
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
</TABLE>
ROBERT F.X. SILLERMAN has served as the Executive Chairman of SFX
Broadcasting since July 1, 1995, and from 1992 through June 30, 1995, he served
as Chairman of the Board of Directors and Chief Executive Officer of SFX
Broadcasting. Mr. Sillerman is Chairman of the Board of Directors and Chief
Executive Officer of SCMC, a private company that makes investments in and
provides financial consulting services to companies engaged in the media
business, and of TSC, a private company that makes investments in and provides
financial advisory services to media-related companies. Through privately held
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<PAGE>
entities, Mr. Sillerman controls the general partner of Sillerman
Communications Partners, L.P., an investment partnership. Mr. Sillerman is also
the Chairman of the Board and a founding stockholder of Marquee, a
publicly-traded company organized in 1995, which is engaged in various aspects
of the sports, news and other entertainment industries. Mr. Sillerman is also a
founder and a significant stockholder of Triathlon, a publicly-traded company
that owns and operates radio stations in medium and small-sized markets in
mid-western and western United States. For the last twenty years, Mr. Sillerman
has been a senior executive of and principal investor in numerous entities
operating in the broadcasting business. In 1993, Mr. Sillerman became the
Chancellor of the Southampton campus of Long Island University.
MICHAEL G. FERREL has been the President, Chief Executive Officer and a
Director of SFX Broadcasting since November 22, 1996. Mr. Ferrel served as
President and Chief Operating Officer of MMR, a wholly-owned subsidiary of SFX
Broadcasting , and a member of MMR's board of directors since MMR's inception
in August 1992 and as Co-Chief Executive Officer of MMR from January 1994 to
January 1996, when he became the Chief Executive Officer. From 1990 to 1993,
Mr. Ferrel served as Vice President of Goldenberg Broadcasting, Inc. the former
owner of radio station WPKX-FM, Springfield, Massachusetts, which was acquired
by MMR in July 1993.
BRIAN E. BECKER has served as Chief Executive Officer of PACE since 1994
and was appointed as President of PACE in 1996. He first joined PACE as the
Vice President and General Manager of PACE's theatrical division at the time of
that division's formation in 1982, and subsequently directed PACE's
amphitheater development efforts. He served as Vice Chairman of PACE from 1992
until he was named its Chief Executive Officer in 1994.
D. GEOFFREY ARMSTRONG has been the Chief Operating Officer and an
Executive Vice President of SFX Broadcasting since November 22, 1996 and has
served as a Director of SFX Broadcasting since 1993. Mr. Armstrong became the
Chief Operating Officer of SFX Broadcasting in June 1996 and the Chief
Financial Officer, Executive Vice President and Treasurer of SFX Broadcasting
in April 1995. Mr. Armstrong was Vice President, Chief Financial Officer and
Treasurer of SFX Broadcasting from 1992 until March 1995. He had been Executive
Vice President and Chief Financial Officer of Capstar, a predecessor of SFX
Broadcasting, since 1989. From 1988 to 1989, Mr. Armstrong was the Chief
Executive Officer of Sterling Communications Corporation.
HOWARD J. TYTEL has been a Director, General Counsel, Executive Vice
President and Secretary of SFX Broadcasting since 1992. Mr. Tytel is Executive
Vice President, General Counsel and a Director of SCMC and TSC and holds an
economic interest in those companies. Mr. Tytel is a Director and a founder of
Marquee and a founder of Triathlon. Mr. Tytel was a Director of Country Music
Television from 1988 to 1991. From March 1995 until March 1997, Mr. Tytel was a
Director of Interactive Flight Technologies, Inc., a publicly-traded company
providing computer-based in-flight entertainment. For the last twenty years,
Mr. Tytel has been associated with Mr. Sillerman in various capacities with
entities operating in the broadcasting business. Since 1993, Mr. Tytel has been
Of Counsel to the law firm of Baker & McKenzie, which currently represents SFX
Broadcasting, the Company and other entities with which Messrs. Sillerman and
Tytel are affiliated, on various matters.
THOMAS P. BENSON has been the Chief Financial Officer and a Director of
SFX Broadcasting since November 22, 1996. Mr. Benson became the Vice President
of Financial Affairs of SFX in June 1996. He was the Vice President--External
and International Reporting for American Express Travel Related Services
Company from September 1995 to June 1996. From 1984 through September 1995, Mr.
Benson worked at Ernst & Young LLP as a staff accountant, senior accountant,
manager and senior manager.
RICHARD A. LIESE has been a Director, Vice President and Associate General
Counsel of SFX Broadcasting since 1995. Mr. Liese has also been the Assistant
General Counsel and Assistant Secretary of SCMC since 1988. In addition, from
1993 until April 1995, he served as Secretary of MMR.
JAMES F. O'GRADY, JR. has been President of O'Grady and Associates, a
media brokerage and consulting company, since 1979. Mr. O'Grady has been a
Director of Orange and Rockland Utilities, Inc. and of Video for Broadcast,
Inc. since 1980 and 1991, respectively. Mr. O'Grady has been the co-owner of
Allcom Marketing Corp., a corporation that provides marketing and public
relations services for a variety of clients, since 1985, and has been Of
Counsel to Cahill and Cahill, Brooklyn, New York, since 1986. He also served on
the Board of Trustees of St. John's University from 1984 to 1996, and has
served as a Director of The Insurance Broadcast System, Inc. since 1994.
PAUL KRAMER has been a partner in Kramer & Love, financial consultants
specializing in acquisitions, reorganizations and dispute resolution, since
1994. From 1992 to 1994, Mr. Kramer was an independent financial consultant.
Mr. Kramer was a
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partner in the New York office of Ernst & Young LLP from 1968 to 1992, and from
1987 to 1992 was Ernst & Young's designated Broadcasting Industry Specialist.
EDWARD F. DUGAN is President of Dugan Associates Inc., a financial
advisory firm to media and entertainment companies, which he founded in 1991.
Mr. Dugan was an investment banker with Paine Webber Inc., as a Managing
Director, from 1978 to 1990, with Warburg Paribas Becker Inc., as President,
from 1975 to 1978 and with Smith Barney Harris Upham & Co., as a Managing
Director, from 1961 to 1975.
Audit Committee
The Audit Committee will review (and report to the Board) on various
auditing and accounting matters, including the selection, quality and
performance of the Company's internal and external accountants and auditors,
the adequacy of its financial controls, and the reliability of financial
information reported to the public. The Audit Committee will also review
certain related-party transactions and potential conflict-of-interest
situations involving officers, directors or stockholders of the Company. The
members of the Audit Committee are Messrs. Kramer, O'Grady and Dugan.
Compensation Committee
The Compensation Committee will review and make recommendations with
respect to certain of the Company's compensation programs and compensation
arrangements with respect to certain officers, including Messrs. Sillerman,
Ferrel, 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 Broadcasting or the Company.
Compensation Committee Interlocks and Insider Participation
The Compensation Committee is comprised of Messrs. Kramer, O'Grady and
Dugan. The Board has approved the issuance of shares of the Class A Common
Stock to holders as of the Spin-Off Record Date of stock options or SARs of SFX
Broadcasting , whether or not vested. The issuance was approved to allow the
holders of these options and SARs to participate in the Spin-Off in a similar
manner to holders of SFX'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 the Class A Common Stock, respectively.
Stock Option Committee
The Stock Option Committee will grant options, determine which employees
and other individuals performing substantial services to the Company may be
granted options and determine the rights and limitations of options granted
under the Company's plans. The members of the Stock Option Committee are
Messrs. Kramer, O'Grady and Dugan.
Stock Option and Restricted Stock Plan
The Board and SFX Broadcasting, as sole stockholder of the Company, have
approved and adopted the Company's 1998 Stock Option and Restricted Stock Plan,
providing for the issuance of up to 2,000,000 shares of the Class A Common
Stock. The purpose of the plan is to provide additional incentive to officers
and employees of the Company. Each option granted under the plan will be
designated at the time of grant as either an "incentive stock option" or a
"non-qualified stock option." The plan will be administered by the Stock Option
Committee. The Board has approved the issuance of stock options exercisable for
an aggregate of 245,000 shares under the plan. See "Executive
Compensation-Employment Agreements and Arrangements with Certain Officers and
Directors."
Compensation of Directors
Directors employed by the Company will receive no compensation for
meetings they attend. Each director not employed by the Company will receive a
fee of $1,500 for each Board meeting he attends, in addition to reimbursement
of travel expenses. Each non-employee director who is a member of a committee
will also receive $1,500 for each committee meeting he attends that is not held
in conjunction with a Board meeting. If the committee meeting occurs in
conjunction with a Board meeting, each committee member will receive an
additional $500 for each committee meeting he attends. In addition, the Company
will pay each director an annual retainer of $30,000, of which one-half will be
paid in cash and one-half will be paid in
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<PAGE>
shares of the Class A Common Stock.
ITEM 11. EXECUTIVE COMPENSATION
The Company did not pay any compensation to the current Executive Officers
in 1997. The Company anticipates that during 1998 its most highly compensated
executive officers will be Messrs. Sillerman, Ferrel, Armstrong, Tytel and,
Becker. See "-- Employment Agreements and Arrangements with Certain Officers
and Directors."
It is anticipated that compensation for the Executive Officers and for
other executives will consist principally of base salary, an annual incentive
bonus opportunity and long-term stock-based incentive awards. All direct and
indirect remuneration of all Executive Officers and certain other executives
will be approved by the Compensation and Stock Option Committees.
It is anticipated that the Board will, after the Spin-Off, grant
shares of the Class A Common Stock to holders as of the Spin-Off Record Date of
stock options or SARs of SFX Broadcasting, whether or not vested. See "Certain
Relationships and Related Transactions--Issuance of Stock to Holders of SFX
Broadcasting`s Options and SARs."
EMPLOYMENT AGREEMENTS AND ARRANGEMENTS WITH CERTAIN OFFICERS AND DIRECTORS
The Company anticipates that it will enter into employment agreements with
all of the Executive Officers prior to the consummation of the Spin-Off, and
that the employment agreements (except for Mr. Becker's employment agreement
which is described below) will become effective immediately after the
consummation of the SFX Merger. It is anticipated that the employment
agreements will provide for annual base salaries of $500,000 for Mr. Sillerman,
$350,000 for Mr. Ferrel, $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 the Company or the
employee, the term will continue thereafter on a year-to-year basis on the same
terms existing at the time of renewal. It is anticipated that each of the
agreements will provide for payments and other benefits to be mutually agreed
upon, if the employee's employment terminates following a change of control.
In connection with entering into the employment agreements, the Board (on
the review and recommendation of the Compensation Committee) approved the
following sales of restricted stock: 500,000 shares of the Company's Class B
Common Stock to Mr. Sillerman, 150,000 shares of the Company's Class B Common
Stock to Mr. Ferrel, 100,000 shares of the Class A Common Stock to Mr.
Armstrong, 80,000 shares of the Class A Common Stock to Mr. Tytel and 10,000
shares of the Class A Common Stock to Mr. Benson. The shares of restricted
stock are to be sold to the officers at a purchase price of $2.00 per share.
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 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 the 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.
Until the closing date of the SFX Merger, the Executive Officers (other
than Mr. Becker) will continue to be employed by SFX Broadcasting (at SFX
Broadcasting's expense), but will devote as much time as they deem reasonably
necessary, consistent with their obligations to SFX Broadcasting, in support of
the Company on a basis consistent with the time and scope of services that they
devoted to the live entertainment business prior to the Spin-Off. Effective
immediately prior to the consummation of the SFX Merger, the Company will
assume all obligations arising under any employment agreement or arrangement
(written or oral) between SFX Broadcasting or any of its subsidiaries and the
Executive Officers, other than the rights, if any, of the Executive Officers to
receive options at the time of their termination following a change of control
of SFX Broadcasting(as defined in their respective employment agreements) and
all existing rights to indemnification. The Company will assume the obligation
to make change of control payments under Messrs. Sillerman's, Ferrel's and
Benson's existing employment agreements with SFX Broadcasting of approximately
$3.3 million, $1.5 million and $0.2 million, respectively. The Company will
also indemnify SFX Broadcasting and its subsidiaries from all obligations
arising under the assumed employment agreements or arrangements (except in
respect of the termination options and all existing rights to indemnification).
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Becker Employment Agreement
As a condition to the execution of the PACE Agreement, the Company entered
into an employment agreement with the Chief Executive Officer and President of
PACE, Mr. Brian Becker (the "Becker Employment Agreement"). The Becker
Employment Agreement has a term of five years commencing on February 25, 1998.
Mr. Becker will continue as President and Chief Executive Officer of PACE. In
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 the Company and (c) a director of each of PACE and the Company (subject to
shareholder approval). During the term of his employment, Mr. Becker will
receive (a) a base salary of $294,000 for the first year, $313,760 for each of
the second and third years and $334,310 for each of the fourth and fifth years
and (b) an annual bonus in the discretion of the Board.
The Company has agreed that it will not sell either the theatrical or
motor sports line of business of PACE prior February 25, 1999. If the Company
sells either line of business after the first anniversary, it has agreed not to
sell the other line of business prior to 15 days past the second anniversary of
the PACE Acquisition. The Becker Employment Agreement provides that Mr. Becker
will have a right of first refusal (the "Becker Right of First Refusal") if,
between the first and second anniversary of the PACE Acquisition, the Company
receives a bona fide offer from a third party to purchase all or substantially
all of either the theatrical or motor sports lines of business at a price equal
to 95% of the proposed purchase price. The Fifth Year Put Option (as defined in
the PACE Agreement) will also be immediately exercisable as of such closing. If
that Mr. Becker does not exercise his right of first refusal and either of the
theatrical or motor sports line of business is sold, then he will have an
identical right of first refusal for the sale of the remaining line of business
beginning on the second anniversary of the PACE Acquisition and ending six
months thereafter. Mr. Becker will be paid an administrative fee of $100,000 if
he does not exercise his right of first refusal and the Company does not
consummate the proposed sale. Mr. Becker would thereafter retain all rights to
the Becker Right of First Refusal.
Beginning on the second anniversary of the date of the Becker Employment
Agreement (December 12, 1999), Mr. Becker will have the option (the "Becker
Second Year Option"), exercisable within 15 days thereafter, to elect one or
more of the following: to (a) put any stock or portion thereof (including any
vested and unvested options to purchase stock) and/or any compensation to be
paid to Mr. Becker by the Company; (b) become a consultant to the Company for
no more than an average of 20 hours per week for the remainder of the term and
with the same level of compensation set forth in the Becker Employment
Agreement; or (c) acquire PACE's motor sports line of business (or, if that
line of business was previously sold, PACE's theatrical line of business) at
its fair market value as determined in the Becker Employment Agreement.
The Becker Employment Agreement may be terminated (a) by the Company for
Cause (as defined in the Becker Employment Agreement), (b) by the Company for
Mr. Becker's death or permanent disability or (c) by Mr. Becker at any time for
any reason or upon exercise of the Becker Second Year Option.
In addition, Mr. Becker's employment may be terminated by the Company any
time in the Company's sole discretion or by Mr. Becker at any time following,
among other things, (a) failure to elect or re-elect Mr. Becker as a director
of the Company, (b) a reduction in Mr. Becker's base salary or in the formula
to calculate his bonus, (c) discontinuation of Mr. Becker's participation in
any stock option, bonus or other employee benefit plan, (d) prior to two years
and fifteen days after consummation of the PACE Acquisition, the sale of either
the motor sports or theatrical line of business to any person other than Mr.
Becker (unless Mr. Becker elected not to exercise the Becker Right of First
Refusal (as defined below)), (e) the sale of all or substantially all of the
assets of PACE, (f) a change of control of the Company or (g) the failure by
the Company to contribute any acquired business (which derives a majority of
its revenues from either a theatrical or motor sports line of business) to
PACE. If Mr. Becker's employment is terminated, then, among other things, (a)
for the period from the date of termination until the fifth anniversary of the
closing of the PACE Acquisition, the Company must pay Mr. Becker the base
salary and any bonus to which he would otherwise be entitled and Mr. Becker
will be entitled to participate in any and all of the profit-sharing,
retirement income, stock purchase, savings and executive compensation plans to
the same extent he would otherwise have been entitled to participate, (b) for a
period of one year after the date of termination, the Company will maintain Mr.
Becker's life, accident, medical, health care and disability programs or
arrangements and provide Mr. Becker with use of the same office and related
facilities and (c) if the termination occurs prior to two years and 15 days
after consummation of the PACE Acquisition, Mr. Becker will retain the Becker
Second Year Option and the Becker Right of First Refusal.
Throughout the term of his employment and for a period of 18 months
thereafter, Mr. Becker has agreed not to, directly or indirectly, engage in any
activity or business that is directly competitive with the Company (or its
affiliates) or solicit any of
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its employees to leave the Company (or its affiliates). However, these
restrictions will not apply if Mr. Becker exercises his rights, or the Company
breaches its obligations, with respect to the Becker Right of First Refusal or
the Becker Second Year Option
The Company has agreed to indemnify, defend and hold Mr. Becker harmless
to the maximum extent permitted by law against expenses, including attorney's
fees, incurred in connection with the fact that Mr. Becker is or was an
officer, employee or director of the Company or any of its affiliates.
Possible Amendments to Delsener/Slater Employment Agreements
Messrs. Delsener and Slater and the Company are in the process of
negotiating amendments to their employment agreements to reflect, among other
things, the changes to the Company's business as a result of the Recent
Acquisitions and the Spin-Off. Messrs. Delsener and Slater have agreed in
principle to waive any rights to repurchase (or to offer to repurchase)
Concerts, and any rights to receive a portion of the proceeds of a Return Event
(as defined in their employment agreements) that they might otherwise have in
connection with the SFX Merger or the Spin-Off. However, there can be no
assurance that Messrs. Delsener and Slater will waive these rights on terms
acceptable to the Company or that, if not so waived, neither Mr. Delsener nor
Mr. Slater will exercise these rights. These rights may continue to apply in
certain circumstances to transactions after, or unrelated to, the Spin-Off and
the SFX Merger. The Company also expects, in connection with the foregoing, to
negotiate mutually satisfactory amendments to certain of Messrs. Delsener's and
Slater's compensation arrangements, including bonus and profit-sharing
provisions. See "Business-- Risk Factors--Control of Concerts " and "Certain
Relationships and Related Transactions-Delsener/Slater Employment Agreements."
The Company and SFX Broadcasting have also entered into certain agreements
and arrangements with their officers and directors from time to time in the
past. See "Certain Relationships and Related Transactions."
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ITEM 12. SECURITY OWNNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
All of the outstanding Common Stock of the Company is currently held by
SFX Broadcasting. To the best of the Company's knowledge, the following table
sets forth projected information regarding the beneficial ownership of shares
of the Company Common Stock after the Spin-Off, and after the Spin-Off, and
grants, with respect to (a) each director of the Company, (b) certain executive
officers of the Company, (c) the directors and executive officers of the
Company as a group and (d) each person known by the Company to own beneficially
more than five percent of the outstanding shares of any class of SFX
Broadcasting's common stock. The ownership information presented below with
respect to all persons and organizations is based on record ownership of SFX
Broadcasting's common stock and certain options and warrants to purchase SFX
Broadcasting's common stock as of March 16, 1998 and assumes no change in
record ownership of SFX Broadcasting's common stock and the options and
warrants.
<TABLE>
<CAPTION>
AFTER THE SPIN-OFF AND STOCK GRANTS(1),(2)
---------------------------------------------------------------------------------------------------
CLASS A CLASS B
COMMON STOCK COMMON STOCK(3)
--------------------------------------- -------------------------------------
PERCENT
OF TOTAL
NUMBER OF PERCENT NUMBER OF PERCENT VOTING
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), 6.9% 1,524,168(6) 89.9% 45.7%
Michael G. Ferrel......... 179,504(7) * 172,869(8) 10.1% 5.3%
Brian Becker............... -- * -- -- *
D. Geoffrey Armstrong.. 261,800(9) 1.4% -- -- *
Howard J. Tytel(11)...... 137,891(10),(11) * -- -- *
Thomas P. Benson........ 19,000(12) * -- -- *
Richard A. Liese.......... 9,500(13) * -- -- *
James F. O'Grady, Jr....... 14,772(14) * -- -- *
Paul Kramer............... 15,922(15) * -- -- *
Edward F. Dugan......... 5,922(16) * -- -- *
All directors and
executive officers as a
group (10 persons )....... 1,976,941 10.2% 1,697,037 100.0% 52.2%
</TABLE>
- ------------------
* Less than 1%
(1) Assumes that (a) all of the outstanding Class B Warrants and Unit Purchase
Options of SFX Broadcasting are exercised prior to the Spin-Off Record
Date and (b) SFX Broadcasting exercises a contractual right to purchase
250,838 shares of SFX Broadcasting's Class A common stock prior to the
Spin-Off Record Date. Does not include 2,000,000 shares reserved for
issuance pursuant to the Company's 1998 Stock Option and Restricted Stock
Plan. In January 1998, the Board approved the issuance of stock options
for an aggregate of 245,000 shares of the Class A Common Stock.
(2) Assumes that (a) an aggregate of 4,216,680 shares of the Class A Common
Stock are issued pursuant to the Recent Acquisitions, (b) an aggregate of
793,633 shares of the Class A Common Stock are issued to the holders of
stock options and SARs issued by SFX Broadcasting and (c) an aggregate of
290,000 shares of the Class A Common Stock and 650,000 shares of the
Company's Class B Common Stock are issued pursuant to certain anticipated
employment agreements. See "Executive Compensation-- Employment Agreements
and Arrangements with Certain Officers and Directors" and "Certain
Relationships and Related Transactions-- Issuance of Stock to Holders of
SFX Broadcasting's Options and SARs."
(3) Assumes that the Spin-Off Proposal to allow holders of SFX Broadcasting's
Class B Common Stock to receive the Company's Class B Common Stock in the
Spin-Off is approved at SFX Broadcasting's stockholders meeting.
(4) Unless otherwise set forth above, the address of each stockholder is the
address of the Company, which is 650 Madison Avenue, 16th Floor, New York,
New York 10022. Pursuant to Rule 13d-3 of the Exchange Act, as used in
this table, (a) "beneficial ownership" means the sole or shared power to
vote, or to direct the disposition of, a security, and (b) a person is
deemed to have "beneficial ownership" of any security that the person has
the right to acquire within 60 days of February 9, 1998. Unless noted
otherwise, (a) information as to beneficial ownership is based on
statements furnished to SFX Broadcasting or the Company by the beneficial
owners, and (b) stockholders possess sole voting and dispositive power
with respect to shares listed on this table. As of February 9, 1998, there
were issued and outstanding 9,517,663 shares of SFX Broadcasting's Class A
common stock
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and 1,047,037 shares of SFX Broadcasting's Class B common stock.
(5) Assumes that the Company issues 45,193 shares of the Class A Common Stock
to Mr. Sillerman (or entities controlled by Mr. Sillerman) as a result of
his ownership of options of SFX Broadcasting. See "Certain Relationships
and Related Transactions--Issuance of Stock to Holders of SFX
Broadcasting's Options and SARs." Includes (i) 8,949 shares of the Class A
Common Stock expected to be issued to TSC in the Spin-Off; (ii) 600,000
shares of the Class A Common Stock to be issued to SCMC in the Spin-Off
pursuant to certain warrants held by SCMC and (iii) an option, exercisable
upon consummation of the Spin-Off, to acquire an aggregate of 537,185
shares of the Class A Common Stock from a third party. If the 1,524,168
shares of the Company's Class B Common Stock to be held by Mr. Sillerman
were included in calculating his ownership of the Class A Common Stock,
then Mr. Sillerman would beneficially own 2,856,705 shares of the Class A
Common Stock, representing approximately 14% of the class. Does not
include options to purchase an aggregate of 120,000 shares of the Class A
Common Stock that are expected to be issued to Mr. Sillerman pursuant to
his anticipated employment agreement. See "Executive Compensation--
Employment Agreements and Arrangements with Certain Officers and
Directors."
(6) Includes 500,000 shares of the Company's Class B Common Stock that are
expected to be issued to Mr. Sillerman pursuant to his anticipated
employment agreement. See "Executive Compensation-- Employment Agreements
and Arrangements with Certain Officers and Directors."
(7) Assumes that the Company issues 167,372 shares of the Class A Common Stock
to Mr. Ferrel as a result of his ownership of options of SFX Broadcasting.
See "Certain Relationships and Related Transactions-- Issuance of Stock to
Holders of SFX Broadcasting's Options and SARs." If the 22,869 shares of
Class B Common Stock held by Mr. Ferrel were included in calculating his
ownership of the Class A Common Stock, then Mr. Ferrel would beneficially
own 352,371 shares of the Class A Common Stock, representing approximately
1.9% of the class. Does not include options to purchase an aggregate of
50,000 shares of the Class A Common Stock that are expected to be issued
to Mr. Ferrel pursuant to his anticipated employment agreement. See
"Executive Compensation-- Employment Agreements and Arrangements with
Certain Officers and Directors."
(8) Includes 150,000 shares of the Company's 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."
(9) Assumes that the Company issues an aggregate of 261,800 shares of the
Class A Common Stock to Mr. Armstrong pursuant to his anticipated
employment agreement and as a result of his ownership of options of SFX
Broadcasting. See "Management-- Employment Agreements and Arrangements
with Certain Officers and Directors" and "Certain Relationships and
Related Transactions-- Issuance of Stock to Holders of SFX Broadcasting's
Options and SARs."
(10) 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."
(11) Assumes that the Company issues an aggregate of 113,614 shares of the
Class A Common Stock to Mr. Tytel pursuant to his anticipated employment
agreement and as a result of his ownership of options of SFX Broadcasting.
Mr. Tytel has an economic interest in SCMC and TSC, which together will
beneficially own an aggregate of 608,949 shares of the 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 the Class A Common Stock that are expected
to be issued to Mr. Tytel pursuant to his employment agreement. See
"Management-- Employment Agreements and Arrangements with Certain Officers
and Directors" and "Certain Relationships and Related Transactions--
Issuance of Stock to Holders of SFX Broadcasting's Options and SARs."
(12) Assumes that the Company issues an aggregate of 19,000 shares of the Class
A Common Stock to Mr. Benson pursuant to his anticipated employment
agreement and as a result of his ownership of options of SFX Broadcasting.
Does not include options to purchase an aggregate of 10,000 shares of the
Class A Common Stock that are expected to be issued to Mr. Benson pursuant
to his employment agreement. See "Executive Compensation** Employment
Agreements and Arrangements with Certain Officers and Directors" and
"Certain Relationships and Related Transactions-- Issuance of Stock to
Holders of SFX Broadcasting's Options and SARs."
(13) Assumes that the Company issues 9,500 shares of the Class A Common Stock
to Mr. Liese as a result of his ownership of options of SFX Broadcasting .
See "Certain Relationships and Related Transactions-- Issuance of Stock to
Holders of SFX Broadcasting's Options and SARs."
(14) Assumes that the Company issues 13,000 shares of the Class A Common Stock
to Mr. O'Grady as a result of his ownership of options and/or SARs of SFX
Broadcasting. See "Certain Relationships and Related Transactions--
Issuance of Stock to Holders of SFX Broadcasting's Options and SARs."
Includes 922 shares issuable pursuant to SFX Broadcasting's director
deferred stock ownership plan.
(15) Assumes that the Company issues 13,000 shares of the 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 Broadcasting's Options and SARs." Includes 922 shares
issuable pursuant to SFX Broadcasting's director deferred stock ownership
plan.
(16) Assumes that the Company issues 3,000 shares of the Class A Common Stock
to Mr. Dugan as a result of his ownership of options and/or SARs of SFX
Broadcasting. See "Certain Relationships and Related Transactions--
Issuance of Stock to Holders of SFX Broadcasting's Options and SARs."
Includes 922 shares issuable pursuant to SFX Broadcasting's director
deferred stock ownership plan.
POSSIBLE CHANGE IN CONTROL
Mr. Sillerman has pledged an aggregate of 793,401 of his shares of SFX
Broadcasting's Class B common stock as collateral for a line of credit, under
which Mr. Sillerman currently has no outstanding borrowings. The pledge extends
to all
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<PAGE>
dividends payable on the pledged shares; accordingly, if the pledge agreement
is in effect at the time of the Spin-Off, and if the Spin-Off Proposal is
approved, then 793,401 shares of the Company's Class B Common Stock distributed
to Mr. Sillerman will be subject to the pledge agreement. Mr. Sillerman
continues to be entitled to exercise voting and consent rights with respect to
the pledged shares, with certain restrictions. However, if Mr. Sillerman
defaults in the payment of any future loans extended to him under the line of
credit, the bank will be entitled to sell the pledged shares. Although the
Company's Class B Common Stock has 10 votes per share in most matters, the
pledged shares will automatically convert into shares of the Class A Common
Stock upon such a sale. Such a sale of the pledged shares would reduce Mr.
Sillerman's share of the voting power of the Company's Common Stock, and would
therefore be likely to result in a change of control of the Company. See
"Business-- Risk Factors-- Restrictions Imposed by the Company's Indebtedness."
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
AGREEMENTS WITH SFX BROADCASTING
The Company and SFX Broadcasting have entered into various agreements
with respect to the Spin-Off and related matters. For a description of the
material terms of these agreements, see "Business- Agreements Related to the
Spin-Off."
THE COMPANY'S COMMON STOCK TO BE RECEIVED IN THE SPIN-OFF
In the Spin-Off, the holders of SFX Broadcasting's Class A common stock,
Series D preferred stock and Warrants (upon exercise) will receive shares of
the Class A Common Stock, whereas Messrs. Sillerman and Ferrel, as the holders
of SFX Broadcasting's Class B common stock (which is entitled to ten votes per
share on most matters), will receive shares of the Company's Class B Common
Stock (assuming approval of the Spin-Off Proposal). The Class A Common Stock
and Class B Common Stock have similar rights and privileges, except that the
Company's Class B Common Stock differs as to voting rights generally to the
extent that SFX Broadcasting's Class A common stock and Class B common stock
presently differ. The issuance of the Company's 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 the
Company after the Recent Acquisitions, Spin-Off and stock grants to management.
Similarly, Messrs. Sillerman and Ferrel are anticipated to be deemed to
beneficially own approximately 51.0% of the combined voting power of the
Company after the Recent Acquisitions, Spin-Off and stock grants to management.
Accordingly, Mr. Sillerman, alone and together with the Company's current
directors and executive officers, will generally be able to control the outcome
of the votes of the stockholders of the Company on most matters. The Company
and Messrs. Sillerman and Ferrel have agreed in principle that Messrs.
Sillerman and Ferrel will serve as officers and directors of the Company;
however, if the Spin-Off Proposal which provides that holders of shares of SFX
Broadcasting's Class B Common Stock will receive shares of the Company's Class
B Common Stock in the Spin-Off is not approved, there can be no assurance that
they will serve in that capacity, in which event SFX Broadcasting intends to
pursue alternative means of disposing of the Company. The Company 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 Broadcasting
approved amendments to the SCMC Warrants (which represent the right to purchase
an aggregate of 600,000 shares of SFX Broadcasting's Class A common stock). The
SCMC Warrants had previously been issued to SCMC, an entity controlled by Mr.
Sillerman. The amendments memorialize the original intent of the directors of
SFX Broadcasting that SCMC receive the aggregate number of shares of the
Company Class A Common Stock that it would have received if it had exercised
the SCMC Warrants immediately prior to the Spin-Off Record Date.
ISSUANCE OF STOCK TO HOLDERS OF SFX BROADCASTING'S OPTIONS AND SARS
The SFX Broadcasting Board has approved the grant of shares of the Class A
Common Stock to holders as of the Spin-Off Record Date of the stock options or
SARs of SFX Broadcasting, whether or not vested. These grants were approved by
the Board to allow holders of these options and SARs to participate in the
Spin-Off in a manner similar to holders of SFX Broadcasting's Class A common
stock. Additionally, many of the option and SAR holders will become officers,
directors or employees of the Company. These grants will result in the issuance
of an aggregate of up to 793,633 shares of the Company Class A Common Stock.
Among those receiving shares will be all members of the Board other than Mr.
Becker.
EMPLOYMENT AGREEMENTS
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<PAGE>
The Company 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. The
Company 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
connection with entering into the employment agreements, the Board (on the
review and recommendation of the Compensation Committee) approved the following
sales of restricted stock: 500,000 shares of the Company's Class B Common Stock
to Mr. Sillerman, 150,000 shares of the Company's Class B Common Stock to Mr.
Ferrel, 100,000 shares of the Class A Common Stock to Mr. Armstrong, 80,000
shares of the Class A Common Stock to Mr. Tytel and 10,000 shares of the Class
A Common Stock to Mr. Benson. The shares of restricted stock are to be sold to
the officers at a purchase of $2.00 per share. 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 Credit Facility. 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 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 exercise period to
the extent that the fair value of the underlying Class A Common Stock of the
Company exceeds the exercise price. See "Executive Compensation-- Employment
Agreements and Arrangements with Certain Officers and Directors" and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations-- Liquidity and Capital Resources-- Future Charges to Earnings."
The Company has entered into an employment agreement with Mr. Becker who
serves as a Director, Member of the Office of the Chairman and Executive Vice
President. Mr. Becker's employment agreement provides for (a) an annual salary
of $294,000 for the first year, $313,760 for each of the second and third years
and $334,310 for each of the fourth and fifth years, (b) an annual bonus in the
discretion of the Board and (c) the other terms described in "Executive
Compensation- Agreements and Arrangements with Certain Officers and Directors."
DELSENER/SLATER EMPLOYMENT AGREEMENTS
In connection with the Delsener/Slater Acquisition, SFX Broadcasting
entered into employment agreements in January 1997 with Ron Delsener and Mitch
Slater (collectively, the "Delsener/Slater Employment Agreements"), pursuant to
which each of Messrs. Delsener and Slater serve as co-Presidents and co-Chief
Executive Officers of Delsener/Slater. The employment agreements will continue
until December 31, 2001 unless terminated earlier by the Company for Cause (as
defined in the employment agreements) or voluntarily by Messrs. Delsener or
Slater.
After the consummation of the Spin-off or the SFX Merger, Messrs. Delsener
and Slater may have the right pursuant to their employment agreements (a) to
purchase the outstanding capital stock of Concerts (a subsidiary of the Company
holding a significant amount of the assets of the Company) for Fair Market
Value (as defined in their employment agreements) or (b) to receive a cash
payment equal to 15% of the amount by which the Fair Market Value of Concerts
exceeds the fixed payment portion of the cash purchase price of the acquisition
of Concerts, plus 20% interest thereon. The senior management of Concerts and
SFX Broadcasting have reached an agreement in principle to waive any of the
above rights in connection with the Spin-Off, the SFX Merger and related
transactions; however, there can be no assurance that the rights will be waived
on terms acceptable to SFX Broadcasting and the Company or at all. In addition,
although the Company is in the process of negotiating amendments to these
agreements, these and certain other rights described in the agreements may
continue to apply to transactions after, or unrelated to, the Spin-Off or the
SFX Merger.
Additionally, the Messrs. Delsener's and Slater's employment agreements
provide for certain annual bonus arrangements. o o o
Management believes that no bonuses were earned in 1997 pursuant to such
arrangements. However, any bonuses that may accrue to Messrs. Delsener and
Slater in the future will not be available for the Company's use to service its
debt or for other purposes.
ASSUMPTION OF EMPLOYMENT AGREEMENTS; CERTAIN CHANGE OF CONTROL PAYMENTS
Pursuant to the terms of the Distribution Agreement, at the time of the
consummation of the SFX Merger, the Company will assume all obligations under
any employment agreement or arrangement (whether written or oral) between SFX
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<PAGE>
Broadcasting or any of its subsidiaries and any employee of the Company
(including Messrs. Sillerman and Ferrel), other than obligations relating to
Messrs. Sillerman's and Ferrel's Change of Control Options and existing rights
to indemnification. These assumed obligations include the obligation to pay to
Messrs. Sillerman, Ferrel and Benson, after the termination of their employment
with SFX Broadcasting, cash payments aggregating approximately $3.3 million,
$1.5 million and $0.2 million, respectively. These payments will become due to
Messrs. Sillerman, Ferrel and Benson after the termination of their employment
with SFX Broadcasting following a change of control of SFX Broadcasting,
pursuant to their employment agreements with SFX Broadcasting. In addition, the
Company's assumed obligations will include the duty to indemnify Messrs.
Sillerman and Ferrel (to the extent permitted by law) for one-half of the cost
of any excise tax that may be assessed against them for any change-of-control
payments made to them by SFX Broadcasting in connection with the SFX Merger.
INDEMNIFICATION OF MR. SILLERMAN
On August 24, 1997, Mr. Sillerman entered into an agreement with SFX
Broadcasting, SFX Buyer and SFX Buyer Sub to waive his right to receive
indemnification (except to the extent covered by directors' and officers'
insurance) from SFX Broadcasting, its subsidiaries, SFX Buyer and SFX Buyer Sub
for claims and damages arising out of the SFX Merger and related transactions.
It is anticipated that, in any employment agreement with Mr. Sillerman, the
Company will agree to indemnify Mr. Sillerman for these claims and damages to
the fullest extent permitted by applicable law.
POTENTIAL CONFLICTS OF INTEREST
Marquee is a publicly-traded company that, among other things, acts as
booking agent for tours and appearances for musicians and other entertainers.
Messrs. Sillerman and Tytel have an aggregate equity interest of approximately
9.2% in Marquee; Mr. Sillerman is the chairman of its board of directors, and
Mr. Tytel is one of its directors. The Company anticipates that, from time to
time, it will enter into transactions and arrangements (particularly, booking
arrangements) with Marquee and Marquee's clients, and it may compete with
Marquee for specific concert promotion engagements. In addition, the Company
could in the future compete with Marquee in the production or promotion of
motor sports or other sporting events. These transactions or arrangements will
be subject to the approval of the independent committees of the Company and
Marquee, except that booking arrangements in the ordinary course of business
will be subject to periodic review, but not 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 Broadcasting, who are anticipated to become directors,
officers and employees of the Company 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 the Company, on the one hand, and their
duties as directors of Marquee and their interests in TSC, Marquee and
Triathlon, on the other hand.
Pursuant to the employment agreement entered into between Brian Becker and
the Company in connection with the acquisition of PACE, Mr. Becker has the
option, exercisable within 15 days after the second anniversary of the
consummation of the PACE Acquisition, to purchase the Company's then existing
motor sports line of business (or, if that line of business has been sold, the
Company's then existing theatrical line of business) at its then fair market
value. Mr. Becker's option may present a conflict of interest in his role as a
director of the Company in evaluating proposals for the acquisition of either
line of business. See "Executive Compensation"
RELATIONSHIP BETWEEN HOWARD J. TYTEL AND BAKER & MCKENZIE
Howard J. Tytel, who is the Executive Vice President, General Counsel,
Secretary and a Director of the Company, is "of counsel" to the law firm of
Baker & McKenzie. Mr. Tytel is also an executive vice president, the general
counsel and a director of SFX Broadcasting. Baker & McKenzie serves as counsel
to SFX Broadcasting, the Company and certain other affiliates of Mr. Sillerman.
Baker & McKenzie compensates Mr. Tytel based, in part, on the fees it receives
from providing legal services to SFX Broadcasting, other affiliates of Mr.
Sillerman and other clients introduced to the firm by Mr. Tytel.
ARRANGEMENT BETWEEN ROBERT F.X. SILLERMAN AND HOWARD J. TYTEL
57
<PAGE>
Since 1978, Messrs. Sillerman and Tytel have been jointly involved in
numerous business ventures, including SCMC, TSC, MMR, Triathlon, Marquee, SFX
Broadcasting and the Company. In consideration for certain services provided by
Mr. Tytel in connection with those ventures, Mr. Tytel has received from Mr.
Sillerman either a minority equity interest in the businesses (with Mr.
Sillerman retaining the right to control the voting and disposition of Mr.
Tytel's interest) or cash fees in an amount mutually agreed upon. Although Mr.
Tytel has not been compensated directly by SFX Broadcasting (except for
ordinary fees paid to him in his capacity as a director), he receives
compensation from TSC and SCMC, companies controlled by Mr. Sillerman, as well
as from Mr. Sillerman personally, with respect to the services he provides to
various entities affiliated with Mr. Sillerman, including SFX Broadcasting. In
1997, these cash fees aggregated approximately $5.0 million, a portion of which
were paid from the proceeds of payments made by SFX Broadcasting to Mr.
Sillerman or entities controlled by Mr. Sillerman and the proceeds from Mr.
Sillerman's exercise for tax purposes of options granted to him by SFX
Broadcasting and subsequent sale of the underlying shares. It is anticipated
that, in connection with the consummation of the SFX Merger and certain related
transactions, Mr. Tytel will receive shares of the Company and cash fees from
TSC, SCMC and Mr. Sillerman personally in an amount to be determined in the
future. See "--Assumption of Employment Agreements; Certain Change of Control
Payments." It is also anticipated that Mr. Tytel will enter into an employment
agreement directly with the Company that will be effective at the time of
consummation of the SFX Merger. See "-- Employment Agreements."
TRIATHLON FEES
SCMC, a corporation controlled by Mr. Sillerman and in which Mr. Tytel has
an equity interest, has an agreement to provide consulting and marketing
services to Triathlon, a publicly-traded company in which Mr. Sillerman is a
significant stockholder. Under the terms of the agreement, SCMC has agreed to
provide consulting and marketing services to Triathlon until June 1, 2005 for
an annual fee of $500,000, together with a refundable advance of $500,000 per
year against fees earned in respect of transactional investment banking
services. Fees paid by Triathlon for the years ended December 31, 1996 and
December 31, 1997 were $3,000,000 and $1,794,000, respectively. These fees will
vary (above the minimum annual fee of $500,000) depending on the level of
acquisition and financing activities of Triathlon. SCMC previously assigned its
rights to receive fees payable under this agreement to SFX Broadcasting.
Pursuant to the terms of the Distribution Agreement, SFX Broadcasting will
assign its rights to receive these fees to the Company. Triathlon has
previously announced that it is exploring ways of maximizing stockholder value,
including possible sale to a third party. If Triathlon were acquired by a third
party, the agreement might not continue for the remainder of its term.
RELATIONSHIPS AND TRANSACTIONS WITH SFX BROADCASTING
SFX Broadcasting has guaranteed certain payments in connection with the
PACE Acquisition, the Contemporary Acquisition and the Network Acquisition.
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8K
(a) Item 8 of this report on Form 10-K are incorporated herein by reference.
(b) Reports on Form 8-K.
On March 11, 1998, the Company filed a Report on Form 8-K disclosing,
pursuant to Item 5, the consummation of certain acquisitions, and the execution
of a Credit and Guarantee Agreement with respect to a senior secured credit
facility and the borrowing of $150 million term loan under such facility.
(c) The following documents are filed as part of this report:
<TABLE>
<CAPTION>
Exhibit
No. Description of Exhibit
- --------- ------------------------
<S> <C>
2.1 Form of Distribution Agreement between SFX Entertainment and SFX (4).
58
<PAGE>
2.2 Form of Tax Sharing Agreement between SFX Entertainment and SFX (3).
2.3 Form of Employee Benefits Agreement between SFX Entertainment and SFX (4).
3.1 Certificate of Incorporation of SFX Entertainment (1).
3.2 Bylaws of SFX Entertainment (3).
3.3 Certificate of Amendment to the Certificate of Incorporation of SFX
Entertainment, Inc., as filed with the Secretary of State of Delaware on
February 25, 1998 (5).
3.4 1998 Stock Option and Restricted Stock Plan of SFX Entertainment (3).
3.5 Indenture relating to the 9 1/8% Senior Subordinated Notes due 2008 (5).
3.6 Certificate of Designations relating to the Series A Preferred Stock of
SFX Entertainment, Inc. as filed with the Secretary of State of Delaware
on February 27, 1998 (5).
3.7 Form of Amended and Restated Certificate of Incorporation of SFX
Entertainment, Inc. (6).
10.1 Stock Purchase Agreement, dated as of October 11, 1996, by and among
Delsener/Slater Enterprises, Ltd., Beach Concerts, Inc., Connecticut
Concerts Incorporated, Broadway Concerts, Inc., Arden Productions, Ltd.,
In-house Tickets, Inc., Exit 116 Revisited, Inc., Ron Delsener, Mitch
Slater and SFX Broadcasting, Inc. (1).
10.2 License Agreement, dated January 29, 1990, by and between the State of New
York and Beach Concerts, Inc. (1).
10.3 Amendment to License Agreement of January 29, 1990, dated as of April 11,
1997, by and between the State of New York and Beach Concerts, Inc. (1).
10.4 Lease Agreement, Easement Agreement and Declaration of Restrictive
Covenants dated as of May 1, 1996, by and between New Jersey Highway
Authority and GSAC Partners (1).
10.5 Partnership Agreement, dated as of November 18, 1996, by and between
Pavilion Partners Exit 116 Revisited, Inc. (1).
10.6 Asset Purchase and Sale Agreement, dated June 23, 1997, by and among
Sunshine Concerts, L.L.C., SFX Broadcasting, Inc., Sunshine Promotions,
Inc., P. David Lucas and Steven P. Sybesma (1).
10.7 Asset Purchase and Sale Agreement, dated as of June 23, 1997, by and among
Suntex Acquisition, L.P., SFX Broadcasting, Inc., Suntex, Inc., P. David
Lucas, Steven P. Sybesma, Greg Buttrey and John Valant (1).
10.8 Asset Purchase and Sale Agreement, dated as of June 23, 1997, by and among
Deer Creek Amphitheater Concerts, L.P., SFX Broadcasting, Inc., Deer Creek
Partners, L.P., Sand Creek Partners, L.P., Sand Creek, Inc., P. David
Lucas and Steven P. Sybesma (1).
10.9 Asset Purchase and Sale Agreement, dated as of June 23, 1997, by and among
Murat Centre Concerts, L.P., SFX Broadcasting, Inc., Murat Centre L.P., P.
David Lucas and Steven P. Sybesma (1).
10.10 Asset Purchase and Sale Agreement, dated June 23, 1997, by and among
Polaris Amphitheater Concerts, Inc., SFX Broadcasting, Inc., Polaris
Amphitheater Limited Partnership and certain of the partners of Polaris
Amphitheater Limited Partnership (1).
10.11 Asset Purchase and Sale Agreement, dated as of June 23, 1997, by and
among Sunshine Design, L.P., SFX
59
<PAGE>
Broadcasting, Inc., Tourdesign, Inc., P. David Lucas and Steven P. Sybesma (1).
10.12 Indenture of Lease, dated as of September 1, 1995, by and between Murat
Temple Association, Inc. and Murat Centre, L.P. (2).
10.13 Agreement of Merger, dated as of February 12, 1997, by and among SFX
Broadcasting, Inc., NOC Acquisition Corp., Cadco Acquisition Corp., QN-
Acquisition Corp., Nederlander of Connecticut, Inc., Connecticut
Amphitheater Development Corporation, QN Corp., Connecticut Performing
Arts, Inc., Connecticut Performing Arts Partners and the Stockholders of
Nederlander of Connecticut, Inc., Connecticut Amphitheater Development
Corporation and QN Corp. (1).
10.14 Agreement of Merger, dated as of February 14, 1997, by and among SFX
Broadcasting, Inc., NOC Acquisition Corp., Cadco Acquisition Corp.,
QN-Acquisition Corp., Nederlander of Connecticut, Inc., Connecticut
Amphitheater Development Corporation, QN Corp., Connecticut Performing
Arts, Inc., Connecticut Performing Arts Partners and the Stockholders of
Nederlander of Connecticut, Inc., Connecticut Amphitheater Development
Corporation and QN Corp. (1).
10.15 Second Amendment of Agreement of Merger, dated as of March 19, 1997, by
and among SFX Broadcasting, Inc., NOC Acquisition Corp., Cadco Acquisition
Corp., QN-Acquisition Corp., Nederlander of Connecticut, Inc., Connecticut
Amphitheater Development Corporation, QN Corp., Connecticut Performing
Arts, Inc., Connecticut Performing Arts Partners and the Stockholders of
Nederlander of Connecticut, Inc., Connecticut Amphitheater Development
Corporation and QN Corp. (1).
10.16 Lease Agreement, dated as of September 14, 1994, by and between The City
of Hartford and Connecticut Performing Arts Partners (1).
10.17 Agreement and Plan of Merger and Asset Purchase Agreement, dated as of
December 10, 1997, by and among SFX Entertainment, Inc., Contemporary
Investments Corporation, Contemporary Investments of Kansas, Inc.,
Continental Entertainment Associates, Inc., Capital Tickets, LP, Dialtix,
Inc., Contemporary International Productions Corporation, Steven F.
Schankman Living Trust, dated 10/22/82, Irving P. Zuckerman Living Trust,
dated 11/24/81, Steven F. Schankman and Irving P. Zuckerman (1).
10.18 Lease Agreement, dated December 13, 1992, by and between Wyandotte
County, Kansas and Wyandotte County Parks Board and Sandstone Amphitheater
Joint Venture (1).
10.19 Stock Purchase Agreement, dated as of December 11, 1997, among each of
the shareholders of BGP Presents, Inc. and BGP Acquisitions, LLC (1).
10.20 Amphitheater Lease and Agreement, dated June 20, 1986, between the City
of Mountain View, the Mountain View Shoreline Regional Park Community and
Shoreline Amphitheater Partners (2).
10.21 Stock and Asset Purchase Agreement, dated December 2, 1997, between and
among SFX Network Group, L.L.C. and SFX Entertainment, Inc., and Elias N.
Bird, individually and as Trustee under the Bird Family Trust u/d/o
11/18/92, Gary F. Bird, individually and as Trustee under the Gary F. Bird
Corporation Trust u/d/o 2/4/94, Stephen R. Smith, individually and as
Trustee under the Smith Family Trust u/d/o 7/17/89, June E. Brody, Steven
A. Saslow and The Network 40, Inc. (1).
10.22 Purchase and Sale Agreement, dated as of December 15, 1997, by and among
Alex Cooley, S. Stephen Selig, III, Peter Conlon, Southern Promotions,
Inc., High Cotton, Inc., Cooley and Conlon Management, Inc., Buckhead
Promotions, Inc., Northern Exposure, Inc., Pure Cotton, Inc., Interfest,
Inc., Concert/Southern Chastain Promotions Joint Venture, Roxy Ventures
Joint Venture and SFX Concerts, Inc. (1).
10.23 Stock Purchase Agreement, dated as of December 12, 1997 by and between
Pace Entertainment Corporation and SFX Entertainment, Inc. (1).
60
<PAGE>
10.24 Agreement and Plan of Merger, dated as of August 24, 1997, as amended on
February 9, 1998, among SFX Buyer, SFX Buyer Sub and SFX (composite
version) (6).
10.25 Reserved
10.26 Non-Negotiable Promissory Note, dated as of June 23, 1997, between SFX
(as maker) and Sunshine Promotions, Inc. (as payee) (1).
10.27 Partnership Agreement, dated as of April 1, 1994, by and among SM/PACE,
Inc., YM Corp., The Westside Amphitheater Corporation, Charlotte
Amphitheater Corporation and Amphitheater Entertainment Partnership (1).
10.28 Purchase Agreement, dated as of December 19, 1997, by and among SM/PACE,
Inc., PACE Entertainment Corporation, Charlotte Amphitheater Corporation,
The Westside Amphitheater Corporation and Viacom Inc. (2).
10.29 Letter Purchase Agreement, dated as of December 22, 1997, by and among
SM/PACE, Inc., YM Corp. and PACE Entertainment Corporation (2).
10.30 Extended Events Management Agreement, dated as of November 21, 1994, by
and between The Woodlands Center for the Performing Arts and Pavilion
Partners (2).
10.31 Operator Lease Agreement, dated as of September 26, 1989, by and between
the City of Phoenix and The Westside Amphitheatre Corp. (2).
10.32 Addendum to Operator Lease Agreement, dated as of September 26, 1989, by
and between the City of Phoenix and Pavilion Partners (2).
10.33 Memorandum of Lease, dated as of April 1, 1994, by and between the City
of Phoenix and Pavilion Partners (2).
10.34 Lease Agreement, dated as of February 9, 1994, by and between New Jersey
Development Authority and Sony Music/Pace Partnership (2).
10.35 First Amendment to Lease Agreement, dated as of March 11, 1994, by and
between New Jersey Economic Development and Sony Music/Pace Partnership
(2).
10.36 Second Amendment to Lease Agreement, dated as of June 7, 1994, by and
between New Jersey Economic Development Authority and Pavilion Partners
(2).
10.37 Third Amendment to Lease Agreement, dated as of March 15, 1995, by and
between New Jersey Economic Development Authority and Pavilion Partners
(2).
10.38 Fourth Amendment to Lease Agreement, dated as of March 11, 1997, by and
between the New Jersey Economic Development Authority and Pavilion
Partners (2).
10.39 Three Way Agreement, dated as of April 28, 1995, by and between New
Jersey Economic Development Authority, South Jersey Performing Arts
Center, Inc. and Pavilion Partners (2).
10.40 Lease Agreement, dated as of December 1, 1989, between Crossroads
Properties, Incorporated and Pace Entertainment Group, Inc. (2).
10.41 Assignment of Ground Lease, dated as of April 6, 1990, by and between
Pace Entertainment Group, Inc. and YM/Pace Partnership (2).
10.42 Partnership Agreement, dated as of July 1, 1991, by and between SM/PACE
Partnership and CDC
61
<PAGE>
Amphitheaters/I, Inc. (2).
10.43 First Amendment to Partnership Agreement, dated as of January 31, 1992,
by and between SM/PACE Partnership and CDC Amphitheaters/I, Inc. (2).
10.44 Lease Agreement, dated as of December 1, 1990, by and between the City of
Raleigh, North Carolina and Sony Music/Pace Partnership (2).
10.45 Amendment to Lease Agreement, dated as of November 15, 1995, by and
between Walnut Creek Amphitheater Partnership and City of Raleigh, North
Carolina (2).
10.46 Mutual Recognition Agreement, dated as of December 1, 1990, by and among
Walnut Creek Amphitheater Financing Assistance Corporation, First Union
National Bank of North Carolina, City of Raleigh, North Carolina and Sony
Music/Pace Partnership (2).
10.47 Mutual Recognition Agreement, dated as of December 1, 1990, by and among
Walnut Creek Amphitheater Financing Assistance Corporation, First Union
National Bank of North Carolina, City of Raleigh, North Carolina and Sony
Music/Pace Partnership (2).
10.48 Partnership Agreement, dated as of February 28, 1986, by and between Belz
Investment Company, Inc., Martin S. Belz and Pace Productions, Inc. (2).
10.49 First Amendment to Partnership Agreement, dated as of June 15, 1986, by
and among Belz Investment Company, Martin S. Belz, Belz-Starwood, Inc. and
Pace Productions, Inc. (2).
10.50 Partnership Agreement, dated as of May 15, 1996, by and between Pavilion
Partners and CDC/SMT, Inc. (2).
10.51 Lease Agreement, Easement Agreement and Declaration of Restrictive
Covenants, dated as of January 4, 1995, by and between South Florida Fair
and Pam Beach County Expositions, Inc. and Pavilion Partners (2).
10.52 First Amendment to Lease Agreement, dated as of June 5, 1995, by and
between South Florida Fair and Pam Beach County Expositions, Inc. and
Pavilion Partners (2).
10.53 Partnership Agreement, dated as of April 4, 1997, by and between Pavilion
Partners and Irvine Meadows Amphitheater (2).
10.54 Amended and Restated Agreement, dated as of October 1, 1991, by and
between The Irvine Company and Irvine Meadows (2).
10.55 Concession Lease, dated as of October 19, 1992, by and between the County
of San Bernardino and Amphitheater Entertainment Corporation (2).
10.56 Partnership Formation Agreement, dated as of January 22, 1988, by and
among MCA Concerts II, Inc. and Pace Entertainment Group, Inc. (2).
10.57 Lease and Use Agreement, dated as of December 9, 1987, by and between
City of Dallas and Pace Entertainment Group, Inc. (2).
10.58 Agreement, dated as of October 10, 1988, by and between the City of
Atlanta and MCA Concerts, Inc. (2).
10.59 Amended Indenture of Lease, February 2, 1984, by and between the City of
Atlanta and Filmworks U.S.A., Inc. (2).
10.60 Amendment to Lease Agreement, dated as of October 10, 1988, between the
City of Atlanta, Georgia and
62
<PAGE>
Filmworks U.S.A., Inc. (2).
10.61 Agreement Regarding Sublease, dated as of January 20, 1988, by and
between Filmworks U.S.A., Inc. and MCA Concerts, Inc. (2).
10.62 First Amendment to Sublease, dated as of January 21, 1988, between
Filmworks U.S.A., Inc. and MCA Concerts, Inc. (2).
10.63 Second Amendment to Sublease, dated as of April 19, 1988, between
Filmworks U.S.A., Inc. and MCA Concerts, Inc. (2).
10.64 Third Amendment to Sublease, dated as of September 15, 1988, between
Filmworks U.S.A., Inc. and MCA Concerts, Inc. (2).
10.65 Memorandum of Agreement, dated as of October 10, 1988, by and between the
City of Atlanta and MCA Concerts, Inc. (2).
10.66 Assignment of Sublease, dated as of June 15, 1989, by Filmworks U.S.A.,
Inc. and MCA Concerts, Inc. (2).
10.67 Assignment of Sublease, dated as of June 23, 1989, by Filmworks U.S.A.,
Inc. and MCA Concerts, Inc. (2).
10.68 Assignment of Agreement, dated as of June 15, 1989, by the City of
Atlanta and MCA Concerts, Inc. (2).
10.69 Assignment of Agreement, dated as of June 23, 1989, by the City of
Atlanta and MCA Concerts, Inc. (2).
10.70 Lease, dated as of June, 1997, by and between 500 Texas Avenue Limited
Partnership and Bayou Place Performance Hall General Partnership (2).
10.71 Master Licensed User Agreement, dated as of February 1, 1996, by and
between Ticketmaster Ticketing Co., Inc. and Pace Entertainment
Corporation (2).
10.72 Joint Venture Agreement, dated as of July, 1995 by and between American
Broadway, Inc. and Gentry & Associates, Inc. (2).
10.73 Amended and Restated Employment Agreement, dated as of December 12, 1997,
by and between SFX Entertainment, Inc. and Brian E. Becker (2).
10.74 Second Amended and Restated Partnership Agreement, dated as of April 1,
1994 by and between The Westside Amphitheatre Corporation, San Bernardino
Amphitheater Corporation and YM Corp. (2).
10.75 Employment Agreement, dated as of January 2, 1997, between
Delsener/Slater Enterprises, Inc., SFX Broadcasting, Inc. and Ron Delsener
(2).
10.76 Employment Agreement, dated as of January 2, 1997, between
Delsener/Slater Enterprises, Inc., SFX Broadcasting, Inc. and Mitch Slater
(2).
10.77 Reserved
10.78 Reserved
10.79 Credit and Guarantee Agreement, dated as of February 26, 1998, by and
among SFX Entertainment, the Subsidiary Guarantors party thereto, the
Lenders party thereto, Goldman Sachs Parnters, L.P., as co-documentation
agent, Lehman Commercial Paper, Inc., as co-documentation agent and the
Bank of New York, as administrative agent (5).
10.80 Purchase Agreement, dated February 5, 1998, relating to the 9_% Senior
Subordinated Notes due 2008 of SFX Entertainment, Inc., by and among SFX
Entertainment, Inc., Lehman Brothers Inc., Sachs & Co., BNY Capital
Markets, Inc. and ING Barings (5).
63
<PAGE>
10.81 Amendment No. 2 to Agreement and Plan of Merger among SBI Holdings
Corporation, SBI Radio Acquisition Corporation and SFX Broadcasting, Inc.,
dated March 9, 1998.
21.1 Subsidiaries of SFX Entertainment.
27.1 Financial Data Schedule.
99.1 Opinion of Lehman Brothers (6).
- -----------------------------
(1) Incorporated by reference to the Registration Statement on Form S-1 (Reg.
No. 333-43287) filed with the Commission on December 24, 1997.
(2) Incorporated by reference to Amendment No. 1 to the Registration Statement
on Form S-1 (Reg. No. 333-43287) filed with the Commission on January 22,
1998.
(3) Incorporated by reference to Amendment No. 2 to the Registration Statement
on Form S-1 (Reg. No. 333-43287) filed with the Commission on February 2,
1998.
(4) Incorporated by reference to Amendment No. 3 to the Registration Statement
on Form S-1 (Reg. No. 333-43287) filed with the Commission on February 11,
1998.
(5) Incorporated by reference to Report on Form 8-K (File No. 333-43287) filed
with the Commission March 11, 1998.
(6) Incorporated by reference to Schedule 14A of SFX, filed with the
Commission on February 13, 1998.
</TABLE>
64
<PAGE>
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto
duly authorized.
SFX ENTERTAINMENT, INC.
By:_/s/Robert F.X. Sillerman
----------------------------
Name: Robert F.X. Sillerman
Title: Executive Chairman and Member of the
Office of the Chairman
Date: March 17, 1998
Pursuant to the requirements of the Securities and Exchange Act of
1934, this report has been signed below by the following persons on behalf of
the registrant and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signature Title Date
- --------- ----- ----
<S> <C> <C>
/s/ Robert F.X. Sillerman Executive Chairman, Member of the
- ------------------------- Office of the Chairman and Director
Robert F.X. Sillerman (principal executive officer) March 17, 1998
/s/ Michael G. Ferrel President, Chief Executive Officer, March 17, 1998
- --------------------- Member of the Office of the Chairman
Michael G. Ferrel and Director
/s/ Brian Becker Executive Vice President, Member of the March 17, 1998
- ----------------- Office of the Chairman and Director
Brian Becker
/s/ D. Geoffrey Armstrong Executive Vice President and Director March 17, 1998
- -------------------------
D. Geoffrey Armstrong
/s/ Thomas P. Benson Chief Financial Officer, Vice President March 17, 1998
- ----------------------- and Director (principal financial and
Thomas P. Benson accounting officer)
/s/ Howard J. Tytel Vice President, General Counsel, March 17, 1998
- -------------------- Secretary and Director
Howard J. Tytel
/s/ Richard A. Liese Vice President, Associate General March 17, 1998
- -------------------- Counsel and Director
Richard A. Liese
/s/ James F. O'Grady, Jr. Director March 17, 1998
- -------------------------
James F. O'Grady, Jr.
/s/ Paul Kramer Director March 17, 1998
- -------------------------
Paul Kramer
/s/ Edward F. Dugan Director March 17, 1998
- -------------------
Edward F. Dugan
</TABLE>
SUPPLEMENTAL INFORMATION TO BE FURNISHED WITH REPORTS FILED PURSUANT TO SECTION
15(d) OF THE ACT WHICH HAVE NOT REGISTERED SECURITIES PURSUANT TO SECTION 12 OF
THE ACT.
65
<PAGE>
The Company became a reporting company pursuant to Section 15(d) of the
Act in February 1998. Prior to the date of this Annual Report on Form 10-K, the
Company has not delivered an annual report or any proxy material to its
stockholders. The Company intends to deliver such documents to its stockholders
subsequent to the date hereof.
66
<PAGE>
SFX ENTERTAINMENT, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page
The following consolidated financial statements
are included in Item 8:
Report of Independent Auditors- SFX Entertainment, Inc. F-2
Report of Independent Auditors- Delsener/Slater Enterprises,
Ltd. and Affiliated Companies (Predecessor) F-3
Consolidated Balance Sheets as of December 31, 1997 and 1996 F-4
Consolidated Statements of Operations for each of the
Three Years in the Period Ended December 31, 1997 F-5
Consolidated Statements of Cash Flows for each of the
Three Years in the Period Ended December 31, 1997 F-6
Notes to Consolidated Financial Statements F-7
F-1
<PAGE>
REPORT OF INDEPENDENT AUDITORS
Board of Directors
SFX Entertainment, Inc.
We have audited the accompanying consolidated balance sheet of SFX
Entertainment, Inc. as of December 31, 1997, and the related consolidated
statements of operations and cash flows for the year then ended. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audit provides a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position
of SFX Entertainment, Inc. at December 31, 1997, and the consolidated results
of their operations and their cash flows for the year then ended, in conformity
with generally accepted accounting principles.
ERNST & YOUNG LLP
New York, New York
March 5, 1998
F-2
<PAGE>
REPORT OF INDEPENDENT AUDITORS
Board of Directors
Delsener/Slater Enterprises, Ltd.
We have audited the accompanying consolidated balance sheet of
Delsener/Slater Enterprises, Ltd. and Affiliated Companies as of December 31,
1996, and the related consolidated statements of operations and cash flows for
each of the two years in the period ended December 31, 1996. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position
of Delsener/Slater Enterprises, Ltd. and Affiliated Companies. at December 31,
1996, and the consolidated results of their operations and their cash flows for
each of the two years in the period ended December 31, 1996, in conformity with
generally accepted accounting principles.
ERNST & YOUNG LLP
New York, New York
October 2, 1997
F-3
<PAGE>
SFX ENTERTAINMENT, INC.
CONSOLIDATED BALANCE SHEETS
(dollars in thousands)
<TABLE>
<CAPTION>
December 31,
-------------------------------
Predecessor
ASSETS 1997 1996
-------------------------------
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 5,979 $5,253
Accounts receivable 3,831 159
Prepaid expenses and other current assets 1,410 779
--------------- --------------
Total current assets 11,220 6,191
Property and equipment, net 59,685 2,231
Deferred acquisition costs 6,213
Goodwill, net 60,306
Investment in unconsolidated subsidiaries 937 458
Note receivable from employee 900
Other assets 7,681
--------------- --------------
TOTAL ASSETS $ 146,942 $8,880
============== ===============
LIABILITIES AND SHAREHOLDER'S EQUITY
Current liabilities:
Accounts payable and accrued expenses $ 2,715 $6,078
Deferred revenue 3,603 18
Income taxes payable 1,707
Due to stockholder -- 1,877
Due to SFX Broadcasting 11,539
Current portion of long-term debt 923
Current portion of deferred purchase consideration 1,950
--------------- --------------
Total current liabilities 22,437 7,973
Long-term debt, less current portion 15,255
Deferred purchase consideration, less current portion 4,289
Deferred income taxes 2,817
Commitment and contingencies
Shareholder's equity:
Capital to be contributed by SFX Broadcasting 98,330 --
Preferred Stock, $.01 par value, 1,000 shares authorized,
none issued and outstanding -- --
Class A common stock, $.01 par value, 1,000 shares
authorized, issued and outstanding -- --
Class B common stock, $.01 par value, 1,000 shares
authorized, issued and outstanding -- --
Combined stockholder's equity-predecessor -- 907
Retained earnings 3 ,814 --
--------------- --------------
Total shareholder's equity 102,144 907
--------------- --------------
TOTAL LIABILITIES AND SHAREHOLDER'S EQUITY $146,942 $8,880
============== ===============
</TABLE>
See accompanying notes.
F-4
<PAGE>
SFX ENTERTAINMENT, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(dollars in thousands)
<TABLE>
<CAPTION>
Year Ended December 31,
--------------------------------------------------------
1997 Predecessor Predecessor
1996 1995
-------------- ---------------- ----------------
<S> <C> <C> <C>
Concert revenue $ 96,144 $50,362 $47,566
Operating expenses:
Cost of concerts 83,417 50,686 47,178
Depreciation and amortization 5,431 747 750
Corporate expenses, net of Triathlon
fees of $1,794 in 1997 2,206
-------------- ---------------- ----------------
91,054 51,433 47,928
-------------- ---------------- ----------------
Income (loss) from operations 5,090 (1,071) (362)
Investment income 295 198 178
Interest expense (1,590) (60) (144)
Equity in pretax income of unconsolidated iiiisubsidiaries 509 524 488
-------------- ---------------- ----------------
Income (loss) before provision for income taxes 4,304 (409) 160
Provision for income taxes 490 106 13
-------------- ---------------- ----------------
Net income (loss) $ 3,814 $ (515) $ 147
============== ================ ================
</TABLE>
See accompanying notes.
F-5
<PAGE>
SFX ENTERTAINMENT, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(dollars in thousands)
<TABLE>
<CAPTION>
Year Ended December 31,
---------------------------------------------------------------
Predecessor Predecessor
1997 1996 1995
----------------- ----------------- ------------------
<S> <C> <C> <C>
Operating activities:
Net income (loss) $ 3,814 $ (515) $ 147
Adjustment to reconcile net income (loss) to net
cash provided by (used in) operating activities:
Depreciation of property and equipment 2,686 746 750
Amortization of goodwill 2,745 --
Equity in pretax income of unconsolidated
subsidiaries, net of distributions received (479) 16 2
Deferred income taxes (427) -- --
Changes in operating assets and liabilities, net
of amounts acquired:
Accounts receivable (923) (159) 384
Prepaid expenses and other current assets 419 (649) 374
Other a ssets (275) -- --
Accounts payable and accrued expenses (325) 4,759 (1,326)
Income taxes payable 917 -- --
Deferred revenue (7,147) 16 (784)
------- ------- --------
Net cash provided by (used in) operating activities 1,005 4,214 (453)
Investing activities:
Purchase of concert promotion businesses, net of
cash acquired (71,213) -- --
Investment in GSAC Partnership -- (435) --
Purchase of property and equipment (2,083) -- --
------- ------- --------
Net cash used in investing activities (73,296) (435) --
------- ------- --------
Financing activities:
Capital to be contributed by SFX Broadcasting 79,093 -- --
Payment of debt (823) -- --
Proceeds from issuance of common stock and
capital contributions 152
Loan from stockholder -- 47 --
Distributions paid -- (1,630) (216)
------- ------- --------
Net cash provided by (used in) financing activities 78,270 (1,431) (216)
Net increase in cash and cash equivalents 5,979 2,348 (669)
Cash and cash equivalents at beginning of period -- 2,905 3,574
---------- ------- --------
Cash and cash equivalents at end of period $ 5,979 $ 5,253 $ 2,905
========== ========= ==========
Supplemental disclosure of cash flow information:
Cash paid for interest $ 1,504 $ 60 $ 144
========== ========= ==========
Cash paid for income taxes $ -- $ 106 $ 13
========== ========= ==========
</TABLE>
Supplemental disclosure of non-cash investing and financing activities:
o Issuance of equity securities, including deferred equity security
issuance, and assumption of debt in connection with certain acquisitions
(Note 1)
o Agreements to pay future cash consideration in connection with certain
acquisitions (Note 1)
o The balance sheet includes certain assets and liabilities which have been
or will be contributed by SFX Broadcasting to the Company prior to the
Spin-Off.
See accompanying notes.
F-6
<PAGE>
SFX ENTERTAINMENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. ORGANIZATION AND BASIS OF PRESENTATION
SFX Entertainment, Inc. ("SFX" or the "Company") was formed as a
wholly-owned subsidiary of SFX Broadcasting, Inc. ("SFX Broadcasting") in
December 1997 and as the parent company of SFX Concerts, Inc ("Concerts").
Concerts was formed in January of 1997 to acquire and hold SFX Broadcasting's
live entertainment operations. During 1997, the Company made several
acquisitions as described below. The Company had no substantive operations
until its acquisition of Delsener/Slater Enterprises, Ltd. and Affiliated
Companies ("Delsener/Slater" or the "Predecessor") in January 1997, and
Delsener/Slater is considered the Company's predecessor for financial
reporting purposes.
DELSENER/SLATER
In January 1997, SFX Broadcasting acquired Delsener/Slater, a leading
concert promotion company, for an aggregate consideration of approximately
$27,600,000, including $2,900,000 for working capital and the present value of
deferred payments of $3,000,000 to be paid without interest over five years and
$1,000,000 to be paid without interest over ten years. Delsener/Slater has
long-term leases or is the exclusive promoter for seven of the major concert
venues in the New York City metropolitan area, including the Jones Beach
Amphitheater, a 14,000-seat complex located in Wantagh, New York, and the PNC
Bank Arts Center (formerly known as the Garden State Arts Center), a
17,500-seat complex located in Holmdel, New Jersey.
MEADOWS
In March 1997, the Company acquired the stock of certain companies which
own and operate the Meadows Music Theater (the "Meadows"), a 25,000-seat
indoor/outdoor complex located in Hartford, Connecticut for $900,000 in cash,
250,838 shares of SFX Broadcasting Class A Common Stock with a value of
approximately $7,500,000 and the assumption of approximately $15,400,000 in
debt.
The Company may assume the obligation to exercise an option held by SFX
Broadcasting to repurchase 250,838 shares of SFX Broadcasting's Class A Common
Stock for an aggregate purchase price of $8.3 million (the "Meadows
Repurchase"). This option was granted in connection with the acquisition of the
Meadows Music Theater. If the option were exercised by SFX Broadcasting, the
exercise would result in a reduction of Working Capital, as defined in the
Spin-Off (see below), by approximately $8.3 million. If the option were not
exercised, Working Capital would decrease by approximately $10.5 million.
SUNSHINE PROMOTIONS
In June 1997, the Company acquired the stock of Sunshine Promotions, Inc.
and certain other related Companies ("Sunshine Promotions"), one of the largest
concert promoters in the Midwest, for $53,900,000 in cash, of which $2,000,000
is payable over five years, 62,792 shares of SFX Broadcasting Class A Common
Stock issued with a value of approximately $2,000,000, shares of SFX
Broadcasting stock issuable over a two year period with a value of
approximately $2,000,000 and the assumption of approximately $1,600,000 of
debt. The shares of stock to be issued in the future are classified as
deferred purchase consideration on the balance sheet. Sunshine Promotions owns
the Deer Creek Music Theater, a 21,000-seat complex located in Indianapolis,
Indiana, and the Polaris Amphitheater, a 20,000-seat complex located in
Columbus, Ohio, and has a long-term lease to operate the Murat Centre (the
"Murat"), a 2,700-seat theater and 2,200-seat ballroom located in Indianapolis,
Indiana. Pursuant to the Broadcasting Merger Agreement, the Company is
responsible for the payments owing under the Sunshine note, which by its terms
accelerates upon the change in control of SFX Broadcasting resulting from the
consummation of the Broadcasting Merger.
F-7
<PAGE>
The Delsener/Slater, Meadows, and Sunshine Promotions acquisitions are
collectively referred to herein as the "Completed Acquisitions." The cash
portion of the Completed Acquisitions were financed through capital
contributions from SFX Broadcasting and were accounted for under the purchase
method of accounting. The purchase prices have been preliminarily allocated to
the assets acquired and are subject to change.
The accompanying consolidated financial statements as of December 31, 1997
include the accounts of Delsener/Slater, Sunshine Promotions, the Meadows, and
certain assets and liabilities which have been or will be contributed by SFX
Broadcasting to the Company prior to the Spin-Off (as defined herein) under the
terms of the Broadcasting Merger (as defined herein) Agreement. Operating
results for the Completed Acquisitions are included herein from their
respective acquisition dates. Operating results associated with the assets
and liabilities to be contributed are included herein. SFX Broadcasting
provides various administrative services to the Company. It is SFX
Broadcasting's policy to allocate these expenses on the basis of direct
usage. In the opinion of management, this method of allocation is reasonable
and allocated expenses approximate what the Company would have incurred on a
stand-alone basis. Intercompany transactions and balances among these companies
have been eliminated in consolidation.
The following unaudited pro forma summary represents the consolidated
results for the years ended December 31, 1997 and 1996 as if the Completed
Acquisitions had occurred at the beginning of such year after giving effect to
certain adjustments, including amortization of goodwill and interest expense on
the acquisition debt. These pro forma results have been included for
comparative purposes only and do not purport to be indicative of what would
have occurred had the acquisition been made as of that date or of results which
may occur in the future (in thousands).
Pro Forma
(unaudited)
Year Ended Year Ended
December 31, 1997 December 31, 1996
Revenues $ 110,387 $ 104,784
Net income $ 734 $ 2,668
F-8
<PAGE>
PENDING SPIN-OFF
In August 1997, SFX Broadcasting agreed to the merger (the "Broadcasting
Merger Agreement") among SBI Holdings, Inc. (the "Buyer"), SBI Radio
Acquisition Corporation, a wholly-owned subsidiary of the Buyer, and
SFX Broadcasting (the "Broadcasting Merger") and to the spin-off of the
Company to the shareholders of SFX Broadcasting (the "Spin-Off"). The Spin-Off
is subject to certain conditions, including, among others: (i) the
satisfaction of the Board of Directors of SFX Broadcasting that SFX
Broadcasting's surplus would be sufficient to permit the Spin-Off under
Delaware law, (ii) the acceptance for listing or trading of the Class A Common
Stock of the Company, subject to official notice of issuance, on the American
Stock Exchange or Nasdaq Stock Market, (iii) receipt of all necessary third
party consents to the Spin-Off, and (iv) receipt of necessary SFX Broadcasting
stockholder approvals.
At or prior to the Spin-Off, pursuant to the terms of the Spin-Off, SFX
Broadcasting will contribute to the Company all of its concert and other live
entertainment assets along with an allocation of working capital in an amount
estimated by management of SFX Broadcasting to be consistent with the proper
operation of SFX Broadcasting, and the Company will assume all of SFX
Broadcasting's liabilities pertaining to the live entertainment businesses, as
well as certain other liabilities including the obligation to make change of
control payments to certain employees of SFX Broadcasting of approximately
$5,000,000 as well as the obligation to indemnify one-half of certain of these
employees' excise tax. At the time of the Broadcasting Merger, SFX
Broadcasting will contribute its positive Working Capital (as defined in the
Broadcasting Merger Agreement) to the Company. If Working Capital is negative,
the Company must pay the amount of the shortfall to SFX Broadcasting. As of
December 31, 1997, SFX Broadcasting had advanced approximately $11,539,000 to
the Company for use in connection with certain acquisitions and capital
expenditures. This obligation and other costs subsequently incurred in
connection with the Spin-Off were reimbursed in February 1998 with the
proceeds from the Senior Subordinated Notes (see Note 2). SFX Broadcasting
may advance additional amounts to the Company prior to the consummation of
the Spin-Off.
Prior to the Spin-Off, SFX Broadcasting and the Company will enter into a
tax sharing agreement. Under the tax sharing agreement, the Company will agree
to pay to SFX Broadcasting the amount of the tax liability of SFX Broadcasting
and the Company combined, to the extent properly attributable to the Company
for the period up to and including the Spin-Off, and will indemnify SFX
Broadcasting for any tax adjustment made in subsequent years that relates to
taxes properly attributable to the Company during the period prior to and
including the Spin-Off. SFX Broadcasting, in turn, will indemnify the Company
for any tax adjustment made in years subsequent to the Spin-Off that relates to
taxes properly attributable to the SFX Broadcasting during the period prior to
and including the Spin-Off. The Company also will be responsible for any taxes
of SFX Broadcasting resulting from the Spin-Off, including any income taxes but
only to the extent that the income taxes result from the gain on the
distribution that exceeds the net operating losses of SFX Broadcasting and
the Company available to offset such gain including net operating losses
generated in the current year prior to the Spin-Off.
The actual amount of the gain will be based on the excess of the value
of the Company's Common Stock on the date of the Spin-Off over the tax basis
of that stock. The Company believes that the value of the Company's Common
Stock for tax purposes will be determined by no later than the first trading
day following the date on which the Company's Common Stock is distributed in
the Spin-Off. Increases or decreases in the value of the Company's Common Stock
subsequent to such date will not effect the tax liability. If the Company's
Common Stock had a value of approximately $15 per share at the time of the
Spin-Off, management believes that no material indemnification payment would
be required. Such indemnification obligation would be approximately
$4.0 million at $16 per share and would increase by approximately $7.7 million
for each $1.00 increase above the per share valuation of $16. If the Company's
Common Stock was valued at $22 1/2 per share, (the last sales price of the
Company's Class A Common Stock (trading on a when-issued basis) on the over
the counter market on March 13, 1998), management estimates that the Company
would have been required to pay approximately $54.0 million pursuant to such
indemnification obligation. The Company expects that such indemnity payment
will be due on or about June 15, 1998.
2. RECENT ACQUISITIONS AND FINANCING
On February 11, 1998, SFX completed the private placement of $350.0
million of 9 1/8% Senior Subordinated Notes (the "Notes") due 2008. Interest is
payable on the Notes on February 1 and August 1 of each year.
F-9
<PAGE>
On February 26, 1998 the Company executed a Credit and Guarantee Agreement
(the "Credit Agreement") which established a $300.0 million senior secured
credit facility comprised of (i) a $150.0 million eight-year term loan (the
"Term Loan") and (ii) a $150.0 million seven-year reducing revolving credit
facility. Loans outstanding under the Credit Facility bear interest, at the
Company's option, at 1.875 to 2.375 percentage points over LIBOR or the greater
of the Federal Funds rate plus 0.50% or BNY's prime rate. The interest rate
spreads on the Term Loan and the Revolver will be adjusted based on the
Company's Total Leverage Ratio (as defined in the Credit Agreement). The
Company will pay a per annum commitment fee on unused availability under the
Revolver of 0.50% to the extent that the Company's Leverage Ratio is greater
than or equal to 4.0 to 1.0, and 0.375% if such ratio is less than 4.0 to 1.0
and a per annum letter of credit fee equal to the Applicable LIBOR Margin (as
defined in the Credit Agreement) for the Revolver then in effect. The Revolver
and Term Loan contain provisions providing that, at its option and subject to
certain conditions, the Company may increase the amount of either the Revolver
or Term Loan by $50.0 million. Borrowings under the Credit Agreement are
secured by substantially all of the assets of the Company, including a pledge
of the outstanding stock of substantially all of its subsidiaries and
guaranteed by all of the Company's subsidiaries. On February 27, 1998, the
Company borrowed $150.0 million under the Term Loan. Together with the proceeds
from the Notes, the proceeds from the Term Loan were used to finance the Recent
Acquisitions (as defined below.)
On February 24, 1998, the Company acquired all of the outstanding capital
stock of BG Presents ("BGP"), one of the oldest promoters of, and
owner-operators of venues for, live entertainment in the United States, and a
leading promoter in the San Francisco Bay area (the "BGP Acquisition"), for
total consideration of approximately $80,300,000 (including the repayment of
$12,000,000 in BGP debt and the issuance upon the Spin-Off of 562,640 shares of
common stock of the Company valued by the parties at $7,500,000). The sellers
of BGP provided net working capital (as defined in the acquisition agreement)
at the closing in an amount equal to or greater than long-term debt.
On February 25, 1998, the Company acquired all of the outstanding capital
stock of PACE Entertainment Corporation ("PACE"), one of the largest
diversified producers and promoters of live entertainment in the United States,
having what the Company believes to be the largest distribution network in the
United States in each of its music, theater and specialized motor sports
businesses (the "PACE Acquisition"), for total consideration of approximately
$150,100,000 (including issuance upon the Spin-Off of 1,500,000 shares of the
Company's common stock valued by the parties at $20,000,000 and assumption of
approximately $20,600,000 of debt). Under the terms of the agreement,
additional cash consideration would be required if the deemed value of the
Company's common stock was less than $13.33 per share as a result of changes in
the consummation of acquisitions. In related transactions, the Company
acquired, for total consideration of $90,600,000 comprised of $41,400,000 in
cash, the repayment of approximately $43,100,000 of debt and the assumption of
approximately $6,100,000 of debt related to a capital lease, the 66 2/3%
ownership interests of Blockbuster Entertainment Corporation and Sony Music
Entertainment, Inc. in Amphitheater Entertainment Partnership, a partner of
PACE in the Pavilion Partners venue partnership. As a result, the Company owns
100% of Pavilion Partners.
The PACE acquisition agreement further provides that each seller of PACE
shall have an option, exercisable during a period beginning on the fifth
anniversary of the closing of the PACE acquisition and ending 90 days
thereafter, to require the Company to purchase up to one-third of the PACE
consideration stock received by such PACE seller for a cash purchase price of
$33.00 per share. With certain limited exceptions, these option rights are not
assignable by the PACE sellers.
Under the terms of an employment agreement to be entered into by the
Company with an officer of PACE, the officer will have the right, two years
from the date of the acquisition, to purchase PACE's motor sports division at
fair value. If the motor sports division has been sold by the Company, the
officer would be entitled to purchase PACE's theatrical division for the fair
value.
On February 27, 1998, the Company acquired the Contemporary Group
("Contemporary"), a fully-integrated live entertainment and special event
promoter and producer, venue owner and operator and consumer marketer, for
total consideration of approximately $101,400,000 comprised of $72,800,000 in
cash,
F-10
<PAGE>
a payment for working capital of approximately $9,900,000 and the
issuance upon the Spin-Off of 1,402,850 shares of common stock of the Company
valued by the parties at $18,700,000 (the "Contemporary Acquisition"). The
Contemporary Acquisition involved the merger of Contemporary International
Productions Corporation with and into the Company, the acquisition by a wholly
owned subsidiary of the Company of substantially all of the assets, excluding
certain cash and receivables, of the remaining members of Contemporary and the
acquisition by Contemporary of the 50% interest in the Riverport Amphitheater
Joint Venture not owned by Contemporary. If any of the Contemporary sellers
owns any shares of the Company's Class A Common Stock received in the
Contemporary Acquisition on the second anniversary of the closing date and the
average trading price of such stock over the 20-day period ending on such
anniversary date is less than $13.33 per share, then the Company will make a
one-time cash payment to each individual holding any such shares that is equal
to the product of (i) the quotient of the difference between (A) the actual
average trading price per share over such 20-day period and (B) $13.33 divided
by two, multiplied by (ii) the number of shares of Class A Common Stock of the
Company received by such individual in the Contemporary Acquisition and owned
as of such anniversary date.
On February 27, 1998, the Company acquired the Network Magazine Group
("Network Magazine"), a publisher of trade magazines for the radio broadcasting
industry, and SJS Entertainment Corporation ("SJS"), an independent creator,
producer and distributor of music-related radio programming, services and
research which it exchanges with radio broadcasters for commercial air-time
sold, in turn, to national network advertisers (the "Network Acquisition"), for
total consideration of approximately $66,800,000 comprised of $52,000,000 in
cash, a payment for working capital of approximately $1,800,000, reimbursed
sellers costs of $500,000, the purchase of an office building and property for
$2,500,000 and the issuance upon the Spin-Off of approximately 750,000 shares
of common stock of the Company valued by the parties at $10,000,000. The
$2,500,000 purchase of the office building and property is comprised of cash of
approximately $700,000 and the assumption of debt of approximately $1,800,000.
The Company is also obligated to pay the sellers an additional payment in
common stock or, at the Company's option, cash based on future operating
results, as defined, generated on a combined basis by Network Magazine and SJS
in 1998, up to a maximum of $14,000,000. In the Network Acquisition, the
Company, through a wholly owned subsidiary, acquired all of the outstanding
capital stock of each of The Album Network, Inc. and SJS Entertainment
Corporation and purchased substantially all of the assets and properties and
assumed substantially all of the liabilities and obligations of the Network 40,
Inc.
On March 4, 1998, the Company acquired Concert/Southern Promotions
("Concert/Southern"), a promoter of live music events in the Atlanta, Georgia
metropolitan area (the "Concert/Southern Acquisition"), for total cash
consideration of approximately $16,900,000 , which includes a $300,000 payment
for working capital.
The PACE Acquisition, the Contemporary Acquisition, the Network
Acquisition, the BGP Acquisition and the Concert/Southern Acquisition are
collectively referred to herein as the "Recent Acquisitions."
Each of the Recent Acquisition agreements other than Concert/Southern
provide that, should the Spin-Off not occur prior to July 1, 1998, the sellers
may require the Company to repurchase the shares of the Company's common stock
issued to the sellers for $13.33 each.
3. SUMMARY OF SIGNIFICANT ACCOUNTING PRINCIPLES
CASH AND CASH EQUIVALENTS
The Company considers all investments purchased with a
maturity of three months or less to be cash equivalents. Included in cash and
cash equivalents at December 31, 1997 is $1,235,000 of cash which has been
deposited in a separate account and will be used to fund committed capital
expenditures at PNC Bank Arts Center.
PROPERTY AND EQUIPMENT
F-11
<PAGE>
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 represent the capitalized costs to renovate the
Jones Beach Theatre. The costs to renovate the theatre included permanent
seats, a new stage and lavatory facilities. These costs are being amortized
over the term of the lease.
GOODWILL
Goodwill represents the excess of the purchase price over the fair market
value of the assets purchased in the Completed Acquisitions and is net of
accumulated amortization of $2,745,000. Goodwill is being amortized using the
straight-line method over 15 years. Management reviews the carrying value of
goodwill against anticipated cash flows on a non-discounted basis to determine
whether the carrying amount will be recoverable.
OTHER ASSETS
Other assets includes $4,928,000 of costs associated with acquiring the
right to receive fees from Triathlon Broadcasting Company ("Triathlon"), an
affiliate, for certain financial consulting, marketing and administrative
services provided by the Company to Triathlon. Under the terms of the
agreement, the Company has agreed to provide consulting and marketing services
to Triathlon for an annual fee of $500,000, together with a refundable advance
of $500,000 per year against fees to be earned in respect of transactional
investment banking services. These fees, which are recorded as a reduction of
corporate, general and administrative expenses, will fluctuate based upon the
level of acquisition and financing activity of Triathlon. The cost of acquiring
the fees is being amortized over the term of the agreement which expires on
June 1, 2005. Triathlon has announced its intention to enhance shareholder
value through a sale. The Company's management believes that the capitalized
cost of acquiring the right to receive fees from Triathlon is recoverable.
REVENUE RECOGNITION
The Company's operations and revenues are largely seasonal in nature, with
generally higher revenue generated in the second and third quarters of the
year. The Company's outdoor venues are primarily utilized in the summer months
and do not generate substantial revenue in the late fall, winter and early
spring. Similarly, the musical concerts that the Company promotes largely occur
in the second and third quarters. To the extent that the Company's
entertainment marketing and consulting relate to musical concerts, they also
predominantly generate revenues in the second and third quarters.
Revenue from ticket sales is recognized upon occurrence of the event.
Advance ticket sales are recorded as deferred revenue until the event occurs.
RISKS AND UNCERTAINTIES
Accounts receivable are due principally from ticket companies and venue
box offices. These amounts are typically collected within 20 days of a
performance. Generally, management considers these accounts receivable to be
fully collectible; accordingly, no allowance for doubtful accounts is required.
Certain other accounts receivable, arising from the normal course of business,
are reviewed for collectibility and allowances for doubtful accounts are
recorded as required. Management believes that no allowance for doubtful
accounts is required at December 31, 1996 or 1997.
F-12
<PAGE>
The agreement governing the partnership through which PACE holds its
interest in the Lakewood Amphitheater in Atlanta, Georgia contains a provision
that purports to restrict PACE and its affiliates from directly or indirectly
owning or operating another amphitheater in Atlanta. In management's view, this
provision will not materially affect the business or prospects of the Company.
However, the Company acquired an interest in the Chastain Park Amphitheater,
also in Atlanta, in the Concert/Southern acquisition. The Company intends to
seek a waiver.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
F-13
<PAGE>
ADVERTISING COSTS
Advertising costs are expensed as incurred and approximated
$7,109,000, $4,896,000 and $2,687,000 in 1997, 1996, and 1995, respectively.
INCOME TAXES
The Company accounts for income taxes in accordance with Statement of
Financial Accounting Standards No. 109, "Accounting for Income Taxes". This
statement requires a company to recognize deferred tax assets and liabilities
for the expected future tax consequences of events that have been recognized in
a company's financial statements or tax returns. Under this method, deferred
tax assets and liabilities are determined based on the difference between the
financial statement carrying amounts and the tax bases of assets and
liabilities.
The Company calculates its tax provision on a separate company basis.
RECLASSIFICATION
Certain amounts in 1995 and 1996 have been reclassified to conform to the
1997 presentation.
4. CONNECTICUT DEVELOPMENT AUTHORITY ASSISTANCE AGREEMENT
On September 12, 1994, the Connecticut Development Authority ("CDA")
entered into a non-recourse assistance agreement with the Meadows whereby the
CDA provided grant funds for the construction and development of the Meadows
through the issuance of State of Connecticut General Fund Obligation Bonds
("GFO Bonds"). The Meadows received bond proceeds of $8,863,000. Pursuant to
such agreement, the annual tax revenues derived from the operation of the
amphitheater are utilized to satisfy the annual service requirements under the
GFO Bonds. In the event that annual tax revenues derived from the operation of
the amphitheater do not equal annual service requirements under the GFO Bonds,
the Company must deposit the lesser of the operating shortfall, as defined, or
10% of the annual service under the GFO Bonds. An operating shortfall has not
existed since the inception of the CDA. The GFO Bonds mature on October 15,
2024 and have an average coupon rate of 6.33%. Annual service requirements,
including interest, on the GFO Bonds for each of the next five years and
thereafter are as follows (in thousands):
1998 $ 739
1999 737
2000 739
2001 740
2002 741
Thereafter 16,399
------------
$20,095
============
The assistance agreement requires an annual Meadows attendance of at least
400,000 for each of the first three years of operations. It will not be
considered an event of default if the annual Meadows attendance is less than
400,000 provided that no operating shortfall exists for that year or if an
operating shortfall exists such amount has been deposited by the Company. If
there is an event of default, the CDA may foreclose on the construction
mortgage loan (see Note 5). If the amphitheater's operations are relocated
outside of Connecticut during the ten year period subsequent to the beginning
of the assistance agreement or during the period of the construction mortgage
loan, the full amount of the grant funds plus a penalty of 5% must be repaid to
the State of Connecticut.
F-14
<PAGE>
5. LONG-TERM DEBT
The Predecessor did not have any long-term debt as of December 31, 1996.
As of December 31, 1997, the company's long-term debt, which is recorded at
present value, consisted of the following (in thousands) :
Meadows CDA Mortgage Loan $ 7,411
Meadows Concession Agreement Loans 5,872
Meadows CDA Construction Loan 700
Murat notes payable 790
Meadows note payable 694
Polaris note payable 221
Capital l ease o bligations 490
-------------
16,178
Less current portion 923
--------------
$ 15,255
==============
MEADOWS CDA MORTGAGE LOAN
On September 12, 1994, the CDA entered into a construction mortgage loan
agreement for $7,685,000 with the Meadows. The purpose of the loan was to
finance a portion of the construction and development of the Meadows. The loan
agreement contains substantially the same covenants as the CDA assistance
agreement (see Note 4). The mortgage loan bears interest at 8.73% and is
payable in monthly installments of principal and interest. The mortgage loan
matures on October 15, 2019.
The loan is collateralized by a lien on the Meadows' assets. The loan is
secured by an irrevocable standby letter of credit issued by the Company in the
amount of $785,000.
MEADOWS CONCESSION AGREEMENT LOANS
In connection with the Meadows' concession agreement, the concessionaire
loaned the Meadows $4,500,000 in 1995 to facilitate the construction of the
amphitheater. Principal and interest at the rate of 7.5% per annum on the note
is payable via withholdings of the first $31,299 from each monthly concession
commission payment. As of December 31, 1997, the outstanding balance was
$4,343,000.
During 1995, the concessionaire loaned the Meadows an additional
$1,000,000. This loan bears interest at a rate of 9.75% per annum and is
payable via withholdings of an additional $11,900 of principal, plus interest,
from each monthly concession commission payment through December 20, 2002. As
of December 31, 1997, the outstanding balance was $679,000.
The concession agreement also required the Company to supply certain
equipment to the concessionaire at the Company's expense. The cost of the
equipment purchased by the concessionaire was converted to a note payable for
$884,000. The note bears interest at the rate of 9.25% per annum and provides
for monthly principal and interest payments of $10,185. However, the Company is
not required to make any principal or interest payments to the extent that 5%
of receipts, as defined, in any month are less than the amount of the payment
due. As of December 31, 1997, the outstanding balance was $850,000.
MEADOWS CDA CONSTRUCTION LOAN
In March 1997, the Meadows entered into a $1,500,000 loan agreement with
the CDA of which $1,000,000 was funded in March 1997. Principal payments of
$150,000 are due on July 1 and October 1 of each year commencing July 1, 1997
through October 1, 2001. The note bears interest at the rate of 8.9% per annum
through February 1, 1998, and thereafter at the index rate, as defined, plus
2.5%. In addition,
F-15
<PAGE>
the Meadows is required to make principal payments in an amount equal to 10% of
the annual gross revenue, as defined, in excess of $13,000,000 on or before the
March 1 following each calendar year commencing March 1, 1998. In 1997, gross
revenues did not exceed the defined threshold and thus no principal payment was
made on March 1, 1998.
MURAT NOTES PAYABLE
The Company has two loans payable to the Massachusetts Avenue Community
Development Corporation (MAC), an $800,000 non-interest bearing note and a
$1,000,000 note. Principal payments on the non-interest bearing note are the
lesser of $0.15 per Murat ticket sold during fiscal year or remaining net cash
flow, as defined. Interest on the other note is calculated annually and is
equal to the lesser of (1) $0.10 per Murat ticket sold during the fiscal year,
(2) prime plus 1% or (3) remaining net cash flow, as defined. Interest and
principal on the $1,000,000 note is payable at the lesser of $0.10 per Murat
ticket sold during fiscal year or remaining net cash flow, as defined.
Provisions of the $800,000 note payable requires the Murat to continue
making payments after the principal has been paid down equal to the lesser of
$0.15 per Murat ticket sold during the fiscal year or remaining cash flow.
These payments are to be made to a not-for-profit foundation and will be
designated for remodeling and upkeep of the theatre.
MEADOWS NOTE PAYABLE
Under the terms of a Meadows ticket and sales agreement, a vendor loaned
the Company $824,500 and pays the Company an annual fee of $140,000 for nine
years commencing in March 1996. Proceeds from the annual fee are used by the
Company to make the annual principal and interest payments.
POLARIS NOTE PAYABLE
In 1994, a concessionaire advanced Sunshine Promotions $500,000 to be used
in the construction of the Polaris Amphitheater. The advance is interest free
and is payable in annual installments of $25,000 beginning in 1994 for a period
of 20 years.
CAPITAL LEASE OBLIGATIONS
The Company has entered into various equipment leases. Interest on the
leases range from 6.5% to 18.67%.
Principal maturities of the long-term debt, notes payable and capital
lease obligations over the next five years as of December 31, 1997 are as
follows (in thousands):
Long-term Debt And Capital Lease
Notes Payable Obligations
1998 $ 756 $ 167
1999 782 157
2000 611 113
2001 541 53
2002 $ 537 --
6. PROPERTY AND EQUIPMENT
The Company's property and equipment as of December 31, 1997 and 1996
consisted of the following (in thousands):
<PAGE>
Predecessor
1997 1996
---- ----
Land $ 8,752 --
Building and improvements 44,364 --
Furniture and equipment 6,503 $ 131
Leasehold improvements 2,676 6,726
------------------ -------------
62,295 6,857
Accumulated depreciation (2,610) (4,626)
------------------ -------------
$ 59,685 $2,231
================== =============
F-17
<PAGE>
7. INVESTMENTS IN UNCONSOLIDATED SUBSIDIARIES
The Company is a 49% partner in a general partnership which subleases a
theater located in New York City. Income associated with the promotion of
concerts at this theater is recorded as concert revenue. Any such promotion
revenue recognized reduces the Company's share of the partnership's profits.
The Company is also a one-third partner in GSAC Partners, a general partnership
through which it shares in the income or loss of the PNC Bank Arts Center at
varying percentages based on the partnership agreement. The Company records
these investments on the equity method. In connection with the PACE
Acquisition, the Company agreed to purchase the interest in GSAC Partners that
it did not already own and in 1998 completed the purchase. Thus, the financial
position and operations of GSAC Partners will be consolidated into those of the
Company beginning in 1998.
The following is a summary of the unaudited financial position and results
of operations of the Company's equity investees (GSAC Partners in 1997 and 1996
only) as of and for the years ended December 31, 1997, 1996 and 1995 (in
thousands):
<TABLE>
<CAPTION>
1997 1996 1995
----------------- ------------ -----------
<S> <C> <C> <C>
Current assets $ 2,818 $ 756 $ 214
Property, plant and equipment 1,427 239 122
Other assets 239 819 --
----------------- ------------ -----------
Total assets $ 4,484 $ 1,814 $ 336
================= ============ ===========
Current liabilities $ 1,621 $ 1,534 $ 264
Partners' capital 2,863 280 72
\ ----------------- ------------ -----------
Total liabilities and partners' capital $ 4,484 $ 1,814 $ 336
================= ============ ===========
Revenue $20,047 $16,037 $4,058
Expenses 17,074 14,624 2,954
----------------- ------------ -----------
Net income $ 2,973 1,413 $1,104
================= ============ ===========
</TABLE>
The equity income recognized by the Company represents the appropriate
percentage of investment income less amounts reported in concert revenues for
shows promoted by the Company at these theaters. Such concert revenues of
unconsolidated subsidiaries was approximately $97,000, $205,000 and $110,000
for the years ended December 31, 1997, 1996 and 1995, respectively.
F-18
<PAGE>
8. INCOME TAXES
The provisions for income taxes for the years ended December 31, 1997,
1996 and 1995 are summarized as follows ( in thousands):
Predecessor Predecessor
1997 1996 1995
Current:
Federal -- -- --
State $420 $106 $13
Deferred:
Federal -- -- --
State 70 -- --
------------ ------------- ----------
Total $490 $106 $13
============ ============= ==========
No Federal income taxes were provided in 1997 as a result of the Company's
inclusion in the consolidated federal income tax return with SFX Broadcasting.
If the Company had filed on a stand alone basis, its federal tax provision
would have been approximately $2,050,000, consisting of $1,760,000 in current
taxes and approximately $290,000 of deferred taxes. The Predecessor had no
Federal tax provision in 1996 or 1995 by virtue of the status of its profitable
included companies as S Corporations. State income taxes were provided to the
extent that S Corporation status was not recognized.
Deferred income taxes reflect the tax effects of temporary differences
between the carrying amount of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. The significant
components of the Company's deferred tax asset and liabilities as of
December 31, 1997 are as follows (in thousands):
Deferred tax assets:
Deferred compensation $ 783
Deferred tax liabilities:
Depreciable assets $3,600
----------
Net deferred tax liability $2,817
==========
The Predecessor had no deferred tax liabilities as of December 31, 1996.
The acquisition of the Meadows resulted in the recognition of deferred tax
liabilities of approximately $3,200,000 under the purchase method of
accounting. These amounts were based upon the excess of the financial statement
basis over the tax basis in assets, principally fixed assets. The acquisition
of Delsener/Slater resulted in the recognition of deferred tax assets of
approximately $1,200,000 under the purchase method of accounting. These amounts
were based upon the excess of the financial statements basis over the tax basis
in assets, principally deferred compensation.
At December 31, 1997, 1996, and 1995 the effective rate varies from the
statutory Federal income tax rate as follows (in thousands):
F-19
<PAGE>
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Income taxes at the statutory rate $1,463 $(139) $54
Effect of Subchapter S status -- 139 (54)
Nondeductible amortization 800 -- --
Travel and entertainment 20 -- --
Effect of consolidated return loss (2,283) -- --
State and local income taxes
(net of Federal benefit) 490 106 13
----- --- --
Total provision $ 490 $106 $13
===== ==== ===
</TABLE>
9. COMMITMENTS, CONTINGENCIES AND OTHER MATTERS
Pursuant to the terms of the Spin-Off, upon the consummation of the
Broadcasting Merger, the Company will assume all obligations under any
employment agreements or arrangements between SFX Broadcasting and any employee
of the Company.
While the Company is involved in several suits and claims in the ordinary
course of business, the Company is not now a party to any legal proceeding that
the Company believes would have a material adverse effect on its business.
The Company's operating leases includes primarily leases with respect to
venues, office space and land. Total rent expense was $2,753,000 , $875,000 and
$835,000 for the years ended December 31, 1997, 1996 and 1995, respectively.
The lease terms range from 3 to 37 years. Prior to the Spin-Off, the Company
will enter into contracts with certain officers and other key employees. No
such contracts existed in 1997. The future minimum payments for all
noncancelable operating leases and employee agreements with initial terms of
one year or more are as follows (in thousands):
<TABLE>
<CAPTION>
Operating Leases Employment Agreements
---------------- ---------------------
<S> <C> <C>
1998 $ 3,366 $ 1,900
1999 3,823 1,864
2000 1,648 1,624
2001 1,666 1,534
2002 1,678 300
2003 and thereafter 14,117 --
------ -----
$26,298 $7,222
========= =======
</TABLE>
The Company has committed to expansion projects at the Jones Beach Theater
and PNC Bank Arts Center and, in connection with the BGP Acquisition, for the
construction of a new amphitheater in the Seattle, Washington market. The Jones
Beach Theater and PNC Bank Arts Center expansions are expected to be completed
in June 1998 and to cost approximately $15,000,000 and $10,500,000,
respectively. As of December 31, 1997, approximately $1,018,000 and $1,500,000
, respectively, of these costs have been incurred. The new amphitheater in
Seattle is expected to cost $10,000,000 and is expected to be completed in the
s pring of 1999.
As of December 31, 1997 and 1996, outstanding letters of credit for
$1,110,000 and $400,000, respectively, were issued by banks on behalf of the
Company as security for loans and the rental of theaters.
F-20
<PAGE>
In connection with the acquisition of Delsener/Slater, SFX Broadcasting
entered into an employment agreement with each of Ron Delsener and Mitch Slater
pursuant to which each of Messrs. Delsener and Slater serve as Co-President and
Co-Chief Executive Officer of Delsener/Slater. Each of the employment
agreements continues until December 31, 2001 unless terminated earlier by the
Company for cause or voluntarily by Mr. Delsener or Mr. Slater.
In certain cases, Messrs. Delsener and Slater have rights to purchase the
outstanding capital stock of Delsener/Slater for fair market value as defined
in their employment agreements.
Additionally, in the case of a return event, as defined, which may be
deemed to include the Spin-Off, the Broadcasting Merger and related
transactions, Messrs. Delsener and Slater have the right to receive a portion
of the excess of the proceeds of the return event over a fixed amount
determined in reference to the original purchase price for Delsener/Slater, all
as calculated pursuant to the Delsener and Slater employment agreements.
Management believes that, with respect to the Spin-Off, the Broadcasting Merger
and related transactions, no payment will accrue to Mr. Delsener or Mr. Slater
pursuant to their employment agreements.
The employment agreements further provide that Messrs. Delsener and Slater
shall be paid annual bonuses determined with reference to Delsener/Slater
profits, as defined, for the immediately preceding year. Management believes
that no such bonus was earned for the year ended December 31, 1997.
Messrs. Delsener and Slater and the Company are in the process of
negotiating amendments to their employment agreements to reflect, among other
things, the changes to the business of the Company as a result of the Recent
Acquisitions and the Spin-Off, and each of Messrs. Delsener and Slater have
agreed in principle to waive any rights which may accrue in connection with the
Broadcasting Merger or the Spin-Off. The Company also expects, in connection
with the foregoing, to negotiate mutually satisfactory amendments to certain of
Messrs. Delsener's and Slater's compensation arrangements, including bonus and
profit sharing provisions.
10. RELATED PARTY TRANSACTIONS
The Company's Executive Vice President, General Counsel and Director is Of
Counsel to the law firm of Baker & McKenzie. Baker & McKenzie serves as counsel
to the Company in certain matters. Baker & McKenzie compensates the executive
based, in part, on the fees it receives from providing legal services to the
Company and other clients originated by the executive. In 1997, the Company
incurred fees of approximately $2,948,000 for legal services related to the
Recent Acquisitions. Such fees were funded by SFX Broadcasting on behalf of the
Company. In February 1998, the Company reimbursed SFX Broadcasting for these
fees.
Due to stockholder represents the balance due to Mr. Delsener on his
advances to renovate the Jones Beach Theatre (the "Jones Beach Loan") and the
PNC Bank Arts Center (the "PNC Loan"). Delsener /Slater paid interest at 8% per
annum on the Jones Beach Loan, which was repaid in May 1996. The PNC Loan,
which was originated in 1996 was repaid in connection with the acquisition of
Delsener/Slater by SFX Broadcasting in 1997 (See Note 1).
11. CAPITAL STOCK
Prior to the Spin-Off, the Company will amend and restate its certificate
of incorporation to, among other things, increase its authorized capital stock
and will issue to SFX Broadcasting, in exchange for the issued and outstanding
shares of the Company's Common Stock held by SFX Broadcasting, the number of
shares of the Company's Common Stock necessary to consummate the Spin-Off.
Subject to the approval of shareholders of SFX Broadcasting, holders of
the Company's Class A Common Stock will be entitled to one vote and holders of
the Company's Class B Common Stock will be entitled to ten votes on all matters
submitted to a vote of shareholders except for (a) the election of directors,
F-21
<PAGE>
(b) with respect to any "going private" transaction involving the Chairman and
(c) as otherwise provided by law.
The Board of Directors has the authority to issued preferred stock and
will assign the designations and rights at the time of issuance.
12. DEFINED CONTRIBUTION PLAN
The Company sponsors a 401(k) defined contribution plan in which most
full-time employees are eligible to participate. The Plan presently provides
for discretionary employer contributions. There were no contributions in 1997.
13. SUBSEQUENT EVENTS
During January 1998, the Board of Directors and SFX Broadcasting, as sole
stockholder, approved and adopted a stock option and restricted stock plan
providing for the issuance of restricted shares of the Company's Class A Common
Stock and options to purchase shares of the Company's Class A Common Stock
totaling up to 2,000,000 shares.
During January 1998, in connection with certain executive officers
entering into employment agreements with the Company the Board of Directors,
upon recommendation of the Compensation Committee, approved the sale of
an aggregate of 650,000 shares of the Company's Class B Common Stock and
190,000 shares of the Company's Class A Common Stock to certain executive
officers for a purchase price of $2.00 per share. Such shares will be issued
on or about the effective date of the Spin-Off. A substantial non-cash charge
to earnings will be recorded by the Company at the time of the Spin-Off
based on the then fair value of such shares.
In addition, the Board, upon recommendation of the Compensation Committee,
has approved the issuance of stock options exercisable for 245,000 shares of
the Company's Class A Common Stock. The options will vest over 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 SFX Broadcasting as of the Spin-Off record
date, whether or not vested. The issuance was approved to allow such holders of
these options or SARs to participate in the Spin-Off in a similar manner to
holders of SFX Broadcasting's Class A Common Stock. Additionally, many of the
option holders will become officers, directors and employees of the Company.
F-22
<PAGE>
AMENDMENT NO. 2
TO
AGREEMENT AND PLAN OF MERGER
AMONG
SBI HOLDING CORPORATION,
SBI RADIO ACQUISITION CORPORATION
AND
SFX BROADCASTING, INC.
<PAGE>
AMENDMENT NO. 2 TO AGREEMENT AND PLAN OF MERGER dated as of
March 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, Parent, Sub and the Company have entered into an
Agreement and Plan of Merger, dated as of August 24, 1997, which was
subsequently amended by Amendment No. 1 to Agreement and Plan of Merger, dated
as of February 9, 1998 (as amended, the "Merger Agreement"), pursuant to which,
among other things, the parties agreed to the merger of Sub with and into the
Company (the "Merger"), upon the terms and subject to the conditions set forth
in the Merger Agreement;
WHEREAS, the parties to the Merger Agreement desire to amend
certain terms and conditions thereof, as set forth herein; and
WHEREAS, capitalized terms used herein have the meanings
ascribed to them in the Merger Agreement;
NOW, THEREFORE, the parties to the Merger Agreement further
agree as follows:
1. Section 1.02 of the Merger Agreement is hereby amended and restated in its
entirety as follows:
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 to May 19, 1998.
2. Except to the extent expressly set forth in this Amendment No. 2 to
Agreement and Plan of Merger, no terms and conditions of the Merger Agreement
are amended or modified hereby, and all such terms and conditions shall remain
in full force and effect.
<PAGE>
IN WITNESS WHEREOF, Parent, Sub and the Company have caused
this Amendment No. 2 to the Merger 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 Neuman
Title: Vice President
SBI RADIO ACQUISITION CORPORATION
By: /s/ Eric Neuman
------------------------
Name: Eric Neuman
Title: Vice President
SFX BROADCASTING, INC.
By: /s/ Robert F.X. Sillerman
-------------------------
Name: Robert F.X. Sillerman
Title: Executive Chairman
<PAGE>
EXHIBIT 21.1
SUBSIDIARIES OF SFX ENTERTAINMENT, INC.
1. Ardee Festivals N.J., Inc.
2. Ardee Productions, Ltd.
3. Atlanta Concerts, Inc.
4. Beach Concerts, Inc.
5. BGP Acquisition, L.L.C.
6. Broadway Concerts, Inc.
7. Conn Ticketing Company
8. Connecticut Amphitheater Development Corporation
9. Connecticut Concerts Incorporated
10. Connecticut Performing Arts, Inc.
11. Connecticut Performing Arts Partners
12. Contemporary Group Acquisition Corp.
13. Deer Creek Amphitheater Concerts, Inc.
14. Deer Creek Amphitheater Concerts, L.P.
15. Delsener/Slater Enterprises Ltd.
16. Dumb Deal, Inc.
17. Exit 116 Revisited, Inc.
18. FPI Concerts, Inc.
19. In House Tickets, Inc.
20. Irving Plaza Concerts, Inc.
21. Murat Center Concerts, Inc.
22. Murat Center Concerts, L.P.
23. NOC, Inc.
24. Northeast Ticketing Company
25. Polaris Amphitheater Concerts, Inc.
26. QN Corp.
27. SFX Broadcasting of the Midwest, Inc.
28. SFX Concerts, Inc.
29. SFX Network Group, L.L.C.
30. Southeast Ticketing Company
31. Sunshine Concerts, L.L.C
32. Sunshine Designs, Inc.
33. Sunshine Designs, L.P.
34. Suntex Acquisition, Inc.
35. Suntex Acquisition, L.P.
36. Westbury Music Fair, L.L.C.
37. PACE Entertainment Corporation
38. PACE Music Group, Inc.
39. PACE Theatrical Group, Inc.
40. PACE Motor Sports, Inc.
41. PACE Touring, Inc.
42. American Broadway, Inc.
43. PACE Variety Entertainment, Inc.
44. PACE Communications, Inc.
45. PACE Entertainment GP Corp.
46. PEC, Inc.
47. PACE Entertainment Charitable Foundation
48. PACE Entertainment Group, Ltd.
49. PACE Productions, Inc.
50. PACE Concerts GP, Inc.
<PAGE>
51. Old PCI, Inc.
52. SM/PACE, Inc.
53. PACE Bayou Place, Inc.
54. PACE Amphitheaters, Inc.
55. PACE Amphitheater Management, Inc.
56. PACE Milton Keynes, Inc.
57. PACE U.K. Holding Corporation
58. Concerts, Inc.
59. PACE Concerts, Ltd.
60. PTG-Florida, Inc.
61. Entertainment Performing Arts, Inc.
62. Touring Productions, Inc. (Dormant Sub)
63. Festival Productions, Inc.
64. Tuneful Company, Inc. (Dormant Sub)
65. Pavilion Partners
66. GSAC Partners
67. BG Presents, Inc.
68. Bill Graham Enterprises, Inc.
69. Bill Graham Presents, Inc.
70. Bill Graham Management, Inc.
71. Shoreline Amphitheatre, Ltd.
72. Fillmore Fingers, Inc.
73. AKG, Inc.
74. Fillmore Corporation
75. Wolfgang Records
76. Shoreline Amphitheatre Partners
77. PACE AEP Acquisition, Inc.
78. PACE UK
79. Walnut Creek Amphitheater Partnership
80. Coral Sky Amphitheater Partnership
81. G123 Corp.
82. Rugrats American Tour, Ltd.
83. PTG Florida, Inc./BSMG Joint Venture
84. The Album Network, Inc.
85. Contemporary Group, Inc.
86. Contemporary Marketing, Inc.
87. Contemporary Productions Incorporated
88. Contemporary Sports Incorporated
89. Cooley and Conlon Management Co.
90. High Cotton, Inc.
91. SJS Entertainment Corporation
92. Southern Promotions, Inc.
<PAGE>
[ARTICLE] 5
<TABLE>
<S> <C>
[PERIOD-TYPE] 12-MOS
[FISCAL-YEAR-END] DEC-31-1997
[PERIOD-END] DEC-31-1997
[CASH] 5,979,000
[SECURITIES] 0
[RECEIVABLES] 3,831,000
[ALLOWANCES] 0
[INVENTORY] 0
[CURRENT-ASSETS] 11,220,000
[PP&E] 62,295,000
[DEPRECIATION] 2,610,000
[TOTAL-ASSETS] 146,942,000
[CURRENT-LIABILITIES] 22,437,000
[BONDS] 0
[PREFERRED-MANDATORY] 0
[PREFERRED] 0
[COMMON] 0
[OTHER-SE] 102,144,000
[TOTAL-LIABILITY-AND-EQUITY] 146,942,000
[SALES] 0
[TOTAL-REVENUES] 96,144,000
[CGS] 0
[TOTAL-COSTS] 91,054,000
[OTHER-EXPENSES] 0
[LOSS-PROVISION] 0
[INTEREST-EXPENSE] 1,590,000
[INCOME-PRETAX] 4,304,000
[INCOME-TAX] 490,000
[INCOME-CONTINUING] 3,814,000
[DISCONTINUED] 0
[EXTRAORDINARY] 0
[CHANGES] 0
[NET-INCOME] 3,814,000
[EPS-PRIMARY] 0
[EPS-DILUTED] 0
</TABLE>
