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TABLE OF CONTENTS
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-K
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Annual report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 |
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For the fiscal year ended December 31, 2013, |
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or |
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Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 |
Commission File Number 001-36119
SFX ENTERTAINMENT, INC.
(Exact name of registrant as specified in its charter)
Delaware (State or other jurisdiction of incorporation or organization) |
90-0860047 (I.R.S. Employer Identification No.) |
430 Park Ave., Sixth Floor
New York, NY 10022
(Address of principal executive offices, including zip code)
(646) 561-6400
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class | Name of each exchange on which registered | |
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Common Stock, $0.001 Par Value per Share | The Nasdaq Global Select Market |
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes o No ý
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes o No ý
Indicate by check whether the registrant (1) has filed all reports to be filed by Section 13 or 15(d) of the Securities and 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 ý No o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ý No o
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§ 229.405 of this chapter) 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. ý
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See definitions of "large accelerated filer," "accelerated filer," "non-accelerated filer" and "smaller reporting company" in Rule 12b-2 of the Exchange Act:
Large Accelerated Filer o | Accelerated filer o | Non-accelerated Filer ý (Do not check if a smaller reporting company) |
Smaller reporting company o |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No ý
The registrant completed the initial public offering of its common stock on October 15, 2013. Accordingly, there was no public market for the registrant's common stock as of June 30, 2013, the last business day of the registrant's most recently completed second fiscal quarter.
As of March 28, 2014, the registrant had outstanding 88,654,237 shares of common stock.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant's definitive proxy statement for its 2014 Annual Meeting to be filed with the Securities and Exchange Commission not later than 120 days after the end of the year covered by this Annual Report are incorporated by reference into Part III of this Annual Report.
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"SFX" (which may be referred to as the "Company," "we," "us" or "our") means SFX Entertainment, Inc. and its subsidiaries, or one of our subsidiaries, as the context requires.
Special Note About Forward-Looking Statements
Certain statements contained in this Annual Report on Form 10-K (or otherwise made by us or on our behalf from time to time in other reports, filings with the Securities and Exchange Commission ("SEC"), news releases, conferences, Internet postings or otherwise) that are not statements of historical fact constitute "forward-looking statements" within the meaning of Section 27A of the Securities Act of 1933, as amended (the "Securities Act"), and Section 21E of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), notwithstanding that such statements are not specifically identified. Forward-looking statements include, but are not limited to, statements about our financial position, business strategy, competitive position, potential growth opportunities, potential operating performance improvements, the effects of competition, the effects of future legislation or regulations and plans and objectives of our management for future operations. We have based our forward- looking statements on our beliefs and assumptions based on information available to us at the time the statements are made. Use of the words "may," "should," "continue," "plan," "potential," "anticipate," "believe," "estimate," "expect," "intend," "outlook," "could," "target," "project," "seek," "predict," or variations of such words and similar expressions are intended to identify forward-looking statements but are not the exclusive means of identifying such statements.
Forward-looking statements are not guarantees of future performance and are subject to risks and uncertainties that could cause actual results to differ materially from those in such statements. Factors that could cause actual results to differ from those discussed in the forward-looking statements include, but are not limited to, those set forth under Item 1A.Risk Factors as well as other factors described herein or in the quarterly and other reports we file with the SEC. Based upon changing conditions, should any one or more of these risks or uncertainties materialize, or should any underlying assumptions prove incorrect, actual results may vary materially from those described in any forward-looking statements. All subsequent written and oral forward- looking statements attributable to us or persons acting on our behalf are expressly qualified in their entirety by the applicable cautionary statements. We do not intend to update these forward-looking statements, except as required by applicable law.
Our Company
We believe we are the largest global producer of live events and digital entertainment content focused exclusively on the electronic music culture ("EMC") and other world-class festivals. We view EMC as a global generational movement driven by a rapidly developing community of avid electronic music followers among the millennial generation. Our mission is to enable this movement by providing our fans with the best possible live experiences, music discovery and connectivity with other fans.
We present leading EMC festivals and events, many of which have more than a decade of history, passionate followers and vibrant social communities. Our live events and leading brands include Tomorrowland, TomorrowWorld, Mysteryland, Sensation, Disco Donnie Presents, Life in Color, Stereosonic, Decibel, Nature One, Ruhr-in-Love, Electric Zoo and several others. In addition, we own a 40% interest in the popular Rock in Rio festival brand. We have significant and growing scale with these global live events.
We believe the broad appeal of EMC beyond festival attendance is demonstrated by the deep engagement of our fans, which is evidenced by the time they devote to EMC-related social media and digital activities. For example, the 2013 Tomorrowland festival in Belgium had 16.5 million live views on YouTube and the official Tomorrowland long-form after movies have had over 200.0 million online views to date. We are addressing the demand from the growing EMC community for music, engaging content and social connectivity between and around our live events. A key component of this initiative is our subsidiary Beatport, which is the principal source of music for EMC DJs and enthusiasts.
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Our business is comprised of premier live entertainment festivals, events and select premier managed EMC venues, a ticketing business and online properties, including the following:
Asset
|
Ownership | 2013 Events/ Festivals(1) |
2013 Total Attendance (000s) |
Description | ||||||
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Accepté Holding B.V. ("Paylogic") |
75 |
% |
NA |
NA |
Platform company engaged in the business of event ticketing. |
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BEATPORT, LLC ("Beatport") |
100 |
% |
NA |
NA |
Principal online resource and destination for EMC DJs and enthusiasts, offering music for purchase in multiple downloadable formats (including uncompressed, high quality audio files) and providing unique music discovery tools for DJs and fans. |
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B2S Holding B.V. ("B2S") |
100 |
% |
21 / 4 |
178 |
EMC event organizer specializing in hard electronic dance music. Its festival and live event brands include Decibel, Hard Bass, Thrillogy, Knock Out and Loudness. |
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Disco Donnie Presents ("DDP") |
100 |
% |
610 / 7 |
961 |
Promoter of EMC events in North America since 2000, including ownership interests in large EMC festivals. |
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ID&T Holding B.V. ("ID&T") |
100 |
% |
18 / 25 |
962 |
One of the largest content providers and producers of international EMC live events across six continents. ID&T-branded festivals include Tomorrowland, TomorrowWorld, Mysteryland, Sensation, Q-Dance, and Defqon.1. |
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i-Motion GmbH Events & Communication |
100 |
% |
5 / 6 |
231 |
Leading promoter and producer of EMC festivals and events in Germany, with key brands including Nature One, Germany's largest open-air EMC festival. |
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Life in Color ("LIC") |
100 |
% |
79 / 5 |
355 |
Promoter and organizer of branded events that feature live music by DJs, acrobatic acts and "paint blasts." |
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Made Event, LLC and EZ Festivals, LLC |
100 |
% |
23 / 1 |
141 |
Promoter and producer of EMC festivals and events in the United States, including Electric Zoo, held annually in New York City. |
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MMG Nightlife LLC ("MMG") |
80 |
% |
NA |
NA |
Management company that manages some of the most popular EMC venues in Miami Beach, Florida. |
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Rock World S.A. ("Rock World") |
40 |
% |
0 / 1 |
612 |
Brazilian company engaged in the entertainment business, including the organization of music festivals held under the "Rock in Rio" name. |
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Totem Onelove Group Pty Ltd and Totem |
100 |
% |
19 / 5 |
472 |
Promoter and producer of a leading Australian EMC festival, Stereosonic, a five city touring outdoor festival held annually in summer (November/December) in conjunction with a touring and promotion business. |
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Our Competitive Strengths
We believe we differentiate ourselves from our competitors as follows:
Our Strategy
Our goal is to grow our business by supporting the development of the EMC movement. Key elements of our strategy include the following:
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accommodation logistics, using wireless technologies to ease on-site logistics and social media interaction, and featuring quality concessions in partnership with top-tier food and beverage partners.
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Our History
SFX Entertainment, Inc. was incorporated in the State of Delaware on June 5, 2012. Between June 5, 2012 and February 13, 2013, we were named SFX Holding Corporation. We started our business on July 7, 2011 as SFX EDM Holdings Corporation, which is now a wholly owned subsidiary of SFX Entertainment, Inc. On October 15, 2013, we completed our initial public offering ("IPO") and became a publicly traded company on The Nasdaq Global Select Market, trading under the symbol "SFXE."
We were founded by Robert F.X. Sillerman, and our senior management team has extensive global experience in entertainment, consumer internet and music-related businesses, including experience working with creative talent, producing and promoting live events and acquiring and integrating companies. Our team also includes a new generation of promoters, producers and executives who are innovators and leaders in the EMC community with established businesses and experience in creating spectacular events that host tens of thousands of people. These team members are generally managers or former owners of our acquired companies and partnerships who received equity in SFX as consideration when we acquired their businesses.
Our Principal Assets
Our business comprises premier live entertainment festivals, events and select premier managed EMC venues, a ticketing business and online properties, including the following:
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Labor Day weekend. In 2013, Electric Zoo attracted over 37,500 attendees per day over a multiday festival, to its site on Randall's Island, compared to 13,000 attendees in 2009, the festival's first year.
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Information Regarding Market Segments and Foreign Operations
Financial data regarding our revenues, results of operations, industry segments and international sales for the three years ended December 31, 2013 are set forth in the Consolidated Statements of Operations and in Note 16 to the Company's consolidated financial statements included in Item 8 of this Annual Report on Form 10-K and are incorporated herein by reference.
Industry Overview
Electronic dance music is one of the most popular music genres in the world among the millennial generation. It is created by artists and DJs, using digital techniques, often in front of a live audience. Within this genre there are numerous subgenres including Dance, Drum and Bass, Dubstep, House, Techno and Trance, which often influence and integrate elements from each other. EMC festivals and events typically feature many different artists and DJs, as well as elaborate sets, lighting and special effects centered on different creative themes. These festivals and events have become highly experiential and social happenings that are enjoyed by thousands of fans. These experiences, further propelled via social media and shared by millions of fans globally, are at the heart of the generational movement that is EMC.
The global market directly associated with electronic dance music was projected to be approximately $4.5 billion in 2013, according to the International Music Summit Business Report. Electronic music has a history of over 20 years of mainstream popularity in Europe and has more recently evolved into a widely followed genre of music in the United States and other international markets. Reflecting this trend, in 2012 the National Academy of Recording Arts and Sciences added a Dance/Electronic songs category for the Grammy Awards, Billboard launched a Dance/Electronic songs chart, and in January 2014, Daft Punk, a Dance/Electronic artist, won the Grammy Award for not only Dance/Electronic Album of the Year but also overall Album of the Year. According to the Nielsen Company & Billboard's 2012 Music Industry Report, Dance/Electronic music had the highest growth of all music genres with a 36% increase in digital music track sales in the United States in 2012 compared to the prior year.
Rising global interest in electronic music complemented by the power of social media and viral content has enabled the rapid growth of large-format, live EMC events. EMC fans are primarily "digital and social natives" who attend festivals and events for the shared live experience and are highly engaged with festivals and artists via social media and other online and mobile platforms. This millennial generation leads the market in social media connectivity, digital media consumption, user-generated content creation, as well as mobile and online commerce.
Our market is characterized by a high degree of ownership fragmentation, and we believe it is well positioned for consolidation. We have a disciplined acquisition strategy that utilizes our in-house expertise and experience to identify, evaluate and integrate acquisitions. We plan to implement best practices across acquired companies and provide active business development, managerial support and financial discipline to achieve operational efficiencies. This will allow us to bring our fans more and higher quality EMC experiences while preserving the unique identities of these events.
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Competition
The broader market for live entertainment is highly competitive. We believe that we compete primarily on the basis of our EMC focus and unique creative elements, combined with the high production value of our events, festivals and managed venues. In the markets in which we promote festivals and events, we face competition from promoters and venue operators. We believe that barriers to entry in the promotion services business are low and that certain local promoters are increasingly expanding the geographic scope of their operations.
Our main competitors in the live music industry include Live Nation, AEG, Insomniac, C3 Concerts, Real Music Events, Slow Motion Music, and SDC, in addition to numerous smaller, regional companies that operate in our markets. Our competitors compete with us in all regions and cities for show dates, ticket sales, artist bookings, EMC fans and concert attendees, venues and festival locations, sponsorships and production equipment. Some of our competitors whose preliminary business is outside of EMC are larger companies with significant operations and a higher profile in the industry. However, we have expertise in the live music industry and the electronic dance music genre, in particular, and we work with the leading EMC promoters in the world, all of which helps us to be competitive in this industry.
With respect to our Beatport business, we face competition from providers of interactive on-demand audio and video content, and pre-recorded entertainment, such as Apple's iTunes Music Store, RDIO, Rhapsody, Spotify, Pandora, Amazon and other digital content providers that allow online listeners to select the audio content that they stream or purchase. However, we believe the breadth and professional nature of our electronic music-focused offering is unique. Our primary source of music sales revenue is derived from high quality audio files which DJs require for production and performance. Beatport is the premier destination for such professional quality offerings.
We compete with other websites, online event sites and ticketing companies to provide event information, sell tickets and provide other online services in the online ticketing services environment. The ticketing services industry includes the sale of tickets primarily through online channels, but also through telephone services, mobile devices and ticket outlets. We face competition from other national, regional and local primary ticketing service providers to secure new venues and to reach fans for events. We also face intense and growing competition from companies that sell self-ticketing systems, as well as from clients that choose to integrate self-ticketing systems into their existing operations or acquire primary ticketing service providers. Further, we face growing competition from secondary ticketing companies, which continue to consolidate and amass inventory. Our main competitors include primary ticketing companies such as Ticketmaster, Tickets.com, AXS, Paciolan, Veritix and CTS Eventim, online and event companies such as Eventbrite, eTix and Ticketfly and secondary ticketing companies such as StubHub.
Government Regulation
Our operations are subject to federal, state, and local laws, statutes, rules, regulations, policies and procedures both domestically and internationally, governing matters such as:
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We believe that we are in material compliance with these laws. There are many complex regulations relating to food service at venues. A variety of regulations at various governmental levels relating to the handling, preparation and serving of food, the cleanliness of food production facilities and the hygiene of food-handling personnel are enforced primarily at the local public health department level. Above all, we are committed to maintaining the highest standards of safety, health and security for our fans at every one of our events and venues.
We must comply with applicable licensing laws, as well as state and local service laws, commonly called dram shop statutes. Dram shop statutes generally prohibit serving alcoholic beverages to certain persons, such as an individual who is intoxicated or a minor. If we violate dram shop laws, we may be liable to third parties for the acts of the customer. We generally hire outside vendors to provide these services at our larger operated venues and we regularly sponsor training programs designed to minimize the likelihood of such a situation. However, we cannot guarantee that intoxicated or minor customers will not be served or that liability for their acts will not be imposed on us.
We are required to comply with the ADA and certain state statutes and local ordinances that, among other things, require that places of public accommodation, including both existing and newly constructed venues, be accessible to customers with disabilities. The ADA requires that venues be constructed to permit persons with disabilities full use of a live entertainment venue. The ADA may also require that certain modifications be made to existing venues to make them accessible to customers and employees who are disabled. In order to comply with the ADA and other similar ordinances, we may face substantial capital expenditures in the future.
We are required to comply with the laws of the countries in which we operate and also the FCPA regarding anti-bribery regulations. These regulations make it illegal for us to pay, promise to pay, or receive money or anything of value to, or from, any government or foreign public official for the purpose of directly or indirectly obtaining or retaining business. This ban on illegal payments and bribes also applies to agents or intermediaries who use funds for purposes prohibited by the statute.
From time to time, governmental bodies have proposed legislation that could have an effect on our business. For example, some legislatures have proposed laws in the past that would impose potential liability on us and other promoters and producers of live music events for entertainment taxes and for incidents that occur at our events, particularly relating to drugs and alcohol. More recently, some jurisdictions have proposed legislation that would restrict ticketing methods, mandate ticket inventory disclosure, and attack current policies governing season tickets for sports teams.
As a company conducting business on the internet, we are subject to a number of foreign and domestic laws and regulations relating to information security, data protection and privacy, among other things. Many of these laws and regulations are still evolving and could be interpreted in ways that could harm our business. In the area of information security and data protection, the laws in several jurisdictions require companies to implement specific information security controls to protect certain types of personally identifiable information. Likewise, all but a few states in the U.S. have laws in place requiring companies to notify users if there is a security breach that compromises certain categories of
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their personally identifiable information. Any failure on our part to comply with these laws may subject us to significant liabilities.
We are also subject to federal and state laws regarding privacy of listener data. Our privacy policy and terms of use describe our practices concerning the use, transmission and disclosure of listener information and are posted on our website. Any failure to comply with our posted privacy policy or privacy-related laws and regulations could result in proceedings against us by governmental authorities or others, which could harm our business. Further, any failure by us to adequately protect the privacy or security of our Beatport users' information could result in a loss of confidence in our service among existing and potential users, and ultimately, in a loss of users and advertising customers, which could adversely affect our business.
We collect and use certain types of information from our customers and fans in accordance with the privacy policies posted on our websites. We collect personally identifiable information directly from our customers, including Beatport users and those who purchase tickets from Paylogic or directly from us, when they register to use our services, fill out their profiles, post comments, use our service's social networking features, participate in polls and contests and sign up to receive email newsletters. We also collect information from customers using our other websites in order to provide ticketing services and other user support. Our policy is to use the collected information to customize and personalize our offerings for our customers and fans and to enhance their experience when using our services.
We also use automated data collection technology, such as tracking cookies, on our websites, including our festivals websites and Beatport, to collect non-personally identifiable information in order to provide artists appropriate royalties and help us track listener interactions with our services and to provide greater functionality. Third-party advertisers and service partners may also use tracking technologies in order to collect non-personally identifiable information regarding use of our platforms.
We have implemented commercially reasonable physical and electronic security measures to protect against the loss, misuse and alteration of personally identifiable information. No security measures are perfect or impenetrable, and we may be unable to anticipate or prevent unauthorized access to our customers' personally identifiable information.
Intellectual Property
It is our practice to protect our trademarks and other original and acquired intellectual property. Our subsidiaries currently hold, or have recently acquired, 27 trademarks registered on the Principal Register of the United States for a number of our brands, with 31 applications pending on the Principal Register. Our subsidiaries have 610 trademarks registered and 83 trademark applications pending in multiple foreign jurisdictions. We are in the process of updating trademark and domain name registries to reflect ownership of recently acquired intellectual property. We believe that our trademarks and other proprietary rights have significant value and are important to our brand-building efforts and the marketing of our services. We cannot predict, however, whether steps taken by us to protect our proprietary rights will be adequate to prevent infringement or misappropriation of these rights.
Employees
As of December 31, 2013, we had approximately 450 full-time employees.
Our staffing needs vary significantly throughout the year. Therefore, we also employ part-time and/or seasonal employees, primarily for our live EMC events held between May and September. We are not a party to any collective bargaining agreements and have not experienced any strikes or work stoppages. We believe that we enjoy good relations with our employees. From time to time, we utilize the services of independent contractors to perform various services.
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Available Information
We are required to file annual, quarterly and current reports, proxy statements and other information with the SEC. You may read and copy any materials we have filed with the SEC at the SEC's Public Reference Room at 100 F Street, NE, Washington, DC 20549. You may obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. Our filings with the SEC are also available to the public through the SEC's website at www.sec.gov.
You can find more information about us at our internet website located at www.sfxii.com. Our Annual Report on Form 10-K, our Quarterly Reports on Form 10-Q, our Current Reports on Form 8-K and any amendments to those reports are available free of charge on our internet website as soon as reasonably practicable after we electronically file such material with the SEC.
Any of the following risks could materially affect our business, financial condition, or results of operations. These risks could also cause our actual results to differ materially from those indicated in the forward-looking statements contained herein and elsewhere. The risks described below are not the only risks facing us. Additional risks not currently known to us or those we currently deem to be immaterial may also materially and adversely affect our business, financial condition or results of operations.
Our success relies, in part, on the strength of our and our ticketing clients' festivals and events, as well as our online businesses, and if any of them were to become less popular, our business could suffer.
We produce, promote and manage EMC festivals and events including Tomorrowland, TomorrowWorld, Sensation, Mysteryland, Q-Dance, Stereosonic, Electric Zoo, Nature One, MayDay, Ruhr-in-Love, Life in Color, Rock in Rio and Decibel, as well as ticketing and other digital businesses, including Beatport. Our growth strategy relies on the strength of these brands to attract customers to our festivals and events, both through attendance at the original festivals and in new markets, as well as to our online digital properties. We also rely on the strength of these brands to secure sponsorships and marketing partners and to facilitate growth in revenue from the sale of music and other content, as well as advertising on our online properties. Maintaining the strength of our festivals, events and online businesses will be challenging, and our relationship with our fans could be harmed for many reasons, including the quality of the experience at a particular festival or event, our competitors developing more popular events or attracting talent from our businesses, adverse occurrences or publicity in connection with an event and changes to public tastes that are beyond our control and difficult to anticipate. If our key properties become less popular with consumers within the EMC community, our growth strategy would be harmed, which could in turn harm our business and financial results.
Maintaining the popularity of our festivals, events and online businesses requires that we anticipate consumer preferences and offer attractions that appeal to the EMC community. Our customers' preferences and tastes for these attractions can change and evolve rapidly, and our competitors actively seek to provide new and compelling experiences at their EMC events. If we fail to anticipate or respond quickly to changes in public taste, our festivals and related offerings may become less attractive to consumers.
Furthermore, our ticketing business relies on third parties to create and perform live entertainment, sporting and leisure events and to price tickets to such events. Therefore, our ticketing business' success depends, in part, upon such parties' ability to accurately anticipate public demand for particular events, as well as the availability of popular artists, entertainers and teams.
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We may be unsuccessful in developing and expanding our music, video and other content offerings.
We intend to continue to develop Beatport as a key point of contact between us and the EMC community. However, we face a number of challenges and risks. For example, we are in the nascent stage of developing additional media content, such as news, lifestyle videos and blogs, which we believe will be attractive to members of the EMC community, but we may not be successful in developing these offerings. Consumers may also decide to access similar offerings from our competitors. We also intend to increase our consumers' paid access to music, including through downloads. However, we face a number of challenges, including illegal downloading and other piracy, which has depressed sales in the music industry generally, competition from mainstream brands, such as iTunes, and our inability to obtain and retain licenses to supply artist content. We may fail to enhance the consumer experience, deepen engagement with the EMC community or achieve the improvements we seek to make. Any of these occurrences may prevent us from improving our connection to our customers and bringing more traffic to the Beatport website, further developing Beatport as a key point of contact for the EMC community and increasing ticket sales for our festivals and events. If we fail to properly execute our strategy in this area, it will be harder for us to achieve the growth we expect, and our business and financial results may be adversely affected.
We are vulnerable to the potential difficulties associated with rapid growth.
We believe that our future success depends on our ability to manage the rapid growth that we expect to achieve organically and through acquisitions and the demands and additional responsibilities that our growth will place on our management.
The following factors could present us with difficulties:
If we fail to address these and other challenges associated with our growth, our growth itself may slow or fail to materialize, we may grow without achieving profitability, we may have difficulty with our internal controls, procedures and financial reporting, and the quality of our festivals, events and other offerings may decline, among other things. Any of these results could harm our business and financial results.
We may not successfully expand into new geographic markets and businesses, which could adversely affect our business, results of operations and financial condition.
Our growth strategy is based, in part, on the expansion of our festivals and events into new geographic markets where they have not previously taken place and into related lines of business. This strategy entails a number of risks. For example, it is not clear that these new markets will have the demand for these festivals and events that we anticipate, which could adversely affect the ticket sales or pricing for these events. There may also be unforeseen difficulties with holding festivals and events in new markets, including obtaining venues, securing requisite licenses and government approvals, and recruiting artists to the location, among other factors. It is also possible that the audiences in a new location will not find a festival to be as attractive or worthwhile as the audience in the festival's home city. In addition, the demands and time commitment necessary to stage a festival in multiple locations
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could make it difficult for our management to oversee that festival effectively; for this reason or otherwise, we may fail to replicate the quality of the original festival in its new location. Providing festivals in new locations may also undermine demand for a festival in its original location, because many of the fans of these festivals travel long distances to attend. Finally, EMC fans may prefer their local festivals to ones that we bring from another city or country. The failure to expand our festivals into new geographies would adversely affect our growth and results of operations. Further, because staging festivals in new locations involves substantial expense, we could suffer significant losses if these festivals fail to attract the expected audience in their new locations.
We also intend to continue to expand into new, related lines of businesses. For example, through the recent acquisition of Paylogic, we expanded our business to event ticketing. Such expansions will also carry risks, including that the demand for these products may be less than we anticipate and that we may fail to receive a return sufficient to cover our investment in the new business.
We also intend to continue to partner with key companies and organizations that could sponsor both our individual events and festivals and our platform as a whole. We are actively seeking and negotiating with potential partners. However, there is significant competition for these types of relationships, and we may fail to establish them for a particular event or for our business as a whole or fail to obtain the number of marketing partnerships or sponsorships or the level of associated compensation that we expect. Failing to secure or retain such partners to the degree we expect would harm our growth plan and adversely affect our revenues and financial results.
It is possible that the popularity of electronic music and the EMC community will not continue their current growth or even decline.
We have focused our business on the broad market for electronic music and the EMC community, including electronic music festivals and events, venues, sponsorships and ecommerce. Accordingly, our growth strategy is dependent upon the continued growth of the popularity of electronic music and the EMC community. However, this growth is subject to the whims of public taste, which may change over time and which may be beyond our control. While interest in electronic music has increased significantly over the past few years, this increase in interest may not continue, and it is possible that the public's current level of interest in electronic music will decline. If either were to happen, the demand for and interest in EMC festivals, events and venues and our online properties and ticketing business could fail to meet our expectations or even decline. This would have a material adverse effect on our business and financial results.
The number of EMC festivals and events may grow faster than the public's demand, which could make it difficult for us to attract customers to our festivals and events.
With the growing EMC community, there has been a significant increase in the number of EMC festivals and events caused by the creation of new events and the expansion, both in geography and duration, of existing events. Our growth strategy includes increasing the number of EMC festivals and events we produce each year, as well as increasing the frequency of established events by bringing them to new cities and countries. It is possible that the proliferation of EMC festivals and events will outpace demand. Further, many of the largest festivals attract fans who travel great distances to attend. It is possible that an increase in local availability of quality EMC festivals and events will make it less likely that these fans travel to existing festivals. If either were to occur, it could make it difficult for us to achieve the increase in attendance that is part of our growth strategy or force us to offer tickets at reduced prices, either of which would adversely affect our business and financial results.
In addition, competition for advertising marketing partners, and sponsorships may lead to fewer business partners at our events or lower compensation, with a resulting decrease in revenue. Our competitors may offer increased guarantees to artists and more favorable terms and ticketing
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arrangements to other parties, which we may be unwilling or unable to match. Even if we are willing to match our competitors' terms, the profitability of our events could decline.
We must match the innovation of our competitors.
There is currently a tremendous amount of innovation among EMC-focused businesses, including in the different experiential aspects of festivals and other live performances. These include things such as video presentations, lighting, special effects, sets and other creative elements. Businesses in the EMC industry compete in part on their ability to provide experiences for their audiences that are both cutting edge and compelling. Innovation in our industry is taking place both at the companies that produce festivals and events, as well as at smaller companies that are retained by producers and performers to create artistic elements to accompany the music and enhance the experience of the fans. We must be able to match the quality and inventiveness of these competitors at our own festivals and events. If we fail to do so, it could lead to reduced demand for tickets to our festivals and events, harm our reputation or the reputation of our festivals and events and adversely affect our business and financial performance.
Furthermore, the ticketing industry is characterized by transforming industry standards, frequent new service and product introductions, enhancements and changing customer demands. We may not be able to adapt quickly enough and/or in a cost-effective manner to changes in industry standards and customer requirements and preferences, and our failure to do so could adversely affect our business and financial performance. In addition, the ongoing widespread adoption of new internet or telecommunications technologies and devices or other technological changes could require us to modify or adapt our respective services or infrastructures. If we fail to modify or adapt our services or infrastructures in response to these developments, our existing websites, services and technologies could be rendered obsolete, which could adversely affect our business and financial performance.
If we are forced to cancel or postpone all or part of a scheduled festival or event, our business will be adversely impacted and our reputation may be harmed.
We incur a significant amount of up-front costs when we plan and prepare for a festival or event. Accordingly, if a planned festival or event fails to occur, we would lose a substantial amount of sunk costs, fail to generate the anticipated revenue and may be forced to issue refunds for tickets sold. If we are forced to postpone a planned festival or event, we would incur substantial additional costs in order to stage the event on a new date, may have reduced attendance and revenue and may have to refund money to ticketholders. In addition, any cancellation or postponement could harm both our reputation and the reputation of the particular festival or event.
We could be compelled to cancel or postpone all or part of an event or festival for many reasons, including such things as low attendance, technical problems, issues with permitting or government regulation, incidents, injuries or deaths at that event or festival, as well as extraordinary incidents, such as terrorist attacks, mass-casualty incidents and natural disasters or similar events. We often have cancellation insurance policies in place to cover a portion of our losses if we are compelled to cancel an event or festival, but our coverage may not be sufficient and may be subject to deductibles. The occurrence of an extraordinary incident at or near the site where a festival or event will be held may make it impossible or difficult to stage the event or make it difficult for attendees to travel to the site of a festival or event. An extraordinary incident may also make it inappropriate to hold a festival or event at a particular site or at a particular time. For example, the third day of the Electric Zoo festival in September 2013 in New York, New York was canceled after there were two fatalities, which the media reported to have been related to drug use by the individuals, during the first two days of the festival. Electric Zoo is produced by Made, which we acquired in October 2013.
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Costs associated with, and our ability to obtain, adequate insurance could adversely affect our profitability and financial condition.
Heightened concerns and challenges regarding property, casualty, liability, artist, business interruption and other insurance coverage have resulted from security incidents, including terrorism, along with varying weather-related conditions and incidents. As a result, we may experience increased difficulty obtaining high policy limits of coverage at reasonable costs, including coverage for acts of terrorism and weather-related property damage.
We cannot guarantee that our insurance policy coverage limits, including insurance coverage for property, casualty, liability, artist and business interruption losses and acts of terrorism, would be adequate under the circumstances should one or multiple events occur at or near any of our venues or events, or that our insurers would have adequate financial resources to pay our related claims. We cannot guarantee that adequate coverage limits will be available, offered at reasonable costs or offered by insurers with sufficient financial soundness. If activities that our insurance policies do not cover result in a significant liability, our financial condition and results of operation could be harmed.
To stage festivals in multiple locations, we may be required to transport complex sets and equipment long distances, which creates increased risk that they will be damaged.
Our larger festivals require complex sets and other equipment, including those that currently exist, that we construct or that we may purchase from a supplier. We are often required to transport these sets and equipment long distances by land and sea, which creates the risk that they may be damaged or lost if there is an accident or other complication during transport. These sets and equipment are very costly to create and it would be expensive and time consuming to repair or replace them. We have insurance policies in place to cover a portion of our losses for damaged or lost sets and equipment, but our coverage may not be sufficient and is subject to deductibles. Additionally, a supplier's failure to deliver the sets and equipment to us or our loss of these sets and equipment might lead to substantial expenses and could force us to delay or cancel a festival or event. Any of these scenarios could adversely affect our business, reputation and financial results.
There is the risk of personal injuries and accidents in connection with our live music events, which could subject us to personal injury or other claims, increase our expenses and damage our brands.
There are inherent risks in live festivals and events, particularly those like ours, which involve complex staging and special effects. As a result, personal injuries and accidents have occurred in the concert industry, including some that have injured or killed employees and guests. Such incidents at our festivals, events or venues could subject us to claims and liabilities, and certain of the businesses we have acquired or plan to acquire have been subject to such claims. Incidents in connection with our live festivals and events or at any of the venues we manage could also harm our reputation with artists and fans and make it more difficult for us to obtain sponsors. Any such incident could also reduce attendance at our events, or lead to the cancelation of all or part of an event or festival, in each case leading to a decrease in our revenue. While we maintain insurance policies that provide coverage within limits that are sufficient, in management's judgment, to protect us from material financial loss for personal injuries sustained by persons at our venues or accidents in the ordinary course of business, there can be no assurance that this insurance will be adequate at all times and in all circumstances. In particular, if there were to be a major incident involving multiple deaths or injuries at one of our events or venues, it is unlikely our insurance would cover the full liability. We will be responsible for any liabilities not covered by our insurance policies, which would negatively impact our cash flows and results of operations.
In addition, we are subject to state "dram shop" laws and regulations, which generally provide that a person injured by an intoxicated person may seek to recover damages from an establishment that
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wrongfully served alcoholic beverages to the intoxicated person. Recent litigation of "dram shop" laws and regulations targeted at restaurant chains has resulted in significant judgments, including many recent instances of punitive damages; such laws may be extended to apply to our events and festivals. While we carry liquor liability coverage as part of our existing comprehensive general liability insurance, we may still be subject to a judgment in excess of our insurance coverage, and we may not be able to obtain or continue to maintain such insurance coverage at reasonable costs, if at all. Regardless of whether any claims against us are valid or whether we are liable, we may be adversely affected by publicity resulting from such laws.
Activities or conduct, such as illegal drug use, at our properties or the festivals and events we produce may expose us to liability, cause us to lose business licenses or government approvals, result in the cancelation of all or a part of an event or festival or result in adverse publicity.
We are subject to risks associated with activities or conduct, such as drug use at our festivals, events or venues, that are illegal or violate the terms of our business licenses. Illegal activities or conduct at any of our events or venues may result in negative publicity, adverse consequences (including illness, injury or death) to the persons engaged in the illegal activity or others and litigation against us. We utilize a medical procedure and safety committee and have developed policies and procedures aimed at ensuring that the operation of each festival and event is conducted in conformance with local, state and federal laws. Additionally, we have a "no tolerance" policy on illegal drug use in or around our facilities, and we continually monitor the actions of entertainers, fans and our employees to ensure that proper behavioral standards are met. However, such policies, no matter how well designed and enforced, cannot provide absolute assurance that the policies' objectives are achieved. Because of the inherent limitations in all control systems and policies, there can be no assurance that our policies will prevent deliberate acts by persons attempting to violate or circumvent them. The consequences of these acts may increase our costs, result in the loss or termination of leases for our venues by property owners (including governments and other parties that own the land at our venues), result in our inability to get the necessary permits and locations for our events or lead to the cancelation of all or part of an event or festival. For example, the third day of the 2013 Electric Zoo festival in New York, New York was canceled after there were two fatalities, which the media reported to have been related to drug use by the individuals, during the first two days of the festival. These consequences may also make it more difficult for us to obtain or retain our business partners, including sponsors, lower consumer demand for our events, subject us to liability claims, divert management's attention from our business and make an investment in our securities unattractive to current and potential investors. These outcomes could have the effect of lowering our revenue profitability and/ or our stock price.
We face intense competition in the live music, media and ticketing industries, which could adversely affect our business, financial condition and results of operations.
We operate in the highly competitive live music, media and ticketing industries, and this competition may prevent us from maintaining or increasing our current revenue. The live music industry, including electronic dance music, competes with other forms of entertainment for consumers' discretionary spending. Within the live music industry, we compete with other promoters and venue operators to attract customers and talent to events and festivals, as well as to obtain the support of sponsors and advertisers and other business partners. Our competitors include large promotion and entertainment companies, some with substantial scale, that have begun to focus on EMC, smaller promoters that focus on a single festival or event or a particular region or country, venue operators and other producers of live events. Some of our competitors are much larger than we are and have greater resources and stronger relationships with artists, venues, sponsors and advertisers than we do. Others have substantial experience in and strong relationships in the EMC community and are primarily focused on EMC. Our competitors may engage in more extensive development efforts for large-scale
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events, undertake more far-reaching marketing campaigns, adopt more aggressive pricing policies and make more attractive offers to existing and potential advertisers and sponsors and other business partners.
With respect to our media offerings, we compete for the time and attention of our users with other content providers on the basis of a number of factors, including quality of experience, relevance, popularity and diversity of content, ease of use, price, accessibility, perception of the number of advertisements and brand awareness and reputation. We face competition from providers of interactive on-demand audio content and pre-recorded entertainment, such as Apple's iTunes Music Store, Rdio, Rhapsody, Spotify, Pandora and Amazon, which allow online listeners to select the audio content that they stream or purchase. The audio entertainment marketplace continues to rapidly evolve, providing listeners of online music with a growing number of alternatives and new access models. Our current and future competitors in music may have more well-established brand recognition, more established relationships with consumer product manufacturers and content licenses, greater financial, technical and other resources, more sophisticated technologies or more experience in the markets in which we compete. If we are unable to compete successfully for listeners against other providers by maintaining and increasing our presence and visibility, our Beatport music sales may fail to increase as expected or decline and our advertising sales will suffer.
Our ticketing business faces intense competition from other national, regional and local primary ticketing service providers to obtain new and retain existing clients on a continuous basis. We also face significant and increasing challenges from companies that sell self-ticketing systems and from clients who choose to self-ticket, through the integration of self-ticketing systems into their existing operations or the acquisition of primary ticket services providers or by increasing sales through venue box offices and season, subscription or group sales. Additionally, we face competition in the resale of tickets from online auction websites and resale marketplaces and from other ticket resellers with capabilities to distribute online. The emergence of new technology, particularly related to online ticketing, has intensified this competition. The high competition that we face in the ticketing industry could cause the volume of our ticketing services business to decline, which could adversely affect our business and financial performance.
We are subject to substantial governmental regulation, and our failure to comply with these regulations could adversely affect our business, financial condition and results of operations.
Our operations are subject to federal, state and local laws, statutes, rules, regulations, policies and procedures, both domestically and internationally, which are subject to change at any time, governing matters such as:
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Our failure to comply with these laws and regulations could result in fines and proceedings against us by governmental agencies and consumers, which if material, could adversely affect our business, financial condition and results of operations. In addition, the promulgation of new laws, rules and regulations could restrict or unfavorably impact our business, which could decrease demand for services, reduce revenue, increase costs and subject us to additional liabilities. For example, some legislatures have proposed laws in the past that would impose potential liability on us and other promoters and producers of live music events for entertainment taxes and for incidents that occur at events, particularly those that involve drugs and alcohol. Additionally, new legislation could be passed that may negatively impact our business, such as provisions that have recently been proposed in various jurisdictions that would restrict ticketing methods, mandate ticket inventory disclosure, and attack current policies governing season tickets for sports teams.
From time to time, federal, state and local authorities and consumers commence investigations, inquiries or litigation with respect to our compliance with applicable consumer protection, advertising, unfair business practice, antitrust (and similar or related laws) and other laws. We may be required to incur significant legal expenses in connection with the defense of future governmental investigations and litigation.
Our business is subject to the risks of international operations.
As a result of the consummation of certain of our recent acquisitions, we derive a significant portion of our revenue and earnings from our international operations. Operating in multiple foreign countries involves substantial risk. For example, our business activities subject us to a number of laws and regulations, such as anti-corruption laws, tax laws, foreign exchange controls and cash repatriation restrictions, data privacy and security requirements, environmental laws, labor laws, and anti-competition regulations. As we expand into additional countries, the complexity inherent in complying with these laws and regulations increases, making compliance more difficult and costly and driving up the costs of doing business in foreign jurisdictions, including the incurrence of significant legal, accounting and other expenses. Any failure to comply with foreign laws and regulations could subject us to fines and penalties, make it more difficult or impossible to do business in that country and harm our reputation. In addition, this strategy will require us to operate in countries with different business environments, labor conditions, tax obligations or other costs, and local customs, including some that conflict with each other or with which we are unfamiliar. These could make it more difficult to operate our business successfully in these countries.
Operating in multiple countries also subjects us to risk from currency fluctuations. Our primary exposure to movements in foreign currency exchange rates relates to non-U.S. dollar denominated sales and operating expenses. The weakening of foreign currencies relative to the U.S. dollar adversely affects the U.S. dollar value of our foreign currency-denominated sales and earnings. This could either reduce the U.S. dollar value of our prices or, if we raise prices in the local currency, it could reduce the overall demand for our offerings. Either could adversely affect our revenue. Conversely, a rise in the price of local currencies relative to the U.S. dollar could adversely impact our profitability because it would increase our costs denominated in those currencies, thus adversely affecting gross margins.
At this time we do not use derivative instruments, such as foreign currency forward and option contracts, to hedge certain exposures to fluctuations in foreign currency exchange rates. Any future use of such hedging activities may not offset any or more than a portion of the adverse financial effects of unfavorable movements in foreign exchange rates over the limited time the hedges are in place.
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A deterioration in general economic conditions and its impact on consumer and business spending, particularly by customers in our targeted millennial generation demographic, would adversely affect our revenue and financial results.
Our business and financial results are influenced significantly by general economic conditions, in particular, those conditions affecting discretionary consumer spending and corporate spending. During past economic slowdowns and recessions, many consumers reduced their discretionary spending and advertisers reduced their advertising expenditures. An economic downturn can result in reduced ticket revenue, lower customer spending and more limited and less lucrative sponsorship opportunities.
For consumers, such things as employment levels, fuel prices, interest and tax rates and inflation can significantly impact attendance and spending at our and other EMC events, including the EMC events for which Paylogic provides ticketing services, and consumer willingness to purchase music from Beatport. For us, these risks may be exacerbated by the fact that our core customer demographic and the majority of attendees at our events and festivals are 18 to 34 years old, and this millennial generation is among the groups most negatively affected by the current economic slowdown. Business conditions, in particular corporate marketing and promotional spending, can also significantly impact our operating results. These factors affect our revenue from sponsorship and advertising. Accordingly, if current economic conditions fail to improve, and especially if they deteriorate, our growth and financial results will be adversely affected.
Our operations are seasonal and our results of operations vary from quarter to quarter, so our financial performance in certain quarters may not be indicative of, or comparable to, our financial performance in other quarters.
Certain of our businesses are seasonal, and this will impact our results of operations from quarter to quarter. We expect most of our largest festivals and events to occur outdoors, primarily in the warmer months. For example, ID&T and Made stage most of their festivals in August and September, and Totem stages most of its festivals in November and December in Australia. As such, we expect our revenues from these festivals to be higher during our third and fourth quarters, and lower in our first and second quarters. Furthermore, because we expect to conduct a limited number of large festivals and events, small variations in this number from quarter to quarter can cause our revenue and net income to vary significantly for reasons that may be unrelated to the performance of our core business. In addition, other portions of our business are generally not subject to seasonal fluctuation or experience much lower seasonal fluctuation, such as the venues our MMG business manages, which receive higher revenues in the winter months as there are more travelers in Miami during the December holidays, as well as the Winter Music Conference, and our LIC business, which produces festivals and events primarily for college campuses during the school year. We believe our financial results and cash needs will vary significantly from quarter to quarter depending on, among other things, the timing of festivals and events, cancellations, ticket on-sales, capital expenditures, seasonal and other fluctuations in our business activity, the timing of guaranteed payments and receipt of ticket sales and fees, financing activities, acquisitions and investments and receivables management. Accordingly, our results for any particular quarter may vary for a number of reasons, including due to the seasonality of our underlying businesses, and we caution investors to evaluate our quarterly results in light of these factors.
We depend on relationships with key event promoters, sponsor and marketing partners, executives, managers and artists, and adverse changes in these relationships could adversely affect our business, financial condition and results of operations.
Our venue management and event promotion businesses are particularly dependent upon personal relationships, as promoters and executives within entertainment companies such as ours leverage their network of relationships with artists, agents, managers and sponsor and marketing partners to secure
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the rights to the performers and events that are critical to our success. Due to the importance of those industry contacts, the loss of any of our officers or other key personnel who have relationships with artists, agents or managers in the music industry could adversely affect our venue management and event promotion businesses. While we have hiring policies and procedures and conduct background checks of our promoters, executives, managers and artists, they may engage in or may have in the past engaged in conduct we do not endorse or that is otherwise improper, which may result in reputational harm to us. In the past, we have terminated our relationships with such personnel, but we cannot provide any assurances that we will learn of misconduct. Also, to the extent artists, agents and managers are replaced with individuals with whom our officers or other key personnel do not have relationships, our competitive position and financial condition could be harmed.
Furthermore, our ticketing business's success depends, in significant part, on our ability to maintain and renew relationships with our existing clients and to form relationships with new clients. We may not be able to maintain existing client contracts, or enter into or maintain new client contracts, on acceptable terms, if at all, and the failure to do so could have a material adverse effect on our business and financial results.
We rely on key members of management, particularly the Chief Executive Officer and Chairman, Mr. Sillerman, and the loss of their services or investor confidence in them could adversely affect our success, development and financial condition.
Our success depends, to a large degree, upon certain key members of our management, particularly our Chief Executive Officer and Chairman, Robert F.X. Sillerman. Our executive team's expertise and experience in acquiring, integrating and growing businesses, particularly those focused on live music and events, have been and will continue to be a significant factor in our growth and ability to execute our business strategy. The loss of any of our executive officers could have a material adverse effect on our operations, financial condition and operating results.
We may not be able to attract qualified personnel.
Our ability to expand operations to accommodate our anticipated growth will depend on our ability to attract and retain qualified personnel. However, competition for the types of employees we seek is intense. We face particular challenges in recruiting and retaining personnel who have experience in integration of globally dispersed acquired companies, festival operators, software engineering, mobile application development and other technical expertise, which is critical to our initiatives. Our ability to meet our business development objectives will depend in part on our ability to recruit, train and retain top quality personnel with advanced skills who understand our technology and business. We cannot provide any assurance that we will be able to attract qualified personnel to execute our business strategies or develop and expand our online properties and ticketing business.
When we acquire new businesses, we typically retain the existing managers and executives of the acquired companies to continue managing and operating the acquired business. We believe that they have the market expertise and network of personal relationships to best implement the growth strategies of the acquired businesses. If we are unable to retain the key personnel of the acquired businesses, we may not be able to achieve the anticipated benefits and synergies of an acquisition. If we are unable to engage and retain the necessary personnel, our business may be materially and adversely affected.
Members of our senior management team, including our Chief Executive Officer, have divided responsibilities and are not required to devote any specified amount of time to our business.
Our Chief Executive Officer and Chairman, Robert F.X. Sillerman, is also the Executive Chairman and Chief Executive Officer of Viggle Inc. ("Viggle"), which is in the business of developing products
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and services that encourage consumers to engage with television content. Mr. Sillerman is also a director of Circle Entertainment Inc. ("Circle"), which is in the business of developing location-based entertainment venues. Our employment agreement with Mr. Sillerman requires that he devote his time, attention, energy, knowledge, best professional efforts and skills to the duties assigned to him by us, but he is permitted to pursue other professional endeavors and investments that do not violate the terms of his employment agreement, including provisions relative to non-competition and non-solicitation. Mr. Sillerman's employment agreement expressly permits him to engage in certain listed endeavors and investments. Any other professional endeavors to be performed by Mr. Sillerman are subject to the reasonable approval of our board of directors. Importantly, Mr. Sillerman's employment agreement does not require him to devote any specific amount of time to our Company. Similarly, under our employment agreements with Mitchell Slater, the Vice Chairman of our board of directors, Sheldon Finkel, our Vice Chairman, Timothy J. Crowhurst, our President, and Joseph F. Rascoff, our Chief Operating Officer, such officers are permitted to, and such officers have informed us that they intend to, engage in specific endeavors that are listed in their agreements or pre-approved by our board and other endeavors that do not compete with us. In addition, Howard Tytel, our General Counsel, is also Counsel in the law firm Reed Smith LLP. Such officers are not contractually required to devote any specified amount of time to our business.
We rely on third-party content, which may not be available to us on commercially reasonable terms or at all.
We contract with third parties to offer their content on our Beatport website. The licensing arrangements with these third parties are generally short-term and do not guarantee the continuation or renewal of these arrangements on reasonable terms, if at all.
The Beatport website requires us to obtain rights in two types of copyrighted works: the sound recordings that we stream and sell, and the underlying musical compositions in those sound recordings. With respect to the sound recordings, we enter into license agreements with the record companies that own and/or control such recordings. Our arrangements with the record companies allow us to copy and distribute those recordings to the public, and to publicly perform portions of those tracks for users as previews for purchase. When we receive notice that a track offered on the website is not properly licensed or authorized for sale, we follow the notice-and-takedown procedures outlined in Section 512 of the Digital Millenium Copyright Act (the "DMCA"), which provides a safe-harbor from copyright infringement liability for online services that adhere to the law's requirements.
With respect to the underlying musical compositions, we must secure both reproduction ("mechanical") and public performance rights from the music publishers who control the compositions. In the U.S., the record companies with whom we contract for the sound recordings also clear the mechanical rights from the publishers. We have entered into necessary publishing licenses in and for all major non-U.S. markets and repertoire, excluding certain developing territories that may not have a performance rights organization. We do not currently have licenses covering music composition performance rights in the U.S., although we are in discussions with the three U.S. performance rights organizations (ASCAP, BMI and SESAC) that we believe will lead to the execution of final licenses in 2014. Those licenses could entail payments covering past as well as going-forward periods.
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Some third-party content providers and distributors, currently or in the future, may offer competing products and services and could take action to make it more difficult or impossible for us to license their content. Other content owners, providers or distributors may seek to limit our access to, increase the cost of, or otherwise restrict or prohibit our use of such content. For example, several major music publishers are in the process of withdrawing their catalogs from BMI, meaning that even if we finalize a BMI license in 2014, that license may not cover the works of certain publishers, and we will need to pursue public performance licenses directly with those publishers. As a result, we may be unable to continue to offer a wide variety of content at reasonable prices with acceptable usage rules or continue to expand its geographic reach.
All content on Beatport is currently provided free of digital rights management. If our requirements or business model changes, we may have to develop or license new technology to provide other solutions. There is no assurance that we will be able to develop or license such solutions at a reasonable cost and in a timely manner. In addition, certain countries have passed or may propose and adopt legislation that would force us to license our digital rights management, if any, which could weaken the protection of content and subject us to piracy and also negatively affect arrangements with our content providers.
We may be unable to adequately protect our intellectual property rights or may be accused of infringing upon intellectual property rights of third parties.
We may be unable to detect unauthorized use of, or otherwise sufficiently protect, our intellectual property rights or may be accused of infringing upon intellectual property rights of third parties.
We rely on a combination of laws and contractual restrictions with employees, customers, suppliers and others to establish and protect these proprietary rights. Despite these precautions, it may be possible for a third party to copy or otherwise obtain and use proprietary information, trademarks, or copyrighted material without authorization which, if discovered, might require legal action to correct. Furthermore, our recently acquired assets may have been improperly adopted or inadequately protected prior to our acquisitions of them. This could include failures to obtain assignments of ownership or confidentiality agreements from third parties, failures to clear use of trademarks, or other failures to protect trademarks and other proprietary rights. In addition, third parties may independently and lawfully develop similar intellectual property or duplicate our services.
We will apply to register, or secure by contract when appropriate, our trademarks and service marks as they are developed and used and reserve and register domain names as we deem appropriate. While we vigorously protect our trademarks, service marks and domain names as we deem appropriate, effective trademark protection may not be available or may not be sought in every country in which we operate, and contractual disputes may affect the use of marks governed by private contract. Similarly, not every variation of a domain name may be available or be registered, even if available. Our failure to protect our intellectual property rights in a meaningful manner or challenges to related contractual rights could result in the erosion of brand names or the loss of rights to our owned or licensed marks and limit our ability to control marketing on or through the internet using our various domain names or otherwise, which could adversely affect our business, financial condition, and results of operations. In addition, the loss of, or inability to otherwise obtain, rights to use third-party trademarks and service marks, including the loss of exclusive rights to use third-party trademarks in territories where we present festivals, could adversely affect our business or otherwise result in competitive harm.
From time to time, we are subject to legal proceedings and claims in the ordinary course of business, including claims of alleged infringement of the trademarks, copyrights, patents and other intellectual property or proprietary rights of third parties. The legal proceedings and claims include notices provided to us by content owners of users' violation of the DMCA, which obligate us to investigate and remove infringing user content from the Beatport site. We also face a risk that content
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licensors may bring claims for copyright infringement or breach of contract if Beatport users exceed the scope of the content licenses or offer compositions or sound recordings not covered by our existing content license. Because EMC involves remixing and sampling of others' music, and because such remixes are typically performed publicly, if our content license agreements do not grant us or our users sufficient use rights, or if we facilitate the performance of music for which we do not have a license, our supply of such content on Beatport could expose us to claims of copyright infringement. We may not be able to successfully defend against such claims, which may result in a limitation on our ability to use the intellectual property subject to these claims and also might require us to enter into settlement or license agreements, pay costly damage awards or face an injunction prohibiting us from using the affected intellectual property in connection with our services.
In addition, litigation may be necessary in the future to enforce our intellectual property rights, protect trade secrets or determine the validity and scope of proprietary rights claimed by others. Any litigation of this nature, regardless of outcome or merit, could result in substantial costs and diversion of management and technical resources, any of which could adversely affect our business, financial condition and results of operations. Patent litigation tends to be particularly protracted and expensive.
Moreover, we use open source software in connection with Beatport. Some open source software licenses require users who distribute open source software as part of their own software product to publicly disclose all or part of the source code to such software product or make available any derivative works of the open source code on unfavorable terms or at no cost. While we have assessed the use of open source software in Beatport to attempt to ensure that we have not used open source software in a manner that would require us to disclose the source code to the related technology, use requiring such disclosure could inadvertently occur and any requirement to disclose our proprietary source code could be harmful to Beatport.
Regulatory and business practice developments relating to personal information of our customers and fans and/or failure to adequately protect the personal information of our customers and fans may adversely affect our business.
Our business requires us to use and store customer and fan personally identifiable information. This may include, among other information, names, addresses, phone numbers, email addresses, contact preferences, and payment account information. We are in the process of evaluating the information collected in our business to understand if we can aggregate and reuse the contact information to inform these individuals of upcoming events, offerings and other products and services that we believe enhance the fan experience. Data protection laws and regulation may impair our ability to use these data in such ways, as certain uses may be prohibited. The use of such customer information is a significant part of our growth strategy in the future. The collection, storage and use of customer information is subject to regulation in many jurisdictions, including the United States and the European Union, and this regulation is becoming more prevalent and stringent. Further, there is a risk that data protection regulators may seek jurisdiction over our activities even in locations in which we do not have an operating entity. This may arise in a number of ways, either because we are conducting direct marketing activities in a particular jurisdiction and the local laws apply to and are enforceable against us, or because one of our databases is controlling the processing of information within that jurisdiction. We are developing but have not yet finalized a comprehensive policy aimed at ensuring adequate protection of our customers' and fans' personal information and compliance with applicable law. There is a risk that we will be unable to successfully adopt and implement this policy, which may give rise to liabilities or increased costs. In addition, we could face liability if the third parties to which we grant access to our customer data were to misuse or expose it. Our current privacy policy and related practices concerning the use and disclosure of data are posted on our websites. Any failure by us or other parties with whom we do business to comply with our posted privacy policy or with other federal,
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state or international privacy-related or data protection laws and regulations could result in proceedings against us by governmental entities or others.
In some countries, the use of cookies and other information placed on users' internet browsers or users' computing devices is currently regulated, regardless of the information contained within or referred to by the cookie. Specifically, in the European Union, this is now subject to national laws being introduced pursuant to the amended Directive 2002/58 on Privacy and Electronic Communications. The effect of these measures may require users to provide explicit consent to the use of cookies. The laws being introduced pursuant to this measure are not finalized in every European Member State, and we have not determined what effect this could have on our business when we place the cookie on the user's computer or when a third party does so. The effect may be to limit the amount of information we receive in relation to each use of the service and/or to limit our ability to link this information to a unique identity, which could adversely affect our business and financial condition.
In the United States, the Federal Trade Commission ("FTC") is starting to exercise greater authority over how online consumer data is collected and maintained by businesses. Prompted by the FTC's recommendation regarding online tracking, a number of federal legislative proposals have been introduced that would allow users to opt out of online monitoring. A number of states have passed similar legislation and some states are becoming more active in enforcing these laws to protect consumers.
The laws in this area are complex and developing rapidly. For instance, we are aware that there is a proposal for a new general law within Europe, the General Data Protection Regulation, which is likely to be introduced within three years. The proposed regulation is still under discussion, and we have not yet assessed the full effect of these proposals if enacted into law in their current form. There is a risk that internet browsers, operating systems or other applications might be modified by their developers in response to proposed legislation to limit or block our ability to access information about our users. It is possible that existing or future regulations could make it difficult or impossible for us to collect or use our customer information in the way we would like which would impede our growth strategy and potentially reduce the revenue we hope to generate. It is also possible that we could be found to have violated regulations relating to customer data, which could result in us being sanctioned, suffering fines or other punishment, being restricted in our activities and/or suffering reputational harm. Any of the foregoing could adversely affect our business and financial results.
We may be subject to disruptions, failures or cyber-attacks in our information technology systems and network infrastructures that could have a material adverse effect on us.
We maintain and rely extensively on information technology systems and network infrastructures for the effective operation of our businesses. Techniques used to gain unauthorized access to private networks are constantly evolving, and we may be unable to anticipate or prevent unauthorized access to data pertaining to our customers, including credit card and debit card information and other personally identifiable information. Like all Internet services, our festival websites and the Beatport and Paylogic services, which are supported by our own systems and those of third-party vendors, are vulnerable to computer viruses, Internet worms, break-ins, phishing attacks, attempts to overload servers with denial-of-service or other attacks and similar disruptions from unauthorized use of our and third-party vendor computer systems, any of which could lead to system interruptions, delays or shutdowns, causing loss of critical data or the unauthorized access to personally identifiable information. If an actual or perceived breach of security occurs to our systems or a vendor's systems, we may face civil liability and public perception of our security measures could be diminished, either of which would negatively affect our ability to attract customers, which in turn would harm our efforts to attract and retain advertisers. In addition, security breaches or the inability to protect our data could lead to increased incidents of
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ticketing fraud and counterfeit tickets. We also would be required to expend significant resources to mitigate the breach of security and to address related matters.
Further, a disruption, infiltration or failure of our information technology systems or any of our data centers including the systems and data centers of our third-party vendors as a result of software or hardware malfunctions, computer viruses, cyber-attacks, employee theft or misuse, power disruptions, natural disasters or accidents could cause breaches of data security and loss of critical data, which in turn could materially adversely affect our business. In addition, our ability to integrate, expand, and update our information technology infrastructure is important for our contemplated growth, and any failure to do so could have an adverse effect on our business.
We cannot fully control the actions of third parties who may have access to the customer data we collect and the customer data collected by our third-party vendors. The ongoing integration of our digital services with applications provided by third parties represents a significant growth opportunity for us, but we may not be able to control such third parties' use of customer data. We may be unable to monitor or control such third parties and the third-parties having access to our other websites in their compliance with the terms of our privacy policies, terms of use, and other applicable contracts, and we may be unable to prevent unauthorized access to, or use or disclosure of, customer information. Any such misuse could hinder or prevent our efforts with respect to growth opportunities and could expose us to liability or otherwise adversely affect our business. In addition, these third parties may become the victim of security breaches or have practices that may result in a breach, and we could be responsible for those third party acts or failures to act.
Any failure, or perceived failure, by us or the prior owners of acquired businesses to maintain the security of data relating to our customers and employees, to comply with our posted privacy policies, our predecessors' posted policies, laws and regulations, rules of self-regulatory organizations, industry standards and contractual provisions to which we or they may be bound, could result in the loss of confidence in us, or result in actions against us by governmental entities or others, all of which could result in litigation and financial losses, and could potentially cause us to lose customers, advertisers, revenue and employees.
We depend on our ability to lease venues for our events, and if we are unable to do so on acceptable terms, or at all, our results of operations could be adversely affected.
Our business requires access to venues to generate revenue from live EMC events. For these events, we generally lease and operate a number of venues or locations under various agreements which include leases or licenses with third-parties or booking agreements, which are agreements where we contract to book the events at a venue or location for a specific period of time. Some of the leases may be between us and governmental entities. Our long-term success will depend in part on the availability of venues, our ability to lease these venues and our ability to enter into booking agreements upon their expiration. As many of these agreements are with third-parties over whom we have little or no control, including the government, we may be unable to renew these agreements or enter into new agreements on acceptable terms or at all, and may be unable to obtain favorable agreements with venues. We may continue to expand our operations through the development of live music venues and the expansion of existing live music venues, which poses a number of risks, including:
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We depend upon unionized labor for the provision of some services at our events and any work stoppages or labor disturbances could disrupt our business.
Certain of the employees at some of the venues we manage and other independent contractors hired to assist at our festivals and events may be subject to collective bargaining agreements. The applicable union agreements typically expire and may require negotiation in the ordinary course of business. Upon the expiration of any such collective bargaining agreements, however, our partners may be unable to negotiate new collective bargaining agreements on favorable terms, and our business operations may be interrupted as a result of labor disputes or difficulties and delays in the process of renegotiating such collective bargaining agreements. In addition, our business operations at one or more of our venues may also be interrupted as a result of labor disputes by outside unions attempting to unionize a venue even though there is not unionized labor at that venue currently. A work stoppage at one or more of our owned and/or operated venues or at our promoted events could have a material adverse effect on our business, results of operations, and financial condition. We cannot predict the effect that a potential work stoppage would have on our business.
Our limited operating history makes it difficult to evaluate our current business and future prospects, and we may be unsuccessful in executing our business model.
We began operations as SFX EDM Holdings Corporation on July 7, 2011, and were incorporated as SFX Entertainment, Inc. in Delaware in June 2012. We recently consummated our IPO on October 15, 2013. The likelihood of our success must be considered in light of the problems, expenses, difficulties, complications and delays frequently encountered by a developing company starting a new business enterprise, the difficulties that may be encountered with integrating acquired companies and the highly competitive environment in which we operate. Because we have a limited operating history, we cannot provide assurance that our business will be profitable or that we will ever generate sufficient revenue to fully meet our expenses, support our anticipated activities and pay interest and principal on our debt.
We have had a history of losses, and we may be unable to achieve or sustain profitability.
We have never been profitable. We experienced net losses attributable to SFX of $0.1 million for the period from inception to December 31, 2011, $16.2 million for the year ended December 31, 2012 and $111.9 million for the year ended December 31, 2013. We expect we will continue to incur net losses in 2014 and significant future expenses as we develop and expand our business. In addition, as a public company with international operations, we incur additional significant legal, accounting and other expenses that we did not incur as a private company and that are not reflected in our existing financial statements, as we consummated our IPO on October 15, 2013. These increased expenditures will make it harder for us to achieve and maintain future profitability. We may incur significant losses in the future for a number of reasons, including unsuccessful acquisitions, costs of integrating new businesses, expenses, difficulties, complications, delays and other unknown events. Accordingly, we may not be able to achieve or sustain profitability.
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Some of our stockholders have repurchase rights that require us to purchase their shares of common stock under certain conditions, and our financial position would be adversely impacted if those stockholders exercise those rights.
As described below, as of March 31, 2014, some of our stockholders have repurchase rights with respect to their shares.
Holder(s) of Redemption
|
Number of Shares |
Price | Relevant Date and Trigger Events | ||||
---|---|---|---|---|---|---|---|
Entertainment Events Funding LLC |
4,000,000 |
$2.50/share |
We granted Entertainment Events Funding LLC "most favored nation" rights under its subscription agreement, which required that (until immediately prior to our IPO), we provide to them the same right or benefit we provided to a third-party purchasing our common stock. Accordingly, we may be obligated to repurchase this investor's shares at their issuance price on substantially similar terms as other investors who purchased shares prior to our IPO. |
||||
Former equity holders of Beatport |
4,930,000 |
$5.00/share |
On or after March 15, 2014, the former equity holders of Beatport will have the right to require us to repurchase from them the shares of our common stock issued as consideration in the merger. This right will not apply to any shares that have been registered in a resale registration. |
||||
Totem |
1,105,846 |
$13.00/share |
We granted Totem the right, during the 30 calendar day period beginning on October 28, 2015, to require us to repurchase at our IPO price per share of $13.00 all of the shares of our common stock that we issued to Totem as consideration under the asset contribution agreement. |
In addition, we granted to the former owners of MMG a put right exercisable at any time between January 1, 2015 and June 30, 2015 to require us to acquire their 20% non-dilutable interest in our subsidiary, SFX-Nightlife Operating LLC. The consideration to be paid by us upon exercise of the put right would be equal to 20% of the product of SFX-Nightlife Operating LLC's EBITDA for the 2014 fiscal year multiplied by six.
If any of these holders of our shares of common stock exercise their repurchase rights, we may not have sufficient cash reserves to pay the amount due. Even if we are able to pay these amounts, the payment may impede our ability to fund other aspects of our business, including potential acquisitions, capital expenditures, other investments or our working capital requirements, which would harm our operating results and the price of our common stock and notes.
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We may be required to make earnout payments to the sellers of businesses that we have acquired if those businesses achieve earnout thresholds and, as a result, our financial position may be adversely impacted if we make such payments.
In connection with certain of our completed acquisitions, we may be required to make earnout payments in the form of cash and/or shares of our common stock to the sellers of certain acquired businesses if those businesses achieve earnout thresholds and even if the former owners are not employed by us, as described below:
If any of these earnout thresholds are met, we may not have sufficient cash reserves to pay the cash amount due to the sellers. If we are able to pay these cash amounts, the payment may impede our ability to fund other aspects of our business, including potential acquisitions, capital expenditures, other investments or our working capital requirements, which would harm our operating results and the price of our common stock and notes.
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Our Chief Executive Officer and Chairman has the ability to substantially influence, if not control, all matters submitted to stockholders for approval.
Our Chief Executive Officer and Chairman of our board of directors, Robert F.X. Sillerman, beneficially owns shares of our common stock, in the aggregate, representing approximately 42.8% of our outstanding capital stock. As a result, he has the ability to substantially influence, if not control, all matters submitted to our stockholders for approval, as well as our management and affairs.
This concentration of voting power could delay or prevent an acquisition of our Company on terms that other stockholders may desire.
We are an emerging growth company within the meaning of the Securities Act, and as such, we will take advantage of certain modified disclosure requirements.
As a public company, we are subject to the reporting requirements of the Exchange Act, the Sarbanes-Oxley Act of 2002 (the "Sarbanes-Oxley Act"), the Dodd-Frank Wall Street Reform and Consumer Protection Act (the "Dodd-Frank Act"), the listing requirements of NASDAQ and other applicable securities rules and regulations. The Exchange Act requires, among other things, that we file annual, quarterly, and current reports with respect to our business and operating results. The Sarbanes-Oxley Act requires, among other things, that we maintain effective disclosure controls and procedures and internal control over financial reporting.
However, we are an "emerging growth company" within the meaning of the rules under the Securities Act. For as long as we remain an emerging growth company, we may take advantage of certain exemptions from various reporting requirements that are applicable to public companies generally, including not being required to comply with the independent auditor attestation requirements of Section 404 of the Sarbanes-Oxley Act ("Section 404"), reduced disclosure obligations regarding executive compensation in our periodic reports and proxy statements, and exemptions from the requirements of holding a nonbinding advisory vote on executive compensation or any golden parachute payments not previously approved. We intend to take advantage of these reporting exemptions until we are no longer an emerging growth company.
We would cease to be an emerging growth company upon the earliest of (1) the first fiscal year following the fifth anniversary of our IPO, (2) the first fiscal year after our annual gross revenue exceeds $1 billion, (3) the date on which we have, during the previous three-year period, issued more than $1 billion in non-convertible debt securities or (4) as of the end of any fiscal year in which the market value of our common stock held by non-affiliates filiates exceeds $700 million as of the end of the second quarter of that fiscal year.
In addition, Section 107(b) of the Jumpstart Our Business Startups Act (the "JOBS Act") also provides that an emerging growth company can take advantage of the extended transition period provided in Section 7(a)(2)(B) of the Securities Act for complying with new or revised accounting standards. In other words, an emerging growth company can delay the adoption of certain accounting standards until those standards would otherwise apply to private companies. We have elected to take advantage of this extended transition period. Our financial statements may therefore not be comparable to those of companies that comply with such new or revised accounting standards as they become applicable to public companies.
Our bylaws designate the state and federal courts in Delaware as the sole and exclusive forum for certain types of actions and proceedings that may be initiated by our stockholders, which could limit our stockholders' ability to obtain a favorable judicial forum for disputes with us or our directors, officers or other employees.
Our bylaws provide, that, with certain limited exceptions, unless we consent in writing to the selection of an alternative forum, the state and federal courts located in the State of Delaware will be
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the sole and exclusive forum for (i) any derivative action or proceeding brought on our behalf, (ii) any action asserting a claim of breach of fiduciary duty owed by any director, officer or other employee of our company owed to us or our stockholders, (iii) any action asserting a claim against us arising pursuant to any provision of the Delaware General Corporation Law, our Certificate of Incorporation or bylaws, (iv) any action to interpret, apply, enforce or determine the validity of our certificate of incorporation or bylaws or (v) any action asserting a claim governed by the internal affairs doctrine. Any person or entity purchasing or otherwise acquiring any interest in shares of our capital stock is deemed to have received notice of and consented to the foregoing provisions. This choice of forum provision may limit a stockholder's ability to bring a claim in a judicial forum that it believes to be favorable for disputes with us or our directors, officers or other employees, which may discourage such lawsuits against us and our directors, officers and employees. Alternatively, if a court were to find this choice of forum provision inapplicable to, or unenforceable in respect of, one or more of the specified types of actions or proceedings, we may incur additional costs associated with resolving such matters in other jurisdictions, which could adversely affect our business, financial condition or results of operations.
If securities or industry analysts publish inaccurate or unfavorable research about our business, our stock price could decline.
The trading market for our common stock depends in part on the research and reports that securities or industry analysts publish about us or our business. If one or more of the analysts who cover us downgrade our common stock or publish inaccurate or unfavorable research about our business, our common stock price would likely decline.
The large number of shares eligible for public sale in the near future could depress the market price of our common stock.
As of December 31, 2013, we had 88,254,237 shares of common stock outstanding. Of these shares, the 20,000,000 shares of common stock sold in our initial public offering are freely tradable in the United States, except for any shares purchased by our "affiliates" as defined in Rule 144 under the Securities Act. The remaining 68,254,237 shares of common stock are "restricted securities" within the meaning of the federal securities laws. In connection with our initial public offering, holders of substantially all of these restricted securities agreed with the underwriters, subject to certain exceptions, not to dispose of or hedge any of their common stock during the 180-day period extending through April 6, 2014, except with the prior written consent of the representatives of the underwriters. After the expiration of the applicable lock-up periods, these restricted shares may be sold in the public market in the United States, subject to other contractual restrictions and prior registration in the United States, if required, or reliance upon an exemption from United States registration, including, in the case of shares held by affiliates or control persons, compliance with the volume restrictions of Rule 144.
Sales of substantial amounts of our common stock in the public market, or the perception that these sales could occur, could adversely affect the price of our common stock, impair our ability to raise capital through the sale of additional shares and make it difficult for us to raise funds through securities offerings in the future.
In the future, we may also issue our securities in connection with investments or acquisitions. The amount of shares of our common stock issued in connection with an investment or acquisition could constitute a material portion of our then- outstanding shares of our common stock.
We do not intend to pay dividends for the foreseeable future.
We have never declared or paid cash dividends on our capital stock. We currently intend to retain any future earnings to finance the operation and expansion of our business, and we do not expect to
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declare or pay any dividends in the foreseeable future. As a result, our stockholders may only receive a return on investment in our common stock if the market price of our common stock increases.
We previously identified material weaknesses in our internal controls over financial reporting.
In connection with the audit of our consolidated financial statements as of and for the year ended December 31, 2012, we identified certain deficiencies relating to our internal control over financial reporting that constituted a material weakness under standards established by the Public Company Accounting Oversight Board ("PCAOB"). We have taken a number of actions to correct these material weaknesses including, but not limited to, adding experienced accounting and financial personnel, retaining third party consultants to review our internal controls and recommend improvements, implementing improvements to our closing procedures and consolidation processes, and improving our accounting software as it relates to accounts payable. As of the year ended December 31, 2013, we have remediated the material weaknesses. Other material weaknesses may be identified in the future. If we are unable to correct deficiencies in internal controls in a timely manner, our ability to record, process, summarize and report financial information accurately and within the time periods specified in the rules and forms of the SEC will be adversely affected. This failure could negatively affect the market price and trading liquidity of our common stock, cause investors to lose confidence in our reported financial information, subject us to civil and criminal investigations and penalties, and generally materially and adversely impact our business and financial condition.
In addition, we and the auditors, prior to our acquisitions, for LIC, DDP, MMG, Made and Totem have previously identified material weaknesses in the internal controls of each of their businesses for periods prior to the acquisition of each business that relate to the proper application of accrual based accounting under GAAP. As of the year ended December 31, 2013, we have remediated these material weaknesses. Further, future target companies may also have material weakness in internal controls at the time we acquire them and it is possible that our remediation efforts will be unsuccessful.
If we are unable to implement and maintain effective internal control over financial reporting, investors may lose confidence in the accuracy and completeness of our financial reports, which could adversely affect the market price of our common stock.
We are required to maintain internal controls over financial reporting and to report any material weaknesses in such internal controls. As a public company, we will eventually be required to furnish a report by management on the effectiveness of our internal control over financial reporting pursuant to Section 404. We are in the process of designing, implementing and testing the internal control over financial reporting required to comply with this obligation, which process is time consuming, costly and complicated. If in the future we identify material weaknesses in our internal control over financial reporting, including at some of our acquired companies, if we are unable to comply with the requirements of Section 404 in a timely manner or assert that our internal control over financial reporting is effective, or if our independent registered public accounting firm is unable to express an opinion as to the effectiveness of our internal control over financial reporting, investors may lose confidence in the accuracy and completeness of our financial reports and the market price of our common stock and our notes could be negatively affected, and we could become subject to investigations by the stock exchange on which our securities are listed, the SEC, or other regulatory authorities, which could require additional financial and management resources.
We incur increased costs as a result of operating as a public company, and will incur even greater costs once we cease to be an emerging growth company, and our management must devote substantial time to new compliance initiatives.
As a public reporting company, we incur significant legal, accounting, and other expenses that we did not incur as a private company. In addition, the Sarbanes-Oxley Act and rules subsequently
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implemented by the SEC and NASDAQ, on which our common stock is listed, have imposed various requirements on public companies, including establishment and maintenance of effective disclosure and financial controls and corporate governance practices. Our management and other personnel devote a substantial amount of time to these compliance initiatives. Moreover, these rules and regulations increase our legal and financial compliance costs and make some activities more time consuming and costly. For example, these rules and regulations make it more difficult and more expensive for us to obtain director and officer liability insurance, and in the future we may be required to accept reduced policy limits and coverage or incur substantial costs to maintain the same or similar coverage.
Pursuant to Section 404, we will be required to furnish a report by our management on our internal control over financial reporting, including once we cease to be an emerging growth company, an attestation report on internal control over financial reporting issued by our independent registered public accounting firm. To achieve compliance with Section 404 within the prescribed time period, we will be engaged in a process to document and evaluate our internal control over financial reporting, which is both costly and challenging. In this regard, we will need to continue to dedicate internal resources, potentially engage outside consultants and adopt a detailed work plan to assess and document the adequacy of internal control over financial reporting, continue steps to improve control processes as appropriate, validate through testing that controls are functioning as documented and implement a continuous reporting and improvement process for internal control over financial reporting. Despite our efforts, there is a risk that neither we nor, if and when required, our independent registered public accounting firm will be able to conclude within the prescribed timeframe that our internal control over financial reporting is effective as required by Section 404. This could result in an adverse reaction in the financial markets due to a loss of confidence in the reliability of our financial statements.
A number of other companies are seeking to make acquisitions in our industry, which may make our acquisition strategy more difficult or expensive to pursue.
The emergence and growth of EMC has brought increased media attention, and a number of companies and investors have begun making acquisitions of EMC businesses or announced their intention to do so. We compete with many of these companies, and certain of them have greater financial resources than we do for pursuing and consummating acquisitions and to developing and integrating acquired businesses. Our strategy relies on our ability to consummate a substantial number of acquisitions to foster the growth of our core business and to establish ourselves in geographic regions and related businesses in which we do not currently operate. The increased focus on acquisitions of EMC companies may impede our ability to acquire these companies because they choose another acquirer. It could also increase the price that we must pay for these companies. Either of these outcomes could reduce our growth, harm our business and prevent us from achieving our strategic goals.
We may be unsuccessful in identifying suitable acquisition candidates which may negatively impact our competitive position and our growth strategy.
In addition to organic growth, our future growth will be driven by our selective acquisition of additional businesses focused on the EMC community, our competitors and complementary businesses. Our growth through acquisitions, to date, has consisted of fourteen acquisitions, and we are in discussions to acquire additional businesses. We may be unable to identify other suitable targets for future acquisition or acquire businesses at favorable prices, which would negatively impact our growth strategy. In addition, in the course of negotiating potential acquisitions, we typically enter into term sheets, letters of intent, purchase options or other similar agreements that provide the counterparties with advances and termination or break-up fees in the event that we do not ultimately consummate any such acquisition. In the aggregate, the payment of any such termination or break-up fees may
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negatively impact our financial condition. We may not be able to execute our growth strategy through organic expansion, and if we are unable to identify and successfully acquire new businesses complementary to ours, we may not be able to expand into new geographic markets, develop our online properties or achieve profitability.
The due diligence process that we undertake in connection with acquisitions may not reveal all facts that may be relevant in connection with an investment.
Before making acquisitions and other investments, we conduct due diligence of the target company that we deem reasonable and appropriate based on the facts and circumstances applicable to each acquisition. The objective of the due diligence process is to assess the investment opportunities based on the facts and circumstances surrounding an investment or acquisition. When conducting due diligence, we may be required to evaluate important and complex business, financial, tax, accounting, environmental and legal issues. The due diligence process may at times be subjective with respect to newly-or ganized companies for which only limited information is available. Accordingly, we cannot be certain that the due diligence investigation that we conduct with respect to any investment or acquisition opportunity will reveal or highlight all relevant facts that may be necessary or helpful in evaluating such investment opportunity. For example, instances of fraud, accounting irregularities and other deceptive practices can be difficult to detect. Executive officers, directors and employees may be named as defendants in litigation involving a company we are acquiring or have acquired. Even if we conduct extensive due diligence on a particular investment or acquisition, we may fail to uncover all material issues relating to such investment, including issues related to the controls and procedures of a particular target or the full scope of its contractual arrangements. We rely on our due diligence to identify potential liabilities in the businesses we acquire, including such things as potential or actual lawsuits, contractual obligations or liabilities imposed by government regulation. However, our due diligence process may not uncover these liabilities, and where we identify a potential liability, we may incorrectly believe that we can consummate the acquisition without subjecting ourselves to that liability. For certain of our acquired businesses, we have acquired only the assets of the business and not assumed the liabilities. Nonetheless, it is possible that we could still be subject to litigation in respect of such acquired businesses. If our due diligence fails to identify issues specific to an investment or acquisition, we may obtain a lower return from that transaction than the investment would return or otherwise subject ourselves to unexpected liabilities. We may also be forced to write-down or write-off assets, restructure our operations or incur impairment or other charges that could result in our reporting losses. Charges of this nature could contribute to negative market perceptions about us.
We may face difficulty in integrating the operations of the businesses we have acquired and may acquire in the future.
Acquisitions have been and will continue to be an important component of our growth strategy; however, we will need to integrate these acquired businesses successfully in order for our growth strategy to succeed and for us to become profitable. We will implement, and the management teams of the acquired businesses will adopt, our policies, procedures and best practices, and cooperate with each other in scheduling events, booking talent and in other aspects of their operations. We may face difficulty with the integration of the businesses we acquire, such as coordinating geographically dispersed organizations, integrating personnel with disparate business backgrounds and combining different corporate cultures. Many of the businesses we acquire are not profitable and do not have sophisticated financial reporting systems in place, and we are relying on their adoption of our best practices to operate their businesses more efficiently to achieve and maintain profitability. However, we may fail in implementing our policies and procedures, or the policies and procedures may not be effective or provide the results we anticipate for a particular business. Further, we will be relying on these policies and procedures in preparing our financial and other reports as a public company, so any failure of acquired businesses to properly adopt these policies and procedures could impair our public
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reporting. Management of the businesses we acquire may not have the operational or business expertise that we require to successfully implement our policies, procedures and best practices.
A part of our growth strategy involves expanding our festivals and events into new markets. As a result, festivals and events from different businesses will be operating in similar geographic areas and/or at similar times of year, often for the first time, and these businesses will need to coordinate their strategies to avoid competing with each other for attendees or talent. If our acquired companies fail to integrate in these important ways, or we fail to adequately understand the business operations of our acquired companies, our growth and financial results will suffer.
In addition, our growth strategy also includes the development in 2014 of online properties that we intend to integrate across all of our acquired businesses. This will require, among other things, the integration of the individual websites and databases of each business we have or will acquire. This will be a complex undertaking that may prove more difficult, expensive and time consuming than we expect. Even if we are able to achieve this integration, it may not achieve the benefits we anticipate. If we fail to do this properly and in a timely manner, it could harm our revenue and relationship with our fans.
We typically retain the management of the businesses we acquire and rely on them to continue running their businesses, which leaves us vulnerable in the event they leave our Company.
We seek to acquire businesses that have strong management teams that will continue to run the business after the acquisition. We often rely on these individuals to conduct the day-to-day operations of and pursue the growth of these acquired businesses. Although we typically seek to sign employment agreements with the managers of acquired businesses, it remains possible that these individuals will leave our organization. This would harm the prospects of the businesses they manage, potentially causing us to lose money on our investment and harming our growth and financial results.
Any current or future joint ventures or minority investments will be subject to certain risks inherent in these investments.
Investments in joint ventures and minority investments involve certain unique risks, including, among others, risks relating to:
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Federal and state taxation of business combinations may discourage business combinations.
Federal and state tax consequences are major considerations in any acquisition or business combination we may undertake. Currently, such transactions may be structured to result in tax-free treatment to both companies, pursuant to various federal and state tax provisions. We intend to structure any business combination to minimize the federal and state tax consequences to both us and the target entity. An acquisition or combination could result in the imposition of both federal and state taxes, which may have an adverse effect on us and our target company, reduce the future value of the shares and potentially discourage a business combination.
Risks Related to our 9.625% Notes
Our substantial indebtedness and lease obligations could impair our financial condition and our ability to fulfill our debt obligations.
We have a substantial amount of indebtedness and lease obligations. The level of our indebtedness, our lease obligations and our equity repurchase obligations could have important consequences. For example, they could:
The occurrence of any of these events could have a material adverse effect on our ability to satisfy our debt obligations, including under our 9.625% notes and our new revolving credit facility. If we are unable to meet our debt service and lease payment obligations, we could be forced to restructure or refinance our indebtedness, seek additional equity capital or sell assets. We may be unable to obtain financing or sell assets on satisfactory terms, or at all.
In addition to our substantial indebtedness, we have granted certain repurchase rights to certain holders of our common stock. For a summary of these repurchase rights, see "Some of our stockholders have repurchase rights that require us to purchase their shares of common stock under certain conditions, and our financial position would be adversely impacted if those stockholders exercise those rights" elsewhere in this Form 10-K.
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We may incur substantial additional indebtedness.
Subject to the restrictions in the indenture governing our 9.625% notes and our new revolving credit facility, we and our subsidiaries may be able to incur substantial additional debt in the future. Although the indenture governing our 9.625% notes and our new revolving credit facility contain restrictions on the incurrence of additional debt, these restrictions are subject to a number of significant qualifications and exceptions and debt incurred in compliance with these restrictions could be substantial. To the extent new debt is added to our current debt levels, the risks associated with our already substantial indebtedness would increase.
We may not be able to generate sufficient cash to service all of our indebtedness and meet our other cash needs, and may be forced to take other actions to satisfy our obligations under our indebtedness, which may not be successful.
Our ability to make scheduled payments on, or repay or refinance our debt obligations and to fund our operations depends on our financial condition and operating performance, which is subject to prevailing economic and competitive conditions and to certain financial, competitive, regulatory, business and other factors beyond our control. We cannot provide assurance that our business will generate sufficient cash flow from operations or that future sources of capital will be available to us in an amount sufficient to enable us to serve our indebtedness or to fund our other liquidity needs.
If our cash flows and capital resources are insufficient to fund our debt obligations and fund our operations, we may be forced to reduce or delay investments and capital expenditures, dispose of material assets or operations, seek additional capital or restructure or refinance our indebtedness, including the 9.625% notes. Our ability to restructure or refinance our debt will depend on the condition of the capital markets and our financial condition at such time. Any refinancing of our debt could be at higher interest rates and may require us to comply with more onerous covenants, which could further restrict our business operations. Additionally, we may not be able to consummate asset dispositions or obtain the proceeds that we expect to realize from them, and any proceeds received may not be adequate to meet any debt service obligations then due. The terms of the indenture governing our 9.625% notes, the new revolving credit facility and any future debt instruments may restrict us from adopting some of these alternatives. In addition, any failure to make payments of interest and principal on our outstanding indebtedness on a timely basis would likely result in a reduction of our credit rating, which could harm our ability to incur additional indebtedness. Our inability to generate sufficient cash flows to satisfy our debt obligations, or to refinance our indebtedness on commercially reasonable terms, would materially and adversely affect our financial condition and results of operations and our ability to satisfy our obligations under the notes.
The agreements governing our debt, including the indenture governing our 9.625% notes and our new revolving credit facility, contain various covenants that impose restrictions on us that may affect our ability to operate our business.
The indenture governing our 9.625% notes and our new revolving credit facility impose operating and financial restrictions on our activities. These restrictions limit our ability, among other things, to:
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After the initial borrowing thereunder, our new revolving credit facility also requires us to maintain specified financial ratios. Any or all of these covenants could have a material adverse effect on our business by limiting our ability to take advantage of financings, mergers and acquisitions, dispositions and other corporate opportunities or to fund our operations. Any future debt could also contain financial and other covenants more restrictive than those imposed under our new revolving credit facility and the indenture governing our 9.625% notes.
Various risks, uncertainties and events beyond our control could affect our ability to comply with these covenants and maintain these financial tests. Failure to comply with any of the covenants in our existing or future financing agreements could result in a default under those agreements and under other agreements containing cross-default and cross-acceleration provisions, which if not cured or waived, could have a material adverse effect on our business, financial condition and results of operations. A default would permit lenders to accelerate the maturity of the debt under these agreements and to foreclose upon any of the collateral securing the debt. Under these circumstances, we might not have sufficient funds or other resources to satisfy all of our debt obligations. In addition, the limitations imposed by financing agreements on our ability to incur additional debt and to take other actions might significantly impair our ability to obtain other financing. We cannot provide assurance that we will be granted waivers or amendments to these agreements if for any reason we are unable to comply with these agreements or that we will be able to refinance our debt on terms acceptable to us, or at all.
ITEM 1B. UNRESOLVED STAFF COMMENTS
None.
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The following table lists material properties that we currently lease by location, type of space, size of occupation and expiration of lease term. We believe that our existing facilities are adequate at this time.
Location
|
Type of Space | Approximate Size of Occupation (in square feet) |
Current Lease Term Expiration |
||||
---|---|---|---|---|---|---|---|
New York, NY(1) |
Office | 16,400 | February 2015 | ||||
Miami, FL |
Office | 3,858 | March 2015 | ||||
Denver, CO |
Office | 14,929 | May 2015 | ||||
Philadelphia, PA |
Office | 2,318 | September 2015 | ||||
Miami Beach, FL |
Office | 1,404 | January 2016 | ||||
Mulheim-Karlich, Germany |
Office | 5,381 | December 2015 | ||||
Melbourne, Australia |
Office | 4,844 | June 2016 | ||||
Charlotte, NC |
Office | 1,701 | January 2016 | ||||
Amsterdam, Netherlands |
Office | 18,729 | December 2015 | ||||
Groningen, Netherlands |
Office | 18,072 | January 2018 | ||||
Amsterdam, Netherlands |
Office | N/A | June 2016 | ||||
Amsterdam, Netherlands |
Office | 6,727 | April 2018 | ||||
New York, NY |
Office | 4,475 | September 2014 | ||||
New York, NY |
Office | 9,500 | September 2014 | ||||
Atlanta, GA |
Warehouse | 32,925 | July 2016 |
We lease additional facilities, including office, storage and event spaces, in the United States and internationally. Our leases are for varying terms ranging from monthly to multi-year and many provide for renewal options.
We are subject to various legal proceedings and claims discussed below as well as other legal proceedings and claims that arise in the ordinary course of business. The outcome of the legal proceedings and claims brought against us is subject to significant uncertainty. Therefore, if one or more legal matters were resolved against us in a reporting period for amounts in excess of management's expectations, our consolidated financial statements for that reporting period could be materially adversely affected. Management does not believe that the outcome of any such existing claims will have a material adverse affect on us.
Pferdmenges
On June 12, 2012, a lawsuit was commenced against Made and its founders, Mike Bindra, Laura De Palma, and Sala Corporation by Henri Pferdmenges and NRW, Inc. in the Circuit Court of the Eleventh Judicial Circuit in and for Miami Dade County, Florida. The lawsuit, as amended on September 17, 2012, alleges claims of (i) breach of joint venture agreement, (ii) breach of fiduciary duty, (iii) declaratory action regarding certain rights related to the 2011, 2012 and future Electric Zoo Festivals and certain rights to intellectual property associated with the Electric Zoo Festival, (iv) unjust enrichment, (v) promissory estoppel, (vi) contract implied in fact and (vii) fraud in the inducement with respect to the ownership of the Electric Zoo Festival. On July 11, 2013, after removal to the United States District Court for the Southern District and transfer to the United States District Court for the Southern District of New York, the Court granted defendants' motion to dismiss in full and the court dismissed all of plaintiffs' claims against all of the defendants. However, the plaintiffs were
39
subsequently permitted to make amendments to their complaint regarding their breach of contract, alter ego and fraudulent conveyance claims. Pursuant to the Third Amended Complaint, the plaintiffs are seeking damages in excess of $10.0 million, plus interest and costs. On January 8, 2014, defendants filed their motion to dismiss the Third Amended Complaint for failure to state a claim and on February 26, 2014, the plaintiffs filed their opposition to such motion. No prediction can be made as to the outcome of this action at this time.
Moreno
On February 5, 2014, Paolo Moreno, Lawrence Vavra and Gabriel Moreno filed suit against SFX, and, in their individual capacities, Mr. Sillerman and Mr. Finkel, in the United Sates District Court for the Central District of California. The complaint alleged, among other things, causes of action for breach of joint venture/partnership agreement, breach of implied joint venture/partnership agreement, breach of fiduciary duty owed to joint ventures/partners, constructive fraud, breach of contract, breach of implied contract, promissory estoppel, fraudulent inducement, promissory fraud, unfair competition, quantum meruit, breach of fiduciary duty owed to principals and interference with prospective economic advantage. The plaintiffs seek over $100.0 million in damages, as well as compensatory and punitive damages, and equitable relief. We believe this lawsuit is without merit and intend to vigorously defend against it.
ITEM 4. MINE SAFETY DISCLOSURE
Not applicable.
40
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
Our common stock was listed on the NASDAQ Stock Market under the symbol "SFXE" on October 9, 2013. There were 75 stockholders of record as of March 15, 2014. This figure does not include an estimate of the indeterminate number of beneficial holders whose shares may be held of record by brokerage firms and clearing agencies. The initial public offering price of our common stock on October 9, 2013 was $13.00 per share. The following table sets forth the range of the high and low market prices of our common stock for the period beginning on October 9, 2013 through December 31, 2013, as reported by The Nasdaq Global Select Market:
|
Common Stock Market Price |
||||||
---|---|---|---|---|---|---|---|
2013
|
High | Low | |||||
Fourth quarter |
$ | 13.39 | $ | 7.80 |
Dividends
We have not declared, nor paid, any cash dividends on our common stock since our Company's inception. At this time, we intend to retain our earnings to finance future growth and maintain liquidity. Future cash dividends, if any, will be at the discretion of our board of directors and will depend upon, among other things, our future operations and earnings, capital requirements, general financial condition, contractual and financing restrictions and such other factors as our board of directors may deem relevant.
Recent Sales of Unregistered Securities
On February 4, 2014, we issued and sold $220.0 million aggregate principal amount 9.625% second lien senior secured notes due 2019 (the "9.625% notes") in a private offering exempt from registration under the Securities Act of 1933, as amended pursuant to Rule 144A and Regulation S. We used a portion of the net proceeds to repay the entire amount outstanding under our former $75.0 million first lien term loan facility and pay related fees and expenses, and used a portion of the net proceeds of the offering to fund the purchase price of previously announced acquisitions. The 9.625% notes are second-priority lien senior secured obligations of the Company and are fully and unconditionally guaranteed by the Company's present and future wholly owned domestic subsidiaries that guarantee the indebtedness under our new revolving credit facility, as well as the Company's non-wholly owned domestic subsidiary, SFX-Nightlife Operating, LLC. The 9.625% notes will mature on February 1, 2019 and accrue interest at a rate of 9.625% per annum, which is payable semi-annually in arrears on February 1 and August 1 of each year, commencing on August 1, 2014.
From October 1, 2013 until December 31, 2013, in reliance upon the exemption from registration requirements available under Rule 701 of the Securities Act or Section 4(2) of the Securities Act (or Regulation D promulgated thereunder), we granted (i) stock options to purchase 1,215,450 shares of our common stock to certain of our employees and directors at exercise prices ranging between $8.61 and $13.00 per share and (ii) 233,000 shares of our common stock to an employee.
As previously disclosed in multiple Current Reports on Form 8-K, we issued shares of our common stock as consideration in acquisitions that were consummated between October 1, 2013 and December 31, 2013. Such shares were offered and sold in reliance upon the exemption from registration provided by Section 4(2) under the Securities Act. In addition to the issuances of shares in these prior acquisitions (which were reported on Current Reports on Form 8-K), we issued (i) 50,000 shares on October 21, 2013 in the acquisition of Fame House, LLC and (ii) a warrant to purchase 100,000 shares at an exercise price of $10.00 per share on December 16, 2013 upon entering into the option agreement with Amazing Holding BV to purchase all issued shares of B2S Holding BV not already owned by us.
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ITEM 6. SELECTED FINANCIAL DATA
The following table sets forth the selected historical financial information for SFX Entertainment, Inc. (Successor) and the selected historical financial information for LIC (Predecessor). The historical results of operations for SFX, as Successor, for the year ended December 31, 2011 do not reflect any of the operations of LIC, as Predecessor. The historical results of operations for SFX, as Successor, for the year ended December 31, 2012 reflect the operations of LIC only from the date of SFX's acquisition of LIC on July 31, 2012.
We derived the selected historical consolidated financial data for SFX for the years ended December 31, 2011, 2012, and 2013 from the audited consolidated financial statements. We derived the selected historical consolidated financial data for LIC for the year ended December 31, 2011, as of and for the period from January 1, 2012 and as of July 31, 2012 from the audited consolidated financial statements.
Historical results are not necessarily indicative of the results to be expected for future periods. Acquisitions and financing transactions impact the comparability of the historical consolidated financial data reflected in this schedule of Selected Financial Data.
The summary historical consolidated financial data should be read in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operations" and our consolidated financial statements and the related notes thereto located within Item 8 of part II of this Annual Report on Form 10-K.
|
|
|
SFX Entertainment, Inc. | |||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
|
Life in Color | |||||||||||||||
|
(Successor) | |||||||||||||||
|
(Predecessor) | |||||||||||||||
|
Year ended December 31, | |||||||||||||||
|
Year ended December 31, 2011 |
Seven months ended July 31, 2012 |
||||||||||||||
(in thousands except per share amounts) |
2011 | 2012 | 2013 | |||||||||||||
Revenue: |
||||||||||||||||
Service revenue |
$ | 9,606 | $ | 10,920 | $ | | $ | 24,513 | $ | 123,608 | ||||||
Sale of products |
| 66 | | 302 | 46,849 | |||||||||||
| | | | | | | | | | | | | | | | |
Total revenue |
9,606 | 10,986 | | 24,815 | 170,457 | |||||||||||
Direct costs: |
||||||||||||||||
Cost of services |
8,572 | 7,905 | | 22,719 | 108,968 | |||||||||||
Cost of products |
| 314 | | 300 | 31,132 | |||||||||||
| | | | | | | | | | | | | | | | |
Total direct costs |
8,572 | 8,219 | | 23,019 | 140,100 | |||||||||||
Gross profit |
1,034 | 2,767 | | 1,796 | 30,357 | |||||||||||
Operating expenses: |
||||||||||||||||
Selling, general and administrative expenses |
1,142 | 2,323 | 101 | 17,026 | 100,382 | |||||||||||
Depreciation & amortization |
41 | 95 | | 991 | 24,717 | |||||||||||
| | | | | | | | | | | | | | | | |
Operating income/(loss) |
(149 | ) | 349 | (101 | ) | (16,221 | ) | (94,742 | ) | |||||||
Interest expense |
| | | (34 | ) | (19,698 | ) | |||||||||
Other income/(expense) |
(9 | ) | 13 | | 98 | (5,066 | ) | |||||||||
| | | | | | | | | | | | | | | | |
Net income/(loss) before taxes |
(158 | ) | 362 | (101 | ) | (16,157 | ) | (119,506 | ) | |||||||
Benefit/(provision) for income taxes |
| | | (67 | ) | 684 | ||||||||||
| | | | | | | | | | | | | | | | |
Net loss |
(158 | ) | 362 | (101 | ) | (16,224 | ) | (118,822 | ) | |||||||
Less: Net loss attributable to non-controlling interest |
| | | | (6,929 | ) | ||||||||||
Net income/(loss) attributable to SFX Entertainment, Inc. |
$ | (158 | ) | $ | 362 | $ | (101 | ) | $ | (16,224 | ) | (111,893 | ) | |||
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
Loss per sharebasic & diluted |
N/A | N/A | $ | | $ | (0.44 | ) | $ | (1.73 | ) | ||||||
Weighted average shares outstandingbasic & diluted |
N/A | N/A | | 37,186 | 64,691 |
42
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
You should read the following discussion of our financial condition and results of operations together with the audited consolidated financial statements and notes to the financial statements included elsewhere in the Annual Report. This discussion contains forward-looking statements that involve risks and uncertainties. The forward-looking statements are not historical facts, but rather are based on current expectations, estimates, assumptions and projections about our industry, business and future financial results. Our actual results could differ materially from the results contemplated by these forward-looking statements due to a number of factors, including those discussed under 1A.Risk Factors and other sections in the Annual Report.
Executive Overview
In 2013, we continued to grow our Company both organically and through acquisitions. In addition to our listing on The Nasdaq Global Select Market, we completed seven material acquisitions, positioning us as the premier EMC company in the world. Revenue for the year ended December 31, 2013 totaled $170.5 million. This revenue was comprised of $123.6 million in service revenue from festival and live events that we produced, promoted or managed, with the balance of $46.8 million of revenue from the sales of products, predominately from the sale of professional quality audio files by Beatport (not giving effect to rounding). Our Live Events segment contributed $129.9 million in revenue in 2013, approximately a 424% increase from 2012. During the year ended December 31, 2013, we produced and promoted a total of 734 events, including 25 festivals of greater than 10,000 attendees, which was an increase of 364 events and 17 festivals from 2012. Our Platform segment contributed $40.6 million in revenue in 2013.
We view EMC as a global generational movement driven by a rapidly developing community of avid followers among the millennial generation. Our mission is to enable this movement by providing our fans with the best possible live experiences, music discovery and connectivity with other fans. Our strategy remains to leverage our unique portfolio of assets to reach EMC fans through the live concert experience by bringing our events to new markets, grow ticket sales, and augment our sponsorship and advertising revenue. We believe that we are well-positioned to fulfill our mission to EMC fans.
Our operations and assets consist almost entirely of businesses that we acquired during 2012 and 2013. These include:
Recent DevelopmentsFourth Quarter 2013 Events
Initial Public Offering. On October 15, 2013, we completed our initial public offering ("IPO") pursuant to which we sold 20,000,000 shares of our common stock. Our IPO was declared effective on
43
October 8, 2013, as filed with the SEC in our Registration Statement on Form S-1 (File No. 333-189564) with a public offering price of $13.00 per share, resulting in net proceeds to us of $240.9 million, before deducting underwriting discounts and commissions and certain offering expenses payable by us.
ID&T Acquisition. On October 18, 2013, we completed the acquisition of 100% of the ownership interests in the worldwide business (the "ID&T Business") of ID&T. ID&T is one of the world's largest content providers and producers of international EMC live events.
We also separately acquired 100% of the ownership interests in One of Us International, B.V. ("One of Us International"). Through this acquisition we acquired the remaining 49% of the ownership interests in the previously established ID&T JV, which was not already owned by us. ID&T JV has an exclusive license to use and promote, or rights to economic benefits from, ID&T's brands in connection with festivals and events in North America.
Totem Acquisition. On October 28, 2013, we completed our acquisition of substantially all of the assets of Totem. Totem promotes and produces Stereosonic, a five-city touring outdoor festival in Australia.
Made Acquisition. On October 31, 2013, we completed the acquisition of 100% of the issued and outstanding membership interests of Made. Made owns and produces EMC festivals, including the Electric Zoo Festival, an annual electronic dance music festival held in New York City.
i-Motion Acquisition. On November 18, 2013, we completed our acquisition of 100% of the ownership interests of i-Motion. i-Motion is a leading promoter and producer of EMC festivals and events in Europe with key brands including Ruhr-in-Love, MayDay and Nature One, one of Germany's largest open-air EMC festivals.
Paylogic Acquisition. On December 2, 2013, we acquired approximately 75% of the outstanding share capital of Paylogic. Paylogic is engaged in the business of event ticketing. We intend to acquire, no later than the second quarter of 2016, the approximately remaining 25% share capital of Paylogic, subject to customary closing conditions.
Other Acquisitions. In the fourth quarter of 2013, we acquired three other companies:
These other acquisitions are not significant individually or in aggregate.
2014
Acquisitions. We acquired a 50% interest in a holding company that owns 80% of Rock in Rio, one of the biggest festival franchises in the world. In addition we acquired the remaining 50% of the equity interests of B2S not currently owned by our subsidiary, ID&T.
Refinancing. On February 4, 2014 we closed our offering of $220 million aggregate principal amount of 9.625% second lien senior secured notes due 2019 in a private offering. We used a portion of the net proceeds from the offering to repay our existing first lien term loan and used the remaining net proceeds from the offering to finance certain acquisitions, including the interest in Rock in Rio and the acquisition of the remaining 50% interest of B2S, as well as for general corporate purposes, including the funding of future acquisitions.
44
Recoupable advance. We are in advanced negotiations with our business partner and the license holder of the TomorrowWorld/Tomorrowland brands with respect to, among other matters, recoupment of losses on the funding of the 2013 TomorrowWorld event. The draft term sheet provides that we may recoup our funding of losses related to our investment in the 2013 TomorrowWorld festival, by offsetting any future profit distributions which may be payable to our partner related to future TomorrowWorld or Tomorrowland events ("TW/TL Events"), with the exception of the Tomorrowland festival in Belgium, until we have recouped all our funded losses. The draft term sheet between the parties further provides that any future losses will be recoupable by the party funding such losses against profits of any other TW/TL Events. We have not accrued any such loss recoupments at December 31, 2013.
Factors Affecting Our Results of Operations
We currently generate revenue from sales of services and sales of products. Service revenue includes ticket sales and ticket fees from our ticketing platform, concessions fees related to the sale of food and beverages, promoter and management fees and sponsorships. Sales of products primarily relate to the sale of professional quality audio files from Beatport but also, to a lesser extent, include merchandise sales, including in connection with live events.
Service revenue costs consist primarily of musical talent costs and event production costs. Musical talent costs are fees paid to performing artists at festivals and venues. Production costs consist of costs incurred to produce events, including crew and material costs associated with staging and construction, and the costs of venue, promotions and travel. Sales of product costs mostly consist of Beatport's royalty payments and other digital music sales-related expenses and also include the cost of merchandise sold.
As we integrate the businesses we have acquired or will acquire in the medium and long-term, we anticipate meaningful growth in our service revenue, primarily due to growing the number of large festivals around the world and increasing the total number of attendees at such festivals and other events. For example, in North America through our ID&T JV, we produced the TomorrowWorld festival outside of Atlanta in September 2013 and held five Sensation events in 2013 in Toronto, Oakland, Las Vegas, New York, and Miami. We intend to hold additional Sensation and Q-Dance events in other North American cities and intend to introduce Mysteryland and other festivals in the future. For example, our first international production of Mysteryland is scheduled for May 2014 in New York. In addition, we plan to bring these and other events to new regions around the world. We also plan to develop additional revenue streams around these events.
In 2013 and 2012, the majority of our service revenue consisted of ticket sales. A significantly smaller portion of our service revenue in 2013 and 2012 was derived from the concession fees received from the sale of food, beverages and merchandise. For indoor festival events, the venue owner typically retains any revenue attributable to food and beverage sales; however, for outdoor festivals we generally contract to third parties the concessions and retain a percentage of the food and beverage revenue. In the medium- to long-term, we expect continued growth in live event attendance, in particular large-scale outdoor festivals, to drive meaningful growth in food and beverage revenue. We expect the gross margin for our service revenue to increase in the near and medium-term as festivals become more established, as initiation and start-up costs are eliminated, and as attendance grows.
For the years ended December 31, 2013 and 2012, we generated $46.8 million and $0.3 million, respectively, in revenue from sales of products with gross margins of 33.6% and 0.7%, respectively. The majority of our sales of products are derived from the sale of professional quality audio files via Beatport, which DJs require to produce and perform new electronic music tracks. In addition, we derive sale of products revenue from merchandise sales generated by our live event businesses. We believe that in the near and medium-term, revenue from our online properties, including Beatport, will
45
experience growth as we introduce new content, products and access offerings, and continue to benefit from our ticketing service commission.
We continue to pursue the sale of global and local sponsorships and marketing and similar partnerships, both domestically and internationally, and have attracted multiple well known, corporate brand partners, including for multi-event and repeat sponsorships. Our goal is to continue to drive growth in this area and capture a larger share of the market. In 2014 and beyond, we plan to increase our event level sponsorships and introduce new ways for fans of EMC to enjoy the music they love 365 days a year, in part, through our relationships with current and future marketing partners and sponsors. Such future arrangements, in some cases, will replace historical event-level arrangements to reflect a broader involvement with our fans. During this transition process, we have and may continue to forego short-term event-level sponsorship revenue to facilitate broader arrangements. We believe that we have a unique opportunity to engage in additional partnerships to increase our revenue and to provide our fans with more memorable experiences and further integration into the EMC community.
Specifically, in 2014 our fans will benefit from our marketing partnership arrangement with Anheuser-Busch InBev N.V. ("AB"). Pursuant to the binding term sheet, dated December 20, 2013 between us and AB, we will organize six international beach-themed dance music events in 2014 focused on the Corona brand. The parties will also sponsor an international DJ contest competition through Beatport with the winner performing at the final event. We have agreed that the revenue and costs of the arrangement will be split on a 50-50 basis. We and AB have agreed that the arrangement will be further memorialized and subject to definitive agreements, provided that if definitive agreements are not executed by April 30, 2014, AB has the right to cancel the arrangement. There is no assurance that we will enter into such documentation on the terms described above or at all.
A second important partnership is with Clear Channel Media and Entertainment ("Clear Channel"). Pursuant to a binding term sheet, dated January 2, 2014, between us and Clear Channel, we will partner with Clear Channel to pursue and create during 2014:
The arrangement contains provisions for costs and revenue sharing. Specifically, we have agreed that the parties will split costs and revenue on a 50-50 basis, subject to certain exemptions. The parties have agreed that the term sheet, which is binding through December 31, 2014, will be further memorialized and subject to definitive agreements.
Quarterly Trends
Our results of operations, and in particular the revenue we generate from a given activity, varies substantially from quarter to quarter. We expect most of our largest festivals to occur outdoors, primarily in warmer months. For example, ID&T stages most of its festivals in August and September in Europe, and Totem stages most of its festivals in November and December in Australia. As such, we expect our revenues from these festivals to be higher during the third and fourth quarters, and lower in the first and second quarters. Further, because we expect to conduct a limited number of large festivals and other events, small variations in this number from quarter to quarter can cause our revenue and net income to vary significantly for reasons that may be unrelated to the performance of our core business. Other portions of our business are generally not subject to seasonal fluctuation or experience much lower seasonal fluctuation, such as MMG, which receives higher revenues in the winter months in Miami, and LIC, which is more active during the academic school year. Overall, we currently expect
46
our revenue to be higher in our third and fourth quarters than in our first and second quarters. In the future, we expect these fluctuations to change and perhaps become less pronounced as we grow our business, stage more festivals and events, including in the southern hemisphere, and acquire additional businesses. We believe our cash needs will vary significantly from quarter to quarter, depending on, among other things, the timing of festivals and events, cancellations, ticket on-sales, capital expenditures, seasonal and other fluctuations in our business activity, the timing of guaranteed payments and receipt of ticket sales and fees, financing activities, acquisitions and investments.
Basis and Presentation
Our acquisition of DDP and LIC were negotiated simultaneously, with DDP closing only six weeks prior to the LIC acquisition. Because LIC and DDP were acquired contemporaneously, we focused on the core operations of each company, as well as the purchase price in the respective transaction to determine which company we should treat as our predecessor company. LIC's historical operations as a producer of live EMC events and festivals are more representative of the core operations around which we are building our global EMC business. The purchase price for LIC totaled $12.1 million. DDP's historical operations were more focused on the promotion of live EMC events to the exclusion of largescale festivals. The purchase price for DDP totaled $8.2 million. Upon review of these facts and discussions with our advisers, we determined that LIC was our Predecessor.
Based on the current status of our corporate evolution and our designation of LIC as our Predecessor, we have presented this Management's Discussion and Analysis of Financial Condition and Results of Operations as follows:
Predecessor
On July 31, 2012, we acquired LIC, our Predecessor, and Advanced Concert Productions LLC. At the time of this transaction, our Predecessor was a promoter and organizer of branded events that featured live DJs, acrobatic acts and "paint blasts," during which participants were sprayed with colorful, harmless paint to provide a more interactive fan experience. Advanced Concert Productions LLC was the production company for our Predecessor's live events.
Our Predecessor principally derived its revenue from ticket sales to events that it promoted and produced and recognized this revenue at the time the event occurred. When our Predecessor acted as the principal promoter of an event and took on the risks and rewards of such event, it recognized the gross revenue from ticket sales. When it acted as agent and did not bear the risks of such event, it recognized only its net share of revenue.
Our Predecessor's principal costs of generating revenue were direct operating expenses associated with the promotion and production of events, including venue costs, artist performance fees, travel expenses, show-specific advertising and marketing, ticketing processing fees, and other show-related production expenses.
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Results of OperationsPredecessor
Seven months ended July 31, 2012 (last day of operations of our Predecessor) and the nine months ended September 30, 2011
Revenue
Our Predecessor's revenue increased by $4.7 million, or 75.0%, to $11.0 million for the seven months ended July 31, 2012 from $6.3 million for the nine months ended September 30, 2011. The increase in revenue is primarily attributable to increases in the number of events, attendees per event, and average ticket price earned per attendee. Our Predecessor generated $9.6 million in ticket revenue (88.2% of total revenue), $0.2 million in licensing fees (1.8% of total revenue), and $1.1 million in other revenue (10.0% of total revenue) for the seven months ended July 31, 2012.
The number of events during the seven months ended July 31, 2012 increased to 90 from 52 events for the nine months ended September 30, 2011 due to new market penetration. Total attendance increased to approximately 250,634 for the seven months ended July 31, 2012, from 163,299 for the nine months ended September 30, 2011, an increase of 87,335, or 53.5%, due to an increasing number of events.
Direct operating expenses
Our Predecessor's direct operating expenses increased by $3.3 million, or 68.7%, to $8.2 million for the seven months ended July 31, 2012 from $4.9 million for the nine months ended September 30, 2011. The increase in direct operating expenses is primarily attributable to increases in production and venue costs of $1.7 million, artist and talent costs of $0.7 million, and promotional costs of $0.7 million associated with the increased number of events.
Selling, general, and administrative expenses
Our Predecessor's selling, general, and administrative expenses increased by $1.7 million, or 283.3%, to $2.3 million for the seven months ended July 31, 2012 from $0.6 million for the nine months ended September 30, 2011. The increase is primarily attributable to increases in professional services fees of $0.8 million incurred in conjunction with the sale of our Predecessor to us and an increase in payroll expense of $0.4 million due to increased headcount.
Depreciation and amortization
Our Predecessor's depreciation and amortization increased by $0.1 million for the seven months ended July 31, 2012 compared to the nine months ended September 30, 2011. The increase resulted from additions of approximately $0.4 million in property, plant and equipment.
Year ended December 31, 2011
Revenue
Our Predecessor's revenue for the year ended December 31, 2011 was $9.6 million. During 2011 our Predecessor increased the size and number of events as well as increased attendance at its events compared to prior years. Our Predecessor entered new markets and hosted larger capacity events in key cities during 2011. Our Predecessor hosted 75 events in 2011. Our Predecessor generated $9.3 million in ticket revenue (96.7% of total revenue), and $0.1 million in licensing fees (1.2% of total revenue) for the year ended December 31, 2011.
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Direct operating expenses
Our Predecessor's direct operating expenses for the year ended December 31, 2011 were $8.6 million.
Selling, general, and administrative expenses
Our Predecessor's selling, general, and administrative expenses for the year ended December 31, 2011 were $1.1 million. During 2011 our Predecessor increased headcount and associated payroll expense associated with the corporate growth strategy and the number of events held in 2011.
Results of OperationsSuccessor
Our history
We started our business on July 7, 2011, and did not have any significant operations in the year ended December 31, 2011.
Further, the results included in the year ended December 31, 2012 are composed as follows:
As a result, we have not provided a comparison of results of operations for the year ended December 31, 2012 to 2011, because such a comparison would not be meaningful.
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Results of Operations
|
Year Ended December 31, |
|
||||||||
---|---|---|---|---|---|---|---|---|---|---|
|
Period from July 7 to December 31, 2011 |
|||||||||
(in thousands) |
2013 | 2012 | ||||||||
Revenue: |
||||||||||
Service revenue |
$ | 123,608 | $ | 24,513 | $ | | ||||
Sale of products |
46,849 | 302 | 0 | |||||||
| | | | | | | | | | |
Total Revenue |
170,457 | 24,815 | | |||||||
Direct costs: |
||||||||||
Cost of services |
108,968 | 22,719 | | |||||||
Cost of products sold |
31,132 | 300 | | |||||||
| | | | | | | | | | |
Total Direct Costs |
140,100 | 23,019 | | |||||||
Gross profit |
30,357 | 1,796 | | |||||||
Operating expenses: |
||||||||||
Selling, general and administrative expenses |
100,382 | 17,026 | 101 | |||||||
Depreciation |
2,239 | 75 | | |||||||
Amortization |
22,478 | 916 | | |||||||
| | | | | | | | | | |
Operating Loss |
(94,742 | ) | (16,221 | ) | (101 | ) | ||||
Interest expense |
(19,698 | ) | (34 | ) | | |||||
Other (expense) / income |
(5,066 | ) | 98 | | ||||||
| | | | | | | | | | |
Loss before income taxes |
(119,506 | ) | (16,157 | ) | (101 | ) | ||||
Benefit/(provision) for income taxes |
684 | (67 | ) | | ||||||
| | | | | | | | | | |
Net loss |
(118,822 | ) | (16,224 | ) | (101 | ) | ||||
Less: Net loss attributable to non-controlling interest |
(6,929 | ) | | | ||||||
| | | | | | | | | | |
Net loss attributable to SFX Entertainment, Inc. |
$ | (111,893 | ) | $ | (16,224 | ) | $ | (101 | ) | |
| | | | | | | | | | |
| | | | | | | | | | |
Year ended December 31, 2013
Revenue
Revenue for the year ended December 31, 2013 totaled $170.5 million. This revenue was composed of $123.6 million in service revenue (72.5% of total revenue) from festival and live events that were produced, promoted or managed by us. During the year ended December 31, 2013, we produced and promoted a total of 734 events, including 25 festivals of greater than 10,000 attendees. Sales of products revenue for the year ended December 31, 2013, totaled $46.8 millionnot giving effect to rounding (27.5% of total revenue) and was predominately from the sale of professional quality audio files by Beatport (83.5% of total sale of products).
Direct costs
Direct costs for the year ended December 31, 2013 totaled $140.1 million, cost of services was $109.0 million (77.8% of total direct cost) and cost of products sold was $31.1 million (22.2% of total direct cost). Cost of products sold is primarily attributable to Beatport's royalty and other digital music sales-related expenses.
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Selling, general and administrative expenses
Selling, general and administrative expenses for the year ended December 31, 2013 totaled $100.4 million. These costs are primarily attributable to salaries and wages related to employees, non-cash stock-based compensation, legal, accounting and professional fees incurred in association with our acquisitions.
Depreciation and amortization
Depreciation and amortization are associated with property, plant and equipment additions with depreciable lives ranging from three to seven years and amortization of intangible assets from the date of acquisition. For the year ended December 31, 2013, depreciation and amortization totaled $24.7 million, primarily related to intangible assets acquired in business acquisitions.
Benefit/(provision) for income taxes
Benefit/(provision) for income taxes for the year ended December 31, 2013 totaled $0.7 million.
Year ended December 31, 2012
Our consolidated financial statements for the year ended December 31, 2012 include costs associated with our formation and startup costs, costs associated with identifying and evaluating our initial target acquisitions, and the results of operations for DDP beginning on June 20, 2012 and for LIC beginning on August 1, 2012, the day after their respective dates of acquisition.
Revenue
Revenue for the year ended December 31, 2012 totaled $24.8 million. This revenue was generated primarily from service revenue related to the festivals and events that were produced and promoted by two of our acquired entities, DDP and LIC, after we acquired them. For the year ended December 31, 2012, we produced and promoted a total of 353 events, including eight festivals of greater than 10,000 attendees. For the year ended December 31, 2012, we generated $24.5 million in service revenue (98.8% of total revenue) and $0.3 million from sale of products revenue (1.2% of total revenue).
Direct costs
For the year ended December 31, 2012 direct costs associated with service revenue totaled $22.7 million (98.7% of total direct 2012 costs). Costs of products sold for the year ended December 31, 2012 related to the cost of merchandise sold at our live events totaled $0.3 million (1.3% of total direct costs).
Depreciation and amortization
Depreciation and amortization for the year ended December 31, 2012 totaled $1.0 million and was associated with property, plant and equipment additions with depreciable lives ranging from three to seven years and amortization of intangible assets from the date of acquisition through December 31, 2012.
Selling, general, and administrative expenses
Selling, general, and administrative expenses for the year ended December 31, 2012 totaled $17.0 million, of which $8.2 million included legal, accounting, and advisory fees incurred primarily in connection with our formation and the evaluation and negotiation of acquisitions. In addition, selling, general and administrative expenses included $2.2 million of non-cash stock-based compensation expense and $2.3 million of salary expense.
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Provision for income taxes
Provision for income taxes for the year ended December 31, 2012 of $0.1 million resulted primarily from deferred taxes related to timing differences offset by a valuation allowance.
Segment Overview
Operating segments include components of the enterprise for which separate financial information is available and evaluated regularly by the chief operating decision maker in deciding how to allocate resources and assess performance. Our chief operating decision maker is our Chief Executive Officer. We have determined that we have two operating and reportable segments, which are (i) Live Events, consisting of the production of our live events and includes revenue from ticket sales, concessions of food, beverages and merchandise, promoter and management fees, event specific sponsorships and advertising and (ii) Platform, which is our 365-day per year engagement with our fans outside of live events and currently includes sales of digital music, ticketing fees and commissions charged by Paylogic, and certain marketing activity. Our segment reporting became applicable with our acquisition of Beatport on March 15, 2013, and accordingly, we do not present segment reporting for periods prior to 2013.
Corporate expenses, including stock-based compensation, and all line items below operating income (loss) are managed on a consolidated basis. Additionally, we manage our assets and working capital on a consolidated basis. Accordingly, segment assets are not reported to, or used by, our management to allocate resources or assess performance of the segments; and therefore, we have not disclosed total segment assets.
Live Events Results of Operations
Our Live Events segment operating results were as follows:
|
Year ended December 31, |
||||||
---|---|---|---|---|---|---|---|
(in thousands)
|
2013 | 2012 | |||||
Revenue |
$ | 129,937 | $ | 24,815 | |||
Direct operating expenses |
113,230 | 23,019 | |||||
| | | | | | | |
Gross profit |
16,707 | 1,796 | |||||
Selling, general and administrative |
16,742 | 2,824 | |||||
Depreciation and amortization |
18,519 | 986 | |||||
| | | | | | | |
Operating loss |
$ | (18,554 | ) | $ | (2,014 | ) | |
| | | | | | | |
| | | | | | | |
Year ended December 31, 2013
Revenue
Our Live Events segment generated revenue of $129.9 million for the year ended December 31, 2013. This included $98.8 million, or 76.1%, from ticket sales, $12.2 million, or 9.4%, from merchandising and concessions fees of food and beverages, and $18.9 million, or 14.5%, from other sources, including license and promoter fees. For the year ended December 31, 2013, we produced and promoted a total of 734 live events, including 25 festivals of greater than 10,000 attendees, attracting a total attendance of over 2.0 million attendees. Our Live Events segment had a gross margin of 12.9% for the period.
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Direct costs
For the year ended December 31, 2013, direct costs associated with live events that we produced, promoted or managed totaled $113.2 million. These costs consisted primarily of $39.0 million, or 34.5%, in musician and DJ costs, $54.4 million, or 48.0%, in production costs, $4.0 million, or 3.5%, in event promotion costs and $15.8 million, or 14.0%, in other expenses associated with revenue earned from our live events.
Selling, general and administrative expenses
Selling, general and administrative expenses for the year ended December 31, 2013 totaled $16.7 million.
Depreciation and amortization
Depreciation and amortization for the Live Events segment totaled $18.5 million for the year ended December 31, 2013. Depreciation expense was associated with property, plant and equipment additions with depreciable lives ranging from three to seven years. Amortization expense represents the amortization of intangible assets.
Year ended December 31, 2012
Revenue
Our Live Events segment generated revenue of $24.8 million for the year ended December 31, 2012. This included $23.1 million, or 93.2% from ticket sales and concessions fees of food and beverages, and $1.7 million, or 6.8%, from other sources, including promoter and management fees. For the year ended December 31, 2012, we produced and promoted a total of 353 live events, including 8 festivals of greater than 10,000 attendees, attracting a total attendance of over 700,000 attendees. Our Live Events segment had a gross margin of 7.2% for the period.
Direct costs
For the year ended December 31, 2012, direct costs associated with live events that we produced, promoted or managed totaled $23.0 million. These costs consisted primarily of $8.0 million, or 34.8%, in musician and DJ costs, $12.6 million, or 54.7%, in production costs, $1.3 million, or 5.7%, in event promotion costs and $1.1 million, or 4.8%, in other expenses associated with revenue earned from our live events.
Selling, general and administrative expenses
Selling, general and administrative expenses for the year ended December 31, 2012 totaled $2.8 million.
Depreciation and amortization
Depreciation and amortization for the Live Events segment totaled $1.0 million for the year ended December 31, 2012. Depreciation expense was associated with property, plant and equipment additions with depreciable lives ranging from three to seven years. Amortization expense represents the amortization of intangible assets.
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Platform Results of Operations
Our Platform segment is primarily composed of Beatport, Paylogic, and certain other businesses we acquired during 2013. As a result, Platform is a new segment for 2013. Beatport is a principal online resource, offering music for purchase in multiple downloadable formats. Paylogic is engaged in the business of event ticketing. We acquired Beatport on March 15, 2013 and Paylogic on December 2, 2013. Therefore the results of their operations are only included in our consolidated results of operations from their respective acquisition dates. As there were no results of operations relating to the Platform segment in 2012, there is no discussion of Platform results of operations for this period. Our Platform segment operating results for 2013 were as follows:
(in thousands)
|
Year ended December 31, 2013 |
|||
---|---|---|---|---|
Revenue |
$ | 40,629 | ||
Direct operating expenses |
26,891 | |||
| | | | |
Gross profit |
13,738 | |||
Selling general and administrative |
13,633 | |||
Depreciation and amortization |
6,138 | |||
| | | | |
Operating loss |
$ | (6,033 | ) | |
| | | | |
| | | | |
Revenue
Our Platform segment generated revenue of $40.6 million for the year ended December 31, 2013. This included $39.1 million, or 96.3%, from the sale of digital music files, $0.8 million, or 2.0%, from ticketing fees, and $0.7 million, or 1.7%, from other sources, including certain marketing services. Our Platform segment had a gross margin of 33.8% for the period.
Direct costs
For the year ended December 31, 2013, direct costs associated with the Platform segment totaled $26.9 million. These costs primarily relate to Beatport's royalty and other digital music sales related expenses.
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Reconciliation of Segment Results
(in thousands)
|
Live Events | Platform | Corporate and Eliminations |
Consolidated | |||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|
2013 |
|||||||||||||
Revenue |
$ | 129,937 | $ | 40,629 | $ | (109 | ) | $ | 170,457 | ||||
Direct costs |
113,230 | 26,891 | (21 | ) | 140,100 | ||||||||
| | | | | | | | | | | | | |
Gross profit |
16,707 | 13,738 | (88 | ) | 30,357 | ||||||||
Selling, general and administrative |
16,742 | 13,633 | 70,007 | 100,382 | |||||||||
Depreciation |
1,331 | 852 | 56 | 2,239 | |||||||||
Amortization |
17,188 | 5,286 | 4 | 22,478 | |||||||||
| | | | | | | | | | | | | |
Operating loss |
$ | (18,554 | ) | $ | (6,033 | ) | $ | (70,155 | ) | $ | (94,742 | ) | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
2012 |
|||||||||||||
Revenue |
$ | 24,815 | $ | | $ | | $ | 24,815 | |||||
Direct costs |
23,019 | | | 23,019 | |||||||||
| | | | | | | | | | | | | |
Gross profit |
1,796 | | | 1,796 | |||||||||
Selling, general and administrative |
2,824 | | 14,202 | 17,026 | |||||||||
Depreciation |
70 | | 5 | 75 | |||||||||
Amortization |
916 | | | 916 | |||||||||
| | | | | | | | | | | | | |
Operating loss |
$ | (2,014 | ) | $ | | $ | (14,207 | ) | $ | (16,221 | ) | ||
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
2011 |
|||||||||||||
Revenue |
$ | | $ | | $ | | $ | | |||||
Direct costs |
| | | | |||||||||
| | | | | | | | | | | | | |
Gross profit |
| | | | |||||||||
Selling, general and administrative |
| | 101 | 101 | |||||||||
Depreciation |
| | | | |||||||||
Amortization |
| | | | |||||||||
| | | | | | | | | | | | | |
Operating loss |
$ | | $ | | $ | (101 | ) | $ | (101 | ) | |||
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
FINANCIAL CONDITION
We have funded our operations from July 7, 2011 (Inception) through December 31, 2013, including our acquisitions, with net proceeds raised from the issuance of equity and debt, including $75.0 million from our Prior Term Loan Facility (defined below).
As of December 31, 2013, we had cash and cash equivalents totaling $52.7 million, exclusive of restricted cash.
On December 31, 2012, we issued a promissory note to Robert F.X. Sillerman in the principal amount of $7.0 million. The note's interest rate was 9% per annum and had a maturity date of March 31, 2013. As of April 3, 2013, the promissory note was fully repaid.
On December 31, 2012, we acquired certain assets and liabilities of MMG for $16.9 million. The purchase price was composed of $5.0 million in cash, a 0.22% promissory note in the principal amount of $8.5 million having a maturity date of February 28, 2013, and $3.4 million in our common stock valued at $5.00 per share. On March 15, 2013, we made a payment of $3.0 million to MMG and the promissory note was amended and restated to provide that the remaining amount of $5.5 million plus interest will mature and be payable on May 15, 2013. On May 15, 2013 the note was fully paid off.
55
On January 8, 2013, we closed a private placement transaction with an investor in which we issued 2,000,000 shares of common stock at a price per share of $5.00 for $10.0 million in net proceeds.
On February 22, 2013, we closed a private placement transaction with an investor in which we issued 2,000,000 shares of common stock at a price per share of $5.00 for $10.0 million in net proceeds.
On March 15, 2013, we acquired Beatport in a merger transaction for $58.6 million, consisting of $33.9 million in cash and $24.7 million in our stock valued at $5.00 per share. We also signed a definitive joint venture agreement with respect to ID&T JV, and in connection with that signing (i) made a $7.5 million non-recourse loan to ID&T, which is to be repaid out of ID&T's interest in the distributions from ID&T JV, (ii) issued to ID&T fully vested warrants to purchase 500,000 shares of our common stock, having an exercise price of $2.50 per share, and (iii) issued to ID&T 2,000,000 shares of our common stock.
On March 20, 2013, we entered into an option agreement with ID&T (the "ID&T Option") whereby we obtained the right to purchase a 75% equity interest in the ID&T Business. We paid $2.5 million in cash and issued 2,000,000 shares of our common stock to acquire the ID&T Option.
On April 2, 2013, we closed a private placement transaction with investors in which we issued 1,000,000 shares of common stock at a price per share of $10.00 for an aggregate purchase price of $10.0 million.
On May 22, 2013, under our asset contribution agreement with Totem, we paid Totem a deposit of $4.8 million as acquisition consideration.
On June 24, 2013, we paid an advance of $2.5 million to Made as acquisition consideration. On August 21, 2013, we paid $1.5 million under the terms of the agreement, of which $1.3 million was an advance towards the purchase price.
On August 8, 2013, we entered into a stock purchase agreement with the ID&T Seller to acquire the ID&T Business. In connection with entering into this agreement, on August 8, 2013, we paid an advance of $10.0 million to the ID&T Seller, and we caused the $7.5 million non-recourse loan that ID&T JV made to ID&T to be transferred to the ID&T Seller, effectively canceling the repayment obligation for that loan.
On August 20, 2013, we entered into an amendment to the Prior Term Loan Facility, which permitted our subsidiary to borrow an additional $10.5 million. The amendment also permitted our payment of a $10.0 million advance under the purchase agreement with the ID&T Seller, our cancellation of the repayment obligations in connection with our previously made $7.5 million loan to the ID&T JV, and our payment of $1.5 million to Made, of which $1.3 million was an advance towards the purchase price under the membership interest purchase agreement. These payments allowed us to extend the closing dates under the ID&T and Made purchase agreements to October 31, 2013.
On October 15, 2013, we completed our initial public offering pursuant to which we sold 20,000,000 shares of our common stock at a public offering price of $13.00 per share, resulting in net proceeds to us of $240.9 million, after deducting underwriting discounts and commissions and offering expenses payable by us.
We completed our acquisitions of ID&T, ID&T JV, Fame House, Totem, Made, Arc90, Tunezy, i-Motion and 75% of the outstanding share capital of Paylogic on October 18, October 18, October 21, October 28, October 31, November 13, November 14, November 18 and December 2, 2013, respectively. Not including cash and equity paid to the respective sellers prior to such dates, we made cash payments in consideration for these acquisitions on such dates as follows:
56
Prior Term Loan Facility
On March 15, 2013, certain of our subsidiaries entered into the $49.5 million first lien term loan facility (the "Prior Term Loan Facility") with Barclays Bank PLC as administrative agent and Barclays Bank PLC, UBS Loan Finance LLC, and Jefferies Group LLC as lenders. The borrower was our indirect, wholly-owned subsidiary, SFX Intermediate Holdco II LLC (the "Prior Term Loan Borrower"). The Prior Term Loan Facility was guaranteed by SFX Intermediate Holdco I LLC, the immediate parent company of the Prior Term Loan Borrower ("Holdings"), the Prior Term Loan Borrower, additional subsidiaries of the Company, LIC, and all of Holdings' future subsidiaries (the "Prior Term Loan Guarantors"), and by Mr. Sillerman as further described below. The Prior Term Loan Facility was secured by a first-priority security interest in all the existing and future assets of the Prior Term Loan Borrower and the Prior Term Loan Guarantors.
Mr. Sillerman entered into a guarantee agreement (the "Sillerman Guarantee") with Barclays Bank PLC, as collateral agent for the benefit of the other lender parties, in which he personally guaranteed all our obligations under the Prior Term Loan Facility.
On June 5, 2013, the Prior Term Loan Facility was amended (the "June Amendment") to increase the facility amount by $15 million, to a total of $64.5 million, and on August 20, 2013, the Prior Term Loan Facility was further amended (the "August Amendment") to increase the facility amount by $10.5 million, to a total of $75.0 million. In connection with each of the June Amendment and the August Amendment, the Prior Term Loan Guarantors reaffirmed their guarantees of the Prior Term Loan Facility, and Mr. Sillerman entered into amendments to the Sillerman Guarantee to reaffirm his guarantee thereunder.
Borrowings under the Prior Term Loan Facility bore interest, at the Borrower's option, at a rate per annum equal to either (a) (i) a rate per annum equal to the highest of (1) the rate of interest per annum publicly announced from time to time by the Administrative Agent under the Prior Term Loan Facility as its prime rate in effect on such day at its principal office in New York City, (2) (x) the weighted average of the rates on overnight Federal funds transactions with members of the Federal Reserve System arranged by Federal funds brokers, as published by the Federal Reserve Bank of New York on the business day next succeeding such day plus (y) 0.50%, (3) (x) a rate per annum equal to (I) the offered rate which appears on the page of the Reuters Screen which displays an average British Bankers Association Interest Settlement Rate (such page currently being LIBOR01 page) for deposits in U.S. dollars being delivered in the London interbank market for a one-month term, determined by the Administrative Agent under the Prior Term Loan Facility as of approximately 11:00 a.m. (London, England time) two Business Days prior to the applicable borrowing or conversion date divided by (II) one minus the applicable reserve percentage (with a rate floor of 1.25% per annum) plus (y) 1.00% and (4) 2.25% per annum, plus (ii) 6.50% per annum or (b) (i) a rate per annum equal to
57
(1) for each one, two, three or six month (or if agreed to by all the lenders under the Prior Term Loan Facility, nine or twelve months) interest period as selected by the Borrower, the offered rate which appears on the page of the Reuters Screen which displays an average British Bankers Association Interest Settlement Rate (such page currently being LIBOR01 page) for deposits (for delivery on the first day of such interest period) with a term equivalent to such interest period in U.S. dollars, determined by the Administrative Agent under the Prior Term Loan Facility as of approximately 11:00 a.m. (London, England time), two Business Days prior to the commencement of such interest period divided by (2) one minus the applicable reserve percentage (with a rate floor of 1.25% per annum) plus (ii) 7.50% per annum.
The Prior Term Loan Facility was repaid in full in February 2014 using the proceeds of the note offering described immediately below. The Sillerman Guarantee was also canceled.
The New Borrowings Transactions
9.625% Second Lien Senior Secured Notes due 2019
On February 4, 2014, the Company issued $220 million 9.625% second lien senior secured notes (the "Notes"). In connection with the issuance of the Notes, we, certain of our subsidiaries and U.S. Bank National Association, as trustee (in such capacity, the "Trustee") and collateral agent, entered into an indenture governing the Notes (the "Indenture"). The Notes are second-priority lien senior secured obligations of the Company and are fully and unconditionally guaranteed by the Company's present and future wholly owned domestic subsidiaries that guarantee the indebtedness under the Credit Agreement (defined below), as well as the Company's non-wholly owned domestic subsidiary, SFX-Nightlife Operating, LLC (collectively, the "Guarantors"). The Notes and the guarantees thereof are secured by a second-priority lien on substantially all of the present and future assets of the Company and the Guarantors, subject to certain exceptions and permitted liens. The Notes will mature on February 1, 2019 and accrue interest at a rate of 9.625% per annum, which is payable semi-annually in arrears on February 1 and August 1 of each year, commencing on August 1, 2014.
Optional Redemption and Mandatory Offer to Purchase. At any time on or after February 1, 2016, the Company may redeem all or any portion of the Notes at the redemption prices set forth in the Indenture. Prior to February 1, 2016, the Company may redeem the Notes, in whole or in part, at a price equal to 100% of the principal amount thereof plus any accrued or unpaid interest thereon and a "make-whole" premium. In addition, at any time before February 1, 2016, the Company may redeem up to 35% of the original aggregate principal amount of the Notes with the net proceeds of certain equity offerings, subject to certain conditions, at a redemption price of 109.625% of the principal amount of the Notes, plus accrued and unpaid interest, if any, to the date of redemption.
The holders of the Notes have the ability to require the Company to repurchase all or any part of the Notes if the Company experiences specific kinds of changes in control or engages in certain asset sales, in each case at the repurchase prices and subject to the terms and conditions set forth in the Indenture.
Covenants. The Indenture contains certain covenants which are customary with respect to non-investment grade debt securities, including limitations on the Company's and its restricted subsidiaries' ability to incur additional indebtedness or issue certain preferred shares, pay dividends, make any distribution in respect of, redeem or repurchase stock, make certain investments or other restricted payments, enter into certain types of transactions with affiliates, incur liens, apply proceeds from certain asset sales or events of loss, and consolidate or merge with or into other entities or otherwise dispose of all or substantially all of its assets. These covenants are subject to a number of important limitations and exceptions.
58
Events of Default. The Indenture provides for customary events of default, including cross payment defaults to other specified debt of the Company and certain of its subsidiaries. In the case of an event of default arising from specified events of bankruptcy, insolvency or reorganization with respect to the Company, then the principal, premium, if any, and accrued and unpaid interest, if any, of all Notes will become due and payable without any declaration or act on the part of the Trustee or any holder of Notes. If any other event of default occurs and is continuing, the Trustee or holders of at least 25% in aggregate principal amount of the Notes then outstanding may declare the principal, premium, if any, and accrued and unpaid interest, if any, of all Notes due and payable. In the case of a declaration of the acceleration of the Notes because an event of default has occurred, but before a judgment or decree for payment of the money due has been obtained by the Trustee, the holders of a majority in aggregate principal amount of the outstanding Notes may rescind and annul such declaration and its consequences if, among other conditions set forth in the Indenture, the Company has paid or deposited with the Trustee a sum sufficient to pay all sums paid or advanced by the Trustee under the Indenture and all overdue interest on all Notes, and all events of default (other than the non-payment of principal of the Notes that has become due solely by such declaration of acceleration) have been cured or waived.
Credit Agreement
On February 7, 2014, the Company entered into a credit agreement (the "Credit Agreement") with the lenders party thereto and Barclays Bank PLC, as administrative agent, letter of credit issuer and swingline lender, which provides for a $30.0 million revolving credit facility (the "Revolver"), which includes a $10.0 million subfacility for loans in certain approved currencies other than US dollars and a $7.5 million subfacility for letters of credit. Commitments under the Revolver may be increased by an aggregate amount of up to the sum of (A) the greater of (1) $30.0 million and (2) 100% of Consolidated EBITDA (as defined in the Credit Agreement) of the Company and its subsidiaries for the four-quarter period ending immediately on or prior to the date of such increase, plus (B) all interest (including interest which, but for the filing of a petition in bankruptcy with respect to the Company or its subsidiaries that are guarantors, would have accrued, whether or not a claim is allowed against the Company or such subsidiary for such interest in the related bankruptcy proceeding), fees, expenses, indemnification or other amounts owed to the lenders under the Credit Agreement and all hedging obligations related thereto less (C) the aggregate commitments under the Credit Agreement then outstanding, subject to certain terms and conditions specified in the Credit Agreement. The Revolver will mature on February 7, 2017, subject to extension pursuant to the terms of the Credit Agreement.
Interest Rates and Fees. Interest under the Revolver is payable, at the option of the Company, either at a base rate plus a margin or a Eurodollar-based rate plus a margin. Interest is payable, in the case of loans bearing interest based on the Eurodollar-based rate, in arrears at the end of the applicable interest period (and, for interest periods longer than three months, every three months) and, in the case of loans bearing interest based on the base rate, quarterly in arrears. The base rate for any date is the per annum rate equal to the highest of (x) a prime rate, (y) the Federal funds effective rate plus 0.50% and (z) an adjusted Eurodollar rate for a one-month term plus 1.00%. The margin is, initially, (a) 3.50% per annum with respect to revolving loans bearing interest based on the base rate, or (b) 4.50% per annum with respect to revolving loans bearing interest based on the Eurodollar-based rate, in each case subject to adjustment after delivery of the audited financial statements for the fiscal
59
year ending December 31, 2013, based on the Company's first lien net leverage ratio, as defined in the Credit Agreement. Beginning in the second quarter of 2014 the margins are as follows:
Level
|
First Lien Net Leverage Ratio |
Base Rate Loans | Eurodollar Loans | ||||||
---|---|---|---|---|---|---|---|---|---|
I |
Greater than or equal to 1.50 to 1 | 3.50 | % | 4.50 | % | ||||
II |
Less than 1.50 to 1 | 3.00 | % | 4.00 | % |
The Company is required to pay a per annum letter of credit fee on the daily maximum amount then available to be drawn under letters of credit issued under the Credit Agreement equal to the margin for revolving loans bearing interest based on the Eurodollar-based rate, calculated on a 360-day basis and payable quarterly in arrears, plus a fronting fee of 0.125% per annum on the daily maximum amount then available to be drawn under such letters of credit, also calculated on a 360-day basis and payable quarterly in arrears, and the customary issuance, presentation, amendment and other processing fees, and other standard costs and charges, of the letter of credit issuer. In addition, the Company is required to pay a per annum commitment fee on the average daily unused portion of the Revolver, which is 0.50%, calculated on a 360-day basis and payable quarterly in arrears.
Security/Guarantors. The Revolver is guaranteed by the Guarantors. The Revolver is secured, subject to certain exceptions, by a first-priority security interest in substantially all of the assets and property of the Company and the Guarantors. If the Company or any of the Guarantors provide additional guarantees or collateral to support the Notes, the same guarantees or collateral must be provided to support the obligations owing under the Credit Agreement.
Mandatory Prepayments. On any date on which the aggregate principal amount of the total borrowings under the Credit Agreement exceeds the aggregate commitments by the lenders under the Credit Agreement, the Company must immediately pay to the administrative agent an amount equal to such excess. In addition, if the administrative agent notifies the Company at any time that the outstanding amount of all loans under the Credit Agreement denominated in certain approved currencies other than U.S. dollars exceeds a specified limit then in effect, which is initially $10.0 million, the Company must prepay loans in an aggregate amount sufficient to reduce such outstanding amount to an amount no greater than such limit.
Covenants. The Credit Agreement contains customary affirmative covenants including covenants related to financial statements and other information, collateral reporting, notices of material events, conduct of the business, payment of obligations, maintenance of properties and insurance, submission to certain inspections, compliance with laws and agreements, use of proceeds and letters of credit, subsidiary guarantees, cash management, and additional collateral and further assurances. The Credit Agreement also contains customary negative covenants that, subject to certain exceptions, qualifications and "baskets," generally limit our ability to incur debt, create liens, make restricted payments, make certain investments, prepay or redeem certain debt, enter into certain transactions with affiliates, change fiscal year, enter into restrictions on distributions from subsidiaries, and enter into certain merger or asset sale transactions. The Credit Agreement also contains financial covenants to comply with a maximum total leverage ratio and a minimum interest coverage ratio on a quarterly basis. Such financial covenants and certain restrictions on the incurrence of indebtedness and the consummation of acquisition and other investments will not be applicable to the Company until the Company has borrowed any amounts or obtained any letters of credit under the Credit Agreement. The Company may not borrow or otherwise request a letter of credit under the Revolver unless, among other things, it would have a total leverage ratio of no more than 4.50:1.00 on a pro forma basis after giving effect to such borrowing or letter of credit and the aggregate amount of cash and cash equivalents of the Company and its subsidiaries has been reduced by at least $100.0 million as compared to February 4, 2014.
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Events of Default. The Credit Agreement contains customary events of default for an agreement of this type. If an event of default under the Credit Agreement occurs and is continuing, the administrative agent may, and, at the request of lenders holding more than 50.0% of the sum of the outstanding amounts and unused commitments under the Revolver will, take any or all of the following actions: (i) declare all outstanding obligations under the Credit Agreement to be immediately due and payable and require the Company to cash collateralize all outstanding letters of credit issued under the Credit Agreement, (ii) terminate all commitments under the Credit Agreement or (iii) exercise the rights and remedies available under the Credit Agreement and any related loan documents. In addition, if, among other things, the Company or any of its restricted subsidiaries, as defined in the Credit Agreement, does not pay its debts as such debts become due or any bankruptcy, insolvency, liquidation or similar proceeding is instituted by or against any such party, then any outstanding obligations under the Credit Agreement (including obligations to cash collateralize outstanding letters of credit issued under the Credit Agreement) will automatically become immediately due and payable without any further act by the administrative agent or any lender.
In connection with the entry into the Indenture and the Credit Agreement, the Company and the Guarantors acknowledged and agreed to the Intercreditor Agreement. The Intercreditor Agreement provides, among other things, that the liens on the collateral securing the Notes and related obligations will be junior and subordinate in all respects to the liens on the collateral securing the Revolver and related obligations.
CASH FLOWS
|
For the year ended December 31, | |||||||||
---|---|---|---|---|---|---|---|---|---|---|
(in thousands)
|
2013 | 2012 | 2011 | |||||||
Cash (used in)/provided by |
||||||||||
Operating activities |
$ | (38,322 | ) | $ | (6,610 | ) | $ | | ||
Investing activities |
(219,638 | ) | (29,215 | ) | | |||||
Financing activities |
307,193 | 39,500 | | |||||||
Effect of exchange rate changes on cash |
(254 | ) | | | ||||||
| | | | | | | | | | |
Net increase in cash and cash equivalents |
$ | 48,979 | $ | 3,675 | $ | | ||||
| | | | | | | | | | |
| | | | | | | | | | |
Cash flows from operating activities
2013
Cash used in operating activities totaled $38.3 million for the year ended December 31, 2013, and was primarily attributable to our net loss, partially offset by non-cash depreciation and amortization expenses of $24.7 million, non-cash stock compensation expense of $32.8 million, non-cash amortization of deferred financing cost and provision for deferred income taxes of $14.5 million.
2012
Cash used in operating activities totaled $6.6 million for the year ended December 31, 2012 and was principally attributable to the operations of DDP and LIC, whose results have been included since their respective dates of acquisition in 2012, and corporate overhead. The principal driver of this was our net loss of $16.2 million, partially offset by non-cash expense of $2.2 million plus changes in our working capital of $5.3 million.
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2011
No cash was used by operating activities for the period from July 7, 2011 (Inception) to December 31, 2011. While we incurred legal expenses of $0.1 million in conjunction with our formation during this period, the expenses were accrued at December 31, 2011 and not settled in cash until the following year.
Cash flows from investing activities
2013
Cash used in investing activities totaled $219.6 million for the year ended December 31, 2013, primarily attributable to cash paid for acquisitions. Cash totaling $209.8 million, net of acquired cash, was used to fund the purchase of ID&T JV, Beatport, ID&T, Totem, Made, i-Motion, Paylogic, and certain other acquisitions.
2012
Cash used by investing activities totaled $29.2 million for the year ended December 31, 2012. Cash totaling $16.1 million was used to fund the purchase of our three acquisitions in 2012, DDP, MMG and LIC net of cash acquired, and $0.6 million was used to fund the purchase of equipment used in the production of events. $12.5 million was used to fund our investment in the ID&T JV.
2011
There was no cash used in investing activities for the period from July 7, 2011 (Inception) to December 31, 2011.
Cash flows from financing activities
2013
Cash provided in financing activities totaled $307.2 million for the year ended December 31, 2013, primarily attributable to the net proceeds received from the private placement of our common stock of $30.0 million, net proceeds from our initial public offering of $240.9 million, net proceeds from the Prior Term Loan Facility of $71.1 million, and payment of a related party note of $7.0 million.
2012
Cash provided by financing activities for the year ended December 31, 2012 totaled $39.5 million, and was composed of the net proceeds from the issuance of our common stock of $32.5 million and proceeds from notes payable of $7.0 million.
2011
There was no cash used for financing activities for the period from July 7, 2011 (Inception) to December 31, 2011.
Capital expenditures
Our capital expenditures for the year ended December 31, 2013 and 2012 was $5.2 million and $0.6 million, respectively
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Future capital requirements
Based on our current business plan, we believe that the combination of our current sources of liquidity, the proceeds from private sales of our common stock, the proceeds from our initial public offering and the proceeds from the refinancing transaction will be sufficient to meet our anticipated operating cash needs for at least the next 12 months.
We intend to continue to acquire additional companies in the live events and consumer Internet industries, and we are currently in the process of exploring a variety of financing options in conjunction with consummating further acquisitions. There can be no assurance that we will be able to successfully raise the capital required to complete future acquisitions.
If our current estimates of revenue, expenses or capital or liquidity requirements change or are inaccurate, or if cash generated from operations is insufficient to satisfy our liquidity requirements, we may seek to sell additional equity or debt securities, or arrange debt financing. In addition, we may seek additional financing to give us financial flexibility to pursue attractive acquisition or investment opportunities that may arise in the future. We cannot be certain that additional funds will be available to us on favorable terms when required, or at all.
CONTRACTUAL AND COMMERCIAL COMMITMENTS
Our contractual obligations as of December 31, 2013 were as follows:
|
Payments due by period | ||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|
(in thousands)
|
Total | 1 - 3 years | 3 - 5 years | More than 5 years |
|||||||||
Prior Term Loan Facility |
$ | 75,000 | $ | 75,000 | $ | | $ | | |||||
Operating leases |
12,157 | 10,145 | 2,012 | | |||||||||
Other long-term obligations(a) |
39,016 | 4,389 | | 34,627 | |||||||||
| | | | | | | | | | | | | |
Total |
$ | 126,173 | $ | 89,534 | $ | 2,012 | $ | 34,627 | |||||
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
OFF BALANCE SHEET ARRANGEMENTS
During the periods presented, we have no obligations, assets or liabilities that would be considered off balance sheet arrangements.
CRITICAL ACCOUNTING POLICIES AND SIGNIFICANT JUDGEMENTS AND ESTIMATES
Our consolidated financial statements are prepared in accordance with GAAP. In connection with the preparation of our consolidated financial statements, we are required to make assumptions and estimates about future events, and apply judgments that affect the reported amounts of assets, liabilities, revenue, expenses, and the related disclosures. We base our assumptions, estimates, and judgments on historical experience, current trends, and other factors that management believes to be relevant at the time our consolidated financial statements are prepared. On a regular basis, we review the accounting policies, assumptions, estimates, and judgments to ensure that our consolidated financial statements are presented fairly and in accordance with GAAP. However, because future events and their effects cannot be determined with certainty, actual results could differ from our assumptions and estimates, and such differences could be material.
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Our significant accounting policies are discussed in Note 1 of our consolidated financial statements. We believe that the following are the most critical to understanding and evaluating our reported financial results. We have reviewed these critical accounting estimates and related disclosures with our audit committee.
Revenue recognition
Revenue from festivals and events are recognized when the performance occurs. Ticket sales and any sponsorship revenue collected in advance of an event or service delivery are recorded as deferred revenue. We evaluate the criteria outlined in Financial Accounting Standards Board ("FASB") Accounting Standards Codification ("ASC") Subtopic 605-45, "Revenue RecognitionPrincipal Agent Considerations," in determining whether it is appropriate to record the gross amount of revenue and related costs or the net revenue. Under this accounting guidance, if we are the primary obligor to perform the services being sold, have general risk as it pertains to recruiting and compensating the talent, have the ability to control the ticket pricing, have discretion in selecting the talent, are involved in the production of the event, generally bear the majority of the credit or collection risk, or have several but not all of these indicators, revenue is recorded gross. If we do not have several of these indicators, we record revenue or losses on a net basis.
Revenue from our ticketing operations primarily consists of convenience and order processing fees charged at the time a ticket for an event is sold and is recorded on a net basis (net of the face value of the ticket).
Allowances for doubtful accounts
We record a provision for doubtful accounts based on historical experience and a detailed assessment of the collectability of our accounts receivable. To assist with the estimate, our management considers certain factors such as historical experience, industry data, credit quality, age of accounts receivable balances, and current economic conditions that may affect a customer's ability to pay. In cases where we become aware of circumstances that may impair a specific customer's ability to meet its financial obligations, we record a specific allowance against amounts due from the customer and thereby reduce the net recognized receivable to the amount we reasonably believe will be collected. There is significant judgment involved in estimating the allowance for doubtful accounts.
Stock-Based Compensation
We measure and recognize expense for stock-based compensation based on the grant date fair value of the award on a straight-line basis over the requisite service period. Because our stock was not publicly traded prior to our IPO we estimated the fair value of our common stock for purposes of determining the fair value of our option awards, as discussed in "Valuations of Common Stock" below. Determining the fair value of stock-based awards at the grant date requires judgment. We use the Black-Scholes option pricing model to determine the fair value of our stock option awards. We used a third-party valuation firm to perform the option pricing under the Black-Scholes model. The determination of the grant date fair value of our stock option awards using an option pricing model is affected by the estimated fair value per share of the common stock underlying those options as well as assumptions regarding a number of other complex and subjective variables. These variables include the risk-free interest rates, expected dividends, our expected stock price volatility over the expected term of the options, and stock option exercise and cancellation behaviors, which are estimated as follows:
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We used the following assumptions in our application of the Black-Scholes option pricing model for the period presented in the table below:
|
As of December 31, 2013 | |||
---|---|---|---|---|
Rick-free interest rate |
0.71% - 2.99 | % | ||
Dividend yield |
| |||
Volatility factor |
50% - 60 | % | ||
Weighted average expected life (in years)(a) |
5.0 - 7.5 |
In addition, CompensationStock compensation (Topic 718) ("ASC 718") requires forfeitures to be estimated at the time of grant and revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates.
Future expense amounts for any particular period could be affected by changes in our assumptions or changes in market conditions.
Valuations of Common Stock
We are required to estimate the fair value of the common stock underlying our share-based awards when performing the fair value calculations with the Black-Scholes option-pricing model. Prior to our initial public offering, the fair value of the common stock underlying our share-based awards was determined by our board of directors, with input from management, evidence of fair value based on the prior sales of company stock method as well as the reports of third-party valuation reports. We believe that our board of directors has the relevant experience and expertise to determine the fair value of our common stock. Our board of directors determined the fair value of our common stock on the date of grant based on a number of factors including:
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The prior sales of company stock or back-solve method estimates value by considering any prior arm's length sales of the Company's equity. When considering prior sales of the company's equity, the valuation considers the size of the equity sale, the relationship of the parties involved in the transaction, the timing of the equity sale, and the financial condition of the Company at the time of the sale.
The following table summarizes, by grant date, information regarding stock options granted prior to our IPO from January 1, 2013 through September 30, 2013.
Grant Date
|
Number of Shares Granted |
Issuance Date(1) | Exercise Price |
Fair Value per Share of Common Stock |
Aggregate Grant Date Fair Value |
|||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
February 22, 2013 |
282,500 | February 22, 2013 | $ | 5.00 | $ | 5.00 | $ | 778,522 | ||||||||
February 23, 2013 |
4,350,000 | March 1, 2012 | $ | 2.00 | $ | 5.00 | $ | 16,140,326 | ||||||||
February 23, 2013 |
3,000 | December 19, 2012 | $ | 4.00 | $ | 5.00 | $ | 8,439 | ||||||||
February 23, 2013 |
150,000 | October 2, 2012 | $ | 4.00 | $ | 5.00 | $ | 440,220 | ||||||||
February 23, 2013 |
200,000 | March 1, 2012 | $ | 4.00 | $ | 5.00 | $ | 619,267 | ||||||||
February 23, 2013 |
500,000 | October 18, 2012 | $ | 4.00 | $ | 5.00 | $ | 1,504,375 | ||||||||
February 23, 2013 |
7,500 | July 2, 2012 | $ | 3.00 | $ | 5.00 | $ | 24,546 | ||||||||
February 23, 2013 |
10,000 | May 17, 2012 | $ | 3.00 | $ | 5.00 | $ | 32,728 | ||||||||
April 23, 2013 |
330,000 | April 23, 2013 | $ | 10.00 | $ | 7.19 | $ | 1,094,913 | ||||||||
April 23, 2013(2) |
700,000 | December 31, 2012 | $ | 5.00 | $ | 7.19 | $ | 3,213,000 | ||||||||
April 23, 2013(2) |
700,000 | December 31, 2012 | $ | 7.50 | $ | 7.19 | $ | 2,758,000 | ||||||||
April 23, 2013(2) |
700,000 | December 31, 2012 | $ | 10.00 | $ | 7.19 | $ | 2,429,000 | ||||||||
April 23, 2013(2) |
500,000 | February 11, 2013 | $ | 5.00 | $ | 7.19 | $ | 2,305,000 | ||||||||
April 23, 2013(2) |
750,000 | February 11, 2013 | $ | 7.50 | $ | 7.19 | $ | 2,985,000 | ||||||||
April 23, 2013(2) |
1,000,000 | February 11, 2013 | $ | 10.00 | $ | 7.19 | $ | 3,510,000 | ||||||||
April 23, 2013(2) |
5,000,000 | March 12, 2013 | $ | 5.00 | $ | 7.19 | $ | 23,150,000 | ||||||||
May 3, 2013 |
175,000 | May 3, 2013 | $ | 10.00 | $ | 7.19 | $ | 579,688 | ||||||||
June 1, 2013 |
2,400,000 | June 1, 2013 | $ | 10.00 | $ | 7.88 | $ | 8,352,000 | ||||||||
August 14, 2013 |
655,500 | August 14, 2013 | $ | 10.00 | $ | 9.67 | $ | 3,182,023 |
In utilizing the prior sales of our common stock, we considered recent sales of our common stock with new investors the most relevant in estimating the fair value of our common stock since we are not in distress and each party has the best incentive to not overpay or oversell its securities. We also considered all events that were known or knowable at the transaction date, including significant value-creating milestones that could affect the value of our common stock. For all of the options granted on February 23, 2013, we used $5.00 per share of common stock to calculate the stock-based compensation expense for the options. Our board of directors determined, with input from management, based on
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sales of common stock to unrelated third parties during this time period, that $5.00 per share of common stock represented fair value. At the time of grant, we did not choose to obtain a contemporaneous valuation of our common stock from a third-party valuation specialist, because in the judgment of the board of directors, with input from management, the multiple third-party transactions at $5.00 per common share during this period represented the best indicator of fair value.
Nevertheless, we did subsequently hire an unrelated third-party valuation specialist to perform a retrospective valuation of our common stock at March 31, 2013 and a contemporaneous valuation at June 30, 2013, August 14, 2013, and September 30, 2013. The range of fair values provided by the specialist is as follows.
|
Low | High | |||||
---|---|---|---|---|---|---|---|
March 31, 2013 |
$ | 5.78 | $ | 8.59 | |||
June 30, 2013 |
$ | 6.24 | $ | 9.52 | |||
August 14, 2013 |
$ | 8.00 | $ | 11.34 | |||
September 30, 2013 |
$ | 10.17 | $ | 12.07 |
Our board of directors, with input from management, concluded that a price of $5.00 per share of common stock was the appropriate value to utilize in determining the fair value of each of the stock option grants through February 23, 2013. The valuation at March 31, 2013, has a fair value range in excess of $5.00 per share, but we believe that $5.00 per share is the appropriate valuation for shares granted on February 23, 2013, as we completed two, separate third-party sales of common stock at $5.00 per share during this period. In addition, we estimate that the fair value of our shares increased substantially on March 15, 2013 to $7.19 per share, when we finalized the formation of our ID&T JV and completed the acquisition of Beatport.
The acquisition of Beatport provided the foundation of our growth strategy for our digital platform, which we expect will increase our engagement with our fans outside of live events. We believe this increased interaction will allow for deeper fan engagement and provide us opportunities to present a larger platform for our marketing partners. It is the fan interaction and projected increase in our revenues from Beatport, which we estimated would comprise approximately 47% of our revenue in 2014 and 2015, that drove the majority of the increase in our share value from $5.00 to $7.19 per share.
During the three months ended June 30, 2013, our estimated share valuation increased from $7.19 to $7.88. We attribute the accretion in value to several business events that took place during the quarter, including the successful completion of the Sensation festivals in Toronto by our ID&T JV, the scheduling and marketing of additional 2013 Sensation events in Miami, Oakland, New York and Las Vegas by our ID&T JV, and the commencement of ticket sales for TomorrowWorld, a three day event that was held from September 27 through September 29, 2013, and attended by more than 120,000 fans. Additionally, we raised $10.0 million through a private placement of our common stock in April 2013.
On April 23, 2013, we exchanged 9,350,000 warrants previously issued in connection with the promissory note and the Sillerman Guarantee for an equal number of stock options having substantially identical terms. The options provide for three-year cliff vesting based on the original issuance date of the warrants and shares of common stock. In addition, we exchanged 100,000 warrants with an exercise price of $.01 per share and 1,000,000 shares of common stock previously issued to Mr. Sillerman for 1,100,000 shares of restricted stock also having three-year cliff vesting. In connection with the services provided by Mr. Sillerman with respect to the amendment to the Prior Term Loan Facility on August 20, 2013, including extending his personal guarantee of the additional $10.5 million under the facility, our board of directors approved a grant to Mr. Sillerman of 233,000 shares of restricted stock that provide for three-year cliff vesting from the date of issuance, which we issued immediately prior to the closing of our IPO. The value of this consideration is $2.67 million. This compensation expense will
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be recognized over a thirty-six month vesting period. All of these options and shares of restricted stocks were awarded under our 2013 Supplemental Equity Compensation Plan.
In considering the value of the exchanged awards (options and restricted stock) we have looked at the value exclusive of the original equity awards. We calculated the fair value of the original issued warrants and common stock at $25.4 million. We determined that these instruments issued to Mr. Sillerman in consideration for his guarantee of the term loan were the most objective indicator of the guarantee's fair value, and therefore, the fair value of the guarantee was recorded at $25.4 million and accounted for as a deferred financing cost related to our term loan. As Mr. Sillerman's guarantee to the lenders is independent of the warrants and common stock issued to him, beyond their use as an indicator of fair value, the subsequent exchange of these instruments did not impact the amortization of the guarantee over the term of the credit facility.
The fair value of the April 23, 2013 exchanged awards is based on assumptions at the date of exchange rather than at the date the warrants and shares of our common stock were issued in connection with the promissory note and guarantee. The increase in the value of the exchanged awards over the original issuance of awards is primarily due to the passage of time and the increase in our enterprise value, as evidenced by the increase in our underlying share value from $5.00 per share at the date of the original issuances of awards to $7.19 per share on the date of the exchange, as opposed to an enhancement in any terms of the instruments received by Mr. Sillerman. Our calculation of fair value for these awards is $48.3 million. The expense associated with these awards will be recognized over their vesting period, which ranges from approximately 32 to 35 months. The underlying assumptions in valuing the awards on April 23, 2013, were as follows.
Risk-free interest rate |
0.97% - 1.01 | % | ||
Dividend yield |
| |||
Volatility factors |
60 | % | ||
Term (years) |
6.19 - 6.39 |
As mentioned above, the guarantee of the term loan by Mr. Sillerman as a deferred financing cost will continue to be recognized as interest expense through the maturity date of the credit facility. The cost associated with the warrants issued to Mr. Sillerman, with respect to the $7.0 million promissory note, has been fully expensed as of June 30, 2013.
In June and August 2013, in connection with their employment agreements, the compensation committee granted to Mr. Rascoff and Mr. Crowhurst, 1,400,000 and 1,410,000 stock options, respectively. The strike price of these options is $10.00 per share and the options vest, 748,667 upon issuance and the balance over 24 to 48 months. These stock options have been valued and are included in outstanding amounts as of the September 30, 2013 in the interim financial statements. The options have been valued using the Black Scholes method, and total aggregate compensation expense associated with these grants is $10.3 million of which $2.5 million has been recognized related to the amounts that vested upon the execution of their employment agreements, and the balance of $7.8 million will be recognized over 24 to 48 months. The underlying assumptions in valuing these awards were as follows.
Risk-free interest rate |
1.05 - 1.50 | % | ||
Dividend yield |
| |||
Volatility factors |
55 | % | ||
Term (years) |
5.0 - 6.8 |
In connection with the acceleration of Mr. Rascoff's prior grant we recognized an expense of $0.2 million.
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On August 14, 2013, we granted 655,500 stock options pursuant to the 2013 Equity Compensation Plan at a strike price of $10.00 per share. The options vest over periods of up to four years, and 132,125 options vested upon issuance. These options have been valued with an aggregate compensation cost of $3.2 million. We will recognize compensation costs of $0.7 million upon issuance and $2.5 million over a four-year period. As part of our valuation of these stock options we engaged an unrelated third-party valuation specialist to perform a valuation of our common stock. The range of fair values provided by the specialist was $8.00 to $11.34 per share. For the purpose of this valuation we have used the midpoint of the range of $9.67 per share.
During the period from July 1 through August 14, 2013, our estimated share value increased from $7.88 to our estimated value of $9.67 per share. We attribute the accretion in value to the fact that we executed purchase agreements for i-Motion, Made, Totem, and the ID&T Business and had, in the view of management, advanced closer to an IPO. The underlying assumptions in valuing these awards were as follows.
Risk-free interest rate |
1.48 - 2.12 | % | ||
Dividend yield |
| |||
Volatility factors |
55 | % | ||
Term (years) |
5.0 - 7.0 |
The estimated share value of our common stock as of August 14, 2013, (as determined using the same methodologies used throughout 2013), was determined to be $9.67, the midpoint of the range of $8.00 to $11.34 per share provided by our valuation specialist. The increase in the share value from August 14, 2013 is primarily due to the creation of a public market for our common stock and the expected benefits that the completion of the IPO will have for us. Consistent with our historical valuation approach and our status as a private company, the lack of marketability discount impacted the valuation at August 14, 2013, by 12%, or $1.32 per share. Absent the lack of marketability discount, the common stock value at August 14, 2013, would have been between $9.09 per share and $12.89 per share, with a midpoint of $10.99.
On October 18, 2013, we granted to employees options to purchase approximately 905,450 shares of our common stock at the price to the public in our IPO. These option grants will vest over five-year periods. The aggregate compensation cost for these option grants is $6.4 million. We will recognize compensation costs from these grants as follows: $0.2 million upon issuance and $6.2 million over a five-year period.
For options granted to non-employees that were remeasured at September 30, 2013, the underlying assumptions were used.
Risk-free interest rate |
2.44 | % | ||
Dividend yield |
| |||
Volatility factor |
50 | % | ||
Term |
9.05 |
Business Combinations
We account for our business combinations under the acquisition method of accounting. Identifiable assets acquired, liabilities assumed and any noncontrolling interest in the acquiree are recognized and measured as of the acquisition date at fair value. Additionally, contingent consideration is recorded at fair value on the acquisition date and classified as a liability. Goodwill is recognized to the extent by which the aggregate of the acquisition-date fair value of the consideration transferred and any noncontrolling interests in the acquiree exceeds the recognized basis of the identifiable assets acquired, net of assumed liabilities. Determining the fair value of assets acquired, liabilities assumed and
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noncontrolling interests requires management's judgment and often involves the use of significant estimates and assumptions, including assumptions with respect to future cash flows, discount rates and asset lives among other items.
Goodwill
Goodwill represents the excess of the aggregate purchase price paid over the fair value of the net tangible assets acquired. Goodwill is not amortized and is tested for impairment at least annually or whenever events or changes in circumstances indicate that the carrying value may not be recoverable. We have determined that we have two operating units and have selected October 1 as the date to perform our annual impairment test. The first step of the impairment test involves comparing the fair value of the reporting unit to its net book value, including goodwill. If the net book value exceeds its fair value, then we would perform the second step of the goodwill impairment test to determine the amount of the impairment loss. When performing the valuation of our goodwill, we make assumptions regarding our estimated future cash flows to determine the fair value of our business. If our estimates or related assumptions change in the future, we may be required to record impairment loss related to our goodwill. We have not recognized any goodwill impairments since our inception.
Impairment of long-lived assets
We assess the impairment of long-lived assets whenever events or changes in circumstances indicate that the carrying amount of such assets may not be recoverable. Recoverability of assets to be held and used is measured first by a comparison of the carrying amount of an asset to the future undiscounted net cash flows expected to be generated by the asset. If such assets are considered to be impaired, an impairment loss would be recognized. When measuring the recoverability of these assets, we will make assumptions regarding our estimated future cash flows expected to be generated by the assets. If our estimates or related assumptions change in the future, we may be required to impair these assets. We have not recognized any impairment of long-lived assets to date.
Income taxes
We account for our income taxes in accordance with the liability method. Under this method, deferred tax assets and liabilities are recognized for the expected future tax consequences of temporary differences between the financial reporting and tax bases of assets and liabilities, and for operating losses and tax credit carryforwards. Management must make assumptions, judgments, and estimates to determine our current provision for income taxes and also our deferred tax assets and liabilities as well as any valuation allowance to be recorded against a deferred tax asset. Our assumptions, judgments, and estimates relative to the current provision for income taxes take into account current tax laws, our interpretation of current tax laws, and possible outcomes of current and future audits conducted by domestic tax authorities. We have established reserves for income taxes to address potential exposures involving tax positions that could be challenged by tax authorities. Although we believe our assumptions, judgments, and estimates are reasonable, changes in tax laws or our interpretation of tax laws, and the resolution of potential tax audits could significantly impact the amounts provided for income taxes in our financial statements. Our assumptions, judgments, and estimates relative to the value of a deferred tax asset take into account predictions of the amount and category of future taxable income, such as income from operations or capital gains income. Actual operating results and the underlying amount and category of income in future years could render our current assumptions, judgments, and estimates of recoverable net deferred taxes inaccurate. Any of the assumptions, judgments, and estimates mentioned above could cause our actual income tax obligations to differ from our estimates, thus materially impacting our financial position and results of operations.
70
Recent Accounting Pronouncements
Recently Adopted Pronouncements
In February 2013, the FASB issued guidance which requires companies to disclose additional information about reclassifications out of AOCI, including changes in AOCI balances by component and significant items reclassified out of AOCI. The new disclosure requirements are applied prospectively and are effective for interim and annual periods beginning after December 15, 2012.
In July 2013, the FASB issued guidance that requires a liability related to an unrecognized tax benefit to be offset against a deferred tax asset for a net operating loss carryforward, a similar tax loss or a tax credit carryforward if certain criteria are met. The guidance is effective for interim and annual periods beginning after December 15, 2013 and are applied prospectively to unrecognized tax benefits that exist at the effective date. Early adoption and retrospective application of the new guidance are permitted. This guidance is consistent with our present practice and will not have a material impact on our financial position.
Quantitative and Qualitative Disclosures about Market Risk
Market risk is the risk of loss arising from adverse changes in market rates and prices, such as interest rates, foreign currency exchange rates and commodity prices. Our primary market risk exposure is in the area of interest rate risk. We incurred interest expense on borrowings outstanding under the Prior Term Loan Facility at December 31, 2013. The Prior Term Loan Facility had variable interest rates. Borrowings under the Prior Term Loan Facility bore interest, at the Prior Term Loan Borrower's option, at a rate per annum equal to either (a) (i) a rate per annum equal to the highest of (1) the rate of interest per annum publicly announced from time to time by the administrative agent under the Prior Term Loan Facility as its prime rate in effect on such day at its principal office in New York City, (2) (x) the weighted average of the rates on overnight Federal funds transactions with members of the Federal Reserve System arranged by Federal funds brokers, as published by the Federal Reserve Bank of New York on the business day next succeeding such day plus (y) 0.50%, (3) (x) a rate per annum equal to (I) the offered rate which appears on the page of the Reuters Screen which displays an average British Bankers Association Interest Settlement Rate (such page currently being LIBOR01 page) for deposits in U.S. dollars being delivered in the London interbank market for a one-month term, determined by the administrative agent under the Prior Term Loan Facility as of approximately 11:00 a.m. (London, England time) two business days prior to the applicable borrowing or conversion date divided by (II) one minus the applicable reserve percentage (with a rate floor of 1.25% per annum) plus (y) 1.00% and (4) 2.25% per annum, plus (ii) 6.50% per annum or (b) (i) a rate per annum equal to (1) for each one, two, three or six month (or if agreed to by all the lenders under the Prior Term Loan Facility, nine or twelve months) interest period as selected by the Prior Term Loan Borrower, the offered rate which appears on the page of the Reuters Screen which displays an average British Bankers Association Interest Settlement Rate (such page currently being LIBOR01 page) for deposits (for delivery on the first day of such interest period) with a term equivalent to such interest period in U.S. dollars, determined by the administrative agent under the Prior Term Loan Facility as of approximately 11:00 a.m. (London, England time), two business days prior to the commencement of such interest period divided by (2) one minus the applicable reserve percentage (with a rate floor of 1.25% per annum) plus (ii) 7.50% per annum.
Market Risk
Interest Rate Risk
As of December 31, 2013, the interest rate applicable to the Prior Term Loan Facility was 8.75%. Based on our Prior Term Loan Facility at December 31, 2013, assuming a 1% increase over such 8.75%, our annual interest cost would increase by approximately $0.8 million.
71
Foreign Currency Risk
As we have foreign operations, foreign currency exchange risk also arises as a normal part of our business. In particular, we are currently subject to fluctuations due to changes in foreign exchange rates in the Euro and Australian dollar. As a result, our financial results could be affected by factors such as changes in foreign currency exchange rates or weak economic conditions in the foreign markets in which we have operations. We reduce this risk by transacting our international business in local currencies. In this manner, assets and liabilities are matched in the local currency, which reduces the need for currency conversions. To manage the currency exchange risk, we may enter into forward or option contracts, but have not done so as of December 31, 2013.
We have operations in countries throughout the world. The financial results of our foreign operations are measured in their local currencies. As a result, our financial results could be affected by factors such as changes in foreign currency exchange rates or weak economic conditions in the foreign markets in which we have operations. Currently, we do not operate in any hyper-inflationary countries. Our foreign operations reported operating income of $92.2 million for the year ended December 31, 2013. We estimate that a 10% change in the value of the United States dollar relative to foreign currencies would change our operating income for the year ended December 31, 2013 by $9.2 million. As of December 31, 2013, our primary foreign exchange exposure included the Euro and Australian Dollar.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
The information required by this Item 7A has been included in Item 7. Management's Discussion and Analysis of Financial Condition and Results of OperationsQuantitative and Qualitative Disclosures about Market Risk, which information is incorporated herein by reference.
72
ITEM 8 FINANCIAL STATEMENTS AND SUPPLEMENTAL SCHEDULES
Report of Independent Registered Public Accounting Firm
The Board of Directors and Shareholders of SFX Entertainment, Inc.
We have audited the accompanying consolidated balance sheets of SFX Entertainment, Inc. as of December 31, 2013 and 2012, and the related consolidated statements of operations, comprehensive loss, stockholders' equity/(deficit), and cash flows for the two years ended December 31, 2013 and the period from July 7, 2011 (inception) through December 31, 2011. Our audits also included the financial statement schedule listed in the Index at Item 15(a)2. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and schedule based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. We were not engaged to perform an audit of the Company's internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company's internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of SFX Entertainment, Inc. at December 31, 2013 and 2012, and the consolidated results of its operations and its cash flows for the two years ended December 31, 2013 and the period from July 7, 2011 (inception) through December 31, 2011, in conformity with U.S. 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.
/s/
Ernst & Young LLP
New York, New York
March 31, 2014
73
SFX Entertainment, Inc.
Consolidated Balance Sheets
(in thousands except share data)
|
December 31, 2013 |
December 31, 2012 |
|||||
---|---|---|---|---|---|---|---|
|
|
(Restated) |
|||||
Assets: |
|||||||
Cash and cash equivalents |
$ | 52,654 | $ | 3,675 | |||
Restricted cash |
16,905 | | |||||
Accounts receivablenet of allowance of $203 and $0, as of December 31 2013 and 2012, respectively |
7,270 | 1,998 | |||||
Due from promotersnet of allowance of $1,279 and $997, as of December 31, 2013 and 2012, respectively |
6,575 | 1,597 | |||||
Prepaid expenses |
3,752 | 181 | |||||
Due from related parties |
1,063 | | |||||
Other current assets |
30,485 | 223 | |||||
| | | | | | | |
Total current assets |
118,704 | 7,674 | |||||
Property, plant and equipment, net |
9,004 | 1,236 | |||||
Goodwill |
142,207 | 21,571 | |||||
Intangible assets, net |
306,412 | 23,571 | |||||
Other assets |
2,815 | 12,680 | |||||
| | | | | | | |
Total assets |
$ | 579,142 | $ | 66,732 | |||
| | | | | | | |
| | | | | | | |
Liabilities: |
|||||||
Accounts payable and accrued expenses |
$ | 45,839 | $ | 7,932 | |||
Notes payable, current |
14,380 | 8,491 | |||||
Label and royalty payables |
12,602 | | |||||
Deferred revenue |
4,598 | 324 | |||||
Due to related parties |
4,359 | 4,525 | |||||
Other current liabilities |
8,716 | 4,407 | |||||
| | | | | | | |
Total current liabilities |
90,494 | 25,679 | |||||
Deferred tax liabilities |
21,988 | 67 | |||||
Notes payable, long term |
74,674 | | |||||
Due to related parties, long term |
470 | | |||||
Acquisition related contingencies |
39,016 | 2,313 | |||||
Mandatorily redeemable non-controlling interest |
1,258 | | |||||
Other long term liabilities |
6,530 | | |||||
| | | | | | | |
Total liabilities |
234,430 | 28,059 | |||||
Commitments and contingencies |
|||||||
Redeemable common stock, $.001 par value, 11,035,846 and 7,800,000 shares outstanding at December 31, 2013 and 2012, respectively |
60,580 | 25,000 | |||||
Redeemable non-controlling interest |
4,128 | 4,794 | |||||
Stockholders' equity |
|||||||
Common stock, $0.001 par value, 300,000,000 authorized, 77,218,391 and 40,461,027 shares issued and outstanding at December 31, 2013 and 2012, respectively |
76 | 40 | |||||
Preferred stock, $0.001 par value, 100,000,000 authorized, 0 shares issued and outstanding at December 31, 2013 and 2012 |
| | |||||
Additional paid-in capital |
409,743 | 25,200 | |||||
Due from stockholder for stock subscriptions |
| (36 | ) | ||||
Accumulated other comprehensive loss |
(1,663 | ) | | ||||
Accumulated deficit |
(128,218 | ) | (16,325 | ) | |||
| | | | | | | |
Total SFX stockholders' equity |
279,938 | 8,879 | |||||
Non-controlling interest in subsidiary |
66 | | |||||
| | | | | | | |
Total stockholders' equity |
280,004 | 8,879 | |||||
| | | | | | | |
Total liabilities and stockholders' equity |
$ | 579,142 | $ | 66,732 | |||
| | | | | | | |
| | | | | | | |
See accompanying notes to the consolidated financial statements
74
SFX Entertainment, Inc.
Consolidated Statements of Operations
(in thousands except per share data)
|
Year Ended December 31, | |
||||||||
---|---|---|---|---|---|---|---|---|---|---|
|
Period from July 7 to December 31, 2011 |
|||||||||
|
2013 | 2012 | ||||||||
Revenue: |
||||||||||
Service revenue |
$ | 123,608 | $ | 24,513 | $ | | ||||
Sale of products |
46,849 | 302 | | |||||||
| | | | | | | | | | |
Total Revenue |
170,457 | 24,815 | | |||||||
Direct costs: |
||||||||||
Cost of services |
108,968 | 22,719 | | |||||||
Cost of products sold |
31,132 | 300 | | |||||||
| | | | | | | | | | |
Total Direct Costs |
140,100 | 23,019 | | |||||||
Gross profit |
30,357 | 1,796 | | |||||||
Operating expenses: |
||||||||||
Selling, general and administrative expenses |
100,382 | 17,026 | 101 | |||||||
Depreciation |
2,239 | 75 | | |||||||
Amortization |
22,478 | 916 | | |||||||
| | | | | | | | | | |
Operating Loss |
(94,742 | ) | (16,221 | ) | (101 | ) | ||||
Interest expense |
(19,698 | ) | (34 | ) | | |||||
Other (expense) / income |
(5,066 | ) | 98 | | ||||||
| | | | | | | | | | |
Loss before income taxes |
(119,506 | ) | (16,157 | ) | (101 | ) | ||||
Benefit / (provision) for income taxes |
684 | (67 | ) | | ||||||
| | | | | | | | | | |
Net loss |
(118,822 | ) | (16,224 | ) | (101 | ) | ||||
Less: Net loss attributable to non-controlling interest |
(6,929 | ) | | | ||||||
| | | | | | | | | | |
Net loss attributable to SFX Entertainment, Inc. |
$ | (111,893 | ) | $ | (16,224 | ) | $ | (101 | ) | |
| | | | | | | | | | |
| | | | | | | | | | |
Loss per sharebasic & diluted |
$ | (1.73 | ) | $ | (0.44 | ) | N/A | |||
Weighted average shares outstandingbasic & diluted |
64,691 | 37,186 | N/A |
See accompanying notes to the consolidated financial statements
75
SFX Entertainment, Inc.
Consolidated Statements of Comprehensive Loss
(in thousands except share data)
|
Year Ended December 31, | |||||||||
---|---|---|---|---|---|---|---|---|---|---|
|
2013 | 2012 | 2011 | |||||||
Net loss |
$ | (118,822 | ) | $ | (16,224 | ) | $ | (101 | ) | |
Other comprehensive loss, net of tax: |
||||||||||
Foreign currency translation adjustments |
(1,663 | ) | | | ||||||
| | | | | | | | | | |
Comprehensive loss, net of tax |
(120,485 | ) | (16,224 | ) | (101 | ) | ||||
| | | | | | | | | | |
Comprehensive loss attributable to non-controlling interest, net of tax |
(6,929 | ) | | | ||||||
| | | | | | | | | | |
Comprehensive loss attributable to common stockholders of SFX Entertainment, Inc., net of tax |
$ | (113,556 | ) | $ | (16,224 | ) | $ | (101 | ) | |
| | | | | | | | | | |
| | | | | | | | | | |
See accompanying notes to the consolidated financial statements
76
SFX Entertainment, Inc.
Consolidated Statement of Changes in Stockholders' Equity/(Deficit)
(in thousands except share data)
|
Common Stock | |
|
|
Accumulated other comprehensive loss |
|
|
||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
|
Additional paid-in- capital |
Stock subscription receivable |
Accumulated deficit |
Non- controlling interest |
Total stockholders' equity/(deficit) |
||||||||||||||||||||
|
Shares | Amount | |||||||||||||||||||||||
Balance at July 7, 2011 |
| $ | | $ | | $ | | $ | | $ | | $ | | $ | | ||||||||||
| | | | | | | | | | | | | | | | | | | | | | | | | |
Net loss |
| | | | (101 | ) | | | (101 | ) | |||||||||||||||
| | | | | | | | | | | | | | | | | | | | | | | | | |
Balance at December 31, 2011 |
| $ | | $ | | $ | | $ | (101 | ) | $ | | $ | | $ | (101 | ) | ||||||||
| | | | | | | | | | | | | | | | | | | | | | | | | |
Net loss |
| | | | (16,224 | ) | | | (16,224 | ) | |||||||||||||||
Common stock issued |
40,461,027 | 40 | 19,801 | | | | | 19,841 | |||||||||||||||||
Non cash stock compensation expense |
| | 2,209 | | | | | 2,209 | |||||||||||||||||
Issuance of warrants |
| | 3,190 | | | | | 3,190 | |||||||||||||||||
Stock subscription receivable |
| | | (36 | ) | | | | (36 | ) | |||||||||||||||
| | | | | | | | | | | | | | | | | | | | | | | | | |
Balance at December 31, 2012 |
40,461,027 | $ | 40 | $ | 25,200 | $ | (36 | ) | $ | (16,325 | ) | $ | | $ | | $ | 8,879 | ||||||||
| | | | | | | | | | | | | | | | | | | | | | | | | |
Net loss |
| | | | (111,893 | ) | | (6,858 | ) | (118,751 | ) | ||||||||||||||
Issuance of common stockacquisitions |
7,301,237 | 7 | 53,442 | | | | 6,924 | 60,373 | |||||||||||||||||
Release of temporary common stock to permanent stock |
3,500,000 | 4 | 14,997 | | | | | 15,001 | |||||||||||||||||
Proceeds from sale of common stock |
24,000,000 | 24 | 260,834 | | | | | 260,858 | |||||||||||||||||
Collection of stock subscription receivable |
| | | 36 | | | | 36 | |||||||||||||||||
Non cash stock based compensation |
1,933,000 | | 32,806 | | | | | 32,806 | |||||||||||||||||
Issuance of warrants |
| | 22,250 | | | | | 22,250 | |||||||||||||||||
Sillerman exchange and share-based payments |
23,127 | 1 | 214 | | | | | 215 | |||||||||||||||||
Other comprehensive loss |
| | | | | (1,663 | ) | | (1,663 | ) | |||||||||||||||
| | | | | | | | | | | | | | | | | | | | | | | | | |
Balance at December 31, 2013 |
77,218,391 | $ | 76 | $ | 409,743 | $ | | $ | (128,218 | ) | $ | (1,663 | ) | $ | 66 | $ | 280,004 | ||||||||
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
See accompanying notes to the consolidated financial statements
77
SFX Entertainment, Inc.
Consolidated Statements of Cash Flows
(in thousands except share data)
|
Year Ended December 31, | |||||||||
---|---|---|---|---|---|---|---|---|---|---|
|
2013 | 2012 | 2011 | |||||||
Cash flow from operating activities: |
||||||||||
Net loss |
$ | (118,822 | ) | $ | (16,224 | ) | $ | (101 | ) | |
Adjustments to reconcile net loss to net cash used in operating activities: |
||||||||||
Depreciation |
2,239 | 75 | | |||||||
Amortization |
22,478 | 916 | | |||||||
Stock-based compensation expense |
32,806 | 2,209 | | |||||||
Non-cash interest expense |
15,190 | | | |||||||
Fair value remeasurement for contingent consideration |
(1,167 | ) | | | ||||||
Provision for doubtful accounts |
2,313 | 1,003 | | |||||||
Provision for deferred income taxes |
(684 | ) | 67 | | ||||||
Other |
(422 | ) | | | ||||||
Changes in operating assets and liabilities, net of acquisitions: |
||||||||||
Restricted cash |
(849 | ) | | | ||||||
Accounts receivable |
(2,319 | ) | (1,290 | ) | | |||||
Due from related parties |
4,010 | | | |||||||
Due from promoters |
(3,227 | ) | (755 | ) | | |||||
Prepaid expenses |
5,109 | 176 | | |||||||
Other current assets |
7,552 | 155 | | |||||||
Other assets |
(1,177 | ) | (161 | ) | | |||||
Accounts payable & accrued expenses |
17,525 | 6,534 | 96 | |||||||
Label and royalty payables |
(102 | ) | | | ||||||
Deferred revenue |
(13,626 | ) | | | ||||||
Due to related parties |
1,012 | (151 | ) | 5 | ||||||
Other current liabilities |
(7,542 | ) | 836 | | ||||||
Other liabilities |
1,381 | | | |||||||
| | | | | | | | | | |
Net cash used by operating activities |
(38,322 | ) | (6,610 | ) | | |||||
| | | | | | | | | | |
Cash flow from investing activities: |
||||||||||
Purchases of property, plant and equipment |
(5,168 | ) | (584 | ) | | |||||
Purchases of software and other intangibles |
(621 | ) | | | ||||||
Advances with respect to future acquisitions |
(4,054 | ) | (12,500 | ) | | |||||
Acquisition of businesses, net of cash acquired |
(209,795 | ) | (16,131 | ) | | |||||
| | | | | | | | | | |
Net cash used by investing activities |
(219,638 | ) | (29,215 | ) | | |||||
| | | | | | | | | | |
Cash flow from financing activities: |
||||||||||
Proceeds from common stock transactions |
270,635 | 32,500 | | |||||||
Related party note |
(7,000 | ) | 7,000 | | ||||||
Contribution from non-controlling interest holder |
1,000 | | | |||||||
Restricted cash |
(16,056 | ) | | | ||||||
First Lien Term Loan Facility and other borrowings, net of origination issuance cost and financing fees |
71,058 | | | |||||||
Payment of note and contingent considerations related to acquisitions |
(12,113 | ) | | | ||||||
Distributions to non-controlling interest shareholders |
(331 | ) | | | ||||||
| | | | | | | | | | |
Net cash provided by financing activities |
307,193 | 39,500 | | |||||||
| | | | | | | | | | |
Effect of exchange rate changes on cash |
(254 | ) | | | ||||||
| | | | | | | | | | |
Net increase in cash and cash equivalents |
48,979 | 3,675 | | |||||||
Cash and cash equivalents, beginning of period |
3,675 | | | |||||||
| | | | | | | | | | |
Cash and cash equivalents, end of period |
$ | 52,654 | $ | 3,675 | $ | | ||||
| | | | | | | | | | |
| | | | | | | | | | |
Supplemental Disclosure: |
||||||||||
Interest paid |
$ | 4,445 | $ | 43 | $ | | ||||
Net income taxes paid |
$ | 512 | $ | | $ | | ||||
Supplemental non-cash disclosures (investing and financing activities): |
||||||||||
Issuance of common stock in connection of acquisitions |
$ | 94,873 | $ | 12,304 | $ | | ||||
Issuance of warrants in connection of acquisitions |
$ | 1,825 | $ | | $ | | ||||
Issuance of notes payable and other liabilities in connection of acquisitions |
$ | 14,302 | $ | 9,082 | $ | | ||||
Contingent obligations in connection of acquisitions |
$ | 41,579 | $ | 2,313 | $ | |
See accompanying notes to the consolidated financial statements
78
1. DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Description of business
SFX Entertainment, Inc. ("SFX" or the "Company"), a Delaware corporation, was formed on June 5, 2012, under the name SFX Holding Corporation. On February 13, 2013, the name was changed to SFX Entertainment, Inc. The operations of SFX began on July 7, 2011, under an entity now named SFX EDM Holdings Corporation (a wholly owned subsidiary of SFX). SFX was formed with the intent of acquiring and operating companies within the live music industry, specifically those engaged in the promotion and production of live music events and festivals in the United States and abroad. Through the Company's recent acquisitions, it is actively engaged in the production and promotion of live electronic music culture (EMC) festivals and events, production of music tours, selling event tickets through a ticketing platform, merchandising and related services. In addition, it also manages large, event-driven nightclubs that serve as venues for key electronic music talent.
For the year ended December 31, 2013, SFX successfully completed the acquisition of certain assets and liabilities of the following companies:
The consolidated financial statements of SFX include the activities for these acquired companies from the dates of their respective acquisition by SFX (See Note 6Business Combinations).
On October 15, 2013, the Company completed its initial public offering in which the Company sold an aggregate of 20,000,000 shares of its common stock at a public offering price of $13.00 per share. The Company received aggregate net proceeds of $240,858, before deducting underwriting commissions and certain offering expenses.
Basis of presentation and principles of consolidation
The Company's consolidated financial statements include all accounts of the Company and its majority owned and controlled subsidiaries.The Company consolidates entities in which the Company owns more than 50% of the voting common stock and controls operations. Investments in non-consolidated affiliates in which the Company owns more than 20% of the voting common stock or otherwise exercises significant influence over operating and financial policies but not control of the non-consolidated affiliate are accounted for using the equity method of accounting. Investments in non-consolidated affiliates in which the Company owns less than 20% of the voting common stock are
79
1. DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
accounted for using the cost method of accounting. Intercompany accounts among the consolidated businesses have been eliminated in consolidation.
Use of estimates
The preparation of financial statements in conformity with accounting principals generally accepted in the United States of America ("US GAAP") requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Significant estimates made by management include allowance for doubtful accounts, purchase accounting allocations, recoverability and useful lives of property, plant and equipment, identifiable intangible assets and goodwill, the valuation allowance of deferred tax assets, contingencies and equity compensation. Actual results could differ materially from those estimates.
Revenue recognition
Revenue from festivals and events are recognized when the performance occurs. Ticket sales collected in advance of an event are recorded as deferred revenue. The Company evaluates the criteria outlined in Financial Accounting Standards Board ("FASB") Accounting Standards Codification ("ASC") Subtopic 605-45, "Revenue RecognitionPrincipal Agent Considerations," in determining whether it is appropriate to record the gross amount of revenue and related costs or the net revenue. Under this accounting guidance, if the Company is the primary obligor to perform the services being sold, has general risk as it pertains to recruiting and compensating the talent, has the ability to control the ticket pricing, has discretion in selecting the talent, is involved in the production of the event, generally bears the majority of the credit or collection risk, or has several but not all of these indicators, revenue is recorded gross. If the Company does not have several of these indicators, it records revenue or losses on a net basis.
Revenue from music sales made via the Internet is recognized when persuasive evidence of an arrangement exists, products or services have been delivered to and accepted by the customer, collectibility is reasonably assured, and the Company's fee is fixed or determinable. Generally, the Company recognizes music sales as revenue upon the customer's remittance by a credit card.
Direct costs
Direct costs include artist performance fees and travel expenses, venue fees, show-specific marketing and advertising expenses, show-related production expenses, and other costs related to producing the events. Direct costs also include cost of royalties to record labels, mechanical royalties to collecting societies and labels, direct costs of order fulfillment, and direct costs associated with ticketing activities. These costs are primarily variable in nature.
Selling, general and administrative expenses
Selling, general and administrative expenses include salaries and other compensation costs related to employees, credit card fees, legal fees, professional fees, rent and other expenses.
Advertising expense
The Company expenses advertising costs when incurred. These costs are recorded on the income statement as cost of services or selling, general, and administrative expenses. Advertising expenses
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1. DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
recorded as cost of services for the years ended December 31, 2013 and 2012 were $3,791 and $0, respectively. Advertising expenses recorded as selling, general, and administrative expenses for the years ended December 31, 2013 and 2012 were $3,687 and $393, respectively. There were no advertising expenses incurred in 2011.
Foreign currency
Results of operations for foreign subsidiaries and foreign equity investees are translated into United States dollars using the average exchange rates during the year. The assets and liabilities of those subsidiaries and investees are translated into United States dollars using the exchange rates at the balance sheet date. The related translation adjustments are recorded in a separate component of stockholders' equity in accumulated other comprehensive loss. Cumulative translation adjustments included in accumulated other comprehensive loss were $1,663 as of December 31, 2013. As of December 31, 2012, the Company did not operate foreign subsidiaries or have foreign equity investees, therefore there were no cumulative translation adjustments. Foreign currency transaction gains and losses are included in the statements of operations.
Income taxes
The Company accounts for income taxes in accordance with the asset and liability method. Under this method, deferred tax assets and liabilities are recognized for the expected future tax consequences of temporary differences between the financial reporting and tax bases of assets and liabilities, and for operating losses and tax credit carryforwards. Management must make assumptions, judgments, and estimates to determine the current provision for income taxes and also the deferred tax assets and liabilities as well as any valuation allowance to be recorded against deferred tax assets.
The Company's assumptions, judgments, and estimates relative to the current provision for income taxes take into account current tax laws, its interpretation of current tax laws, and possible outcomes of current and future audits conducted by domestic tax authorities. The Company has established reserves for income taxes to address potential exposures involving tax positions that could be challenged by tax authorities. Although the Company believes its assumptions, judgments, and estimates are reasonable, changes in tax laws or the Company's interpretation of tax laws, and the resolution of potential tax audits could significantly impact the amounts provided for income taxes in the financial statements.
The Company's assumptions, judgments, and estimates relative to the value of a deferred tax asset take into account predictions of the amount and category of future taxable income, such as income from operations or capital gains income. Actual operating results and the underlying amount and category of income in future years could render its current assumptions, judgments, and estimates of recoverable deferred tax assets inaccurate. Any of the assumptions, judgments and estimates mentioned above could cause the Company's actual income tax obligations to differ from its estimates, thus materially impacting its financial position and results of operations.
Cash, cash equivalents and restricted cash
The Company considers cash deposits in all highly liquid investments with a maturity of three months or less to be cash equivalents. The Company's cash deposits are held at multiple high credit quality financial institutions. The Company's cash deposits at these institutions often exceeded the federally insured limits. Restricted cash represents cash not available for immediate and general use by the Company, primarily related to a deposit in a collateral account, related to a letter of credit, pledged
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1. DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
as part of the Company's acquisition of Rock World S.A. in 2014. See Note 17Subsequent events, for further discussion of this acquisition.
Accounts receivable and allowance for doubtful accounts
Accounts receivable are primarily amounts due from ticketing agencies in conjunction with events. The Company records a provision for doubtful accounts based on historical experience and a detailed assessment of the collectability of its accounts receivable. To assist with the estimate, management considers certain factors such as historical experience, credit quality, age of accounts receivable balances, and current economic conditions that may affect a customer's ability to pay. In cases where the Company becomes aware of circumstances that may impair a specific customer's ability to meet its financial obligations, the Company records a specific allowance against amounts due from the customer and thereby reduces the net recognized receivable to the amount reasonably believed to be collectible. There is significant judgment involved in estimating the allowance for doubtful accounts. The Company recorded an allowance for settlement revisions and doubtful accounts of $203 and $0 as of December 31, 2013 and December 31, 2012, respectively.
Due from promoters, due to promoters and allowance for doubtful accounts
In the period preceding an event, both the Company and its promoters incur various costs. These costs are tracked in a shared database which can be accessed by both parties at any time. As costs are incurred by the Company, a corresponding prepaid expense asset is recognized. After the event, the Company and its promoters agree upon a settlement for that individual event and that settlement culminates the earnings process. Based on the settlement, the Company generally records one amount in either Due From or Due To Promoters for that event.
Management assesses the collectability of the receivables due from the promoters and writes off balances when it determines that they are no longer collectible. The Company recorded an allowance for settlement revisions and doubtful accounts of $1,279 and $997 as of December 31, 2013 and December 31, 2012, respectively. On a periodic basis, management evaluates the balances due from promoters and determines whether to provide an allowance or if any balances should be written off. The evaluation is based on a past history of collections, current credit conditions, the length of time the balance is past due, and a past history of write-downs.
Prepaid event expenses
The Company routinely incurs event expenses in advance of the event date. These expenses are recorded as prepaid and are expensed when the event occurs.
Property, plant and equipment, and depreciation and amortization
Property, plant, and equipment are stated at cost net of accumulated depreciation. Depreciation expense is computed over the estimated useful lives of the assets using the straight-line method. Expenditures for maintenance and repairs are expensed as incurred. Additions, renewals and improvements that materially extend the life of the asset are capitalized and depreciated over five years or the extended life of the asset, whichever is shorter.
Leasehold improvements are depreciated over the shorter of the economic life or associated lease term.
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1. DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
The Company tests for possible impairment of property, plant and equipment whenever events or circumstances change, such as a current period operating cash flow loss combined with a history of, or projected, operating cash flow losses or a significant adverse change in the manner in which the asset is intended to be used, which may indicate that the carrying amount of the asset may not be recoverable. If indicators exist, the Company compares the estimated undiscounted future cash flows related to the asset to the carrying value. Any such impairment charge is recorded in depreciation and amortization expense in the statement of operations. The impairment loss calculations require management to apply judgment in estimating the loss. The Company has not recorded an impairment loss on its property, plant and equipment.
Business combinations
The Company accounts for business combinations under the acquisition method of accounting. Identifiable assets acquired, liabilities assumed and any non-controlling interest in the acquiree are recognized and measured as of the acquisition date at fair value. Additionally, contingent consideration is recorded at fair value on the acquisition date and classified as either a liability or equity. Goodwill is recognized to the extent by which the aggregate of the acquisition-date fair value of the consideration transferred and any non-controlling interests in the acquiree exceeds the recognized basis of the identifiable assets acquired, net of assumed liabilities. Determining the fair value of assets acquired, liabilities assumed and non-controlling interests requires management's judgment and often involves the use of significant estimates and assumptions, including assumptions with respect to future cash flows, discount rates and asset lives among other items. Acquisition related costs, including advisory, legal, accounting, valuation and other costs are expensed in the periods in which the costs are incurred. The results of operations of acquired businesses are included in the consolidated financial statements from the date of acquisition.
Due to the Company's rapid expansion plan, letters of intent, asset contribution agreements ("ACA"), or similar documents are signed regularly for businesses the Company has an interest in acquiring. While the language in each of these varies, management evaluates if there is effectively a constructive acquisition as of the date signed based on the control considerations within Accounting Statement Codification 805Business Combinations ("ASC 805"). To date, the Company has accounted for all acquisitions as of the date that the Company has transferred valuable consideration and control of the entities in question has been obtained.
Goodwill
Goodwill represents the excess of the aggregate purchase price paid over the fair value of the net tangible and identified intangible assets acquired. Goodwill is not amortized and is tested for impairment at least annually or whenever events or changes in circumstances indicate that the carrying value may not be recoverable. The Company has determined that it operates as two reporting units and has selected October 1 as the date to perform the annual impairment test. The first step of the impairment test involves comparing the fair value of the reporting unit to its net book value, including goodwill. If the net book value exceeds its fair value, then the Company would perform the second step of the goodwill impairment test to determine the amount of the impairment loss. When performing the valuation of its goodwill, the Company makes assumptions regarding estimated future cash flows to determine the fair value of its reporting units. If the estimates or related assumptions change in the future, the Company may be required to record impairment loss related to its goodwill. The Company has not recognized any goodwill impairments since its inception.
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1. DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Intangible assets
The Company accounts for intangible assets in accordance with Accounting Statement Codification 350Intangibles and GoodwillOther ("ASC 350"). Intangible assets, which arose in business combinations and are considered to have finite lives are valued at their fair value and are amortized taking into account the character of the acquired intangible asset and the expected period of benefit. The Company evaluates intangible assets for impairment whenever events or changes in circumstances indicate the carrying value may not be recoverable from its estimated future cash flows. The Company will determine the recoverability of its intangible assets by comparing the net book value to the related projected undiscounted cash flows from these assets, considering a number of factors, including past operating results, budgets, economic projections, market trends and product development cycles. If the net book value of the asset exceeds the related undiscounted cash flows, the asset is considered impaired, and a second test is performed to measure the amount of impairment loss. The Company has not recorded an impairment loss on its intangible assets.
Artist fee tax withholding
Artist fee tax withholdings are amounts owed to domestic and foreign taxing authorities for income tax withholdings required on payments made to foreign artists for services. These withholdings are withheld from the artist, accrued, and paid to the domestic and foreign taxing authority.
Fair value of financial instruments
The Company values its assets and liabilities using the methods of fair value as described in ASC 820, Fair Value Measurements and Disclosures ("ASC 820"). ASC 820 establishes a three-tier fair value hierarchy, which prioritizes the inputs used in measuring fair value.
The three levels of the fair value hierarchy under ASC 820 are described as follows:
The Company's financial instruments consist principally of cash, receivables, balances due from promoters, accounts payable, notes payable, other liabilities and warrants issued with respect to the Company's common stock. Cash, receivables, and balances due from promoters are financial assets with carrying values that approximate fair value. Accounts payable and other liabilities are financial liabilities with carrying values that approximate fair value. Notes payable and related warrants are recorded based on their relative fair value at date of issuance. The Company believes that the recorded values of all of its financial instruments approximate fair value because of the nature and duration of the respective financial instruments.
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1. DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Stock-based compensation
The Company follows the fair value recognition provisions in ASC 718, Stock Compensation ("ASC 718"). Stock-based compensation expense recognized during the year includes compensation expense for all share-based payments based on the grant date fair value estimated in accordance with the provisions in the FASB guidance for stock compensation. The grant date is the date at which an employer and an employee reach a mutual understanding of the key terms and conditions of a share-based payment award. Generally awards have been approved as needed, unless such approval is deemed to be a formality or perfunctory, and contemporaneous documentation exists.
The fair value for options in SFX common stock is estimated on the date of grant using the Black-Scholes option-pricing model. The fair value of the options is amortized to expense on a straight-line basis over the options' vesting period. Expected volatilities were based on similar companies' implied volatilities of traded options and historical volatilities. In addition, the Company has not paid a dividend on its common stock. The Company uses the simplified method for estimating the expected life within the valuation model which is the period of time that options granted are expected to be outstanding. The risk free rate for periods within the expected life of the option is based on the United States Treasury Note rate.
Non-consolidated affiliates
In general, non-consolidated investments in which the Company owns more than 20% of the common stock or otherwise exercises significant influence over the affiliate are accounted for under the equity method. As of December 31, 2013, the Company had various investments in non-consolidated affiliates, which were not deemed to be significant individually or in aggregate. However, the Company has not completed the valuation studies necessary to finalize the acquisition date fair values of certain equity investments acquired as part of the Company business acquisitions during 2013. For the year ended December 31, 2013, the Company's interests in the results of these operations are recorded in the statement of operations in "Other income" for $496. The Company did not have any non-consolidated affiliates as of December 31, 2012.
Recent Accounting Pronouncements
In February 2013, the FASB issued guidance which required companies to disclose additional information about reclassifications out of accumulated other comprehensive income ("AOCI"), including changes in AOCI balances by component and significant items reclassified out of AOCI. The new disclosure requirements are applied prospectively and are effective for interim and annual periods beginning after December 15, 2012. The Company has adopted this guidance.
In July 2013, the FASB issued guidance that requires a liability related to an unrecognized tax benefit to be offset against a deferred tax asset for a net operating loss carryforward, a similar tax loss or a tax credit carryforward if certain criteria are met. The guidance is effective for interim and annual periods beginning after December 15, 2013 and is applied prospectively to unrecognized tax benefits that exist at the effective date.
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2. CONCENTRATION OF CREDIT RISK
Financial instruments which could potentially subject the Company to concentrations of credit risk consist principally of cash, accounts receivable, and balances due from promoters. Exposure to losses on accounts receivable and due from promoters is minimal as the promoters and vendors with whom the Company partners for ticket sales and collection of event revenues typically remit proceeds to the Company in a timely manner. The Company maintains balances at financial institutions, which at times exceed the federally insured limit. On a periodic basis, management evaluates accounts receivable and its balances due from promoters and determines whether to provide an allowance or if any balances should be written off. The evaluation is based on a past history of collections, current credit conditions, the length of time the balance is past due, and a past history of write-downs.
The credit risk in amounts due from promoters is generally not diversified due to the limited number of promoters that the Company works with. The following table represents a breakdown of concentrations at December 31, 2013 and 2012:
Percentage of Due from Promoters at:
|
December 31, 2013 |
December 31, 2012 |
|||||
---|---|---|---|---|---|---|---|
Promoter A |
17 | % | | % | |||
Promoter B |
11 | % | | % | |||
Promoter C |
11 | % | | % | |||
Promoter D |
2 | % | 14 | % | |||
Promoter E |
| % | 16 | % |
Percentage of Accounts Receivable at:
|
December 31, 2013 |
December 31, 2012 |
|||||
---|---|---|---|---|---|---|---|
Counterparty A |
16 | % | | % | |||
Counterparty B |
7 | % | 30 | % | |||
Counterparty C |
6 | % | 22 | % |
3. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consists of the following:
(in thousands)
|
December 31, 2013 |
December 31, 2012 |
|||||
---|---|---|---|---|---|---|---|
Computer equipment |
$ | 2,474 | $ | 96 | |||
Furniture, fixtures and other equipment |
2,327 | 35 | |||||
Production equipment |
5,353 | 1,180 | |||||
Leasehold improvements |
1,153 | | |||||
| | | | | | | |
Property, plant and equipment, gross |
11,307 | 1,311 | |||||
Less accumulated depreciation |
(2,303 | ) | (75 | ) | |||
| | | | | | | |
Property, plant and equipment, net |
$ | 9,004 | $ | 1,236 | |||
| | | | | | | |
| | | | | | | |
Total depreciation expense related to property, plant and equipment was $2,239, $75, and $0 for the years ended December 31, 2013, 2012, and 2011, respectively. With the exception of certain production equipment, depreciation expense for production equipment is recognized upon each show/event with the assumption that there will be one show/event each year for the next five years.
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4. INTANGIBLE ASSETS
Intangible assets consist of the following:
|
2013 | 2012 | |||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
(in thousands) |
Intangible, Gross |
Accumulated Amortization |
Intangible, Net |
Intangible, Gross |
Accumulated Amortization |
Intangible, Net |
|||||||||||||
Fan database |
$ | 40,376 | $ | (3,380 | ) | $ | 36,996 | $ | 2,300 | $ | (364 | ) | $ | 1,936 | |||||
Supplier and customer relationship |
19,924 | (965 | ) | 18,959 | | | | ||||||||||||
Trademarks and trade names |
213,768 | (13,114 | ) | 200,654 | 6,470 | (437 | ) | 6,033 | |||||||||||
Management agreements |
13,600 | (2,720 | ) | 10,880 | 13,600 | | 13,600 | ||||||||||||
Non-compete agreements |
22,450 | (1,607 | ) | 20,843 | 2,094 | (112 | ) | 1,982 | |||||||||||
Other intellectual property |
19,697 | (1,617 | ) | 18,080 | 23 | (3 | ) | 20 | |||||||||||
| | | | | | | | | | | | | | | | | | | |
Total |
$ | 329,815 | $ | (23,403 | ) | $ | 306,412 | $ | 24,487 | $ | (916 | ) | $ | 23,571 | |||||
| | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | |
Amortization expense for the years ended December 31, 2013, 2012 and 2011 was $22,478, $916, and $0, respectively.
The following table presents future amortization expense for the period from December 31, 2013, through December 31, 2018 and thereafter, excluding $393 of in-process intangible assets, that have not been placed into service as of December 31, 2013.
(in thousands)
|
|
|||
---|---|---|---|---|
2014 |
$ | 56,696 | ||
2015 |
$ | 56,134 | ||
2016 |
$ | 53,265 | ||
2017 |
$ | 42,429 | ||
2018 |
$ | 37,162 | ||
Thereafter |
$ | 60,333 |
5. GOODWILL
The following table presents the changes in the carrying amount of goodwill in each of the Company's reportable segments for the years ended December 31, 2013 and 2012:
(in thousands)
|
Live Events | Platform | Total | |||||||
---|---|---|---|---|---|---|---|---|---|---|
Balance as of December 31, 2011 |
$ | | $ | | $ | | ||||
Acquisitions |
21,571 | | 21,571 | |||||||
| | | | | | | | | | |
Balance as of December 31, 2012 |
21,571 | | 21,571 | |||||||
Acquisitions(a) |
88,399 | 33,357 | 121,756 | |||||||
Foreign exchange |
(1,040 | ) | 97 | (943 | ) | |||||
Purchase price adjustment |
(177 | ) | | (177 | ) | |||||
| | | | | | | | | | |
Balance as of December 31, 2013 |
$ | 108,753 | $ | 33,454 | $ | 142,207 | ||||
| | | | | | | | | | |
| | | | | | | | | | |
During 2013, the Company reduced the purchase price related to one acquisition and increased the purchase price of another, both related to 2012 acquisitions, based on the terms in the purchase agreements, for a net decrease of $177, resulting in a decrease to goodwill by the same amount. In
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5. GOODWILL (Continued)
addition, the Company is in the process of finalizing its acquisition accounting for recent acquisitions which could result in changes to the relevant purchase price allocations including goodwill.
6. BUSINESS COMBINATIONS
During the years ended December 31, 2013 and 2012, the Company completed the following material acquisitions which further enhance its presence in the EMC space:
Acquired Entity
|
Acquisition Date | Purchase Price | |||||
---|---|---|---|---|---|---|---|
Life in Color, LLC ("LIC") |
July 31, 2012 | $ | 12,063 | ||||
Disco Productions, Inc. ("Disco" or "DDP") |
June 19, 2012 | $ | 8,232 | ||||
MMG |
December 31, 2012 | $ | 19,768 | ||||
ID&T JV |
January 1, 2013 | $ | 23,475 | ||||
Beatport |
March 15, 2013 | $ | 58,550 | ||||
ID&T |
October 18, 2013 | $ | 109,181 | ||||
Totem |
October 28, 2013 | $ | 89,295 | ||||
Made |
October 31, 2013 | $ | 68,989 | ||||
i-Motion |
November 18, 2013 | $ | 22,660 | ||||
Paylogic |
December 2, 2013 | $ | 15,163 |
2012
LIC
On July 31, 2012, SFX acquired certain assets and liabilities of LIC for $12,063 in cash and common stock. The purchase price was comprised of $8,131 in cash and $3,932 in common stock. LIC is a promoter and operator of EMC themed concerts with live entertainment. Goodwill recognized as part of the acquisition is primarily related to expected synergies and assembled work force and is expected to be deductible for tax purposes. For the period August 1, 2012 through December 31, 2012, LIC contributed revenue of $10,147 and pre-tax loss of $(452).
Disco
On June 19, 2012, SFX acquired certain assets and liabilities of Disco for $9,000 in cash and common stock. The purchase price was comprised of $4,000 in cash and $5,000 in common stock. Disco contracts with regional promoters to produce dance music events across the USA and internationally that feature electronic music artists playing at nightclub, arena and festival venues.
The asset purchase agreement includes a provision that the net liabilities assumed by the Company will not exceed $1,500. To the extent that the settlement of assumed liability payments, net of receivable collections, exceeds $1,500, the purchase price paid to the former shareholder will be adjusted in cash or the cancellation of common shares issued. In 2013, the Company reduced the cash portion of the purchase price by $768. In the fourth quarter of 2013, the Company recognized an adjustment due to the seller of $1,070. Since this adjustment was subsequent to the one year valuation window proscribed by GAAP, the adjustment was recognized as an expense in the statement of operations.
For the period from June 20, 2012 through December 31, 2012, Disco contributed revenue of $14,668 and pre-tax loss of ($1,490). Goodwill resulting from the Disco acquisition is expected to be deductible for tax purposes. Goodwill is primarily related to expected synergies and assembled work force.
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6. BUSINESS COMBINATIONS (Continued)
MMG
On December 31, 2012, SFX acquired certain assets and liabilities representing 80% of the operations of MMG for $17,455 in cash and equity. The purchase price was comprised of $5,000 in cash, a $9,082 promissory note and future payment, plus $3,373 in common stock. MMG is engaged in the business of nightlife operations and management. Contingent consideration of $2,313 was also recorded as part of the initial purchase price. This amount has been calculated at fair value based on a valuation prepared by an independent third party, and is contingent on the EBITDA results for MMG for 2014 exceeding a threshold amount of $3,372. The contingent payment was valued using a probability weighted income approach, whereby, different ranges of EBITDA targets were estimated and possible payment values were calculated based on the EBITDA estimates. These different payment values were then weighted based on their probability of occurrence. The weighted average value was then discounted to the present value using a 20.6% discount rate at December 31, 2012. Any contingent consideration will be comprised of 80% cash and 20% shares of the Company's common stock at a price equal to a 30-day volume weighted average closing price per share. In connection with the acquisition of MMG the Company recorded an amount representing the non-controlling interest of MMG of $4,794. The non-controlling interest in MMG was determined based on the fair value of MMG less the amounts paid by the Company for the 80% controlling interest.
In addition, the Company has a call option and the holders of the non-controlling interest in MMG have a put option, which are exercisable anytime during the period January 1, 2015 through June 30, 2015. The call and put options provide for the Company to acquire the remaining non-controlling interest at a price based on a multiple of 20% of MMG's 2014 EBITDA times six. In addition, the Company will adjust the carrying value of the redeemable non-controlling interest in MMG as the greater of the amount determined under non-controlling interest guidance and the redemption amount assuming the security was redeemable at the balance sheet date. Goodwill is not expected to be deductible for tax purposes and is attributable to expected synergies.
During 2012, the Company issued 786,467 shares of its common stock at $5.00 per share to the former shareholders of LIC, 1,000,000 shares of its common stock at $5.00 per share to the former owner of Disco Productions, Inc., and 674,560 shares of its common stock at $5.00 per share to the former owners of MMG. For purposes of calculating the value of the common stock, and prior to the Company's initial public offering, the Company evaluated and estimated the fair value of its common stock at each grant date. There was no public market for the Company's common stock and, as such, the Company evaluated the best evidence available to estimate the common stock's fair value. The common stock was valued using the market approach. The market approach bases the valuation measurement on what other similar enterprises or comparable transactions indicate the value to be. Based upon the most recent negotiated third-party transactions in the Company's common stock preceding the acquisitions, the Company valued the price of the common stock issued in conjunction with these transactions at $5.00 per share. The Company considered these transactions preceding the acquisition the best evidence of fair value for the common stock.
2013
ID&T JV
On January 1, 2013, the Company acquired 51% of ID&T JV, which has an exclusive license to use and promote, or rights to economic benefits from ID&T's brands in North America. The purchase price was $23,475, comprised of $12,500 in cash, 2,000,000 shares of common stock valued at $5.00 per share, which the Company has the right to purchase at a price of $35.00 per share, to the extent then held by the ID&T JV seller, for a period beginning January 1, 2013 and ending on January 1, 2016, and at a price of $50.00 per share through January 1, 2018, which in aggregate was valued at $9,150. In
89
6. BUSINESS COMBINATIONS (Continued)
addition, the Company issued $1,825 in warrants to buy 500,000 shares of common stock at $2.50 per share.
For a period of five years beginning in the year ended December 31, 2013, ID&T JV sellers were entitled to receive 100,000 warrants to purchase shares of the Company's common stock each year if ID&T JV achieved an EBITDA of $7,000 or more in the prior fiscal year. The warrant exercise price was equal the fair market value as determined in good faith by the Company's board of directors, but after the Company's initial public offering, based on the Company's stock's 30-day weighted average closing price. At the time of the acquisition, the Company did not forecast ID&T JV to achieve $7,000 or more in EBITDA in 2013, and could not determine that such a threshold level of EBITDA was probable in 2014 and after. Accordingly, no value was assigned to these warrants that may be issuable in the future. As part of the acquisition agreement to acquire the ID&T Business, the Company and the ID&T Business sellers extinguished this contingent payment.
Goodwill recognized as part of the acquisition of ID&T JV is expected to be deductible for tax purposes. Goodwill is attributable to expected synergies between the joint venture and the Company's businesses. Transaction-related expense of $159 was incurred in connection with this acquisition and is included in selling, general, and administrative expenses in the Company's consolidated statement of operations. ID&T JV is consolidated into the Company's results from the date of acquisition. From the date of acquisition through December 31, 2013, ID&T JV contributed revenue of $25,981 and pre-tax loss of $(16,919).
In connection with the acquisition of ID&T JV, the Company recorded an amount representing the non-controlling interest of ID&T JV of $22,554 which represents a 49% interest in ID&T JV. The acquisition-date fair value of the non-controlling interest in ID&T JV was measured using an income approach. The equity interests of ID&T JV are not traded and as such could not be determined based on active market prices. The fair value was determined by calculating the fair value of ID&T JV as a whole and subtracting the consideration the Company paid for the 51% controlling interest. In determining the fair value of ID&T JV, the acquisition-date fair value contemplated synergies that are expected to be created through the acquisition and determined that the synergies created from the acquisition will benefit ID&T JV as a whole, including the non-controlling interest, resulting in the Company's ownership and the non-controlling interest having proportionate economic interest to the respective ownership interests.
At the date of acquisition the Company considered ID&T JV to be a variable interest entity ("VIE") and considered the Company, based on the guidance in ASC 810, Consolidation ("ASC 810"), to be the primary beneficiary. ASC 810 requires an enterprise to consolidate a VIE if it is determined to be the primary beneficiary of the VIE. The primary beneficiary has both (a) the power to direct the activities of the VIE that most significantly impacts the entity's economic performance, and (b) the obligation to absorb losses or the right to receive benefits from the VIE that could potentially be significant to the VIE. The Company is solely required to fund and to absorb any losses of ID&T JV and is responsible for management decisions that have a significant impact on the economic performance of ID&T JV. In accordance with the agreement governing ID&T JV, the Company is required to fund the operations of ID&T JV and provide certain management expertise which is material to the operation of ID&T JV. The Company is solely responsible for funding the ID&T JV operations and is entitled to repayment of a portion of loans to ID&T JV, including commercially reasonable interest or a commercially reasonable preferred return to the extent that ID&T JV operations are funded by equity contributions, prior to ID&T JV making distributions of surplus cash to the members, and that distributions of surplus cash are made in proportion to the members' equity interests so that a majority of surplus cash will be distributed to the Company. As the primary beneficiary, the Company consolidates the results of ID&T JV. Upon the acquisition of the ID&T
90
6. BUSINESS COMBINATIONS (Continued)
Business on October 18, 2013, the Company acquired the remaining 49% of ID&T JV, and as of that date consolidates the ID&T JV under the voting interest model. See discussion of ID&T acquisition below.
Beatport
On March 15, 2013, the Company acquired 100% of the membership interests of Beatport for $58,550 in cash and equity. The purchase price was comprised of $33,900 in cash and $24,650 in common stock (4,930,000 shares of common stock valued at $5.00 per share as determined by sales of the Company's common stock at $5.00 per share with unrelated third parties). Beatport is primarily engaged in the business of selling EMC related digital music. Goodwill is expected to be deductible for tax purposes and is attributable to expected synergies and assembled workforce. Transaction related expense of $614 was expensed as incurred and is included within selling, general and administrative expenses in the consolidated statements of operations. Beatport is consolidated in the Company's results from the date of acquisition. From the date of acquisition through December 31, 2013, Beatport contributed revenue of $39,100 and pre-tax loss of ($4,530).
The value of the Company's common stock used in connection with the Beatport and ID&T JV transactions was $5.00 per share. This value was based on sales of the Company's equity to third-parties during that period and a valuation of the Company's common stock as of December 31, 2012, prepared by an independent third party.
ID&T
The Company acquired an option (the "ID&T Option") to buy a 75% ownership interest in the ID&T Business and has since acquired 100% of the ID&T Business (the "ID&T Acquisition"), which includes the acquisition of the remaining interest in the ID&T JV, with an economic effect as of July 1, 2013. On March 20, 2013, the Company paid $2,500 in cash and issued 2,000,000 shares of the Company's common stock to acquire the ID&T Option. The Company treated the $2,500 in cash and 2,000,000 of the Company's common stock as consideration transferred on March 20, 2013 for the ID&T Option as a deposit and later applied the considerations towards the total purchase price upon the closing of the acquired 100% ID&T Acquisition. On August 8, 2013, the Company entered into a stock purchase agreement with One of Us Holding B.V., the seller of the ID&T Business (the "ID&T Seller"), pursuant to which the Company exercised the ID&T Option. In connection with entering into this agreement, the Company paid an advance of $10,000 to the ID&T Seller and caused the $7,500 non-recourse loan that the ID&T JV made to ID&T to be transferred to the ID&T Seller, effectively canceling the repayment obligation for that loan. On October 18, 2013, the Company completed the acquisition of 100% of the ownership interests in the ID&T Business. The Company also separately acquired 100% of the ownership interests in One of Us International, B.V. ("One of Us International"). Through this acquisition the Company acquired the remaining 49% of the ownership interests in the previously established ID&T JV, which was not already owned by the Company. At the time of the purchase of the remaining ownership interests in ID&T JV, the ID&T Seller repaid to the Company $1,000, to settle losses relating to ID&T JV's operations. The consideration transferred at closing consisted of a cash payment of $60,834, plus the payment of certain working capital adjustments of $5,914, and the issuance to the ID&T Sellers 801,277 shares of the Company's common stock. Of the total consideration transferred at closing, $22,554 was preliminary attributed to the 49% non-controlling interest in ID&T JV. Goodwill is not expected to be deductible for tax purposes and is attributable to expected synergies and assembled workforce. Transaction related expenses of $2,588 were expensed as incurred and are included within selling, general and administrative expenses in the consolidated statements of operations. ID&T is consolidated into the Company's results from the date
91
6. BUSINESS COMBINATIONS (Continued)
of acquisition. From the date of acquisition through December 31, 2013, ID&T contributed revenue of $10,044 and pre-tax loss of $(2,700).
Totem
On October 28, 2013, the Company completed the acquisition of substantially all of the assets of the Totem business, now operating as SFX-Totem Pty Ltd., a 100% owned subsidiary, for $67,229 in cash, an AUD$5,000 (or $4,652 as of October 28, 2013) note due by February 28, 2014, and issued 1,105,846 shares of the Company's common stock with repurchase rights, as described below, valued at $15,930, including the value of the repurchase rights. On January 22, 2014, the Company settled the note payable to the sellers.
Totem has the right to require the Company to repurchase all (but not less than all) of the shares of the Company's common stock issued to Totem as consideration under the asset contribution agreement at the Company's initial public offering price of $13.00 per share. The repurchase right will be exercisable beginning on the second anniversary of the closing date and continuously for 30 days thereafter, and the payment for such repurchased shares must be made by the Company within 45 days after receiving notice from Totem of its election to exercise its repurchase right, therefore these shares are treated as temporary equity carried at the preliminary acquisition date fair value of $5,955. Additionally, the Totem purchase agreement requires the Company to make an earnout payment of AUD$10,000 (or $9,579 as of October 28, 2013) if the EBITDA of the business exceeds AUD$18,000 (or $17,242 as of October 28, 2013) for the one-year period ending December 31, 2014. Such earn out payment, if any, shall be paid in the form of cash and shares of the Company's common stock at the then current market price, with an allocation of cash and stock as to be determined in the Company's sole discretion, provided that the maximum cash payment shall not exceed AUD$5,000. The Company has preliminarily valued this contingent payment as of the acquisition date at $1,484. Goodwill is not expected to be deductible for tax purposes and is attributable to expected synergies and assembled workforce. Transaction related expenses of $1,292 was expensed as incurred and is included within selling, general and administrative expenses in the consolidated statements of operations. Totem is consolidated into the Company's results from the date of acquisition.From the date of acquisition through December 31, 2013, Totem contributed revenue of $41,170 and pre-tax income of $9,203.
Made
On October 31, 2013, the Company completed the acquisition of 100% of the issued and outstanding membership interest in Made. Pursuant to the amended and restated membership interest purchase agreement, the Company paid at closing $18,624 in cash and issued 392,158 shares of the Company's common stock valued on the closing date of $3,365. The Company previously paid an aggregate amount of $3,950, which was applied as part of the total purchase price consideration. The consideration includes $10,000 to be paid at the earlier of March 31, 2014 or the completion of the 2013 audit. The Company has preliminarily valued the non-interest bearing promissory notes at $9,650 discounted over the period due date at the borrowing rate of 9.0%. In December 2013, the Company paid to the sellers of Made a $3,600 contingent payment related to an insurance claim which was settled subsequent to the close of the acquisition. In addition, the sellers of Made will be entitled to receive a cash earn-out payment in 2018 in an amount equal to the greater of (A) (1) the product of (x) the greater of (a) the mean Estimated EBITDA of the ongoing festivals for 2015, 2016 and 2017 or (b) the median Estimated EBITDA of the ongoing festivals for 2015, 2016 and 2017, each as set forth in the Final Payment EBITDA report, and (y) a factor of 10, minus (2) thirty five million dollars ($35,000); or (B) ten million dollars ($10,000), (C) in the case of a payment pursuant to either (A) or (B), less the Final Payment Reserve Amount (the "Final Payment"), and (D) in the case of a payment pursuant to either (A) or (B), less the amount of payments, if any, due and payable by the Sellers as of
92
6. BUSINESS COMBINATIONS (Continued)
the Final Payment date. The Company has preliminarily valued these contingent payments at $37,350. Goodwill is expected to be deductible for tax purposes and is attributable to expected synergies and assembled workforce. Transaction related expenses of $870 was expensed as incurred and is included within selling, general and administrative expenses in the consolidated statements of operations. Made is consolidated into the Company's results from the date of acquisition. From the date of acquisition through December 31, 2013, Made contributed revenue of $0 and pre-tax loss of $(2,972).
i-Motion
On November 18, 2013, the Company completed the acquisition of 100% of the i-Motion business for (i) $17,074 in cash, (ii) 409,357 shares of the Company's common stock valued at the stock price on the closing date of $3,471, (iii) an earn out payment of $1,000 (or, if greater, the U. S. dollar equivalent of €787 based on the exchange rate on the business day prior to the due date of the earn out payment) if the EBITDA of i-Motion for the fiscal years ending on December 31, 2013 or December 31, 2014 exceeds the lesser of $4,000, converted into Euros based on the exchange rate on the last banking day of the respective fiscal year, or €3,150, and (iv) if the seller realizes a loss during the 30-day period after a one year lock-up period ("price protection"), the Company has agreed to guarantee the value of the issued shares of common stock up to 80% of $5,000, or $4,000 (or if, greater, the U. S. dollar equivalent of €3,150). The Company has preliminarily valued the earnout payment and price protection at $2,115. Goodwill is not expected to be deductible for tax purposes and is attributable to expected synergies and assembled workforce. Transaction related expenses of $961 was expensed as incurred and is included within selling, general and administrative expenses in the consolidated statements of operations. i-Motion is consolidated into the Company's results from the date of acquisition. From the date of acquisition through December 31, 2013, i-Motion contributed revenue of $695 and pre-tax loss of $(301).
Paylogic
On December 2, 2013, the Company acquired 75% of the outstanding share capital of Paylogic from the shareholders of Accepte for $5,431 in cash and issued 1,007,419 shares of common stock of the Company valued at the stock price on the closing date of $9,732. The Company has committed to acquire the remaining 25% share capital in Paylogic within the second quarter of 2016 (the "second payment"), for a payment equal to 25% of the EBITDA of the business for 2015 multiplied by six. Such payment at the second closing shall consist of one-third cash and two-thirds shares of the Company's common stock. The Company considers the obligation to purchase the remaining equity in this business as making the non-controlling interest mandatorily redeemable, and accordingly, the Company has characterized it as a liability, preliminary valued at $1,242 as of the acquisition date. Goodwill is not expected to be deductible for tax purposes and is attributable to expected synergies and assembled workforce. Transaction related expenses of $334 was expensed as incurred and is included within selling, general and administrative expenses in the consolidated statements of operations. Paylogic is consolidated into the Company's results from the date of acquisition. From the date of acquisition through December 31, 2013, Paylogic contributed revenue of $722 and pre-tax loss of $(871).
Other
In addition, during 2013, the Company completed its acquisitions of Fame House, Tunezy, and Arc90. These acquisitions were accounted for as business combinations under the acquisition method of accounting and were not considered significant on an individual basis or in aggregate.
93
6. BUSINESS COMBINATIONS (Continued)
The Company has made a preliminary allocation of the purchase price to the assets acquired and liabilities assumed as of the purchase date for its acquisitions. The Company expects to finalize the purchase price within the first year of the acquisitions, and therefore adjustments to goodwill and identifiable assets may occur. The allocation of the aggregate purchase price, based on the Company's initial valuation of the assets and liabilities for the significant acquisitions are as follows:
Consideration
|
LIC | Disco | MMG | ID&T JV | Beatport | ID&T | Totem | Made | i-Motion | Paylogic | |||||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
(in thousands except share data) |
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||||||
Cash |
$ | 8,131 | $ | 3,232 | $ | 5,000 | $ | 12,500 | $ | 33,900 | $ | 79,248 | $ | 67,229 | $ | 18,624 | $ | 17,074 | $ | 5,431 | |||||||||||
Contingent Consideration |
| | 2,313 | | | | 1,484 | 37,350 | 2,115 | | |||||||||||||||||||||
Promissory notes and future payment |
| | 9,082 | | | | 4,652 | 9,650 | | | |||||||||||||||||||||
Forgiveness of cash advance |
| | | | | 7,500 | | | | | |||||||||||||||||||||
Warrants |
| | | 1,825 | | | | | | | |||||||||||||||||||||
Common stock |
3,932 | 5,000 | 3,373 | 9,150 | 24,650 | 22,433 | 15,930 | 3,365 | 3,471 | 9,732 | |||||||||||||||||||||
Common shares issued |
786,467 | 1,000,000 | 674,560 | 2,000,000 | 4,930,000 | 2,801,277 | 1,105,846 | 392,158 | 409,357 | 1,007,419 | |||||||||||||||||||||
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Fair value of consideration transfered |
$ | 12,063 | $ | 8,232 | $ | 19,768 | $ | 23,475 | $ | 58,550 | $ | 109,181 | $ | 89,295 | $ | 68,989 | $ | 22,660 | $ | 15,163 | |||||||||||
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Recognized amounts of identifiable assets acquired and liabilities assumed |
|||||||||||||||||||||||||||||||
Cash |
$ | | $ | | $ | | $ | | $ | 11,637 | $ | 3,919 | $ | 3,392 | $ | 950 | $ | 3,031 | $ | 3,782 | |||||||||||
Accounts receivable |
| | 714 | | 137 | 670 | | 1,440 | 222 | 261 | |||||||||||||||||||||
Due from promoters |
| 1,838 | | | | 2,174 | | | | | |||||||||||||||||||||
Prepaid expenses & other current assets |
355 | 3 | | | 859 | 11,936 | 10,039 | 3,783 | 920 | 2,408 | |||||||||||||||||||||
Other assets |
| 204 | 203 | | 502 | 3,950 | 527 | | 13 | 357 | |||||||||||||||||||||
Property, plant and equipment |
724 | 1 | 2 | | 1,740 | 2,053 | 253 | 79 | 117 | 522 | |||||||||||||||||||||
Identifiable intangible assets |
5,420 | 4,633 | 14,425 | 41,800 | 47,404 | 60,676 | 67,951 | 50,103 | 15,622 | 13,321 | |||||||||||||||||||||
Liabilities including deferred tax liabilities |
(375 | ) | (3,895 | ) | (789 | ) | | (20,588 | ) | (34,069 | ) | (15,320 | ) | (4,067 | ) | (6,886 | ) | (11,684 | ) | ||||||||||||
Non-controlling interest, including mandatorily redeemable(a) |
| | (4,794 | ) | (22,554 | ) | | 22,478 | | | | (1,242 | ) | ||||||||||||||||||
Goodwill |
5,939 | 5,448 | 10,007 | 4,229 | 16,859 | 35,394 | 22,453 | 16,701 | 9,621 | 7,438 | |||||||||||||||||||||
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Fair value of consideration transfered |
$ | 12,063 | $ | 8,232 | $ | 19,768 | $ | 23,475 | $ | 58,550 | $ | 109,181 | $ | 89,295 | $ | 68,989 | $ | 22,660 | $ | 15,163 | |||||||||||
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
The Company has not completed the valuation studies necessary to finalize the acquisition-date fair values of the assets acquired and liabilities assumed and the related allocation of purchase price for ID&T, Totem, Made, i-Motion, Paylogic, as well as Fame House, Tunezy, and Arc90. Accordingly, the type, value, and useful lives of these intangible assets set forth here are preliminary. Once the valuation process is finalized for these acquisitions there may be changes to the reported values of the assets acquired and liabilities assumed, including goodwill and intangibles assets, and those changes could differ materially from what is presented here.
The preliminary estimates of intangible asset types that the Company has recognized from these acquisitions are based on the nature of the business, preliminary assessments in conjunction with third-party valuations, and estimates based on the Company's experience from prior acquisitions. The Company determined the fair value of the acquired intangible assets using the income approach. The preliminary significant assumptions used in certain of the valuations include discount rates ranging from 17% to 29%. In determining fair value of trade names the Company used royalty rates ranging from 2% to 3%. As part of the acquisitions certain executives of the acquired entities agreed not to directly compete with the Company for a period of time. The value of such non-compete agreements have been determined using the income approach over the period of such non-compete. In addition, the mandatorily redeemable non-controlling interest was estimated utilizing the income approach. The
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6. BUSINESS COMBINATIONS (Continued)
estimated useful lives of the intangible assets are based on the useful lives that the Company believes reflects the minimum economic life of the intangible. The following table reflects the fair value of the intangible assets acquired in 2013 through these significant acquisitions.
(in thousand)
|
ID&T JV |
Beatport | ID&T | Totem | Made | i-Motion | Paylogic | Estimated useful lives (in years) |
|||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Supplier and customer relationships |
| 17,900 | | | | | 1,998 | 15 | |||||||||||||||||
Other intellectual property |
| 8,804 | | | | | 1,998 | 5 | |||||||||||||||||
Fan database |
| | 12,135 | 13,590 | 10,021 | 3,125 | | 3 | |||||||||||||||||
Trademarks and trade names |
41,800 | 19,400 | 42,473 | 47,566 | 35,072 | 10,935 | 9,325 | 7 | |||||||||||||||||
Non-compete agreements |
| 1,300 | 6,068 | 6,795 | 5,010 | 1,562 | | 5 | |||||||||||||||||
| | | | | | | | | | | | | | | | | | | | | | | | | |
Total acquired definite-lived intangible assets |
$ | 41,800 | $ | 47,404 | $ | 60,676 | $ | 67,951 | $ | 50,103 | $ | 15,622 | $ | 13,321 | |||||||||||
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
The weighted average useful lives of the identified intangible assets acquired is 6.80 years. These identified intangible assets will be amortized on a straight line basis over their useful lives.
Supplemental pro forma information
The unaudited pro forma information is presented for illustrative purposes only and is not necessarily indicative of the results of operations of future periods or the results of operations that actually would have been realized had these businesses been a single company during the periods presented or the results that the combined company will experience after these acquisitions. The unaudited pro forma information does not give effect to the potential impact of current financial condition, anticipated synergies, operating efficiencies or cost savings that may be associated with these transactions. The following unaudited consolidated pro forma financial information assumes the Company's acquisitions of ID&T JV, Beatport, ID&T, Totem, Made, i-Motion, and Paylogic had occurred on January 1, 2012, and the acquisitions of LIC, Disco, and MMG occurred on January 1, 2011.
(in thousands)
|
2013 | 2012 | 2011 | |||||||
---|---|---|---|---|---|---|---|---|---|---|
Net revenue |
$ | 294,619 | $ | 246,213 | $ | 35,515 | ||||
Net loss attributable to SFX Entertainment, Inc |
$ | (154,288 | ) | $ | (23,752 | ) | $ | (3,996 | ) |
The unaudited consolidated pro forma financial information has been adjusted to give effect to the pro forma events that are (1) directly attributable to the acquisitions, (2) factually supportable, and (3) expected to have continuing impact.
95
7. NOTES PAYABLE
The Company's notes payable at December 31, 2013 and 2012 were comprised as follows:
|
December 31, | ||||||
---|---|---|---|---|---|---|---|
(in thousands)
|
2013 | 2012 | |||||
First Lien Term Loan Facility |
$ | 75,000 | $ | | |||
Less: Original issue discount |
(913 | ) | | ||||
Other long term debt |
587 | ||||||
| | | | | | | |
|
74,674 | | |||||
Note payable to sellers of Made |
9,788 |
|
|||||
Note payable to sellers of Totem |
4,372 | | |||||
Secured promissory note |
| 8,491 | |||||
Other short term debt |
220 | | |||||
| | | | | | | |
Total notes payable |
$ | 89,054 | $ | 8,491 | |||
| | | | | | | |
| | | | | | | |
Secured promissory note
On December 31, 2012, the Company issued a secured promissory note in the principal amount of $8,491 as part of the acquisition of certain assets and liabilities of MMG. On March 15, 2013, a payment of $3,000 was made to Nightlife Holdings, LLC and the promissory note was amended and restated to provide for a remaining amount of $5,491 plus interest. On May 15, 2013, the promissory note was paid in full.
Notes payable to sellers of Made
As part of the consideration paid to the sellers of Made, the Company issued non-interest bearing notes for a principal amount of $10,000 on the date of acquisition. The principal amount is due by March 31, 2014. The Company, using guideline companies and market borrowings with comparable risk profiles, discounted these notes at 9% over the period from October 31, 2013 to March 31, 2014, for a fair value of $9,650 on the date of acquisition. This discount will be amortized over the life of the notes utilizing the effective interest rate method.
Note payable to sellers of Totem
As part of the consideration paid to the sellers of Totem, the Company issued a non-interest bearing note for a principal amount of AUD $5,000 on the date of acquisition. The principal amount was due by February 28, 2014 and was repaid on January 22, 2014. The Company, using guideline companies and market borrowings with comparable risk profiles, discounted the note at 9% over the period from October 28, 2013 to February 28, 2014, for a fair value of AUD $4,857 ($4,652) on date of acquisition. This discount will be amortized over the life of the note utilizing the effective interest rate method.
Credit Facility
On March 15, 2013, certain of the Company's subsidiaries entered into a $49,500 First Lien Term Loan Facility with Barclays Bank PLC as administrative agent and Barclays Bank PLC, UBS Loan Finance LLC, and Jefferies Group LLC as lenders. The Company received $48,510 in cash, net of $990 original issue discount. The borrower under the First Lien Term Loan Facility is the Company's indirect, wholly-owned subsidiary SFX Intermediate Holdco II LLC (the "Borrower). The First Lien Term Loan Facility is guaranteed by SFX Intermediate Holdco I LLC, the immediate parent company
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7. NOTES PAYABLE (Continued)
of the Borrower ("Holdings"), the Borrower, SFX-LIC Operating LLC, Pita I LLC, Beatport, LLC, Beatport Japan, LLC, SFX-Nightlife Operating LLC, SFX-IDT N.A. Holding LLC, ID&T JV, ID&T/SFX Q-Dance LLC, ID&T/SFX Sensation LLC, ID&T/SFX Mysteryland LLC, ID&T/SFX TomorrowWorld LLC, SFX International, Inc. and all of Holdings' future subsidiaries (the "Guarantors"), and by Mr. Sillerman as further described below. The First Lien Term Loan Facility was secured by a first-priority security interest in all the existing and future assets of the Borrower and the Guarantors.
Mr. Sillerman entered into a guarantee agreement (the "Sillerman Guarantee") with Barclays Bank PLC, as collateral agent for the benefit of the secured parties under the First Lien Term Loan Facility, in which he personally guaranteed all of the Company's obligations under the facility. See Note 14Related Parties for further details on the Sillerman Guarantee.
On May 22, 2013, the First Lien Term Loan Facility was amended to permit under the restricted payments covenant for any loan party to make a payment to SFX or any affiliate thereof to enable such person to make a payment of up to the U.S. Dollar equivalent of AUD $5,000 in connection with the acquisition pursuant to the Asset Contribution Agreement dated as of May 15, 2013, by and among SFX, SFX-Totem Operating Pty Ltd, and the transferor parties defined therein.
On June 5, 2013, the First Lien Term Loan Facility was further amended to increase the facility amount by $15,000, to a total of $64,500. The Guarantors reaffirmed their guarantees of the First Lien Term Facility and Mr. Sillerman entered into an amendment to the Sillerman Guarantee to reaffirm his guarantee. The Company received $14,700 in cash, net of $300 in original issue discount.
On August 20, 2013, the First Lien Term Loan Facility (as previously amended) was further amended again to increase the facility amount by $10,500, to a total of $75,000. The Guarantors reaffirmed their guarantees of the First Lien Term Loan Facility, and Mr. Sillerman entered into an amendment to the Sillerman Guarantee to reaffirm his guarantee. The Company received $10,290 in cash, net of $210 in original issue discount.
On August 23, 2013, SFX International, Inc. became a guarantor and security provider to the First Lien Term Loan Facility.
Borrowings under the First Lien Term Loan Facility bore interest, at the Borrower's option, at a rate per annum equal to either (a) (i) a rate per annum equal to the highest of (1) the rate of interest per annum publicly announced from time to time by the Administrative Agent under the First Lien Term Loan Facility as its prime rate in effect on such day at its principal office in New York City, (2) (x) the weighted average of the rates on overnight Federal funds transactions with members of the Federal Reserve System arranged by Federal funds brokers, as published by the Federal Reserve Bank of New York on the business day next succeeding such day plus (y) 0.50%, (3) (x) a rate per annum equal to (I) the offered rate which appears on the page of the Reuters Screen which displays an average British Bankers Association Interest Settlement Rate (such page currently being LIBOR01 page) for deposits in U.S. dollars being delivered in the London interbank market for a one-month term, determined by the Administrative Agent under the First Lien Term Loan Facility as of approximately 11:00 a.m. (London, England time) two Business Days prior to the applicable borrowing or conversion date divided by (II) one minus the applicable reserve percentage (with a rate floor of 1.25% per annum) plus (y) 1.00% and (4) 2.25% per annum, plus (ii) 6.50% per annum or (b) (i) a rate per annum equal to (1) for each one, two, three or six months (or if agreed to by all the lenders under the First Lien Term Loan Facility, nine or twelve months) interest period as selected by the Borrower, the offered rate which appears on the page of the Reuters Screen which displays an average British Bankers Association Interest Settlement Rate (such page currently being LIBOR01 page) for
97
7. NOTES PAYABLE (Continued)
deposits (for delivery on the first day of such interest period) with a term equivalent to such interest period in U.S. dollars, determined by the Administrative Agent under the First Lien Term Loan Facility as of approximately 11:00 a.m. (London, England time), two Business Days prior to the commencement of such interest period divided by (2) one minus the applicable reserve percentage (with a rate floor of 1.25% per annum) plus (ii) 7.50% per annum. Upon the occurrence and during the continuance of any Event of Default under the First Lien Term Loan Facility, all outstanding borrowings thereunder will automatically bear interest at a rate per annum equal to the applicable interest rate plus 2.00% per annum.
The First Lien Term Loan Facility matures on September 15, 2014. The maturity date will be extended to March 13, 2015 if the Company contributes to the Borrower at least $50,000 of proceeds from the Company's initial public offering (so long as the Company raises net proceeds of at least $100,000) and the Borrower uses such proceeds to make a prepayment equal to at least 50.0% of the borrowings then outstanding under the First Lien Term Loan Facility. On October 15, 2013, the Company completed its initial public offering, and as of December 31, 2013, the Company has not made a payment of 50% of the borrowings outstanding under the First Lien Term Loan Facility.
The Borrower may prepay the First Lien Term Loan Facility at any time without penalty, subject to breakage costs. The Borrower is also required to make prepayments (subject to certain basket amounts and exceptions) (collectively, the "Mandatory Prepayments") equal to:
The First Lien Term Loan Facility included customary affirmative covenants, subject to certain materiality thresholds and exceptions, including covenants to deliver certain information and notices; preservation of existence; compliance with laws; payment of obligations; maintenance of properties; maintenance of insurance; keeping of books and records; access to books and property; limitations on use of proceeds under the First Lien Term Loan Facility; and requirements to join future subsidiaries of Holdings as guarantors and to provide additional collateral. The First Lien Term Loan Facility includes customary restrictive covenants, subject to certain materiality thresholds and exceptions, including covenants limiting the Borrower's and the loan parties' ability to
98
7. NOTES PAYABLE (Continued)
certain transaction costs); and (v) certain dividends or distributions by ID&T JV to ID&T pursuant to the ID&T JV agreement by and among the Company, ID&T and Mr. Sillerman, dated as of October 2012, as amended March 14, 2013.
The First Lien Term Loan Facility does not include any financial covenants.
The First Lien Term Loan Facility includes customary events of default, subject to certain materiality thresholds and cure periods, including: the Sillerman Guarantee ceasing to be in full force and effect or Mr. Sillerman breaching any material term of the Sillerman Guarantee; or a change in control occurring. A change in control is defined in the First Lien Term Loan Facility to include the occurrence of any of the following: (i) Holdings ceases to be wholly-owned directly or indirectly, by the Company or Borrower ceases be directly wholly-owned by Holdings; (ii) at any time prior to the Company's initial public offering (so long as the Company raises net proceeds of at least $100,000) and for any reason whatsoever, Mr. Sillerman and certain affiliates and senior management cease to own, directly or indirectly, at least 40% of the Company's outstanding voting equity or any "person" or "group" own a greater percentage of the Company's voting equity than beneficially owned by Mr. Sillerman and certain affiliates and senior management; (iii) at any time after the Company's initial public offering (so long as the Company raises net proceeds of at least $100,000) and for any reason whatsoever, Mr. Sillerman and certain affiliates cease to own, directly or indirectly, at least 30% of the Company's outstanding voting equity or any "person" or "group" other than Mr. Sillerman and certain affiliates and senior management beneficially own a greater percentage of the Company's voting equity than beneficially owned by Mr. Sillerman and certain affiliates and senior management; or (iv) the majority of the seats (other than vacant seats) on the Company's board of directors cease to be occupied by persons who either were members of SFX's board of directors on March 15, 2013, or were nominated for election by a majority of the Company's board of directors who were directors at the time of the closing of the First Lien Term Loan Facility or whose election or nomination for election was previously approved by a majority of such directors. On October 15, 2013, the Company completed it's initial public offering and therefore provision (ii) would no longer be effective.
On February 4, 2014, the Company issued $220 million 9.625% second lien senior secured notes and repaid the First Lien Term Loan Facility in full.
99
8. OTHER INFORMATION
|
For the Year Ended December 31, |
||||||
---|---|---|---|---|---|---|---|
(in thousands)
|
2013 | 2012 | |||||
The following details the components of "Other current assets": |
|||||||
Deferred financing costs |
$ | 17,614 | $ | | |||
Other receivablereimbursement from underwriters |
2,370 | | |||||
Advance for future acquisitions |
2,254 | | |||||
Merchants cash advance receivable |
2,630 | | |||||
Accrued service revenue |
1,256 | | |||||
VAT receivables |
1,221 | | |||||
Other |
3,140 | 223 | |||||
| | | | | | | |
Total other current assets |
$ | 30,485 | $ | 223 | |||
| | | | | | | |
| | | | | | | |
The following details the components of "Accounts payable and accrued expenses:" |
|||||||
Accounts payable |
$ | 29,824 | $ | 2,337 | |||
Accrued professional fees |
2,459 | 4,933 | |||||
Accrued and other fees |
13,556 | 662 | |||||
| | | | | | | |
Total Accounts payable and Accrued expenses |
$ | 45,839 | $ | 7,932 | |||
| | | | | | | |
| | | | | | | |
The following details the components of "Other current liabilities": |
|||||||
Foreign artist withholding liability |
$ | 330 | $ | 1,971 | |||
Acquisition related liabilities |
31 | 1,398 | |||||
Due to Eventbrite |
238 | 612 | |||||
Sales taxes liability |
2,272 | 350 | |||||
Employee related liabilities |
1,482 | 1 | |||||
Income tax liability |
2,216 | | |||||
Other |
2,147 | 75 | |||||
| | | | | | | |
Total other current liabilities |
$ | 8,716 | $ | 4,407 | |||
| | | | | | | |
| | | | | | | |
On October 26, 2012, the Company entered into an agreement with ID&T to acquire a controlling interest in ID&T JV, subject to certain closing conditions. At the time of the agreement, the Company paid ID&T $12,500 as an initial deposit. This initial deposit of $12,500 and $180 of other, comprise the balance of Other assets on December 31, 2012.
The following table discloses the components of "Accumulated other comprehensive loss," net of tax, as of December 31, 2013 and 2012, respectively:
|
As of December 31, |
||||||
---|---|---|---|---|---|---|---|
(in thousands)
|
2013 | 2012 | |||||
Cumulative currency translation adjustment, net of income tax of $78 |
$ | (1,663 | ) | $ | | ||
| | | | | | | |
Total accumulated other comprehensive loss |
$ | (1,663 | ) | $ | | ||
| | | | | | | |
| | | | | | | |
100
9. CAPITAL STOCK AND COMMON STOCK WARRANTS
Common Stock
As of December 31, 2013, the Company has issued and outstanding 88,254,237 shares of its $.001 par value common stock of which 11,035,846 shares are classified as temporary equity.
During the year ended December 31, 2013, the Company issued 39,993,210 shares of common stock, 7,035,846 of which are included in temporary equity as a result of certain rights granted by the Company to the counterparties at December 31, 2013.
Initial public offering
On October 15, 2013, the Company completed its initial public offering in which the Company sold an aggregate of 20,000,000 shares of its common stock at a public offering price of $13.00 per share. The Company received net proceeds of $240,858, after deducting underwriting commissions and certain offering expenses.
Temporary EquityRedemption rights and Redeemable non-controlling interest
Under certain circumstances, specifically if the Company does not successfully undertake a registration of their shares of the Company's common stock, some shareholders may elect to have the Company redeem their stock at the initial purchase price paid. These shares are recorded as temporary equity until the redemption rights associated with them are no longer applicable. As of the date of this report, none of the investors have elected to exercise their redemption rights. The terms of these
101
9. CAPITAL STOCK AND COMMON STOCK WARRANTS (Continued)
repurchase rights existing at December 31, 2013, including information with respect to their expiration, are set forth in the table below.
Holder(s) of Redemption (Repurchase) Right |
Number of Shares | Price | Relevant Date and Trigger Events | ||||
---|---|---|---|---|---|---|---|
Entertainment Events Funding LLC |
4,000,000 |
$2.50/share |
The Company granted Entertainment Events Funding LLC "most favored nation" rights under its subscription agreement, which required that (until immediately prior to the IPO), the Company provide to them the same right or benefit we provided to a third-party purchasing the Company's common stock. Accordingly, the Company may be obligated to repurchase this investor's shares at their issuance price on substantially similar terms as other investors who purchased shares prior to the Company's IPO. |
||||
Former equity holders of Beatport |
4,930,000 |
$5.00/share |
On or after March 15, 2014, the former equity holders of Beatport will have the right to require the Company to repurchase from them the shares of the Company's common stock issued as consideration in the merger. This right will not apply to any shares that have been registered in a resale registration. |
||||
Insight Venture Partners V, L.P / Insight Venture Partners V (Employee Co-Investors), L.P. / Insight Venture Partners (Cayman) V, L.P. |
1,000,000 |
$10.00/share |
On or after March 15, 2014, these parties can require the Company to repurchase shares of our common stock that the Company has not registered in a resale registration or that are not eligible for resale under Rule 144 under the Securities Act ("Rule 144"). If prior to the date that these shares are registered for resale or become subsequently eligible for resale under Rule 144, the Company enters into an agreement for the acquisition by any third party of beneficial ownership of more than 50% of the voting power in the Company's voting shares (including by merger or consolidation) or the sale of all of the Company's assets to a third-party in one or a series of related transactions, then this repurchase right will automatically accelerate and become exercisable. If the Company does not pay these investors the repurchase price of $10.00 per share within ten business days following receipt of notice from the investors of their exercise of this repurchase right, then the repurchase price will increase at a rate of 10% per annum (compounded quarterly) until the date of payment. |
||||
Totem |
1,105,846 |
$13.00/share |
The Company granted Totem the right, during the 30 calendar day period beginning on October 28, 2015, to require the Company to repurchase at the IPO price per share of $13.00 all of the shares of the Company's common stock that the Company issued to Totem as consideration under the asset contribution agreement. |
||||
| | | | | | | |
Total Shares |
11,035,846 |
||||||
| | | | | | | |
| | | | | | | |
102
9. CAPITAL STOCK AND COMMON STOCK WARRANTS (Continued)
The following table presents the changes in the carrying amounts and activity for redeemable non-controlling interest and common stock as of December 31, 2013 and 2012, respectively:
|
Redeemable | |||||||||
---|---|---|---|---|---|---|---|---|---|---|
|
Non-controlling interest |
Common stock shares |
Common stock | |||||||
Balance at December 31, 2011 |
$ | | | $ | | |||||
Acquisition of redeemable non-controlling interest subsidiary |
4,794 | |||||||||
Common stock issued: |
||||||||||
Baron Small Cap Fund(a) |
2,500,000 | 10,000 | ||||||||
Entertainment Events Funding LLC |
4,000,000 | 10,000 | ||||||||
Disco Productions(a) |
1,000,000 | 5,000 | ||||||||
Subscription Receivable |
300,000 | | ||||||||
| | | | | | | | | | |
Balance at December 31, 2012 |
$ | 4,794 | 7,800,000 | $ | 25,000 | |||||
| | | | | | | | | | |
| | | | | | | | | | |
Distribution to non-controlling interest holder |
$ | (595 | ) | |||||||
Net loss |
(71 | ) | ||||||||
Common stock issued: |
||||||||||
Beatport |
4,930,000 | 24,650 | ||||||||
Insight |
1,000,000 | 10,000 | ||||||||
Totem |
1,105,846 | 15,930 | ||||||||
Canceled Shares |
(300,000 | ) | | |||||||
Shares no longer redeemable(a) |
(3,500,000 | ) | (15,000 | ) | ||||||
| | | | | | | | | | |
Balance at December 31, 2013 |
$ | 4,128 | 11,035,846 | $ | 60,580 | |||||
| | | | | | | | | | |
| | | | | | | | | | |
Common stock warrants
For the year ended December 31, 2012, the Company granted 2,200,000 warrants to its chief executive officer and chairman, Robert F.X. Sillerman. The Company has accounted for these warrants as equity instruments and as such, are classified in stockholders' equity. The Company has estimated the fair value of these warrants as $3,190 at December 31, 2012. The warrants were issued at strike prices as follows:
Warrants issued
|
Strike Price | |||
---|---|---|---|---|
100,000 |
$ | 0.01 | ||
700,000 |
$ | 5.00 | ||
700,000 |
$ | 7.50 | ||
700,000 |
$ | 10.00 |
In connection for services provided by Mr. Sillerman, including his guarantee of the First Lien Term Loan Facility, the board of directors granted warrants to purchase 5,500,000 shares at $5.00 per share, warrants to purchase 750,000 shares at $7.50 per share, warrants to purchase 1,000,000 shares at $10.00 per share, and 1,000,000 shares of the Company's common stock. The Company has estimated the grant date fair value of the warrants and common stock at $25,430 and accounted for them as deferred financing fees related to the First Lien Term Loan Facility.
103
9. CAPITAL STOCK AND COMMON STOCK WARRANTS (Continued)
On April 23, 2013, the Company exchanged 9,350,000 of warrants previously issued to Mr. Sillerman for stock options on substantially identical terms. The replacement equity awards all provide for three year cliff vesting based on the original issuance date of the warrants and shares of common stock. In addition, 100,000 warrants with an exercise price of $.01 per share and 1,000,000 shares of common stock issued to Mr. Sillerman were exchanged for 1,100,000 shares of restricted stock with three year cliff vesting. All of these options and restricted shares were issued under the Company's 2013 Supplemental Equity Compensation Plan. See Note 10Stock Based Compensationfor greater detail on the exchange of these warrants for stock options and shares of restricted stock.
As part of the acquisition of ID&T JV, the Company issued warrants to purchase 500,000 shares of the Company's common stock at $2.50 per share to ID&T (subsequently assumed by the ID&T's sellers). The Company has estimated the fair value of these warrants at $1,825.
The Company has estimated the fair value of these warrants utilizing the Black-Scholes option pricing model. The following assumptions were used to calculate the fair value of the Company's warrants on the date of grant:
|
2013 | 2012 | |||||
---|---|---|---|---|---|---|---|
Risk-free rate |
1.18 - 1.40 | % | 1.18 | % | |||
Dividend yield |
| | |||||
Volatility factors |
60 | % | 60 | % | |||
Weighted average expected life (in years) |
7 | 7 |
At the time that these warrants were issued there was no publicly traded market for the Company's common stock and therefore the expected volatility was based on the historical closing stock prices of comparable companies over the expected term. The risk-free interest rate for the periods within the contractual life of the warrants is based on the 7 year U.S. Treasury bond rate and the expected term of the warrants granted is based on management's estimate for the period of time for which warrants are expected to be outstanding.
10. STOCK-BASED COMPENSATION & RESTRICTED SHARES
The Company adopted the SFX Entertainment, Inc. 2013 Equity Compensation Plan ("Equity Plan") on February 25, 2013. The Equity Plan authorizes the Company to grant incentive stock options, nonqualified stock options, restricted stock units and stock awards. Prior to the formation and adoption of the Equity Plan, the Company granted options to purchase its common stock to employees, directors and consultants of the Company and its affiliates at prices ranging from $2.00 to $5.00 per share, which in the view of management and, after it was formed, by the Company's compensation committee, represented the fair market value of the Company's common stock at the time of issuance. Options are granted for a term not exceeding ten years and nonvested options are generally forfeited in the event the employee, director, or consultant terminates his or her employment or relationship with the Company or one of its affiliates. Any options that have vested at the time of termination are forfeited to the extent they are not exercised within the 90 day applicable post-employment exercise period, unless otherwise provided in the option agreement. Options generally vest in various periods up to five years. Stock based compensation is recognized over the period during which an employee, or consultant, is required to provide service in exchange for the award, usually the vesting period.
The Company also adopted in April 2013, the SFX Entertainment, Inc. 2013 Supplemental Equity Compensation Plan (the "Supplemental Equity Plan"). The Supplemental Equity Plan authorizes the Company to grant incentive stock options, nonqualified stock options, restricted stock units and stock awards. All awards issued under the Supplemental Equity Plan to date have been made to
104
10. STOCK-BASED COMPENSATION & RESTRICTED SHARES (Continued)
Mr. Sillerman, who has been granted 9,350,000 options and 1,333,000 shares of restricted stock under the Supplemental Equity Plan. The options have been granted at exercise prices ranging from $5.00 to $10.00 per share and each of the option grants and the restricted stock grants have service-based vesting components and, in general, vest on the third anniversary of each grant or upon a change in control, subject to Mr. Sillerman's continued employment with the Company through such date. Such options were originally issued as warrants in 2012 or 2013 representing the same number of underlying shares at the same exercise price per share. On August 31, 2013, an independent committee of the Company's board of directors recommended that Mr. Sillerman receive 233,000 shares of restricted stock in connection with services provided with respect to the August amendment to the First Lien Term Loan Facility, including extending his personal guarantee of an additional $10,500 under the Company's credit facility. On September 6, 2013, the board of directors approved the grant of these shares of restricted stock under the Supplemental Equity Plan and also adopted an amendment to this plan to increase the number of authorized shares by 233,000. These shares of restricted stock were issued on October 15, 2013.
In some cases, contemporaneous documentation of option grants made in 2012 could not be provided. While some of these grants were documented during 2012, some were not fully documented until 2013. As a result of the issues with respect to contemporaneous documentation of the Company's option grants, the Company recorded compensation expense with respect to option grants at the time it was believed that the documentation of such grants met all key criteria under ASC 718 and could be evidenced (referred to as the measurement date). In some cases this was 2013 and accordingly, 2012 contains no expense related to those stock option awards. 5,220,500 options were issued in 2012 at exercise prices ranging from $2 to $4 per share, but not fully documented until 2013. The approximate fair value of such options at grant date was $2.81 to $3.87 and the compensation expense (measured from the date such option grants were originally made) recognized in 2013 with respect to these options was $9,304. The fair value of common stock on the measurement date has been used solely to record compensation expense in the Company's consolidated financial statements.
The Company records stock-based compensation expense as part of selling, general and administrative expenses. The Company recorded $32,806, $2,209, and $0 of stock-based compensation expense for the years ended December 31, 2013, 2012, and 2011, respectively.
The Company accounts for stock options issued to non-employees on a fair value-based method as well; however, the fair value of the options granted to non-employees is remeasured each reporting period until the service is complete, and the resulting increase or decrease in value, if any, is recognized as expense during the period the related services are rendered. Non-employee options issued as of December 31, 2013 and 2012 were 1,573,200 and 0, respectively, for which $4,092 was recognized expense for the year ended December 31, 2013. No expense related to non-employees was recognized during 2012 or 2011. As of December 31, 2013 there was $8,879 of total unrecognized compensation cost related to non-employee stock options granted.
The fair value of the stock options issued to employees and non-employees was estimated at each grant date using the Black- Scholes option pricing model. One of the inputs to this model is the estimate of the fair value of the underlying common stock on the date of grant. The other inputs include an estimate of the expected volatility of the stock price, an option's expected term, the risk-free interest rate over the option's expected term, the option's exercise price, and the Company's expectations regarding dividends.
105
10. STOCK-BASED COMPENSATION & RESTRICTED SHARES (Continued)
Stock options-Employees and Directors
The following assumptions were used to calculate the fair value of the Company's options on the date of grant:
|
December 31, | |||
---|---|---|---|---|
|
2012 | 2013 | ||
Risk-free interest rate |
0.71% - 2.66% | 0.77% - 1.40% | ||
Dividend Yield |
| | ||
Volatility factors |
50% - 60% | 60% | ||
Weighted average expected life (in years) |
5 - 7.5 | 5 - 7.6 |
The following table presents a summary of the Company's stock options outstanding at, and stock option activity during, the year ended December 31, 2013 and 2012 ("Price" reflects the weighted average exercise price per share):
|
December 31, 2013 | December 31, 2012 | |||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|
|
Options | Price | Options | Price | |||||||||
Outstanding at beginning of period |
3,250,000 | $ | 2.45 | | $ | | |||||||
Granted |
19,475,225 | 6.70 | 3,250,000 | 2.45 | |||||||||
Exercised |
| | | | |||||||||
Forfeited or expired. |
(225,000 | ) | 3.00 | | | ||||||||
| | | | | | | | | | | | | |
Outstanding at end of period |
22,500,225 | $ | 6.12 | 3,250,000 | $ | 2.45 | |||||||
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
Through December 31, 2013, no tax benefit from the exercise of stock options has been recognized. Any future excess tax benefits derived from the exercise of stock options will be recorded prospectively and reported as cash flows from financing activities.
There were 2,726,575 shares available for future grants under the Equity Plan and the Supplemental Equity Plan at December 31, 2013. Vesting dates on the stock options range from
106
10. STOCK-BASED COMPENSATION & RESTRICTED SHARES (Continued)
October 2012 to November 2018 and expiration dates range from March 2022 to November 2023 at exercise prices and average contractual lives as follows:
Options Outstanding | Options Exercisable | ||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Exercise Price
|
Outstanding as of 12/31/13 |
Weighted Average Remaining Contractual Life (in years) |
Exercisable as of 12/31/13 (in thousands) |
Weighted Average Remaining Contractual Life (in years) |
Fair Value of Options Granted |
||||||||||||
$ | 2.00 | 5,900,000 | 9.0 | 2,300,000 | 9.0 | $ | 3.44 | ||||||||||
$ | 3.00 | 17,500 | 9.1 | 12,500 | 9.1 | $ | 2.96 | ||||||||||
$ | 4.00 | 778,000 | 9.0 | 528,000 | 9.0 | $ | 3.45 | ||||||||||
$ | 5.00 | 6,482,500 | 9.3 | 139,688 | 9.1 | $ | 2.76 | ||||||||||
$ | 7.50 | 1,450,000 | 9.3 | | | $ | | ||||||||||
$ | 10.00 | 5,260,500 | 9.4 | 1,138,792 | 9.4 | $ | 3.63 | ||||||||||
$ | 13.00 | 883,250 | 9.8 | 48,200 | 9.8 | $ | 6.43 | ||||||||||
$ | 10.13 | 135,000 | 9.8 | | | $ | | ||||||||||
$ | 9.23 | 284,500 | 9.9 | 42,375 | 9.9 | $ | 4.52 | ||||||||||
$ | 8.79 | 808,975 | 9.9 | | | $ | | ||||||||||
$ | 8.61 | 50,000 | 9.9 | 12,500 | 9.9 | $ | 4.10 | ||||||||||
$ | 9.03 | 175,000 | 9.9 | 43,750 | 9.9 | $ | 4.30 | ||||||||||
$ | 8.75 | 275,000 | 9.9 | 55,000 | 9.9 | $ | 4.25 | ||||||||||
| | | | | | | | | | | | | | | | | |
22,500,225 | 9.3 | 4,320,805 | 9.1 | $ | 3.48 | ||||||||||||
| | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
The total intrinsic value of options outstanding as of December 31, 2013, (based on the fair value of the Company's common stock of $12.00 at December 31, 2013) and December 31, 2012 (based on the fair value of the Company's common stock of $5.00 at December 31, 2012), was $131,248 and $8,288, respectively. As of December 31, 2013, and December 31, 2012, there was $62,430 and $9,330, respectively, of total unrecognized compensation cost related to stock options granted during the period. This cost is expected to be recognized over a weighted average remaining period of 2.7 years on a straight-line basis.
107
10. STOCK-BASED COMPENSATION & RESTRICTED SHARES (Continued)
Stock options-Non-employees
The following assumptions were used to calculate the fair value of the Company's options for non-employees on the date of grant:
|
December 31, | |||
---|---|---|---|---|
|
2013 | 2012 | ||
Risk-free interest rate |
0.84% - 2.99% | N/A | ||
Dividend Yield |
| N/A | ||
Volatility factors |
50% - 60% | N/A | ||
Weighted average expected life (in years) |
8.8 - 9.8 | N/A |
The following table presents a summary of the Company's stock options granted to non-employees which remain outstanding at, and stock option activity during, the year ended December 31, 2013 ("price" reflects the weighted average exercise price per share):
|
December 31, 2013 |
December 31, 2012 |
|||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|
|
Options | Price | Options | Price | |||||||||
Outstanding at beginning of period |
| $ | | | $ | | |||||||
Granted |
1,573,200 | 3.05 | | | |||||||||
Exercised |
| | | | |||||||||
Forfeited or expired |
| | | | |||||||||
| | | | | | | | | | | | | |
Outstanding at end of period |
1,573,200 | $ | 3.05 | | $ | | |||||||
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
Through December 31 2013, no tax benefit from the exercise of stock options has been recognized. Any future excess tax benefits derived from the exercise of stock options will be recorded prospectively and reported as cash flows from financing activities.
Vesting dates of the stock options range from March 2012 to October 2018, and expiration dates range from March 2022 to October 2023 at exercise prices and average contractual lives as follows:
Options Outstanding | Options Exercisable | ||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Exercise Price
|
Outstanding as of 12/31/13 |
Weighted Average Remaining Contractual Life (in years) |
Exercisable as of 12/31/13 (in thousands) |
Weighted Average Remaining Contractual Life (in years) |
Fair Value of Options Granted |
||||||||||||
$ | 2.00 | 850,000 | 9.1 | 390,000 | 9.1 | $ | 3.62 | ||||||||||
$ | 4.00 | 700,000 | 9.1 | 40,000 | 9.1 | $ | 2.92 | ||||||||||
$ | 13.00 | 23,200 | 9.8 | | | ||||||||||||
| | | | | | | | | | | | | | | | | |
1,573,200 | 9.2 | 430,000 | 9.1 | $ | 3.55 | ||||||||||||
| | | | | | | | | | | | | | | | | |
The total intrinsic value of options outstanding as of December 31, 2013 (based on the fair value of the Company's common stock of $12.00 at December 31, 2013) and December 31, 2012 (based on the fair value of the Company's common stock of $5.00 at December 31, 2012) was $14,100 and $0, respectively. As of December 31, 2013 and December 31, 2012, there was $8,879 and $0, respectively, of total unrecognized compensation cost related to stock options granted during the period. This cost is expected to be recognized on a straight-line basis over a weighted average remaining period of 2.5 years.
108
10. STOCK-BASED COMPENSATION & RESTRICTED SHARES (Continued)
Restricted Shares
In 2013, the Company granted 1,933,000 restricted shares to Mr. Sillerman and another employee. Mr. Sillerman's 1,333,000 restricted shares have a three-year cliff vesting schedule, and the remaining 600,000 restricted shares (issued pursuant to the Equity Plan) have a two-year graded vesting period in 2014 and 2015. The expense associated with all these shares is recognized on a straight-line basis over the respective vesting periods. As of December 31, 2013, and December 31, 2012, there was $11,050 and $0, respectively, of total unrecognized compensation expense related to restricted shares issued during the period. Expense of $3,832 and $0 was recognized for the years ended December 31, 2013 and 2012, respectively.
11. EARNINGS PER SHARE OF COMMON STOCK
Basic net income/(loss) per share of common stock is computed as net income/(loss) attributable to SFX divided by the weighted-average number of shares of common stock outstanding for the period.
Diluted net income/(loss) per share of common stock reflects the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock. However, since the Company had a net loss for the years ended December 31, 2013, 2012, and 2011, diluted loss per share of common stock is the same as basic loss per share of common stock, as any potentially dilutive securities would reduce the loss per share. The following table shows securities excluded from the calculation of diluted loss per share because such securities are anti-dilutive:
|
2013 | 2012 | 2011 | |||||||
---|---|---|---|---|---|---|---|---|---|---|
|
(shares in thousands) |
|||||||||
Options to purchase shares of common stock |
24,073 | 3,250 | | |||||||
Restricted stock awardsnon-vested |
1,933 | | | |||||||
Warrants |
500 | 2,200 | | |||||||
| | | | | | | | | | |
Number of anti-dilutive potentially issuable shares excluded from diluted common shares outstanding |
26,506 | 5,450 | | |||||||
| | | | | | | | | | |
| | | | | | | | | | |
12. FAIR VALUE MEASUREMENT
The Company has certain contingent consideration obligations and guarantees related to acquisitions, which are measured at fair value using Level 3 inputs as defined by the FASB as, Unobservable inputs that reflect assumptions about what market participants would use in pricing the asset or liability. These inputs would be based on the best information available, including the Company's own data. The amount due for the contingent consideration is based on the achievement of financial performance metrics, EBITDA, in future periods. The acquisition price protection is based on the value of certain shares of the Company's common stock issued, as well as certain guarantees of Euro to U.S. Dollar payments made for contingent consideration in the future in relation to the i-Motion transaction. See Note 6Business Combination for additional information related to these obligations. The Company recorded these liabilities at the time of acquisition, at fair value. Subsequent to the date of acquisition, the Company updates the original valuation to reflect current projections of future results of the acquired companies, the passage of time, changes in the value of the Company's common stock, and the change in exchange rates between the Euro and U.S. Dollar. Accretion of, and changes in the valuations are recognized in the results of the Company's earnings.
During the year ended December 31, 2013, the Company recognized contingent consideration and guarantees of $41,579 (of which $3,599 was settled in December 2013) related to the completed
109
12. FAIR VALUE MEASUREMENT (Continued)
acquisitions. The Company recognized $1,167, $0, and $0 in other expenses due to the change in fair value for the years ended December 31, 2013, 2012, and 2011, respectively.
|
December 31, | ||||||
---|---|---|---|---|---|---|---|
|
2013 | 2012 | |||||
Liabilities: |
|||||||
Acquisition price protection |
$ | 630 | $ | | |||
Contingent consideration |
38,386 | 2,313 | |||||
| | | | | | | |
Total (included in other long-term liabilities) |
$ | 39,016 | $ | 2,313 | |||
| | | | | | | |
| | | | | | | |
Due to their short maturity, the carrying amounts of accounts receivable, accounts payable and accrued expenses, and other short term liabilities approximate their fair values at December 31, 2013, and December 31, 2012.
13. BENEFIT/(PROVISION) FOR INCOME TAXES
Income/(loss) before provision for income taxes for the years ended December 31, 2013, 2012, and 2011, consisted of the following:
(in thousands)
|
2013 | 2012 | 2011 | |||||||
---|---|---|---|---|---|---|---|---|---|---|
United States |
(125,408 | ) | (16,157 | ) | (101 | ) | ||||
International |
5,902 | | | |||||||
| | | | | | | | | | |
Total |
(119,506 | ) | (16,157 | ) | (101 | ) | ||||
| | | | | | | | | | |
| | | | | | | | | | |
The provision for income taxes for the years ended December 31, 2013, 2012, and 2011, consists of current and deferred taxes based on income as follows:
(in thousands)
|
2013 | 2012 | 2011 | |||||||
---|---|---|---|---|---|---|---|---|---|---|
Current: |
||||||||||
Federal |
$ | | $ | | $ | | ||||
State |
| | | |||||||
Foreign |
2,216 | | | |||||||
| | | | | | | | | | |
Total Current Income Tax Provision/(Benefit) |
2,216 | | | |||||||
| | | | | | | | | | |
Deferred: |
||||||||||
Federal |
(2,360 | ) | 58 | | ||||||
State |
(282 | ) | 9 | | ||||||
Foreign |
(258 | ) | | | ||||||
| | | | | | | | | | |
Total Deferred Income Tax Provision/(Benefit) |
(2,900 | ) | 67 | | ||||||
| | | | | | | | | | |
Total Income Tax Provision/(Benefit) |
$ | (684 | ) | $ | 67 | $ | | |||
| | | | | | | | | | |
| | | | | | | | | | |
110
13. BENEFIT/(PROVISION) FOR INCOME TAXES (Continued)
Significant components of the Company's deferred tax assets/(liabilities) as of December 31, 2013 and 2012 were as follows:
(in thousands)
|
2013 | 2012 | |||||
---|---|---|---|---|---|---|---|
Deferred tax assets: |
|||||||
Transaction costs |
$ | 4,799 | $ | 3,883 | |||
Share-based payments |
12,821 | 1,152 | |||||
Bad debt reserves |
1,153 | 983 | |||||
Other reserves |
144 | | |||||
Net operating loss |
11,073 | 1,818 | |||||
Intangibles |
| 246 | |||||
Other. |
65 | 390 | |||||
| | | | | | | |
Total gross deferred tax assets |
30,055 | 8,472 | |||||
| | | | | | | |
Deferred tax liabilities: |
|||||||
Intangibles |
(21,347 | ) | | ||||
Fixed assets |
(69 | ) | (142 | ) | |||
Other foreign |
(241 | ) | | ||||
| | | | | | | |
Total deferred tax liabilities |
(21,657 | ) | (142 | ) | |||
| | | | | | | |
Valuation allowance |
(30,386 | ) | (8,397 | ) | |||
| | | | | | | |
Total deferred tax liabilities, net |
$ | (21,988 | ) | $ | (67 | ) | |
| | | | | | | |
| | | | | | | |
ASC 740 requires that the tax benefit of net operating losses, temporary differences and credit carryforwards be recorded as an asset to the extent that the Company assesses that realization is "more likely than not." Realization of the future tax benefits is dependent on the Company's ability to generate sufficient taxable income within the carryforward period. Because of the Company's recent history of operating losses, it believes that recognition of the deferred tax assets arising from the above-mentioned future tax benefits is currently not likely to be realized and accordingly has provided a valuation allowance. The valuation allowance increased by $21,989 during 2013, and $8,352 during 2012.
The Company records deferred taxes on temporary differences between book and tax in accordance with ASC 740. However, the Company has not recorded deferred taxes related to nondeductible goodwill and foreign earnings that will not be repatriated (discussed below). In both cases, there are specific exemptions in ASC 740 from the general rule to record deferred taxes on temporary timing differences. Deferred tax liabilities of approximately $8,633 were not recognized for book and tax differences related to goodwill of certain investments in subsidiaries. This unrecognized deferred tax liability would only become recognized upon the disposition of such subsidiary.
Net operating losses and tax credit carryforwards as of December 31, 2013 are as follows:
(in thousands)
|
Amount | Expiration Years Beginning In |
|||||
---|---|---|---|---|---|---|---|
Net operating losses, federal |
$ | 27,888 | 2032 | ||||
Net operating losses, state |
$ | 19,500 | 2027 | ||||
Net operating losses, foreign |
$ | 3,673 | 2021 |
111
13. BENEFIT/(PROVISION) FOR INCOME TAXES (Continued)
The effective tax rate of the Company's provision/(benefit) for income taxes differs from the federal statutory rate as follows:
|
Year Ending December 31, | |||||||||
---|---|---|---|---|---|---|---|---|---|---|
|
2013 | 2012 | 2011 | |||||||
Statutory rate |
34.0 | % | 34.0 | % | 34.0 | % | ||||
State deferred |
1.7 | % | 16.5 | % | | % | ||||
Nondeductible items |
(3.8 | )% | | % | | % | ||||
Noncontrolling interest |
(2.0 | )% | | % | | % | ||||
Taxable gain |
(6.7 | )% | | % | | % | ||||
Valuation allowance |
(18.4 | )% | (52.0 | )% | (34.0 | )% | ||||
Other |
(4.2 | )% | 1.1 | % | | % | ||||
| | | | | | | | | | |
Total tax provision (benefit) |
0.6 | % | (0.4 | )% | | % | ||||
| | | | | | | | | | |
| | | | | | | | | | |
The foreign earnings tax rate differentials in the tax rate reconciliation above primarily reflect the impacts of operations in jurisdictions with different tax rates than the United States, particularly Australia, Netherlands, and Germany, where the earnings have been indefinitely reinvested under ASC740-30, thereby yielding a favorable impact on the effective tax rate as compared with the U.S. statutory rate of 34%. The tax provisions recorded in these jurisdictions have lower tax rates than the United States, therefore, the impact of recording these tax provisions at a lower tax rate results in a favorable impact on the effective tax rate as compared to the 34% U.S. statutory rate.
The Company has reviewed its 2012 Federal, State and Foreign tax returns and have not deferred and recorded any uncertain tax positions under ASC 740-10. Company policy is to recognize interest and penalties related to income taxes as a component of income/(loss) before provision for income taxes. The Company is subject to income tax examinations for U.S. income taxes from 2012 forward. The Company does not anticipate that total unrecognized tax benefits will significantly change prior to December 31, 2014.
At December 31, 2013, no deferred taxes have been provided on undistributed earnings of approximately $7,157 from the Company's international subsidiaries since these earnings have been permanently reinvested outside the United States.
14. RELATED PARTIES
Robert Sillerman
The Company's chief executive officer and chairman, Mr. Sillerman, beneficially owns shares, in the aggregate, representing approximately 43.0% of the Company's outstanding capital stock as of December 31, 2013.
112
14. RELATED PARTIES (Continued)
On December 31, 2012, the Company issued in a financing transaction a promissory note to Mr. Sillerman in the principal amount of $7,000 ("promissory note"), together with warrants to purchase up to an aggregate amount of 2,100,000 shares of the Company's common stock. In connection with this transaction, Mr. Sillerman entered into a back-stop agreement pursuant to which he agreed to fund the entire amount of the notes offered but not subscribed for by third party stockholders approached to purchase the notes. As consideration for the back-stop agreement, Mr. Sillerman received 100,000 warrants at an exercise price of $.01 per share. In connection with the funding of the note, Mr. Sillerman was issued 700,000 warrants to purchase stock at $5.00 per share; 700,000 warrants to purchase stock $7.50 per share; and 700,000 warrants to purchase stock at $10.00 per share. Under the terms of the promissory note, the Company was required to repay the outstanding principal and interest by (i) one-third of the amounts raised in completed equity offerings and (ii) 100% of the amounts raised in debt financings over $15,000 after December 31, 2012. As of April 3, 2013, the entire principal amount was repaid.
In accordance with the guidance under ASC 815, the fair value of both the promissory note and the warrants was determined and the proceeds of the promissory note were allocated between the promissory note and the warrants based on the pro rata individual values to the aggregate combined value of the promissory note and the warrants. As a result $3,190 was recorded as additional paid in capital with respect to the allocated value of the warrants and $3,810 was allocated to the promissory note. The difference between the face value of the promissory note and the recorded value represents a discount associated with the issuance of the promissory note and was amortized as interest expense during the twelve months ended December 31, 2013.
On March 15, 2013, Mr. Sillerman entered into the Sillerman Guarantee with Barclays Bank PLC, as collateral agent, for the benefit of the other lender parties, in which he personally guaranteed all of the Company's obligations under the First Lien Term Loan Facility. On June 5, 2013, the First Lien Term Loan Facility was amended to increase the facility amount by $15,000 to a total of $64,500. Mr. Sillerman entered into an amendment to the Sillerman Guarantee to reaffirm his guarantee thereunder in connection with the amendment. As consideration for personally guaranteeing the obligations under the First Lien Term Loan Facility, the board of directors granted Mr. Sillerman the following: (i) warrants to purchase 5,500,000 shares of the Company's common stock at $5.00 per share, (ii) warrants to purchase 750,000 shares of the Company's common stock at $7.50 per share, (iii) warrants to purchase 1,000,000 shares of the Company's common stock at $10.00 per share, and (iv) 1,000,000 shares of the Company's common stock. In April 2013, the warrants and common stock issued to Mr. Sillerman were exchanged for (i) 9,350,000 stock options and (ii) 1,100,000 shares of restricted stock. See Note 10Stock-Based Compensation-for greater detail on the exchange of these warrants for stock options and shares of restricted stock. On August 20, 2013, the Company entered into an amendment to the First Lien Term Loan Facility, which increased the amount outstanding by $10,500, for a total of $75,000 outstanding. Mr. Sillerman entered into a second amendment to the Sillerman Guarantee, to reaffirm his guarantee thereunder. In connection with this amendment on September 6, 2013, the board of directors approved a grant of 233,000 restricted shares of the Company's common stock for Mr. Sillerman's August 20, 2013 guarantee.
In connection with the Company's entry into a letter of credit agreement on December 12, 2013, Mr. Sillerman entered into an amendment to his guarantee, which, among other things, increased the aggregate amount of indebtedness, other than borrowings under the First Lien Term Loan Facility, that Mr. Sillerman is permitted to incur or guarantee from time to time to $66,000, in order to permit his guarantee of all of our obligation under letters of credit, as described below.
113
14. RELATED PARTIES (Continued)
In connection with our entry into a letter of credit agreement, Mr. Sillerman entered into a guarantee agreement with the lender, dated December 12, 2013, pursuant to which he personally guaranteed all of the Company's obligations under the letter of credit agreement and agreed, at all times during the term of the letter of credit, to deposit a minimum of $10,000 with the lender. The letter of credit provides approximately $66,400 of financing that was required for us to exercise our option to acquire a 40% interest in Rock World (see Note 17Subsequent Events).
MJX, LLC
In 2013 and 2012, MJX, LLC ("MJX"), a company owned 100% by Mr. Sillerman, funded certain travel and entertainment expenses incurred by the Company's consultants and employees who were assisting in meeting with potential acquisition targets. In addition in 2013, certain employees of the Company provided services to MJX, primarily tax and administrative in nature. Total expenses incurred by the Company for services provided by MJX for the years ended December 31, 2013, 2012, and 2011 were $13, $507, and $0, respectively. The Company owed MJX $7 and $507 at December 31, 2013 and 2012, respectively.
Viggle, Inc.
The Company has a shared service agreement with Viggle, Inc. ("Viggle"), a company whose chief executive officer and primary shareholder is Mr. Sillerman. The shared services agreement is for taxation, and financial processing services to the Company. Costs incurred by the Company during the years ended December 31, 2013, 2012, and 2011 was $612, $12, and $0, respectively. The Company owed Viggle $44 and $5 at December 31, 2013 and 2012, respectively. Also see Note 17Subsequent events regarding the new software license agreement.
Circle Entertainment, Inc.
The Company has a shared service agreement with Circle Entertainment Inc. ("Circle Entertainment"), a company partially owned by Mr. Sillerman. The shared services agreement covers expenses for office space, legal services, secretarial services, IT services and office supplies for SFX. Costs incurred by the Company during the years ended December 31, 2013, 2012, and 2011 was $0, $181, and $0, respectively. The Company owed $0 and $181 to Circle Entertainment at December 31, 2013 and 2012, respectively.
Donnie Estopinal
The Company has recorded a liability to the former owner of Disco, Donnie Estopinal, in the amount of $1,070 as of December 31, 2013, for certain working capital adjustments related to the sale by Mr. Estopinal of Disco to SFX.
MMG Nightlife, LLC
MMG Nightlife, LLC is the 20% non-controlling interest shareholder of MMG, a 80% controlled and consolidated entity of the Company. As of December 31, 2013, the Company had a payable of $1,323.
Totem One Love Group and Totem Industries
The directors of one of the Company's subsidiaries are also the directors of two unacquired entities, Totem One Love Group and Totem Industries. During the year ended December 31, 2013,
114
14. RELATED PARTIES (Continued)
Totem One Love Group and Totem Industries made payments on behalf of the Company resulting in a payable of $179.
Former owners of acquired entities
The Company has certain balances due to and due from former owners of companies that the Company acquired during 2013. These balances primarily relate to payments made to or received on behalf of the Company in connection with rent, advances, insurance and event proceeds. Collectively at December 31, 2013 the Company recorded a receivable of $89 and payable of $41 these former owners.
Non-consolidated affiliates
The Company regularly engages in business activities with its non-consolidated affiliates in the production and operation of events. On December 31, 2013 the total balance due to the Company from these non-consolidated affiliates was $202 and the total balance payable was $1,896.
Other
Pursuant to subscription agreements with three separate investors entered into in June 2012 with respect to an aggregate of 5,750,000 shares, Mr. Sillerman granted certain tag-along rights to the three investors that would permit them to participate in any transfer to an unaffiliated third-party by Mr. Sillerman and/or his affiliates of their shares. These tag-along rights expired immediately prior to the pricing of the Company's initial public offering.
On November 1, 2012, the Company entered into a master services agreement with Sports & Entertainment Physicians, PC ("S & E Physicians") for the provision of advice and consultation regarding various medical issues and services designed to further the Company's goal of hosting safe festivals and events. Andrew N. Bazos, the principal and founder of S & E Physicians, is also a director of the Company and serves as Chairman of the Company's Medical Procedure & Safety Committee. Pursuant to the terms of the master services agreement, the Company has agreed to pay S & E Physicians on terms to be determined provided the charges must not exceed the amounts charged by S & E Physicians to its most favored clients. The services the Company may request include advice on health, safety and medical training and staffing; consultation on contracts related to medical services; creation of plans, policies and programs to improve the provision of medical services and ensure compliance with applicable laws, regulations, and rules; work with state and local regulatory authorities; and other tasks intended to advance the Company's objective of hosting safe festivals and events. The term of the agreement is from November 1, 2012, the effective date, until November 1, 2013, unless earlier terminated. The parties entered into an amendment, effective November 1, 2013, to extend the terms until November 1, 2014. Either party may terminate the agreement at any time, with or without cause, by providing 60 days' written notice to the other party. The agreement also provides that the Company must pay any incremental cost in S & E Physicians' medical malpractice insurance caused solely by execution of the agreement directly to S & E Physicians' insurance company. For the year ended December 31, 2013, the Company incurred expenses of $170 for consulting and expense reimbursements. As of December 31, 2013, the Company had an outstanding payable balance to S & E Physicians of $8.
On December 6, 2012, the Company closed a financing with White Oak Securities LLC in which the Company issued 300,000 shares of common stock at a price per share of $5.00 for an aggregate purchase price of $1,500. Such purchase price was paid in the form of a $1,500 principal amount promissory note having a maturity date of December 6, 2015. White Oak Securities LLC is controlled by its managing member, Timothy J. Crowhurst, who was subsequently hired as the Company's
115
14. RELATED PARTIES (Continued)
President in June 2013. The promissory note was secured by the 300,000 shares issued to White Oak Securities LLC, and Mr. Crowhurst personally guaranteed the repayment of $375 of the promissory note. In connection with his hiring as the Company's President, Mr. Crowhurst surrendered the 300,000 shares, the Company canceled the promissory note, and Mr. Crowhurst was released from the personal guarantee.
The Company in 2013 and 2012 had an investment banking relationship with Tangent Capital Partners LLC ("Tangent"). The Company's President, Timothy J. Crowhurst, is a registered representative of Tangent. Under the arrangement with Tangent, Tangent agreed to be paid up to $1,500 in cash upon the closing of certain financings, including the Company's initial public offering, plus fees for other services to be mutually agreed to between Tangent and the Company. On July 17, 2013, the Company entered into a letter agreement with Tangent to amend the terms of its compensation to provide that after giving effect to the payment of the fees paid and payable as of July 17, 2013, Tangent will receive the balance of its fees no later than September 30, 2013, payable upon receipt of an invoice for the amount owed, and must relinquish its right to any additional fees. As of December 31, 2013, the Company incurred expenses of $225 and capitalized expenses of $1,125 related to the First Lien Term Loan Facility and $150 related to the Company's initial public offering.
15. COMMITMENTS AND CONTINGENCIES
Legal matters
Pferdmenges
On June 12, 2012, a lawsuit was commenced against Made and its founders, Mike Bindra, Laura De Palma, and Sala Corporation by Henri Pferdmenges and NRW, Inc. in the Circuit Court of the Eleventh Judicial Circuit in and for Miami Dade County, Florida. The lawsuit, as amended on September 17, 2012, alleges claims of (i) breach of joint venture agreement, (ii) breach of fiduciary duty, (iii) declaratory action regarding certain rights related to the 2011, 2012 and future Electric Zoo Festivals and certain rights to intellectual property associated with the Electric Zoo Festival, (iv) unjust enrichment, (v) promissory estoppel, (vi) contract implied in fact and (vii) fraud in the inducement with respect to the ownership of the Electric Zoo Festival. On July 11, 2013, after removal to the United States District Court for the Southern District and transfer to the United States District Court for the Southern District of New York, the Court granted defendants' motion to dismiss in full and the court dismissed all of plaintiffs' claims against all of the defendants. However, the plaintiffs were subsequently permitted to make amendments to their complaint regarding their breach of contract, alter ego and fraudulent conveyance claims. Pursuant to the Third Amended Complaint, the plaintiffs are seeking damages in excess of $10.0 million, plus interest and costs. On January 8, 2014, defendants filed their motion to dismiss the Third Amended Complaint for failure to state a claim and on February 26, 2014, the plaintiffs filed their opposition to such motion. No prediction can be made as to the outcome of this action at this time.
Moreno
On February 5, 2014, Paolo Moreno, Lawrence Vavra and Gabriel Moreno filed suit against SFX, and, in their individual capacities, Mr. Sillerman and Mr. Finkel, in the United States District Court for the Central District of California. The complaint alleged, among other things, causes of action for breach of joint venture/partnership agreement, breach of implied joint venture/ partnership agreement, breach of fiduciary duty owed to joint ventures/partners, constructive fraud, breach of contract, breach of implied contract, promissory estoppel, fraudulent inducement, promissory fraud, unfair competition, quantum meruit, breach of fiduciary duty owed to principals and interference with prospective
116
15. COMMITMENTS AND CONTINGENCIES (Continued)
economic advantage. The plaintiffs seek over $100.0 million in damages, as well as compensatory and punitive damages, and equitable relief. The Company believes this lawsuit is without merit and intend to vigorously defend against it.
During the normal course of business, the Company is occasionally involved with various claims and litigation. Reserves are established in connection with such matters when a loss is probable and the amount of such loss can be reasonably estimated. At December 31, 2013 and 2012, no material reserves were recorded. No reserves are established for losses which are only reasonably possible. The determination of probability and the estimation of the actual amount of any such loss is inherently unpredictable, and it is therefore possible that the eventual outcome of such claims and litigation could exceed the estimated reserves, if any. Based upon the Company's experience, current information and applicable law, it does not believe it is reasonably possible that any proceedings or possible related claims will have a material effect on its financial statements.
Lease commitments
The Company leases its office and warehouse facilities under non-cancellable operating lease agreements. Future minimum rent commitment amounts for the Company's foreign subsidiary was translated from the foreign subsidiaries functional currency to the U.S. Dollar reporting currency using the foreign exchange rate as of December 31, 2013. The following table excludes a sublease agreement for office space leased by the Company expiring in September 2014.
Future minimum lease commitments as follows: |
||||
2014 |
$ | 5,849 | ||
2015 |
2,589 | |||
2016 |
1,707 | |||
2017 |
1,499 | |||
2018 |
513 | |||
Total |
12,157 |
Total rent expense charged to operations for 2013, 2012 and 2011 was $2,245, $202, and $0, respectively.
16. SEGMENT REPORTING
The Company started its business on July 7, 2011, and did not have any significant operations in the year ended December 31, 2011 or in 2012, until the acquisitions of the operations of the Company's Predecessor, LIC, and the operations of Disco. As a result of these acquisitions the Company determined that it had one operating segment in 2012. However, as a result of the acquisition of Beatport on March 15, 2013, the Company reassessed its business units and the way in which results are reviewed and decisions on overall resource allocations are made by the Company's chief operating decision maker, who has been identified as the Chief Executive Officer. The Company has determined that its operating segments are i) Live Events, which is the production and promotion of the Company's live events and includes revenue from ticket sales, concessions of food, beverages and merchandise, promoter and management fees, event specific sponsorships and advertising and ii) Platform, which is the Company's 365 day per year engagement with the Company's fans outside of live events and currently includes sale of digital music, ticketing fees and commissions, digital marketing, and other platform supporting businesses.
As of December 31, 2013, the Company assessed its business units, in consideration of the acquisitions that took place during the fourth quarter of 2013. The Company considered all of the
117
16. SEGMENT REPORTING (Continued)
acquisitions that took place during this time, but in particular the acquisitions of Totem, Made, ID&T, and i-Motion, which the Company determined were part of its Live Events segment, as well as Paylogic and certain other acquisitions that are included in the Platform segment.
The Company has determined not to aggregate any of its operating segments, and therefore, the Company's reportable segments are its operating segments.
Corporate expenses, including stock based compensation, and all line items below operating income/(loss) are managed on a total Company basis. The Company eliminates inter-segment activity within "Corporate and Eliminations". Additionally, the chief operating decision maker manages assets on a consolidated basis. Accordingly, segment assets are not reported to, used to allocate resources or asses performance of the segments, and therefore, total segment assets have not been disclosed.
(in thousands)
|
Live Events | Platform | Corporate and Eliminations |
Consolidated | |||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|
2013 |
|||||||||||||
Revenue |
$ | 129,937 | $ | 40,629 | $ | (109 | ) | $ | 170,457 | ||||
Direct costs |
113,230 | 26,891 | (21 | ) | 140,100 | ||||||||
| | | | | | | | | | | | | |
Gross profit |
16,707 | 13,738 | (88 | ) | 30,357 | ||||||||
Selling, general and administrative |
16,742 | 13,633 | 70,007 | 100,382 | |||||||||
Depreciation |
1,331 | 852 | 56 | 2,239 | |||||||||
Amortization |
17,188 | 5,286 | 4 | 22,478 | |||||||||
| | | | | | | | | | | | | |
Operating loss |
$ | (18,554 | ) | $ | (6,033 | ) | $ | (70,155 | ) | $ | (94,742 | ) | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
2012 |
|||||||||||||
Revenue |
$ | 24,815 | $ | | $ | | $ | 24,815 | |||||
Direct costs |
23,019 | | | 23,019 | |||||||||
| | | | | | | | | | | | | |
Gross profit |
1,796 | | | 1,796 | |||||||||
Selling, general and administrative |
2,824 | | 14,202 | 17,026 | |||||||||
Depreciation |
70 | | 5 | 75 | |||||||||
Amortization |
916 | | | 916 | |||||||||
| | | | | | | | | | | | | |
Operating loss |
$ | (2,014 | ) | $ | | $ | (14,207 | ) | $ | (16,221 | ) | ||
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
2011 |
|||||||||||||
Revenue |
$ | | $ | | $ | | $ | | |||||
Direct costs |
| | | | |||||||||
| | | | | | | | | | | | | |
Gross profit |
| | | | |||||||||
Selling, general and administrative |
| | 101 | 101 | |||||||||
Depreciation |
| | | | |||||||||
Amortization |
| | | | |||||||||
| | | | | | | | | | | | | |
Operating loss |
$ | | $ | | $ | (101 | ) | $ | (101 | ) | |||
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
No customer represented 10 percent or more of the Company's revenue.
118
16. SEGMENT REPORTING (Continued)
Geographical Information
Net revenue, classified by the major geographic areas in which the Company operates, was as follows for the year ended December 31, 2013:
(in thousands)
|
2013 | |||
---|---|---|---|---|
Net Revenue: |
||||
U.S |
$ | 78,216 | ||
Australia |
43,867 | |||
Other international |
48,374 | |||
| | | | |
Consolidated net revenue |
$ | 170,457 | ||
| | | | |
| | | | |
The Company had no material net revenues or long-lived assets outside of the U.S. in 2012 or 2011. The Company's net revenue by geographic area is based upon the sales location. For the year ended December 31, 2013, other than the U.S. and Australia, no country represented more than 10% of our total consolidated net revenue. At December 31, 2013, approximately $2.1 million or 22.9% of the Company's long-lived assets are derived from foreign operations held in the Netherlands.
17. SUBSEQUENT EVENTS
New Borrowings
On February 4, 2014, the Company issued $220,000 aggregate principal amount of its 9.625% second lien senior secured notes due 2019 (the "Notes" or "9.625% Notes") in a private offering (the "Offering") exempt from registration under the Securities Act of 1933, as amended (the "Securities Act"). The Company used a portion of the net proceeds of the Offering to repay the entire amount outstanding under the Company's former $75,000 First Lien Term Loan Facility and pay related fees and expenses, and intends to use a portion of the net proceeds of the offering to fund the purchase price of its previously announced planned acquisition of Rock World and other acquistions.
In addition, on February 7, 2014, the Company entered into a credit agreement ("credit agreement"), which provides for a $30,000 revolving credit facility (the "Revolver"), which includes a $10,000 subfacility for loans in certain approved currencies other than US dollars and a $7,500 subfacility for letters of credit.
9.625% Second Lien Senior Secured Notes due 2019
In connection with the issuance of the Notes, the Company, certain of its subsidiaries and U.S. Bank National Association, as trustee (in such capacity, the "Trustee") and collateral agent, entered into an indenture governing the Notes (the "Indenture"). The Notes are second-priority lien senior secured obligations of the Company and are fully and unconditionally guaranteed by the Company's present and future wholly owned domestic subsidiaries that guarantee the indebtedness under the Credit Agreement, as well as the Company's non-wholly owned domestic subsidiary, SFX-Nightlife Operating, LLC (collectively, the "New Guarantors"). The Notes and the guarantees thereof are secured by a second-priority lien on substantially all of the present and future assets of the Company and the New Guarantors, subject to certain exceptions and permitted liens. The Notes will mature on February 1, 2019 and accrue interest at a rate of 9.625% per annum, which is payable semi-annually in arrears on February 1 and August 1 of each year, commencing on August 1, 2014.
Optional Redemption and Mandatory Offer to Purchase. At any time on or after February 1, 2016, the Company may redeem all or a portion of the Notes at the redemption prices set forth in the
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17. SUBSEQUENT EVENTS (Continued)
Indenture. Prior to February 1, 2016, the Company may redeem the Notes, in whole or in part, at a price equal to 100% of the principal amount thereof plus any accrued or unpaid interest thereon and a "make-whole" premium. In addition, at any time before February 1, 2016, the Company may redeem up to 35% of the original aggregate principal amount of the Notes with the net proceeds of certain equity offerings, subject to certain conditions, at a redemption price of 109.625% of the principal amount of the Notes, plus accrued and unpaid interest, if any, to the date of redemption.
The holders of the Notes have the ability to require the Company to repurchase all or any part of the Notes if the Company experiences specific kinds of changes in control or engages in certain asset sales, in each case at the repurchase prices and subject to the terms and conditions set forth in the Indenture.
Covenants. The Indenture contains certain covenants which are customary with respect to non-investment grade debt securities, including limitations on the Company's and its restricted subsidiaries' ability to incur additional indebtedness or issue certain preferred shares, pay dividends, make any distribution in respect of, redeem or repurchase stock, make certain investments or other restricted payments, enter into certain types of transactions with affiliates, incur liens, apply proceeds from certain asset sales or events of loss, and consolidate or merge with or into other entities or otherwise dispose of all or substantially all of its assets. These covenants are subject to a number of important limitations and exceptions.
Events of Default. The Indenture provides for customary events of default, including cross payment defaults to other specified debt of the Company and certain of its subsidiaries. In the case of an event of default arising from specified events of bankruptcy, insolvency or reorganization with respect to the Company, then the principal, premium, if any, and accrued and unpaid interest, if any, of all Notes will become due and payable without any declaration or act on the part of the Trustee or any holder of Notes. If any other event of default occurs and is continuing, the Trustee or holders of at least 25% in aggregate principal amount of the Notes then outstanding may declare the principal, premium, if any, and accrued and unpaid interest, if any, of all Notes due and payable. In the case of a declaration of the acceleration of the Notes because an event of default has occurred, but before a judgment or decree for payment of the money due has been obtained by the Trustee, the holders of a majority in aggregate principal amount of the outstanding Notes may rescind and annul such declaration and its consequences if, among other conditions set forth in the Indenture, the Company has paid or deposited with the Trustee a sum sufficient to pay all sums paid or advanced by the Trustee under the Indenture and all overdue interest on all Notes, and all events of default (other than the non-payment of principal of the Notes that has become due solely by such declaration of acceleration) have been cured or waived.
Revolving Credit Agreement
Commitments under the Revolver may be increased by an aggregate amount of up to the sum of (A) the greater of (1) $30,000 and (2) 100% of Consolidated EBITDA (as defined in the Credit Agreement) of the Company and its subsidiaries for the four quarter period ending immediately on or prior to the date of such increase, plus (B) all interest (including interest which, but for the filing of a petition in bankruptcy with respect to the Company or its subsidiaries that are guarantors, would have accrued, whether or not a claim is allowed against the Company or such subsidiary for such interest in the related bankruptcy proceeding), fees, expenses, indemnification or other amounts owed to the lenders under the Credit Agreement and all hedging obligations related thereto less (C) the aggregate commitments under the Credit Agreement then outstanding, subject to certain terms and conditions
120
17. SUBSEQUENT EVENTS (Continued)
specified in the Credit Agreement. The Revolver will mature on February 7, 2017, subject to extension pursuant to the terms of the Credit Agreement.
Interest Rates and Fees. Interest under the Revolver is payable, at the option of the Company, either at a base rate plus a margin or a Eurodollar-based rate plus a margin. Interest is payable, in the case of loans bearing interest based on the Eurodollar-based rate, in arrears at the end of the applicable interest period (and, for interest periods longer than three months, every three months) and, in the case of loans bearing interest based on the base rate, quarterly in arrears. The base rate for any date is the per annum rate equal to the highest of (x) a prime rate, (y) the federal funds effective rate plus 0.50% and (z) an adjusted Eurodollar rate for a one-month term plus 1.00%. The margin is, initially, (a) 3.50% per annum with respect to revolving loans bearing interest based on the base rate, or (b) 4.50% per annum with respect to revolving loans bearing interest based on the Eurodollar-based rate, in each case subject to adjustment after delivery of the audited financial statements for the fiscal year ending December 31, 2013, based on the Company's first lien net leverage ratio, as defined in the Credit Agreement.
The Company is required to pay a per annum letter of credit fee on the daily maximum amount then available to be drawn under letters of credit issued under the Credit Agreement equal to the margin for revolving loans bearing interest based on the Eurodollar-based rate, calculated on a 360-day basis and payable quarterly in arrears, plus a fronting fee of 0.125% per annum on the daily maximum amount then available to be drawn under such letters of credit, also calculated on a 360-day basis and payable quarterly in arrears, and the customary issuance, presentation, amendment and other processing fees, and other standard costs and charges, of the letter of credit issuer. In addition, the Company is required to pay a per annum commitment fee on the average daily unused portion of the Revolver, which is 0.50% initially, calculated on a 360-day basis and payable quarterly in arrears.
Security/Guarantors. The Revolver is guaranteed by the New Guarantors. The Revolver is secured, subject to certain exceptions, by a first-priority security interest in substantially all of the assets and property of the Company and the New Guarantors. If the Company or any of the New Guarantors provide additional guarantees or collateral to support the Notes, the same guarantees or collateral must be provided to support the obligations owing under the Credit Agreement.
Mandatory Prepayments. On any date on which the aggregate principal amount of the total borrowings under the Credit Agreement exceed the aggregate commitments by the lenders under the Credit Agreement, the Company must immediately pay to the administrative agent an amount equal to such excess. In addition, if the administrative agent notifies the Company at any time that the outstanding amount of all loans under the Credit Agreement denominated in certain approved currencies other than U.S. dollars exceeds a specified limit then in effect, which is initially $10,000, the Company must prepay loans in an aggregate amount sufficient to reduce such outstanding amount to an amount no greater than such limit.
Covenants. The Credit Agreement contains customary affirmative covenants including covenants related to financial statements and other information, collateral reporting, notices of material events, conduct of the business, payment of obligations, maintenance of properties and insurance, submission to certain inspections, compliance with laws and agreements, use of proceeds and letters of credit, subsidiary guarantees, cash management, and additional collateral and further assurances. The Credit Agreement also contains customary negative covenants that, subject to certain exceptions, qualifications and "baskets," generally limit the ability to incur debt, create liens, make restricted payments, make certain investments, prepay or redeem certain debt, enter into certain transactions with affiliates, change fiscal year, enter into restrictions on distributions from subsidiaries, and enter into certain
121
17. SUBSEQUENT EVENTS (Continued)
merger or asset sale transactions. The Credit Agreement also contains financial covenants to comply with a maximum total leverage ratio and a minimum interest coverage ratio on a quarterly basis. Such financial covenants and certain restrictions on the incurrence of indebtedness and the consummation of acquisition and other investments will not be applicable to the Company until the Company has borrowed any amounts or obtained any letters of credit under the Credit Agreement. The Company may not borrow or otherwise request a letter of credit under the Revolver unless, among other things, it would have a total leverage ratio of no more than 4.50:1.00 on a pro forma basis after giving effect to such borrowing or letter of credit and the aggregate amount of cash and cash equivalents of the Company and its subsidiaries has been reduced by at least $100.0 million as compared to February 4, 2014.
Events of Default. The Credit Agreement contains customary events of default for a transaction of this type. If an event of default under the Credit Agreement occurs and is continuing, the administrative agent may, and at the request of lenders holding more than 50.0% of the sum of the outstanding amounts and unused commitments under the Revolver and, will, take any or all of the following actions: (i) declare all outstanding obligations under the Credit Agreement to be immediately due and payable and require the Company to cash collateralize all outstanding letters of credit issued under the Credit Agreement, (ii) terminate all commitments under the Credit Agreement or (iii) exercise the rights and remedies available under the Credit Agreement and any related loan documents. In addition, if, among other things, the Company or any of its restricted subsidiaries, as defined in the Credit Agreement, does not pay its debts as such debts become due or any bankruptcy, insolvency, liquidation or similar proceeding is instituted by or against any such party, then any outstanding obligations under the Credit Agreement (including obligations to cash collateralize outstanding letters of credit issued under the Credit Agreement) will automatically become immediately due and payable without any further act by the administrative agent or any lender.
In connection with the entry into the Indenture and the Credit Agreement, the Company and the New Guarantors acknowledged and agreed to the Intercreditor Agreement. The Intercreditor Agreement provides, among other things, that the liens on the collateral securing the Notes and related obligations will be junior and subordinate in all respects to the liens on the collateral securing the Revolver and related obligations.
Rock World
On February 12, 2014, the Company completed its acquisition of a fifty percent (50%) interest in a holding company that owns eighty percent (80%) of the equity shares of Rock World S.A. ("Rock World"), a Brazilian company engaged in the entertainment business, including the organization of music festivals held under the "Rock in Rio" name. In connection with this acquisition, the Company entered into a share purchase agreement, dated December 12, 2013, as subsequently amended and restated on February 12, 2014, by and among the Company, Rock World, Rock City S.A., SFX Entretenimento do Brasil Participações Ltda, and certain other third parties named therein, including management shareholders of Rock World S.A.
Pursuant to the purchase agreement, the consideration transferred at closing consisted of a cash payment of R$150,000 (or approximately $62,624 million as of the closing date). The purchase agreement contains customary representations, warranties and covenants. At closing, the Company and the shareholders holding the other fifty percent (50%) of the equity shares of Rock World entered into a shareholders' agreement to govern the management of the Rock World business, including, among other things, the appointment of officers and directors. The Company has preliminary concluded that it will account for this investment under the equity method.
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17. SUBSEQUENT EVENTS (Continued)
B2S
On February 28, 2014, the Company completed its acquisition of B2S Holding BV ("B2S") from Amazing Holding BV ("Amazing"). Through this acquisition, the Company acquired the remaining 50% interest of B2S not owned by the Company. Pursuant to the purchase agreement, the consideration transferred at closing consisted of a cash payment of approximately $14,240 million (net of transaction expenses and other adjustments) and 400,000 shares of the Company's common stock. In addition, the Company issued to Jan Lok, one of the selling shareholders, a warrant to purchase 100,000 shares of the Company's common stock at an exercise price of $10.00 per share, exercisable as of and following the closing and expiring on the fifth anniversary of the closing. Prior to this acquisition, the Company accounted for its investment in B2S as an equity investment, and subsequently B2S will be consolidated into the Company's results from the date of this acquisition.
Viggle
On March 10, 2014, the Company entered into a software license and services agreement with Viggle, a company whose chief executive officer and primary shareholder is Mr. Sillerman. Under the terms of this agreement, the Company paid $5,000 for a ten-year non-exclusive, fully paid license to exploit certain audio recognition software owned by Viggle to be used in the Company's business. Viggle is required to pay the Company a royalty equal to 50% of the net revenue paid to Viggle by third parties who license the audio recognition software.
18. RESTATEMENT
The Company restated its previously issued consolidated financial statements as of and for the year ended December 31, 2012, to correct the classification of certain shares of common stock and non-controlling interest. The Company determined that 7,800,000 shares of common stock were issued in 2012 with redemption features, which should have been classified as temporary equity in accordance with the provisions of ASC 480-10-S99 for public companies. This includes 300,000 shares of common stock with a related subscription receivable of $1,500, which equals the original issuance price and therefore results in no net adjustment to temporary equity related to these 300,000 shares. Additionally, in connection with the 80% acquisition of MMG on December 31, 2012, the asset purchase agreement contains certain rights which allows the Company to call the remaining interest it does not own, as well as providing that the minority interest holder may put their interest to the Company at a multiple of 20% of MMG's 2014 EBITDA times six. Similarly, the Company has determined that the non-controlling interest should have been classified as redeemable non-controlling interest and included as part of temporary equity, as required for public companies.
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19. QUARTERLY RESULTS OF OPERATIONS (Unaudited)
|
Three Months Ended March 31, |
Three Months Ended June 30, |
Three Months Ended September 30, |
Three Months Ended December 31, |
|||||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
|
2013 | 2012 | 2013 | 2012 | 2013 | 2012 | 2013 | 2012 | |||||||||||||||||
Revenue: |
|||||||||||||||||||||||||
Service revenue |
$ | 7,790 | $ | | $ | 15,094 | $ | 378 | $ | 34,723 | $ | 9,933 | $ | 66,001 | $ | 14,202 | |||||||||
Sale of products |
2,363 | | 12,306 | | 14,019 | | $ | 18,161 | 302 | ||||||||||||||||
| | | | | | | | | | | | | | | | | | | | | | | | | |
Total Revenue |
10,153 | | 27,400 | 378 | 48,742 | 9,933 | 84,162 | 14,504 | |||||||||||||||||
Direct costs: |
|||||||||||||||||||||||||
Cost of services |
5,995 | | 10,985 | 365 | 38,724 | 8,811 | 53,264 | 13,543 | |||||||||||||||||
Cost of goods sold |
1,606 | | 8,163 | | 9,488 | 11,875 | 300 | ||||||||||||||||||
| | | | | | | | | | | | | | | | | | | | | | | | | |
Total Direct Costs |
7,601 | | 19,148 | 365 | 48,212 | 8,811 | 65,139 | 13,843 | |||||||||||||||||
Gross profit |
2,552 |
|
8,252 |
13 |
530 |
1,122 |
19,023 |
661 |
|||||||||||||||||
Operating expenses: |
|||||||||||||||||||||||||
Selling, general and administrative expenses |
14,246 | 1,366 | 24,128 | 1,768 | 23,628 | 2,848 | 38,380 | 11,044 | |||||||||||||||||
Depreciation |
118 | | 380 | | 1,049 | 43 | 692 | 32 | |||||||||||||||||
Amortization |
2,963 | | 4,255 | 27 | 4,235 | 420 | 11,025 | 469 | |||||||||||||||||
| | | | | | | | | | | | | | | | | | | | | | | | | |
Operating Loss |
(14,775 | ) | (1,366 | ) | (20,511 | ) | (1,782 | ) | (28,382 | ) | (2,189 | ) | (31,074 | ) | (10,884 | ) | |||||||||
Interest expense |
(3,911 | ) | | (4,272 | ) | 3 | (5,285 | ) | (46 | ) | (6,230 | ) | 9 | ||||||||||||
Other (expense) / income |
(942 | ) | | (99 | ) | | 396 | 232 | (4,421 | ) | (134 | ) | |||||||||||||
| | | | | | | | | | | | | | | | | | | | | | | | | |
Net loss before taxes |
(19,628 | ) | (1,366 | ) | (24,882 | ) | (1,779 | ) | (33,271 | ) | (2,003 | ) | (41,725 | ) | (11,009 | ) | |||||||||
Provision for income taxes |
(572 | ) | | (2 | ) | | 76 | 1,929 | 1,182 | (1,996 | ) | ||||||||||||||
| | | | | | | | | | | | | | | | | | | | | | | | | |
Net loss |
(20,200 | ) | (1,366 | ) | (24,884 | ) | (1,779 | ) | (33,195 | ) | (74 | ) | (40,543 | ) | (13,005 | ) | |||||||||
Less: Net loss attributable to non-controlling interest |
(878 | ) | | (285 | ) | | (4,409 | ) | | (1,357 | ) | | |||||||||||||
| | | | | | | | | | | | | | | | | | | | | | | | | |
Net loss attributable to SFX Entertainment, Inc. |
$ | (19,322 | ) | $ | (1,366 | ) | $ | (24,599 | ) | $ | (1,779 | ) | $ | (28,786 | ) | $ | (74 | ) | $ | (39,186 | ) | $ | (13,005 | ) | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
Loss per sharebasic & diluted |
$ | (0.36 | ) | N/A | $ | (0.39 | ) | $ | (0.05 | ) | $ | (0.46 | ) | $ | | $ | (0.48 | ) | $ | (0.28 | ) | ||||
Weighted average shares outstandingbasic & diluted (in thousands) |
52,929 | N/A | 62,444 | 37,637 | 61,902 | 43,271 | 81,209 | 46,210 |
Acquisitions significantly impact the comparability of the historical consolidated financial data reflected in this schedule of consolidated results of operations and should be read in conjunction with Note 6Business Combinations.
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ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
ITEM 9A. CONTROLS AND PROCEDURES
Evaluation of disclosure controls and procedures
Prior to our initial public offering, we were a private company with limited accounting personnel to adequately execute our accounting processes and limited other supervisory resources with which to address our internal control over financial reporting. In connection with the preparation of our audited consolidated financial statements as of and for the year ended December 31, 2012, our independent registered public accounting firm identified and communicated three material weaknesses in our internal controls over financial reporting to our board of directors. As of December 31, 2013, all of the material weaknesses noted in connection with the December 31, 2012 audit have been remediated and no additional material weaknesses have been identified.
Our management, with the participation of our Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of our disclosure controls and procedures (as such term is defined in Rule 13a-15(e) and 15d-15(e) of the Exchange Act), as of December 31, 2013. In designing and evaluating the disclosure controls and procedures, management recognized that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives. In addition, the design of disclosure controls and procedures must necessarily reflect the fact that there are resource constraints and that management is required to apply its judgment in evaluating the benefits of possible controls and procedures relative to their costs. However, the controls have been designed to provide reasonable assurance of achieving the controls' stated goals.
Based upon its evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that, as of December 31, 2013, our disclosure controls and procedures were effective in ensuring that information required to be disclosed in reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the SEC and is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure.
Management's Report on Internal Control Over Financial Reporting and Attestation Report of the Registered Public Accounting Firm
This Annual Report on Form 10-K does not include a report of management's assessment regarding internal control over financial reporting or an attestation report of the Company's independent registered public accounting firm due to a transition period established by the rules of the SEC for newly public companies.
In addition, because we are an "emerging growth company" under the JOBS Act, our independent public registered accounting firm will not be required to attest to the effectiveness of our internal control over financial reporting for our Annual Report on Form 10-K for so long as we are an "emerging growth company."
Changes in Internal Control Over Financial Reporting
There have been no changes in our internal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) of the Exchange Act) that occurred during our fiscal quarter
125
ended December 31, 2013 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
None.
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ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
The information required under this item is incorporated by reference to the Company's Proxy Statement for the 2014 Annual Meeting of Stockholders (the "2014 Proxy Statement") which is to be filed with the SEC not later than 120 days after the close of our fiscal year ended December 31, 2013 and is hereby incorporated by reference.
ITEM 11. EXECUTIVE COMPENSATION
The information required under this item is incorporated by reference to the 2014 Proxy Statement.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
The information required under this item is incorporated by reference to the 2014 Proxy Statement.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS AND DIRECTOR INDEPENDENCE
The information required under this item is incorporated by reference to the 2014 Proxy Statement.
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
The information required under this item is incorporated by reference to the 2014 Proxy Statement.
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) 1. Financial Statements.
The following consolidated financial statements are included in Item 8:
Consolidated Balance Sheets as of December 31, 2013 and 2012
Consolidated Statements of Operations for the Years Ended December 31, 2013, 2012 and for the Period from July 7, 2011 to December 31, 2011
Consolidated Statements of Changes in Stockholders' Equity/(Deficit) for the Years Ended December 31, 2013, 2012 and for the Period from July 7, 2011 to December 31, 2011
Consolidated Statements of Comprehensive Loss for the Years Ended December 31, 2013, 2012 and for the Period from July 7, 2011 to December 31, 2011
Consolidated Statements of Cash Flows for the Years Ended December 31, 2013, 2012 and for the Period from July 7, 2011 to December 31, 2011
(a) 2. Financial Statement Schedules
The following financial statement schedule for the years ended December 31, 2013, 2012 and for the period from July 7, 2011 to December 31, 2011 and related report of independent auditors is filed as part of this report should be read in conjunction with the consolidated financial statements.
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Schedule II Valuation and Qualifying Accounts
All other schedules for which provision is made in the applicable accounting regulation of the Securities and Exchange Commission are not required under the related instructions or are inapplicable, and therefore have been omitted.
(a) 3. Exhibits
The information in the Exhibit Index of this Annual Report on Form 10-K is incorporated into Item 15(a)3 by reference.
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VALUATION AND QUALIFIYING ACCOUNTS
Allowance for Doubtful Accounts
|
Balance at Beginning of period |
Charges to Costs, Expenses and other |
Write-off of Accounts Receivable |
|
Balance at End of Period |
|||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
(in thousands) |
Other | |||||||||||||||
Description
|
||||||||||||||||
Year ended December 31, 2011 |
| | | | | |||||||||||
Year ended December 31, 2012 |
| (1,003 | ) | 6 | | (997 | ) | |||||||||
Year ended December 31, 2013 |
(997 | ) | (2,313 | ) | 28 | 0 | (3,282 | ) |
S-1
VALUATION AND QUALIFYING ACCOUNTS
Deferred Tax Asset Valuation Allowance
|
Balance at Beginning of period |
Charges to Costs, Expenses and other |
|
|
Balance at End of Period |
|||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
(in thousands) |
Reversals | Adjustments | ||||||||||||||
Description
|
||||||||||||||||
Year ended December 31, 2011 |
| (46 | ) | | | (46 | ) | |||||||||
Year ended December 31, 2012 |
(46 | ) | (8,351 | ) | | | (8,397 | ) | ||||||||
Year ended December 31, 2013 |
(8,397 | ) | (21,989 | ) | | | (30,386 | ) |
S-2
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
SFX ENTERTAINMENT, INC. Registrant |
||||
Date: March 31, 2014 |
||||
By: | /s/ ROBERT F.X. SILLERMAN |
|||
Robert F.X. Sillerman, Chairman of the Board, Chief Executive Officer and Director |
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed by the following persons on behalf of the Registrant and in the capacities and on the dates indicated:
Principal Executive Officer | Principal Financial Officer | |||||
By: |
/s/ ROBERT F.X. SILLERMAN |
By: |
/s/ RICHARD ROSENSTEIN |
|||
Robert F.X. Sillerman Chairman of the Board and Chief Executive Officer |
Richard Rosenstein Chief Financial Officer |
|||||
Chief Accounting Officer |
||||||
By: |
/s/ ROBERT DAMON |
|||||
Robert Damon Chief Accounting Officer |
||||||
Date: March 31, 2014 |
||||||
Directors |
||||||
/s/ MITCHELL SLATER Mitchell Slater |
/s/ D. GEOFF ARMSTRONG D. Geoff Armstrong |
|||||
/s/ JOHN D. MILLER John D. Miller |
/s/ JARED COHEN Jared Cohen |
|||||
/s/ EDWARD SIMON Edward Simon |
/s/ MICHAEL MEYER Michael Meyer |
|||||
/s/ JOSEPH F. RASCOFF Joseph F. Rascoff |
/s/ PASQUALE MANOCCHIA Pasquale Manocchia |
|||||
/s/ DR. ANDREW N. BAZOS Dr. Andrew N. Bazos |
||||||
Date: March 31, 2014 |
Exhibit Number |
Description of Exhibit | ||
---|---|---|---|
3.1 | Certificate of Incorporation of the Registrant (incorporated by reference to Exhibit 3.1 to the Registration Statement on Form S-1 (File No. 333-189564) filed by the Registrant on June 25, 2013) | ||
3.2 | Certificate of Amendment to the Certificate of Incorporation of the Registrant (incorporated by reference to Exhibit 3.3 to the Registration Statement on Form S-1 (File No. 333-189564) filed by the Registrant on June 25, 2013) | ||
3.3 | Second Amended and Restated Bylaws of the Registrant (incorporated by reference to Exhibit 4.3 to the Registration Statement on Form S-8 (File No. 333-192236) filed by the Registrant on November 8, 2013) | ||
4.1 | Specimen Common Stock Certificate (incorporated by reference to Exhibit 4.1 to the Registration Statement on Form S-1 (File No. 333-189564) filed by the Registrant on July 18, 2013) | ||
4.2 | Registration Rights Agreement, dated July 31, 2012, by and among the Registrant, Sebastian Solano, Paul Campbell, Patryk Tracz and Lukasz Tracz (incorporated by reference to Exhibit 4.2 to the Registration Statement on Form S-1 (File No. 333-189564) filed by the Registrant on June 25, 2013) | ||
4.3 | Registration Rights Agreement, dated July 31, 2012, by and among the Registrant, Eric Fuller and Collyns Stenzel (incorporated by reference to Exhibit 4.3 to the Registration Statement on Form S-1 (File No. 333-189564) filed by the Registrant on June 25, 2013) | ||
4.4 | Registration Rights Agreement, dated December 31, 2012, by and between the Registrant and Nightlife Holdings LLC (incorporated by reference to Exhibit 4.4 to the Registration Statement on Form S-1 (File No. 333-189564) filed by the Registrant on June 25, 2013) | ||
4.5 | Registration Rights Agreement, dated June 19, 2012, by and between the Registrant and Disco Productions, Inc. (incorporated by reference to Exhibit 4.5 to the Registration Statement on Form S-1 (File No. 333-189564) filed by the Registrant on June 25, 2013) | ||
4.6 | Registration Rights Agreement, dated October 31, 2013, by and among the Registrant, Mike Bindra and Laura De Palma (incorporated by reference to Exhibit 4.4 to the Form 10-Q filed by the Registrant on November 22, 2013) | ||
4.7 | SFX Stockholder Agreement, dated August 8, 2013, by and among the Registrant, One of Us Holding B.V. and additional parties named therein (incorporated by reference to Exhibit 4.6 to the Registration Statement on Form S-1 (File No. 333-189564) filed by the Registrant on August 30, 2013) | ||
4.8 | Amendment No. 1 to SFX Stockholder Agreement, dated October 18, 2013, by and among the Registrant, One of Us Holding B.V. and additional parties named therein (incorporated by reference to Exhibit 4.3 to the Form 10-Q filed by the registrant on November 22, 2013) | ||
10.1 | Form of Indemnification Agreement for officers and directors of the Registrant (incorporated by reference to Exhibit 10.20 to the Registration Statement on Form S-1 (File No. 333-189564) filed by the Registrant on June 25, 2013) | ||
10.2 | SFX Entertainment, Inc. 2013 Equity Compensation Plan, and forms of agreements thereunder (incorporated by reference to Exhibit 10.1 to the Registration Statement on Form S-1 (File No. 333-189564) filed by the Registrant on June 25, 2013) | ||
10.3 | Amendment No. 1 to 2013 Equity Compensation Plan, dated August 20, 2013 (incorporated by reference to Exhibit 10.2 to the Registration Statement on Form S-8 (File No. 333-192236) filed by the Registrant on November 8, 2013) |
Exhibit Number |
Description of Exhibit | ||
---|---|---|---|
10.4 | Amendment No. 2 to 2013 Equity Compensation Plan, dated October 2, 2013 (incorporated by reference to Exhibit 10.3 to the Registration Statement on Form S-8 (File No. 333-192236) filed by the Registrant on November 8, 2013) | ||
10.5 | SFX Entertainment, Inc. 2013 Supplemental Equity Compensation Plan, and forms of agreement thereunder (incorporated by reference to Exhibit 10.35 to the Registration Statement on Form S-1 (File No. 333-189564) filed by the Registrant on June 25, 2013) | ||
10.6 | Amendment to 2013 Supplemental Equity Compensation Plan, dated September 9, 2013 (incorporated by reference to Exhibit 10.58 to Amendment No. 4 to the Registration Statement on Form S-1 (File No. 333-189564), filed by the Registrant on September 18, 2013) | ||
10.7 | Employment Agreement, dated November 8, 2012, by and between the Registrant and Sheldon Finkel (incorporated by reference to Exhibit 10.2 to the Registration Statement on Form S-1 (File No. 333-189564) filed by the Registrant on June 25, 2013) | ||
10.8 | Employment Agreement, dated October 18, 2012, by and between the Registrant and Robert F.X. Sillerman (incorporated by reference to Exhibit 10.3 to the Registration Statement on Form S-1 (File No. 333-189564) filed by the Registrant on June 25, 2013) | ||
10.9 | Employment Agreement, dated January 1, 2013, by and between the Registrant and Mitchell Slater (incorporated by reference to Exhibit 10.4 to the Registration Statement on Form S-1 (File No. 333-189564) filed by the Registrant on June 25, 2013) | ||
10.10 | Employment Agreement, dated October 2, 2012, by and between the Registrant and Richard Rosenstein (incorporated by reference to Exhibit 10.5 to the Registration Statement on Form S-1 (File No. 333-189564) filed by the Registrant on June 25, 2013) | ||
10.11 | Employment Agreement, dated November 13, 2012, by and between the Registrant and Chris Stephenson (incorporated by reference to Exhibit 10.37 to the Registration Statement on Form S-1 (File No. 333-189564) filed by the Registrant on June 25, 2013) | ||
10.12 | Employment Agreement, dated June 5, 2013, by and between the Registrant and Robert Damon (incorporated by reference to Exhibit 10.43 to the Registration Statement on Form S-1 (File No. 333-189564) filed by the Registrant on June 25, 2013) | ||
10.13 | Employment Agreement, dated June 1, 2013, by and between the Registrant and Timothy Crowhurst (incorporated by reference to Exhibit 10.47 to the Registration Statement on Form S-1 (File No. 333-189564) filed by the Registrant on August 30, 2013) | ||
10.14 | Employment Agreement, dated June 3, 2013, by and between the Registrant and Joseph F. Rascoff (incorporated by reference to Exhibit 10.48 to the Registration Statement on Form S-1 (File No. 333-189564) filed by the Registrant on August 12, 2013) | ||
10.15 | Subscription Agreement, dated June 5, 2012, by and between SFX EDM Holdings Corporation and The Gordon & Dona Crawford Trust, UTD 8/23/77 (incorporated by reference to Exhibit 10.6 to the Registration Statement on Form S-1 (File No. 333-189564) filed by the Registrant on June 25, 2013) | ||
10.16 | Subscription Agreement, dated June 6, 2012, by and between SFX EDM Holdings Corporation and Entertainment Events Funding LLC (incorporated by reference to Exhibit 10.7 to the Registration Statement on Form S-1 (File No. 333-189564) filed by the Registrant on June 25, 2013) | ||
10.17 | Amendment to Subscription Agreement, dated August 15, 2012, between the Registrant and Entertainment Events Funds LLC (incorporated by reference to Exhibit 10.34 to the Registration Statement on Form S-1 (File No. 333-189564) filed by the Registrant on June 25, 2013) |
Exhibit Number |
Description of Exhibit | ||
---|---|---|---|
10.18 | Subscription Agreement, dated January 8, 2013, by and between the Registrant and Adage Capital Management, L.P. (incorporated by reference to Exhibit 10.9 to the Registration Statement on Form S-1 (File No. 333-189564) filed by the Registrant on June 25, 2013) | ||
10.19 | Subscription Agreement, dated June 6, 2012, by and between SFX EDM Holdings Corporation and Baron Small Cap Fund (incorporated by reference to Exhibit 10.8 to the Registration Statement on Form S-1 (File No. 333-189564) filed by the Registrant on June 25, 2013) | ||
10.20 | Termination of Subscription Agreement, dated October 28, 2012, between the Registrant and Baron Small Cap Fund (incorporated by reference to Exhibit 10.33 to the Registration Statement on Form S-1 (File No. 333-189564) filed by the Registrant on June 25, 2013) | ||
10.21 | Subscription Agreement, dated April 1, 2013, by and among the Registrant, and Insight Venture Partners V, L.P., Insight Venture Partners V (Employee Co-Investors), L.P., and Insight Venture Partners (Cayman) V, L.P. (incorporated by reference to Exhibit 10.28 to the Registration Statement on Form S-1 (File No. 333-189564) filed by the Registrant on June 25, 2013) | ||
10.22 | Subscription Agreement, dated February 22, 2013, by and between the Registrant and WPP Luxembourg Gamma Three SARL (incorporated by reference to Exhibit 10.30 to the Registration Statement on Form S-1 (File No. 333-189564) filed by the Registrant on June 25, 2013) | ||
10.23 | Put Option Letter Agreement, dated October 28, 2012, by and between the Registrant and Baron Small Cap Fund (incorporated by reference to Exhibit 10.10 to the Registration Statement on Form S-1 (File No. 333-189564) filed by the Registrant on June 25, 2013) | ||
10.24 | Asset Contribution Agreement, dated June 19, 2012, by and among the Registrant, SFX-Disco Operating LLC, SFX EDM Holdings Corporation, Disco Productions, Inc. and James Donald Estopinal (incorporated by reference to Exhibit 10.11 to the Registration Statement on Form S-1 (File No. 333-189564) filed by the Registrant on June 25, 2013) | ||
10.25 | Asset Contribution Agreement, dated July 31, 2012, by and among the Registrant, SFX-LIC Operating LLC, Dayglow LLC, Committee Entertainment, LLC and additional parties named therein (incorporated by reference to Exhibit 10.12 to the Registration Statement on Form S-1 (File No. 333-189564) filed by the Registrant on June 25, 2013) | ||
10.26 | Asset Contribution Agreement, dated July 31, 2012, by and among the Registrant, SFX-LIC Operating LLC, Advanced Concert Productions and additional parties named therein (incorporated by reference to Exhibit 10.18 to the Registration Statement on Form S-1 (File No. 333-189564) filed by the Registrant on June 25, 2013) | ||
10.27 | Asset Contribution Agreement, dated November 21, 2012, by and among the Registrant, SFX-Nightlife Operating LLC, Nightlife Holdings LLC, MMG Nightlife LLC and additional parties named therein (incorporated by reference to Exhibit 10.13 to the Registration Statement on Form S-1 (File No. 333-189564) filed by the Registrant on June 25, 2013) | ||
10.28 | Letter Amendment to Asset Contribution Agreement; Termination of Pledge and Security Agreement; Amended and Restated Promissory Note, dated March 15, 2013, from the Registrant to Nightlife Holdings LLC (incorporated by reference to Exhibit 10.36 to the Registration Statement on Form S-1 (File No. 333-189564) filed by the Registrant on June 25, 2013) | ||
10.29 | Amended & Restated Promissory Note, dated March 15, 2013, issued by the Registrant to Nightlife Holdings LLC (incorporated by reference to Exhibit 10.16 to the Registration Statement on Form S-1 (File No. 333-189564) filed by the Registrant on June 25, 2013) |
Exhibit Number |
Description of Exhibit | ||
---|---|---|---|
10.30 | Promissory Note, dated December 31, 2012, issued by the Registrant to Robert F.X. Sillerman (incorporated by reference to Exhibit 10.17 to the Registration Statement on Form S-1 (File No. 333-189564) filed by the Registrant on June 25, 2013) | ||
10.31 | Backstop Commitment Agreement, dated December 28, 2012, by and between the Registrant and Robert F.X. Sillerman (incorporated by reference to Exhibit 10.19 to the Registration Statement on Form S-1 (File No. 333-189564) filed by the Registrant on June 25, 2013) | ||
10.32 | Shared Services Agreement, dated January 4, 2013, by and between the Registrant and Viggle Inc. (incorporated by reference to Exhibit 10.23 to the Registration Statement on Form S-1 (File No. 333-189564) filed by the Registrant on June 25, 2013) | ||
10.33 | Software License and Services Agreement, dated March 10, 2014, by and between the Registrant and Viggle Inc. | ||
10.34 | Shared Services Agreement, dated January 4, 2013, by and between the Registrant and Circle Entertainment Inc. (incorporated by reference to Exhibit 10.24 to the Registration Statement on Form S-1 (File No. 333-189564) filed by the Registrant on June 25, 2013) | ||
10.35 | Letter Agreement, dated December 31, 2012, between the Registrant and Tangent Capital Partners LLC (incorporated by reference to Exhibit 10.49 to the Registration Statement on Form S-1 (File No. 333-189564) filed by the Registrant on June 25, 2013) | ||
10.36 | Letter Agreement, dated July 17, 2013, between the Registrant and Tangent Capital Partners LLC (incorporated by reference to Exhibit 10.54 to the Registration Statement on Form S-1 (File No. 333-189564) filed by the Registrant on July 18, 2013) | ||
10.37 | Master Services Agreement, dated November 1, 2012, between the Registrant and Sports and Entertainment Physicians, PC (incorporated by reference to Exhibit 10.50 to the Registration Statement on Form S-1 (File No. 333-189564) filed by the Registrant on July 18, 2013) | ||
10.38 | Amendment to Master Services Agreement, dated March 23, 2014, by and between the Registrant and Sports and Entertainment Physicians, PC | ||
10.39 | Credit Agreement, dated March 15, 2013, by and among SFX Intermediate Holdco II LLC, SFX Intermediate Holdco I LLC, Barclays Bank PLC, UBS Securities LLC and Jefferies Group LLC (incorporated by reference to Exhibit 10.25 to the Registration Statement on Form S-1 (File No. 333-189564) filed by the Registrant on June 25, 2013) | ||
10.40 | Amendment No. 1 and Consent to Credit Agreement, dated May 22, 2013, by and among SFX Intermediate Holdco II LLC, SFX Intermediate Holdco I LLC, Barclays Bank PLC, UBS Loan Finance LLC, Jefferies Group LLC and additional parties therein (incorporated by reference to Exhibit 10.39 to the Registration Statement on Form S-1 (File No. 333-189564) filed by the Registrant on June 25, 2013) | ||
10.41 | Amendment No. 3, Consent and Waiver Agreement, dated August 20, 2013, by and among SFX Intermediate Holdco II LLC, SFX Intermediate Holdco I LLC, Barclays Bank PLC, UBS Loan Finance LLC, Jefferies Group LLC, and additional parties named therein (incorporated by reference to Exhibit 10.46 to the Registration Statement on Form S-1 (File No. 333-189564) filed by the Registrant on August 30, 2013) | ||
10.42 | Guarantee Agreement, dated March 15, 2013, by and between Robert F.X. Sillerman and Barclays Bank PLC (incorporated by reference to Exhibit 10.26 to the Registration Statement on Form S-1 (File No. 333-189564) filed by the Registrant on June 25, 2013) | ||
10.43 | Amendment No. 1 to Guarantee Agreement, dated June 5, 2013, between Robert F.X. Sillerman and Barclays Bank PLC (incorporated by reference to Exhibit 10.51 to the Registration Statement on Form S-1 (File No. 333-189564) filed by the Registrant on June 25, 2013) |
Exhibit Number |
Description of Exhibit | ||
---|---|---|---|
10.44 | Amendment No. 2 to Guarantee Agreement, dated August 20, 2013, between Robert F.X. Sillerman and Barclays Bank PLC (incorporated by reference to Exhibit 10.55 to the Registration Statement on Form S-1 (File No. 333-189564) filed by the Registrant on August 30, 2013) | ||
10.45 | Amendment No. 3 to Guarantee Agreement dated December 12, 2013, between Robert F.X. Sillerman and Barclays Bank PLC (incorporated by reference to Exhibit 10.2 to the Form 8-K filed by the Registrant on December 16, 2013) | ||
10.46 | Agreement and Plan of Merger, dated February 25, 2013, by and among the Registrant, PITA II LLC, Beatport, LLC, BP Representative, LLC and additional parties named therein (incorporated by reference to Exhibit 10.31 to the Registration Statement on Form S-1 (File No. 333-189564) filed by the Registrant on June 25, 2013) | ||
10.47 | Share Purchase Agreement, dated July 16, 2013, by and among the Registrant, i-Motion Besitz- und Verwaltungsgesellschaft mbH & Co KG, and additional parties named therein (incorporated by reference to Exhibit 10.38 to the Registration Statement on Form S-1 (File No. 333-189564) filed by the Registrant on August 12, 2013) | ||
10.48 | Amendment Agreement relating to the Share Purchase Agreement, dated November 18, 2013, by and among the Registrant, I-Motion Besitz- und Verwaltungsgesellschaft mbH & Co KG, I-Motion GmbH Events & Communication and the additional parties named therein (incorporated by reference to Exhibit 10.18 to the Form 10-Q filed by the Registrant on November 22, 2013) | ||
10.49 | Asset Contribution Agreement, dated May 15, 2013, by and among the Registrant, SFX-Totem Operating Pty Ltd, Totem Onelove Group Pty Ltd, and additional parties named therein (incorporated by reference to Exhibit 10.44 to the Registration Statement on Form S-1 (File No. 333-189564) filed by the Registrant on August 12, 2013) | ||
10.50 | Letter Amendment to Asset Contribution Agreement and Side Letter Amendment, dated September 16, 2013, by and among the Registrant, SFX-Totem Operating Pty Ltd, Totem Onelove Group Pty Ltd and the additional parties named therein (incorporated by reference to Exhibit 10.60 to Amendment No. 5 to the Registration Statement on Form S-1 (File No. 333-189564), filed by the Registrant on September 25, 2013) | ||
10.51 | Letter Amendment to Asset Contribution Agreement and Disclosure Schedules, dated October 28, 2013, by and among the Registrant, SFX-Totem Operating Pty Ltd, Totem Onelove Group Pty Ltd and the additional parties named therein (incorporated by reference to Exhibit 10.7 to the Form 10-Q filed by the Registrant on November 22, 2013) | ||
10.52 | Membership Interest Purchase Agreement, dated August 21, 2013, between the Registrant, SFX Acquisition, LLC, Made Event, LLC, EZ Festivals, LLC, and additional parties named therein (incorporated by reference to Exhibit 10.45 to the Registration Statement on Form S-1 (File No. 333-189564) filed by the Registrant on August 30, 2013) | ||
10.53 | Amended and Restated Membership Interest Purchase Agreement, dated October 31, 2013, by and among the Registrant, SFX Acquisition, LLC, Made Event, LLC, EZ Festivals, LLC, and the additional parties named therein (incorporated by reference to Exhibit 10.4 to the Form 10-Q filed by the Registrant on November 22, 2013) | ||
10.54 | Side Letter Agreement, dated June 23, 2013, by and among the Registrant, Made Event, LLC, and EZ Festivals, LLC (incorporated by reference to Exhibit 10.52 to the Registration Statement on Form S-1 (File No. 333-189564) filed by the Registrant on June 25, 2013) |
Exhibit Number |
Description of Exhibit | ||
---|---|---|---|
10.55 | Agreement and Plan of Merger, dated November 12, 2013, by and among the Registrant, 430 Acquisition LLC, Arc90, Inc. and the stockholders of Arc90, Inc. named therein (incorporated by reference to Exhibit 10.8 to the Form 10-Q filed by the Registrant on November 22, 2013) | ||
10.56 | Stock Purchase Agreement, dated August 8, 2013, by and between the Registrant and One of Us Holding B.V. (incorporated by reference to Exhibit 10.29 to the Registration Statement on Form S-1 (File No. 333-189564) filed by the Registrant on August 30, 2013) | ||
10.57 | Amendment Number One to Stock Purchase Agreement, dated October 18, 2013, by and among the Registrant, SFXE Netherlands Holdings B.V. and One of Us Holding B.V. (incorporated by reference to Exhibit 10.12 to the Form 10-Q filed by the Registrant on November 22, 2013) | ||
10.58 | Transfer Agreement and Amendment, dated December 30, 2013, by and among the Registrant, SFX-IDT N.A. Holding II LLC, SFXE Netherlands Holdings B.V., and ID&T Holding B.V. (f/k/a ID&T NewHolding B.V.), One of Us Holding B.V. and One of Us B.V. | ||
10.59 | Stock Purchase Agreement, dated October 18, 2013, by and among the Registrant, SFX-IDT N.A. Holding II LLC, One of Us Holding B.V. and One of Us B.V. (f/k/a ID&T Holding B.V.) (incorporated by reference to Exhibit 10.13 to the Form 10-Q filed by the Registrant on November 22, 2013) | ||
10.60 | Intellectual Property License and Assignment Agreement, dated August 8, 2013, by and between ID&T/SFX North America LLC, ID&T NewHolding B.V. and One of Us Holding B.V. (incorporated by reference to Exhibit 10.19 to the Form 10-Q filed by the Registrant on November 22, 2013) | ||
10.61 | Warrant to Purchase Common Stock, dated March 15, 2013, issued by the Registrant to ID&T Holding B.V. (incorporated by reference to Exhibit 10.32 to the Registration Statement on Form S-1 (File No. 333-189564) filed by the Registrant on June 25, 2013) | ||
10.62 | Call Option Certificate, dated March 15, 2013, between ID&T Holding B.V. and the Registrant (incorporated by reference to Exhibit 10.42 to the Registration Statement on Form S-1 (File No. 333-189564) filed by the Registrant on June 25, 2013) | ||
10.63 | General Pledge and Security Agreement, dated December 12, 2013, between the Registrant and Deutsche Bank AG, New York Branch (incorporated by reference to Exhibit 10.4 to the Form 8-K filed by the Registrant on December 16, 2013) | ||
10.64 | Springing Unconditional Guaranty, dated December 12, 2013, between Robert F.X. Sillerman and Deutsche Bank AG, New York Branch (incorporated by reference to Exhibit 10.5 to the Form 8-K filed by the Registrant on December 16, 2013) | ||
10.65 | Letter of Credit and Reimbursement Agreement, dated December 12, 2013, between the Registrant and Deutsche Bank AG, New York Branch (incorporated by reference to Exhibit 10.3 to the Form 8-K filed by the Registrant on December 16, 2013) | ||
10.66 | Share Purchase Agreement, dated as of November 26, 2013, by and among the Registrant, SFXE Netherlands Holdings B.V., Accepté Holding B.V., and the additional parties named therein (incorporated by reference to Exhibit 10.1 to the Form 8-K/A filed by the Registrant on February 14, 2014) | ||
10.67 | First Lien Guarantee and Collateral Agreement, dated February 7, 2014, by and among the Registrant, the Grantors named therein, and Barclays Bank PLC, as collateral agent | ||
10.68 | First Lien Patent Security Agreement, dated February 7, 2014, by and among the Registrant and the Grantors named therein in favor of Barclays Bank PLC, as collateral agent |
Exhibit Number |
Description of Exhibit | ||
---|---|---|---|
10.69 | First Lien Trademark Security Agreement, dated February 7, 2014, by and among the Registrant and the Grantors named therein in favor of Barclays Bank PLC, as collateral agent | ||
10.70 | Second Lien Collateral Agreement, dated February 4, 2014, by and among the Grantors named therein in favor of U.S. Bank National Association, as collateral agent | ||
10.71 | Second Lien Patent Security Agreement, dated February 4, 2014, by and among the Registrant and the Grantors named therein, in favor of U.S. Bank National Association, as collateral agent | ||
10.72 | Second Lien Trademark Security Agreement, dated February 4, 2014, by and among the Registrant and the Grantors named therein, in favor of U.S. Bank National Association, as collateral agent | ||
10.73 | Indenture, dated as of February 4, 2014, by and among the Registrant, as Issuer, U.S. Bank National Association, as Trustee and Collateral Agent, and the Guarantors party thereto (incorporated by reference to Exhibit 4.1 to the Form 8-K filed by the Registrant on February 10, 2014) | ||
10.74 | Option Agreement, dated December 16, 2013, between SFXE Netherlands Holdings B.V. and Amazing Holding BV (incorporated by reference to Exhibit 10.1 to the Form 8-K filed by the Registrant on December 19, 2013) | ||
10.75 | Share Purchase Agreement, dated as of February 28, 2014, by and among the Registrant, Q-Dance Partners B.V., B2S Holding BV, and Amazing Holding BV (incorporated by reference to Exhibit 10.1 to the Form 8-K filed by the Registrant on March 3, 2014) | ||
10.76 | Warrant Issued to Jan Lok, dated January 10, 2014, to Purchase Shares of Common Stock of the Registrant (incorporated by reference to Exhibit 10.2 to the Form 8-K filed by the Registrant on March 3, 2014) | ||
10.77 | Asset and Membership Interest Contribution Agreement, dated as of February 18, 2014, by and among the Registrant, SFX-React Operating LLC, React Presents, Inc., Clubtix, Inc., Lucas King and Jeffery Callahan (incorporated by reference to Exhibit 10.1 to the Form 8-K filed by the Registrant on February 24, 2014) | ||
10.78 | Asset Contribution Agreement, dated as of February 18, 2014, by and among the Registrant, SFX-React Operating LLC, West Loop Management I, LLC, Jeffery Callahan, Lucas King, Nick Karounos and Sam Cappas (incorporated by reference to Exhibit 10.2 to the Form 8-K filed by the Registrant on February 24, 2014) | ||
10.79 | Letter Amendment to Asset and Membership Interest Contribution Agreement, dated March 14, 2014, by and among the Registrant, SFX-React Operating LLC, React Presents, Inc., Clubtix Inc., Lucas King, and Jeffery Callahan (incorporated by reference to Exhibit 10.1 to the Form 8-K filed by the Registrant on March 18, 2014) | ||
10.80 | Letter Amendment to Asset Contribution Agreement, dated March 14, 2014, by and among the Registrant, SFX-React Operating LLC, West Loop Management I, LLC, Jeffery Callahan, Lucas King, Nick Karounos, and Sam Cappas (incorporated by reference to Exhibit 10.2 to the Form 8-K filed by the Registrant on March 18, 2014) | ||
10.81 | Amended and Restated Share Purchase Agreement, dated February 12, 2014, by and among the Registrant, Rock World S.A., Rock City S.A., SFX Entretenimento do Brasil Participações Ltda., and the additional parties named therein (incorporated by reference to Exhibit 10.1 to the Form 8-K filed by the Registrant on February 14, 2014) | ||
10.82 | Stock Purchase Agreement, dated as of March 14, 2014, by and among the Registrant, Todd Sims, James Reichardt, and 430R Acquisition LLC (incorporated by reference to Exhibit 10.1 to the Form 8-K filed by the Registrant on March 17, 2014) |
Exhibit Number |
Description of Exhibit | ||
---|---|---|---|
10.83 | Employment Agreement, dated March 21, 2014, by and between the Registrant and Paul Greenberg (incorporated by reference to Exhibit 10.1 to the Form 8-K filed by the Registrant on March 25, 2014) | ||
21.1 | List of Subsidiaries of the Registrant | ||
23.1 | Consent of Ernst & Young LLP | ||
31.1 | Certification of Chief Executive Officer pursuant to Rule 13a-14(a)/15d-14(a) of the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 | ||
31.2 | Certification of Chief Financial Officer pursuant to Rule 13a-14(a)/15d-14(a) of the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 | ||
32.1 | Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 | ||
32.2 | Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 | ||
101.INS | XBRL Instance Document | ||
101.SCH | XBRL Taxonomy Extension Schema | ||
101.CAL | XBRL Taxonomy Extension Calculation Linkbase | ||
101.Def | XBRL Taxonomy Extension Definition Linkbase | ||
101.LAB | XBRL Taxonomy Extension Label Linkbase | ||
101.PRE | XBRL Taxonomy Extension Presentation Linkbase |
Exhibit 10.33
SOFTWARE LICENSE AND SERVICES AGREEMENT
This Software License and Services Agreement (the Agreement) is entered into as of March 10, 2014 (the Effective Date) by and between Viggle Inc. (F/K/A Function(x) Inc.), with its principal place of business at 902 Broadway, 11th Floor, New York, NY 10010 (Viggle), and SFX Entertainment, Inc., with its principal place of business at 430 Park Avenue, 6th Floor, New York, NY 10022 (SFX).
In consideration of the mutual covenants and Agreements contained herein and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, and intending to be legally bound, the parties hereto agree as follows:
1. DEFINITIONS. Capitalized terms shall have the meanings ascribed to them in this Section 1. All other capitalized terms used in this Agreement not otherwise defined in Section 1 shall have the meanings assigned in the part of this Agreement in which they are defined.
1.1 Affiliate means any entity which Controls, is Controlled by, or is under common Control with a party, at any time during the term of this Agreement, or which is a wholly owned subsidiary of a party.
1.2 Blended Hourly Rate shall mean an hourly rate that, as of the Effective Date, shall be One Hundred Fifty Dollars ($150) per hour and may be increased following the one (1) year anniversary of the Agreement to Viggles average hourly rate for the applicable services (subject to Section 3.3 if applicable).
1.3 Blue Spike Litigation means the patent infringement litigation filed by Blue Spike, LLC (Blue Spike v. Viggle Inc. (E.D. Tx., Civ. Action No. 6:12-CV-00526)).
1.4 Confidential Information means, but shall not be limited to, all information relating to a partys, its Affiliate(s), or its supplier(s) business, products, or services, which is furnished or disclosed to Receiving Party by Disclosing Party or its Affiliate(s), or is acquired by Receiving Party directly or indirectly from the Disclosing Party, either orally or in writing, and which a reasonable person would assume to be of a confidential or proprietary nature. Such term shall also include all memoranda, notes, reports, documents and other media containing Confidential Information, as well as any copies and extracts of Confidential Information and any computer-generated studies and data containing Confidential Information prepared by or for the benefit of Receiving Party in connection with carrying out the relationship contemplated by this Agreement. Viggle Confidential Information shall include, without limitation, the Software and all Documentation and Enhancements thereof and any associated know-how relating to search technology.
1.5 Contractor means a third party that performs technical or development services on behalf of SFX or its Affiliates in accordance with the terms of this Agreement, provided that a Contractor may not include an entity that, directly or indirectly, competes with Viggle in the Viggle Field of Use.
1.6 Control means the possession, directly or indirectly, of the power to direct or cause the direction of the management and policies of an entity through record or beneficial ownership of voting securities, by contract or otherwise.
1.7 Disclosing Party means any party that provides or otherwise discloses its or any third party Confidential Information to the other party.
1.8 Documentation means the standard user and technical manuals that describe the functionality of the Software and are distributed with the Software.
1.9 Enhancement means a customization or enhancement of the Software, whether created solely by or on behalf of either of the parties or jointly by the parties.
1.10 Executable Code means a form of computer program or portion thereof which can be executed by a computer without further translation or modification. Examples include binary code and code which can be directly executed by an interpreter.
1.11 Net Third Party Revenue means licensee fees actually received by Viggle from the licensing of any Software to third parties, less sales, export and/or use taxes, commissions, marketing and sales expenses, overhead, shipping, and amounts allowed or credited due to returns or refunds.
1.12 Initial Term shall have the meaning set forth in Section 6.1.
1.13 Patents means any patents and applications (including provisional applications and utility models), patents issuing from such applications, certificates of invention or any other grants by any governmental entity for the protection of inventions, and all reissues, renewals, continuations, continuations-in-part, re-examinations and extensions of any of the foregoing, in the United States and all jurisdictions of the world, including all foreign and international patents and applications.
1.14 Professional Services mean any development, consulting, training, technical or other services provided by Viggle pursuant to a Statement of Work.
1.15 Receiving Party means any party receiving any Confidential Information.
1.16 Renewal Term shall have the meaning set forth in Section 6.1.
1.17 Services means Support Services and Professional Services that are provided by Viggle pursuant to this Agreement or any SOW entered by the parties.
1.18 SFX Enhancement means an Enhancement that is developed by Viggle at SFXs request pursuant to an SOW.
1.19 SFX Field of Use means the field of promotion of dance music, including, for the avoidance of doubt, dance music promotions by LiveNation.
1.20 Software means the Viggle software programs described on Schedule 1 and which shall be in Executable Code and Source Code formats, including Updates or Enhancements created by either of the parties, except as otherwise expressly provided hereunder. The Software shall include all modules and functionality that exist as of the Effective Date or are created by either party for audio recognition or loyalty programs.
1.21 Source Code means a form of computer program or portion thereof written in a programming language employed by computer programmers that must be translated into Executable Code before it can be executed.
1.22 Source Code Handling Requirements shall mean procedures mutually agreed to by the parties to ensure that all access to Source Code follows reasonable security protocols designed to ensure secure access and accountability for use of the Source Code. The Source Code Handling Requirements may include, for example, the use of source code repository that may only be accessed by named individuals that must use unique identifiers and access credentials.
1.23 Statement of Work or SOW means a document which incorporates the terms of this Agreement by reference, and pursuant to which SFX orders certain Services from Viggle.
1.24 Support Services means technical support and maintenance services further described in Schedule 2 to this Agreement.
1.25 Technical Requirements mean the minimum technical requirements for the Software as provided in the Documentation.
1.26 Term shall have the meaning set forth in Section 6.1.
1.27 Third Party Software means software owned or licensed by a third party and which may be incorporated within or necessary for the use of the Software.
1.28 Updates means any subsequent releases of the Software that Viggle makes generally available to its customers that receive Support Services at no additional license fee from time to time and that is intended to replace a prior Software release. Updates shall not include any future products which Viggle licenses separately.
1.29 Viggle Field of Use means the field of entertainment rewards.
1.30 Viggle Materials means any materials provided to SFX by Viggle in the course of performing Services.
2. LICENSE.
2.1 License Grant. Subject to the terms and conditions of this Agreement, Viggle grants to SFX a non-exclusive, non-transferable (except as provided herein), paid-up, world-wide, right during the Term to install, use, modify, reproduce, and create derivative works of the Software for SFXs and its Affiliates internal business purposes. For the avoidance of doubt, the
foregoing license shall permit SFX to create versions of the Software that enable usage in different languages.
2.2 License Restrictions. SFXs use of the Software (or any Viggle Materials licensed pursuant to Section 5.2) is subject to the following:
2.2.1 SFX may not, nor allow any third party to (a) decompile, disassemble, or reverse engineer the Software except to the extent expressly permitted by applicable law without Viggles prior written consent; (b) remove any product identification or proprietary rights notices; (c) lease, lend, sublicense (except as expressly permitted) or use the Software for timesharing or service bureau purposes; or (d) otherwise use or copy the Software or Viggle Materials except as expressly provided herein;
2.2.2 SFX may sublicense the use of the Software or Viggle Materials licensed hereunder in accordance with the terms of this Agreement to (a) an Affiliate (only for so long as such person or entity remains an Affiliate of SFX) and (b) co-promoters, joint venture partners or non-wholly owned subsidiaries of SFX and its Affiliates, provided that any such joint venture partners shall be subject to Viggles approval, not to be unreasonably withheld (collectively, Partners), and (c) Contractor that is performing development services on behalf of SFX or its Affiliates, provided that (i) SFX and each Affiliate, Partner or Contractor that has access to or uses the Software or Viggle Materials shall be jointly and severally liable for such parties compliance with the terms of this Agreement, (ii) SFX shall cause each such party to agree in writing that Viggle is a third party beneficiary of the license agreement between SFX and such party, (iii) only Affiliates and Contractors may have access to Source Code and, as a pre-requisite for such access, must agree in writing to adhere and shall adhere to the Source Code Handling Requirements. For the avoidance of doubt, any Contractors, Affiliates, or Partners may only use the Software for Viggles or its Affiliates internal business purposes (which, with respect to co-promoters, shall include co-promotion of events that are co-promoted by SFX or an SFX Affiliate and the co-promoter but shall not include an event promoted solely by such co-promoter).
2.3 Retention of Rights. Viggle reserves all rights not expressly granted to SFX in this Agreement. Except as specified in Section 5.3 (Restrictions on Competitive Use), nothing in this Agreement shall limit in any way Viggles right to develop, use, license, create derivative works of, or otherwise exploit the Software, or to permit third parties to do so.
3. SERVICES.
3.1 Support Services. Viggle shall provide SFX and its Affiliates with Support Services as described more fully in Schedule 2.
3.2 Professional Services. Subject to SFX providing Viggle with a written request for Professional Services specifying the scope of work, schedule for performance and technical requirements to enable Viggle to secure necessary resources and provided that the parties execute a Statement of Work, Viggle will provide Professional Services to SFX. Professional Services may include development services (e.g., creation of SFX Enhancements), technical,
design, consulting, or other similar services, and shall be subject to the following additional terms:
3.2.1 For on-site work, SFX will be billed for a minimum duration of one (1) workday, which may include travel time to/from the SFXs site if it is necessary to travel during typical workday hours (Monday-Friday, 8:30am-6pm).
3.2.2 SFX shall reimburse Viggle for all reasonable travel and lodging expenses incurred while performing Professional Services. Hotel accommodations are business class and airline tickets are refundable coach class.
3.2.3 Professional Services performed (a) in excess of eight (8) hours on a business day are billed at one-and-a-half times standard rates, and (b) on weekends and Viggle holidays are billed at twice standard rates. Travel on weekends and Viggle holidays and international travel are billed at standard rates using the official airline guide for travel time.
3.2.4 Should SFX cancel a Professional Services engagement less than two (2) business days prior to the date that such engagement was scheduled to commence, SFX shall pay Viggle fifty percent (50%) of the estimated Professional Service fees for up to two (2) cancelled days plus non-recoverable expenses. Such fees shall be waived if Viggle is able to reassign resources to another Professional Services engagement prior to the scheduled commencement date.
3.3 Most Favored Terms. During the Term, to the extent that terms and conditions are offered by Viggle to a third-party licensing the Software that are, when taken as a whole, more favorable than the terms and conditions provided in Section 3.2 and Section 4.1.2, Viggle shall provide SFX with the same terms and conditions on a prospective basis.
4. FEES.
4.1 One Time Fees For Initial Term and Any Renewal Terms. SFX shall pay to Viggle the following fees:
4.1.1 License Fees.
4.1.1.1 Initial Term. For the Initial Term, SFX shall pay Five Million Dollars ($5,000,000) on the Effective Date, which shall constitute an upfront royalty for the license to use the Software hereunder.
4.1.1.2 Renewal Term(s). For each Renewal Term, if any, SFX shall pay Five Million Dollars ($5,000,000) on or prior to the commencement of the applicable Renewal Terms, which payment shall constitute an upfront royalty for the license to use the Software hereunder.
4.1.2 Services Fees. Unless otherwise agreed to by the parties, all Professional Services or Support Services (other than the provision of Updates that are made available to other Viggle customers) shall be chargeable at the Blended Hourly Rate, provided that Viggle has personnel with the requisite skills and experience to perform the requested Professional
Services. In the event that Viggle does not have personnel with the skills required for the requested Professional Services, Viggle reserves the right to charge SFX for Professional Services at Viggles current applicable professional services rates.
4.2 Royalties. During the Term, Viggle shall calculate its Net Third Party License Revenue arising from its third party licensing of the Software and shall, within forty five (45) days following each calendar quarter, remit to SFX 50% of such Net Third Party License Revenue. Viggle will provide with such payments a written report to SFX a report summarizing in reasonable detail the calculation of its Net Third Party License Revenue. Viggle will keep accurate, full, and complete records that support such reports and related calculation of the payments due under the Agreement. SFX shall have the right to nominate an independent certified public accountant satisfactory to it who shall have access during reasonable business hours to such of Viggles records as are necessary to verify the accuracy of the royalty reports and the royalty payments made under this Agreement. The parties shall split the costs of any such accountant review.
4.3 Payment Terms. Unless otherwise provided herein, all fees are due and payable within thirty (30) days of the date of invoice. Late payments will bear interest at the rate of 1.5% per month, or, if lower, the maximum rate allowed by law.
4.4 Taxes. SFX is responsible for payment of all applicable sales, use, consumption, VAT, GST and other taxes and all applicable export and import fees, customs duties and similar charges (other than taxes based on Viggles net income) arising from the payment of license or maintenance fees or the delivery or license of the Software or maintenance services. SFX will make all payments without reduction for any withholding taxes, which taxes shall be SFXs sole responsibility, and SFX will provide Viggle with such evidence as Viggle may reasonably request to establish that such taxes have been paid.
5. INTELLECTUAL PROPERTY RIGHTS; RESTRICTIONS ON COMPETIVE USE OF SOFTWARE OR VIGGLE MATERIALS
5.1 Ownership of Software and Viggle Materials. Except for the licenses granted herein and subject to the restrictions specified in Section 5.3, Viggle and its suppliers shall own all right, title and interest (including any copyrights, patents, trade secrets or other intellectual property rights) in and to the Software (including, for the avoidance of doubt, Enhancements) or any Viggle Materials delivered to SFX pursuant to this Agreement.
5.2 License to Viggle Materials. Subject to full payment to Viggle of all sums due for any Professional Services provided hereunder and the terms and conditions of this Agreement (including the restrictions specified in Section 2.2 above), Viggle hereby grants to SFX a non-exclusive, non-transferable (except as provided herein) license during the Term to use, modify, reproduce, and create derivative works of the Viggle Materials for SFXs and its Affiliates internal business purposes.
5.3 Restrictions on Competitive Use.
5.3.1 Restrictions on Viggle Use of Software. Notwithstanding anything to the contrary in this Agreement, Viggle agrees that during the term of this Agreement it may not
license the Software (or any Viggle Materials) to any third party that directly competes with SFX within the SFX Field of Use.
5.3.2 Restriction on SFX Use of Software. Notwithstanding anything to the contrary in this Agreement, SFX agrees that during the term of this Agreement it may not use the Software (or any Viggle Materials) for any business that directly competes with Viggle within the Viggle Field of Use. Viggle acknowledges that the business of SFX does not currently compete with the business of Viggle.
5.4 Prosecution of Viggle Patents. Viggle agrees to shall have the exclusive right to conduct prosecution and maintenance of Patents relating to the Software and/or any Enhancements (collectively, the Viggle Patents), at Viggles discretion and by internal or external counsel of Viggles choosing. The phrase prosecution and maintenance of Patents shall be deemed to include, without limitation, the conduct of interferences or oppositions, and/or requests for re-examinations, reissues or extensions of patent terms. Viggle shall use commercially reasonable efforts to obtain broad patent coverage with respect to the Viggle Patents. The Viggle Patents are specified on Schedule 3.
6. TERM AND TERMINATION
6.1 Term. The term of this Agreement shall commence on the effective date and continue for a period of ten (10) years (the Initial Term), unless terminated in accordance with its term. Following the Initial Term, SFX may renew this Agreement by providing at least ninety (90) days notice prior to the expiration of the then current term, whereupon the term shall be extended for am additional ten (10) year period (each, a Renewal Term). The Term shall mean, collectively, the Initial Term and any Renewal Term(s).
6.2 Termination. Either party may terminate this Agreement if the breaching party fails to cure any material breach of this Agreement within thirty (30) days of receiving notice of such breach from the non-breaching party. Upon such termination, all of SFXs right to use the Software shall immediately cease and SFX shall promptly return to Viggle or destroy all copies of the Software and Documentation.
6.3 Suspension. Notwithstanding anything to the contrary contained in the Agreement, Viggle may temporarily suspend any Services immediately, without notice, if (a) interruption of service is necessary to prevent or protect against fraud or otherwise protect Viggles or its subcontractors or Affiliates personnel, facilities or services, (b) SFX breaches or otherwise fails to comply in any material respect with the license restrictions; or (c) the suspension is in accordance with an order, instruction or request of a government, an emergency service organization or other administrative agency having appropriate jurisdiction. The suspension shall be without prejudice to any other right or remedy Viggle may have arising out of SFXs breach or non-compliance.
6.4 Effect of Termination. Any obligations to pay fees incurred under Section 4 prior to termination and the provisions of Sections 5, and 7-11 shall survive termination of the Agreement for any reason. Termination is not an exclusive remedy.
7. LIMITED WARRANTY AND DISCLAIMER
7.1 Software Warranty. Viggle warrants that, when delivered, and for a period of ninety (90) days thereafter (the Warranty Period), the Software licensed hereunder (excluding Updates, Enhancements for purposes of this Section 7.1) will conform in all material respects to Viggles current Documentation for such Software. The preceding warranty will not apply if: (a) any Software is modified without Viggles written consent, (b) Software is used other than in accordance with the Agreement or the Documentation, or (c) Software is installed on any computer hardware or used with any software not specified in the Documentation or in accordance with the Technical Requirements.
7.2 Services Warranty. Viggle warrants for a period of ninety (90) days from the performance of any Services provided by Viggle pursuant to this Agreement, including Support Services, that such Services shall be performed in a professional and workmanlike manner consistent with generally accepted industry standards.
7.3 Additional Warranties. Viggle further warrants that (a) has all requisite corporate authority to enter into this Agreement and its performance hereunder does not and shall not conflict with any third party contracts or agreements to which it is a party; (b) it has taken all necessary actions to authorize the execution and performance of this Agreement; (c) to its knowledge, there are no intellectual property rights owned by a third party that will be infringed or misused by the exercise or exploitation of the Software as set forth herein in a manner that will have a material adverse impact on the business of Viggle, provided that the parties each acknowledge that Viggle has disclosed to SFX the Blue Spike Litigation, which Viggle does not believe will have a material impact on either Viggles or SFXs business.
7.4 Warranty Limitations. SFX must report in writing any breach of the warranties contained in this Section 7.1 and 7.2 to Viggle during the applicable warranty periods, and SFXs exclusive remedy and Viggles entire liability for any breach of such warranties shall be as follows:
7.4.1 Software Warranty Remedy. In the event of a breach of Section 7.1, Viggle shall use its commercially reasonable efforts to correct or provide a workaround for reproducible Software errors that cause a breach of such warranty, or if Viggle is unable to make the Software operate as warranted within a reasonable time considering the severity of the error, SFX shall be entitled to return the Software to Viggle and recover the fees paid for the Software.
7.4.2 Services Warranty Remedy. In the event of a breach of Section 7.2, Viggle shall reperform the Services, or if Viggle is unable to perform the Services as warranted, SFX shall be entitled to a services credit equal to the fees paid to Viggle for the nonconforming Services.
7.5 Warranty Disclaimers. Viggle does not warrant that (a) the Software will meet SFXs requirements, (b) the Software will operate in combination with other hardware, software, systems or data not provided by which SFX may select for use, (c) the operation of the Software will be uninterrupted or error-free, or (d) all Software errors will be corrected. THE SOFTWARE IS PROVIDED AS IS. THE WARRANTIES ABOVE ARE EXCLUSIVE AND IN LIEU OF ALL OTHER WARRANTIES, WHETHER EXPRESS, IMPLIED OR STATUTORY, AND VIGGLE AND ITS LICENSORS HEREBY DISCLAIM ALL IMPLIED
WARRANTIES, INCLUDING, WITHOUT LIMITATION, THE IMPLIED WARRANTIES OF MERCHANTABILITY, FITNESS FOR A PARTICULAR PURPOSE, TITLE, NONINFRINGEMENT, AND QUALITY OF SERVICE.
8. LIMITATION OF REMEDIES AND DAMAGES
8.1 EXCEPT FOR BREACHES OF SECTION 2 (LICENSE) OR SECTION 10 (CONFIDENTIALITY), IN NO EVENT SHALL VIGGLE, VIGGLES SUPPLIERS OR SFX BE LIABLE FOR ANY INDIRECT, INCIDENTAL, SPECIAL OR CONSEQUENTIAL DAMAGES, INCLUDING WITHOUT LIMITATION DAMAGES FOR LOSS OF PROFITS, DATA OR USE, INCURRED BY EITHER PARTY OR ANY THIRD PARTY, WHETHER IN AN ACTION IN CONTRACT OR TORT, EVEN IF THE OTHER PARTY HAS BEEN ADVISED OF THE POSSIBILITY OF SUCH DAMAGES.
8.2 Except for Viggles liability for IP Claims pursuant to Section 9.1, any breach of Section 2 (License), Section 10 (Confidentiality), or any amounts to be paid hereunder, the aggregate and cumulative liability of each party and its suppliers for damages hereunder shall in no event exceed the amount of fees paid or owed by SFX under this Agreement, and if such damages relate to particular Software or Services, such liability shall be limited to fees paid for the Software or Services giving rise to the liability.
9. INTELLECTUAL PROPERTY INDEMNITY
9.1 If a third party makes a claim against SFX that the Software infringes any U.S. patent, copyright, or trademark or misappropriates any trade secret (IP Claim); Viggle will (a) defend SFX against the IP Claim at Viggles cost and expense, and (b) indemnify and hold SFX harmless against any and all costs, damages and expenses (including reasonable legal fees) finally awarded against SFX by a court of competent jurisdiction or agreed to in a written settlement agreement signed by Viggle arising out of such IP Claim; provided that: (i) SFX promptly notifies Viggle in writing no later than ninety (90) days after SFXs receipt of notification of a potential claim, provided that any failure to provide such notice Viggle shall limit Viggles foregoing obligations only to the extent that Viggle is prejudiced by such delay; (ii) Viggle may assume sole control of the defense of such claim and all related settlement negotiations, provided that SFX may in its sole discretion and cost, participate in its defense through its counsel; and (iii) SFX provides Viggle, at Viggles request and expense, with the assistance, information and authority necessary to perform Viggles obligations under this Section. Notwithstanding the foregoing, Viggle shall have no liability for any claim of infringement based on (w) the use of a superseded or altered release of Software if the infringement would have been avoided by the use of a current unaltered release of the Software, (x) the modification of Software by anyone other than Viggle, (y) the use of the Software other than in accordance with the Documentation and this Agreement and Technical Requirements, or (z) use of the Software in combination with any other software, hardware or data where in the absence of such combination the Software would not have been infringing.
9.2 If the Software is held to infringe or is believed by Viggle to infringe, Viggle shall have the option, at its expense, to (a) replace or modify the Software to be non-infringing, or (b) obtain for SFX a license to continue using the Software. If it is not commercially reasonable to
perform either of the foregoing options, then Viggle may terminate the Software license for the infringing Software and refund the license fees paid for those Software and fees for any Services that directly relate to such Software upon return of the Software by SFX. Except in the case of Viggles breach of Section 7.3(b), this Section 9.2 states Viggles entire liability and SFXs exclusive remedy for any claim of infringement provided that Viggle covers the out of pocket costs incurred by SFX in any such action.
10. CONFIDENTIALITY.
10.1 Disclosure of Confidential Information. The Receiving Party may not disclose the Disclosing Partys Confidential Information to any third party except the Receiving Partys representative and advisors, and only to the extent that such disclosure is necessary for the performance of the Receiving Partys obligations and exercise of Receiving Partys rights under this Agreement, provided, however, that before disclosing any Confidential Information of the Disclosing Party, the Receiving Party shall ensure that all such persons receiving Confidential Information shall (a) be subject to a written confidentiality Agreement with the Receiving Party that is at least as protective of the Disclosing Partys Confidential Information as this Agreement, and (b) have been informed of the confidential nature of the Confidential Information. Additionally, if a Receiving Party is ordered by a court, administrative agency, regulatory agency, or other governmental body of competent jurisdiction to disclose Confidential Information, or if it is served with or otherwise becomes aware of a motion or similar request that such an order be issued, then the Receiving Party will not be liable to the Disclosing Party for disclosure of Confidential Information required by such order, provided that the Receiving party first notifies the Disclosing Party of the motion or order by the most expeditious possible means and permits the Disclosing Party an opportunity to seek a protective order or injunction prohibiting or restricting such disclosure
10.2 Restrictions on Use of Confidential Information. Receiving Party agrees to use reasonable care, but in all events at least the same degree of care that it uses to protect its own confidential and proprietary information of similar importance, to prevent the unauthorized use, disclosure, or availability of Confidential Information of the Disclosing Party. SFX acknowledges and agrees that the Source Code provided hereunder constitute valuable Viggle trade secrets. Accordingly, SFX will and shall cause its Contractors and employees to (a) comply with the Source Code Handling Requirements and (b) monitor, maintain and implement prevailing industry standard security controls that are designed to prevent unauthorized access to the Viggle Source Code. Except as otherwise expressly permitted by this Agreement, the Receiving Party shall not
10.2.1 disclose, duplicate, copy, transmit or otherwise disseminate in any manner whatsoever any Confidential Information of the Receiving Party;
10.2.2 use the Confidential Information of the Disclosing Party for the Receiving Partys own benefit or that of any third party or for any purpose other than performance of this Agreement;
10.2.3 commercially exploit any Confidential Information of the Disclosing Party; or
10.2.4 acquire any right in, or assert any lien against, the Confidential Information of the Disclosing Party.
10.3 Exceptions to Confidential Treatment. Confidential Information shall not include, and the obligations herein shall not apply to, information that
10.3.1 is now or subsequently becomes generally available to the public through no fault of Receiving Party;
10.3.2 Receiving Party can demonstrate was rightfully in its possession prior to disclosure to Receiving Party by Disclosing Party;
10.3.3 is independently developed by Receiving Party without the use of any Confidential Information provided by Disclosing Party; or
10.3.4 Receiving Party rightfully obtains from a third party (without restriction and without breach of any agreement) who has the right, without obligation to Disclosing Party, to transfer or disclose such information.
10.4 Return of Confidential Information. Except as otherwise provided in this Agreement, upon termination of this Agreement, or upon the Disclosing Partys earlier request, the Receiving Party shall promptly return to the Disclosing Party, or destroy, all of the Disclosing Partys Confidential Information then in the Receiving Partys possession, except for any data retained by SFX pursuant to its automatic back-up/retention policy. The Receiving Party shall, if requested in writing, certify its respective compliance with the foregoing provision
10.5 Injunctive Relief. It is agreed that the unauthorized use or disclosure of any Confidential Information by Receiving Party in violation of this Agreement may cause severe and irreparable damage to Disclosing Party, for which monetary damages may be insufficient. In the event of any violation of this Agreement, Receiving Party agrees that Disclosing Party may, without posting a bond, seek from any court of competent jurisdiction preliminary and/or permanent injunctive relief to prevent disclosure and/or to prohibit further disclosure.
11. MISCELLANEOUS
11.1 Assignment. Except as otherwise provided in this Section 11.1, neither party may assign this Agreement, and SFX may not transfer Software, to another legal entity, without the other partys written consent, such consent not to be unreasonably withheld or delayed; provided, however, that no consent shall be required if (a) either party assigns this Agreement to an Affiliate or in connection with a merger, acquisition, or sale of all or substantially all of its assets, unless the Affiliate or surviving entity is a direct competitor of the other party, and so long as: (i) such Affiliate or surviving entity agrees to be bound in writing by the terms of this Agreement, and (ii) the assigning or transferring entity provides the other party with notice of the assignment or transfer and the Affiliate or surviving entitys written assent to the terms of this Agreement within thirty days of the assignment or transfer, or (b) Viggle assigns its right to receive and collect payments hereunder. This Agreement and all of its terms, conditions and covenants are intended to be fully effective and binding, to the extent permitted by law, on the successors and permitted assigns of the parties hereto.
11.2 Governing Law; Jurisdiction. The Agreement shall be governed by and construed under the laws of the State of New York without regard to the conflicts of law provisions thereof. The United Nations Convention on Contracts for the International Sale of Goods is specifically excluded from application to this Agreement. There parties hereby consent to the exclusive jurisdiction of the federal and state courts located in New York County, New York.
11.3 Notices. All notices delivered under the Agreement shall be in writing and deemed given upon receipt when delivered personally or upon confirmation of receipt following delivery of (i) nationally recognized overnight courier service or (ii) registered or certified mail, return receipt requested, postage prepaid, in each case addressed to the Legal Department at the address indicated above, or at such other address of which one party is notified by the other in writing.
11.4 Severability. If a provision of the Agreement or portion thereof is found to be invalid or unenforceable under applicable law, it shall be omitted from the Agreement without invalidating the remainder of such provision or the remaining provisions of the Agreement. The waiver by either party of any default or breach of any provision of this Agreement shall not constitute a waiver of any other or subsequent default or breach.
11.5 Force Majeure. Each party will be excused from performance for any period during which, and to the extent that, it or its subcontractor(s) is prevented from performing any obligation or service, in whole or in part, as a result of causes beyond its reasonable control, and without its fault or negligence, including without limitation, acts of God, strikes, lockouts, riots, acts of war, epidemics, communication line failures, and power failures.
11.6 Export Laws. SFX agrees to comply fully with all relevant export laws and regulations, including but not limited to the U.S. Export Administration Regulations (collectively, Export Controls). Without limiting the generality of the foregoing, SFX expressly agrees that it shall not, and shall cause its representatives to agree not to, export, directly or indirectly, re-export, divert, or transfer the Software, Documentation, Enhancements
or any code or work product provided hereunder to any destination, company or person restricted or prohibited by Export Controls.
11.7 Nonsolicitation. Except if agreed to in writing by Viggle, SFX shall not contract or employ any current or former Viggle employee(s), either directly or through a third party, to work with products or services developed, provided, sold or licensed by Viggle. Contracting or employing a current or former Viggle employee to perform any implementation, customization, configuration or support on Viggle products or services is expressly prohibited by this clause. Such prohibition shall be binding until one (1) year after the date of the applicable current or former employees termination of employment with Viggle.
11.8 Independent Contractor. Viggle is an independent contractor; nothing in this Agreement shall be construed to create a partnership, joint venture or agency relationship between the parties
11.9 Entire Agreement. The Agreement, including the attached Schedules and any Statement(s) of Work, represents the entire Agreement between the parties, and expressly supersedes and cancels any other agreements, whether oral or written, on the subjects herein. Each party acknowledges that it is not entering into the Agreement on the basis of any representations not expressly contained herein. Other than as specified herein, this Agreement may only be supplemented or modified by an amendment in a writing executed by the parties. No additional or conflicting term in a purchase order or other document shall have any effect.
11.10 Counterparts. This Agreement may be executed simultaneously in two (2) or more counterparts, each of which will be considered an original, but all of which together will constitute one and the same instrument. The exchange of digital copies of a fully executed Agreement (in counterparts or otherwise) shall be sufficient to bind the parties to the terms and conditions of this Agreement.
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SCHEDULE 1 SOFTWARE DESCRIPTION
Viggles Audio Content Recognition (ACR) software, which includes functionality to convert an audio sample into a digital fingerprint and match that digital fingerprint against a database of stored digital fingerprints and any associated loyalty programs of such audio recognition platform. For the avoidance of doubt, the license granted hereby does not include a database of audio fingerprints.
SCHEDULE 2 SUPPORT AND MAINTENANCE SERVICES
1. SUPPORT AND MAINTENANCE SERVICES. In consideration SFXs payment of the applicable fees set forth in the Agreement, Viggle shall provide the support and maintenance services set forth in this Schedule 2 (collectively, Support Services) for a term of ten years from the original delivery date of the Software. Support Services are renewed and invoiced on an annual basis unless terminated as provided herein.
1.1 Standard Telephone Support. During normal Viggle business hours (i.e., 9:00 a.m. to 5:00 p.m. U.S. Eastern Time, Monday through Friday, holidays excepted), Viggle shall provide SFX technical assistance by telephone with the installation and use of the Software, the identification of Software and/or Documentation problems and the reporting of Bugs (as defined below).
1.2 Software Updates. Viggle shall make available to SFX each minor and major functional release of the Software, that Viggle makes generally available without additional charge to its customers that receive support services for such Software to replace a prior Software release. A major functional release is indicated by a change in the first digit of a version number, e.g. from 4.0.0 to 5.0.0; a minor functional release is indicated by a change in the second digit, e.g. from 4.0.0 to 4.1.0. Maintenance releases, which are indicated by a change in the third digit of a version number, e.g. from 5.0.1 to 5.0.2, are provided as needed in response to SFX inquiry.
1.3 Bug Fixes. Viggle shall exercise commercially reasonable efforts to correct any reproducible malfunction of the Software reported to Viggle by SFX that prevents the Software from performing in accordance with the operating specifications described in the then current Documentation (a Bug).
1.4 Retirement of Releases. Support Services are provided for a Software product version from the date the version becomes generally available until such version is retired. Prior commercial releases of the Software are retired as follows: (a) one month after the commercial release of a subsequent maintenance release; (b) two (2) months after the commercial release of a new minor functional release; (c) six (6) months after the commercial release of a new major functional release. In all events, however, telephone support services are provided with respect to how-to use questions for a retired version of the Software for six (6) months following its retirement.
1.5 Termination. SFX may terminate Support Service at the end of the term by giving written notice to Viggle at least thirty (30) days prior to the end of any such term. Viggle may suspend or cancel Maintenance Service if SFX fails to make any required payments or if SFX is in material breach of the Agreement. The
1.6 Exclusions. Viggle shall have no obligation to support or maintain: (a) any Software modified without Viggles written consent, (b) use of the Software other than in accordance with the Agreement or the Documentation, (c) SFX Enhancements, (d) Software installed on any computer hardware or used with any software, not specified in the Documentation or in accordance with the Technical Requirements, or (e) Third Party Software. In the event that SFX requests Support Services and Viggle performs services and any of the exclusions in this Section 1.6 applies, Viggle may charge SFX for such services as specified in Section 4 of the Agreement.
SCHEDULE 3 VIGGLE PATENTS
Non-Provisional Patent Application |
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January 9, 2012 |
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METHOD AND SYSTEM FOR IDENTIFYING A MEDIA PROGRAM FROM AN AUDIO SIGNAL ASSOCIATED WITH THE MEDIA PROGRAM |
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February 27, 2012 |
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SYSTEM AND METHOD FOR PLAYING AN ADJUNCT GAME DURING A LIVE SPORTING EVENT |
Exhibit 10.38
AMENDMENT TO THE MASTER SERVICES AGREEMENT
This amendment to the Master Services Agreement (this Amendment) is entered into effective November 1, 2013 (the Effective Date), by and between Sports & Entertainment Physicians, PC, a Connecticut professional corporation, with its principal place of business at 188 Northrop Street, Bridgewater, Connecticut 06751 (Provider), and SFX Entertainment, Inc., a Delaware corporation, with its principal place of business at 430 Park Avenue, 6th Floor, New York, New York 10022 (Client, together with the Provider, the Parties).
RECITALS
WHEREAS, Provider and Client entered into a Master Services Agreement (the Agreement) pertaining to the provision of certain services set forth in Appendix I to the Agreement;
WHEREAS, the Parties desire to amend the Agreement pursuant to the terms and conditions contained herein to be effective and enforceable as of the Effective Date; and
NOW, THEREFORE, in consideration of the mutual covenants and promises of the Parties, the Parties hereby agree to amend the Agreement pursuant to the terms and conditions herein:
a. Section 3.1 shall be amended to read as follows:
3.1 Term. The initial term of this Agreement will begin on the Effective Date and will continue for two (2) years (the Initial Term), unless terminated earlier as provided in Section 3.2 below. Thereafter, the Client and Provider may renew the Agreement on mutually agreeable terms and conditions each year for an additional one (1) year thereafter.
IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be executed by their duly authorized representatives.
SPORTS & ENTERTAINMENT PHYSICIANS, PC |
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SFX ENTERTAINMENT, INC. | |
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By: |
/s/ Andrew Bazos MD |
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By: |
/s/ Richard Rosenstein |
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Name: |
Andrew Bazos MD |
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Name: |
Richard Rosenstein |
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Title: |
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Chief Executive Officer |
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Date: |
3/28/14 |
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Date: |
3/28/14 |
Exhibit 10.58
Execution Copy
TRANSFER AGREEMENT AND AMENDMENT
This TRANSFER AGREEMENT AND AMENDMENT (this Agreement), dated December 30, 2013 (the Effective Date), is made between SFX Entertainment, Inc., a Delaware corporation (the Buyer Parent), SFX-IDT N.A. Holding II LLC, a Delaware limited liability company (the Buyer and, collectively with the Buyer Parent, the Buyer Parties), SFXE Netherlands Holdings B.V., a company organized under the laws of the Netherlands (the ROW Buyer), and ID&T NewHolding B.V. (n/k/a ID&T Holding B.V.), a company organized under the laws of the Netherlands (ID&T Worldwide), on the one hand, and One of Us Holding B.V., a company organized under the laws of the Netherlands (the Seller Parent), and One of Us B.V. (f/k/a ID&T Holding B.V.), a company organized under the laws of the Netherlands (the Seller and, collectively with the Seller Parent, the Seller Parties; the Buyer Parties, the ROW Buyer, ID&T Worldwide, and the Seller Parties, collectively, the Parties), on the other hand.
A. The Parties are party to a stock purchase agreement (the ID&T International SPA), dated October 18, 2013 (the Closing Date), pursuant to which the Seller transferred to the Buyer 100% of the outstanding capital stock of One of Us International B.V., a company organized under the laws of the Netherlands (ID&T International).
B. The Buyer Parent, the ROW Buyer, and the Seller Parent are party to a stock purchase agreement, dated August 8, 2013, as amended by Amendment Number One to Stock Purchase Agreement, dated the Closing Date (the stock purchase agreement, as so amended, the ID&T Worldwide SPA), pursuant to which the Seller Parent transferred to the ROW Buyer 100% of the outstanding capital stock of ID&T Worldwide.
C. Under the ID&T International SPA: (i) each Seller Party represented to the Buyer Parties that, prior to the Closing Date, the Seller Parties caused ID&T International to make a dividend distribution (the Belgium JV Equity Economic Distribution) to the Seller of all economic benefits, including the benefits of ownership (including the right to receive dividends, or any other form of distribution of capital, reserves, or retained profits, whether in respect of the current financial year or in respect of any previous financial years, that have not been distributed or paid out at the time of such distribution), of and with respect to the Belgium JV Equity (as defined in the ID&T International SPA) (such benefits, the Belgium JV Equity Benefits) and all of the obligations, including all of the burdens of ownership, of and with respect to the Belgium JV Equity (such obligations, the Belgium JV Equity Obligations), and to provide for the Seller to bear all of the Belgium JV Equity Obligations and be entitled to all of the Belgium JV Equity Benefits; and (ii) following the Closing, the Seller Parties are obligated to use their reasonable best efforts to obtain the consent of M&M to the transfer of the Belgium JV Equity (as evidenced by the Belgium JV Equity Economic Distribution) to the Seller (such consent, the M&M Consent) and, promptly after obtaining the M&M Consent, the Seller Parties are obligated to memorialize such transfer.
D. The ID&T Worldwide SPA and certain of the Ancillary Documents contemplate that the Belgium JV Equity Benefits and the Belgium JV Equity Obligations would be transferred to the Seller as described in the ID&T International SPA.
E. The ID&T International SPA, the ID&T Worldwide SPA, and the Ancillary Documents (collectively, the Transaction Documents) inaccurately reflect the intent of the Parties with respect to the Belgium JV Equity Benefits, the Belgium JV Equity Obligations, the ownership of the Belgium JV Equity, and the actions to be taken with respect to the transfer of the Belgium JV Equity.
F. The Parties desire:
(i) to acknowledge that the Parties intended that the Belgium JV Equity (including the Belgium JV Equity Benefits and the Belgium JV Equity Obligations) be owned (beneficially and otherwise) as of the Closing solely by the Buyer Parent or an Affiliate of the Buyer Parent; and
(ii) to amend the terms of the Transaction Documents, as applicable, to reflect the Parties intention with respect to the Belgium JV Equity, the Belgium JV Equity Benefits, and the Belgium JV Equity Obligations as described in the immediately foregoing clause (i).
The Parties hereby agree as follows:
1. Transfer, Acknowledgments, and Certain Agreements.
(a) The Parties acknowledge that the Parties intended that the Belgium JV Equity (including the Belgium JV Equity Benefits and the Belgium JV Equity Obligations) be owned (beneficially and otherwise) as of the Closing solely by the Buyer Parent or an Affiliate of the Buyer Parent.
(b) The Seller hereby assigns, transfers, delivers, and conveys to ID&T Worldwide, and ID&T Worldwide hereby purchases, takes delivery of, and acquires from the Seller, all of the Belgium JV Equity Benefits, free and clear of any Liens. The Seller hereby delegates to ID&T Worldwide, and ID&T Worldwide hereby assumes and shall pay, perform, and otherwise discharge when due, the Belgium JV Equity Obligations. The Parties acknowledge that the transfer of the Belgium JV Equity Benefits and the Belgium JV Equity Obligations pursuant this Section 1(b) is being made in connection with the transactions contemplated by the ID&T Worldwide SPA and the ID&T International SPA and that a portion of the Closing Date Consideration will be allocated to the transfer of the Belgium JV Equity Benefits and the Belgium JV Equity Obligations as contemplated by this Agreement. For the avoidance of doubt, the Parties acknowledge that, other than consideration that the Seller Parties have already received, neither the Seller Parties nor any of their respective Affiliates are entitled to receive any consideration or other payments for the transfer of or otherwise with respect to the Belgium JV Equity Benefits, the Belgium JV Equity Obligations, the Belgium JV Equity, or any equity interest in the Company, in ID&T International, or in any Entity in which the Company or ID&T International directly or indirectly holds an equity interest; it being understood that this sentence will not limit the Parties respective obligations to make and rights to receive payments (including
cancellation of SFX Shares in respect of any such payments) described in Section 2.9 of the ID&T Worldwide SPA (Treatment of Certain Payments).
(c) The Parties intend that ID&T Worldwide bear the Belgium JV Equity Obligations and be entitled to the Belgium JV Equity Benefits as if the Belgium JV Equity Obligations and the Belgium JV Equity Benefits had been transferred as described in Section 1(b) (such transfer, the Economic Transfer) as of immediately after the Closing. Without limiting the generality of Section 4(e), the Parties shall take such actions as are required (i) to ensure that ID&T Worldwide is obligated as if ID&T Worldwide was obligated with respect to the Belgium JV Equity Obligations as of immediately after the Closing and is entitled to the Belgium JV Equity Benefits as if ID&T Worldwide was entitled the Belgium JV Equity Benefits as of immediately after the Closing and (ii) to put the Parties in the same economic position as if the Economic Transfer had occurred as of immediately after the Closing.
(d) The Parties acknowledge that the Buyer Parent or an Affiliate of the Buyer Parent, and not the Seller, (i) will, prior to consummating the transactions contemplated by the Belgium JV Binding Term Sheet, own 50% of the outstanding capital stock of the Belgium JV and (ii) will, subject to the terms of and consummation of the transactions contemplated by the Belgium JV Binding Term Sheet, transfer 37.5% of the outstanding capital stock of the Belgium JV to M&M, reducing the ownership by the Buyer Parent or such Affiliate, as applicable, of the outstanding capital stock of the Belgium JV to 12.5%.
(e) The Seller Parties represent and warrant to the Buyer Parties as follows:
(i) other than the Belgium JV Equity Economic Distribution, none of the Seller Parties nor any of the Seller Parties respective Affiliates has taken any action with respect to the transfer of the Belgium JV Equity (or any economic benefit or obligation with respect to the Belgium JV Equity) to the Seller;
(ii) the Seller owns the Belgium JV Equity Benefits free and clear of any Liens; and
(iii) to the best of the knowledge of the Seller Parties, the Belgium JV does not currently directly or indirectly conduct, and has not directly or indirectly conducted, any business or operations (and does not directly or indirectly own any assets or have any Liabilities with respect to any business or operations), other than operations relating to Events with respect to the Tomorrowland brand.
(f) Notwithstanding anything to the contrary in this Section 1, nothing herein will eliminate or limit any of the Seller Parties respective obligations under any of the ID&T International SPA and the ID&T Worldwide SPA (including any indemnification obligations thereunder), whether with respect to any ID&T
International Liability (including under Section 5.6(e) of the ID&T International SPA) or otherwise.
(g) Any Liability that ID&T International, any NAJV Entity, or any Buyer Entity (as defined in the ID&T International SPA, as amended by this Agreement) incurs or sustains arising out of, relating to, or as a result of any Breach of any representations, warranties, or obligations (or any of the foregoing) set forth in this Agreement will be an ID&T International Liability.
(h) Anything contained in this Agreement, the ID&T International SPA or the ID&T Worldwide SPA to the contrary notwithstanding:
(i) the Buyer Parties will indemnify and hold harmless the Seller Parties from and against any loss, cost, damage, expense or claim of any kind arising out of or related to the direct or indirect transfer of Belgium JV Equity as contemplated by this Agreement, the ID&T International SPA or the ID&T Worldwide SPA (including, but not limited to, any claim asserted by M&M related to any failure to obtain the M&M Consent or otherwise), other than any Liability that is an ID&T International Liability by virtue of Section 1(g); and
(ii) except as provided in the last sentence of Section 5.8(b) of the ID&T Worldwide SPA, neither the failure by the Seller or any of the Sellers Affiliates to obtain the M&M Consent (either with respect to the transactions contemplated by this Agreement or the transactions contemplated by the ID&T International SPA or the ID&T Worldwide SPA) nor any other facts or circumstances arising as a result of the Reorganization (as revised by this Agreement) or the Reorganization Documents will give rise to any claim for indemnification by any Buyer Party, and the Company shall bear any and all Losses with respect thereto, other than any Liability that is an ID&T International Liability by virtue of Section 1(g).
(i) As promptly as practical following the date hereof, the Buyer Parties shall replace the Seller Parties designees to the board of directors of the Belgium JV. Notwithstanding their removal as directors of the Belgium JV, the Buyer Parties shall indemnify and hold harmless such directors for any loss, cost, damage, expense or claim of any kind arising out of or related to actions taken by such directors after the Closing Date, in good faith, in their capacity as directors of the Belgium JV.
2. Amendments to ID&T International SPA.
(a) The definition of Buyer Entity in the ID&T International SPA is hereby amended and restated in its entirety to read as follows:
Buyer Entity means any of the following: (a) the Buyer Parent; (b) any Subsidiary of the Buyer Parent (including the NAJV Entities); (c) any ID&T Worldwide Entity (including ID&T Brazil Eventos, ID&T Brazil Produções, and ID&T Australia); and (d) the Belgium JV.
(b) The definition of Company Entity in the ID&T International SPA is hereby amended and restated in its entirety to read as follows:
Company Entity means any of the following: (a) the Company; (b) ID&T Brazil Eventos; (c) ID&T USA; (d) ID&T Brazil Produções; (e) ID&T Australia; (f) the Belgium JV (other than for purposes of Article 3) or (g) any Entity in which the Company owns or owned, directly or indirectly as of the relevant time of determination, any capital stock or other equity interests, other than the NAJV Entities and except as provided in the immediately foregoing clause (f).
(c) Section 5.6(c) of the ID&T International SPA is hereby amended and restated in its entirety to read as follows:
(c) [Reserved.]
(d) Section 5.6(e) of the ID&T International SPA is hereby amended and restated in its entirety to read as follows:
(e) Notwithstanding anything to the contrary in this Agreement or in the Amended ID&T Worldwide SPA, any Liability that the Company, any NAJV Entity, or any Buyer Entity incurs or sustains arising out of, relating to, or as a result of the Companys direct or indirect ownership of the Belgium JV Equity as of any time prior to the Closing will be an ID&T International Liability.
3. Amendments to ID&T Worldwide SPA.
(a) Clause (iv) in the definition of the term Business in the ID&T Worldwide SPA is hereby amended and restated in its entirety to read as follows:
(iv) 50% of the outstanding capital stock of the Belgium JV;
(b) Section 2.9(b) of the ID&T Worldwide SPA is hereby amended by deleting the following text from that section: the Belgium JV Earn-Out Payments, .
(c) The first sentence of Section 5.7 of the ID&T Worldwide SPA is hereby amended and restated in its entirety to read as follows:
The Parties shall use their respective commercially reasonable efforts to consummate the transactions contemplated by the Belgium JV Binding Term Sheet, it being understood that the Parent or an Affiliate of the Parent, and not ID&T Holding, (a) will, prior to consummating the transactions contemplated by the Belgium JV Binding Term Sheet, own 50% of the outstanding capital stock of the Belgium JV and (b) will, subject to the terms of and consummation of the transactions contemplated by the Belgium JV Binding Term Sheet, transfer 37.5% of the outstanding capital stock of the Belgium JV to M&M, reducing the ownership by the
Parent or such Affiliate, as applicable, of the outstanding capital stock of the Belgium JV to 12.5%.
(d) Section 5.8(d) of the ID&T Worldwide SPA is hereby amended and restated in its entirety to read as follows:
(d) To the fullest extent permitted by Law after the Closing: (i) the Parent shall cause the Company to indemnify and hold harmless the directors of the Seller and the directors of the Sellers Affiliates (including the directors of any Company Entity) for any Losses suffered or incurred by such directors arising out of actions taken by such directors, in good faith, to implement the Reorganization pursuant to the Reorganization Plan; and (ii) the Parent shall cause the Company to indemnify and hold harmless the directors of the Seller (in their capacities as directors of the Seller), the directors of the Sellers Affiliates (including the directors of any Company Entity) (in their capacities as directors of such Affiliate), and ID&T Holding (in ID&T Holdings capacity as the sole shareholder of ID&T International) for any Losses suffered or incurred by ID&T Holding (in ID&T Holdings capacity as the sole shareholder of ID&T International) or such directors (in their capacities as such) arising out of the dividend distribution of $7.5 million by ID&T International as set forth in step 34.A of the Reorganization Plan, but (A) only if there has been a ruling from a court of competent jurisdiction that such dividend was improperly made, (B) only to the extent that such dividend rendered ID&T International insolvent, without taking into account the ID&T Brazil Eventos Equity Distribution (as defined in the ID&T International SPA), the ID&T Brazil Produções Distribution (as defined in the ID&T International SPA), and the ID&T Australia Equity Distribution (as defined in the ID&T International SPA), and (C) only up to a maximum of $7.5 million, plus any court awarded or directed interest, in aggregate.
(e) The following text under the heading ID&T shareholders in Exhibit H to the ID&T Worldwide SPA is hereby deleted:
· Ownership of 12.5% in Tomorrowland Belgium
(f) The following text in Exhibit H to the ID&T Worldwide SPA is hereby deleted:
ID&T Holding & ID&T International
· Ownership interest in ID&T International
· Ownership interest in the NAJV and rights pursuant to the NAJV Second Amended and Restated LLC Agreement
(g) Step 44.A of the Reorganization Plan (including Tabs 44.A.1 and 44.A.2 thereunder) is hereby deleted from the Reorganization Plan.
4. Miscellaneous.
(a) Defined Terms. Capitalized terms used but not otherwise defined herein have the respective meanings given to such terms in the ID&T Worldwide SPA (other than those capitalized terms that are included in the amended provisions of the ID&T International SPA that are amended by Section 2 and other than those capitalized terms that are included in the amended provisions of the ID&T Worldwide SPA that are amended by Section 3).
(b) Incorporation by Reference. The following provisions of the ID&T Worldwide SPA are hereby incorporated by reference as if set forth in full herein, mutatis mutandis: Section 8.1 (Notices); Section 8.3 (Amendments; Waivers); Section 8.5 (Arbitration); Section 8.6 (Governing Law); Section 8.7 (Consent to Jurisdiction and Venue); Section 8.8 (Counterparts); Section 8.9 (No Third-Party Beneficiaries); Section 8.11 (Captions); Section 8.12 (Severability); Section 8.13 (Interpretation; Construction); Section 8.14 (Equitable Relief); and Section 8.15 (Business Days).
(c) Access to Counsel. Each Party acknowledges that such Party has had an adequate opportunity to consult with and to engage such Partys own legal counsel in connection with the drafting, negotiation, execution, and delivery hereof, discussions relating hereto, and otherwise with respect hereto.
(d) Waiver of Jury Trial. To the extent permitted by Law, each Party irrevocably and unconditionally waives any right that such Party might have to a trial by jury in any Suit arising out of or relating to this Agreement or the transactions contemplated hereby. Each Party acknowledges that: (i) such Party has considered the implications of the waiver in this Section 4(d); (ii) each other Party will continue to rely upon the waiver in this Section 4(d) in such other Partys future dealings arising out of or relating to this Agreement and the transactions contemplated hereby; and (iii) this provision is a material inducement for each other Party to enter into this Agreement and to consummate the transactions contemplated hereby.
(e) Further Assurances. Each Party shall, without further consideration, prepare, execute, acknowledge, file, record, publish, and deliver such other instruments, documents, and statements, and take such other actions as might be required by Law or reasonably necessary to effectively carry out the purposes hereof.
(f) Adequate Consideration. Each Party hereby acknowledges that such Party has received adequate consideration in connection with entering into this Agreement and in connection with the transactions contemplated hereby.
(g) Assignment. Each Party shall not, and shall not purport to, assign any of such Partys rights hereunder, delegate any of such Partys obligations hereunder, or delegate such Partys performance in satisfaction of any conditions to any obligations of any other Party hereunder (and shall not enter into any Contract
that requires any such assignment or delegation) without the prior written consent of each other Party, and any such purported assignment or delegation without obtaining such written consent will be void.
(h) Entire Agreement. This Agreement, the ID&T Worldwide SPA, the ID&T International SPA, the Ancillary Documents, the Existing NAJV LLC Agreement Surviving Terms, and the NAJV JV Agreement Surviving Terms (i) are a final, complete, and exclusive statement of the agreement and understanding of the Parties with respect of the subject matter hereof, (ii) collectively constitute the entire agreement of the Parties with respect to the subject matter hereof, and (iii) except with respect to the Existing NAJV LLC Agreement, the First Amendment to Existing NAJV LLC Agreement, the Existing NAJV LLC Agreement Surviving Terms, and the NAJV JV Agreement Surviving Terms, supersede, merge, and integrate herein any prior and contemporaneous negotiations, discussions, representations, understandings, and agreements between any of the Parties (including the Option Agreement (including the Side Letter), the Letter Agreement, and the Pre-existing Confidentiality Agreements), whether oral or written, with respect to the subject matter hereof.
(i) Legal Fees. The Buyer agrees to reimburse the Seller Parties for all reasonable fees and disbursements of counsel incurred in connection with the negotiation, execution and consummation of the transactions contemplated by this Agreement.
[Signature page follows.]
The Parties are signing this Agreement as of the Effective Date.
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SFX ENTERTAINMENT, INC. | |
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By: |
/s/ Richard Rosenstein |
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SFX-IDT N.A. HOLDING II LLC | |
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By: |
/s/ Richard Rosenstein |
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SFXE NETHERLANDS HOLDINGS B.V. | |
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By: |
/s/ Sheldon Finkel |
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By: |
/s/ Mitchell J. Slater |
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Signature Page to Transfer Agreement and Amendment
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ID&T NEWHOLDING B.V. | |
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(n/k/a ID&T HOLDING B.V.) | |
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By: |
/s/ Sheldon Finkel |
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By: |
/s/ Richard Rosenstein |
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ONE OF US HOLDING B.V. | |
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By: |
/s/ Duncan Stutterheim |
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By: |
/s/ Wouter Tavecchio |
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ONE OF US B.V. | |
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By: |
/s/ Duncan Stutterheim |
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By: |
/s/ Wouter Tavecchio |
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Signature Page to Transfer Agreement and Amendment
Exhibit 10.67
EXECUTION VERSION
FIRST LIEN GUARANTEE AND COLLATERAL AGREEMENT
made by
EACH OF THE GRANTORS PARTY HERETO
in favor of
BARCLAYS BANK PLC,
as Collateral Agent
Dated as of February 7, 2014
TABLE OF CONTENTS
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SECTION 1. |
DEFINED TERMS |
1 |
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1.1 |
Definitions |
1 |
1.2 |
Other Definitional Provisions |
4 |
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SECTION 2. |
GUARANTEE |
4 |
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2.1 |
Guarantee |
4 |
2.2 |
Right of Contribution |
5 |
2.3 |
No Subrogation |
5 |
2.4 |
Amendments, Etc. with Respect to the Guaranteed Obligations |
6 |
2.5 |
Guarantee Absolute and Unconditional |
6 |
2.6 |
Reinstatement |
8 |
2.7 |
Payments |
8 |
2.8 |
Information |
8 |
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SECTION 3. |
GRANT OF SECURITY INTEREST |
8 |
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3.1 |
Grant of Security Interests |
8 |
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SECTION 4. |
REPRESENTATIONS AND WARRANTIES |
9 |
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4.1 |
Representations in Credit Agreement |
9 |
4.2 |
Title; No Other Liens |
9 |
4.3 |
Names; Jurisdiction of Organization; Chief Executive Office |
10 |
4.4 |
Pledged Securities |
10 |
4.5 |
Pledged Notes |
10 |
4.6 |
Intellectual Property |
10 |
4.7 |
Commercial Tort Claims |
10 |
4.8 |
Deposit Accounts; Securities Accounts and Commodity Accounts |
10 |
4.9 |
Specific Collateral |
11 |
4.10 |
Perfection and Priority |
11 |
4.11 |
Enforcement |
11 |
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SECTION 5. |
COVENANTS |
11 |
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5.1 |
Covenants in Credit Agreement |
11 |
5.2 |
Investment Property |
11 |
5.3 |
Commercial Tort Claims |
11 |
5.4 |
Maintenance of Perfected Security Interest; Defense of Claims |
12 |
5.5 |
Delivery of Instruments and Tangible Chattel Paper and Control of Investment Property, Letter-of-Credit Rights and Electronic Chattel Paper |
12 |
5.6 |
Deposit Accounts, Securities Accounts and Commodity Accounts |
13 |
5.7 |
Intellectual Property |
13 |
5.8 |
Maintenance of Perfected Security Interest; Further Documentation and Consents |
14 |
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SECTION 6. |
REMEDIAL PROVISIONS |
14 |
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6.1 |
Certain Matters Relating to Receivables |
14 |
6.2 |
Communications with Grantors; Grantors Remain Liable |
15 |
TABLE OF CONTENTS
(cont)
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6.3 |
Pledged Securities; Dividends |
15 |
6.4 |
Intellectual Property |
16 |
6.5 |
Proceeds to be Turned Over To Collateral Agent |
17 |
6.6 |
Application of Proceeds |
17 |
6.7 |
Code and Other Remedies |
17 |
6.8 |
Private Sales |
20 |
6.9 |
Deficiency |
20 |
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SECTION 7. |
THE COLLATERAL AGENT |
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7.1 |
Collateral Agents Appointment as Attorney-in-Fact, etc. |
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7.2 |
Duty of Collateral Agent |
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7.3 |
Authorization of Financing Statements |
22 |
7.4 |
Authority of Collateral Agent |
22 |
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SECTION 8. |
MISCELLANEOUS |
22 |
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8.1 |
Amendments in Writing |
22 |
8.2 |
Notices |
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8.3 |
No Waiver by Course of Conduct; Cumulative Remedies |
23 |
8.4 |
Enforcement Expenses; Indemnification |
23 |
8.5 |
Successors and Assigns |
23 |
8.6 |
Set-Off |
23 |
8.7 |
Counterparts |
24 |
8.8 |
Severability |
24 |
8.9 |
Section Headings |
24 |
8.10 |
Integration |
24 |
8.11 |
Governing Law; Jurisdiction; Etc. |
24 |
8.12 |
Acknowledgements |
25 |
8.13 |
Additional Grantors |
25 |
8.14 |
Releases |
25 |
8.15 |
WAIVER OF JURY TRIAL |
26 |
8.16 |
Reinstatement |
26 |
8.17 |
Independent Obligations |
26 |
8.18 |
Intercreditor Agreement Governs |
26 |
TABLE OF CONTENTS
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SCHEDULES |
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Schedule 1 |
Notice Addresses |
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Schedule 2 |
Investment Property |
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Schedule 3 |
Legal Name, Jurisdictions of Organization and Organizational Identification Number |
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Schedule 4(a) |
Intellectual Property |
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Schedule 4(b) |
License Arrangements and Agreements |
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Schedule 5 |
Commercial Tort Claims |
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Schedule 6 |
Deposit Accounts; Securities Accounts; Commodity Accounts |
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Schedule 7 |
Perfection and Priority |
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ANNEXES |
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Annex I |
Assumption Agreement |
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FIRST LIEN GUARANTEE AND COLLATERAL AGREEMENT
FIRST LIEN GUARANTEE AND COLLATERAL AGREEMENT, dated as of February 7, 2014, made by SFX Entertainment, Inc. a Delaware corporation (the Borrower), the other Persons listed on the signature pages hereof and the Additional Grantors (as defined herein) in favor of Barclays Bank PLC, as collateral agent (in such capacity, together with any successor agent appointed pursuant to Section 8.07 of the Credit Agreement referred to below, the Collateral Agent) for the Secured Parties (as defined below), including the several banks and other financial institutions or entities (the Lenders) from time to time parties to that certain Credit Agreement, dated as the date hereof, by and among the Borrower, the Lenders, Barclays Bank PLC, as administrative agent, and the other agents party thereto (as amended, restated, supplemented waived and/or otherwise modified from time to time, the Credit Agreement).
W I T N E S S E T H:
WHEREAS, pursuant to the Credit Agreement, the Lenders have severally agreed to make Revolving Loans and other extensions of credit to the Borrower upon the terms and subject to the conditions set forth therein;
WHEREAS, the Borrower is a member of an affiliated group of companies that includes each other Grantor (as defined below);
WHEREAS, the proceeds of the Revolving Loans under the Credit Agreement will be used in part to enable the Borrower to fund Permitted Acquisitions;
WHEREAS, the Borrower and the other Grantors are engaged in related businesses, and each Grantor will derive substantial direct and indirect benefit from the making of the Revolving Loans and other extensions of credit under the Credit Agreement; and
WHEREAS, it is a condition precedent to the obligation of the Lenders to make their respective Revolving Loans and other extensions of credit to the Borrower under the Credit Agreement that the Grantors shall have executed and delivered this Agreement to the Administrative Agent for the ratable benefit of the Secured Parties;
NOW, THEREFORE, in consideration of the premises and to induce the Administrative Agent and the Lenders to enter into the Credit Agreement and to induce the Lenders to make their respective Revolving Loans thereunder and to induce the Secured Hedging Counterparties to enter into Secured Hedging Agreements and the Cash Management Counterparties to enter into Cash Management Documents from time to time, each Grantor hereby agrees with the Collateral Agent, for the ratable benefit of the Secured Parties, as follows:
SECTION 1. DEFINED TERMS
1.1 Definitions. (a) Unless otherwise defined herein, terms defined in the Credit Agreement and used herein shall have the meanings given to them in the Credit Agreement, and the following terms are used herein as defined in the UCC: Accession, As-Extracted Collateral, Certificated Security, Chattel Paper, Commercial Tort Claim, Document, Equipment, Fixture, General Intangible, Goods, Instrument, Inventory, Letter-of-Credit Right, Securities Account, Security, Supporting Obligations and Uncertificated Securities.
(b) The following terms shall have the following meanings:
Acceleration Date: the date the Collateral Agent may take any of the actions listed in Section 7.01 of the Credit Agreement upon and during the continuance of any Event of Default.
Account: any right to payment of a monetary obligation, whether or not earned by performance, including, but not limited to, the right to payment for goods sold or leased or for services rendered, whether or not such right is evidenced by an Instrument or Chattel Paper, and right to payment of management fees. Without limiting the generality of the foregoing, the term Account shall further include all accounts (as that term is defined in the UCC), all accounts receivable, all health-care-insurance receivables (as that term is defined in the UCC), all payment intangibles (as that term is defined in the UCC) and all other rights to payment of every kind and description, whether or not earned by performance.
Additional Grantors: as defined in Section 8.13.
Agreement: this First Lien Guarantee and Collateral Agreement, as the same may be amended, restated, supplemented waived and/or otherwise modified from time to time.
Bankruptcy Default: an Event of Default under Section 7.01(f) of the Credit Agreement.
Borrower: as defined in the preamble hereto.
Borrower Credit Agreement Obligations: Obligations as defined in the Credit Agreement.
Borrower Obligations: collectively, the (i) Borrower Credit Agreement Obligations and (ii) the Borrowers Hedging and Cash Management Obligations, but, as to the foregoing clause (ii), only to the extent that, and only so long as, the Borrower Credit Agreement Obligations are secured and guaranteed pursuant to this Agreement; provided that Borrower Obligations shall not include Excluded Swap Obligations.
Collateral: as defined in Section 3.1.
Collateral Account: any collateral account established by the Collateral Agent as provided in Sections 6.1 or 6.5.
Collateral Agent: as defined in the preamble hereto.
Commodity Exchange Act: the Commodity Exchange Act (7 U.S.C. § 1 et seq.), as amended from time to time, and any successor statute.
Credit Agreement: as defined in the preamble hereto.
Deposit Account: all deposit accounts as defined in the Uniform Commercial Code of any applicable jurisdiction and, in any event, including, without limitation, any demand, time, savings, passbook or like account maintained with a depositary institution.
Excluded Accounts: all Deposit Accounts and Securities Accounts not required to be subject to Controlled Deposit Accounts or Controlled Securities Accounts (as applicable) pursuant to Section 5.15 of the Credit Agreement.
Excluded Equity Interests: any Equity Interest in any Excluded Subsidiary, other than (i) 100% of the non-Voting Stock of an Excluded Subsidiary and (ii) Voting Stock of an Excluded Subsidiary representing 65% of the total voting power of all outstanding Voting Stock of such Excluded Subsidiary.
Excluded Swap Obligation: with respect to any Guarantor, any Swap Obligation if, and to the extent that, all or a portion of the guarantee of such Guarantor of, or the grant by such Guarantor of a security interest to secure, such Swap Obligation (or any guarantee thereof) is or becomes illegal under the Commodity Exchange Act or any rule, regulation or order of the Commodity Futures Trading Commission (or the application or official interpretation of any thereof) by virtue of such Guarantors failure for any reason to constitute an eligible contract participant as defined in the Commodity Exchange Act and the regulations thereunder at the time the guarantee of such Guarantor or the grant of such security interest becomes effective with respect to such Swap Obligation. If a Swap Obligation arises under a master agreement governing more than one swap, such exclusion shall apply only to the portion of such Swap Obligation that is attributable to swaps for which such guarantee or security interest is or becomes illegal.
Grantors: the collective reference to each signatory hereto (other than the Collateral Agent) together with any other entity that may become a party hereto as provided herein.
Guaranteed Obligations: as defined in Section 2.1; provided that Guaranteed Obligations shall not include Excluded Swap Obligations.
Guarantor Obligations: with respect to any Guarantor, (i) all obligations and liabilities of such Guarantor which may arise under or in connection with this Agreement (including, without limitation, Section 2) or any other Loan Document to which such Guarantor is a party, in each case whether on account of guarantee obligations, fees, indemnities, costs, expenses or otherwise (including, without limitation, all fees and disbursements of counsel to the Administrative Agent, to the Collateral Agent or to the other Secured Parties that are required to be paid by such Guarantor pursuant to the terms of this Agreement or any other Loan Document) and (ii) any Subsidiary Guarantors Hedging and Cash Management Obligations, but, as to foregoing clause (ii) only to the extent that, and only so long as, the Borrowers Credit Agreement Obligations are secured and guaranteed pursuant to this Agreement; provided that Guarantor Obligations shall not include Excluded Swap Obligations.
Guarantors: the collective reference to each signatory hereto (in each case, other than the Collateral Agent) together with any other entity that may become a party hereto as provided herein.
Intercompany Note: any promissory note evidencing loans made by any Grantor to the Borrower or any of its Subsidiaries.
Investment Property: the collective reference to (i) all investment property as such term is defined in Section 9-102(a)(49) of the UCC (other than any Excluded Equity Interests) and (ii) whether or not constituting investment property as so defined, all Pledged Securities.
Issuers: the collective reference to each issuer of a Pledged Security.
Lenders: as defined in the preamble hereto.
Pledged Notes: all promissory notes listed on Schedule 2, all Intercompany Notes at any time issued to any Grantor and all other promissory notes issued to or held by any Grantor (other than promissory notes issued in connection with extensions of trade credit by any Grantor in the ordinary course of business).
Pledged Securities: the collective reference to the Pledged Notes and the Pledged Stock.
Pledged Stock: the collective reference to (i) the shares of equity interests listed on Schedule 2, (ii) any other shares, stock certificates, options, interests or rights of any nature whatsoever in respect of the equity interests of any Person that may be issued or granted to, or held by, any Grantor while this Agreement is in effect and that are required to become Collateral pursuant to Section 3.1.
Proceeds: all proceeds as such term is defined in Section 9-102(a)(64) of the UCC and, in any event, shall include, without limitation, all dividends or other income from the Investment Property, collections thereon or distributions or payments with respect thereto.
Receivable: any right to payment for goods sold or leased or for services rendered, whether or not such right is evidenced by an Instrument or Chattel Paper and whether or not it has been earned by performance (including, without limitation, any Account).
Secured Obligations: (i) in the case of the Borrower, the Borrower Obligations and (ii) in the case of each other Guarantor, its Guarantor Obligations, in each case except as constitutes an Excluded Swap Obligation.
Swap Obligation: with respect to any Guarantor, any obligation to pay or perform under any agreement, contract or transaction that constitutes a swap within the meaning of section 1a(47) of the Commodity Exchange Act.
UCC: the Uniform Commercial Code from time to time in effect in the State of New York; provided, that in the event that, by reason of mandatory provisions of any applicable requirement of Law, any of the perfection or priority of the Collateral Agents or any other Secured Partys security interest in any Collateral is governed by the Uniform Commercial Code of a jurisdiction other than the State of New York, UCC shall mean the Uniform Commercial Code as in effect in such other jurisdiction for purposes of the provisions hereof relating to such perfection or priority and for purposes of the definitions related to or otherwise used in such provisions.
1.2 Other Definitional Provisions. (a) The words hereof, herein, hereto and hereunder and words of similar import when used in this Agreement shall refer to this Agreement as a whole and not to any particular provision of this Agreement, and Section and Schedule references are to this Agreement unless otherwise specified.
(b) The meanings given to terms defined herein shall be equally applicable to both the singular and plural forms of such terms.
(c) Where the context requires, terms relating to the Collateral or any part thereof, when used in relation to a Grantor, shall refer to such Grantors Collateral or the relevant part thereof.
SECTION 2. GUARANTEE
2.1 Guarantee. (a) Each of the Grantors hereby, jointly and severally, as a primary obligor and not merely as a surety, unconditionally and irrevocably, guarantees to the Collateral Agent for the ratable benefit of the Secured Parties and their respective permitted successors, indorsees, transferees and assigns, the prompt and complete payment and performance by each other Guarantor when due (whether at the stated maturity, by acceleration or otherwise) of the Secured Obligations, including, without limitation, (i) the principal of and interest on the Revolving Loans made to the Borrower pursuant to the Credit Agreement, (ii) all other amounts payable by the Borrower under the Credit Agreement and the
other Loan Documents, and (iii) the punctual and faithful performance, keeping, observance, and fulfillment by the Guarantors of all of the agreements, conditions, covenants, and obligations of the Guarantors contained in the Loan Documents (all of the foregoing being referred to collectively as the Guaranteed Obligations). Each Grantor hereby agrees that this Guarantee is an absolute, irrevocable and unconditional Guarantee of payment and is not a Guarantee of collection.
(b) Anything herein or in any other Loan Document to the contrary notwithstanding, the maximum liability of each Grantor for the Guaranteed Obligations shall in no event exceed the amount which can be guaranteed by such Grantor under applicable federal and state laws relating to the insolvency of debtors (after giving effect to the right of contribution established in Section 2.2).
(c) Each Grantor agrees that the Guaranteed Obligations may at any time and from time to time exceed the amount of the liability of such Grantor hereunder without impairing the Guarantee contained in this Section 2 or affecting the rights and remedies of the Collateral Agent or any other Secured Party hereunder.
(d) The Guarantee contained in this Section 2 shall remain in full force and effect until all the Obligations (including all obligations of each Grantor under the guarantee contained in this Section 2) shall have been satisfied by payment in full (other than contingent or indemnification obligations not then asserted or due), notwithstanding that from time to time during the term of the Credit Agreement the Loan Parties may be free from any Obligations.
(e) Except as provided in Section 8.14, no payment made by the Borrower, any of the other Guarantors, any other guarantor or any other Person or received or collected by the Collateral Agent or any other Secured Party from the Borrower, any of the other Guarantors or any other Person by virtue of any action or proceeding or any set-off or appropriation or application at any time or from time to time in reduction of or in payment of the Guaranteed Obligations shall be deemed to modify, reduce, release or otherwise affect the liability of any Grantor hereunder which shall, notwithstanding any such payment (other than any payment made by such Guarantor in respect of the Guaranteed Obligations or any payment received or collected from such Guarantor in respect of the Guaranteed Obligations), remain liable for the Guaranteed Obligations up to the maximum liability of such Grantor hereunder until the Guaranteed Obligations shall have been paid in full (other than contingent or indemnification obligations not then asserted or due).
2.2 Right of Contribution. Each Grantor hereby agrees that to the extent that a Grantor shall have paid more than its proportionate share of any payment made hereunder, such Grantor shall be entitled to seek and receive contribution from and against any other Guarantor which has not paid its proportionate share of such payment. Each Grantors right of contribution shall be subject to the terms and conditions of Section 2.3. The provisions of this Section 2.2 shall in no respect limit the obligations and liabilities of any Guarantor to the Collateral Agent and the other Secured Parties, and each Guarantor shall remain liable to the Collateral Agent and the other Secured Parties for the full amount guaranteed by such Guarantor hereunder.
2.3 No Subrogation. Notwithstanding any payment made by any Grantor hereunder or any set-off or application of funds of any Guarantor by the Collateral Agent or any other Secured Party, no Guarantor shall be entitled to be subrogated to any of the rights of the Collateral Agent or any other Secured Party against the Borrower or any other Guarantor or any collateral security or guarantee or right of offset held by the Collateral Agent or any other Secured Party for the payment of the Guaranteed Obligations, nor shall any Guarantor seek or be entitled to seek any contribution or reimbursement from the Borrower or any other Guarantor in respect of payments made by such Guarantor hereunder, until all amounts owing to the Collateral Agent and the other Secured Parties on account of the Guaranteed
Obligations shall have been indefeasibly paid in full in cash (other than contingent or indemnification obligations not then asserted or due). If any amount shall be paid to any Grantor on account of such subrogation rights at any time when all of such Guaranteed Obligations shall not have been paid in full, such amount shall be held by such Grantor in trust for the Collateral Agent and the other Secured Parties, segregated from other funds of such Grantor, and shall, forthwith upon receipt by such Grantor, be turned over to the Collateral Agent in the exact form received by such Grantor (duly indorsed by such Grantor to the Collateral Agent, if required), to be applied against the Guaranteed Obligations, whether matured or unmatured, in such order as the Collateral Agent may determine. Notwithstanding anything to the contrary contained in this Agreement, if all or any portion of the Guaranteed Obligations have been satisfied in connection with an exercise of remedies in respect of the Equity Interests of any Loan Party (Foreclosed Loan Party), no Loan Party may, at any time, exercise any rights of subrogation, contribution, indemnity, reimbursement or other similar rights against, and may not proceed or seek recourse against or with respect to such Foreclosed Loan Party and/or any property or asset thereof, whether pursuant to this Agreement or otherwise, including after indefeasible payment in full in cash of the Guaranteed Obligations.
2.4 Amendments, Etc. with Respect to the Guaranteed Obligations. To the fullest extent permitted by applicable law, each Grantor shall remain obligated hereunder notwithstanding that, without any reservation of rights against any Guarantor and without notice to or further assent by any Guarantor, any demand for payment of any of the Guaranteed Obligations made by the Collateral Agent or any other Secured Party may be rescinded by the Collateral Agent or such other Secured Party and any of the Guaranteed Obligations continued, and the Guaranteed Obligations, or the liability of any other Person upon or for any part thereof, or any collateral security or guarantee therefor or right of offset with respect thereto, may, from time to time, in whole or in part, be renewed, extended, amended, modified (including changing the time for payment of the Guaranteed Obligations), accelerated, compromised, waived, surrendered or released by the Collateral Agent or any other Secured Party, and the Credit Agreement and the other Loan Documents and any other documents executed and delivered in connection therewith may be, amended, modified, supplemented or terminated, in whole or in part, as the Collateral Agent may reasonably deem advisable from time to time, and any collateral security, guarantee or right of set-off at any time held by the Collateral Agent or any other Secured Party for the payment of the Guaranteed Obligations may be sold, exchanged, waived, surrendered or released. Neither the Collateral Agent nor any other Secured Party shall have any obligation to protect, secure, perfect or insure any Lien at any time held by it as security for the Guaranteed Obligations or for the guarantee contained in this Section 2 or any property subject thereto.
2.5 Guarantee Absolute and Unconditional. To the fullest extent permitted by applicable law, each Grantor waives any and all notice of the creation, renewal, extension or accrual of any of the Guaranteed Obligations and notice of or proof of reliance by the Collateral Agent or any other Secured Party upon the guarantee contained in this Section 2 or acceptance of the guarantee contained in this Section 2; the Guaranteed Obligations, and any of them, shall conclusively be deemed to have been created, contracted or incurred, or renewed, extended, amended or waived, in reliance upon the guarantee contained in this Section 2; and all dealings between the Borrower and any of the Guarantors, on the one hand, with respect to the Loan Documents and the Collateral Agent and the other Secured Parties, on the other hand, likewise shall be conclusively presumed to have been had or consummated in reliance upon the guarantee contained in this Section 2. To the fullest extent permitted by applicable law, each Grantor waives diligence, presentment, protest, demand for payment and notice of default or nonpayment to or upon the Borrower or any of the Guarantors with respect to the Guaranteed Obligations. Each Grantor understands and agrees that the guarantee of such Grantor contained in this Section 2, to the fullest extent permitted by applicable law, shall be construed as a continuing, absolute and unconditional guarantee of payment and shall not be discharged as a result of or otherwise affected by any of the following:
(a) any and all notice of the creation, renewal, extension or accrual of any of the Obligations and notice of or proof of reliance by the Collateral Agent or any other Secured Party upon the Guarantee contained in this Section 2 or acceptance of the Guarantee contained in this Section 2;
(b) diligence, presentment, protest, demand for payment, notice of default or nonpayment and any other notice whatsoever to or upon the Borrower or any other Grantor in respect of any Guaranteed Obligations or any part thereof or any defense arising by reason of any disability or other defense of a Borrower or any other Grantor with respect to the Obligations;
(c) the validity or enforceability (or invalidity or unenforceability) of the Credit Agreement or any other Loan Document, any of the Guaranteed Obligations (or any portion thereof) or any other collateral security therefor or guarantee or right of offset with respect thereto at any time or from time to time held by the Collateral Agent or any other Secured Party,
(d) any defense, set-off or counterclaim (other than a defense of payment or performance) which may at any time be available to or be asserted by the Borrower or any other Person against the Collateral Agent or any other Secured Party,
(e) the absence of (i) any attempt to collect any Guaranteed Obligation or any part thereof from a Borrower or any other Grantor or other action to enforce the same or (ii) any action to enforce any Loan Document or any Lien hereunder or thereunder;
(f) the failure by any Person to take any steps to perfect and maintain any Lien on, or preserve any rights with respect to any Collateral;
(g) any workout, insolvency, bankruptcy proceeding, reorganization, arrangement, liquidation or dissolution by or against a Borrower, any other Guarantor, or any Subsidiary of any Loan Party or any procedure, agreement, order, stipulation, election, action or omission thereunder, including any discharge or disallowance of, or bar or stay against collection, any Guaranteed Obligation (or any interest therein) in or as a result of any such proceeding;
(h) any foreclosure, whether or not through judicial sale, and any other sale or other disposition of any Collateral or any election following the occurrence of an Event of Default by any Secured Party to proceed separately against any Collateral in accordance with such Secured Partys rights under applicable requirement of Law; or
(i) any defense, setoff or counterclaim or any other circumstance whatsoever (other than a defense of payment or performance) (with or without notice to or knowledge of the Borrower or any Guarantor) which constitutes, or might be construed to constitute, an equitable or legal discharge of any other Grantor from the Guaranteed Obligations, or of such Grantor under the Guarantee contained in this Section 2, in bankruptcy or in any other instance.
When making any demand hereunder or otherwise pursuing its rights and remedies hereunder against any Grantor, the Collateral Agent or any other Secured Party may, but shall be under no obligation to, make a similar demand on or otherwise pursue such rights and remedies as it may have against the Borrower, any other Guarantor or any other Person or against any collateral security or guarantee for the Guaranteed Obligations or any right of offset with respect thereto, and any failure by the Collateral Agent or any other Secured Party to make any such demand, to pursue such other rights or remedies or to collect any payments from the Borrower, any other Guarantor or any other Person or to realize upon any such collateral security or guarantee or to exercise any such right of offset, or any release of the Borrower, any other Guarantor or any other Person or any such collateral security, guarantee or
right of offset, shall not relieve any Grantor of any obligation or liability hereunder, and shall not impair or affect the rights and remedies, whether express, implied or available as a matter of law, of the Collateral Agent or any other Secured Party against any Guarantor. For the purposes hereof demand shall include the commencement and continuance of any legal proceedings.
2.6 Reinstatement. The Guarantee contained in this Section 2 shall continue to be effective, or be reinstated, as the case may be, if at any time payment, or any part thereof, of any of the Guaranteed Obligations is rescinded or must otherwise be restored or returned by the Collateral Agent or any other Secured Party upon the insolvency, bankruptcy, dissolution, liquidation or reorganization of the Borrower or any other Guarantor, or upon or as a result of the appointment of a receiver, intervenor or conservator of, or trustee or similar officer for, the Borrower or any other Guarantor or any substantial part of its property, or otherwise, all as though such payments had not been made.
2.7 Payments. Each Grantor hereby guarantees that payments hereunder will be paid to the Collateral Agent (a) without set-off or counterclaim in Dollars at the Administrative Agents Office and (b) free and clear of, and without deduction for, any Non-Excluded Taxes or Other Taxes on the same terms and to the same extent that payments by the Borrower are required to be made pursuant to the terms of Section 2.18 of the Credit Agreement, applying the provisions of Section 2.18 of the Credit Agreement to such Grantor and the Collateral Agent mutatis mutandis.
2.8 Information. Each Grantor (a) assumes all responsibility for being and keeping itself informed of the financial condition and assets of any other Guarantor, and of all other circumstances bearing upon the risk of nonpayment of the Guaranteed Obligations and the nature, scope and extent of the risks that such Grantor assumes and incurs hereunder, and (b) agrees that none of the Collateral Agent or the other Secured Parties will have any duty to advise such Grantor of information known to it or any of them regarding such circumstances or risks.
SECTION 3. GRANT OF SECURITY INTEREST
3.1 Grant of Security Interests. Each Grantor hereby grants to the Collateral Agent, for the ratable benefit of the Secured Parties, a security interest in all of the following property now owned or at any time hereafter acquired or created by such Grantor or in which such Grantor now has or at any time in the future may acquire any right, title or interest (collectively, the Collateral), as collateral security for the prompt and complete payment and performance when due (whether at the stated maturity, by acceleration or otherwise) of the Secured Obligations:
(a) all Accounts;
(b) all Chattel Paper;
(c) all cash and Cash Equivalents;
(d) all Deposit Accounts, Securities Accounts and Commodity Accounts;
(e) all Documents;
(f) all Equipment;
(g) all Fixtures;
(h) all General Intangibles;
(i) all Goods not covered by the other clauses of this Section 3;
(j) all Instruments, including the Pledged Notes;
(k) all Pledged Stock;
(l) all Intellectual Property;
(m) all Inventory;
(n) all Investment Property;
(o) all Letters of Credit and Letter-of-Credit Rights;
(p) all Commercial Tort Claims described on Schedule 5 and on any supplement thereto received by the Collateral Agent;
(q) all other tangible and intangible personal property not otherwise described above;
(r) all books and records pertaining to the Collateral; and
(s) to the extent not otherwise included, all Proceeds, Supporting Obligations and products of any of the Collateral and products of any and all of the foregoing and all collateral security and guarantees given by any Person with respect to any of the foregoing;
provided, that notwithstanding any of the other provisions set forth in this Section 3.1, this Agreement shall not constitute a grant of a security interest in any Excluded Assets and the Excluded Assets shall be excluded from the definition of Collateral.
SECTION 4. REPRESENTATIONS AND WARRANTIES
To induce the Lenders and the other Secured Parties to enter into the Credit Agreement and extend credit to the Borrower, each Grantor hereby represents and warrants to the Collateral Agent and each other Secured Party and, with respect to Section 4.1, each Lender:
4.1 Representations in Credit Agreement. The representations and warranties set forth in Article III of the Credit Agreement to the extent they refer to a Grantor or to the Loan Documents to which such Grantor is a party, each of which is hereby incorporated herein by reference, are true and correct in all material respects (or, in the case of any such representation or warranty already qualified by materiality, in all respects), and the Collateral Agent and each other Secured Party shall be entitled to rely on each of them as if they were fully set forth herein; provided, that each reference in each such representation and warranty to the Borrowers knowledge shall, for the purposes of this Section 4.1, be deemed to be a reference to such Grantors knowledge.
4.2 Title; No Other Liens. Except as otherwise permitted under Section 6.02 of the Credit Agreement, such Grantor owns or has rights in each item of the Collateral pledged by it hereunder free and clear of any and all Liens. Except as otherwise permitted under Section 6.02 of the Credit Agreement, no financing statement or other public notice with respect to all or any part of the Collateral is on file or of record in any public office except financing statements that have been filed without the consent of the Grantor.
4.3 Names; Jurisdiction of Organization; Chief Executive Office. On the date hereof, such Grantors full and correct legal name, jurisdiction of organization and identification number from the jurisdiction of organization (if any) are specified on Schedule 3. Except as set forth on Schedule 3, no Grantor has changed its name, jurisdiction of organization, chief executive office or sole place of business or its corporate structure in any way (e.g., by merger, consolidation, change in corporate form or otherwise) and has not done business under any other name, in each case, within the past five years. On the date hereof, such Grantors books and records concerning the Collateral are kept at the locations designated on Schedule 3.
4.4 Pledged Securities. On the date hereof, the shares of Pledged Stock pledged by such Grantor hereunder:
(a) have been duly authorized, validly issued and are fully paid and non-assessable, to the extent such concepts are applicable; and
(b) constitute all the issued and outstanding shares of all classes of the Voting Stock of each Issuer owned by such Grantor or (x) in the case of the Voting Stock of any Excluded Subsidiary, 65% of the outstanding Voting Stock and (y) in the case of shares of the non-voting Equity Interests of an Excluded Subsidiary, 100% of such issued and outstanding shares of each such Excluded Subsidiary.
4.5 Pledged Notes. Schedule 2 sets forth a complete and correct list of all promissory notes (other than any held in a Securities Account listed on Schedule 6) held by any Grantor on the date hereof with a principal amount in excess of $2,500,000.
4.6 Intellectual Property.
(a) Schedule 4(a) lists all registered or applied for United States Intellectual Property owned by such Grantor in its own name on the date hereof.
(b) Schedule 4(b) sets forth all IP Licenses under which a Grantor is an exclusive licensee or licensor on the date hereof except as either would not reasonably be expected to have a Material Adverse Effect or the failure of which to maintain would not reasonably be expected to have a Material Adverse Effect.
(c) On the Closing Date, the Intellectual Property set forth on Schedule 4(a) is owned by the Grantor specified thereon and is, to the relevant Grantors knowledge, (i) valid, in full force and effect, subsisting and unexpired and (ii) insofar as it is registered Intellectual Property, enforceable. The consummation of the Transactions or any Permitted Acquisition shall not result in a breach or default of any material IP License, and none of the following shall materially limit or impair the ownership, use, validity or enforceability of, or any rights of such Grantor in, any Intellectual Property.
4.7 Commercial Tort Claims. To the knowledge of such Grantor, the only Commercial Tort Claims of any Grantor in an amount reasonably estimated to exceed $2,500,000 existing on the date hereof (regardless of whether the defendant or other material facts can be determined and regardless of whether such Commercial Tort Claim has been asserted, threatened or has otherwise been made known to the obligee thereof or whether litigation has been commenced for such claims) are those listed on Schedule 5, which sets forth such information separately for each Grantor in a manner that reasonably identifies each such Commercial Tort Claim.
4.8 Deposit Accounts; Securities Accounts and Commodity Accounts. Schedule 6 sets forth a complete and correct list of all Deposit Accounts, Securities Accounts and Commodity Accounts of any
Grantor on the date hereof. Each Control Agreement is effective (or will be when executed) to establish the Collateral Agents control (for purposes of the UCC) of the Collateral subject thereto.
4.9 Specific Collateral. None of the Collateral is, or is Proceeds or products of any (a) farm products, (b) as-extracted collateral or (c) timber to be cut.
4.10 Perfection and Priority. Except as set forth on Schedule 7 and as permitted pursuant to Section 5.16 of the Credit Agreement, all actions by each Grantor required hereunder to protect and perfect the Lien granted hereunder on the Collateral have been duly taken.
4.11 Enforcement. No Permit, notice to or filing with any Governmental Authority or any other Person or any consent from any Person is required for the exercise by the Collateral Agent of its rights provided for in this Agreement or the enforcement of remedies in respect of a material portion of the Collateral pursuant to this Agreement, including the transfer of a material portion of the Collateral, except as may be required in connection with any approvals that may be required to be obtained from any bailees or landlords to collect the Collateral.
SECTION 5. COVENANTS
Until all Obligations shall have been indefeasibly paid in full in cash, each Grantor hereby covenants and agrees to the Collateral Agent and each other Secured Party that:
5.1 Covenants in Credit Agreement. To the extent applicable, each Grantor shall take, or shall refrain from taking, as the case may be, each action that is necessary to be taken or not taken, as the case may be, so that no Default or Event of Default is caused by the failure to take such action or to refrain from taking such action by such Grantor or any of its Subsidiaries.
5.2 Investment Property. (a) [Reserved].
(b) To the extent any Pledged Stock (i) constitutes interests in any limited liability company or limited partnership controlled now or in the future by any Grantor and (ii) is a Security within the meaning of Article 8 of the UCC and is governed by Article 8 of the UCC, such interest shall be certificated and each such interest shall at all times hereafter continue to be such a security and represented by such certificate. Each Grantor further acknowledges and agrees that with respect to any interest in any limited liability company or limited partnership controlled now or in the future by such Grantor and pledged hereunder that is not a Security within the meaning of Article 8 of the UCC, such Grantor shall at no time elect to treat any such interest as a Security within the meaning of Article 8 of the UCC, nor shall such interest be represented by a certificate, unless such Grantor provides prior written notification to the Collateral Agent of such election and such interest is thereafter represented by a certificate that is promptly delivered to the Collateral Agent pursuant to the terms hereof.
(c) To the extent that any Pledged Security is a Certificated Security or an Instrument or is an Uncertificated Security that becomes a Certificated Security or Instrument, the applicable Grantor shall promptly deliver such certificates or Instruments evidencing such Pledged Securities to the Collateral Agent together with stock powers or indorsements thereof reasonably satisfactory to the Collateral Agent.
5.3 Commercial Tort Claims. If any Grantor shall at any time after the date of this Agreement acquire or become the beneficiary of a Commercial Tort Claim in an amount reasonably estimated to exceed $2,500,000 (regardless of whether the defendant or other material facts can be determined and regardless of whether such Commercial Tort Claim has been asserted, threatened or has otherwise been made known to the obligee thereof or whether litigation has been commenced for such
claims), such Grantor shall promptly provide the Collateral Agent with a supplement to Schedule 5 hereto describing the details thereof in a manner that reasonably identifies such Commercial Tort Claim and which is otherwise reasonably satisfactory to the Collateral Agent, and hereby authorizes the filing of additional financing statements or amendments to existing financing statements describing such Commercial Tort Claim, and agrees to do such other acts or things reasonably deemed necessary or desirable by the Collateral Agent to provide a perfected security interest in any such Commercial Tort Claim. Any supplement to Schedule 5 delivered pursuant to this Section 5.3 shall, after the receipt thereof by the Collateral Agent, become part of Schedule 5 for all purposes hereunder other than in respect of representations and warranties made prior to the date of such receipt.
5.4 Maintenance of Perfected Security Interest; Defense of Claims. Each Grantor agrees to promptly, and in any case within five Business Days after the occurrence thereof, notify the Collateral Agent of any change (i) in its legal name, (ii) in the type of organization or corporate structure of any Grantor, (iii) in the jurisdiction of organization of any Grantor, (iv) in the location (as determined in accordance with Section 9-307 of the UCC) of any Grantor or (v) in the organizational identification number of any Grantor. Each Grantor agrees not to effect or permit any change referred to in the preceding sentence unless all filings have been made under the UCC or other applicable Law that are required in order for the Collateral Agent to continue at all times following such change to have a valid, legal and perfected (to the extent perfection of the security interest in such property is required by the terms hereof), security interest (subject only to Liens permitted under the Credit Agreement and having priority by operation of applicable Law) in the Collateral for its benefit and the benefit of the other Secured Parties.
5.5 Delivery of Instruments and Tangible Chattel Paper and Control of Investment Property, Letter-of-Credit Rights and Electronic Chattel Paper. (a) If any amount payable under or in connection with any Collateral owned by such Grantor shall be or become evidenced by an Instrument or Tangible Chattel Paper other than such Instrument delivered in accordance with Section 5.2(c) and in the possession of the Collateral Agent, such Grantor shall, at the request of the Collateral Agent, immediately deliver such Instrument or Tangible Chattel Paper to the Collateral Agent, duly indorsed in a manner satisfactory to the Collateral Agent; provided, that this requirement shall not apply to any interests in such Instruments or Tangible Chattel Paper which have an individual value of $2,500,000 or less.
(b) Such Grantor shall not grant control (as defined in Article 9-106 of the UCC) over any Investment Property to any Person other than the Collateral Agent.
(c) If such Grantor is or becomes the beneficiary of letters of credit that are not Supporting Obligations with respect to any Collateral, such Grantor shall promptly, and in any event within five Business Days after becoming a beneficiary, notify the Collateral Agent thereof and if requested by the Collateral Agent, enter into a Contractual Obligation with the Collateral Agent, the issuers of such letters of credit or any nominated person with respect to the Letter-of-Credit Rights under such letters of credit; provided, that this requirement shall not apply to any such letters of credit which have an individual value of $2,500,000 or less. Such Contractual Obligation shall assign such Letter-of-Credit Rights to the Collateral Agent and such assignment shall be sufficient to grant control for the purposes of Section 9-107 of the UCC (or any similar section under any equivalent UCC). Such Contractual Obligation shall also direct all payments thereunder to a Deposit Account subject to a Control Agreement in compliance with Section 5.6. The provisions of the Contractual Obligation shall be in form and substance reasonably satisfactory to the Collateral Agent.
(d) If any amount payable under or in connection with any Collateral owned by such Grantor shall be or become evidenced by Electronic Chattel Paper, such Grantor shall take all steps necessary to grant the Collateral Agent control of all such Electronic Chattel Paper for the purposes of Section 9-105
of the UCC (or any similar section under any equivalent UCC) and all transferable records as defined in each of the Uniform Electronic Transactions Act and the Electronic Signatures in Global and National Commerce Act; provided, that this requirement shall not apply to any interests in such Electronic Chattel Paper which have an individual value of $2,500,000 or less.
5.6 Deposit Accounts, Securities Accounts and Commodity Accounts. Each Grantor agrees that:
(a) With respect to any Commodity Account, Deposit Account or Securities Account of such Grantor on the Closing Date other than any Excluded Account, it shall deliver on or prior to the date that is 120 days following the Closing Date (or such longer period as to which the Collateral Agent may consent in its sole discretion) to the Collateral Agent, an executed Control Agreement in form and substance satisfactory to the Collateral Agent which will provide the Collateral Agent with control (as defined in Section 9-104, 9-106 or 8-106 of the UCC, as applicable) with respect to all cash, Cash Equivalents and other Collateral on deposit or contained therein; and
(b) With respect to any Commodity Account, Deposit Account or Securities Account created, acquired, established or maintained by such Grantor after the Closing Date other than any Excluded Account, such Granter shall execute and deliver an executed Control Agreement with respect to such Deposit Account, Securities Account or Commodities Account to the Collateral Agent within 30 days of opening such account (or such longer period as the Collateral Agent may consent in its sole discretion).
5.7 Intellectual Property. Each Grantor agrees that:
(a) it shall not do any act or omit to do any act whereby any of the Intellectual Property which is material to the business of Grantor or which is of material value may lapse, be impaired, or become abandoned, dedicated to the public, or unenforceable, or which would adversely affect the validity, grant, or enforceability of the security interest granted therein;
(b) it shall, within 30 days after the creation or acquisition or exclusive license of any copyrightable work which is material to the business of Grantors (and at the request of the Collateral Agent assuming such Grantor has timely provided notice thereof to the Collateral Agent), apply to register the Copyright and, in the case of an exclusive IP License, record such license to such Copyright, in the United States Copyright Office;
(c) it shall (i) within 30 days after Grantor or any of its agents, employees, designees or licensees, filing, in the name of or for the benefit of Grantor, an application for the registration of any material Patent or Trademark with the United States Patent and Trademark Office or any foreign counterpart or (ii) within 30 days after such Grantor receives, as owner or exclusive licensee, a Copyright registration with the United States Copyright Office or any foreign counterpart, in any case which is material to the business of Grantors notify the Collateral Agent and upon request of the Collateral Agent, promptly execute and deliver documents as the Collateral Agent may reasonably request to evidence the Collateral Agents security interest in such Collateral;
(d) it shall promptly notify the Collateral Agent if it knows or has reason to know that any item of material Intellectual Property may become (i) abandoned or dedicated to the public or placed in the public domain, (ii) invalid or unenforceable, (iii) subject to any adverse determination or development (including the institution of proceedings) in any action or proceeding in the United States Patent and Trademark Office, the United States Copyright Office, any state registry, any foreign counterpart of the foregoing, or any court or (iv) be the subject of any reversion or termination rights;
(e) it shall not permit the inclusion in any contract to which it hereafter becomes a party of any provision that could or might in any way materially impair or prevent the creation of a security interest in, or the assignment of, such Grantors rights and interests in any material property included within the definitions of any Intellectual Property acquired under such contracts;
(f) in the event that any material Intellectual Property owned by or exclusively licensed to any Grantor is infringed, misappropriated, or diluted by a third party, such Grantor shall promptly take all commercially reasonable actions to stop such infringement, misappropriation, or dilution and protect its rights in such Intellectual Property including, but not limited to, the initiation of a suit for injunctive relief and to recover damages; and
(g) it shall take all steps reasonably necessary to protect the secrecy of all material Trade Secrets, including, without limitation, entering into confidentiality agreements with employees and consultants and labeling and restricting access to secret information and documents.
5.8 Maintenance of Perfected Security Interest; Further Documentation and Consents.
(a) No Grantor shall (i) use or permit any Collateral to be used unlawfully or in violation of any provision of any Loan Document, any Related Document, any material requirement of Law or any policy of insurance covering the Collateral or (ii) enter into any Contractual Obligation or undertaking restricting the right or ability of such Grantor or the Collateral Agent to transfer any Collateral if such restriction would reasonably be expected to have a Material Adverse Effect.
(b) Such Grantor shall maintain the security interest created by this Agreement as a perfected security interest and, if reasonably requested by the Collateral Agent, shall defend such security interest and such priority against the claims and demands of all Persons.
(c) Such Grantor shall furnish to the Collateral Agent from time to time statements and schedules further identifying and describing the Collateral and such other documents in connection with the Collateral as the Collateral Agent may reasonably request, all in reasonable detail and in form and substance reasonably satisfactory to the Collateral Agent.
(d) At any time and from time to time, upon the written request of the Collateral Agent, such Grantor shall, for the purpose of obtaining or preserving the full benefits of this Agreement and of the rights and powers herein granted, (i) promptly and duly execute and deliver, and have recorded, such further documents, including an authorization to file (or, as applicable, the filing) of any financing statement or amendment under the UCC (or other filings under similar requirements of Law) in effect in any jurisdiction with respect to the security interest created hereby and (ii) take such further action as the Collateral Agent may reasonably request, including using its commercially reasonable efforts to secure all approvals necessary or appropriate for the assignment to or for the benefit of the Collateral Agent of any Contractual Obligation held by such Grantor and to enforce the security interests granted hereunder.
SECTION 6. REMEDIAL PROVISIONS
6.1 Certain Matters Relating to Receivables.
(a) At any time after the occurrence and during the continuance of an Event of Default, upon the Collateral Agents reasonable request and at the expense of the relevant Grantor, such Grantor shall use commercially reasonable efforts to cause independent public accountants or others satisfactory to the Collateral Agent to furnish to the Collateral Agent reports showing reconciliations, aging and test verifications of, and trial balances for, the Receivables.
(b) If required by the Collateral Agent at any time after the occurrence and during the continuance of an Event of Default, any payments of Receivables, when collected by any Grantor, (i) shall be forthwith (and, in any event, within three Business Days) deposited by such Grantor in the exact form received, duly indorsed by such Grantor to the Collateral Agent if required, in a Collateral Account maintained under the sole dominion and control of the Collateral Agent, subject to withdrawal by the Collateral Agent for the account of the Collateral Agent and the other Secured Parties only as provided in Section 6.6 and (ii) until so turned over, shall be held by such Grantor in trust for the Collateral Agent and the other Secured Parties, segregated from other funds of such Grantor. Each such deposit of Proceeds of Receivables shall be accompanied by a report identifying in reasonable detail the nature and source of the payments included in the deposit.
(c) If an Event of Default has occurred and is continuing and at the Collateral Agents request, each Grantor shall deliver to the Collateral Agent all documents evidencing, and relating to, the agreements and transactions which gave rise to the Receivables, including, without limitation, all orders, invoices and shipping receipts.
6.2 Communications with Grantors; Grantors Remain Liable.
(a) Upon the request of the Collateral Agent at any time after the occurrence and during the continuance of an Event of Default, each Grantor shall notify obligors on the Receivables that such Receivables have been assigned to the Collateral Agent for the ratable benefit of the Collateral Agent and the other Secured Parties and that payments in respect of such Receivables shall be made directly to the Collateral Agent.
(b) Anything herein to the contrary notwithstanding, each Grantor shall remain liable under the Receivables (or any agreements giving rise thereto) to observe and perform all the conditions and obligations to be observed and performed by it thereunder, all in accordance with the terms of any agreement giving rise thereto. Neither the Collateral Agent nor any other Secured Party shall have any obligation or liability under any Receivable (or any agreement giving rise thereto) by reason of or arising out of this Agreement or the receipt by the Collateral Agent or any other Secured Party of any payment relating thereto, nor shall the Collateral Agent or any other Secured Party be obligated in any manner to perform any of the obligations of any Grantor under or pursuant to any Receivable (or any agreement giving rise thereto), to make any payment, to make any inquiry as to the nature or the sufficiency of any payment received by it or as to the sufficiency of any performance by any party thereunder, to present or file any claim, to take any action to enforce any performance or to collect the payment of any amounts which may have been assigned to it or to which it may be entitled at any time or times.
6.3 Pledged Securities; Dividends. (a) Unless an Event of Default shall have occurred and be continuing and the Collateral Agent shall have given notice to the relevant Grantor of the Collateral Agents intent to exercise its corresponding rights pursuant to paragraph (b) below, each Grantor shall be permitted to receive all cash dividends paid in respect of the Pledged Stock and all payments made in respect of the Pledged Notes to the extent permitted in the Credit Agreement, and to exercise all voting and corporate or other organizational rights with respect to the Pledged Securities.
(b) If an Event of Default shall have occurred and be continuing and the Collateral Agent has given notice to the relevant Grantor or Grantors of its intent to exercise such rights, (i) unless otherwise provided in the Credit Agreement, the Collateral Agent shall have the right to receive any and all cash dividends, payments or other Proceeds paid in respect of the Pledged Securities of such Grantor or Grantors and make application thereof to the Secured Obligations in the order set forth in Section 6.6 and (ii) any or all of the Pledged Securities of such Grantor or Grantors shall be registered in the name of the Collateral Agent or its nominee, and the Collateral Agent or its nominee may thereafter exercise (x) all
voting, corporate and other rights pertaining to such Pledged Securities at any meeting of shareholders of the relevant Issuer or Issuers or otherwise and (y) any and all rights of conversion, exchange and subscription and any other rights, privileges or options pertaining to such Pledged Securities as if it were the absolute owner thereof (including, without limitation, the right to exchange at its discretion any and all of the Pledged Securities upon the merger, consolidation, reorganization, recapitalization or other fundamental change in the corporate structure of any Issuer, or upon the exercise by any Grantor or the Collateral Agent of any right, privilege or option pertaining to such Pledged Securities, and in connection therewith, the right to deposit and deliver any and all of the Pledged Securities with any committee, depositary, transfer agent, registrar or other designated agency upon such terms and conditions as the Collateral Agent may determine), all without liability except to account for property actually received by it, but the Collateral Agent shall have no duty to any Grantor to exercise any such right, privilege or option and shall not be responsible for any failure to do so or delay in so doing unless the Collateral Agent has given notice of its intent to exercise as set forth above.
(c) Each Grantor hereby authorizes and instructs each Issuer of any Pledged Securities pledged by such Grantor hereunder to comply with any instruction received by it from the Collateral Agent in writing that (i) states that an Event of Default has occurred and is continuing and (ii) is otherwise in accordance with the terms of this Agreement, without any other or further instructions from such Grantor, and each Grantor agrees that each Issuer shall be fully protected in so complying.
(d) After all Events of Default have been cured or waived in accordance with the provisions of the Credit Agreement, and so long as the Secured Obligations shall not have been accelerated, (i) each Grantor shall have the right to exercise the voting, corporate and other rights pertaining to such Pledged Securities that it would have otherwise been entitled to and receive all cash dividends, payments, or other Proceeds paid in respect of the Pledged Securities which it would be authorized to receive and retain, in each case, pursuant to paragraph (a) above, and, to the extent necessary, the Collateral Agent shall deliver a proxy in favor of such Grantor evidencing the same and (ii) to the extent that the Collateral Agent has exercised its rights under paragraph (b)(ii), the Collateral Agent shall, promptly after the written request of the applicable Grantor, cause such Pledged Securities to be registered in the name of such Grantor to the extent such Grantor or its nominees holds an interest in such Collateral at such time.
6.4 Intellectual Property.
(a) Without limiting any rights of the Collateral Agent under the Loan Documents, for the purpose of enabling the Collateral Agent to exercise its rights and remedies under this Section 6, solely after an Event of Default has occurred and is continuing and during such time as the Collateral Agent shall be lawfully entitled to exercise such rights and remedies, and at no other time or for no other purpose, each Grantor hereby grants to the Collateral Agent, to the extent permitted by Law, an irrevocable, non-exclusive IP License (exercisable without payment of royalty or other compensation to such Grantor) under the Intellectual Property now owned or hereafter acquired or created by such Grantor, wherever the same may be located; provided, that nothing in this Section 6.4 shall require a Grantor to grant any IP License that is prohibited by any Law or is prohibited by, or constitutes a breach or default under or results in the termination of or gives rise to any right of acceleration, modification or cancellation under any Contractual Obligation with respect to such Property; provided, further, that such IP Licenses to be granted hereunder with respect to Trademarks shall be subject to the maintenance of quality standards with respect to the goods and services on which such Trademarks are used sufficient to preserve the validity of such Trademarks.
(b) Notwithstanding anything contained herein to the contrary, but subject to the provisions of Section 6.05 of the Credit Agreement that limit the rights of the Grantors to dispose of their Property and subject to the Collateral Agents exercise of its rights and remedies under this Section 6, the Grantors will
be permitted to exploit, use, enjoy, protect, license, sublicense, assign, sell, dispose of or take other actions with respect to their Intellectual Property in the ordinary course of the business of the Grantors. The Grantors shall not (and shall not cause their licensees to) do any act or omit to do any act whereby any Intellectual Property that is necessary for the operations of such Grantors business may become invalidated or otherwise impaired. In furtherance of the foregoing, so long as no Event of Default shall have occurred and be continuing, the Collateral Agent shall from time to time, upon the request of the respective Grantor, execute and deliver any instruments, certificates or other documents, in the form so requested, that such Grantor shall have certified are appropriate in its judgment to allow it to take any action permitted above (including relinquishment of the IP License provided pursuant to paragraph (a) above as to any specific Intellectual Property). Further, upon the payment in full in cash of all of the Obligations (other than contingent or indemnification obligations not then asserted or due) or earlier expiration of this Agreement or release of the Collateral, the IP License granted pursuant to paragraph (a) above shall terminate and become null and void. Notwithstanding the foregoing, the exercise of rights and remedies under this Section 6 by the Collateral Agent shall not terminate the rights of the holders of any licenses or sublicenses theretofore granted by the Grantors in accordance with the first sentence of this paragraph (b).
6.5 Proceeds to be Turned Over To Collateral Agent. If an Event of Default shall have occurred and be continuing, all Proceeds received by any Grantor consisting of cash, checks and other near-cash items shall be held by such Grantor in trust for the Collateral Agent and the other Secured Parties, segregated from other funds of such Grantor, and shall, promptly upon receipt by such Grantor, be turned over to the Collateral Agent in the exact form received by such Grantor (duly indorsed by such Grantor to the Collateral Agent, if required). All Proceeds received by the Collateral Agent hereunder shall be held by the Collateral Agent in a Collateral Account maintained under its sole dominion and control. All Proceeds while held by the Collateral Agent in a Collateral Account (or by such Grantor in trust for the Collateral Agent and the other Secured Parties) shall continue to be held as collateral security for all of the Secured Obligations and shall not constitute payment thereof until applied as provided in Section 6.7.
6.6 Application of Proceeds. If an Event of Default shall have occurred and be continuing, and the Loans shall have been accelerated pursuant to Article VII of the Credit Agreement, the Collateral Agent shall apply all or any part of Proceeds constituting Collateral and any proceeds of the Guarantee set forth in Section 2, after deducting all reasonable costs and expenses of every kind incurred in connection therewith or incidental to the care or safekeeping of any Collateral or otherwise reasonably relating to the Collateral or the rights of the Collateral Agent and any other Secured Party hereunder (including any other amounts owed to the Collateral Agent or such other Secured Party under any other Loan Document), in payment of the Secured Obligations, and shall make any such application in accordance with Section 7.02 of the Credit Agreement, and only after such application and after the payment by the Collateral Agent of any other amount required by any requirement of Law, need the Collateral Agent account for the surplus, if any, to any Grantor.
6.7 Code and Other Remedies. (a) UCC Remedies. If an Event of Default shall have occurred and be continuing, the Collateral Agent, on behalf of itself, the Collateral Agent and the other Secured Parties, may exercise, in addition to all other rights and remedies granted to them in this Agreement and in any other instrument or agreement securing, evidencing or relating to the Secured Obligations, all rights and remedies of a secured party under the UCC or any other applicable Law.
(b) Disposition of Collateral. Without limiting the generality of the foregoing, if an Event of Default shall have occurred and be continuing, the Collateral Agent, without demand of performance or other demand, presentment, protest, advertisement or notice of any kind (except any notice required by law referred to below or notices otherwise provided in the Loan Documents) to or upon any Grantor or any other Person (all and each of which demands, defenses, advertisements and notices are hereby waived
unless otherwise provided in the Loan Documents), may in such circumstances forthwith collect, receive, appropriate and realize upon the Collateral, or any part thereof, and/or may forthwith sell, lease, assign, give option or options to purchase, or otherwise dispose of and deliver the Collateral or any part thereof (or contract to do any of the foregoing), in one or more parcels at public or private sale or sales, at any exchange, brokers board or office of the Collateral Agent or any Lender or elsewhere upon such terms and conditions as it may deem advisable and at such prices as it may deem best, for cash or on credit or for future delivery without assumption of any credit risk. Any Agent or any Lender shall have the right upon any such public sale or sales, and, to the extent permitted by law, upon any such private sale or sales, to purchase the whole or any part of the Collateral so sold, free of any right or equity of redemption in any Grantor, which right or equity is hereby waived and released.
(c) Management of Collateral. Each Grantor further agrees, if an Event of Default shall have occurred and be continuing, (i) at the Collateral Agents request, to assemble the Collateral and make it available to the Collateral Agent at places which the Collateral Agent shall reasonably select, whether at such Grantors premises or elsewhere, (ii) without limiting the foregoing, the Collateral Agent also has the right to require that each Grantor store and keep any Collateral pending further action by the Collateral Agent and, while any such Collateral is so stored or kept, provide such guards and maintenance services as shall be reasonably necessary to protect the same and to preserve and maintain such Collateral in good condition, (iii) until the Collateral Agent is able to transfer any Collateral, the Collateral Agent shall have the right to hold or use such Collateral to the extent that it deems appropriate for the purpose of preserving the Collateral or its value or for any other purpose deemed appropriate by the Collateral Agent and (iv) the Collateral Agent may, if it so elects, seek the appointment of a receiver or keeper to take possession of any Collateral and to enforce any of the Collateral Agents remedies (for the benefit of the Secured Parties), with respect to such appointment without prior notice or hearing as to such appointment. Notwithstanding the foregoing, the Collateral Agents rights under this paragraph (c) are subject to the applicable limitations under federal Law. The Collateral Agent shall not have any obligation to any Grantor to maintain or preserve the rights of any Grantor as against third parties with respect to any Collateral while such Collateral is in the possession of the Collateral Agent.
(d) Application of Proceeds. The Collateral Agent shall apply the net proceeds of any action taken by it pursuant to this Section 6.7, after deducting all reasonable and documented out-of-pocket costs and expenses of every kind actually incurred in connection therewith or incidental to the care or safekeeping of any of the Collateral or in any way relating to the Collateral or the rights of the Collateral Agent hereunder (including any other amounts owed to the Collateral Agent under any other Loan Document), including, without limitation, reasonable attorneys fees and disbursements of one firm of counsel, one firm of local counsel in each applicable jurisdiction, and in case of an actual or potential conflict, one firm of special counsel, to the payment in whole or in part of the Secured Obligations, in such order as the Collateral Agent may elect, and only after such application and after the payment by the Collateral Agent of any other amount required by any provision of Law, including, without limitation, Section 9-615(a)(3) of the UCC, need the Collateral Agent account for the surplus, if any, to any Grantor. If any notice of a proposed sale or other disposition of Collateral shall be required by law, such notice shall be deemed reasonable and proper if given at least 10 Business Days before such sale or other disposition.
(e) Direct Obligation. Neither the Collateral Agent nor any other Secured Party shall be required to make any demand upon, or pursue or exhaust any right or remedy against, any Grantor, any other Loan Party or any other Person with respect to the payment of the Obligations or to pursue or exhaust any right or remedy with respect to any Collateral therefor or any direct or indirect guarantee thereof. All of the rights and remedies of the Collateral Agent and any other Secured Party under any Loan Document shall be cumulative, may be exercised individually or concurrently and not exclusive of any other rights or remedies provided by any applicable requirement of Law. To the extent it may
lawfully do so, each Grantor absolutely and irrevocably waives and relinquishes the benefit and advantage of, and covenants not to assert against the Collateral Agent, any Lender or any other Secured Party, any valuation, stay, appraisement, extension, redemption or similar laws and any and all rights or defenses it may have as a surety, now or hereafter existing, arising out of the exercise by them of any rights hereunder. If any notice of a proposed sale or other disposition of Collateral shall be required by law, such notice shall be deemed reasonable and proper if given at least 10 Business Days before such sale or other disposition.
(f) Commercially Reasonable. To the extent that applicable requirements of Law impose duties on the Collateral Agent to exercise remedies in a commercially reasonable manner, each Grantor acknowledges and agrees that it is not commercially unreasonable for the Collateral Agent to do any of the following:
(i) fail to incur significant costs, expenses or other Liabilities reasonably deemed as such by the Collateral Agent to prepare any Collateral for disposition or otherwise to complete raw material or work in process into finished goods or other finished products for disposition;
(ii) fail to obtain Permits, or other consents, for access to any Collateral to transfer or for the collection or transfer of any Collateral, or, if not required by other requirements of Law, fail to obtain Permits or other consents for the collection or disposition of any Collateral;
(iii) fail to exercise remedies against account debtors or other Persons obligated on any Collateral or to remove Liens on any Collateral or to remove any adverse claims against any Collateral;
(iv) advertise dispositions of any Collateral through publications or media of general circulation, whether or not such Collateral is of a specialized nature or to contact other Persons, whether or not in the same business as any Grantor, for expressions of interest in acquiring any such Collateral;
(v) exercise collection remedies against account debtors and other Persons obligated on any Collateral, directly or through the use of collection agencies or other collection specialists, hire one or more professional auctioneers to assist in the disposition of any Collateral, whether or not such Collateral is of a specialized nature or, to the extent deemed appropriate by the Collateral Agent, obtain the services of other brokers, investment bankers, consultants and other professionals to assist the Collateral Agent in the collection or disposition of any Collateral, or utilize Internet sites that provide for the auction of assets of the types included in the Collateral or that have the reasonable capacity of doing so, or that match buyers and sellers of assets to dispose of any Collateral;
(vi) dispose of assets in wholesale rather than retail markets;
(vii) disclaim disposition warranties, such as title, possession or quiet enjoyment; or
(viii) purchase insurance or credit enhancements to insure the Collateral Agent against risks of loss, collection or disposition of any Collateral or to provide to the Collateral Agent a guaranteed return from the collection or disposition of any Collateral.
Each Grantor acknowledges that the purpose of this Section 6.7 is to provide a non-exhaustive list of actions or omissions that are commercially reasonable when exercising remedies against any Collateral and that other actions or omissions by the Secured Parties shall not be deemed commercially
unreasonable solely on account of not being indicated in this Section 6.7. Without limitation upon the foregoing, nothing contained in this Section 6.7 shall be construed to grant any rights to any Grantor or to impose any duties on the Collateral Agent that would not have been granted or imposed by this Agreement or by applicable requirements of Law in the absence of this Section 6.7.
6.8 Private Sales. Each Grantor recognizes that the Collateral Agent may be unable to effect a public sale of any or all the Pledged Stock, by reason of certain prohibitions contained in the Securities Act and applicable state securities laws or otherwise, and may be compelled to resort to one or more private sales thereof to a restricted group of purchasers which will be obliged to agree, among other things, to acquire such securities for their own account for investment and not with a view to the distribution or resale thereof. Each Grantor acknowledges and agrees that any such private sale may result in prices and other terms less favorable than if such sale were a public sale and, notwithstanding such circumstances, agrees that any such private sale shall be deemed to have been made in a commercially reasonable manner. The Collateral Agent shall be under no obligation to delay a sale of any of the Pledged Stock for the period of time necessary to permit the Issuer thereof to register such securities for public sale under the Securities Act, or under applicable state securities laws, even if such Issuer would agree to do so.
6.9 Deficiency. Each Grantor shall remain liable for any deficiency if the proceeds of any sale or other disposition of the Collateral are insufficient to pay the Secured Obligations and the reasonable fees and disbursements of any attorneys employed by the Collateral Agent to collect such deficiency.
SECTION 7. THE COLLATERAL AGENT
7.1 Collateral Agents Appointment as Attorney-in-Fact, etc.
(a) Each Grantor hereby irrevocably constitutes and appoints the Collateral Agent and any officer or agent thereof, with full power of substitution, as its true and lawful attorney-in-fact with full irrevocable power and authority in the place and stead of such Grantor and in the name of such Grantor or in its own name, for the purpose of carrying out the terms of this Agreement, to take any and all appropriate action and to execute any and all documents and instruments which may be necessary or desirable to accomplish the purposes of this Agreement, and, without limiting the generality of the foregoing, each Grantor hereby gives the Collateral Agent the power and right, on behalf of such Grantor, without notice to or assent by such Grantor, to do any or all of the following after written notice by the Collateral Agent of its intent to do so:
(i) in the name of such Grantor or its own name, or otherwise, take possession of and indorse and collect any checks, drafts, notes, acceptances or other instruments for the payment of moneys due under any Receivable or with respect to any other Collateral and file any claim or take any other action or proceeding in any court of law or equity or otherwise deemed appropriate by the Collateral Agent for the purpose of collecting any and all such moneys due under any Receivable or with respect to any other Collateral whenever payable;
(ii) in the case of any Intellectual Property, execute and deliver, and have recorded, any and all agreements, instruments, documents and papers as the Collateral Agent may request to evidence and/or perfect the Secured Parties security interest in such Intellectual Property and the goodwill and general intangibles of such Grantor relating thereto or represented thereby;
(iii) pay or discharge taxes and Liens levied or placed on or threatened against the Collateral, effect any repairs or provide any insurance called for by the terms of this Agreement and pay all or any part of the premiums therefor and the costs thereof;
(iv) execute, in connection with any sale provided for in Section 6.7 or 6.8, any indorsements, assignments or other instruments of conveyance or transfer with respect to the Collateral; and
(v) (1) direct any party liable for any payment under any of the Collateral to make payment of any and all moneys due or to become due thereunder directly to the Collateral Agent or as the Collateral Agent shall direct; (2) ask or demand for, collect, and receive payment of and receipt for, any and all moneys, claims and other amounts due or to become due at any time in respect of or arising out of any Collateral; (3) sign and indorse any invoices, freight or express bills, bills of lading, storage or warehouse receipts, drafts against debtors, assignments, verifications, notices and other documents in connection with any of the Collateral; (4) commence and prosecute any suits, actions or proceedings at law or in equity in any court of competent jurisdiction to collect the Collateral or any portion thereof and to enforce any other right in respect of any Collateral; (5) defend any suit, action or proceeding brought against such Grantor with respect to any Collateral; (6) settle, compromise or adjust any such suit, action or proceeding and, in connection therewith, give such discharges or releases as the Collateral Agent may deem appropriate; (7) assign any Copyright, Patent or Trademark (along with the goodwill of the business to which any such Copyright, Patent or Trademark pertains), throughout the world for such term or terms, on such conditions, and in such manner, as the Collateral Agent shall in its sole discretion determine; and (8) generally, sell, transfer, pledge and make any agreement with respect to or otherwise deal with any of the Collateral as fully and completely as though the Collateral Agent were the absolute owner thereof for all purposes, and do, at the Collateral Agents option and such Grantors expense, at any time, or from time to time, all acts and things which the Collateral Agent deems necessary to protect, preserve or realize upon the Secured Parties security interests therein and to effect the intent of this Agreement, all as fully and effectively as such Grantor might do;
provided, that anything in this Section 7.1(a) to the contrary notwithstanding, the Collateral Agent agrees that it will not exercise any rights under the power of attorney provided for in this Section 7.1(a) unless an Event of Default shall have occurred and be continuing.
(b) If any Grantor fails to perform or comply with any of its agreements contained herein, the Collateral Agent, at its option, but without any obligation so to do, may give such Grantor written notice of such failure to perform or comply and if such Grantor fails to perform or comply within five Business Days of receiving such notice (or if the Collateral Agent reasonably determines that irreparable harm to the Collateral or to the security interest of the Secured Parties hereunder could result prior to the end of such five Business Day period), then the Collateral Agent may perform or comply, or otherwise cause performance or compliance, with such agreement.
(c) Each Grantor hereby ratifies all that said attorneys shall lawfully do or cause to be done by virtue hereof. All powers, authorizations and agencies contained in this Agreement are coupled with an interest and are irrevocable until this Agreement is terminated and the security interests created hereby are released.
7.2 Duty of Collateral Agent. To the extent permitted by law, the Collateral Agents sole duty with respect to the custody, safekeeping and physical preservation of the Collateral in its possession, under Section 9-207 of the UCC or otherwise, shall be to deal with it in the same manner as the Collateral
Agent deals with similar property for its own account. None of the Collateral Agent, any other Secured Party or any of their respective officers, directors, employees or agents shall be liable for failure to demand, collect or realize upon any of the Collateral or for any delay in doing so or shall be under any obligation to sell or otherwise dispose of any Collateral upon the request of any Grantor or any other Person or to take any other action whatsoever with regard to the Collateral or any part thereof. The powers conferred on the Collateral Agent and the other Secured Parties hereunder are solely to protect the Collateral Agents and the other Secured Parties interests in the Collateral and shall not impose any duty upon the Collateral Agent or any other Secured Party to exercise any such powers. The Collateral Agent and the other Secured Parties shall be accountable only for amounts that they actually receive as a result of the exercise of such powers, and neither they nor any of their officers, directors, employees or agents shall be responsible to any Grantor for any act or failure to act hereunder, except for their own gross negligence, bad faith or willful misconduct or that of their directors, officers, employees or agents. In addition, the Collateral Agent shall not be liable or responsible for any loss or damage to any Collateral, or for any diminution in the value thereof, by reason of the act or omission of any warehousemen, carrier, forwarding agency, consignee or other bailee if such Person has been selected by the Collateral Agent.
7.3 Authorization of Financing Statements. Pursuant to any applicable law, each Grantor authorizes the Collateral Agent to file or record financing statements and other filing or recording documents or instruments with respect to the Collateral without the signature of such Grantor in such form and in such offices as the Collateral Agent reasonably determines appropriate to perfect the security interests of the Collateral Agent (for the benefit of the Secured Parties) under this Agreement. Each Grantor authorizes the Collateral Agent to use the collateral description all personal property or any similar phrase in any such financing statements. Notwithstanding anything to the contrary contained herein or in applicable law, the Collateral Agent shall have no responsibility for (i) preparing, recording, filing, re-recording, or re-filing any financing statement, perfection statement, continuation statement or other instrument in any public office or for otherwise ensuring the perfection or maintenance of any security interest granted pursuant to, or contemplated by, this Agreement (ii) taking any necessary steps to preserve rights against any parties with respect to any Collateral or (iii) taking any action to protect against any diminution in value of the Collateral.
7.4 Authority of Collateral Agent. Each Grantor acknowledges that the rights and responsibilities of the Collateral Agent under this Agreement with respect to any action taken by the Collateral Agent or the exercise or non-exercise by the Collateral Agent of any option, voting right, request, judgment or other right or remedy provided for herein or resulting or arising out of this Agreement shall, as among the Collateral Agent and the other Secured Parties, be governed by the Credit Agreement and by such other agreements with respect thereto as may exist from time to time among them, but, as between the Collateral Agent and the Grantors, the Collateral Agent shall be conclusively presumed to be acting as agent for the Secured Parties with full and valid authority so to act or refrain from acting, and no Grantor shall be under any obligation, or entitlement, to make any inquiry respecting such authority.
SECTION 8. MISCELLANEOUS
8.1 Amendments in Writing. None of the terms or provisions of this Agreement may be waived, amended, supplemented or otherwise modified except in accordance with Section 9.02 of the Credit Agreement; provided, that annexes to this Agreement may be supplemented (but no existing provisions may be modified and no Collateral may be released) through Assumption Agreements, in substantially the form of Annex I duly executed by the Collateral Agent and the applicable Additional Grantor.
8.2 Notices. All notices, requests and demands to or upon the Collateral Agent or any Grantor hereunder shall be effected in the manner provided for in Section 9.01 of the Credit Agreement; provided that any such notice, request or demand to or upon any Subsidiary Guarantor shall be addressed to such Subsidiary Guarantor at its notice address set forth on Schedule 1.
8.3 No Waiver by Course of Conduct; Cumulative Remedies. Neither the Collateral Agent nor any other Secured Party shall by any act (except by a written instrument pursuant to Section 8.1 above), delay, indulgence, omission or otherwise be deemed to have waived any right or remedy hereunder or to have acquiesced in any Default or Event of Default. No failure to exercise, nor any delay in exercising, on the part of the Collateral Agent or any other Secured Party, any right, power or privilege hereunder shall operate as a waiver thereof. No single or partial exercise of any right, power or privilege hereunder shall preclude any other or further exercise thereof or the exercise of any other right, power or privilege. A waiver by the Collateral Agent or any other Secured Party of any right or remedy hereunder on any one occasion shall not be construed as a bar to any right or remedy which the Collateral Agent or such other Secured Party would otherwise have on any future occasion. The rights and remedies herein provided are cumulative, may be exercised singly or concurrently and are not exclusive of any other rights or remedies provided by law. By its acceptance of the benefits of this Agreement, each Secured Party agrees that the Loan Documents may be enforced only by the Collateral Agent as provided for in the Credit Agreement, and that no Secured Party shall have any right individually to enforce or seek to enforce this Agreement or to realize upon any Collateral or other security given to secure the payment and performance of the Obligations.
8.4 Enforcement Expenses; Indemnification. Each Grantor, jointly and severally, agrees to pay, indemnify and to save the Collateral Agent and the other Secured Parties harmless from, any and all liabilities, obligations, losses, damages, penalties, actions, judgments, suits, costs, expenses or disbursements of any kind or nature whatsoever with respect to the execution, delivery, enforcement, performance and administration of this Agreement to the extent the Borrower would be required to do so pursuant to Section 9.03 (taking into account the limitations set forth therein) of the Credit Agreement. The agreements in this Section 8.4 shall survive repayment of the Obligations and all other amounts payable under the Credit Agreement and the other Loan Documents and the resignation or removal of the Collateral Agreement.
8.5 Successors and Assigns. This Agreement shall be binding upon the successors and assigns of each Grantor and shall inure to the benefit of the Collateral Agent and the other Secured Parties and their successors and permitted assigns; provided, that no Grantor may assign, transfer or delegate any of its rights or obligations under this Agreement without the prior written consent of the Collateral Agent (it being understood that Sales and fundamental changes permitted under the Credit Agreement shall not be subject to this proviso).
8.6 Set-Off. Each Grantor hereby irrevocably authorizes the Collateral Agent, each other Secured Party and each of their respective Affiliates at any time and from time to time, in each case, while an Event of Default shall have occurred and be continuing, without notice to such Grantor or any other Grantor, any such notice being expressly waived by each Grantor, to the extent permitted by applicable law, upon any amount becoming due and payable by each Grantor (whether at the stated maturity, by acceleration or otherwise after the expiration of any applicable grace periods) to set-off and appropriate and apply against such amount any and all deposits (general or special, time or demand, provisional or final but excluding trust accounts), in any currency, and any other credits, indebtedness or claims, in any currency, in each case whether direct or indirect, absolute or contingent, matured or unmatured, at any time held or owing by the Collateral Agent or such other Secured Party or any of their respective Affiliates to or for the credit or the account of such Grantor. Each of the Collateral Agent and each other Secured Party shall notify such Grantor promptly of any such set-off made by it or its
respective Affiliates and the application made by it of the proceeds thereof, provided that the failure to give such notice shall not affect the validity of such set-off and application.
8.7 Counterparts. This Agreement may be executed by one or more of the parties to this Agreement on any number of separate counterparts (including by telecopy or other electronic means), and all of said counterparts taken together shall be deemed to constitute one and the same instrument.
8.8 Severability. Any provision of this Agreement which is prohibited or unenforceable in any jurisdiction shall, as to such jurisdiction, be ineffective to the extent of such prohibition or unenforceability without invalidating the remaining provisions hereof, and any such prohibition or unenforceability in any jurisdiction shall not invalidate or render unenforceable such provision in any other jurisdiction.
8.9 Section Headings. The section headings used in this Agreement are for convenience of reference only and are not to affect the construction hereof or be taken into consideration in the interpretation hereof.
8.10 Integration. This Agreement and the other Loan Documents represent the agreement of the Grantors, the Collateral Agent and the other Secured Parties with respect to the subject matter hereof and thereof.
8.11 Governing Law; Jurisdiction; Etc.
(a) Governing Law. This Agreement and any claims, controversy, dispute or cause of action (whether in contract or tort or otherwise) based upon, arising out of or relating to this Agreement and the transactions contemplated hereby and thereby shall be governed by, and construed in accordance with, the Law of the State of New York.
(b) Jurisdiction. Each Grantor irrevocably and unconditionally agrees that it will not commence any action, litigation or proceeding of any kind or description, whether in law or equity, whether in contract or tort or otherwise, against the Collateral Agent, any other Secured Party, any Related Party of any of the foregoing, in any way relating to this Agreement or the transactions relating hereto or thereto, in a forum other than the courts of the State of New York sitting in New York County, and of the United States District Court of the Southern District of New York, and any appellate court from any thereof, and each of the parties hereto irrevocably and unconditionally submits to the exclusive jurisdiction of such courts and agrees that all claims in respect of any such action, litigation or proceeding may be heard and determined in such New York State court or, to the fullest extent permitted by applicable Law, in such Federal court. Each of the parties hereto agrees that a final judgment in any such action, litigation or proceeding shall be conclusive and may be enforced in other jurisdictions by suit on the judgment or in any other manner provided by Law. Nothing in this Agreement or in any other Loan Document shall affect any right that the Collateral Agent or any other Secured Party may otherwise have to bring any action or proceeding relating to this Agreement or any other Loan Document against the Borrower or its properties in the courts of any jurisdiction.
(c) Waiver of Venue. Each Grantor irrevocably and unconditionally waives, to the fullest extent permitted by applicable Law, any objection that it may now or hereafter have to the laying of venue of any action or proceeding arising out of or relating to this Agreement in any court referred to in paragraph (b) above. Each of the parties hereto hereby irrevocably waives, to the fullest extent permitted by applicable Law, the defense of an inconvenient forum to the maintenance of such action or proceeding in any such court.
(d) Service of Process. Each party hereto irrevocably and unconditionally consents to service of process in the manner provided for notices in Section 9.01 of the Credit Agreement. Nothing in this Agreement will affect the right of any party hereto to serve process in any other manner permitted by applicable Law.
(e) Special Damages. Each party hereto irrevocably and unconditionally waives, to the maximum extent not prohibited by law, any right it may have to claim or recover in any legal action or proceeding referred to in this paragraph (e) any special, exemplary, punitive or consequential damages; provided, that nothing in this sentence shall limit the indemnification obligations of any Guarantor with respect to special, indirect, consequential or punitive damages arising in a third party claim against an Indemnitee.
8.12 Acknowledgements. Each Grantor hereby acknowledges that:
(a) it has been advised by counsel in the negotiation, execution and delivery of this Agreement and the other Loan Documents to which it is a party;
(b) neither the Collateral Agent nor any other Secured Party has any fiduciary relationship with or duty to any Grantor arising out of or in connection with this Agreement or any of the other Loan Documents, and the relationship between the Grantors, on the one hand, and the Collateral Agent and the other Secured Parties, on the other hand, in connection herewith or therewith is solely that of debtor and creditor; and
(c) no joint venture is created hereby or by the other Loan Documents or otherwise exists by virtue of the transactions contemplated hereby among the Collateral Agent and the other Secured Parties or among the Grantors and the Collateral Agent and the other Secured Parties.
8.13 Additional Grantors. Each Subsidiary of the Borrower that is required to become a party to this Agreement pursuant to Section 5.14 of the Credit Agreement shall become a Grantor for all purposes of this Agreement upon execution and delivery by such Subsidiary of an Assumption Agreement in the form of Annex I hereto (each such Subsidiary, an Additional Grantor).
8.14 Releases.
(a) At such time as the Revolving Loans and the other Obligations (other than contingent or indemnification obligations not then asserted or due) shall have been indefeasibly paid in full in cash, the Collateral Agent shall take such actions as shall be required to release its security interest in all Collateral, and to release all guarantee obligations provided for in any Loan Document and this Agreement and all obligations (other than those expressly stated to survive such termination) of the Collateral Agent and each Grantor hereunder shall terminate, all without delivery of any instrument or performance of any act by any party, and all rights to the Collateral shall revert to the Grantors. At the request and sole expense of any Grantor following any such termination, the Collateral Agent shall assign, transfer and deliver to such Grantor any Collateral held by the Collateral Agent hereunder, and execute and deliver to such Grantor such documents as such Grantor shall reasonably request to evidence such termination.
(b) If any of the Collateral shall be sold, transferred or otherwise Sold by any Grantor in a transaction permitted by the Credit Agreement other than to another Grantor, then (i) the security interest in any such Collateral shall be automatically released to the extent that such Sale does not (x) pertain to Voting Stock of the Borrower or any Subsidiary Guarantor or other Collateral in the possession of the Collateral Agent or (y) involve the filing of amendments to or termination of any financing statement or mortgage in favor of the Collateral Agent on behalf of the Secured Parties and (ii) the Collateral Agent, at
the request and sole expense of such Grantor, shall execute and deliver to such Grantor all releases or other documents reasonably necessary or desirable for the release of the Liens created hereby on such Collateral. At the request and sole expense of the Borrower, a Subsidiary Guarantor shall be released from its obligations hereunder in the event that all the Voting Stock of such Subsidiary Guarantor shall be sold, transferred or otherwise Sold in a transaction permitted by the Credit Agreement and the Collateral Agent will assign, transfer and deliver to the Borrower Agent such of the applicable Collateral concerning such Voting Stock as may then be in possession of the Collateral Agent.
8.15 WAIVER OF JURY TRIAL. EACH PARTY HERETO HEREBY IRREVOCABLY WAIVES, TO THE FULLEST EXTENT PERMITTED BY APPLICABLE LAW, ANY RIGHT IT MAY HAVE TO A TRIAL BY JURY IN ANY LEGAL PROCEEDING DIRECTLY OR INDIRECTLY ARISING OUT OF OR RELATING TO THIS AGREEMENT OR THE TRANSACTIONS CONTEMPLATED HEREBY OR THEREBY (WHETHER BASED ON CONTRACT, TORT OR ANY OTHER THEORY). EACH PARTY HERETO (A) CERTIFIES THAT NO REPRESENTATIVE, AGENT OR ATTORNEY OF ANY OTHER PERSON HAS REPRESENTED, EXPRESSLY OR OTHERWISE, THAT SUCH OTHER PERSON WOULD NOT, IN THE EVENT OF LITIGATION, SEEK TO ENFORCE THE FOREGOING WAIVER AND (B) ACKNOWLEDGES THAT IT AND THE OTHER PARTIES HERETO HAVE BEEN INDUCED TO ENTER INTO THIS AGREEMENT AND THE OTHER LOAN DOCUMENTS BY, AMONG OTHER THINGS, THE MUTUAL WAIVERS AND CERTIFICATIONS IN THIS SECTION.
8.16 Reinstatement. Each Grantor agrees that, if any payment made by any Loan Party or other Person and applied to the Secured Obligations is at any time annulled, avoided, set aside, rescinded, invalidated, declared to be fraudulent or preferential or otherwise required to be refunded or repaid, or the Proceeds of any Collateral are required to be returned by any Secured Party to such Loan Party, its estate, trustee, receiver or any other party, including any Grantor, under any bankruptcy law, state or federal law, common law or equitable cause, then, to the extent of such payment or repayment, any Lien or other Collateral securing such liability shall be and remain in full force and effect, as fully as if such payment had never been made. If, prior to any of the foregoing, any Lien or other Collateral securing such Grantors liability hereunder shall have been released or terminated by virtue of the foregoing, such Lien or other Collateral shall be reinstated in full force and effect and such prior release, termination, cancellation or surrender shall not diminish, release, discharge, impair or otherwise affect the obligations of any such Grantor in respect of any Lien or other Collateral securing such obligation or the amount of such payment.
8.17 Independent Obligations. The obligations of each Grantor hereunder are independent of and separate from the Secured Obligations. If any Secured Obligation is not paid when due, or upon the occurrence and continuance of any Event of Default, the Collateral Agent may, at its sole election, proceed directly and at once, without notice, against any Grantor and any Collateral to collect and recover the full amount of any Secured Obligation then due, without first proceeding against any other Grantor, any other Loan Party or any other Collateral and without first joining any other Grantor or any other Loan Party in any proceeding.
8.18 Intercreditor Agreement Governs. Notwithstanding anything herein to the contrary, the lien and security interest granted to the Collateral Agent pursuant to this Agreement and the exercise of any right or remedy by the Collateral Agent hereunder are subject to the provisions of the Intercreditor Agreement. In the event of any conflict between the terms of the Intercreditor Agreement and this Agreement, the terms of the Intercreditor Agreement shall govern.
(Signature Pages Follow)
IN WITNESS WHEREOF, each of the undersigned has caused this Agreement to be duly executed and delivered as of the date first above written.
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SFX ENTERTAINMENT, INC. | |
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430 ACQUISITION LLC | |
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430R ACQUISITION LLC | |
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BEATPORT JAPAN, LLC | |
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BEATPORT, LLC | |
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EZ FESTIVALS, LLC | |
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ID&T/SFX MYSTERYLAND LLC | |
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ID&T/SFX NORTH AMERICA LLC | |
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ID&T/SFX Q-DANCE LLC | |
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ID&T/SFX SENSATION LLC | |
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ID&T/SFX TOMORROWWORLD LLC | |
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MADE EVENT, LLC | |
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MICHIGAN JJ HOLDINGS LLC | |
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PITA I LLC | |
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PITA III LLC | |
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SFX ACQUISITION, LLC | |
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SFX EDM HOLDINGS CORPORATION | |
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SFX EX IP LLC | |
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SFX EXPERIENCE, LLC | |
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SFX INTERMEDIATE HOLDCO I LLC | |
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SFX INTERMEDIATE HOLDCO II LLC | |
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SFX INTERNATIONAL, INC. | |
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SFX IP LLC | |
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SFX MADE IP LLC | |
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SFX MARKETING LLC | |
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SFX NIGHTLIFE TELEVISION LLC | |
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SFX-320 LINCOLN OPERATING LLC | |
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SFX-CAMEO OPERATING LLC | |
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SFX-DISCO INTERMEDIATE HOLDCO LLC | |
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SFX-DISCO OPERATING LLC | |
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SFXE IP LLC | |
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SFX-HUDSON LLC | |
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SFX-HUKA OPERATING LLC | |
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SFX-IDT N.A. HOLDING II LLC | |
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SFX-IDT N.A. HOLDING LLC | |
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SFX-LIC OPERATING LLC | |
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SFX-MOKAI OPERATING LLC | |
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SFX-NIGHTLIFE OPERATING LLC | |
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SFX-OPIUM GROUP OPERATING LLC | |
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SFX-REACT OPERATING LLC | |
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SFX-STAR ISLAND OPERATING LLC | |
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SFX-VMX HOLDING LLC | |
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SFX-VMX OPERATING LLC | |
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STEREOSONIC US IP LLC | |
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By |
/s/ Richard Rosenstein |
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Name: |
Richard Rosenstein |
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Title: |
Chief Financial Officer |
First Lien Guarantee and Collateral Agreement
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BARCLAYS BANK PLC, as Collateral Agent | |
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By: |
/s/ Craig Malloy |
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Name: |
Craig Malloy |
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Title: |
Director |
First Lien Guarantee and Collateral Agreement
Annex I to
First Lien Guarantee and Collateral Agreement
ASSUMPTION AGREEMENT, dated as of [·], 201[·], made by [·] (the Additional Grantor), in favor of Barclays Bank PLC (Barclays), as Collateral Agent (in such capacity, the Collateral Agent) for the banks and other financial institutions or entities (the Secured Parties) from time to time parties to the Credit Agreement referred to below. All capitalized terms not defined herein shall have the meanings ascribed to them in such Credit Agreement.
W I T N E S S E T H :
WHEREAS, SFX Entertainment, Inc., a Delaware corporation (the Borrower), the Lenders party thereto from time to time, and Barclays, as Administrative Agent have entered into that certain Credit Agreement, dated as of February 7, 2014 (as amended, restated, supplemented waived and/or otherwise modified from time to time, the Credit Agreement);
WHEREAS, in connection with the Credit Agreement, the Borrower and certain of its Subsidiaries (other than the Additional Grantor) have entered into the First Lien Guarantee and Collateral Agreement, dated as of February 7, 2014 (as amended, restated, supplemented, waived and/or otherwise modified from time to time, the First Lien Guarantee and Collateral Agreement) in favor of the Collateral Agent for the benefit of the Secured Parties;
WHEREAS, the Credit Agreement requires the Additional Grantor to become a party to the First Lien Guarantee and Collateral Agreement; and
WHEREAS, the Additional Grantor has agreed to execute and deliver this Assumption Agreement in order to become a party to the First Lien Guarantee and Collateral Agreement;
NOW, THEREFORE, IT IS AGREED:
1. First Lien Guarantee and Collateral Agreement. By executing and delivering this Assumption Agreement, the Additional Grantor, as provided in Section 8.13 of the First Lien Guarantee and Collateral Agreement, hereby becomes a party to the First Lien Guarantee and Collateral Agreement as a Grantor thereunder with the same force and effect as if originally named therein as a Grantor and, without limiting the generality of the foregoing, hereby expressly assumes all obligations and liabilities of a Grantor thereunder. The information set forth in Annex 1-A hereto is hereby added to the information set forth in the Schedules to the First Lien Guarantee and Collateral Agreement. The Additional Grantor hereby represents and warrants, to the extent applicable, that each of the representations and warranties contained in Section 4 of the First Lien Guarantee and Collateral Agreement is true and correct in all material respects on and as of the date hereof (after giving effect to this Assumption Agreement) as if made on and as of such date except to the extent that any representation and warranty relates to an earlier date, in which case such representation and warranty shall be true and correct in all material respects as of such earlier date.
2. GOVERNING LAW. THIS ASSUMPTION AGREEMENT SHALL BE GOVERNED BY, AND CONSTRUED AND INTERPRETED IN ACCORDANCE WITH, THE LAW OF THE STATE OF NEW YORK.
IN WITNESS WHEREOF, the undersigned has caused this Assumption Agreement to be duly executed and delivered as of the date first above written.
Annex I-A to
Assumption Agreement
Supplement to Schedule 1
Supplement to Schedule 2
Supplement to Schedule 3
Supplement to Schedule 4(a)
Supplement to Schedule 4(b)
Supplement to Schedule 5
Supplement to Schedule 6
Supplement to Schedule 7
Exhibit 10.68
EXECUTION VERSION
FIRST LIEN PATENT SECURITY AGREEMENT
FIRST LIEN PATENT SECURITY AGREEMENT (this Agreement), dated as of February 7, 2014, made by the Persons listed on the signature page hereto (the Grantor), in favor of Barclays Bank PLC, as collateral agent for the Lenders (in such capacity, together with its successors in such capacity, the Collateral Agent).
W I T N E S S E T H:
WHEREAS, pursuant to the First Lien Guarantee and Collateral Agreement, dated as of the date hereof (the Guarantee and Collateral Agreement), among SFX Entertainment, Inc. (the Borrower), the grantors party thereto, and the Collateral Agent, each of the Grantors is required to execute and deliver this Agreement; and
WHEREAS, capitalized terms used herein and not otherwise defined herein shall have the meanings assigned to such terms in the Guarantee and Collateral Agreement and the rules of construction and other interpretive provisions specified in Section 1.02 of the Credit Agreement shall apply to this Agreement.
Accordingly, the Grantors and the Collateral Agent agree as follows:
SECTION 1. Grant of Security. Each Grantor hereby grants to the Collateral Agent for the ratable benefit of the Secured Parties a continuing security interest in all of such Grantors right, title and interest in or to any and all of the following assets and properties now owned or at any time hereafter acquired by such Grantor and wherever located or in which such Grantor now has or at any time in the future may acquire any right, title or interest (collectively, the Collateral):
(a) all of its Patents, including, without limitation, each United States Patent or patent application referred to on Schedule A hereto; and
(b) all proceeds of and revenues from the foregoing, including, without limitation, all proceeds of and revenues from any claim by such Grantor against third parties for past, present or future unfair competition with, or violation of intellectual property rights in connection with or injury to, or infringement or dilution of, any Patent owned by such Grantor (including, without limitation, any United States Patent identified in Schedule A hereto).
SECTION 2. Security for Obligations. The grant of a security interest in the Collateral by each Grantor under this Agreement secures the payment and performance of all Obligations of each Grantor now or hereafter existing under the Guarantee and Collateral Agreement.
SECTION 3. Recordation. Each Grantor authorizes and requests that the Commissioner for Patents at the United States Patent and Trademark Office record this Agreement.
SECTION 4. Grants, Rights and Remedies. This Agreement has been entered into in conjunction with the provisions of the Guarantee and Collateral Agreement. Each Grantor does hereby acknowledge and confirm that the grant of the security interest hereunder to, and the rights and remedies of, the Collateral Agent with respect to the Collateral are more fully set forth in the Guarantee and Collateral Agreement, the terms and provisions of which are incorporated herein by reference as if fully set forth herein. In the event of any conflict between the terms of this Agreement and the terms of the Guarantee and Collateral Agreement, the terms of the Guarantee and Collateral Agreement shall govern.
SECTION 5. Governing Law. This Agreement and any claims, controversy, dispute or cause of action (whether in contract or tort or otherwise) based upon, arising out of or relating to this Agreement and the transactions contemplated hereby and thereby shall be governed by, and construed in accordance with, the Law of the State of New York.
SECTION 6. Severability. Any provision of this Agreement which is prohibited or unenforceable in any jurisdiction shall, as to such jurisdiction, be ineffective to the extent of such prohibition or unenforceability without invalidating the remaining provisions hereof, and any such prohibition or unenforceability in any jurisdiction shall not invalidate or render unenforceable such provision in any other jurisdiction.
[Remainder of the page intentionally left blank]
IN WITNESS WHEREOF, each Grantor has duly executed this Agreement as of the day and year first above written.
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BEATPORT, LLC | |
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By: |
/s/ Richard Rosenstein |
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Name: Richard Rosenstein |
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Title: Chief Financial Officer |
First Lien Patent Security Agreement
ACKNOWLEDGED AND AGREED:
BARCLAYS BANK PLC, as Collateral Agent
By: |
/s/ Craig Malloy |
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Name: Craig Malloy |
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Title: Director |
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First Lien Patent Security Agreement
SCHEDULE A
TO
PATENT SECURITY AGREEMENT
Patents
TITLE |
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APP. NO. AND |
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STATUS |
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INVENTOR(S) |
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OWNER |
Systems And Methods For Selling Sounds |
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61/613,730 |
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Pending |
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Matthew Thomas |
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BEATPORT, LLC |
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Systems And Methods For Selling Sounds |
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13802585 |
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Pending |
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Matthew Thomas |
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BEATPORT, LLC |
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DJ Stem Systems and Methods |
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13802548 |
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Pending |
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Michael Peter Siciliano |
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BEATPORT, LLC |
Schedule to Patent Security Agreement
Exhibit 10.69
EXECUTION VERSION
FIRST LIEN TRADEMARK SECURITY AGREEMENT
FIRST LIEN TRADEMARK SECURITY AGREEMENT (this Agreement), dated as of February 7, 2014, made by each of the Persons listed on the signature pages hereto (collectively, the Grantors), in favor of Barclays Bank PLC, as Collateral Agent for the Lenders (in such capacity, together with its successors in such capacity, the Collateral Agent).
W I T N E S S E T H:
WHEREAS, pursuant to the First Lien Guarantee and Collateral Agreement, dated as of the date hereof (the Guarantee and Collateral Agreement), among SFX Entertainment, Inc. (the Borrower), the grantors party thereto, and the Collateral Agent, the Grantors are required to execute and deliver this Agreement; and
WHEREAS, capitalized terms used herein and not otherwise defined herein shall have the meanings assigned to such terms in the Guarantee and Collateral Agreement and the rules of construction and other interpretive provisions specified in Section 1.02 of the Credit Agreement shall apply to this Agreement.
Accordingly, the Grantors and the Collateral Agent agree as follows:
SECTION 1. Grant of Security. Each Grantor hereby grants to the Collateral Agent for the ratable benefit of the Secured Parties a continuing security interest in all of such Grantors right, title and interest in or to any and all of the following assets and properties now owned or at any time hereafter acquired by such Grantor and wherever located or in which such Grantor now has or at any time in the future may acquire any right, title or interest (collectively, the Collateral):
(a) each Trademark, including, without limitation, each registered and applied for United States Trademark and all goodwill associated with or symbolized by each Trademark listed on Schedule A hereto; and
(b) all proceeds of and revenues from the foregoing, including, without limitation, all proceeds of and revenues from any claim by such Grantor against third parties for past, present or future unfair competition with, or violation of intellectual property rights in connection with or injury to, or infringement or dilution of, any Trademark owned by such Grantor (including, without limitation, any United States Trademark identified in Schedule A hereto).
SECTION 2. Security for Obligations. The grant of a security interest in the Collateral by each Grantor under this Agreement secures the payment and performance of all Obligations of such Grantor now or hereafter existing under the Guarantee and Collateral Agreement.
SECTION 3. Recordation. Each Grantor authorizes and requests that the Commissioner for Trademarks at the United States Patent and Trademark Office record this Agreement.
SECTION 4. Grants, Rights and Remedies. This Agreement has been entered into in conjunction with the provisions of the Guarantee and Collateral Agreement. Each Grantor does hereby acknowledge and confirm that the grant of the security interest hereunder to, and the rights and remedies of, the Collateral Agent with respect to the Collateral are more fully set forth in the Guarantee and Collateral Agreement, the terms and provisions of which are incorporated herein by reference as if fully set forth herein. In the event of any conflict between the terms of this Agreement and the terms of the Guarantee and Collateral Agreement, the terms of the Guarantee and Collateral Agreement shall govern.
SECTION 5. Counterparts. This Agreement may be executed by one or more of the parties to this Agreement on any number of separate counterparts (including by telecopy or other electronic means), and all of said counterparts taken together shall be deemed to constitute one and the same instrument.
SECTION 6. Governing Law. This Agreement and any claims, controversy, dispute or cause of action (whether in contract or tort or otherwise) based upon, arising out of or relating to this Agreement and the transactions contemplated hereby and thereby shall be governed by, and construed in accordance with, the Law of the State of New York.
SECTION 7. Severability. Any provision of this Agreement which is prohibited or unenforceable in any jurisdiction shall, as to such jurisdiction, be ineffective to the extent of such prohibition or unenforceability without invalidating the remaining provisions hereof, and any such prohibition or unenforceability in any jurisdiction shall not invalidate or render unenforceable such provision in any other jurisdiction.
[Remainder of the page intentionally left blank]
IN WITNESS WHEREOF, each Grantor has duly executed this Agreement as of the day and year first above written.
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SFX-LIC OPERATING LLC | ||
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| |
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| |
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By: |
/s/ Richard Rosenstein | |
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|
Name: |
Richard Rosenstein |
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Title: |
Chief Financial Officer |
First Lien Trademark Security Agreement
|
BEATPORT, LLC | |
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| |
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| |
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/s/ Richard Rosenstein | |
|
Name: |
Richard Rosenstein |
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Title: |
Chief Financial Officer |
First Lien Trademark Security Agreement
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MADE EVENT, LLC | ||
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| |
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| |
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By: |
/s/ Richard Rosenstein | |
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|
Name: |
Richard Rosenstein |
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|
Title: |
Chief Financial Officer |
First Lien Trademark Security Agreement
|
SFX MARKETING LLC | ||
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| |
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| |
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By: |
/s/ Richard Rosenstein | |
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|
Name: |
Richard Rosenstein |
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|
Title: |
Chief Financial Officer |
First Lien Trademark Security Agreement
ACKNOLEDGED AND AGREED: |
| ||
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| ||
BARCLAYS BANK PLC, as Collateral Agent |
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By |
/s/ Craig Malloy |
| |
|
Name: |
Craig Malloy |
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|
Title: |
Director |
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First Lien Trademark Security Agreement
SCHEDULE A
TO
TRADEMARK SECURITY AGREEMENT
U.S. Federal Trademark Registrations
TRADEMARK |
|
APPLICATION |
|
REGISTRATION |
|
STATUS |
|
OWNER |
WORLDS LARGEST PAINT PARTY |
|
85/240,789 |
|
4,051,072 |
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Registered |
|
SFX-LIC Operating LLC |
|
|
|
|
|
|
|
|
|
STATE OF EMERGENCY |
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85/601,379 |
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4,253,706 |
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Registered |
|
SFX-LIC Operating LLC |
|
|
|
|
|
|
|
|
|
CANT STOP THE STATE |
|
85/601,397 |
|
4,253,707 |
|
Registered |
|
SFX-LIC Operating LLC |
|
|
|
|
|
|
|
|
|
RMF |
|
85/601,420 |
|
4,253,709 |
|
Registered |
|
SFX-LIC Operating LLC |
|
|
|
|
|
|
|
|
|
LIFE IN COLOR |
|
85/638,822 |
|
4,429,570 |
|
Registered |
|
SFX-LIC Operating LLC |
U.S. Federal Trademark Applications
TRADEMARK |
|
APPLICATION |
|
OWNER |
DANCEGIVING SAVE ROOM FOR THE MUSIC |
|
85/479,845 |
|
SFX-LIC Operating LLC |
|
|
|
|
|
I AM THANKFUL FOR MUSIC |
|
85/479,913 |
|
SFX-LIC Operating LLC |
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|
|
|
|
RIVALRY MUSIC FESTIVAL |
|
85/601,439 |
|
SFX-LIC Operating LLC |
|
|
|
|
|
BEYONDGLOW |
|
85/613,814 |
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SFX-LIC Operating LLC |
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|
|
|
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PAINTOPIA |
|
85/943,432 |
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SFX-LIC Operating LLC |
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|
|
|
|
LIFE IN COLOR |
|
85/884,181 |
|
SFX-LIC Operating LLC |
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|
|
|
|
WORLDS LARGEST PAINT PARTY |
|
85/884,227 |
|
SFX-LIC Operating LLC |
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|
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|
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I GO HARD IN THE PAINT |
|
86/029,879 |
|
SFX-LIC Operating LLC |
U.S. Federal Trademark Registrations
TRADEMARK |
|
APPLICATION |
|
REGISTRATION |
|
STATUS |
|
OWNER |
BASEWARE |
|
78/753,029 |
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3,158,076 |
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Registered |
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BEATPORT, LLC |
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|
|
|
|
|
|
|
|
BEATBOT |
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85/485860 |
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4,185,671 |
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Registered |
|
BEATPORT, LLC |
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|
|
|
|
|
|
|
|
BEATPORT |
|
76/518,151 |
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2,985,842 |
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Registered |
|
BEATPORT, LLC |
|
|
|
|
|
|
|
|
|
BEATPORT MIX |
|
85/152,799 |
|
4,040,816 |
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Registered |
|
BEATPORT, LLC |
|
|
|
|
|
|
|
|
|
BEATPORT MIX & |
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85/153,116 |
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4,040,817 |
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Registered |
|
BEATPORT, LLC |
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|
|
|
|
|
|
|
|
BEATPORT SOUNDS |
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85/396,844 |
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4,293,035 |
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Registered |
|
BEATPORT, LLC |
|
|
|
|
|
|
|
|
|
BEATPORTAL & |
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77/198,205 |
|
3,425,679 |
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Registered |
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BEATPORT, LLC |
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|
|
|
|
|
|
|
|
BEATSOURCE |
|
77/20118,769 |
|
3,524,861 |
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Registered |
|
BEATPORT, LLC |
TRADEMARK |
|
APPLICATION |
|
REGISTRATION |
|
STATUS |
|
OWNER | ||||
GET DOWN Logo |
|
78/755,864 |
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3,210,719 |
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Registered |
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BEATPORT, LLC | ||||
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|
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|
|
|
|
|
| ||||
LOG ON. GET DOWN. |
|
76/627,972 |
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3,058,549 |
|
Registered |
|
BEATPORT, LLC | ||||
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|
|
|
|
|
|
|
| ||||
MASHBOX |
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85/343,701 |
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4,211,125 |
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Registered |
|
BEATPORT, LLC | ||||
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|
|
|
|
|
|
|
| ||||
MY BEATPORT |
|
85/332,533 |
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4,163,489 |
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Registered |
|
BEATPORT, LLC | ||||
|
|
|
|
|
|
|
|
| ||||
PLAY WITH MUSIC |
|
85/204,693 |
|
4,119,425 |
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Registered |
|
BEATPORT, LLC | ||||
|
|
|
|
|
|
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|
| ||||
PROMOONE |
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78/737,889 |
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3,145,372 |
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Registered |
|
BEATPORT, LLC | ||||
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|
|
|
|
|
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|
| ||||
SOUNDMAIL & |
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77/157,863 |
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3,380,595 |
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Registered |
|
BEATPORT, LLC | ||||
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|
|
|
|
|
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|
| ||||
PLAY WITH MUSIC |
|
85/605,758 |
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4,451,997 |
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Registered |
|
BEATPORT, LLC | ||||
U.S. Federal Trademark Applications
TRADEMARK |
|
APPLICATION |
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OWNER |
BEATPORT |
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85/711,666 |
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BEATPORT, LLC |
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BASEWARE DISTRIBUTION |
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85/422,724 |
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BEATPORT, LLC |
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BEATPORT PRO |
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85/455,915 |
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BEATPORT, LLC |
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BEATPORT (stylized) & Design |
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85/920,281 |
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BEATPORT, LLC |
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BEATPORT LOUNGE |
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85/959,355 |
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BEATPORT, LLC |
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BEATPORT PLAY (stylized) & Design |
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85/919,987 |
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BEATPORT, LLC |
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SOUNDS TO SAMPLE |
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85/954,236 |
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BEATPORT, LLC |
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WE KNOW THE FEELING |
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86/060,932 |
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BEATPORT, LLC |
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BEATPORT AMPLIFY |
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86/080,058 |
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BEATPORT, LLC |
U.S. Federal Trademark Registrations
TRADEMARK |
|
APPLICATION |
|
REGISTRATION |
|
STATUS |
|
OWNER |
ELECTRIC ZOO (word mark) |
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85/936,625 |
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4,447,907 |
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Registered |
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MADE EVENT, LLC |
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|
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|
|
|
|
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ELECTRIC ZOO (design) |
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77/711,013 |
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3,747,742 |
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Registered |
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MADE EVENT, LLC |
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Made (design) |
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77/565,155 |
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3,605,821 |
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Registered |
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MADE EVENT, LLC |
U.S. Federal Trademark Applications
TRADEMARK |
|
APPLICATION |
|
OWNER |
MADE (word mark) |
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85/922,887 |
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MADE EVENT, LLC |
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ELECTRIC ZOO (word mark) |
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85/923,072 |
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MADE EVENT, LLC |
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ELECTRIC ZOO (word mark) |
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85/925,263 |
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MADE EVENT, LLC |
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MADE (word mark) |
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85/936,974 |
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MADE EVENT, LLC |
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ELECTRIC BOO |
|
86/144,558 |
|
MADE EVENT, LLC |
TRADEMARK |
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APPLICATION |
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OWNER |
SUNDAY SCHOOL |
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86/144,746 |
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MADE EVENT, LLC |
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SUNDAY SCHOOL |
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86/144,819 |
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MADE EVENT, LLC |
U.S. Federal Trademark Registrations
TRADEMARK |
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APPLICATION |
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REGISTRATION |
|
STATUS |
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OWNER |
FAME HOUSE |
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85/571,597 |
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4,241,401 |
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Registered |
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SFX MARKETING LLC |
Exhibit 10.70
EXECUTION VERSION
SECOND LIEN COLLATERAL AGREEMENT
made by
EACH OF THE GRANTORS PARTY HERETO
in favor of
U.S. BANK NATIONAL ASSOCIATION,
as Collateral Agent
Dated as of February 4, 2014
TABLE OF CONTENTS
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Page |
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SECTION 1. |
DEFINED TERMS |
1 |
|
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1.1 |
Definitions |
1 |
1.2 |
Other Definitional Provisions |
5 |
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SECTION 2. |
[Reserved] |
5 |
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SECTION 3. |
GRANT OF SECURITY INTEREST |
5 |
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3.1 |
Grant of Security Interests |
5 |
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SECTION 4. |
REPRESENTATIONS AND WARRANTIES |
6 |
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4.1 |
[Reserved] |
6 |
4.2 |
Title; No Other Liens |
6 |
4.3 |
Names; Jurisdiction of Organization; Chief Executive Office |
6 |
4.4 |
Pledged Securities |
6 |
4.5 |
Pledged Notes |
7 |
4.6 |
Intellectual Property |
7 |
4.7 |
Commercial Tort Claims |
7 |
4.8 |
Deposit Accounts; Securities Accounts and Commodity Accounts |
7 |
4.9 |
Specific Collateral |
7 |
4.10 |
Perfection and Priority |
7 |
4.11 |
Enforcement |
7 |
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|
SECTION 5. |
COVENANTS |
8 |
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|
5.1 |
[Reserved] |
8 |
5.2 |
Investment Property |
8 |
5.3 |
Commercial Tort Claims |
8 |
5.4 |
Maintenance of Perfected Security Interest; Defense of Claims |
8 |
5.5 |
Delivery of Instruments and Tangible Chattel Paper and Control of Investment Property, Letter-of-Credit Rights and Electronic Chattel Paper |
9 |
5.6 |
[Reserved]: |
9 |
5.7 |
Intellectual Property |
9 |
5.8 |
Maintenance of Perfected Security Interest; Further Documentation and Consents |
10 |
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SECTION 6. |
REMEDIAL PROVISIONS |
11 |
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|
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6.1 |
Certain Matters Relating to Receivables |
11 |
6.2 |
Communications with Grantors; Grantors Remain Liable |
12 |
6.3 |
Pledged Securities; Dividends |
12 |
6.4 |
Intellectual Property |
13 |
6.5 |
Proceeds to be Turned Over To Collateral Agent |
14 |
6.6 |
Application of Proceeds |
14 |
6.7 |
Code and Other Remedies |
14 |
6.8 |
Private Sales |
16 |
6.9 |
Deficiency |
17 |
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SECTION 7. |
THE COLLATERAL AGENT |
17 |
TABLE OF CONTENTS
(cont)
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Page |
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7.1 |
Collateral Agents Appointment as Attorney-in-Fact, etc. |
17 |
7.2 |
Duty of Collateral Agent |
18 |
7.3 |
Authorization of Financing Statements |
19 |
7.4 |
Authority of Collateral Agent |
19 |
7.5 |
Additional Collateral Agent Terms |
19 |
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SECTION 8. |
MISCELLANEOUS |
20 |
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8.1 |
Amendments in Writing |
20 |
8.2 |
Notices |
20 |
8.3 |
No Waiver by Course of Conduct; Cumulative Remedies |
20 |
8.4 |
Enforcement Expenses; Indemnification |
20 |
8.5 |
Successors and Assigns |
21 |
8.6 |
Set-Off |
21 |
8.7 |
Counterparts |
21 |
8.8 |
Severability |
21 |
8.9 |
Section Headings |
21 |
8.10 |
Integration |
21 |
8.11 |
Governing Law; Jurisdiction; Etc. |
21 |
8.12 |
Acknowledgements |
22 |
8.13 |
Additional Grantors |
22 |
8.14 |
Releases |
22 |
8.15 |
WAIVER OF JURY TRIAL |
23 |
8.16 |
Reinstatement |
23 |
8.17 |
Independent Obligations |
23 |
8.18 |
Intercreditor Agreement Governs |
24 |
TABLE OF CONTENTS
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Page |
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SCHEDULES |
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Schedule 1 |
Notice Addresses |
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Schedule 2 |
Investment Property |
|
Schedule 3 |
Legal Name, Jurisdictions of Organization and Organizational Identification Number |
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Schedule 4(a) |
Intellectual Property |
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Schedule 4(b) |
License Arrangements and Agreements |
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Schedule 5 |
Commercial Tort Claims |
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Schedule 6 |
Deposit Accounts; Securities Accounts; Commodity Accounts |
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Schedule 7 |
Perfection and Priority |
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ANNEXES |
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Annex I |
Assumption Agreement |
|
SECOND LIEN COLLATERAL AGREEMENT
SECOND LIEN COLLATERAL AGREEMENT, dated as of February 4, 2014, made by SFX Entertainment, Inc. a Delaware corporation (the Issuer), the other Persons listed on the signature pages hereof and the Additional Grantors (as defined herein) in favor of U.S. Bank National Association, as collateral agent (in such capacity, together with any successor agent, the Collateral Agent) for the Holders (the Secured Parties) of the Second Lien Senior Secured Notes due 2019, issued pursuant to the terms of that certain Indenture, dated as the date hereof, by and among the Issuer, the other Grantors and U.S. Bank National Association, as Trustee and Collateral Agent (as amended, restated, supplemented waived and/or otherwise modified from time to time, the Indenture).
W I T N E S S E T H:
WHEREAS, pursuant to the Purchase Agreement, dated as of January 31, 2014 (the Purchase Agreement), the Initial Purchasers (as defined in the Purchase Agreement) of the Securities (as defined in the Purchase Agreement) have severally agreed to purchase the Securities upon the terms and subject to the conditions set forth therein;
WHEREAS, the Issuer is a member of an affiliated group of companies that includes each other Grantor (as defined below);
WHEREAS, the proceeds of the Securities will be used in part to enable the Issuer to repay existing indebtedness, pay transaction expenses to fund certain acquisitions and for general corporate purposes;
WHEREAS, the Issuer and the other Grantors are engaged in related businesses, and each Grantor will derive substantial direct and indirect benefit from the issuance of the Securities and other extensions of credit under the Indenture; and
WHEREAS, it is a condition precedent to the effectiveness of the Indenture that the Grantors shall have executed and delivered this Agreement to the Trustee for the ratable benefit of the Secured Parties;
NOW, THEREFORE, in consideration of the premises and to induce the Initial Purchasers to purchase the Securities, each Grantor hereby agrees with the Collateral Agent, for the ratable benefit of the Secured Parties, as follows:
SECTION 1. DEFINED TERMS
1.1 Definitions. (a) Unless otherwise defined herein, terms defined in the Indenture and used herein shall have the meanings given to them in the Indenture, and the following terms are used herein as defined in the UCC: Accession, As-Extracted Collateral, Certificated Security, Chattel Paper, Commercial Tort Claim, Document, Equipment, Fixture, General Intangible, Goods, Instrument, Inventory, Letter-of-Credit Right, Securities Account, Security, Supporting Obligations and Uncertificated Securities.
(b) The following terms shall have the following meanings:
Acceleration Date: the date the Collateral Agent may take any of the actions listed in Section 6.02 of the Indenture upon and during the continuance of any Event of Default.
Account: any right to payment of a monetary obligation, whether or not earned by performance, including, but not limited to, the right to payment for goods sold or leased or for services rendered, whether or not such right is evidenced by an Instrument or Chattel Paper, and right to payment of management fees. Without limiting the generality of the foregoing, the term Account shall further include all accounts (as that term is defined in the UCC), all accounts receivable, all health-care-insurance receivables (as that term is defined in the UCC), all payment intangibles (as that term is defined in the UCC) and all other rights to payment of every kind and description, whether or not earned by performance.
Additional Grantors: as defined in Section 8.13.
Agreement: this Second Lien Collateral Agreement, as the same may be amended, restated, supplemented waived and/or otherwise modified from time to time.
Bankruptcy Default: an Event of Default under Section 6.01(g) of the Indenture.
Collateral: as defined in Section 3.1.
Collateral Account: any collateral account established by the Collateral Agent as provided in Sections 6.1 or 6.5.
Collateral Agent: as defined in the preamble hereto.
Contractual Obligation: means, as to any Person, any provision of any security issued by such Person or of any agreement, instrument or other undertaking to which such Person is a party or by which it or any of its Property is bound.
Copyrights: means all rights, title and interests (and all related IP Ancillary Rights) arising under any Law in or relating to copyrights and all mask work, database and design rights, whether or not registered or published, all registrations and recordations thereof and all applications in connection therewith.
Deposit Account: all deposit accounts as defined in the Uniform Commercial Code of any applicable jurisdiction and, in any event, including, without limitation, any demand, time, savings, passbook or like account maintained with a depositary institution.
Excluded Equity Interests: any Equity Interest in any Foreign Subsidiary, other than (i) 100% of the non-Voting Stock of an Foreign Subsidiary and (ii) Voting Stock of an Foreign Subsidiary representing 65% of the total voting power of all outstanding Voting Stock of such Foreign Subsidiary.
Governmental Authority: means any nation or government, or state or political subdivision thereof, and any agency, authority, instrumentality, regulatory body, court, administrative tribunal, central bank or other entity exercising executive, legislative, judicial, taxing, regulatory or administrative powers or functions of or pertaining to government (including any supra-national bodies such as the European Union or the European Central Bank).
Grantors: the collective reference to each signatory hereto (other than the Collateral Agent) together with any other entity that may become a party hereto as provided herein.
Guarantor Obligations: with respect to any Guarantor, all obligations and liabilities of such Guarantor which may arise under or in connection with the Indenture or any Collateral Document to
which such Guarantor is a party, in each case whether on account of guarantee obligations, fees, indemnities, costs, expenses or otherwise (including, without limitation, all fees and disbursements of counsel to the Trustee, to the Collateral Agent or to the other Secured Parties that are required to be paid by such Guarantor pursuant to the terms of this Agreement or any other Collateral Document).
Indenture: shall have the meaning ascribed to such term in the preamble hereto.
Intercompany Note: any promissory note evidencing loans made by any Grantor to the Issuer or any of its Subsidiaries.
Investment Property: the collective reference to (i) all investment property as such term is defined in Section 9-102(a)(49) of the UCC (other than any Excluded Equity Interests) and (ii) whether or not constituting investment property as so defined, all Pledged Securities.
IP Ancillary Rights: means, with respect to any Intellectual Property and other similar proprietary rights, as applicable, all foreign counterparts to, and all divisionals, reversions, continuations, continuations-in-part, reissues, reexaminations, renewals and extensions of, such Intellectual Property and all income, royalties, proceeds and Liabilities at any time due or payable or asserted under or with respect to any of the foregoing or otherwise with respect to such Intellectual Property, and all other intellectual property rights, including all rights to sue or recover at law or in equity for any past, present or future infringement, misappropriation, dilution, violation or other impairment thereof, and, in each case, all rights to obtain any other IP Ancillary Right.
IP License: means all Contractual Obligations (and all related IP Ancillary Rights), whether written or oral, granting any right title and interest in or relating to any Intellectual Property.
Issuer: as defined in the preamble hereto.
Issuers: the collective reference to each issuer of a Pledged Security.
Issuer Obligations: Note Obligations as defined in the Indenture.
Laws: means, collectively, all international, foreign, Federal, state and local statutes, laws (including common law) treaties, rules, guidelines, regulations, ordinances, codes and administrative or judicial precedents or authorities, including the interpretation or administration thereof by any Governmental Authority charged with the enforcement, interpretation or administration thereof, and all applicable administrative orders, directed duties, requests, licenses, authorizations and permits of, and agreements with, any Governmental Authority.
Lenders: as defined in the preamble hereto.
Liabilities: means all claims, actions, suits, judgments, damages, losses, liability, obligations, responsibilities, fines, penalties, sanctions, costs, fees, taxes, commissions, charges, disbursements and expenses, in each case of any kind or nature (including interest accrued thereon or as a result thereto and fees, charges and disbursements of financial, legal and other advisors and consultants), whether joint or several, whether or not indirect, contingent, consequential, actual, punitive, treble or otherwise.
Patents: means all rights, title and interests (and all related IP Ancillary Rights) arising under any Law in or relating to letters patent and applications therefor.
Permit: means, with respect to any Person, any permit, approval, authorization, license, registration, certificate, concession, grant, franchise, variance or permission from, any Governmental Authority, in each case whether or not having the force of law and applicable to or binding upon such Person or any of its property or to which such Person or any of its Property is subject.
Pledged Notes: all promissory notes listed on Schedule 2, all Intercompany Notes at any time issued to any Grantor and all other promissory notes issued to or held by any Grantor (other than promissory notes issued in connection with extensions of trade credit by any Grantor in the ordinary course of business).
Pledged Securities: the collective reference to the Pledged Notes and the Pledged Stock.
Pledged Stock: the collective reference to (i) the shares of equity interests listed on Schedule 2, (ii) any other shares, stock certificates, options, interests or rights of any nature whatsoever in respect of the equity interests of any Person that may be issued or granted to, or held by, any Grantor while this Agreement is in effect and that are required to become Collateral pursuant to Section 3.1.
Proceeds: all proceeds as such term is defined in Section 9-102(a)(64) of the UCC and, in any event, shall include, without limitation, all dividends or other income from the Investment Property, collections thereon or distributions or payments with respect thereto.
Property: means any right or interest in or to property of any kind whatsoever, whether real, personal or mixed and whether tangible or intangible, including, without limitation, Equity Interests and Intellectual Property.
Purchase Agreement: shall have the meaning ascribed to such term in the recitals.
Receivable: any right to payment for goods sold or leased or for services rendered, whether or not such right is evidenced by an Instrument or Chattel Paper and whether or not it has been earned by performance (including, without limitation, any Account).
Required Secured Parties: means, as of any date of determination, Secured Parties holding more than 50% of the aggregate principal amount of the Securities then outstanding.
Secured Obligations: (i) in the case of the Issuer, the Issuer Obligations and (ii) in the case of each other Guarantor, its Guarantor Obligations, in each case except as constitutes an Excluded Swap Obligation.
Secured Parties: shall have the meaning ascribed to such term in the recitals.
Trademarks: means all rights, title and interests (and all related IP Ancillary Rights) arising under any Law, including common law, in or relating to trademarks, trade names, corporate names, company names, business names, fictitious business names, trade styles, service marks, logos and other source or business identifiers and, in each case, all goodwill associated therewith, all registrations and recordations thereof and all applications in connection therewith.
UCC: the Uniform Commercial Code from time to time in effect in the State of New York; provided, that in the event that, by reason of mandatory provisions of any applicable requirement of Law, any of the perfection or priority of the Collateral Agents or any other Secured Partys security interest in any Collateral is governed by the Uniform Commercial Code of a jurisdiction other than the State of New York, UCC shall mean the Uniform Commercial Code as in effect in such other jurisdiction for
purposes of the provisions hereof relating to such perfection or priority and for purposes of the definitions related to or otherwise used in such provisions.
1.2 Other Definitional Provisions. (a) The words hereof, herein, hereto and hereunder and words of similar import when used in this Agreement shall refer to this Agreement as a whole and not to any particular provision of this Agreement, and Section and Schedule references are to this Agreement unless otherwise specified.
(b) The meanings given to terms defined herein shall be equally applicable to both the singular and plural forms of such terms.
(c) Where the context requires, terms relating to the Collateral or any part thereof, when used in relation to a Grantor, shall refer to such Grantors Collateral or the relevant part thereof.
SECTION 2. [Reserved].
SECTION 3. GRANT OF SECURITY INTEREST
3.1 Grant of Security Interests. Each Grantor hereby grants to the Collateral Agent, for the ratable benefit of the Secured Parties, a security interest in all of the following property now owned or at any time hereafter acquired or created by such Grantor or in which such Grantor now has or at any time in the future may acquire any right, title or interest (collectively, the Collateral), as collateral security for the prompt and complete payment and performance when due (whether at the stated maturity, by acceleration or otherwise) of the Secured Obligations:
(a) all Accounts;
(b) all Chattel Paper;
(c) all cash and Cash Equivalents;
(d) all Deposit Accounts, Securities Accounts and Commodity Accounts;
(e) all Documents;
(f) all Equipment;
(g) all Fixtures;
(h) all General Intangibles;
(i) all Goods not covered by the other clauses of this Section 3;
(j) all Instruments, including the Pledged Notes;
(k) all Pledged Stock;
(l) all Intellectual Property;
(m) all Inventory;
(n) all Investment Property;
(o) all Letters of Credit and Letter-of-Credit Rights;
(p) all Commercial Tort Claims described on Schedule 5 and on any supplement thereto received by the Collateral Agent;
(q) all other tangible and intangible personal property not otherwise described above;
(r) all books and records pertaining to the Collateral; and
(s) to the extent not otherwise included, all Proceeds, Supporting Obligations and products of any of the Collateral and products of any and all of the foregoing and all collateral security and guarantees given by any Person with respect to any of the foregoing;
provided, that notwithstanding any of the other provisions set forth in this Section 3.1, this Agreement shall not constitute a grant of a security interest in any Excluded Assets and the Excluded Assets shall be excluded from the definition of Collateral.
SECTION 4. REPRESENTATIONS AND WARRANTIES
To induce the Initial Purchasers to purchase the Securities and to induce the Collateral Agent to enter into the Indenture, each Grantor hereby represents and warrants to the Collateral Agent and each other Secured Party and, with respect to Section 4.1, each Lender:
4.1 [Reserved].
4.2 Title; No Other Liens. Except with respect to Permitted Liens, such Grantor owns or has rights in each item of the Collateral pledged by it hereunder free and clear of any and all Liens. Except with respect to Permitted Liens, no financing statement or other public notice with respect to all or any part of the Collateral is on file or of record in any public office except financing statements that have been filed without the consent of the Grantor.
4.3 Names; Jurisdiction of Organization; Chief Executive Office. On the date hereof, such Grantors full and correct legal name, jurisdiction of organization and identification number from the jurisdiction of organization (if any) are specified on Schedule 3. Except as set forth on Schedule 3, no Grantor has changed its name, jurisdiction of organization, chief executive office or sole place of business or its corporate structure in any way (e.g., by merger, consolidation, change in corporate form or otherwise) and has not done business under any other name, in each case, within the past five years. On the date hereof, such Grantors books and records concerning the Collateral are kept at the locations designated on Schedule 3.
4.4 Pledged Securities. On the date hereof, the shares of Pledged Stock pledged by such Grantor hereunder:
(a) have been duly authorized, validly issued and are fully paid and non-assessable, to the extent such concepts are applicable; and
(b) constitute all the issued and outstanding shares of all classes of the Voting Stock of each Issuer owned by such Grantor or (x) in the case of the Voting Stock of any Foreign Subsidiary, 65% of the outstanding Voting Stock and (y) in the case of shares of the non-voting Equity Interests of an Foreign Subsidiary, 100% of such issued and outstanding shares of each such Foreign Subsidiary.
4.5 Pledged Notes. Schedule 2 sets forth a complete and correct list of all promissory notes (other than any held in a Securities Account listed on Schedule 6) held by any Grantor on the date hereof with a principal amount in excess of $2,500,000.
4.6 Intellectual Property.
(a) Schedule 4(a) lists all registered or applied for United States Intellectual Property owned by such Grantor in its own name on the date hereof.
(b) Schedule 4(b) sets forth all IP Licenses under which a Grantor is an exclusive licensee or licensor on the date hereof except as either would not reasonably be expected to have a material adverse effect on the financial condition of the Grantors (taken as a whole) or the failure of which to maintain would not reasonably be expected to have a material adverse effect on the financial condition of the Grantors (taken as a whole).
(c) On the Closing Date, the Intellectual Property set forth on Schedule 4(a) is owned by the Grantor specified thereon and is, to the relevant Grantors knowledge, (i) valid, in full force and effect, subsisting and unexpired and (ii) insofar as it is registered Intellectual Property, enforceable. The consummation of the Transactions shall not result in a breach or default of any material IP License, and none of the following shall materially limit or impair the ownership, use, validity or enforceability of, or any rights of such Grantor in, any Intellectual Property.
4.7 Commercial Tort Claims. To the knowledge of such Grantor, the only Commercial Tort Claims of any Grantor in an amount reasonably estimated to exceed $2,500,000 existing on the date hereof (regardless of whether the defendant or other material facts can be determined and regardless of whether such Commercial Tort Claim has been asserted, threatened or has otherwise been made known to the obligee thereof or whether litigation has been commenced for such claims) are those listed on Schedule 5, which sets forth such information separately for each Grantor in a manner that reasonably identifies each such Commercial Tort Claim.
4.8 Deposit Accounts; Securities Accounts and Commodity Accounts. Schedule 6 sets forth a complete and correct list of all Deposit Accounts, Securities Accounts and Commodity Accounts of any Grantor on the date hereof.
4.9 Specific Collateral. None of the Collateral is, or is Proceeds or products of any (a) farm products, (b) as-extracted collateral or (c) timber to be cut.
4.10 Perfection and Priority. Except as set forth on Schedule 7 and as permitted pursuant to Section 4.20 of the Indenture, all actions by each Grantor required hereunder to protect and perfect the Lien granted hereunder on the Collateral have been duly taken.
4.11 Enforcement. No Permit, notice to or filing with any Governmental Authority or any other Person or any consent from any Person is required for the exercise by the Collateral Agent of its rights provided for in this Agreement or the enforcement of remedies in respect of a material portion of the Collateral pursuant to this Agreement, including the transfer of a material portion of the Collateral, except as may be required in connection with any approvals that may be required to be obtained from any bailees or landlords to collect the Collateral.
SECTION 5. COVENANTS
Until all Secured Obligations shall have been indefeasibly paid in full in cash or otherwise discharged or defeased in accordance with the Indenture, each Grantor hereby covenants and agrees to the Collateral Agent and each other Secured Party that:
5.1 [Reserved].
5.2 Investment Property. (a) [Reserved].
(b) To the extent any Pledged Stock (i) constitutes interests in any limited liability company or limited partnership controlled now or in the future by any Grantor and (ii) is a Security within the meaning of Article 8 of the UCC and is governed by Article 8 of the UCC, such interest shall be certificated and each such interest shall at all times hereafter continue to be such a security and represented by such certificate. Each Grantor further acknowledges and agrees that with respect to any interest in any limited liability company or limited partnership controlled now or in the future by such Grantor and pledged hereunder that is not a Security within the meaning of Article 8 of the UCC, such Grantor shall at no time elect to treat any such interest as a Security within the meaning of Article 8 of the UCC, nor shall such interest be represented by a certificate, unless such Grantor provides prior written notification to the Collateral Agent of such election and such interest is thereafter represented by a certificate that is promptly delivered to the Collateral Agent pursuant to the terms hereof.
(c) To the extent that any Pledged Security is a Certificated Security or an Instrument or is an Uncertificated Security that becomes a Certificated Security or Instrument, the applicable Grantor shall promptly deliver such certificates or Instruments evidencing such Pledged Securities to the Collateral Agent together with all necessary stock powers or indorsements thereof.
5.3 Commercial Tort Claims. If any Grantor shall at any time after the date of this Agreement acquire or become the beneficiary of a Commercial Tort Claim in an amount reasonably estimated to exceed $2,500,000 (regardless of whether the defendant or other material facts can be determined and regardless of whether such Commercial Tort Claim has been asserted, threatened or has otherwise been made known to the obligee thereof or whether litigation has been commenced for such claims), such Grantor shall promptly provide the Collateral Agent with a supplement to Schedule 5 hereto describing the details thereof in a manner that reasonably identifies such Commercial Tort Claim, and hereby authorizes the filing of additional financing statements or amendments to existing financing statements describing such Commercial Tort Claim, and agrees to do such other acts or things necessary or desirable to provide a perfected security interest in any such Commercial Tort Claim. Any supplement to Schedule 5 delivered pursuant to this Section 5.3 shall, after the receipt thereof by the Collateral Agent, become part of Schedule 5 for all purposes hereunder other than in respect of representations and warranties made prior to the date of such receipt.
5.4 Maintenance of Perfected Security Interest; Defense of Claims. Each Grantor agrees to promptly, and in any case within five Business Days after the occurrence thereof, notify the Collateral Agent of any change (i) in its legal name, (ii) in the type of organization or corporate structure of any Grantor, (iii) in the jurisdiction of organization of any Grantor, (iv) in the location (as determined in accordance with Section 9-307 of the UCC) of any Grantor or (v) in the organizational identification number of any Grantor. Each Grantor agrees not to effect or permit any change referred to in the preceding sentence unless all filings have been made under the UCC or other applicable Law that are required in order for the Collateral Agent to continue at all times following such change to have a valid, legal and perfected (to the extent perfection of the security interest in such property is required by the
terms hereof), security interest (subject only to Permitted Liens and having priority by operation of applicable Law) in the Collateral for its benefit and the benefit of the other Secured Parties.
5.5 Delivery of Instruments and Tangible Chattel Paper and Control of Investment Property, Letter-of-Credit Rights and Electronic Chattel Paper. (a) If any amount payable under or in connection with any Collateral owned by such Grantor shall be or become evidenced by an Instrument or Tangible Chattel Paper other than such Instrument delivered in accordance with Section 5.2(c) and in the possession of the Collateral Agent or the First-Priority Collateral Agent (as defined in the Intercreditor Agreement), such Grantor shall immediately deliver such Instrument or Tangible Chattel Paper to the Collateral Agent, duly indorsed in a manner satisfactory to the Collateral Agent; provided, that this requirement shall not apply to any interests in such Instruments or Tangible Chattel Paper which have an individual value of $2,500,000 or less.
(b) Such Grantor shall not grant control (as defined in Article 9-106 of the UCC) over any Investment Property to any Person other than the Collateral Agent and any First-Priority Collateral Agent.
(c) If such Grantor is or becomes the beneficiary of letters of credit that are not Supporting Obligations with respect to any Collateral, such Grantor shall promptly, and in any event within five Business Days after becoming a beneficiary, notify the Collateral Agent thereof and enter into a Contractual Obligation with the Collateral Agent, the issuers of such letters of credit or any nominated person with respect to the Letter-of-Credit Rights under such letters of credit; provided, that this requirement shall not apply to any such letters of credit which have an individual value of $2,500,000 or less. Such Contractual Obligation shall assign such Letter-of-Credit Rights to the Collateral Agent and such assignment shall be sufficient to grant control for the purposes of Section 9-107 of the UCC (or any similar section under any equivalent UCC). Such Contractual Obligation shall also direct all payments thereunder to a Deposit Account subject to a Control Agreement in compliance with Section 5.6. The provisions of the Contractual Obligation shall be in form and substance reasonably satisfactory to the Collateral Agent. Notwithstanding anything to the contrary set forth in the foregoing, to the extent that any of the Grantors have entered into a Revolving Credit Facility and entry into a Contractual Obligation with the First-Priority Collateral Agent with respect to any such letter of credit is not required under the terms governing such Revolving Credit Facility, then registration or recordation of the same shall not be required hereunder.
(d) If any amount payable under or in connection with any Collateral owned by such Grantor shall be or become evidenced by Electronic Chattel Paper, such Grantor shall take all steps necessary to grant the Collateral Agent control of all such Electronic Chattel Paper for the purposes of Section 9-105 of the UCC (or any similar section under any equivalent UCC) and all transferable records as defined in each of the Uniform Electronic Transactions Act and the Electronic Signatures in Global and National Commerce Act; provided, that this requirement shall not apply to any interests in such Electronic Chattel Paper which have an individual value of $2,500,000 or less.
5.6 [Reserved]:
5.7 Intellectual Property. Each Grantor agrees that:
(a) it shall not do any act or omit to do any act whereby any of the Intellectual Property which is material to the business of Grantor or which is of material value may lapse, be impaired, or become abandoned, dedicated to the public, or unenforceable, or which would adversely affect the validity, grant, or enforceability of the security interest granted therein;
(b) it shall, within 30 days after the creation or acquisition or exclusive license of any copyrightable work which is material to the business of Grantors, apply to register the Copyright and, in the case of an exclusive IP License, record such license to such Copyright, in the United States Copyright Office; provided, however, to the extent that any of the Grantors have entered into a Revolving Credit Facility and registration or recordation of such Copyright or IP License, respectively, is not required under the terms governing such Revolving Credit Facility, then registration or recordation of the same shall not be required hereunder;
(c) it shall (i) within 30 days after Grantor or any of its agents, employees, designees or licensees, filing, in the name of or for the benefit of Grantor, an application for the registration of any material Patent or Trademark with the United States Patent and Trademark Office or any foreign counterpart or (ii) within 30 days after such Grantor receives, as owner or exclusive licensee, a Copyright registration with the United States Copyright Office or any foreign counterpart, in any case which is material to the business of Grantors notify the Collateral Agent, and promptly execute and deliver documents as are necessary to evidence the Collateral Agents security interest in such Collateral; provided, however, to the extent that any of the Grantors have entered into a Revolving Credit Facility and execution and delivery of such documents, respectively, is not required under the terms governing such Revolving Credit Facility, then delivery of the same shall not be required hereunder;
(d) it shall promptly notify the Collateral Agent if it knows or has reason to know that any item of material Intellectual Property may become (i) abandoned or dedicated to the public or placed in the public domain, (ii) invalid or unenforceable, (iii) subject to any adverse determination or development (including the institution of proceedings) in any action or proceeding in the United States Patent and Trademark Office, the United States Copyright Office, any state registry, any foreign counterpart of the foregoing, or any court or (iv) be the subject of any reversion or termination rights;
(e) it shall not permit the inclusion in any contract to which it hereafter becomes a party of any provision that could or might in any way materially impair or prevent the creation of a security interest in, or the assignment of, such Grantors rights and interests in any material property included within the definitions of any Intellectual Property acquired under such contracts;
(f) in the event that any material Intellectual Property owned by or exclusively licensed to any Grantor is infringed, misappropriated, or diluted by a third party, such Grantor shall promptly take all commercially reasonable actions to stop such infringement, misappropriation, or dilution and protect its rights in such Intellectual Property including, but not limited to, the initiation of a suit for injunctive relief and to recover damages; and
(g) it shall take all steps reasonably necessary to protect the secrecy of all material Trade Secrets, including, without limitation, entering into confidentiality agreements with employees and consultants and labeling and restricting access to secret information and documents.
5.8 Maintenance of Perfected Security Interest; Further Documentation and Consents.
(a) No Grantor shall (i) use or permit any Collateral to be used unlawfully or in violation of any provision of the Indenture, any Collateral Document, any material requirement of Law or any policy of insurance covering the Collateral or (ii) enter into any Contractual Obligation or undertaking restricting the right or ability of such Grantor or the Collateral Agent to transfer any Collateral if such restriction would reasonably be expected to have a material adverse effect on the financial condition of the Grantors (taken as a whole).
(b) Such Grantor shall maintain the security interest created by this Agreement as a perfected security interest and shall defend such security interest and such priority against the claims and demands of all Persons.
(c) Such Grantor shall furnish to the Collateral Agent from time to time statements and schedules further identifying and describing the Collateral and such other documents in connection with the Collateral as the Collateral Agent may reasonably request, all in reasonable detail and in form and substance reasonably satisfactory to the Collateral Agent.
(d) At any time and from time to time, upon the written request of the Collateral Agent, such Grantor shall, for the purpose of obtaining or preserving the full benefits of this Agreement and of the rights and powers herein granted, (i) promptly and duly execute and deliver, and have recorded, such further documents, including an authorization to file (or, as applicable, the filing) of any financing statement or amendment under the UCC (or other filings under similar requirements of Law) in effect in any jurisdiction with respect to the security interest created hereby and (ii) take such further action as the Collateral Agent may reasonably request, including using its commercially reasonable efforts to secure all approvals necessary or appropriate for the assignment to or for the benefit of the Collateral Agent of any Contractual Obligation held by such Grantor and to enforce the security interests granted hereunder.
5.9 Maintenance of Insurance. Each Grantor shall (a) maintain or cause to be maintained in full force and effect all policies of insurance of any kind with respect to the property and businesses of the Grantors with financially sound and reputable insurance companies or associations (in each case that are not Affiliates of the Issuer) of a nature and providing such coverage as is sufficient and as is customarily carried by businesses of the size and character of the business of the Grantors and (b) cause all such insurance relating to any property or business of any Grantor to name the Collateral Agent on behalf of the Secured Parties as additional insured or loss payee, as appropriate, and, to the extent permitted by applicable Law, to provide 30 days prior written notice to the Collateral Agent of any cancellation, material addition in amount or material change in coverage.
SECTION 6. REMEDIAL PROVISIONS
6.1 Certain Matters Relating to Receivables.
(a) At any time after the occurrence and during the continuance of an Event of Default, upon the Collateral Agents reasonable request and at the expense of the relevant Grantor, such Grantor shall use commercially reasonable efforts to cause independent public accountants or others satisfactory to the Collateral Agent to furnish to the Collateral Agent reports showing reconciliations, aging and test verifications of, and trial balances for, the Receivables.
(b) If required by the Collateral Agent at any time after the occurrence and during the continuance of an Event of Default, any payments of Receivables, when collected by any Grantor, (i) shall be forthwith (and, in any event, within three Business Days) deposited by such Grantor in the exact form received, duly indorsed by such Grantor to the Collateral Agent if required, in a Collateral Account maintained under the sole dominion and control of the Collateral Agent, subject to withdrawal by the Collateral Agent for the account of the Collateral Agent and the other Secured Parties only as provided in Section 6.6 and (ii) until so turned over, shall be held by such Grantor in trust for the Collateral Agent and the other Secured Parties, segregated from other funds of such Grantor. Each such deposit of Proceeds of Receivables shall be accompanied by a report identifying in reasonable detail the nature and source of the payments included in the deposit.
(c) If an Event of Default has occurred and is continuing and at the Collateral Agents request, each Grantor shall deliver to the Collateral Agent all documents evidencing, and relating to, the agreements and transactions which gave rise to the Receivables, including, without limitation, all orders, invoices and shipping receipts.
6.2 Communications with Grantors; Grantors Remain Liable.
(a) Upon the request of the Collateral Agent at any time after the occurrence and during the continuance of an Event of Default, each Grantor shall notify obligors on the Receivables that such Receivables have been assigned to the Collateral Agent for the ratable benefit of the Collateral Agent and the other Secured Parties and that payments in respect of such Receivables shall be made directly to the Collateral Agent.
(b) Anything herein to the contrary notwithstanding, each Grantor shall remain liable under the Receivables (or any agreements giving rise thereto) to observe and perform all the conditions and obligations to be observed and performed by it thereunder, all in accordance with the terms of any agreement giving rise thereto. Neither the Collateral Agent nor any other Secured Party shall have any obligation or liability under any Receivable (or any agreement giving rise thereto) by reason of or arising out of this Agreement or the receipt by the Collateral Agent or any other Secured Party of any payment relating thereto, nor shall the Collateral Agent or any other Secured Party be obligated in any manner to perform any of the obligations of any Grantor under or pursuant to any Receivable (or any agreement giving rise thereto), to make any payment, to make any inquiry as to the nature or the sufficiency of any payment received by it or as to the sufficiency of any performance by any party thereunder, to present or file any claim, to take any action to enforce any performance or to collect the payment of any amounts which may have been assigned to it or to which it may be entitled at any time or times.
6.3 Pledged Securities; Dividends. (a) Unless an Event of Default shall have occurred and be continuing and the Collateral Agent shall have given notice to the relevant Grantor of the Collateral Agents intent to exercise its corresponding rights pursuant to paragraph (b) below, each Grantor shall be permitted to receive all cash dividends paid in respect of the Pledged Stock and all payments made in respect of the Pledged Notes to the extent permitted in the Indenture, and to exercise all voting and corporate or other organizational rights with respect to the Pledged Securities.
(b) If an Event of Default shall have occurred and be continuing and the Collateral Agent has given notice to the relevant Grantor or Grantors of its intent to exercise such rights, (i) unless otherwise provided in the Indenture, the Collateral Agent shall have the right to receive any and all cash dividends, payments or other Proceeds paid in respect of the Pledged Securities of such Grantor or Grantors and make application thereof to the Secured Obligations in the order set forth in Section 6.6 and (ii) any or all of the Pledged Securities of such Grantor or Grantors shall be registered in the name of the Collateral Agent or its nominee, and the Collateral Agent or its nominee may thereafter exercise (x) all voting, corporate and other rights pertaining to such Pledged Securities at any meeting of shareholders of the relevant Issuer or Issuers or otherwise and (y) any and all rights of conversion, exchange and subscription and any other rights, privileges or options pertaining to such Pledged Securities as if it were the absolute owner thereof (including, without limitation, the right to exchange at its discretion any and all of the Pledged Securities upon the merger, consolidation, reorganization, recapitalization or other fundamental change in the corporate structure of any Issuer, or upon the exercise by any Grantor or the Collateral Agent of any right, privilege or option pertaining to such Pledged Securities, and in connection therewith, the right to deposit and deliver any and all of the Pledged Securities with any committee, depositary, transfer agent, registrar or other designated agency upon such terms and conditions as the Collateral Agent may determine), all without liability except to account for property actually received by it, but the
Collateral Agent shall have no duty to any Grantor to exercise any such right, privilege or option and shall not be responsible for any failure to do so or delay in so doing.
(c) Each Grantor hereby authorizes and instructs each Issuer of any Pledged Securities pledged by such Grantor hereunder to comply with any instruction received by it from the Collateral Agent in writing that (i) states that an Event of Default has occurred and is continuing and (ii) is otherwise in accordance with the terms of this Agreement and the Indenture, without any other or further instructions from such Grantor, and each Grantor agrees that each Issuer shall be fully protected in so complying.
(d) After all Events of Default have been cured or waived in accordance with the provisions of the Indenture, and so long as the Secured Obligations shall not have been accelerated, (i) each Grantor shall have the right to exercise the voting, corporate and other rights pertaining to such Pledged Securities that it would have otherwise been entitled to and receive all cash dividends, payments, or other Proceeds paid in respect of the Pledged Securities which it would be authorized to receive and retain, in each case, pursuant to paragraph (a) above, and, to the extent necessary, the Collateral Agent shall deliver a proxy in favor of such Grantor evidencing the same and (ii) to the extent that the Collateral Agent has exercised its rights under paragraph (b)(ii), the Collateral Agent shall, promptly after the written request of the applicable Grantor, cause such Pledged Securities to be registered in the name of such Grantor to the extent such Grantor or its nominees holds an interest in such Collateral at such time.
6.4 Intellectual Property.
(a) Without limiting any rights of the Collateral Agent under the Indenture or any Collateral Document, for the purpose of enabling the Collateral Agent to exercise its rights and remedies under this Section 6, solely after an Event of Default has occurred and is continuing and during such time as the Collateral Agent shall be lawfully entitled to exercise such rights and remedies, and at no other time or for no other purpose, each Grantor hereby grants to the Collateral Agent, to the extent permitted by Law, an irrevocable, non-exclusive IP License (exercisable without payment of royalty or other compensation to such Grantor) under the Intellectual Property now owned or hereafter acquired or created by such Grantor, wherever the same may be located; provided, that nothing in this Section 6.4 shall require a Grantor to grant any IP License that is prohibited by any Law or is prohibited by, or constitutes a breach or default under or results in the termination of or gives rise to any right of acceleration, modification or cancellation under any Contractual Obligation with respect to such Property; provided, further, that such IP Licenses to be granted hereunder with respect to Trademarks shall be subject to the maintenance of quality standards with respect to the goods and services on which such Trademarks are used sufficient to preserve the validity of such Trademarks.
(b) Notwithstanding anything contained herein to the contrary, but subject to the provisions of Section 4.12 of the Indenture that limit the rights of the Grantors to dispose of their Property and subject to the Collateral Agents exercise of its rights and remedies under this Section 6, the Grantors will be permitted to exploit, use, enjoy, protect, license, sublicense, assign, sell, dispose of or take other actions with respect to their Intellectual Property in the ordinary course of the business of the Grantors. The Grantors shall not (and shall not cause their licensees to) do any act or omit to do any act whereby any Intellectual Property that is necessary for the operations of such Grantors business may become invalidated or otherwise impaired. In furtherance of the foregoing, so long as no Event of Default shall have occurred and be continuing, the Collateral Agent shall from time to time, upon the request of the respective Grantor, execute and deliver any instruments, certificates or other documents, in the form so requested, that such Grantor shall have certified, in writing, are appropriate in its judgment to allow it to take any action permitted above (including relinquishment of the IP License provided pursuant to paragraph (a) above as to any specific Intellectual Property). Further, upon the payment in full in cash of all of the Secured
Obligations (other than contingent or indemnification obligations not then asserted or due) or defeasance or discharge of the Secured Obligations or earlier expiration of this Agreement or release of the Collateral, the IP License granted pursuant to paragraph (a) above shall terminate and become null and void. Notwithstanding the foregoing, the exercise of rights and remedies under this Section 6 by the Collateral Agent shall not terminate the rights of the holders of any licenses or sublicenses theretofore granted by the Grantors in accordance with the first sentence of this paragraph (b).
6.5 Proceeds to be Turned Over To Collateral Agent. If an Event of Default shall have occurred and be continuing, all Proceeds received by any Grantor consisting of cash, checks and other near-cash items shall be held by such Grantor in trust for the Collateral Agent and the other Secured Parties, segregated from other funds of such Grantor, and shall, promptly upon receipt by such Grantor, be turned over to the Collateral Agent in the exact form received by such Grantor (duly indorsed by such Grantor to the Collateral Agent, if required). All Proceeds received by the Collateral Agent hereunder shall be held by the Collateral Agent in a Collateral Account maintained under its sole dominion and control. All Proceeds while held by the Collateral Agent in a Collateral Account (or by such Grantor in trust for the Collateral Agent and the other Secured Parties) shall continue to be held as collateral security for all of the Secured Obligations and shall not constitute payment thereof until applied as provided in Section 6.7.
6.6 Application of Proceeds. If an Event of Default shall have occurred and be continuing, and the Loans shall have been accelerated pursuant to Article VII of the Indenture, the Collateral Agent shall apply all or any part of Proceeds constituting Collateral and any proceeds of the Guarantee set forth in Article X of the Indenture, after deducting all reasonable costs and expenses of every kind incurred in connection therewith or incidental to the care or safekeeping of any Collateral or otherwise reasonably relating to the Collateral or the rights of the Collateral Agent (including any other amounts owed to the Collateral Agent under any Collateral Document) and any other Secured Party hereunder, in payment of the Secured Obligations, and shall make any such application in accordance with Section 6.10 of the Indenture and only after such application and after the payment by the Collateral Agent of any other amount required by any requirement of Law, need the Collateral Agent account for the surplus, if any, to any Grantor.
6.7 Code and Other Remedies. (a) UCC Remedies. If an Event of Default shall have occurred and be continuing, the Collateral Agent, on behalf of itself, the Collateral Agent and the other Secured Parties, may exercise, in addition to all other rights and remedies granted to them in this Agreement and in any other instrument or agreement securing, evidencing or relating to the Secured Obligations, all rights and remedies of a secured party under the UCC or any other applicable Law.
(b) Disposition of Collateral. Without limiting the generality of the foregoing, if an Event of Default shall have occurred and be continuing, the Collateral Agent, without demand of performance or other demand, presentment, protest, advertisement or notice of any kind (except any notice required by law referred to below or notices otherwise provided in the Indenture or any Collateral Document) to or upon any Grantor or any other Person (all and each of which demands, defenses, advertisements and notices are hereby waived unless otherwise provided in the Indenture or any other Collateral Document), may in such circumstances forthwith collect, receive, appropriate and realize upon the Collateral, or any part thereof, and/or may forthwith sell, lease, assign, give option or options to purchase, or otherwise dispose of and deliver the Collateral or any part thereof (or contract to do any of the foregoing), in one or more parcels at public or private sale or sales, at any exchange, brokers board or office of the Collateral Agent or any Lender or elsewhere upon such terms and conditions as it may deem advisable and at such prices as it may deem best, for cash or on credit or for future delivery without assumption of any credit risk. Any Agent or any Lender shall have the right upon any such public sale or sales, and, to the extent permitted by law, upon any such private sale or sales, to purchase the whole or any part of the Collateral
so sold, free of any right or equity of redemption in any Grantor, which right or equity is hereby waived and released.
(c) Management of Collateral. Each Grantor further agrees, if an Event of Default shall have occurred and be continuing, (i) at the Collateral Agents request, to assemble the Collateral and make it available to the Collateral Agent at places which the Collateral Agent shall reasonably select, whether at such Grantors premises or elsewhere, (ii) without limiting the foregoing, the Collateral Agent also has the right to require that each Grantor store and keep any Collateral pending further action by the Collateral Agent and, while any such Collateral is so stored or kept, provide such guards and maintenance services as shall be reasonably necessary to protect the same and to preserve and maintain such Collateral in good condition, (iii) until the Collateral Agent is able to transfer any Collateral, the Collateral Agent shall have the right to hold or use such Collateral to the extent that it deems appropriate for the purpose of preserving the Collateral or its value or for any other purpose deemed appropriate by the Collateral Agent and (iv) the Collateral Agent may, if it so elects, seek the appointment of a receiver or keeper to take possession of any Collateral and to enforce any of the Collateral Agents remedies (for the benefit of the Secured Parties), with respect to such appointment without prior notice or hearing as to such appointment. Notwithstanding the foregoing, the Collateral Agents rights under this paragraph (c) are subject to the applicable limitations under federal Law. The Collateral Agent shall not have any obligation to any Grantor to maintain or preserve the rights of any Grantor as against third parties with respect to any Collateral while such Collateral is in the possession of the Collateral Agent.
(d) Application of Proceeds. The Collateral Agent shall apply the net proceeds of any action taken by it pursuant to this Section 6.7, after deducting all reasonable and documented out-of-pocket costs and expenses of every kind actually incurred in connection therewith or incidental to the care or safekeeping of any of the Collateral or in any way relating to the Collateral or the rights of the Collateral Agent hereunder (including any other amounts owed to the Collateral Agent under any Security Document), including, without limitation, reasonable attorneys fees and disbursements of one firm of counsel, one firm of local counsel in each applicable jurisdiction, and in case of an actual or potential conflict, one firm of special counsel, to the payment in whole or in part of the Secured Obligations, in such order as the Collateral Agent may elect, and only after such application and after the payment by the Collateral Agent of any other amount required by any provision of Law, including, without limitation, Section 9-615(a)(3) of the UCC, need the Collateral Agent account for the surplus, if any, to any Grantor. If any notice of a proposed sale or other disposition of Collateral shall be required by law, such notice shall be deemed reasonable and proper if given at least 10 Business Days before such sale or other disposition.
(e) Direct Obligation. Neither the Collateral Agent nor any other Secured Party shall be required to make any demand upon, or pursue or exhaust any right or remedy against, any Grantor, the Issuer any other Guarantor or any other Person with respect to the payment of the Secured Obligations or to pursue or exhaust any right or remedy with respect to any Collateral therefor or any direct or indirect guarantee thereof. All of the rights and remedies of the Collateral Agent and any other Secured Party under any Collateral Document shall be cumulative, may be exercised individually or concurrently and not exclusive of any other rights or remedies provided by any applicable requirement of Law. To the extent it may lawfully do so, each Grantor absolutely and irrevocably waives and relinquishes the benefit and advantage of, and covenants not to assert against the Collateral Agent, any Lender or any other Secured Party, any valuation, stay, appraisement, extension, redemption or similar laws and any and all rights or defenses it may have as a surety, now or hereafter existing, arising out of the exercise by them of any rights hereunder. If any notice of a proposed sale or other disposition of Collateral shall be required by law, such notice shall be deemed reasonable and proper if given at least 10 Business Days before such sale or other disposition.
(f) Commercially Reasonable. To the extent that applicable requirements of Law impose duties on the Collateral Agent to exercise remedies in a commercially reasonable manner, each Grantor acknowledges and agrees that it is not commercially unreasonable for the Collateral Agent to do any of the following:
(i) fail to incur significant costs, expenses or other Liabilities reasonably deemed as such by the Collateral Agent to prepare any Collateral for disposition or otherwise to complete raw material or work in process into finished goods or other finished products for disposition;
(ii) fail to obtain Permits, or other consents, for access to any Collateral to transfer or for the collection or transfer of any Collateral, or, if not required by other requirements of Law, fail to obtain Permits or other consents for the collection or disposition of any Collateral;
(iii) fail to exercise remedies against account debtors or other Persons obligated on any Collateral or to remove Liens on any Collateral or to remove any adverse claims against any Collateral;
(iv) advertise dispositions of any Collateral through publications or media of general circulation, whether or not such Collateral is of a specialized nature or to contact other Persons, whether or not in the same business as any Grantor, for expressions of interest in acquiring any such Collateral;
(v) exercise collection remedies against account debtors and other Persons obligated on any Collateral, directly or through the use of collection agencies or other collection specialists, hire one or more professional auctioneers to assist in the disposition of any Collateral, whether or not such Collateral is of a specialized nature or, to the extent deemed appropriate by the Collateral Agent, obtain the services of other brokers, investment bankers, consultants and other professionals to assist the Collateral Agent in the collection or disposition of any Collateral, or utilize Internet sites that provide for the auction of assets of the types included in the Collateral or that have the reasonable capacity of doing so, or that match buyers and sellers of assets to dispose of any Collateral;
(vi) dispose of assets in wholesale rather than retail markets;
(vii) disclaim disposition warranties, such as title, possession or quiet enjoyment; or
(viii) purchase insurance or credit enhancements to insure the Collateral Agent against risks of loss, collection or disposition of any Collateral or to provide to the Collateral Agent a guaranteed return from the collection or disposition of any Collateral.
Each Grantor acknowledges that the purpose of this Section 6.7 is to provide a non-exhaustive list of actions or omissions that are commercially reasonable when exercising remedies against any Collateral and that other actions or omissions by the Secured Parties shall not be deemed commercially unreasonable solely on account of not being indicated in this Section 6.7. Without limitation upon the foregoing, nothing contained in this Section 6.7 shall be construed to grant any rights to any Grantor or to impose any duties on the Collateral Agent that would not have been granted or imposed by this Agreement or by applicable requirements of Law in the absence of this Section 6.7.
6.8 Private Sales. Each Grantor recognizes that the Collateral Agent may be unable to effect a public sale of any or all the Pledged Stock, by reason of certain prohibitions contained in the Securities Act and applicable state securities laws or otherwise, and may be compelled to resort to one or
more private sales thereof to a restricted group of purchasers which will be obliged to agree, among other things, to acquire such securities for their own account for investment and not with a view to the distribution or resale thereof. Each Grantor acknowledges and agrees that any such private sale may result in prices and other terms less favorable than if such sale were a public sale and, notwithstanding such circumstances, agrees that any such private sale shall be deemed to have been made in a commercially reasonable manner. The Collateral Agent shall be under no obligation to delay a sale of any of the Pledged Stock for the period of time necessary to permit the Issuer thereof to register such securities for public sale under the Securities Act, or under applicable state securities laws, even if such Issuer would agree to do so.
6.9 Deficiency. Each Grantor shall remain liable for any deficiency if the proceeds of any sale or other disposition of the Collateral are insufficient to pay the Secured Obligations and the reasonable fees and disbursements of any attorneys employed by the Collateral Agent to collect such deficiency.
SECTION 7. THE COLLATERAL AGENT
7.1 Collateral Agents Appointment as Attorney-in-Fact, etc.
(a) Each Grantor hereby irrevocably constitutes and appoints the Collateral Agent and any officer or agent thereof, with full power of substitution, as its true and lawful attorney-in-fact with full irrevocable power and authority in the place and stead of such Grantor and in the name of such Grantor or in its own name, for the purpose of carrying out the terms of this Agreement, to take any and all appropriate action and to execute any and all documents and instruments which may be necessary or desirable to accomplish the purposes of this Agreement, and, without limiting the generality of the foregoing, each Grantor hereby gives the Collateral Agent the power and right, on behalf of such Grantor, without notice to or assent by such Grantor, to do any or all of the following after written notice by the Collateral Agent of its intent to do so:
(i) in the name of such Grantor or its own name, or otherwise, take possession of and indorse and collect any checks, drafts, notes, acceptances or other instruments for the payment of moneys due under any Receivable or with respect to any other Collateral and file any claim or take any other action or proceeding in any court of law or equity or otherwise deemed appropriate by the Collateral Agent for the purpose of collecting any and all such moneys due under any Receivable or with respect to any other Collateral whenever payable;
(ii) in the case of any Intellectual Property, execute and deliver, and have recorded, any and all agreements, instruments, documents and papers as the Collateral Agent may request to evidence and/or perfect the Secured Parties security interest in such Intellectual Property and the goodwill and general intangibles of such Grantor relating thereto or represented thereby;
(iii) pay or discharge taxes and Liens levied or placed on or threatened against the Collateral, effect any repairs or provide any insurance called for by the terms of this Agreement and pay all or any part of the premiums therefor and the costs thereof;
(iv) execute, in connection with any sale provided for in Section 6.7 or 6.8, any indorsements, assignments or other instruments of conveyance or transfer with respect to the Collateral; and
(v) (1) direct any party liable for any payment under any of the Collateral to make payment of any and all moneys due or to become due thereunder directly to the Collateral Agent
or as the Collateral Agent shall direct; (2) ask or demand for, collect, and receive payment of and receipt for, any and all moneys, claims and other amounts due or to become due at any time in respect of or arising out of any Collateral; (3) sign and indorse any invoices, freight or express bills, bills of lading, storage or warehouse receipts, drafts against debtors, assignments, verifications, notices and other documents in connection with any of the Collateral; (4) commence and prosecute any suits, actions or proceedings at law or in equity in any court of competent jurisdiction to collect the Collateral or any portion thereof and to enforce any other right in respect of any Collateral; (5) defend any suit, action or proceeding brought against such Grantor with respect to any Collateral; (6) settle, compromise or adjust any such suit, action or proceeding and, in connection therewith, give such discharges or releases as the Collateral Agent may deem appropriate; (7) assign any Copyright, Patent or Trademark (along with the goodwill of the business to which any such Copyright, Patent or Trademark pertains), throughout the world for such term or terms, on such conditions, and in such manner, as the Collateral Agent shall in its sole discretion determine; and (8) generally, sell, transfer, pledge and make any agreement with respect to or otherwise deal with any of the Collateral as fully and completely as though the Collateral Agent were the absolute owner thereof for all purposes, and do, at the Collateral Agents option and such Grantors expense, at any time, or from time to time, all acts and things which the Collateral Agent deems necessary to protect, preserve or realize upon the Secured Parties security interests therein and to effect the intent of this Agreement, all as fully and effectively as such Grantor might do;
provided, that anything in this Section 7.1(a) to the contrary notwithstanding, the Collateral Agent agrees that it will not exercise any rights under the power of attorney provided for in this Section 7.1(a) unless an Event of Default shall have occurred and be continuing.
(b) If any Grantor fails to perform or comply with any of its agreements contained herein, the Collateral Agent, at its option, but without any obligation so to do, may give such Grantor written notice of such failure to perform or comply and if such Grantor fails to perform or comply within five Business Days of receiving such notice (or if the Collateral Agent reasonably determines that irreparable harm to the Collateral or to the security interest of the Secured Parties hereunder could result prior to the end of such five Business Day period), then the Collateral Agent may perform or comply, or otherwise cause performance or compliance, with such agreement.
(c) Each Grantor hereby ratifies all that said attorneys shall lawfully do or cause to be done by virtue hereof. All powers, authorizations and agencies contained in this Agreement are coupled with an interest and are irrevocable until this Agreement is terminated and the security interests created hereby are released.
7.2 Duty of Collateral Agent. To the extent permitted by law, the Collateral Agents sole duty with respect to the custody, safekeeping and physical preservation of the Collateral in its possession, under Section 9-207 of the UCC or otherwise, shall be to exercise reasonable care. None of the Collateral Agent, any other Secured Party or any of their respective officers, directors, employees or agents shall be liable for failure to demand, collect or realize upon any of the Collateral or for any delay in doing so or shall be under any obligation to sell or otherwise dispose of any Collateral upon the request of any Grantor or any other Person or to take any other action whatsoever with regard to the Collateral or any part thereof. The powers conferred on the Collateral Agent and the other Secured Parties hereunder are solely to protect the Collateral Agents and the other Secured Parties interests in the Collateral and shall not impose any duty upon the Collateral Agent or any other Secured Party to exercise any such powers. The Collateral Agent and the other Secured Parties shall be accountable only for amounts that they actually receive as a result of the exercise of such powers, and neither they nor any of their officers, directors, employees or agents shall be responsible to any Grantor, except for their own gross negligence,
bad faith or willful misconduct. In addition, the Collateral Agent shall not be liable or responsible for any loss or damage to any Collateral, or for any diminution in the value thereof, by reason of the act or omission of any warehousemen, carrier, forwarding agency, consignee or other bailee.
7.3 Authorization of Financing Statements. Pursuant to any applicable law, each Grantor authorizes (but does not obligate) the Collateral Agent to file or record financing statements and other filing or recording documents or instruments with respect to the Collateral without the signature of such Grantor in such form and in such offices as the Collateral Agent reasonably determines appropriate to perfect the security interests of the Collateral Agent (for the benefit of the Secured Parties) under this Agreement. Each Grantor authorizes the Collateral Agent to use the collateral description all personal property or any similar phrase in any such financing statements. Notwithstanding anything to the contrary contained herein or in applicable law, the Collateral Agent shall have no responsibility for (i) preparing, recording, filing, re-recording, or re-filing any financing statement, perfection statement, continuation statement or other instrument in any public office or for otherwise ensuring the perfection or maintenance of any security interest granted pursuant to, or contemplated by, this Agreement (ii) taking any necessary steps to preserve rights against any parties with respect to any Collateral or (iii) taking any action to protect against any diminution in value of the Collateral.
7.4 Authority of Collateral Agent. Each Grantor acknowledges that the rights and responsibilities of the Collateral Agent under this Agreement with respect to any action taken by the Collateral Agent or the exercise or non-exercise by the Collateral Agent of any option, voting right, request, judgment or other right or remedy provided for herein or resulting or arising out of this Agreement shall, as among the Collateral Agent and the other Secured Parties, be governed by the Indenture and by such other agreements with respect thereto as may exist from time to time among them, but, as between the Collateral Agent and the Grantors, the Collateral Agent shall be conclusively presumed to be acting as agent for the Secured Parties with full and valid authority so to act or refrain from acting, and no Grantor shall be under any obligation, or entitlement, to make any inquiry respecting such authority.
7.5 Additional Collateral Agent Terms.
(a) Any duty, role, responsibility, action or inaction contemplated or required on the part of the Collateral Agent hereunder is expressly subject to the terms and conditions of the Indenture and the Collateral Agent shall be entitled to the rights, powers, benefits, protections, immunities and indemnities set forth in the Indenture as if fully set forth herein. The permissive authorizations, entitlements, powers and rights (including the right to request that a Grantor take an action or deliver a document and the exercise of remedies following a Default) granted to the Collateral Agent herein shall not be construed as duties. Phrases such as satisfactory to the Collateral Agent, approved by the Collateral Agent, acceptable to the Collateral Agent, as determined by the Collateral Agent, in the Collateral Agents discretion, selected by the Collateral Agent, and phrases of similar import authorize and permit the Collateral Agent to approve, disapprove, determine, act or decline to act in its discretion, it being understood that the Collateral Agent in exercising such discretion shall be acting on the instructions of the Required Secured Parties and shall be fully protected in, and shall incur no liability in connection with, acting (or failing to act) pursuant to such instructions. With regards to any action or refusal to act that involves discretion (including, but not limited to the exercise of any remedies), the Collateral Agent shall be entitled to refrain from any act or the taking of any action hereunder or from the exercise of any power or authority vested in it hereunder or thereunder unless and until the Collateral Agent shall have received instructions from the Required Secured Parties and shall not be liable for any such delay in acting. Any indemnity or right to reimbursement granted to the Collateral Agent hereunder shall be in addition to, and not in place of, any indemnity granted to the Collateral Agent in any other document.
(b) If at any time the Collateral Agent is served with any judicial or administrative order, judgment, decree, writ or other form of judicial or administrative process which in any way affects the Collateral (including, but not limited to, orders of attachment or garnishment or other forms of levies or injunctions or stays relating to the transfer of the Collateral), the Collateral Agent (a) shall furnish to the Companies prompt written notice thereof and (b) is authorized to comply therewith in any manner as it or its legal counsel of its own choosing deems appropriate; and if the Collateral Agent complies with any such judicial or administrative order, judgment, decree, writ or other form of judicial or administrative process, the Collateral Agent shall not be liable to any of the parties hereto or to any other person or entity even though such order, judgment, decree, writ or process may be subsequently modified or vacated or otherwise determined to have been without legal force or effect.
SECTION 8. MISCELLANEOUS
8.1 Amendments in Writing. None of the terms or provisions of this Agreement may be waived, amended, supplemented or otherwise modified except in accordance with Article IX of the Indenture; provided, that annexes to this Agreement may be supplemented (but no existing provisions may be modified and no Collateral may be released) through Assumption Agreements, in substantially the form of Annex I duly executed by the Collateral Agent and the applicable Additional Grantor.
8.2 Notices. All notices, requests and demands to or upon the Collateral Agent or any Grantor hereunder shall be effected in the manner provided for in Article IX of the Indenture; provided that any such notice, request or demand to or upon any Subsidiary Guarantor shall be addressed to such Subsidiary Guarantor at its notice address set forth on Schedule 1.
8.3 No Waiver by Course of Conduct; Cumulative Remedies. Neither the Collateral Agent nor any other Secured Party shall by any act (except by a written instrument pursuant to Section 8.1 above), delay, indulgence, omission or otherwise be deemed to have waived any right or remedy hereunder or to have acquiesced in any Default or Event of Default. No failure to exercise, nor any delay in exercising, on the part of the Collateral Agent or any other Secured Party, any right, power or privilege hereunder shall operate as a waiver thereof. No single or partial exercise of any right, power or privilege hereunder shall preclude any other or further exercise thereof or the exercise of any other right, power or privilege. A waiver by the Collateral Agent or any other Secured Party of any right or remedy hereunder on any one occasion shall not be construed as a bar to any right or remedy which the Collateral Agent or such other Secured Party would otherwise have on any future occasion. The rights and remedies herein provided are cumulative, may be exercised singly or concurrently and are not exclusive of any other rights or remedies provided by law. By its acceptance of the benefits of this Agreement, each Secured Party agrees that the Indenture and any Collateral Document may be enforced only by the Collateral Agent as provided for in the Indenture, and that no Secured Party shall have any right individually to enforce or seek to enforce this Agreement or to realize upon any Collateral or other security given to secure the payment and performance of the Secured Obligations.
8.4 Enforcement Expenses; Indemnification. Each Grantor, jointly and severally, agrees to pay, indemnify and to save the Collateral Agent and the other Secured Parties harmless from, any and all liabilities, obligations, losses, damages, penalties, actions, judgments, suits, costs, expenses or disbursements of any kind or nature whatsoever with respect to the execution, delivery, enforcement, performance and administration of this Agreement to the extent the Issuer would be required to do so pursuant to Section 7.07 (taking into account the limitations set forth therein) of the Indenture. The agreements in this Section 8.4 shall survive repayment of the Secured Obligations and all other amounts payable under the Indenture and the other Collateral Documents and the resignation or removal of the Collateral Agent.
8.5 Successors and Assigns. This Agreement shall be binding upon the successors and assigns of each Grantor and shall inure to the benefit of the Collateral Agent and the other Secured Parties and their successors and permitted assigns; provided, that no Grantor may assign, transfer or delegate any of its rights or obligations under this Agreement without the prior written consent of the Collateral Agent (it being understood that Sales and fundamental changes permitted under the Indenture shall not be subject to this proviso).
8.6 [Reserved].
8.7 Counterparts. This Agreement may be executed by one or more of the parties to this Agreement on any number of separate counterparts (including by telecopy or other electronic means), and all of said counterparts taken together shall be deemed to constitute one and the same instrument.
8.8 Severability. Any provision of this Agreement which is prohibited or unenforceable in any jurisdiction shall, as to such jurisdiction, be ineffective to the extent of such prohibition or unenforceability without invalidating the remaining provisions hereof, and any such prohibition or unenforceability in any jurisdiction shall not invalidate or render unenforceable such provision in any other jurisdiction.
8.9 Section Headings. The section headings used in this Agreement are for convenience of reference only and are not to affect the construction hereof or be taken into consideration in the interpretation hereof.
8.10 Integration. This Agreement and the other Collateral Documents represent the agreement of the Grantors, the Collateral Agent and the other Secured Parties with respect to the subject matter hereof and thereof.
8.11 Governing Law; Jurisdiction; Etc.
(a) Governing Law. This Agreement and any claims, controversy, dispute or cause of action (whether in contract or tort or otherwise) based upon, arising out of or relating to this Agreement and the transactions contemplated hereby and thereby shall be governed by, and construed in accordance with, the Law of the State of New York.
(b) Jurisdiction. Each Grantor irrevocably and unconditionally agrees that it will not commence any action, litigation or proceeding of any kind or description, whether in law or equity, whether in contract or tort or otherwise, against the Collateral Agent, any other Secured Party, any Related Party of any of the foregoing, in any way relating to this Agreement or the transactions relating hereto or thereto, in a forum other than the courts of the State of New York sitting in New York County, and of the United States District Court of the Southern District of New York, and any appellate court from any thereof, and each of the parties hereto irrevocably and unconditionally submits to the exclusive jurisdiction of such courts and agrees that all claims in respect of any such action, litigation or proceeding may be heard and determined in such New York State court or, to the fullest extent permitted by applicable Law, in such Federal court. Each of the parties hereto agrees that a final judgment in any such action, litigation or proceeding shall be conclusive and may be enforced in other jurisdictions by suit on the judgment or in any other manner provided by Law. Nothing in this Agreement or in any other Collateral Document shall affect any right that the Collateral Agent or any other Secured Party may otherwise have to bring any action or proceeding relating to this Agreement or any other Collateral Document against the Issuer or its properties in the courts of any jurisdiction.
(c) Waiver of Venue. Each Grantor irrevocably and unconditionally waives, to the fullest extent permitted by applicable Law, any objection that it may now or hereafter have to the laying of venue of any action or proceeding arising out of or relating to this Agreement in any court referred to in paragraph (b) above. Each of the parties hereto hereby irrevocably waives, to the fullest extent permitted by applicable Law, the defense of an inconvenient forum to the maintenance of such action or proceeding in any such court.
(d) Service of Process. Each party hereto irrevocably and unconditionally consents to service of process in the manner provided for notices in Section 12.01 of the Indenture. Nothing in this Agreement will affect the right of any party hereto to serve process in any other manner permitted by applicable Law.
(e) Special Damages. Each party hereto irrevocably and unconditionally waives, to the maximum extent not prohibited by law, any right it may have to claim or recover in any legal action or proceeding referred to in this paragraph (e) any special, exemplary, punitive or consequential damages; provided, that nothing in this sentence shall limit the indemnification obligations of any Guarantor with respect to special, indirect, consequential or punitive damages arising in a third party claim against an Indemnitee.
8.12 Acknowledgements. Each Grantor hereby acknowledges that:
(a) it has been advised by counsel in the negotiation, execution and delivery of the Indenture, this Agreement and the other Collateral Documents to which it is a party;
(b) neither the Collateral Agent nor any other Secured Party has any fiduciary relationship with or duty to any Grantor arising out of or in connection with the Indenture, this Agreement or any of the other Collateral Documents, and the relationship between the Grantors, on the one hand, and the Collateral Agent and the other Secured Parties, on the other hand, in connection herewith or therewith is solely that of debtor and creditor; and
(c) no joint venture is created by the Indenture, this Agreement or by the other Collateral Documents or otherwise exists by virtue of the transactions contemplated hereby among the Collateral Agent and the other Secured Parties or among the Grantors and the Collateral Agent and the other Secured Parties.
8.13 Additional Grantors. Each Subsidiary of the Issuer that is required to become a party to this Agreement pursuant to Section 4.10 of the Indenture shall become a Grantor for all purposes of this Agreement upon execution and delivery by such Subsidiary of an Assumption Agreement in the form of Annex I hereto (each such Subsidiary, an Additional Grantor).
8.14 Releases.
(a) At such time as the Securities and the other Secured Obligations (other than contingent or indemnification obligations not then asserted or due) shall have been indefeasibly paid in full in cash, the Collateral Agent shall take such actions as shall be required to release its security interest in all Collateral, and to release all guarantee obligations provided for in any Collateral Document and this Agreement and all obligations (other than those expressly stated to survive such termination) of the Collateral Agent and each Grantor hereunder shall terminate, all without delivery of any instrument or performance of any act by any party, and all rights to the Collateral shall revert to the Grantors. At the request and sole expense of any Grantor following any such termination and upon the Collateral Agents receipt of any documentation required by the Indenture, the Collateral Agent shall assign, transfer and deliver to such
Grantor any Collateral held by the Collateral Agent hereunder, and execute and deliver to such Grantor such documents as such Grantor shall reasonably request to evidence such termination.
(b) If any of the Collateral shall be sold, transferred or otherwise Sold by any Grantor in a transaction permitted by the Indenture (other than to another Grantor), then (i) the security interest in any such Collateral shall be automatically released to the extent that such Sale does not (x) pertain to Voting Stock of the Issuer or any Subsidiary Guarantor or other Collateral in the possession of the Collateral Agent or (y) involve the filing of amendments to or termination of any financing statement or mortgage in favor of the Collateral Agent on behalf of the Secured Parties and (ii) the Collateral Agent, at the request and sole expense of such Grantor and upon the Collateral Agents receipt of any documentation required by the Indenture, shall execute and deliver to such Grantor all releases or other documents reasonably necessary or desirable for the release of the Liens created hereby on such Collateral. At the request and sole expense of the Issuer, a Subsidiary Guarantor shall be released from its obligations hereunder in the event that all the Voting Stock of such Subsidiary Guarantor shall be sold, transferred or otherwise Sold in a transaction permitted by the Indenture and the Collateral Agent will assign, transfer and deliver to the Issuer such of the applicable Collateral concerning such Voting Stock as may then be in possession of the Collateral Agent.
8.15 WAIVER OF JURY TRIAL. EACH PARTY HERETO HEREBY IRREVOCABLY WAIVES, TO THE FULLEST EXTENT PERMITTED BY APPLICABLE LAW, ANY RIGHT IT MAY HAVE TO A TRIAL BY JURY IN ANY LEGAL PROCEEDING DIRECTLY OR INDIRECTLY ARISING OUT OF OR RELATING TO THIS AGREEMENT OR THE TRANSACTIONS CONTEMPLATED HEREBY OR THEREBY (WHETHER BASED ON CONTRACT, TORT OR ANY OTHER THEORY). EACH PARTY HERETO (A) CERTIFIES THAT NO REPRESENTATIVE, AGENT OR ATTORNEY OF ANY OTHER PERSON HAS REPRESENTED, EXPRESSLY OR OTHERWISE, THAT SUCH OTHER PERSON WOULD NOT, IN THE EVENT OF LITIGATION, SEEK TO ENFORCE THE FOREGOING WAIVER AND (B) ACKNOWLEDGES THAT IT AND THE OTHER PARTIES HERETO HAVE BEEN INDUCED TO ENTER INTO THE INDENTURE, THIS AGREEMENT AND THE OTHER COLLATERAL DOCUMENTS BY, AMONG OTHER THINGS, THE MUTUAL WAIVERS AND CERTIFICATIONS IN THIS SECTION.
8.16 Reinstatement. Each Grantor agrees that, if any payment made by the Issuer, any Guarantor or other Person and applied to the Secured Obligations is at any time annulled, avoided, set aside, rescinded, invalidated, declared to be fraudulent or preferential or otherwise required to be refunded or repaid, or the Proceeds of any Collateral are required to be returned by any Secured Party to the Issuer or such Guarantor, its estate, trustee, receiver or any other party, including any Grantor, under any bankruptcy law, state or federal law, common law or equitable cause, then, to the extent of such payment or repayment, any Lien or other Collateral securing such liability shall be and remain in full force and effect, as fully as if such payment had never been made. If, prior to any of the foregoing, any Lien or other Collateral securing such Grantors liability hereunder shall have been released or terminated by virtue of the foregoing, such Lien or other Collateral shall be reinstated in full force and effect and such prior release, termination, cancellation or surrender shall not diminish, release, discharge, impair or otherwise affect the obligations of any such Grantor in respect of any Lien or other Collateral securing such obligation or the amount of such payment.
8.17 Independent Obligations. The obligations of each Grantor hereunder are independent of and separate from the Secured Obligations. If any Secured Obligation is not paid when due, or upon the occurrence and continuance of any Event of Default, the Collateral Agent may, at its sole election, proceed directly and at once, without notice, against any Grantor and any Collateral to collect and recover the full amount of any Secured Obligation then due, without first proceeding against any other Grantor,
the Issuer or any other Guarantor or any other Collateral and without first joining any other Grantor or the Issuer or any other Guarantor in any proceeding.
8.18 Intercreditor Agreement Governs. Notwithstanding anything herein to the contrary, the lien and security interest granted to the Collateral Agent pursuant to this Agreement and the exercise of any right or remedy by the Collateral Agent hereunder are subject to the provisions of the Intercreditor Agreement (once entered into). In the event of any conflict between the terms of the Intercreditor Agreement and this Agreement, the terms of the Intercreditor Agreement shall govern.
(Signature Pages Follow)
IN WITNESS WHEREOF, each of the undersigned has caused this Agreement to be duly executed and delivered as of the date first above written.
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SFX Entertainment, Inc. | ||
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430 Acquisition LLC | ||
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430R Acquisition, LLC | ||
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Beatport Japan, LLC | ||
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BEATPORT, LLC | ||
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EZ Festivals, LLC | ||
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ID&T/SFX Mysteryland LLC | ||
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ID&T/SFX North America LLC | ||
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ID&T/SFX Q-Dance LLC | ||
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ID&T/SFX Sensation LLC | ||
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ID&T/SFX TomorrowWorld LLC | ||
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Made Event, LLC | ||
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PITA I LLC | ||
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PITA III LLC | ||
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SFX Acquisition, LLC | ||
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SFX EDM Holdings Corporation | ||
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SFX EX IP LLC | ||
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SFX Experience, LLC | ||
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SFX Intermediate Holdco I LLC | ||
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SFX Intermediate Holdco II LLC | ||
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SFX International, Inc. Holdco II | ||
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SFX IP LLC | ||
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SFX Made IP LLC | ||
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By: |
/s/ Richard Rosenstein | |
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Name: |
Richard Rosenstein |
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Title: |
Chief Financial Officer |
Second Lien Collateral Agreement
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SFX Marketing LLC | ||
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SFX Nightlife Television LLC | ||
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SFX-320 Lincoln Operating LLC | ||
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SFX-Cameo Operating LLC | ||
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SFX-Disco Operating LLC | ||
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SFXE IP LLC | ||
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SFX-Huka Operating LLC | ||
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SFX-IDT N.A. Holding II LLC | ||
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SFX-IDT N.A. Holding LLC | ||
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SFX-LIC Operating LLC | ||
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SFX-Mokai Operating LLC | ||
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SFX-Opium Group Operating LLC | ||
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SFX-Star Island Operating LLC | ||
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SFX-VMX Holding LLC | ||
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SFX-VMX Operating LLC | ||
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Stereosonic US IP LLC | ||
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SFX-Disco Intermediate Holdco LLC | ||
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Readability LLC | ||
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SFX-Nightlife Operating LLC | ||
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By: |
/s/ Richard Rosenstein | |
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Name: |
Richard Rosenstein |
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Title: |
Chief Financial Officer |
Second Lien Collateral Agreement
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U.S. Bank National Association, as Collateral Agent | |
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By: |
/s/ Linda Garcia |
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Name: |
Linda Garcia |
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Title: |
Vice President |
Second Lien Collateral Agreement
Annex I to
Second Lien Collateral Agreement
ASSUMPTION AGREEMENT, dated as of [·], 201[·], made by [·] (the Additional Grantor), in favor of U.S. Bank National Association (US Bank), as Collateral Agent (in such capacity, the Collateral Agent) for the Holders (the Secured Parties) of the Second Lien Senior Secured Notes due 2019. All capitalized terms not defined herein shall have the meanings ascribed to them in the Indenture.
W I T N E S S E T H :
WHEREAS, SFX Entertainment, Inc., a Delaware corporation (the Issuer) and US Bank have entered into that certain Indenture, dated as of February 4, 2014 (as amended, restated, supplemented waived and/or otherwise modified from time to time, the Indenture);
WHEREAS, in connection with the Indenture, the Issuer and certain of its Subsidiaries (other than the Additional Grantor) have entered into the Second Lien Collateral Agreement, dated as of February 4, 2014 (as amended, restated, supplemented, waived and/or otherwise modified from time to time, the Second Lien Collateral Agreement) in favor of the Collateral Agent for the benefit of the Secured Parties;
WHEREAS, the Indenture requires the Additional Grantor to become a party to the Second Lien Collateral Agreement; and
WHEREAS, the Additional Grantor has agreed to execute and deliver this Assumption Agreement in order to become a party to the Second Lien Collateral Agreement;
NOW, THEREFORE, IT IS AGREED:
1. Second Lien Collateral Agreement. By executing and delivering this Assumption Agreement, the Additional Grantor, as provided in Section 8.13 of the Second Lien Collateral Agreement, hereby becomes a party to the Second Lien Collateral Agreement as a Grantor thereunder with the same force and effect as if originally named therein as a Grantor and, without limiting the generality of the foregoing, hereby expressly assumes all obligations and liabilities of a Grantor thereunder. The information set forth in Annex 1-A hereto is hereby added to the information set forth in the Schedules to the Second Lien Collateral Agreement. The Additional Grantor hereby represents and warrants, to the extent applicable, that each of the representations and warranties contained in Section 4 of the Second Lien Collateral Agreement is true and correct in all material respects on and as of the date hereof (after giving effect to this Assumption Agreement) as if made on and as of such date except to the extent that any representation and warranty relates to an earlier date, in which case such representation and warranty shall be true and correct in all material respects as of such earlier date.
2. GOVERNING LAW. THIS ASSUMPTION AGREEMENT SHALL BE GOVERNED BY, AND CONSTRUED AND INTERPRETED IN ACCORDANCE WITH, THE LAW OF THE STATE OF NEW YORK.
IN WITNESS WHEREOF, the undersigned has caused this Assumption Agreement to be duly executed and delivered as of the date first above written.
Annex I-A to
Assumption Agreement
Supplement to Schedule 1
Supplement to Schedule 2
Supplement to Schedule 3
Supplement to Schedule 4(a)
Supplement to Schedule 4(b)
Supplement to Schedule 5
Supplement to Schedule 6
Supplement to Schedule 7
Exhibit 10.71
EXECUTION VERSION
SECOND LIEN PATENT SECURITY AGREEMENT
SECOND LIEN PATENT SECURITY AGREEMENT (this Agreement), dated as of February 4, 2014, made by the Persons listed on the signature page hereto (the Grantor), in favor of U.S. Bank National Association, as collateral agent (in such capacity, together with its successors in such capacity, the Collateral Agent).
W I T N E S S E T H:
WHEREAS, pursuant to the Second Lien Guarantee and Collateral Agreement, dated as of the date hereof (the Guarantee and Collateral Agreement), among SFX Entertainment, Inc. (the Borrower), the grantors party thereto, and the Collateral Agent, each of the Grantors is required to execute and deliver this Agreement; and
WHEREAS, capitalized terms used herein and not otherwise defined herein shall have the meanings assigned to such terms in the Guarantee and Collateral Agreement and the rules of construction and other interpretive provisions specified in Section 1.02 of the Credit Agreement shall apply to this Agreement.
Accordingly, the Grantors and the Collateral Agent agree as follows:
SECTION 1. Grant of Security. Each Grantor hereby grants to the Collateral Agent for the ratable benefit of the Secured Parties a continuing security interest in all of such Grantors right, title and interest in or to any and all of the following assets and properties now owned or at any time hereafter acquired by such Grantor and wherever located or in which such Grantor now has or at any time in the future may acquire any right, title or interest (collectively, the Collateral):
(a) all of its Patents, including, without limitation, each United States Patent or patent application referred to on Schedule A hereto; and
(b) all proceeds of and revenues from the foregoing, including, without limitation, all proceeds of and revenues from any claim by such Grantor against third parties for past, present or future unfair competition with, or violation of intellectual property rights in connection with or injury to, or infringement or dilution of, any Patent owned by such Grantor (including, without limitation, any United States Patent identified in Schedule A hereto).
SECTION 2. Security for Obligations. The grant of a security interest in the Collateral by each Grantor under this Agreement secures the payment and performance of all Obligations of each Grantor now or hereafter existing under the Guarantee and Collateral Agreement.
SECTION 3. Recordation. Each Grantor authorizes and requests that the Commissioner for Patents at the United States Patent and Trademark Office record this Agreement.
SECTION 4. Grants, Rights and Remedies. This Agreement has been entered into in conjunction with the provisions of the Guarantee and Collateral Agreement. Each Grantor does hereby acknowledge and confirm that the grant of the security interest hereunder to, and the rights and remedies of, the Collateral Agent with respect to the Collateral are more fully set forth in the Guarantee and Collateral Agreement, the terms and provisions of which are incorporated herein by reference as if fully set forth herein. In the event of any conflict between the terms of this Agreement and the terms of the Guarantee and Collateral Agreement, the terms of the Guarantee and Collateral Agreement shall govern.
SECTION 5. Governing Law. This Agreement and any claims, controversy, dispute or cause of action (whether in contract or tort or otherwise) based upon, arising out of or relating to this Agreement and the transactions contemplated hereby and thereby shall be governed by, and construed in accordance with, the Law of the State of New York.
SECTION 6. Severability. Any provision of this Agreement which is prohibited or unenforceable in any jurisdiction shall, as to such jurisdiction, be ineffective to the extent of such prohibition or unenforceability without invalidating the remaining provisions hereof, and any such prohibition or unenforceability in any jurisdiction shall not invalidate or render unenforceable such provision in any other jurisdiction.
[Remainder of the page intentionally left blank]
IN WITNESS WHEREOF, each Grantor has duly executed this Agreement as of the day and year first above written.
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BEATPORT, LLC | |
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| |
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By: |
/s/ Richard Rosenstein |
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Name: Richard Rosenstein |
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Title: Chief Financial Officer |
Second Lien Patent Security Agreement
U.S. BANK NATIONAL ASSOCIATION, |
| |
as Collateral Agent |
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By |
/s/ Linda Garcia |
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Name: Linda Garcia |
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Title: Vice President |
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Second Lien Patent Security Agreement
SCHEDULE A
TO
PATENT SECURITY AGREEMENT
Patents
TITLE |
|
APP. NO. AND |
|
STATUS |
|
INVENTOR(S) |
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OWNER |
Systems And Methods For Selling Sounds |
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61/613,730 |
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Pending |
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Matthew Thomas |
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BEATPORT, LLC |
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Systems And Methods For Selling Sounds |
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13802585 |
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Pending |
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Matthew Thomas |
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BEATPORT, LLC |
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DJ Stem Systems and Methods |
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13802548 |
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Pending |
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Michael Peter Siciliano |
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BEATPORT, LLC |
Schedule to Patent Security Agreement
Exhibit 10.72
EXECUTION VERSION
SECOND LIEN TRADEMARK SECURITY AGREEMENT
SECOND LIEN TRADEMARK SECURITY AGREEMENT (this Agreement), dated as of February 4, 2014, made by each of the Persons listed on the signature pages hereto (collectively, the Grantors), in favor of U.S. Bank National Association, as Collateral Agent (in such capacity, together with its successors in such capacity, the Collateral Agent).
W I T N E S S E T H:
WHEREAS, pursuant to the Second Lien Guarantee and Collateral Agreement, dated as of the date hereof (the Guarantee and Collateral Agreement), among SFX Entertainment, Inc. (the Borrower), the grantors party thereto, and the Collateral Agent, the Grantors are required to execute and deliver this Agreement; and
WHEREAS, capitalized terms used herein and not otherwise defined herein shall have the meanings assigned to such terms in the Guarantee and Collateral Agreement and the rules of construction and other interpretive provisions specified in Section 1.02 of the Credit Agreement shall apply to this Agreement.
Accordingly, the Grantors and the Collateral Agent agree as follows:
SECTION 1. Grant of Security. Each Grantor hereby grants to the Collateral Agent for the ratable benefit of the Secured Parties a continuing security interest in all of such Grantors right, title and interest in or to any and all of the following assets and properties now owned or at any time hereafter acquired by such Grantor and wherever located or in which such Grantor now has or at any time in the future may acquire any right, title or interest (collectively, the Collateral):
(a) each Trademark, including, without limitation, each registered and applied for United States Trademark and all goodwill associated with or symbolized by each Trademark listed on Schedule A hereto; and
(b) all proceeds of and revenues from the foregoing, including, without limitation, all proceeds of and revenues from any claim by such Grantor against third parties for past, present or future unfair competition with, or violation of intellectual property rights in connection with or injury to, or infringement or dilution of, any Trademark owned by such Grantor (including, without limitation, any United States Trademark identified in Schedule A hereto).
SECTION 2. Security for Obligations. The grant of a security interest in the Collateral by each Grantor under this Agreement secures the payment and performance of all Obligations of such Grantor now or hereafter existing under the Guarantee and Collateral Agreement.
SECTION 3. Recordation. Each Grantor authorizes and requests that the Commissioner for Trademarks at the United States Patent and Trademark Office record this Agreement.
SECTION 4. Grants, Rights and Remedies. This Agreement has been entered into in conjunction with the provisions of the Guarantee and Collateral Agreement. Each Grantor does hereby acknowledge and confirm that the grant of the security interest hereunder to, and the rights and remedies of, the Collateral Agent with respect to the Collateral are more fully set forth in the Guarantee and Collateral Agreement, the terms and provisions of which are incorporated herein by reference as if fully set forth herein. In the event of any conflict between the terms of this Agreement and the terms of the Guarantee and Collateral Agreement, the terms of the Guarantee and Collateral Agreement shall govern.
SECTION 5. Counterparts. This Agreement may be executed by one or more of the parties to this Agreement on any number of separate counterparts (including by telecopy or other electronic means), and all of said counterparts taken together shall be deemed to constitute one and the same instrument.
SECTION 6. Governing Law. This Agreement and any claims, controversy, dispute or cause of action (whether in contract or tort or otherwise) based upon, arising out of or relating to this Agreement and the transactions contemplated hereby and thereby shall be governed by, and construed in accordance with, the Law of the State of New York.
SECTION 7. Severability. Any provision of this Agreement which is prohibited or unenforceable in any jurisdiction shall, as to such jurisdiction, be ineffective to the extent of such prohibition or unenforceability without invalidating the remaining provisions hereof, and any such prohibition or unenforceability in any jurisdiction shall not invalidate or render unenforceable such provision in any other jurisdiction.
[Remainder of the page intentionally left blank]
IN WITNESS WHEREOF, each Grantor has duly executed this Agreement as of the day and year first above written.
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SFX-LIC OPERATING LLC | |||
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By: |
/s/ Richard Rosenstein | |
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Name: |
Richard Rosenstein | |
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Title: |
Chief Financial Officer | |
Second Lien Trademark Security Agreement
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MADE EVENT, LLC | |
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| |
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| |
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/s/ Richard Rosenstein | |
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Name: |
Richard Rosenstein |
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Title: |
Chief Financial Officer |
Second Lien Trademark Security Agreement
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BEATPORT, LLC | |||
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| ||
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By: |
/s/ Richard Rosenstein | ||
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Name: |
Richard Rosenstein | |
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Title: |
Chief Financial Officer | |
Second Lien Trademark Security Agreement
|
SFX MARKETING LLC | |||
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By: |
/s/ Richard Rosenstein | ||
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Name: |
Richard Rosenstein | |
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Title: |
Chief Financial Officer | |
Second Lien Trademark Security Agreement
U.S. BANK NATIONAL ASSOCIATION, |
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as Collateral Agent |
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By |
/s/ Linda Garcia |
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Name: |
Linda Garcia | ||
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Title: |
Vice President | ||
Second Lien Trademark Security Agreement
SCHEDULE A
TO
TRADEMARK SECURITY AGREEMENT
U.S. Federal Trademark Registrations
TRADEMARK |
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APPLICATION |
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REGISTRATION |
|
STATUS |
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OWNER |
WORLDS LARGEST PAINT PARTY |
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85/240,789 |
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4,051,072 |
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Registered |
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SFX-LIC Operating LLC |
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2/11/2011 |
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11/1/2011 |
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STATE OF EMERGENCY |
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85/601,379 |
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4,253,706 |
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Registered |
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SFX-LIC Operating LLC |
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4/18/2012 |
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12/4/2012 |
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CANT STOP THE STATE |
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85/601,397 |
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4,253,707 |
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Registered |
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SFX-LIC Operating LLC |
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4/18/2012 |
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12/4/2012 |
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RMF |
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85/601,420 |
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4,253,709 |
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Registered |
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SFX-LIC Operating LLC |
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4/18/2012 |
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12/4/2012 |
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LIFE IN COLOR |
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85/638,822 |
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4,429,570 |
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Registered |
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SFX-LIC Operating LLC |
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5/30/2012 |
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11/5/2013 |
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U.S. Federal Trademark Applications
TRADEMARK |
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APPLICATION |
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OWNER |
DANCEGIVING SAVE ROOM FOR THE MUSIC |
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85/479,845 |
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SFX-LIC Operating LLC |
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11/23/2011 |
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|
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|
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I AM THANKFUL FOR MUSIC |
|
85/479,913 |
|
SFX-LIC Operating LLC |
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11/23/2011 |
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|
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RIVALRY MUSIC FESTIVAL |
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85/601,439 |
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SFX-LIC Operating LLC |
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4/18/2012 |
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BEYONDGLOW |
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85/613,814 |
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SFX-LIC Operating LLC |
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5/1/2012 |
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PAINTOPIA |
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85/943,432 |
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SFX-LIC Operating LLC |
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05/28/2013 |
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|
|
|
|
|
LIFE IN COLOR |
|
85/884,181 |
|
SFX-LIC Operating LLC |
|
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3/22/2013 |
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|
|
|
|
|
|
WORLDS LARGEST PAINT PARTY |
|
85/884,227 |
|
SFX-LIC Operating LLC |
|
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3/22/2013 |
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|
|
|
I GO HARD IN THE PAINT |
|
86/029,879 |
|
SFX-LIC Operating LLC |
|
|
8/6/2013 |
|
|
U.S. Federal Trademark Registrations
TRADEMARK |
|
APPLICATION |
|
REGISTRATION |
|
STATUS |
|
OWNER |
BASEWARE |
|
78/753,029 |
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3,158,076 |
|
Registered |
|
BEATPORT, LLC |
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11/14/2005 |
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10/17/2006 |
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|
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BEATBOT |
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85/485860 |
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4,185,671 |
|
Registered |
|
BEATPORT, LLC |
|
|
12/2/2011 |
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8/7/12 |
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|
|
|
|
|
|
|
|
|
|
BEATPORT |
|
76/518,151 |
|
2,985,842 |
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Registered |
|
BEATPORT, LLC |
|
|
5/30/2003 |
|
8/16/2005 |
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|
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|
|
|
|
|
|
|
BEATPORT MIX |
|
85/152,799 |
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4,040,816 |
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Registered |
|
BEATPORT, LLC |
|
|
10/14/2010 |
|
10/18/2011 |
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|
|
|
|
|
|
BEATPORT MIX & Design |
|
85/153,116 |
|
4,040,817 |
|
Registered |
|
BEATPORT, LLC |
|
10/14/2010 |
|
10/18/2011 |
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| |
|
|
|
|
|
|
|
|
|
BEATPORT SOUNDS |
|
85/396,844 |
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4,293,035 |
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Registered |
|
BEATPORT, LLC |
|
|
8/12/2011 |
|
2/19/2013 |
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|
|
|
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|
|
|
|
|
|
BEATPORTAL & Design |
|
77/198,205 |
|
3,425,679 |
|
Registered |
|
BEATPORT, LLC |
|
6/5/2007 |
|
5/13/2008 |
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| |
|
|
|
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|
|
|
|
BEATSOURCE |
|
77/20118,769 |
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3,524,861 |
|
Registered |
|
BEATPORT, LLC |
|
|
2/28/2007 |
|
10/28/2008 |
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|
|
|
TRADEMARK |
|
APPLICATION |
|
REGISTRATION |
|
STATUS |
|
OWNER |
GET DOWN Logo |
|
78/755,864 |
|
3,210,719 |
|
Registered |
|
BEATPORT, LLC |
|
11/17/2005 |
|
2/20/2007 |
|
|
|
| |
|
|
|
|
|
|
|
|
|
LOG ON. GET DOWN. |
|
76/627,972 |
|
3,058,549 |
|
Registered |
|
BEATPORT, LLC |
|
|
1/13/2005 |
|
2/14/2006 |
|
|
|
|
|
|
|
|
|
|
|
|
|
MASHBOX |
|
85/343,701 |
|
4,211,125 |
|
Registered |
|
BEATPORT, LLC |
|
|
6/10/2011 |
|
9/18/2012 |
|
|
|
|
|
|
|
|
|
|
|
|
|
MY BEATPORT |
|
85/332,533 |
|
4,163,489 |
|
Registered |
|
BEATPORT, LLC |
|
|
5/27/2011 |
|
6/26/2012 |
|
|
|
|
|
|
|
|
|
|
|
|
|
PLAY WITH MUSIC |
|
85/204,693 |
|
4,119,425 |
|
Registered |
|
BEATPORT, LLC |
|
|
12/23/2010 |
|
3/27/2012 |
|
|
|
|
|
|
|
|
|
|
|
|
|
PROMOONE |
|
78/737,889 |
|
3,145,372 |
|
Registered |
|
BEATPORT, LLC |
|
10/21/2005 |
|
9/19/2006 |
|
|
|
| |
|
|
|
|
|
|
|
|
|
SOUNDMAIL & Design |
|
77/157,863 |
|
3,380,595 |
|
Registered |
|
BEATPORT, LLC |
|
4/16/2007 |
|
2/12/2008 |
|
|
|
| |
|
|
|
|
|
|
|
|
|
PLAY WITH MUSIC |
|
85/605,758 |
|
4,451,997 |
|
Registered |
|
BEATPORT, LLC |
|
|
4/23/2012 |
|
12/17/2013 |
|
|
|
|
U.S. Federal Trademark Applications
TRADEMARK |
|
APPLICATION |
|
OWNER |
BEATPORT |
|
85/711,666 |
|
BEATPORT, LLC |
|
|
8/23/2012 |
|
|
|
|
|
|
|
BASEWARE DISTRIBUTION |
|
85/422,724 |
|
BEATPORT, LLC |
|
|
9/14/2011 |
|
|
|
|
|
|
|
BEATPORT PRO |
|
85/455,915 |
|
BEATPORT, LLC |
|
|
10/25/2011 |
|
|
|
|
|
|
|
BEATPORT (stylized) & Design |
|
85/920,281 |
|
BEATPORT, LLC |
|
|
5/1/2013 |
|
|
|
|
|
|
|
BEATPORT LOUNGE |
|
85/959,355 |
|
BEATPORT, LLC |
|
|
6/13/2013 |
|
|
|
|
|
|
|
BEATPORT PLAY (stylized) & Design |
|
85/919,987 |
|
BEATPORT, LLC |
|
|
5/1/2013 |
|
|
|
|
|
|
|
SOUNDS TO SAMPLE |
|
85/954,236 |
|
BEATPORT, LLC |
|
|
6/7/2013 |
|
|
|
|
|
|
|
WE KNOW THE FEELING |
|
86/060,932 |
|
BEATPORT, LLC |
|
|
9/10/2013 |
|
|
|
|
|
|
|
BEATPORT AMPLIFY |
|
86/080,058 |
|
BEATPORT, LLC |
|
|
10/1/2013 |
|
|
U.S. Federal Trademark Registrations
TRADEMARK |
|
APPLICATION |
|
REGISTRATION |
|
STATUS |
|
OWNER |
ELECTRIC ZOO (word mark) |
|
85/936,625 |
|
4,447,907 |
|
Registered |
|
MADE EVENT, LLC |
|
|
5/20/2013 |
|
12/10/2013 |
|
|
|
|
|
|
|
|
|
|
|
|
|
ELECTRIC ZOO (design) |
|
77/711,013 |
|
3,747,742 |
|
Registered |
|
MADE EVENT, LLC |
|
|
4/9/2009 |
|
2/9/2010 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Made (design) |
|
77/565,155 |
|
3,605,821 |
|
Registered |
|
MADE EVENT, LLC |
|
|
9/8/2008 |
|
4/14/2009 |
|
|
|
|
U.S. Federal Trademark Applications
TRADEMARK |
|
APPLICATION |
|
OWNER |
MADE (word mark) |
|
85/922,887 |
|
MADE EVENT, LLC |
|
|
5/3/2013 |
|
|
|
|
|
|
|
ELECTRIC ZOO (word mark) |
|
85/923,072 |
|
MADE EVENT, LLC |
|
|
5/3/2013 |
|
|
|
|
|
|
|
ELECTRIC ZOO (word mark) |
|
85/925,263 |
|
MADE EVENT, LLC |
|
|
5/7/2013 |
|
|
|
|
|
|
|
MADE (word mark) |
|
85/936,974 |
|
MADE EVENT, LLC |
|
|
5/20/2013 |
|
|
|
|
|
|
|
ELECTRIC BOO |
|
86/144,558 |
|
MADE EVENT, LLC |
|
|
12/16/2013 |
|
|
TRADEMARK |
|
APPLICATION |
|
OWNER |
SUNDAY SCHOOL |
|
86/144,746 |
|
MADE EVENT, LLC |
|
|
12/16/2013 |
|
|
|
|
|
|
|
SUNDAY SCHOOL |
|
86/144,819 |
|
MADE EVENT, LLC |
|
|
12/16/2013 |
|
|
U.S. Federal Trademark Registrations
TRADEMARK |
|
APPLICATION |
|
REGISTRATION |
|
STATUS |
|
OWNER |
FAME HOUSE |
|
85/571,597 |
|
4,241,401 |
|
Registered |
|
SFX MARKETING LLC |
|
|
3/16/2012 |
|
11/13/2012 |
|
|
|
|
Exhibit 21.1
Subsidiaries of SFX Entertainment, Inc.
Domestic |
|
State of Incorporation or Organization |
|
|
|
BEATPORT LLC |
|
Colorado |
|
|
|
ID&T/SFX North America LLC |
|
Delaware |
|
|
|
ID&T/SFX Sensation LLC |
|
Delaware |
|
|
|
ID&T/SFX TomorrowWorld LLC |
|
Delaware |
|
|
|
PITA I LLC |
|
Delaware |
|
|
|
SFX Acquisition, LLC |
|
Delaware |
|
|
|
SFX Entertainment International II, Inc. |
|
Delaware |
|
|
|
SFX Intermediate Holdco I LLC |
|
Delaware |
|
|
|
SFX Intermediate Holdco II LLC |
|
Delaware |
|
|
|
SFX-Disco Operating LLC |
|
Delaware |
|
|
|
SFXE IP LLC |
|
Delaware |
|
|
|
SFX-IDT N.A. Holding II LLC |
|
Delaware |
|
|
|
SFX-IDT N.A. Holding LLC |
|
Delaware |
|
|
|
SFX-Nightlife Operating LLC |
|
Delaware |
International |
|
Jurisdiction of Organization |
|
|
|
Accepté Holding B.V. |
|
The Netherlands |
|
|
|
B2S Holding B.V. |
|
The Netherlands |
|
|
|
I. D. & T. Events B.V. |
|
The Netherlands |
|
|
|
ID&T Holding B.V. |
|
The Netherlands |
|
|
|
ID&T Participation Holding B.V. |
|
The Netherlands |
|
|
|
I-Motion GmbH Events & Communication |
|
Germany |
|
|
|
Q-dance B.V. |
|
The Netherlands |
|
|
|
Q-Dance Partners B.V. |
|
The Netherlands |
|
|
|
Sensation Holding B.V. |
|
The Netherlands |
|
|
|
SFXE International Holdings C.V. |
|
The Netherlands |
|
|
|
SFXE Netherlands Holdings B.V. |
|
The Netherlands |
|
|
|
SFXE Netherlands Holdings Coöperatief U.A. |
|
The Netherlands |
|
|
|
SFX-Totem Operating Pty Ltd |
|
Australia |
Exhibit 23.1
Consent of Independent Registered Public Accounting Firm
We consent to the incorporation by reference in the Registration Statement (Form S-8 No. 333-192236) pertaining to the 2013 Equity Compensation Plan of SFX Entertainment, Inc. of our report dated March 31, 2014, with respect to the consolidated financial statements and schedule of SFX Entertainment, Inc., in this Annual Report (Form 10-K) for the year ended December 31, 2013.
/s/ Ernst & Young, LLP |
New York, NY |
March 31, 2014 |
OFFICER'S CERTIFICATION PURSUANT TO
RULE 13a-14(a)/15d-14(a) OF THE SECURITIES EXCHANGE ACT OF 1934
I, Robert F.X. Sillerman, certify that:
Date: March 31, 2014 | By: | /s/ ROBERT F.X. SILLERMAN Robert F.X. Sillerman Chairman of the Board and Chief Executive Officer |
OFFICER'S CERTIFICATION PURSUANT TO
RULE 13a-14(a)/15d-14(a) OF THE SECURITIES EXCHANGE ACT OF 1934
I, Richard Jay Rosenstein, certify that:
Date: March 31, 2014 | By: | /s/ RICHARD JAY ROSENSTEIN Richard Jay Rosenstein Chief Financial Officer |
SFX ENTERTAINMENT, INC.
CERTIFICATION OF PRINCIPAL EXECUTIVE OFFICER
PURSUANT TO RULE 13a-14(b) OF THE SECURITIES EXCHANGE ACT OF 1934
AND 18 U.S.C. SECTION 1350, AS
ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
I, Robert F.X. Sillerman, Chief Executive Officer of SFX Entertainment, Inc., a Delaware corporation (the "Registrant"), in connection with the Registrant's Annual Report on Form 10-K for the year ended December 31, 2013, as filed with the Securities and Exchange Commission on the date hereof (the "Report"), do hereby represent, warrant and certify, in compliance with Rule 13a-14(b) of the Securities Exchange Act of 1934 and 18 U.S.C Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that, to the best of my knowledge:
/s/ ROBERT F.X. SILLERMAN Robert F.X. Sillerman Chairman of the Board and Chief Executive Officer March 31, 2014 |
SFX ENTERTAINMENT, INC.
CERTIFICATION OF PRINCIPAL FINANCIAL OFFICER
PURSUANT TO RULE 13a-14(b) OF THE SECURITIES EXCHANGE ACT OF 1934
AND 18 U.S.C. SECTION 1350, AS
ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
I, Richard Jay Rosenstein, Jr., Chief Financial Officer of SFX Entertainment, Inc., a Delaware corporation (the "Registrant"), in connection with the Registrant's Annual Report on Form 10-K for the year ended December 31, 2013, as filed with the Securities and Exchange Commission on the date hereof (the "Report"), do hereby represent, warrant and certify, in compliance with Rule 13a-14(b) of the Securities Exchange Act of 1934 and 18 U.S.C Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that, to the best of my knowledge:
/s/ RICHARD JAY ROSENSTEIN Richard Jay Rosenstein Chief Financial Officer |
||
March 31, 2014 |
BHSE/LC9%PG$JL;Z&$-A8`IG%'Y!XE.+J`JLU Liabilities: Acquisition price protection Contingent consideration Total (included in other long-term liabilities) !!@V8--"D`8L&
M6E'@YK"A%TFGL%6DU+N3PK13F$YDH@-;EP9Z--"/`DG;,$B#AG&('@!&:9`;
MH6@SQC0PB0+7M58.;-,49J8:=M`BQR,O!BD'B'DL(GUA$8O(H689BZZ9I.I@
M=XI2=21?SW(M504--&C`I($F#5@TT*(!FP8<&FC30(<&NC30HX$^#0QH8$@#
M(QIP:6!,`Y,H<.UX[-+KNG/.MZG3-&B6!GEIT#P-6D0HJJGE34#J4FQ@0.I2
M?)0`WRKQN9B[O>DTR)FO+@SKWI<;4])P#2A,*)I06%"TH+"A<*!H0]&!H@M%
M#XH^%`,HAE",H'"A&$,Q@6(*Q0P*#XHY%`LHEDE"*EDVION-DN5S/639W=:E
M'-FYC]R)U`5*JEDH3"B:4%A0M*"PA:B=ARR+.>5&""9H0]&!H@M%#XH^%`,H
MAD*4SXU![M)&M]/(Z(0+,X^AF$`QA6(&A2>$V$)RC36_G::1L>O%[432-,O;
M:=>D4C7RAW^WP^S)UV1<*U5(SYP")54A%"8432@L*%I0V%`X4+2AZ$#1A:('
M11^*`11#*$90N%",H9A`,85B!H4'Q1R*!11+56AZY5KF4KG62+GRZ]T2NSA.
M+EL^%RW;"AE^JPN45+90F%`TH;"@:$%A0^%`T8:B`T47BAX4?2@&4`RA&$'A
M0C&&8@+%%(H9%!X4
12 Months Ended
FAIR VALUE MEASUREMENT
Schedule of contingent consideration
December 31,
2013
2012
$
630
$
—
38,386
2,313
$
39,016
$
2,313
12 Months Ended
Temporary Equity - Redemption rights and Redeemable non-controlling interest
Number of investors who have elected to exercise their redemption rights
0
Number of Shares
11,035,846
7,800,000
11,035,846
4,000,000
4,930,000
1,000,000
1,105,846
Price (in dollars per share)
$ 5.00
$ 5.00
$ 2.50
$ 5.00
$ 10.00
$ 13.00
Minimum percentage of voting interest acquired by third party that would accelerate repurchase right
50.00%
Period within which repurchase price is to be paid after receipt of notice from investors for exercising repurchase right
10 days
Rate of increase in repurchase price on nonpayment of repurchase price after receipt of notice from investors for exercising repurchase right (as a percent)
10.00%
Period of repurchase right that will be exercisable beginning on the second anniversary of the closing date
30 days
In Thousands, unless otherwise specified3 Months Ended
12 Months Ended
Intangible assets
Intangible, Gross
$ 329,815
$ 24,487
$ 329,815
$ 24,487
Accumulated Amortization
(23,403)
(916)
(23,403)
(916)
Intangible, Net
306,412
23,571
306,412
23,571
Amortization expense
11,025
4,235
4,255
2,963
469
420
27
22,478
916
0
In-process intangible assets
393
393
Aggregate amortization expense
2014
56,696
56,696
2015
56,134
56,134
2016
53,265
53,265
2017
42,429
42,429
2018
37,162
37,162
Thereafter
60,333
60,333
Intangible assets
Intangible, Gross
40,376
2,300
40,376
2,300
Accumulated Amortization
(3,380)
(364)
(3,380)
(364)
Intangible, Net
36,996
1,936
36,996
1,936
Intangible assets
Intangible, Gross
19,924
19,924
Accumulated Amortization
(965)
(965)
Intangible, Net
18,959
18,959
Intangible assets
Intangible, Gross
213,768
6,470
213,768
6,470
Accumulated Amortization
(13,114)
(437)
(13,114)
(437)
Intangible, Net
200,654
6,033
200,654
6,033
Intangible assets
Intangible, Gross
13,600
13,600
13,600
13,600
Accumulated Amortization
(2,720)
(2,720)
Intangible, Net
10,880
13,600
10,880
13,600
Intangible assets
Intangible, Gross
22,450
2,094
22,450
2,094
Accumulated Amortization
(1,607)
(112)
(1,607)
(112)
Intangible, Net
20,843
1,982
20,843
1,982
Intangible assets
Intangible, Gross
19,697
23
19,697
23
Accumulated Amortization
(1,617)
(3)
(1,617)
(3)
Intangible, Net
$ 18,080
$ 20
$ 18,080
$ 20
?27-Z@
MC!<9GR_K\R><*-C3'QS^`GO:"O#9L*<;.-QH=M+H.6GJJU=W5S\!``#__P,`
M4$L#!!0`!@`(````(0`;23'6CP4``"(6```/````>&PO=V]R:V)O;VLN>&UL
ME)C=;IM*%(7OCW3>P>+^U`;\$U=-*HPG":H#+N!4O1I1F]2H&"Q#FO;MSP;+
M9,$FH_8J&>Q9[+WFF\7@#Q]_'=+!S_A4)'EVK>GO1MH@SK;Y+LF^7VN;\/:_
M*VU0E%&VB](\BZ^UWW&A?;SY]Y\/+_GIQ[<\_S$@@:RXUO9E>7P_'!;;?7R(
MBG?Y,<[HDZ?\=(A*&IZ^#XOC*8YVQ3Z.RT,Z-$:CZ?`0)9EV5GA_^A.-_.DI
MV<;+?/M\B+/R+'**TZBD\HM]
TAEW*D'?0&C8K4*^U0G!X=(LN
M^/>HN"1YJ:3X#%W09W3Y%>SXB5U4Y%;O]H^D@F.C^M\K'!-BV%I"ME65,R'5
MXX(^H#UXW/T'``#__P,`4$L#!!0`!@`(````(0#4)XC>E`<```\J```9````
M>&PO=V]R:W-H965T
?5_F;E\F+
ML>-[8NY1U:3OQXUO5RX
MS_]BA;0.45U%M;),&H*P'G7-(PLS$KRP^**;-&!%BXE$*PI