<PAGE>   1
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                       SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549



                                    FORM 8-K

                                 CURRENT REPORT


     PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

         DATE OF REPORT (DATE OF EARLIEST EVENT REPORTED): MAY 29, 1998



                       CAPSTAR BROADCASTING PARTNERS, INC.
           (Exact name of registrants as specified in their charters)



          DELAWARE                    333-25683                  75-2672663
(State or other jurisdiction of    (Commission File            (IRS Employer
       incorporation)                  Number)               Identification No.)

600 CONGRESS AVENUE, SUITE 1400
          AUSTIN, TEXAS                                         78701
(Address of principal executive offices)                      (Zip code)



       Registrant's telephone number, including area code: (512) 340-7800

                                 NOT APPLICABLE
         (former name and former address, if changed since last report)

================================================================================




<PAGE>   2



ITEM 2.  ACQUISITION OR DISPOSITION OF ASSETS.

SFX ACQUISITION

         On May 29, 1998, SBI Holding Corporation, a Delaware corporation
("Parent"), acquired SFX Broadcasting, Inc. (now known as Capstar
Communications, Inc.), a Delaware corporation ("SFX"). The acquisition was
effected through the merger (the "Merger") of SBI Radio Acquisition Corporation,
a Delaware corporation and a wholly-owned subsidiary of Parent ("Sub"), with and
into SFX, with SFX as the surviving corporation. The acquisition of SFX by
Parent resulted in a change of control of SFX. As a result of the Merger, SFX
became an indirect subsidiary of Capstar Broadcasting Partners, Inc., a Delaware
corporation and sole indirect stockholder of Parent (the "Company"). Capstar
Radio Broadcasting Partners, Inc., a wholly owned subsidiary of the Company
("Capstar Radio"), owns all of the outstanding common stock of Parent. Capstar
Broadcasting Corporation, a Delaware corporation ("CBC"), is the sole common
stockholder of the Company.

         The holders of (i) Class A common stock, par value $.01 per share ("SFX
Class A Common Stock"), of SFX were paid $75.00 per share, (ii) Class B common
stock, par value $.01 per share ("SFX Class B Common Stock"), of SFX were paid
$97.50 per share, (iii) Series C Redeemable Preferred Stock, par value $.01 per
share ("SFX Series C Preferred Stock"), of SFX were paid $1,009.73 per share,
and (iv) Series D Cumulative Convertible Exchangeable Preferred Stock, par value
$.01 per share ("SFX Series D Preferred Stock" and together with the SFX Class A
Common Stock, SFX Class B Common Stock, and SFX Series C Preferred Stock, the
"SFX Stock"), of SFX were paid $82.4025 per share. Each issued and outstanding
share of 125/8% Series E Cumulative Exchangeable Preferred Stock, par value $.01
per share ("SFX Series E Preferred Stock"), of SFX continues to be outstanding.
SFX has delivered a notice of redemption to each holder of the SFX Series E
Preferred Stock with respect to a partial redemption of the outstanding shares
of SFX Series E Preferred Stock that will be effected in accordance with the
terms of the certificate of designation governing the SFX Series E Preferred
Stock. From and after the effective time of the Merger (as defined below), each
option or warrant to purchase shares of the capital stock of SFX represented
only the right to receive cash from SFX (net of any applicable exercise price).
The total consideration paid by CBC in the Merger was approximately $1.5 billion
(the "Merger Consideration"), including the repayment of the outstanding balance
under the existing credit facility of SFX (the "SFX Credit Facility") of
approximately $313.0 million. The Merger Consideration was determined through
arms' length negotiations between CBC and SFX.

         In connection with the Merger and other related transactions, the
Company (i) borrowed $596.2 million (the "Capstar Loan") under the Capstar
Credit Facility (as defined below) and (ii) received approximately $265.0
million from sales of certain assets. The net proceeds from these transactions,
in part, were, or will be, used (i) to finance the Merger and other related
transactions, (ii) to repay existing indebtedness under the SFX Credit Facility,
(iii) to purchase additional shares of common stock of SFX, (iv) to redeem
approximately $154.0 million aggregate principal amount of SFX's 10 3/4% Senior
Subordinated Notes Due 2006 (the "10 3/4% SFX Notes") for an aggregate purchase
price of $173.3 million, including a $16.6 million redemption premium and $2.8
million of accrued interest and (iv) to redeem approximately $119.6 million
aggregate liquidation preference of the SFX Series E Preferred Stock for an
aggregate purchase price of approximately $141.6 million, including a $15.1
million redemption premium and $6.9 million of accumulated dividends.

         In connection with the Merger, Capstar Radio, as the borrower, entered
into a new Credit Agreement, dated as of May 29, 1998 (the "Capstar Credit
Facility"), with the Company, CBC, and the financial institutions party thereto.
The Capstar Credit Facility consists of a $500.0 million revolving loan, a
$450.0 million A term loan and a $400.0 million B term loan. The Capstar Credit
Facility will also contain provisions for additional terms loans and revolving
loans in an aggregate amount up to $550.0 million, subject, in all instances, to
future commitment availability from the lenders at their discretion.

         The assets of SFX, included among other things, real property and
equipment. Such real property was used by SFX in connection with its radio
broadcasting business. The Company intends to continue to use such assets in the
radio broadcasting business.



                                       2


<PAGE>   3


         Upon consummation of the Merger and other related transactions (as
described below), the consummation of some of which are subject to various
conditions, the Company, through its directly and indirectly wholly-owned
subsidiaries, will own and operate or provide services to 299 radio stations
(208 FM and 91 AM) in 75 mid-sized markets in the United States.

OTHER RELATED TRANSACTIONS.

         KODA Exchange. On May 29, 1998, SFX, through its indirect, wholly-owned
subsidiaries, exchanged station KODA-FM in Houston, Texas for Chancellor Media
Corporation of Los Angeles radio stations WAPE-FM and WFYV-FM in Jacksonville,
Florida and approximately $90.25 million in cash (the "KODA Exchange"). In a
deferred like kind exchange transaction, the indirect, wholly-owned subsidiaries
of SFX, through a qualified intermediary, used the $90.25 million in cash
received from Chancellor Media Corporation of Los Angeles to acquire radio
stations KASE-FM, KVET-AM and KVET-FM in Austin, Texas. The deemed value of the
KODA Exchange was $143.3 million as determined through arms' length negotiations
between such subsidiaries and Chancellor Media Corporation of Los Angeles. The
assets of the radio stations consist of, among other things, broadcasting
licenses granted by the Federal Communications Commission ("FCC"), transmitting
antennae, transmitters and other broadcasting and technical equipment, technical
information and data and certain real property. Such subsidiaries currently
intends to continue broadcasting operations of the radio stations and to utilize
the assets thereof in such operations.

         Nashville Acquisition. On May 21, 1998, SFX completed the acquisition
of three radio stations (two FM and one AM) in the Nashville, Tennessee market
from Sinclair Broadcasting Group ("Sinclair Broadcasting") for an aggregate
purchase price of approximately $35.0 million (the "Nashville Purchase Price").
The assets of the radio stations consist of, among other things, broadcasting
licenses granted by the FCC, transmitting antennae, transmitters and other
broadcasting and technical equipment, technical information and data and certain
real property. SFX currently intends to continue broadcasting operations of the
radio stations and to utilize the assets thereof in such operations. The
Nashville Purchase Price was determined through arms' length negotiations
between SFX and Sinclair Broadcasting. SFX funded the Nashville Purchase Price
from excess cash on hand.

         Greenville Disposition. On May 29, 1998, due to governmental
restrictions on multiple station ownership, the Company, through its indirect,
wholly-owned subsidiaries, completed the disposition of the assets of four radio
stations (three FM and one AM) in the Greenville, South Carolina market for
approximately $35.0 million (the "Greenville Sale Price") to Clear Channel
Radio, Inc. ("CCR"). The assets of the radio stations consist of, among other
things, broadcasting licenses granted by the FCC, transmitting antennae,
transmitters and other broadcasting and technical equipment, technical
information and data and certain real property. The Greenville Sale Price was
determined through arms' length negotiations between such subsidiaries and CCR.

         Upper Fairfield Disposition. On May 29, 1998, due to governmental
restrictions on multiple station ownership, the Company, through its indirect,
wholly-owned subsidiaries, assigned the assets of four radio stations (two FM
and two AM), subject to a right of repurchase, with an aggregate fair market
value at such date of approximately $15.0 million (the "Estimated Upper
Fairfield Sale Price") to a trust, whose trustee is Henry M. Rivera (the
"Trustee") and whose beneficiary is CBC. Concurrently with such assignment, such
subsidiaries contributed their right to repurchase such assets to Upper
Fairfield Radio, L.L.C. ("Upper Fairfield") in exchange for all of the
outstanding ownership interests in Upper Fairfield. Upon the approval by the
FCC, it is expected that the Trustee will sell the assets to Upper Fairfield for
approximately $14.9 million and such subsidiaries will sell all of their voting
interests in Upper Fairfield to BBR II, L.L.C. for $150,000. After the sale of
the assets to Upper Fairfield, the Trustee will distribute the proceeds to CBC.
Such subsidiaries will retain a non-voting interest in Upper Fairfield. The
assets of the radio stations consist of, among other things, broadcasting
licenses granted by the FCC, transmitting antennae, transmitters and other
broadcasting and technical equipment, technical information and data and certain
real property.

         Daytona Beach-WGNE Disposition. On May 29, 1998, due to governmental
restrictions on multiple station ownership, two indirect, wholly-owned
subsidiaries of SFX completed the disposition of the assets of one FM radio
station in the Daytona Beach, Florida market for consideration of approximately
$11.5 million (the "Daytona Beach Sale Price") to Clear Channel Metroplex, Inc.
and Clear Channel Metroplex Licensee, Inc. (collectively, "CCM"). The assets 




                                       3

<PAGE>   4


of the radio station consist of, among other things, broadcasting licenses
granted by the FCC, transmitting antennae, transmitters and other broadcasting
and technical equipment, technical information and data and certain real
property. The Daytona Beach Sale Price was determined through arms' length
negotiations between such subsidiaries and CCM.

         Long Island Disposition. On May 29, 1998, due to governmental
restrictions on multiple station ownership, four indirect, wholly-owned
subsidiaries of SFX completed the disposition of the assets of four radio
stations (three FM and one AM) in the Long Island, New York market for an
aggregate sale price in cash of approximately $48.0 million (the "Long Island
Sale Price") to Cox Radio, Inc. ("Cox"). The assets of the radio stations
consist of, among other things, broadcasting licenses granted by the FCC,
transmitting antennae, transmitters and other broadcasting and technical
equipment, technical information and data and certain real property. The Long
Island Sale Price was determined through arms' length negotiations between such
subsidiaries and Cox.

         Houston-KKPN Disposition. On May 29, 1998, due to governmental
restrictions on multiple station ownership, SFX, through two of its indirect,
wholly-owned subsidiaries, completed the disposition of the assets of one FM
radio station in the Houston, Texas market for cash consideration of
approximately $54.0 million (the "Houston-KKPN Sale Price") to HBC Houston, Inc.
and HBC Houston License Corporation (collectively, "HBC"). Pursuant to an
agreement with Chancellor Media, CBC will pay 50% of the sale proceeds in excess
of $50.0 million, approximately $2.0 million, to Chancellor Media. The assets of
the radio station consist of, among other things, broadcasting licenses granted
by the FCC, transmitting antennae, transmitters and other broadcasting and
technical equipment, technical information and data and certain real property.
The Houston-KKPN Sale Price was determined through arms' length negotiations
between CBC and HBC.

ITEM 7.  FINANCIAL STATEMENTS AND EXHIBITS.

(a)      FINANCIAL STATEMENTS OF BUSINESSES ACQUIRED.

         The following information is included in this report beginning at page
         F-1:

         SFX Broadcasting, Inc.

         -    Report of Independent Auditors
         -    Consolidated Balance Sheets as of March 31, 1998 and as of 
              December 31, 1997 and 1996
         -    Consolidated Statements of Operations for the three months ended 
              March 31, 1998 and 1997 and for the years ended December 31, 1997,
              1996 and 1995 
         -    Consolidated Statements of Shareholders' Equity for the three
              months ended March 31, 1998 and 1997 and for the years ended 
              December 31, 1997, 1996 and 1995 
         -    Consolidated Statements of Cash Flows for the three months ended 
              March 31, 1998 and for the years ended December 31, 1997, 1996 and
              1995 
         -    Notes to Consolidated Financial Statements

(b)      PRO FORMA FINANCIAL INFORMATION.

         It is impracticable to provide the required pro forma financial
information at the time of this Report on Form 8-K because such information is
not currently available. The required pro forma financial information will be
filed as an amendment to this Report on Form 8-K as soon as practicable, but not
later than 60 days after the date this Report on Form 8-K is required to be
filed.




                                       4



<PAGE>   5


(c)      EXHIBITS.

         2.1.1    Agreement and Plan of Merger, dated as of August 24, 1997 (the
                  "SFX Merger Agreement"), by and among SBI Holding Corporation,
                  SBI Radio Acquisition Corporation and SFX. (1)

         2.1.2    Amendment No. 1 to SFX Merger Agreement.(2)

         2.1.3    Amendment No. 2 to SFX Merger Agreement.(3)

         10.1     Credit Agreement, dated as of May 29, 1998, among Capstar
                  Radio Broadcasting Partners, Inc., as the borrower, the
                  Company, CBC and the financial institutions party thereto. The
                  Credit Agreement filed herewith excludes the exhibits and
                  schedules thereto. The contents of such exhibits and schedules
                  are described in the Credit Agreement.(4)

------------------


(1)      Incorporated by reference to SFX's Current Report on Form 8-K, dated
         August 26, 1997, File No. 000-22486.

(2)      Incorporated by reference to SFX's Annual Report on Form 10-K for the
         year ended December 31, 1997, File No. 000-22486.

(3)      Incorporated by reference to SFX's Current Report on Form 8-K dated
         February 17, 1998, File No. 000-22486.

(4)      Incorporated by reference to CBC's Current Report on Form 8-K dated 
         June 15, 1998, File No. 333-48819.

                                       5

<PAGE>   6


                                   SIGNATURES

         Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrants have duly caused this report to be signed on their behalf by the
undersigned thereunto duly authorized.

                                             CAPSTAR BROADCASTING PARTNERS, INC.
                                             (Registrant)


                                             By: /s/ PAUL D. STONE
                                                --------------------------------
                                             Name: Paul D. Stone
                                                  ------------------------------
                                             Title: Executive Vice President
                                                   -----------------------------


Date:    June 12, 1998

<PAGE>   7
 
                         REPORT OF INDEPENDENT AUDITORS
 
Board of Directors
SFX Broadcasting, Inc.
 
     We have audited the accompanying consolidated balance sheets of SFX
Broadcasting, Inc. and Subsidiaries as of December 31, 1997 and 1996, and the
related consolidated statements of operations, shareholders' equity, and cash
flows for each of the three years in the period ended December 31, 1997. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
 
     We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
 
     In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
SFX Broadcasting, Inc. and Subsidiaries at December 31, 1997 and 1996, and the
consolidated results of their operations and their cash flows for each of the
three years in the period ended December 31, 1997 in conformity with generally
accepted accounting principles.
 
                                            ERNST & YOUNG LLP
 
New York, New York
March 5, 1998 except for
  Notes 2 and 14
  as to which the date
  is April 27, 1998
 
                                     F-1

<PAGE>   8
 
                    SFX BROADCASTING, INC. AND SUBSIDIARIES
 
                          CONSOLIDATED BALANCE SHEETS
                             (DOLLARS IN THOUSANDS)
 
                                     ASSETS
 
<TABLE>
<CAPTION>
                                                                              DECEMBER 31,
                                                           MARCH 31,     ----------------------
                                                             1998           1997         1996
                                                          -----------    ----------    --------
                                                          (UNAUDITED)
<S>                                                       <C>            <C>           <C>
Current Assets:
  Cash and cash equivalents.............................  $   38,464     $   24,686    $ 10,601
  Cash pledged for letters of credit....................          --             --      20,000
  Accounts receivable less allowance for doubtful
     accounts of $2,400 in 1998, $2,264 in 1997 and
     $1,620 in 1996.....................................      64,447         71,241      47,275
  Assets under contract for sale........................      38,268         42,883       8,352
  Prepaid and other current assets......................       3,791          3,109       2,461
  Receivable from SFX Entertainment.....................     125,378         11,539          --
                                                          ----------     ----------    --------
          Total current assets..........................     270,348        153,458      88,689
Property and equipment:
  Land..................................................       6,169          6,169       6,791
  Buildings and improvements............................      20,389         18,295      11,485
  Broadcasting equipment and other......................      68,714         67,821      54,736
                                                          ----------     ----------    --------
                                                              95,272         92,285      73,012
Less accumulated depreciation and amortization..........     (19,976)       (17,456)    (10,192)
                                                          ----------     ----------    --------
Net property and equipment..............................      75,296         74,829      62,820
Intangible Assets:
  Broadcast licenses....................................     915,020        913,887     558,640
  Goodwill..............................................     131,601        131,601      98,165
  Deferred financing costs..............................      22,250         22,250      19,504
  Other.................................................       5,406          5,406       4,727
                                                          ----------     ----------    --------
                                                           1,074,277      1,073,144     681,036
Less accumulated amortization...........................     (46,898)       (39,580)    (16,933)
                                                          ----------     ----------    --------
Net intangible assets...................................   1,027,379      1,033,564     664,103
Net assets to be distributed to shareholders............      11,454        102,144          --
Deposits and other payments for pending acquisitions....       4,295          5,830      31,692
Other assets............................................       5,123          5,790      12,023
                                                          ----------     ----------    --------
          Total Assets..................................  $1,393,895     $1,375,615    $859,327
                                                          ==========     ==========    ========
</TABLE>
 
                            See accompanying notes.
 
                                     F-2

<PAGE>   9
 
                    SFX BROADCASTING, INC. AND SUBSIDIARIES
 
                          CONSOLIDATED BALANCE SHEETS
                  (DOLLARS IN THOUSANDS, EXCEPT SHARE AMOUNTS)
 
                      LIABILITIES AND SHAREHOLDERS' EQUITY
 
<TABLE>
<CAPTION>
                                                                               DECEMBER 31,
                                                             MARCH 31,    ----------------------
                                                               1998          1997         1996
                                                            -----------   ----------    --------
                                                            (UNAUDITED)
<S>                                                         <C>           <C>           <C>
Current Liabilities:
  Accounts payable........................................  $   14,624    $    8,665    $ 10,921
  Accrued expenses........................................      11,966        19,246      21,913
  Payable to former national sales representative.........      11,783        23,025          --
  Accrued interest and dividends..........................      25,851        20,475       7,111
  Income tax payable......................................     115,037            --          --
  Current portion of long-term debt.......................         535           509         231
  Current portion of capital lease obligations............          82           101         150
                                                            ----------    ----------    --------
Total current liabilities.................................     179,878        72,021      40,326
Long-term debt, less current portion......................     763,882       763,966     480,875
Capital lease obligations, less current portion...........         103           126         204
Deferred income taxes.....................................      77,781       102,681      91,352
                                                            ----------    ----------    --------
Total liabilities.........................................   1,021,644       938,794     612,757
Redeemable preferred stock................................     376,615       361,996     145,999
Minority interests -- SFX Entertainment...................      56,200            --          --
Commitments and contingencies
Shareholders' Equity (Deficit):
  Class A Voting common stock, $.01 par value; 100,000,000
     shares authorized; and 9,562,602 issued and 9,532,157
     outstanding at March 31, 1998, 9,508,379 issued and
     9,477,934 outstanding at December 31, 1997 and
     8,089,367 issued and 8,063,348 outstanding at
     December 31, 1996....................................          95            95          81
  Class B Voting convertible common stock, $.01 par value;
     10,000,000 shares authorized; 1,190,911 issued and
     1,047,037 outstanding at March 31, 1998 and at
     December 31, 1997 and 1,208,810 issued and 1,064,936
     outstanding at December 31, 1996.....................          12            12          12
Additional paid-in capital................................     183,141       185,537     189,920
Treasury Stock; 174,319 shares at March 31, 1998 and
  December 31, 1997 and 170,192 shares at December 31,
  1996....................................................      (6,523)       (6,523)     (6,393)
Accumulated deficit.......................................    (237,289)     (104,296)    (83,049)
                                                            ----------    ----------    --------
Total shareholders' equity (deficit)......................     (60,564)       74,825     100,571
                                                            ----------    ----------    --------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)......  $1,393,895    $1,375,615    $859,327
                                                            ==========    ==========    ========
</TABLE>
 
                            See accompanying notes.
 

                                     F-3
<PAGE>   10
 
                    SFX BROADCASTING, INC. AND SUBSIDIARIES
 
                     CONSOLIDATED STATEMENTS OF OPERATIONS
                (DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
 
<TABLE>
<CAPTION>
                                                   THREE MONTHS ENDED
                                                       MARCH 31,               YEAR ENDED DECEMBER 31,
                                                 ----------------------   ---------------------------------
                                                    1998        1997        1997        1996        1995
                                                 ----------   ---------   ---------   ---------   ---------
                                                      (UNAUDITED)
<S>                                              <C>          <C>         <C>         <C>         <C>
Gross revenues.................................  $   74,405   $  50,994   $ 306,842   $ 162,011   $  87,140
Less agency commissions........................      (8,654)     (6,003)    (36,478)    (18,950)    (10,310)
                                                 ----------   ---------   ---------   ---------   ---------
Net revenues...................................      65,751      44,991     270,364     143,061      76,830
Station operating expenses.....................      44,636      29,916     167,063      92,816      51,039
Depreciation, amortization, duopoly integration
  costs and acquisition related costs..........      10,653       7,485      38,232      17,311       9,137
Corporate expenses, net of $2,206 allocated to
  SFX Entertainment in 1997, including related
  party expenses of $151 in 1996 and $330 in
  1995, net of related party advisory fees of
  $802 in 1996.................................       1,569       1,035       6,837       6,261       3,797
Non-cash stock compensation....................         138         156         624          52          --
Non-recurring and unusual charges, including
  adjustments to broadcast rights agreement....      24,974          --      20,174      28,994       5,000
                                                 ----------   ---------   ---------   ---------   ---------
Total operating expenses.......................      81,970      38,592     232,930     145,434      68,973
                                                 ----------   ---------   ---------   ---------   ---------
Operating income (loss)........................     (16,219)      6,399      37,434      (2,373)      7,857
Investment income..............................        (202)     (1,654)      2,821       4,017         650
Interest expense...............................      19,190      12,712     (64,506)    (34,897)    (12,903)
Loss on sale of radio station..................          --          --          --      (1,900)         --
                                                 ----------   ---------   ---------   ---------   ---------
Loss from continuing operations before income
  taxes and extraordinary item.................     (35,207)     (4,659)    (24,251)    (35,153)     (4,396)
Income tax expense.............................         210         285         810         480          --
                                                 ----------   ---------   ---------   ---------   ---------
Loss from continuing operations before
  extraordinary item...........................     (35,417)     (4,944)    (25,061)    (35,633)     (4,396)
Discontinued operations:
  Income (loss) from operations to be
    distributed to shareholders, net of
    taxes......................................     (97,576)     (1,544)      3,814          --          --
  Loss on disposal of operations to be
    distributed to shareholders................          --          --          --          --          --
                                                 ----------   ---------   ---------   ---------   ---------
Income (loss) from discontinued operations.....     (97,576)     (1,544)      3,814          --          --
                                                 ----------   ---------   ---------   ---------   ---------
Loss before extraordinary item.................    (132,993)     (6,488)    (21,247)    (35,633)     (4,396)
Extraordinary loss on debt retirement..........          --          --          --      15,219          --
                                                 ----------   ---------   ---------   ---------   ---------
Net loss.......................................    (132,993)     (6,488)    (21,247)    (50,852)     (4,396)
Redeemable preferred stock dividends and
  accretion....................................      10,350       7,952      38,510       6,061         291
                                                 ----------   ---------   ---------   ---------   ---------
Net loss applicable to common stock............  $  143,343   $ (14,440)  $ (59,757)  $ (56,913)  $  (4,687)
                                                 ==========   =========   =========   =========   =========
Loss per basic common share from continuing
  operations...................................  $    (4.34)  $   (1.41)  $   (6.67)  $   (5.51)  $   (0.71)
(Loss) income per basic common share from
  operations to be distributed to
  shareholders.................................       (9.24)      (0.17)       0.40          --          --
                                                 ----------   ---------   ---------   ---------   ---------
Loss per basic common share before
  extraordinary item...........................  $   (13.58)  $   (1.58)  $   (6.27)  $   (5.51)  $   (0.71)
Extraordinary loss on debt retirement per basic
  common share.................................          --          --          --       (2.01)         --
                                                 ----------   ---------   ---------   ---------   ---------
Loss per basic common share....................  $   (13.58)  $   (1.58)  $   (6.27)  $   (7.52)  $   (0.71)
                                                 ==========   =========   =========   =========   =========
Weighted average common shares outstanding.....  10,554,130   9,161,433   9,526,429   7,563,600   6,595,728
                                                 ==========   =========   =========   =========   =========
</TABLE>
 
                            See accompanying notes.

                                     F-4
<PAGE>   11
 
                     SFX BROADCASTING INC. AND SUBSIDIARIES
 
                CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
 YEARS ENDED DECEMBER 31, 1995, 1996, AND 1997 AND THREE MONTHS ENDED MARCH 31,
                                      1998
                             (DOLLARS IN THOUSANDS)
 
<TABLE>
<CAPTION>
                                 CLASS A   CLASS B   PAID-IN    TREASURY   ACCUMULATED
                                 COMMON    COMMON    CAPITAL     STOCK       DEFICIT       TOTAL
                                 -------   -------   --------   --------   -----------   ---------
<S>                              <C>       <C>       <C>        <C>        <C>           <C>
Balance, December 31, 1994.....    $48       $ 9     $ 76,600        --     $ (27,801)   $  48,856
Public offering, net of
  expenses.....................     17                 39,149                               39,166
Redemption of Class C Common...                          (459)                                (459)
Accretion and dividends on
  redeemable preferred stock...                          (291)                                (291)
Conversion of Class A Common to
  Class B Common...............     (1)        1                                                --
Decrease in unrealized holding
  losses.......................                           185                                  185
Net loss.......................                                                (4,396)      (4,396)
                                   ---       ---     --------   -------     ---------    ---------
Balance, December 31, 1995.....    $64       $10     $115,184   $    --     $ (32,197)   $  83,061
                                   ===       ===     ========   =======     =========    =========
Accretion and dividends on
  redeemable preferred stock...                        (6,061)                              (6,061)
Issuance upon exercise of stock
  options......................                           370                                  370
Issuance of warrants to SCMC...                         8,905                                8,905
Issuance of equity securities
  for MMR Merger...............     17         2       71,522                               71,541
Repurchase of common stock.....                                  (6,393)                    (6,393)
Net loss.......................                                               (50,852)     (50,852)
                                   ---       ---     --------   -------     ---------    ---------
Balance, December 31, 1996.....    $81       $12     $189,920   $(6,393)    $ (83,049)   $ 100,571
                                   ===       ===     ========   =======     =========    =========
Issuance upon exercise of stock
  options......................     11                 21,132                               21,143
Issuance upon exercise of Class
  B Warrants...................                         2,476                                2,476
Issuance of stock for
  acquisitions.................      3                  9,519                                9,522
Payment from shareholder.......                         1,000                                1,000
Accretion and dividends on
  redeemable preferred stock...                       (38,510)                             (38,510)
Repurchase of common stock.....                                    (130)                      (130)
Net loss.......................                                               (21,247)     (21,247)
                                   ---       ---     --------   -------     ---------    ---------
Balance, December 31, 1997.....    $95       $12     $185,537   $(6,523)    $(104,296)   $  74,825
                                   ===       ===     ========   =======     =========    =========
Redeemable preferred stock
  dividends and accretion......                       (10,350)                             (10,350)
Other, principally shares
  issued pursuant to stock
  option plans.................                         7,954                                7,954
Net loss.......................                                              (132,993)    (132,993)
                                   ---       ---     --------   -------     ---------    ---------
Balance at March 31, 1998
  (unaudited)..................    $95       $12     $183,141   $(6,523)    $(237,289)   $ (60,564)
                                   ===       ===     ========   =======     =========    =========
</TABLE>
 
                            See accompanying notes.


                                     F-5
<PAGE>   12
 
                    SFX BROADCASTING, INC. AND SUBSIDIARIES
 
                     CONSOLIDATED STATEMENTS OF CASH FLOWS
                             (DOLLARS IN THOUSANDS)
 
<TABLE>
<CAPTION>
                                                         THREE MONTHS ENDED
                                                              MARCH 31,             YEARS ENDED DECEMBER 31,
                                                        ---------------------   --------------------------------
                                                          1998        1997        1997        1996        1995
                                                        ---------   ---------   ---------   ---------   --------
                                                             (UNAUDITED)
<S>                                                     <C>         <C>         <C>         <C>         <C>
Operating activities:
Net loss..............................................  $(132,993)  $  (6,488)  $ (21,247)  $ (50,852)  $ (4,396)
Income from operations to be distributed to
  shareholders........................................     27,296       1,544      (3,814)         --         --
Adjustments to reconcile net loss to net cash provided
  by (used in) operating activities:
  Depreciation........................................      2,986       2,253      10,955       5,972      2,658
  Amortization........................................      7,546       4,932      26,406      10,202      5,099
  Noncash portion of non-recurring and unusual
    charge............................................      4,196          --       4,712       9,878         --
  Extraordinary loss on debt repayment................         --          --          --      15,219         --
  Loss on sale of radio station and other noncash
    items.............................................         --          --          --       1,900       (207)
  Deferred taxes......................................    (13,500)         --          --        (710)        --
  Changes in assets and liabilities, net of amounts
    acquired:
    Accounts receivable...............................      6,794       6,076     (22,189)    (13,839)    (5,164)
    Prepaid and other assets..........................      6,140      (1,256)      2,599      (1,704)     2,052
    Accrued interest and dividends....................     12,098      11,966         345       3,841          6
    Accounts payable, accrued expenses and other
      liabilities.....................................    (14,991)     (9,959)      6,275       6,646        451
                                                        ---------   ---------   ---------   ---------   --------
      Cash provided by (used in) continuing
         operations...................................    (94,428)      9,068       4,042     (13,447)       499
         Cash from operating activities of SFX
           Entertainment..............................      9,140         307       1,005          --         --
                                                        ---------   ---------   ---------   ---------   --------
      Net cash provided by (used in) operating
         activities...................................    (85,288)      9,375       5,047     (13,447)       499
Investing activities:
  Purchase of stations and related businesses, net of
    cash acquired.....................................         --     (63,667)   (408,788)   (493,433)   (26,057)
  Proceeds from sales of stations and other assets....      4,692         717       1,836      56,943        703
  Deposits and other payments for pending
    acquisitions......................................        (59)    (14,545)     (3,594)    (30,799)    (3,000)
  Purchase of property and equipment..................     (3,602)     (2,763)    (12,409)     (3,224)    (3,261)
  Sale of short-term investments......................         --          --          --          --      7,918
  Loans and advances to related parties...............         --      (2,800)     (2,800)         --     (2,000)
  Net tax liability on Spin-Off to be reimbursed......    105,975          --          --          --         --
                                                        ---------   ---------   ---------   ---------   --------
      Net cash used in investing activities...........    107,006     (83,058)   (425,755)   (470,513)   (25,697)
  Cash from investing activities of SFX
    Entertainment.....................................   (379,782)    (22,612)    (73,296)         --         --
                                                        ---------   ---------   ---------   ---------   --------
      Net cash used in investing activities...........   (272,776)   (105,670)   (499,051)   (470,513)   (25,697)
Financing activities:
  Payments on long-term debt, including prepayment
    premiums..........................................       (100)    (50,123)    (73,863)   (110,396)   (22,521)
  Additions to debt issuance costs....................         --         (52)     (3,006)    (19,505)    (2,139)
  Proceeds from issuance of senior and subordinated
    debt..............................................         --      20,000     356,500     501,500     22,000
  Net proceeds from sales of preferred stock..........         --     215,258     215,258     143,445         --
  Dividends paid on preferred stock...................     (2,459)     (2,459)    (23,487)     (4,983)        --
  Proceeds from issuance of common stock and
    shareholders......................................      3,759          46      24,619          --     39,166
  Purchases of treasury stock.........................         --          --        (130)     (6,393)        --
  Stock, redemptions, retirements and other...........         --          --      (1,000)     (1,000)    (2,609)
                                                        ---------   ---------   ---------   ---------   --------
      Net cash provided by financing activities.......      1,200     182,670     494,891     502,668     33,897
  Cash from financing activities of SFX
    Entertainment.....................................    458,654         (29)       (823)         --         --
                                                        ---------   ---------   ---------   ---------   --------
      Net cash provided by financing activities.......    459,854     182,641     494,068     502,668     33,897
  Net increase in cash and cash equivalents...........    101,790      86,346          64      18,708      8,699
  Cash and cash equivalents at beginning of period....     30,666      30,601      30,601      11,893      3,194
  Cash of SFX Entertainment at the end of period......     93,992      (2,622)     (5,979)         --         --
                                                        ---------   ---------   ---------   ---------   --------
  Cash and equivalents at end of period...............  $  38,464   $ 114,325   $  24,686   $  30,601   $ 11,893
                                                        =========   =========   =========   =========   ========
</TABLE>
 
Supplemental disclosure of cash flow information (See Note 13).
 
                            See accompanying notes.


                                     F-6

<PAGE>   13
 
                    SFX BROADCASTING, INC. AND SUBSIDIARIES
 
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                               DECEMBER 31, 1997
 
NOTE 1 -- ORGANIZATION AND BASIS OF PRESENTATION
 
     SFX Broadcasting, Inc. (the "Company"), a Delaware corporation, is one of
the largest radio station groups in the United States. At December 31, 1997, the
Company owned and operated, provided programming to or sold advertising on
behalf of sixty-three FM stations and nineteen AM stations serving the following
twenty-three markets: Dallas, Texas; Houston, Texas; Pittsburgh, Pennsylvania;
Milwaukee, Wisconsin; San Diego, California; Providence, Rhode Island;
Indianapolis, Indiana; Charlotte, North Carolina; Hartford, Connecticut;
Greensboro, North Carolina; Nashville, Tennessee; Raleigh-Durham, North
Carolina; Jacksonville, Florida; Richmond, Virginia; Albany, New York;
Greenville-Spartanburg, South Carolina; Tucson, Arizona;
Springfield/Northampton, Massachusetts; Wichita, Kansas; Daytona Beach, Florida;
New Haven, Connecticut; Jackson, Mississippi and Biloxi, Mississippi.
 
     In addition, in 1997, the Company, through the acquisitions of
Delsener/Slater Enterprises, Ltd. ("Delsener/Slater"), a concert promotion
company based in New York City, Sunshine Promotions, Inc., ("Sunshine
Promotions"), an Indianapolis concert promotion company which owns the Deer
Creek Music Theater and the Polaris Amphitheater and certain related companies,
and certain companies which collectively own and operate the Meadows Music
Theater, (the "Meadows"), a 25,000-seat indoor/outdoor complex located in
Hartford, Connecticut, became one of the largest live entertainment groups in
the United States.
 
     As more fully described in Note 2, the Company has entered into an
Agreement and Plan of Merger and intends to distribute to its shareholders its
live entertainment business. Therefore, the live entertainment business has been
classified as net assets to be distributed to shareholders and income from
operations to be distributed to shareholders in the consolidated financial
statements. The Company has also recently completed substantial additional
acquisitions in the live entertainment business (see Note 14).
 
NOTE 2 -- RECENT DEVELOPMENT; SPIN-OFF AND PENDING MERGER
 
     On August 24, 1997, the Company entered into an Agreement and Plan of
Merger with SBI Holdings Corporation, a wholly owned subsidiary of Capstar
Broadcasting Corporation ("Buyer"), and SBI Radio Acquisition Corporation
pursuant to which the Company will become a wholly owned subsidiary of Buyer
(the "Merger"). In the Merger, holders of the Company's Class A Common Stock
will receive $75.00 per share, Class B Common Stock will receive $97.50 per
share, and the 6 1/2% Series D Cumulative Convertible Exchangeable Preferred
Stock will convert into the right to receive an amount equal to the product of
(i) $75.00 and (ii) the number of shares of Class A Common Stock into which that
share would convert immediately prior to the consummation of the Merger; in each
case, subject to adjustment under certain circumstances. Pursuant to the merger
agreement, the Company distributed the net assets (the "Spin-Off") of its live
entertainment business ("SFX Entertainment") pro-rata to its stockholders and
the holders of certain warrants, options and stock appreciation rights on April
27, 1998.
 
     Until the consummation of the Merger, senior management of the Company will
continue to serve in their present capacities with the Company while devoting
such time as they deem reasonably necessary to conduct the operations of SFX
Entertainment. Although SFX Entertainment has not yet entered into employment
agreements with such members of senior management, most members of existing
management have agreed in principle to become full-time employees of SFX
Entertainment and Mr. Sillerman, Executive Chairman, will continue to be
Executive Chairman of SFX Entertainment upon consummation of the Merger.
 
     SFX Entertainment is required to repay to the Company all amounts paid in
connection with its concert promotion acquisitions and certain capital
improvements since the date of the Merger agreement and SFX Entertainment will
assume all the liabilities and obligations related to such company's business.
As of March 31, 1998, the Company had a $5.4 million receivable from SFX
Entertainment related to such obligations. In April 1998, SFX Entertainment
reimbursed such amount to the Company.
 

                                     F-7
<PAGE>   14
                    SFX BROADCASTING, INC. AND SUBSIDIARIES
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
     Upon the consummation of the Merger, all net working capital of the
Company, as determined in accordance with the merger agreement, will be paid to
SFX Entertainment by the Company or any net negative working capital will be
paid to the Company by SFX Entertainment. As of March 31, 1998, the Company
estimates that the working capital to be paid by SFX Entertainment would have
been approximately $3.3 million.
 
     The consummation of the Merger is subject to the receipt of certain
regulatory approvals. In February 1998, the Company received the consents of the
holders of the Series E Preferred Stock and certain of the Company's outstanding
notes and in March 1998 the required approval of the shareholders.
 
     SFX Entertainment also will be responsible for any taxes of the Company
resulting from the Spin-Off, including any income taxes to the extent that the
income taxes result from gain on the distribution that exceeds the net operating
losses of the Company and SFX Entertainment available to offset gain. In
connection with the use of the Company's NOL's to offset the Spin-Off gain, a
tax benefit of $13.5 million has been recorded in operations to be distributed
to shareholders. Such tax benefit includes a $8.5 million reversal of the
Company's deferred tax asset valuation allowance at December 31, 1997, the
remainder reflects a benefit for a $5.0 million estimated use of the Company's
NOL generated during the first quarter of 1998. In addition, the Spin-Off gain
was also offset by the Company NOL's generated from the exercise of stock
options in 1997. As a result, the deferred tax asset valuation allowance at
December 31, 1997 was reduced by an additional $11.4 million and the related tax
benefit has reduced the income (loss) from operations to be distributed to
shareholders, net of taxes, in the consolidated statement of operations for the
three months ended March 31, 1998. Also included in income (loss) from
operations to be distributed to shareholders, net of tax benefit for the three
months ended March 31, 1998 is estimated tax expense of $117 million related to
the taxable gain on the spin-off.
 
     The actual amount of the tax indemnification payment will be based largely
on the excess of the value of SFX Entertainment's Common Stock on the date of
the Spin-Off over the tax basis of that stock. Management estimates that SFX
Entertainment will be required to pay approximately $120.0 million pursuant to
such indemnification obligation, based on the $30 1/2 average per share price on
the Spin-Off date. The Company expects that such indemnity payment will be due
on or about June 15, 1998. It is the Company's understanding that SFX
Entertainment intends to pay such indemnification amount with the proceeds from
a public offering of SFX Entertainment's capital stock. No assurances can be
given that SFX Entertainment's public offering will be successful or, if
successful, that such payment will be received in time by the Company to pay
such tax liability.
 
     The Company anticipates that the Merger will be consummated in the second
quarter of 1998. There can be no assurance that the regulatory approvals will be
given or that the conditions to consummating the Merger will be met.
 
     The operations of SFX Entertainment have been presented in the financial
statements as operations to be distributed to shareholders pursuant to the
Spin-Off. During the three months ended March 31, 1998, revenue and loss from
operations for SFX Entertainment were $61.0 million and $27.6 million,
respectively. Included in operating expenses is $1.3 million of allocated
corporate expenses, net of $133,000 of reimbursements from Triathlon (Note 9).
Additionally, interest expense relating to the debt to be distributed to the
shareholders pursuant to the Spin-off of $6.7 million has been allocated to SFX
Entertainment. During the year ended December 31, 1997, revenue and income from
operations for SFX Entertainment were $96.1 million and $5.1 million,
respectively. Included in operating expenses is $2.2 million of allocated
corporate expenses net of $1.8 million of reimbursement from Triathlon (Note 9).
Additional, interest expense relating to the debt to be distributed to the
shareholders pursuant to the Spin-Off of $1.6 million has been allocated to SFX
Entertainment. The Company provides various administrative services to SFX
Entertainment. It is the Company's policy to allocate these expenses on the
basis of direct usage. In the opinion of management, this
 

                                     F-8
<PAGE>   15
                    SFX BROADCASTING, INC. AND SUBSIDIARIES
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
method of allocation is reasonable and allocated expenses approximate what SFX
Entertainment would have occurred on a stand-alone basis.
 
NOTE 3 -- ACQUISITIONS AND DISPOSITIONS
 
     Radio Broadcasting Acquisitions. In August 1997, the Company acquired two
radio stations operating in Pittsburgh, Pennsylvania and two radio stations in
Milwaukee, Wisconsin for $35.0 million (the "Hearst Acquisition").
 
     In August 1997, the Company exchanged one radio station in Pittsburgh,
Pennsylvania, which the Company had recently acquired from Secret Communications
Limited Partnership ("Secret Communications") (part of the Secret Communications
Acquisition, as defined below), and $20.0 million in cash for one radio station
in Charlotte, North Carolina (the "Charlotte Exchange"). The Company operated
the radio station in Charlotte, North Carolina pursuant to a local market
agreement during July 1997.
 
     In July 1997, the Company acquired substantially all of the assets of four
radio stations operating in Richmond, Virginia for approximately $46.5 million
in cash, including payments made to buy out minority equity interests which the
Company had originally agreed to provide to certain of the sellers (the
"Richmond Acquisition").
 
     In April 1997, the Company acquired substantially all of the assets of
three radio stations in Indianapolis, Indiana and in June 1997 the Company
acquired substantially all of the assets of four stations in Pittsburgh,
Pennsylvania from Secret Communications for a total purchase price of $255.0
million in cash (collectively, the "Secret Communications Acquisition").
 
     Also in April 1997, the Company sold one radio station operating in Little
Rock, Arkansas (the "Little Rock Disposition") to Triathlon Broadcasting
Company, a related party. The station was sold for $4.1 million, of which $3.5
million had been held as a deposit by the Company since 1996. No gain or loss
was recorded on the transaction as the radio station was recently acquired in
connection with the MMR Merger, as defined below.
 
     In March 1997, the Company acquired two radio stations operating in
Houston, Texas, for a purchase price of approximately $43.0 million in cash,
exclusive of certain additional contingent liabilities which may become payable
(the "Texas Coast Acquisition"). The Texas Coast Acquisition increased the
number of stations the Company owns in the Houston market to four.
 
     In March 1997, the Company exchanged one radio station operating in
Washington D.C./Baltimore, Maryland, for two radio stations operating in Dallas,
Texas (the "CBS Exchange") and completed the sale of two radio stations
operating in the Myrtle Beach, South Carolina market for $5.1 million payable in
installments over a five year period (present value approximately $4.3 million).
The CBS Exchange was structured as a substantially tax free exchange of
like-kind assets. The contract for the sale of the Myrtle Beach stations was in
place prior to the merger with Multi-Market Radio, Inc. ("MMR"). No gain or loss
was recognized on the Myrtle Beach stations that were recently acquired in the
MMR Merger, as defined below.
 
     Costs of $871,000 related to the reformatting of the Dallas stations was
included in depreciation, amortization, duopoly integration costs and
acquisition related costs in 1997.
 
     In February 1997, the Company purchased WWYZ-FM, operating in Hartford,
Connecticut, for a purchase price of $25.9 million in cash (the "Hartford
Acquisition"). The Hartford Acquisition increased the number of stations the
Company owns in the Hartford market to five.
 
     In January 1997, the Company purchased one radio station operating in
Albany, New York, for $1.0 million in cash (the "Albany Acquisition").
 

                                     F-9
<PAGE>   16
                    SFX BROADCASTING, INC. AND SUBSIDIARIES
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
     In December 1996, the Company acquired substantially all of the assets of
WHSL-FM, operating in Greensboro, North Carolina, for a purchase price of $6.0
million in cash (the "Greensboro Acquisition") and exchanged radio station
KRLD-AM, Dallas, Texas and the Texas State Networks for radio station KKRW-FM,
Houston, Texas (the "Houston Exchange"). The Houston Exchange was structured as
a substantially tax free exchange of like kind assets. No gain or loss was
recorded on the Houston Exchange as the book values of KRLD-AM and the Texas
State Networks approximated the fair value of the assets of KKRW-FM.
 
     In November 1996, the Company consummated its merger with MMR (the "MMR
Merger"), pursuant to which it acquired MMR in exchange for 1,631,450 shares of
Class A Common Stock, 208,810 shares of Class B Common Stock both valued at $34
per share and other equity securities with a total market value for all
securities issued of approximately $71.5 million in cash (Note 7). Concurrently
with the consummation of the MMR Merger, the Company paid approximately $43.0
million in cash to satisfy outstanding indebtedness of MMR. MMR was organized in
1992 by the Company's executive chairman and another officer and director of the
Company. The Company's executive chairman owned a substantial equity interest in
MMR which was exchanged for Class B Common Stock of the Company upon the
consummation of the MMR Merger. MMR owned and operated, provided programming to
or sold advertising on behalf of thirteen FM stations and on AM station located
in eight markets: New Haven, Connecticut; Hartford, Connecticut;
Springfield/Northampton, Massachusetts; Daytona Beach, Florida; Augusta,
Georgia; Biloxi, Mississippi; Myrtle Beach, South Carolina and Little Rock,
Arkansas. Prior to the MMR Merger, MMR had entered into agreements to sell two
stations operating in Myrtle Beach, South Carolina and one station operating in
Little Rock, Arkansas (the "MMR Dispositions"). The MMR Dispositions, which were
completed in 1997 as described above, are classified as assets under contract
for sale in the accompanying balance sheet at December 31, 1996. The Company
also terminated a Joint Sales Agreement ("JSA") with one station operating in
Augusta, Georgia and its Local Marketing Agreement ("LMA") with one station
operating in Myrtle Beach, South Carolina in December 1996.
 
     In October 1996, the Company sold radio station KTCK-AM, Dallas, Texas for
approximately $13.4 million in cash, net of certain sale expenses (the "Dallas
Disposition"). The Company acquired the assets of KTCK-AM in Dallas, Texas (the
"Dallas Acquisition") in September 1995 from a third party for $8,633,000 in
cash (including $133,000 in transaction costs) and $2,000,000 of 6% current
coupon Series C Redeemable Preferred Stock (Note 6). The purchase agreement
contains a provision for a contingent payment not to exceed $7,500,000 payable
in 1998 if the Company's Dallas properties achieve certain ratings and financial
goals. In 1996, the Company recorded a loss of $1.9 million on the Dallas
disposition, based on its estimate of the ultimate resolution of the
contingency. During 1997, the company paid $3,000,000 to the Seller in
connection with this provision, leaving a remaining accrual at December 31, 1997
of approximately $300,000, and it is unable to reasonably estimate future
amounts due, if any. The Company had provided programming to KTCK-AM pursuant to
an LMA since March 1, 1995.
 
     In July 1996, the Company acquired Liberty Broadcasting, Inc. ("Liberty
Broadcasting") for a purchase price of approximately $239.7 million in cash,
including $10.4 million for working capital (the "Liberty Acquisition"). Liberty
Broadcasting was a privately-held radio broadcasting company which owned and
operated, provided programming to or sold advertising on behalf of fourteen FM
and six AM radio stations (the "Liberty Stations") located in six markets:
Washington, DC/Baltimore, Maryland; Nassau-Suffolk, New York; Providence, Rhode
Island; Hartford, Connecticut; Albany, New York and Richmond, Virginia.
 
     In July 1996, the Company sold three of the Liberty Stations operating in
the Washington, DC/Baltimore, Maryland market (the "Washington Dispositions")
for $25.0 million. No gain or loss was recognized on the Washington
Dispositions.
 
     In July 1996, the Company acquired from Prism Radio Partners, L.P.
("Prism"), substantially all of the assets used in the operation of eight FM and
five AM radio stations located in four markets: Jacksonville,


                                    F-10

<PAGE>   17
                    SFX BROADCASTING, INC. AND SUBSIDIARIES
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
Florida; Raleigh, North Carolina; Tucson, Arizona and Wichita, Kansas. In
September 1996, the Company also acquired from Prism substantially all of the
assets of three radio stations operating in Louisville, Kentucky (the
"Louisville Stations"), upon renewal of the Federal Communications Commission
("FCC") licenses of such stations (the "Louisville Acquisition") (collectively
the "Prism Acquisition"). The total purchase price for the Prism Acquisition was
approximately $105.3 million in cash. In October 1996, the Company sold the
Louisville Stations (the "Louisville Disposition") for $18.5 million in cash.
The Company recognized no gain or loss on the Louisville Disposition.
 
     In July 1996, the Company acquired substantially all of the assets of
WJDX-FM, Jackson, Mississippi for a purchase price of approximately $3.2
million. In addition, in August 1996, the Company acquired substantially all of
the assets of WSTZ-FM and WZRX-AM, each operating in Jackson, Mississippi, for
approximately $3.5 million in cash (collectively, the "Jackson Acquisitions").
 
     In June 1996, the Company acquired substantially all of the assets of
WROQ-FM, Greenville, South Carolina, for approximately $14.0 million in cash
(the "Greenville Acquisition") and WTRG-FM and WRDU-FM, both operating in
Raleigh, North Carolina, and WMFR-AM, WMAG-FM and WTCK-AM (formerly WWWB-AM),
each operating in Greensboro, North Carolina for approximately $36.8 million in
cash (the Raleigh-Greensboro Acquisition").
 
     In February 1996, the Company acquired radio stations WTDR-FM and WLYT-FM
(formerly WEZC-FM), both operating in Charlotte, North Carolina (the "Charlotte
Acquisition"), for an aggregate purchase price of $24.3 million in cash. Costs
of $785,000 related to the integration and reformatting of the Charlotte
stations were included in depreciation, amortization, duopoly integration costs
and acquisition related costs in 1996.
 
     In April 1995, the Company acquired all of the outstanding stock of Parker
Broadcasting Company ("Parker"), the owner and licensee of radio station KYXY-FM
in San Diego, California (the "San Diego Acquisition"), for approximately
$17,424,000 in cash (including transaction costs of $831,000 of which $175,000
was paid to Sillerman Communications Management Company ("SCMC") for providing
or paying for legal services necessary in negotiating and documenting the
transaction), including a $650,000 three year covenant not to compete with the
former owners. In addition, costs of $1,380,000 related to the integration of
KYXY-FM and reformatting of its duopoly partner, KPLN-FM, were included in
depreciation, amortization, duopoly integration costs and acquisition related
costs in 1995. The Company had provided programming to and sold advertising on
behalf of KYXY-FM pursuant to an LMA since January 18, 1995.
 
     For financial statement purposes, all of the acquisitions described above
were accounted for using the purchase method, with the aggregate purchase price
allocated to the tangible and identifiable intangible assets based upon current
estimated fair market values. Certain of the recent transactions are based on
preliminary estimates of the fair value of the net assets acquired and subject
to final adjustment. The assets and liabilities of these acquisitions and the
results of their operations for the period from the date of acquisition have
been included in the accompanying consolidated financial statements. The
following unaudited pro forma summary presents the consolidated results of
operations, excluding operations to be distributed to shareholders, for the
years ended December 31, 1997, 1996 and 1995 as if the acquisitions for any
given year and the subsequent year had occurred at the beginning of such year
after giving effect to certain adjustments, including amortization of goodwill
and interest expense on the acquisition debt. These pro forma results have been
 

                                    F-11
<PAGE>   18
                    SFX BROADCASTING, INC. AND SUBSIDIARIES
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
prepared for comparative purposes only and do not purport to be indicative of
what would have occurred had the acquisition been made as of that date or of
results which may occur in the future.
 
                                   PRO FORMA
                             YEAR ENDED DECEMBER 31
                       IN THOUSANDS EXCEPT PER SHARE DATA
                                  (UNAUDITED)
 
<TABLE>
<CAPTION>
                                                           1997          1996            1995
                                                        ----------    ----------      ----------
<S>                                                     <C>           <C>             <C>
Net revenues..........................................  $  309,049    $  276,075      $  189,595
                                                        ==========    ==========      ==========
Loss before extraordinary item........................  $  (23,436)   $  (49,285)     $  (16,978)
                                                        ==========    ==========      ==========
Net loss..............................................  $  (23,436)   $  (64,504)     $  (32,197)
                                                        ==========    ==========      ==========
</TABLE>
 
  Pending Radio Broadcasting Transactions.
 
     Pursuant to separate agreements, the Company has agreed to: (i) exchange
four radio stations owned by the Company and located on Long Island, New York,
for $11 million cash and two radio stations operating in Jacksonville, Florida,
where the Company currently owns four stations, (the "Chancellor Exchange");
(ii) acquire three radio stations operating in Nashville, Tennessee, where the
Company currently owns two radio stations, for $35 million (the "Nashville
Acquisition"); and (iii) sell six stations in Jackson, Mississippi and two
stations in Biloxi, Mississippi for $66.0 million in cash (the "Jackson and
Biloxi Disposition"). The assets related to the Jackson and Biloxi Deposition
are classified as assets under contract for sale in the accompanying balance
sheet as of December 31, 1997. The Chancellor Exchange and the Nashville
Acquisition are collectively referred to as the "Pending Acquisition." The
Jackson and Biloxi Disposition is referred to herein as the "Pending
Disposition." The U.S. Department of Justice, Antitrust Division (the "DOJ") has
brought suit alleging that the Chancellor Exchange is likely to reduce
competition. The complaint requests permanent injunctive relief preventing the
consummation of the acquisition of the Long Island stations by Chancellor Media
Corporation ("Chancellor"). The Company, Chancellor, an affiliate of Buyer, and
DOJ are currently involved in settlement discussions. If successfully concluded,
these settlement discussions will resolve all competitive issues raised by DOJ
and will terminate all investigations or litigation by DOJ with respect to the
Company, the Merger, the Pending Acquisitions and the Pending Disposition. The
Company cannot, however, be certain that the settlement discussions will be
successful. If the Company fails to reach an acceptable settlement agreement
with DOJ, the Company intends to defend the suit vigorously. At December 31,
1997, the Company had capitalized $1.7 million of costs related to the
acquisition of the Jacksonville radio stations. In the event the Chancellor
Exchange does not take place the Company will be required to write-off such
costs.
 
     The aggregate proceeds to be received from these transactions, net of
acquisitions, is approximately $42 million. The Company has deposited $2.0
million in escrow to secure its obligations under these agreements. The Company
expects to record a pre-tax gain of approximately $20.0 million on the Jackson
and Biloxi Disposition. The Company does not expect to record a gain or loss on
the other transactions as the assets were recently acquired.
 
     Concert Promotion Acquisitions. During 1997, the Company also acquired the
following concert promotion companies, which are expected to be contributed to
SFX Entertainment at the Spin-Off date.
 
     In January 1997, the Company purchased Delsener/Slater for an aggregate
consideration of approximately $26.6 million, including $2.9 million for working
capital and the present value of deferred payments of $3.0 million to be paid,
without interest, over five years and $1.0 million to be paid, without interest,
over ten years (the "Delsener/Slater Acquisition"). The deferred payments are
subject to acceleration in certain circumstances.
 
                                    F-12

<PAGE>   19
                    SFX BROADCASTING, INC. AND SUBSIDIARIES
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
     In March 1997, Delsener/Slater consummated the acquisition of certain
companies which collectively own and operate the Meadows (the "Meadows
Acquisition") for $900,000 in cash, 250,838 shares of SFX Class A Common Stock
with a value of approximately $7.5 million and the assumption of approximately
$15.4 million of debt.
 
     SFX Entertainment may assume the obligation to exercise an option held by
the Company to repurchase 250,838 shares of the Company's Class A Common Stock
for an aggregate purchase price of $8.3 million (the "Meadows Repurchase"). This
option was granted in connection with the acquisition of the Meadows Music
Theater. If the option were exercised by the Company, the exercise would result
in a reduction of working capital in connection with the Spin-Off by
approximately $8.3 million. If the option were not exercised, working capital
would decrease by approximately $10.5 million.
 
     Also in March 1997, the Company, in partnership with Pavilion Partners,
entered into a twenty-two year lease to operate the PNC Bank Arts Center, a
10,800 seat complex located in Holmdel, New Jersey. The lease also granted
Pavilion Partners the right to expand the capacity to 17,500 prior to the 1998
season.
 
     In June 1997, the Company acquired Sunshine Promotions for $53.9 million in
cash at closing, $2.0 million in cash payable over 5 years, 62,792 shares of
Class A Common Stock issued and issuable over a two year period with a value of
approximately $4.0 million and the assumption of approximately $1.6 million of
debt. The assets to be acquired include Deer Creek Music Center, a 21,000 seat
complex located in Indianapolis, Indiana, the Polaris Amphitheater, a 20,000
seat complex located in Columbus, Ohio and a 99 year lease to operate Murat
Centre, a 2,700 seat theater and 2,200 seat ballroom, located in Indianapolis,
Indiana.
 
     For financial statement purposes, all of the concert acquisitions described
above were accounted for using the purchase method, with the aggregate purchase
price allocated to the tangible and identifiable intangible assets based upon
current estimated fair market values. The concert acquisitions are based on
preliminary estimates of the fair value of the net assets acquired and subject
to final adjustment. The assets and liabilities of these acquisitions and the
results of their operations for the period from the date of acquisition have
been included as net assets and income from operations to be distributed to
shareholders in the accompanying consolidated financial statements.
 
NOTE 4 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
 
  Consolidation
 
     The consolidated financial statements include the accounts of the Company
and its wholly-owned subsidiaries. All significant intercompany accounts for
transactions have been eliminated in consolidation. The Company accounts for
investments in which it has a 50% or less and 20% or greater ownership interest
under the equity method.
 
  Cash and Cash Equivalents
 
     All highly liquid investments with an original maturity of less than three
months are classified as cash equivalents. The carrying amounts of cash and cash
equivalents reported in the balance sheet approximate their fair values.
 
  Property and Equipment
 
     Property and equipment are stated at cost. Depreciation and amortization is
provided on the straight-line method over the estimated useful lives of the
assets as follows:
 
<TABLE>
<S>                                                           <C>
Buildings and improvements..................................  7-20 years
Broadcasting equipment and other............................  5-7 years
</TABLE>
 

                                    F-13
<PAGE>   20
                    SFX BROADCASTING, INC. AND SUBSIDIARIES
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
     Leasehold improvements are amortized over the shorter of the lease term or
estimated useful lives of the assets. Amortization of assets recorded under
capital leases is included in depreciation expense.
 
  Amortization of Intangible Assets
 
     Broadcast licenses and goodwill are amortized using the straight-line
method over 40 years. Other intangible assets are being amortized using the
straight-line method over their estimated remaining useful lives from 1 to 10
years. Debt issuance costs and discounts are being amortized by the
straight-line method, which closely approximates the interest method, over the
life of the respective debt. Concert promotion goodwill was amortized using the
straight-line method over 15 years.
 
     In 1996 the Company adopted FAS No. 121 "Accounting for the Impairment of
Long-Lived Assets". Under FAS No. 121, the carrying values of intangible assets
are reviewed if the facts and circumstances suggest that they may be impaired.
If this review indicates the intangible assets will not be recoverable as
determined based on the undiscounted cash flows of the Company over the
remaining amortization period, the Company's carrying value of the intangible
assets will be reduced to their estimated fair values, if lower than the
carrying value. The impact of this adoption had no effect on the consolidated
financial statements.
 
  Payable to Former National Sales Representative
 
     The Company is obligated to pay $23 million to a national advertising
representative company in 1998 in connection with switching its affiliations.
The amount is classified in the current liabilities section of the consolidated
balance sheets at December 31, 1997.
 
  Revenue Recognition
 
     The Company's primary source of revenue is the sale of airtime to
advertisers. Revenue from the sale of airtime is recorded when the
advertisements are broadcast.
 
  Barter Transactions
 
     The Company barters unsold advertising time for products and services. Such
transactions are recorded at the estimated fair value of the products or
services received or used. Barter revenue is recorded when commercials are
broadcast and related expenses are recorded when the product or service is
received or used. For the years ended December 31, 1997, 1996 and 1995, the
Company recorded barter revenue of $11,995,000, $8,029,000 and $4,961,000
respectively, and expenses of $11,281,000, $7,476,000 and $4,811,000
respectively.
 
  Use of Estimates
 
     The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
 
  Local Marketing Agreements/Joint Sales Agreements
 
     From time to time, the Company enters into LMAs and JSAs with respect to
radio stations owned by third parties including radio stations which it intends
to acquire. Terms of the agreements generally require the Company to pay a
monthly fee in exchange for the right to provide station programming and sell
related advertising time in the case of an LMA or sell advertising in the case
of a JSA. The agreements terminate upon the acquisition of the stations. It is
the Company's policy to expense the fees as incurred as a component of operating
income (loss). The Company accounts for payments received pursuant to LMAs of
owned


                                    F-14

<PAGE>   21
                    SFX BROADCASTING, INC. AND SUBSIDIARIES
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
stations as net revenue to the extent that the payment received represents a
reimbursement of the Company's ownership costs.
 
  Advertising Costs
 
     Advertising costs are expensed as incurred and approximated $9,789,000,
$5,068,000 and $3,336,000 in 1997, 1996 and 1995, respectively.
 
  Concentration of Credit Risk
 
     The Company's revenue and accounts receivable primarily relate to the sale
of advertising within the radio stations' broadcast areas. Credit is extended
based on an evaluation of a customer's financial condition, and generally
collateral is not required. Credit losses are provided for in the financial
statements and consistently have been within management's expectations.
 
  New Accounting Pronouncement
 
     The Company adopted SFAS No. 130 "Reporting Comprehensive Income" during
the first quarter of 1998. The Company has no items of other comprehensive
income as described in SFAS No. 130. Therefore, net income is equal to
comprehensive income for all periods presented.
 
  Reclassification
 
     Certain amounts in 1995 and 1996 have been reclassified to conform to the
1997 presentation.
 
  Interim Financial Information
 
     Information as of March 31, 1998 and for the three months ended March 31,
1998 and 1997 is unaudited. The accompanying unaudited consolidated financial
statements have been prepared in accordance with generally accepted accounting
principles for interim financial information and Rule 10-01 of Regulation S-X.
Accordingly, they do not include all information and footnotes required by
generally accepted accounting principles for complete financial statements. In
the opinion of management, the unaudited interim financial statements contain
all adjustments, consisting of normal recurring accruals, necessary for a fair
presentation of the financial position, results of operations and cash flows of
the Company, for the periods presented. The results of operations for the three
month period are not necessarily indicative of the results of operations for the
full year.
 
NOTE 5 -- DEBT AND SUBORDINATED NOTES
 
     Debt consists of the following at December 31, 1997 and 1996 (in
thousands):
 
<TABLE>
<CAPTION>
                                                                1997        1996
                                                              --------    --------
<S>                                                           <C>         <C>
Senior subordinated notes...................................  $450,566    $450,566
Senior credit facility......................................   313,000      30,000
Other.......................................................       909         540
                                                              --------    --------
                                                               764,475     481,106
Less: current portion.......................................      (509)       (231)
                                                              --------    --------
                                                              $763,966    $480,875
                                                              ========    ========
</TABLE>
 

                                    F-15
<PAGE>   22
                    SFX BROADCASTING, INC. AND SUBSIDIARIES
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
     The aggregate contractual maturities of long-term debt for the years ending
December 31 are as follows: 1998 -- $509,000; 1999 -- $200,000;
2000 -- $766,000; 2001 -- $57,000,000; 2002 -- $72,000,000;
thereafter -- $634,000,000.
 
     In May 1996, the Company completed the placement of $450.0 million in
aggregate principal amount of its 10.75% Senior Subordinated Notes due 2006 (the
"Note Offering"). Interest is payable semi-annually on May 15 and November 15.
The notes are unsecured obligations of the Company and are subordinate to all
senior debt of the Company. The Company incurred issuance costs totaling $15.3
million related to the Note Offering which were recorded as deferred financing
costs. In addition to the Note Offering, the Company sold in a private placement
2,990,000 shares of Series D Preferred Stock aggregating $149.5 million in
liquidation preference (the "Preferred Stock Offering").
 
     Concurrently with the closings of the Note Offering and the Preferred Stock
Offering, the Company completed a tender offer (the "Tender Offer") and related
consent solicitation with respect to its 11.375% Senior Subordinated Notes due
2000 (the "Old Notes"). SFX repurchased approximately $79.4 million in principal
amount of the $80.0 million in principal amount of the Old Notes outstanding in
the Tender Offer. The Company also entered into a supplemental indenture
amending the terms of the indenture pursuant to which the remaining Old Notes
were issued.
 
     In March 1995, the Company entered into a $50.0 million senior credit
facility (the "Old Credit Facility") pursuant to which the Company made
borrowings to finance the Charlotte Acquisition and certain working capital
needs. On May 31, 1996 all amounts outstanding under the Old Credit Facility
were repaid with a portion of the proceeds of the Note Offering and the
Preferred Stock Offering.
 
     In connection with the repurchase of the Old Notes and the repayment of the
Old Credit Facility, the Company recorded an extraordinary loss on debt
retirement of approximately $15.2 million to reflect the cost of prepayment
premiums and the write-off of debt issuance costs.
 
     On November 22, 1996, the Company entered into a new credit facility, as
amended (the "New Credit Agreement"), a senior revolving credit facility
providing for borrowings of up to $400 million. Borrowings under the New Credit
Agreement may be used to finance permitted acquisitions, for working capital and
general corporate purposes, and for letters of credit up to $20.0 million. The
credit facility will be reduced by $18 million on a quarterly basis commencing
March 31, 2000 to December 31, 2004 and two final payments of $20 million will
be paid on March 31, 2005 and June 30, 2005. Interest on the funds borrowed
under the New Credit Agreement is based on a floating rate selected by the
Company of either (i) the higher of (a) the Bank of New York's prime rate and
(b) the federal funds rate plus 0.5%, plus a margin which varies from 0.25% to
1.5%, based on the Company's then-current leverage ratio, or (ii) the LIBOR rate
plus a margin which varies from 1.875% to 2.75%, based on the Company's
then-current leverage ratio. The Company must prepay certain outstanding
borrowings in advance of their scheduled due dates in certain circumstances,
including but not limited to achieving certain cash flow levels or receiving
certain proceeds from asset disposition as defined. The Company must also pay
annual commitment fees of 0.5% of the unutilized total commitments under the New
Credit Agreement. The Company's obligations under the New Credit Agreement are
secured by substantially all of its assets, including property, stock of
subsidiaries and accounts receivable, and are guaranteed by the Company's
subsidiaries. At December 31, 1997, the weighted average interest rate was
8.19%.
 
     The New Credit Agreement and the indentures related to the Company's
subordinated notes contain covenants that impose certain restrictions on the
Company, such as total leverage, pro forma debt service and pro forma interest
expense ratios.
 
     The fair value of the Company's senior subordinated notes was $493,313,000
at December 31, 1997 based upon the quoted market price. The book value of the
Company's senior credit facility and other debt approximates fair value, which
was estimated using discounted cash flow analysis based on the Company's
incremental borrowing rate for similar types of borrowing arrangements.
 


                                    F-16
<PAGE>   23
                    SFX BROADCASTING, INC. AND SUBSIDIARIES
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
     The Company's 10.75% senior subordinated notes and 11.375% senior
subordinated notes are guaranteed by every direct and indirect subsidiary of the
Company. There are no non-guarantor subsidiaries. The guarantees by the
guarantor subsidiaries are full, unconditional, and joint and several. All of
the guarantor subsidiaries are wholly-owned. The Company is a holding company
with no assets, liabilities or operations other than its investment in its
subsidiaries. Separate financial statements of each guarantor have not been
included as management has determined that they are not material to investors.
 
NOTE 6 -- REDEEMABLE PREFERRED STOCK
 
     Preferred stock consists of the following at December 31, 1997 and 1996
(dollars in thousands):
 
<TABLE>
<CAPTION>
                                                                1997        1996
                                                              --------    --------
<S>                                                           <C>         <C>
Preferred Stock of the Company, $.01 par value, 10,012,000
  shares authorized:
Series B Redeemable, 0 and 1,000 shares issued and
  outstanding in 1997 and 1996, respectively................  $     --    $    917
Series C Redeemable, 2,000 shares issued and outstanding in
  1997 and 1996, includes accreted dividends of $197 in 1997
  and $108 in 1996..........................................     1,725       1,636
Series D Cumulative Convertible Exchangeable Preferred
  Stock, 2,990,000 shares issued and outstanding, includes
  accreted issuance costs of $878 in 1997...................   144,324     143,446
Series E Cumulative Exchangeable Preferred Stock, 2,250,000
  shares issued and outstanding, net of issuance costs,
  includes accreted issuance costs of $951 in 1997..........   215,947          --
                                                              --------    --------
                                                              $361,996    $145,999
                                                              ========    ========
</TABLE>
 
     The Series B Redeemable Preferred Stock which was non-voting and not
entitled to receive dividends was redeemed in October 1997 at the liquidation
value of $1,000 per share.
 
     The shares of Series C Redeemable Preferred Stock receive cumulative
dividends equal to 6% per annum paid by the Company in arrears on a quarterly
basis. The shares are non-voting and are redeemable by the Company after
September 15, 1998 or by the holder after September 15, 2000, at the liquidation
value of $1,000 per share. The Series C Redeemable Preferred Stock ranks senior
to other preferred stock and to the Company's common stock as to dividends and
liquidation rights.
 
     The shares of Series D Cumulative Convertible Exchangeable Preferred Stock
(the "Series D Preferred Stock") receive cumulative dividends equal to 6 1/2%
per annum ($0.8125 per share) which are paid by the Company on a quarterly
basis. The shares of Series D Preferred Stock are redeemable at the option of
the Company on or after June 1, 1999, in whole or in part, at redemption prices
ranging from 104.5% in 1999 to 100.0% in 2006, plus accrued and unpaid dividends
to the redemption date. The Series D Preferred Stock is not subject to any
scheduled mandatory redemption prior to its maturity. The Series D Preferred
Stock will mature on May 31, 2007.
 
     The Series D Preferred Stock is convertible at the option of the holder
into shares of Class A Common Stock of the Company at any time prior to maturity
at a conversion price of $45.51 per share (equivalent to a conversion rate of
1.0987 shares per $50 in Liquidation Preference of Series D Preferred Stock),
subject to adjustment in certain events. The Series D Preferred Stock is
exchangeable in full but not in part, at the Company's option on any dividend
payment date, for the Company's 6 1/2% Convertible Subordinated Exchange Notes
due 2007.
 
     The Series D Preferred Stock ranks senior to the Company's common stock as
to dividends and liquidation rights.
 
     The shares of Series E Cumulative Exchangeable Preferred Stock (the "Series
E Preferred Stock") receive cumulative dividends equal to the rate of 12 5/8%
per annum which are paid by the Company on
 

                                    F-17
<PAGE>   24
                    SFX BROADCASTING, INC. AND SUBSIDIARIES
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
January 15 and July 15 of each year. Dividends may be paid, at the Company's
option, through January 15, 2002, in cash or additional shares of Series E
Preferred Stock. Subject to certain condition, the shares of the Series E
Preferred Stock are exchangeable in whole or in part on a pro rata basis, at the
option of the Company, on any dividend payment date, for the Company's 12 5/8%
Senior Subordinated Exchangeable Debentures due 2006. The Company is required,
subject to certain conditions, to redeem all of the Series E Preferred Stock
outstanding on October 31, 2006. The semi-annual dividend payable on January 15,
1998 was paid in additional shares of preferred stock.
 
NOTE 7 -- SHAREHOLDER'S EQUITY
 
  Common Stock
 
     The holders of Class A Common Stock are entitled to one vote per share and
the holders of Class B Common Stock are entitled to ten votes per share on all
matters to be voted on by stockholders, except (i) for the election of
directors, (ii) with respect to any "going private" transaction between the
Company and its Chairman, or any of his affiliates, and (iii) as otherwise
provided by law. The holders of Class A and Class B Common Stock share ratably
in all dividends and other distributions. As of December 31, 1997, 1,047,937
shares of Class A Common Stock, authorized but unissued, are reserved for
conversion of the Class B Common Stock. Shares of the Company's Class B Common
Stock convert on a share per share basis into the same number of Class A Common
Stock under certain circumstances.
 
     In December 1995, 16,784 shares of non-voting Class C Common Stock were
repurchased and retired by the Company for $459,000. In May 1996, 26,318 shares
of Class A common Stock and 143,874 shares of Class B Common Stock were
repurchased from the Company's former President. In July 1997, the Company
repurchased 3,667 shares of Class A Common for $111,000. In addition, in
September 1997, the Company repurchased 460 shares of Class A Common Stock for
$19,000.
 
     In July 1995, the Company completed an offering of 1,725,000 shares of its
Class A Common Stock for $24.50 per share. The net proceeds of the offering were
$39,166,000 after underwriting discounts, commissions and other costs of the
offering. The net proceeds were utilized to repay senior indebtedness of
$21,500,000 and to fund the Dallas Acquisition and a portion of the Charlotte
Acquisition.
 
Securities Issued in MMR Merger
 
     The following MMR warrants and options issued and outstanding at the date
of the merger were assumed by the Company and are now convertible into SFX
shares:
 
<TABLE>
<CAPTION>
                                         NUMBER        MMR          NUMBER          SFX
                                         OF MMR      EXERCISE       OF SFX       EXERCISE
              SECURITIES                 SHARES       PRICE       SECURITIES       PRICE
              ----------                 -------   ------------   ----------   -------------
<S>                                      <C>       <C>            <C>          <C>
Underwriters Warrants exercisable
  through July 22, 1998................  125,000      $9.10         37,288        $30.51
Class B Warrants exercisable through
  March 22, 1999.......................  749,460      $11.50       217,162        $38.55
Unit Purchase Options exercisable
  through March 22, 1999 (entitle the
  holder to purchase one share of MMR
  Common Stock, one MMR Class A Warrant
  and one MMR Class B Warrant).........  160,000   $7.75-$11.50     47,728     $25.98-$38.55
Stock options exercisable at various
  dates through November 22, 2006......  305,000   $5.00-$10.50     90,982     $16.76-$35.20
Warrants issued to Huff Alternative
  Income Fund, L.P. exercisable through
  March 31, 2005.......................  728,000      $7.75        223,564        $25.98
Sillerman Options......................   10,000      $2.50          2,983         $8.38
</TABLE>
 

                                    F-18

<PAGE>   25
                    SFX BROADCASTING, INC. AND SUBSIDIARIES
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
     The former MMR warrants and options are exercisable for that number of
shares of the Company's Class A Common Stock equal to the product of the number
of MMR shares covered by the security times 0.2983 and the per share exercise
price for the share of the Company's Class A Common Stock issuable upon the
exercise of each warrant and option is equal the quotient determined by dividing
the exercise price per share of the MMR shares specified for such security by
0.2983.
 
     During 1997, certain holders of the former MMR securities exercised 95,874,
215,344, 153,445, and 142,001 of Underwriters Warrants, Class B Warrants, Unit
Purchase Options and Stock Options, respectively, of the securities describe
above. The warrants issued to the Huff Alternative Income Fund, L.P. were
exercised through election of cashless exercise provisions whereby the Company
issued 165,023 shares of the Company's Class A Common Stock.
 
Stock Options
 
     The Company has elected to follow Accounting Principles Board Opinion No.
25, "Accounting for Stock Issued to employees" ("APB25") and related
interpretations in accounting for its employee stock options, as opposed to the
fair value accounting provided for under FAS Statement No. 123, "Accounting for
Stock-Based Compensation."
 
     Under stock option plans adopted annually since 1993, stock options to
acquire Class A Common Stock have been granted to certain officers, key
employees and other key individuals who perform services for the Company.
Options granted under these plans are generally granted at option prices equal
to the fair market value of the Class A Common Stock on the date of grant. As
such, under APB25, no expense is recorded in the statement of operations. Terms
of the options, determined by the Company, provided that the maximum term of
each options shall not exceed ten years and the options become fully exercisable
within five years of continued employment with the exception of certain options
granted to executives which were fully vested upon issuance.
 
     In connection with the Merger, the Board has approved that all outstanding
options will vest immediately upon the date of such Merger.
 
     At December 31, 1997, options outstanding had an average exercise price of
$22.04 and expiration dates ranging from December 1, 2003 to April 15, 2007. The
table below does not include the MMR options described above.
 
<TABLE>
<CAPTION>
                                             1997             1996              1995
                                         -------------    -------------    --------------
<S>                                      <C>              <C>              <C>
Options outstanding at beginning of
  year.................................     910,000          748,000          500,000
Option price...........................  $13.00-$33.75    $13.00-$21.25    $13.00-$13.50
Options granted........................     420,000          349,000          248,000
Options price..........................     $28.00        $27.25-$33.75        $21.25
Options exercised......................     726,050            --                --
Option price...........................  $13.00-$33.75         --                --
Options repurchased....................       --             187,000             --
Option price...........................       --          $13.00-$21.25
Options expired or canceled............       --               --                --
Options outstanding at end of year.....     603,950          910,000          748,000
Option price...........................  $13.00-$28.75    $13.00-$33.75    $13.00-$21.25
Options exercisable at end of year.....     439,750          461,200          153,000
</TABLE>
 

                                    F-19

<PAGE>   26
                    SFX BROADCASTING, INC. AND SUBSIDIARIES
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
NOTE 8 -- INCOME TAXES
 
     The provision for income taxes for the years ended December 31, 1997, 1996
and 1995 is summarized in thousands as follows:
 
<TABLE>
<CAPTION>
                                                            1997      1996      1995
                                                            -----    ------    ------
<S>                                                         <C>      <C>       <C>
Current
  Federal.................................................  $  --    $   --    $   --
  State...................................................    990     1,190        --
                                                            -----    ------    ------
                                                              990     1,190        --
                                                            -----    ------    ------
Deferred
  Federal.................................................     --        --        --
  State...................................................   (180)     (710)       --
                                                            -----    ------    ------
                                                             (180)     (710)       --
                                                            -----    ------    ------
                                                            $ 810    $  480    $   --
                                                            =====    ======    ======
</TABLE>
 
     The Company files a consolidated tax return for federal income tax
purposes. As a result of current losses, no federal tax provision was recorded
for the year ended December 31, 1997 and 1996. The current income tax expense
recorded during 1997 and 1996 is a result of current state and local income
taxes in certain states where subsidiaries file separate tax returns. Deferred
state tax benefit was recognized in 1997 and 1996 attributable to the
disposition of stations acquired in transactions in which associated deferred
tax liabilities were recorded in purchase accounting. As a result of current
losses and the deferred benefit associated with the losses, no current or
deferred expense or benefit was recorded for the year ended December 31, 1995.
 
     At December 31, 1997, the Company had total net operating loss
carryforwards of approximately $69,000,000 that will expire from 2003 through
2012, including net operating losses of acquired subsidiaries. Due to ownership
changes related to the acquisition of subsidiaries, the utilization of
approximately $15,300,000 of which losses is subject to various limitations. The
future use of remaining net operating loss carryforwards may be impacted and
subject to additional limitations as a result of the Merger.
 
     Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amount of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. The
 

                                    F-20
<PAGE>   27
                    SFX BROADCASTING, INC. AND SUBSIDIARIES
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
significant components of the Company's deferred tax assets and liabilities as
of December 31, 1997 and 1996 are as follows (in thousands):
 
<TABLE>
<CAPTION>
                                                                1997        1996
                                                              ---------   ---------
<S>                                                           <C>         <C>
Deferred Tax Assets:
Accounts receivable.........................................  $     860   $     563
Net operating loss carryforwards............................     23,965      12,044
Management service contract.................................      2,356       2,128
Other reserves..............................................        113         646
National sales representative contract settlement...........      8,740          --
Accrued bonuses and other compensation......................      1,563         997
                                                              ---------   ---------
Total deferred tax assets...................................     37,597      16,378
Valuation allowance.........................................    (21,876)     (5,623)
                                                              ---------   ---------
  Net Deferred Tax Assets...................................     15,721      10,755
Deferred Tax Liabilities:
Property, plant and equipment...............................       (684)       (372)
Intangible assets...........................................   (117,718)   (101,658)
Other.......................................................         --         (77)
                                                              ---------   ---------
  Total Deferred Tax Liabilities............................   (118,402)   (102,107)
                                                              ---------   ---------
  Net Deferred Tax Liabilities..............................  $(102,681)  $ (91,352)
                                                              =========   =========
</TABLE>
 
     The acquisition of radio station WWYZ resulted in the recognition of
deferred tax liabilities of approximately $10 million under the purchase method
of accounting. The amounts were based upon the excess of the financial statement
basis over the tax basis in assets, primarily intangibles.
 
     The 1997, 1996 and 1995 effective tax rate varied from the statutory
federal income tax rate as follows (in thousands):
 
<TABLE>
<CAPTION>
                                                       1997        1996        1995
                                                     --------    --------    --------
<S>                                                  <C>         <C>         <C>
Income taxes at the statutory rate.................  $ (8,488)   $(16,924)   $ (1,495)
Effect of non-recurring and unusual charges........     6,781       6,875          --
Valuation allowance................................    13,977       9,859       1,434
Effect of nondeductible amortization of
  intangibles......................................       295         264         198
Nonqualified stock options.........................   (12,380)         --          --
State and local income taxes (net of federal
  benefit).........................................       535         317        (145)
Other..............................................        90          89           8
                                                     --------    --------    --------
          Total....................................  $    810    $    480    $     --
                                                     ========    ========    ========
</TABLE>
 
NOTE 9 -- RELATED PARTY TRANSACTIONS
 
     Prior to April 1996, SCMC, where Robert F.X. Sillerman, the Company's
Executive Chairman, serves as Chairman of the Board of Directors and Chief
Executive Officer, had been engaged by the Company from time to time for
advisory services with respect to specific transactions. In April 1996, the
Company and SCMC entered into the SCMC Termination Agreement, pursuant to which
SCMC assigned to the Company its rights to provide services to, and receive fees
payable by each of, MMR and Triathlon in respect of such consulting and
marketing services to be performed on behalf of such companies, except for fees
related to certain transactions pending at the date of such agreement. In
addition, the Company and SCMC terminated the arrangement pursuant to which SCMC
performed financial consulting services for the Company. Upon
 

                                    F-21
<PAGE>   28
                    SFX BROADCASTING, INC. AND SUBSIDIARIES
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
consummation of the MMR Merger, SCMC's agreement with MMR was terminated. Prior
to consummation of the MMR Merger, MMR paid an annual fee of $500,000 to SCMC
and Triathlon paid SCMC an annual fee of $300,000 (which increased to $500,000
effective January 1, 1997). In addition, Triathlon has agreed to advance to SCMC
an amount of $500,000 per year in connection with transaction-related services
to be rendered by SCMC. However, if the agreement between SCMC and Triathlon is
terminated or if an unaffiliated person acquires a majority of the capital stock
of Triathlon the unearned fees must be repaid. Pursuant to the SCMC Termination
Agreement, the Company has agreed to continue to provide consulting and
marketing services to Triathlon until the expiration of their agreement on June
1, 2005, and not to perform any consulting or investment banking services for
any person or entity other than Triathlon in the radio broadcasting industry or
in any business which uses technology for the audio transmission of information
or entertainment. In consideration of the foregoing agreements, the Company
issued to SCMC warrants to purchase up to 600,000 shares of Class A Common Stock
at an exercise price, subject to adjustment, of $33.75 (the market price at the
time the financial consulting arrangement was terminated). The Company also
forgave a $2.0 million loan made by the Company to SCMC, plus accrued and unpaid
interest thereon. Pursuant to such agreement, the Chairman has agreed with the
Company that he will supervise, subject to the direction of the Board of
Directors, the performance of the financial consulting and other services
previously performed by SCMC for the Company. During 1996, the Company received
fees of $292,000 from MMR and $511,000 from Triathlon. During 1997, the Company
received fees of $1,794,000 from Triathlon. In connection with this agreement,
the Company had a $44,000 receivable from Triathlon at December 31, 1997.
Pursuant to the Merger, the Company will transfer the Triathlon consulting
contract to SFX Entertainment. Triathlon has previously announced that it is
exploring ways of maximizing stockholder value, including possible sale to a
third party. If Triathlon were acquired by a third party, the agreement might
not continue for the remainder of its term.
 
     In 1996, the Company paid to SCMC advisory fees of $4.0 million in
connection with the Liberty Acquisition, the Prism Acquisition, the Greenville
Acquisition, the Jackson Acquisitions, the Greensboro Acquisition and the
Raleigh-Greensboro Acquisition. In addition, the Company paid SCMC, on behalf of
MMR, a non-refundable fee of $2.0 million for investment banking services
provided to MMR in connection with the MMR Merger.
 
     No pending transactions, as described in Note 3, predate the SCMC
Termination Agreement, and therefore no fees are payable to SCMC.
 
     Prior to June 1996, the Company held a non-recourse note receivable from
the Company's former President in the amount of $2,000,000 which was secured by
133,333 shares of Class B Common Stock. The note bore interest at 6% per annum.
Interest income of $60,000 and $120,000 was accrued in 1996 and 1995 on the
loan, respectively. The loan and interest accrued were forgiven in June 1996
pursuant to an agreement with the former President and are included in
non-recurring and unusual charges.
 
     In January 1995, the Company paid a $1,000,000 fee to SCMC in connection
with the transfer of shares of the Company's Class C Common Stock.
 
     During the last quarter of 1996, the Company consolidated all of its
corporate office functions in New York. Prior to such time, the Company had an
agreement with the Chairman related to the maintenance of the Company's New York
Office whereby the Company reimbursed SCMC for certain office expenses and
salaries for certain employees of SCMC who provided services on behalf of the
Company. In addition certain of the Company's employees performed certain
services for other entities affiliated with SCMC. In connection with SCMC
Termination Agreement and the consolidation of the Company's Corporate Office in
New York, SCMC employees who provided services on behalf of the Company became
employees of the Company. Total reimbursements paid to SCMC for office expenses
and salaries totaled approximately $1,082,000 and $530,000 for the years ended
December 31, 1996 and 1995. The reimbursements paid to SCMC in 1996 included
$292,000 and $261,000 of fees paid by MMR and Triathlon, respectively, directly
to SCMC

                                    F-22
<PAGE>   29
                    SFX BROADCASTING, INC. AND SUBSIDIARIES
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
following the effective date of the SCMC Termination Agreement. The timing of
these payments during the year were such that the Company had advanced amounts
to SCMC of up to $230,000 during the period. As of December 31, 1996 and 1997,
there are no amounts due to or from SCMC.
 
     The transactions above were not negotiated on an arms-length basis.
Accordingly, each transaction was approved by the Company's Board of Directors,
including the Company's independent directors, in accordance with the provisions
relating to affiliate transactions in the Company's by-laws, bank agreements and
Indenture, which provisions require a determination as to the fairness of the
transactions to the Company.
 
     The Company's Executive Vice President, General Counsel and Director is Of
Counsel to the law firm of Baker & McKenzie. Baker & McKenzie serves as counsel
to the Company in certain matters. Baker & McKenzie compensates the executive
based, in part, on the fees it receives from providing legal services to the
Company and other clients originated by the executive. The Company paid Baker &
McKenzie $6,813,000, $4,886,000 and $793,000 for legal services during 1997,
1996 and 1995, respectively. During February 1998, the Company was reimbursed by
SFX Entertainment for approximately $2,948,000 of legal fees related to concert
acquisitions and the Spin-Off. As of December 31, 1997 and 1996, the Company
accrued Baker & McKenzie legal fees of approximately $4,782,000 and $1,550,000,
respectively.
 
NOTE 10 -- NON-RECURRING AND UNUSUAL CHARGES, INCLUDING ADJUSTMENTS TO BROADCAST
RIGHTS AGREEMENT
 
Audited:
 
     The Company recorded non-recurring and unusual charges related to the
Merger of SFX Broadcasting and the Spin-Off of SFX Entertainment of $20,174,000
in 1997 which consisted primarily of (i) $12,140,000 related to bonuses paid to
officers of the Company (ii) a write-off of a $2,500,000 loan made to the
Company's Executive Chairman (iii) $1,713,000 relating to an increase in value
of certain Stock Appreciation Rights and (iv) $3,821,000 of other expenses,
primarily legal, accounting and regulatory fees.
 
     The Company recorded non-recurring and unusual charges of $28,994,000 in
1996 which consisted primarily of payments in excess of the fair value of stock
repurchased totaling $12,461,000 to the company's former President and the
reserve by the Company of $2,330,000 relating to the loan and accrued interest
to the Company's former President, $5,586,000 related to the SCMC Termination
Agreement (Note 9), $4,575,000 for the repurchase of options and rights to
receive options held by the Chief Operating Officer, and a charge of $1,600,000
related to the termination of the Company's contractual four-year broadcast
rights of Texas Rangers baseball and an adjustment in the value of the contract
for the 1996 season. In 1995, the Company recorded a $5 million charge related
to the write down in value of the Company's Texas Rangers broadcast rights.
 
Unaudited:
 
     In the first quarter of 1998, the Company recorded non-recurring and
unusual charges of $25.0 million which consisted primarily of (i) $4.2 million
of compensation expense related to options issued, (ii) $550,000 relating to the
settlement of a lawsuit, (iii) $489,000 relating to the increase in value of
certain SARs, (iv) $16.6 million relating to the consent solicitations from the
holders of its Senior Subordinated Notes due 2006 and the holders of its 12 5/8%
Series E Preferred Stock in connection with the Spin-Off and (v) $3.2 million of
expenses, primarily legal, accounting and regulatory fees associated with the
pending Merger and the consent solicitations in connection with the Spin-Off.
 
NOTE 11 -- COMMITMENTS AND CONTINGENCIES
 
     The Company has entered into various operating leases, broadcast rights
agreements and employment agreements. Total rent expense was $5,403,000,
$2,903,000 and $1,506,000 for the years ending December 31, 1997, 1996 and 1995,
respectively. The Company has entered into employment agreements with certain
 

                                    F-23
<PAGE>   30
                    SFX BROADCASTING, INC. AND SUBSIDIARIES
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
officers and other key employees. Expenses under the contracts approximated
$19,748,000 for the year ended December 31, 1997. Future minimum payments in the
aggregate for all noncancelable operating leases including broadcast rights
agreements and employment agreements with initial terms of one year or more
consist of the following at December 31, 1997 (in thousands):
 
<TABLE>
<CAPTION>
                                                    SFX BROADCASTING, INC.   SFX ENTERTAINMENT, INC.
                                                    ----------------------   ------------------------
                                                    OPERATING   EMPLOYMENT   OPERATING    EMPLOYMENT
                                                     LEASES     AGREEMENTS     LEASES     AGREEMENTS
                                                    ---------   ----------   ----------   -----------
<S>                                                 <C>         <C>          <C>          <C>
1998..............................................   $11,186     $18,090      $ 3,366       $1,900
1999..............................................     7,232      12,394        3,823        1,864
2000..............................................     6,373       5,638        1,648        1,624
2001..............................................     4,084       2,133        1,666        1,534
2002..............................................     2,913       1,471        1,678          300
2003 and thereafter...............................     7,725       1,159       14,117           --
                                                     -------     -------      -------       ------
                                                     $39,513     $40,885      $26,298       $7,222
                                                     =======     =======      =======       ======
</TABLE>
 
     The future minimum payments pursuant to operating leases does not include
the New York offices as theses facilities will be transferred to SFX
Entertainment.
 
     Future minimum payments in the aggregate for all noncancelable capital
leases with initial terms of one year or more consist of the following at
December 31, 1997 (in thousands)
 
<TABLE>
<CAPTION>
                                                              CAPITAL
                                                              LEASES
                                                              -------
<S>                                                           <C>
1998........................................................   $ 124
1999........................................................      86
2000........................................................      43
2001........................................................      14
2002 and thereafter.........................................      --
                                                               -----
Total minimum lease payments................................     267
Less: amount representing interest..........................     (40)
                                                               -----
Present value of future minimum lease payments..............     227
Less: current portion.......................................    (101)
                                                               -----
Long-term capital lease obligations.........................   $ 126
                                                               =====
</TABLE>
 
     The Company is the subject of various claims and litigation principally in
the normal course of business. In the opinion of management, the ultimate
resolution of such matters will not have a material adverse impact on the
consolidated financial statements. SFX Entertainment has committed to certain
renovation and construction projects totaling $35.5 million.
 
NOTE 12 -- DEFINED CONTRIBUTION PLAN
 
     The Company sponsors a 401(k) defined contribution plan in which most of
its employees were eligible to participate. The Plan presently provides for
discretionary employer contributions. The Company made no contributions in 1997,
1996 or 1995.
 

                                    F-24
<PAGE>   31
                    SFX BROADCASTING, INC. AND SUBSIDIARIES
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
NOTE 13 -- SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
 
<TABLE>
<CAPTION>
                                                             1997      1996      1995
                                                            -------   -------   -------
<S>                                                         <C>       <C>       <C>
Cash paid during the year for:
  Interest................................................  $65,184   $30,898   $12,903
  Income taxes............................................  $ 1,059   $    81   $    --
</TABLE>
 
Supplemental schedule of noncash investing and financing activities:
 
Issuance of equity securities, including deferred equity security issuance, and
     assumption of debt in connection with certain acquisitions (Note 3)
 
Agreements to pay future cash consideration in connection with certain
acquisitions (Note 3)
 
Exchange of radio stations (Note 3)
 
Issuance of warrants in connection with SCMC termination agreement (Note 9).
 
NOTE 14 -- SUBSEQUENT EVENTS
 
     Radio Broadcasting. In January 1998, the Company sold one radio station
operating in Richmond, Virginia (the "Richmond Disposition") for $4.3 million.
 
     Concert Promotion Acquisitions and Financing. In February and March 1998,
SFX Entertainment acquired the following live entertainment businesses which
were contributed to SFX Entertainment upon the Spin-Off.
 
     PACE Entertainment Corporation ("PACE"), one of the largest diversified
producers and promoters of live entertainment in the United States, having what
SFX Entertainment believes to be the largest distribution network in the United
Sates in each of its music, theater and specialized motor sports businesses (the
"PACE Acquisition"), for total consideration of approximately $156,056,000. In
connection with the PACE Acquisition, SFX Entertainment acquired 100% of
Pavilion Partners, a partnership that owns interest in 10 venues ("Pavilion"),
through the PACE Acquisition and directly from PACE's various partners for
$90,627,000. The Company has guaranteed the performance of SFX Entertainment's
obligation to PACE until PACE is issued the SFX Entertainment stock it is
entitled to under the acquisition agreement.
 
     The Contemporary Group ("Contemporary"), a fully-integrated live
entertainment and special event promoter and producer, venue owner and operator
and consumer marketer, for total consideration of approximately $101,402,000.
 
     The Network Magazine Group ("Network Magazine"), a publisher of trade
magazines for the radio broadcasting industry, and SJS Entertainment ("SJS"), an
independent creator, producer and distributor of music-related radio
programming, services and research which it exchanges with radio broadcasters
for commercial air-time sold, in turn, to national network advertisers (the
"Network Acquisition"), for total consideration of approximately $66,784,000.
 
     BG Presents ("BGP"), one of the oldest promoters of, and owner-operators of
venues for, live entertainment in the United States, and a leading promoter in
the San Francisco Bay area (the "BGP Acquisition"), for total consideration of
approximately $80,327,000.
 
     Concert/Southern Promotions ("Concert/Southern"), a promoter of live music
events in the Atlanta, Georgia metropolitan area (the "Concert/Southern
Acquisition"), for total consideration of approximately $16,600,000.
 

                                    F-25
<PAGE>   32
 
     Westbury Music Fair, a theater located in Westbury, New York for aggregate
consideration of $3.0 million in cash and an agreement to issue 75,019 shares of
Class A Common Stock of SFX Entertainment.
 
     On February 11, 1998, SFX Entertainment completed the private placement of
$350.0 million of 9 1/8% Senior Subordinated Notes (the "Notes") due 2008.
Interest is payable on the Notes on February 1 and August 1 of each year.
 
     On February 26, 1998, SFX Entertainment executed a Credit and Guarantee
Agreement (the "Credit Agreement") which established a $300.0 million senior
secured credit facility comprised of (i) a $150.0 million eight-year term loan
(the "Term Loan") and (ii) a $150.0 million seven-year reducing revolving credit
facility. Borrowings under the Credit Agreement are secured by substantially all
of the assets of SFX Entertainment, including a pledge of the outstanding stock
of substantially all of its subsidiaries and guaranteed by all of SFX
Entertainment's subsidiaries. On February 27, 1998, SFX Entertainment borrowed
$150.0 million under the Term Loan. Together with the proceeds from the Notes,
the proceeds from the Term Loan were used to finance the 1998 acquisitions
discussed above.
 
     Consent Solicitation. To facilitate the Spin-Off, SFX Entertainment's 1998
acquisitions and its financing thereof, the Company sought and obtained consents
from the holders of its Old Notes and the holders of its Senior Subordinate
Notes due 2006 and the holders of its 12 5/8% Series E Preferred Stock. In
connection with these consents, the Company modified certain covenants.
Management anticipates that the Company will be in compliance with these
covenants in the foreseeable future. Fees and expenses of approximately $18.0
million were incurred by the Company in connection with the consent
solicitations and were reimbursed by SFX Entertainment with the proceeds of the
SFX Entertainment Notes. Such charges are included in non-recurring and unusual
charges, including adjustments to broadcast rights agreement.
 
  Legal Proceedings
 
     On August 29, 1997, two lawsuits were commenced against the Company and its
directors which allege that the consideration to be paid as a result of the
Merger to the holders of the Company's Class A Common Stock is unfair and that
the individual defendants have breached their fiduciary duties.
 
     On March 16, 1998, all of the parties entered into a Memorandum of
Understanding, pursuant to which they have reached an agreement providing for a
settlement of the action (the "Settlement"). The Settlement provides for the
Company to pay plaintiffs' counsel an aggregate of $950,000, including all fees
and expenses as approved by the court. The Company anticipates that a
significant portion of such payment will be funded by the Company's insurance.
The Settlement is conditioned on the (a) consummation of the Merger, (b)
completion of the confirmatory discovery and (iii) approval of the court.
 

                                     F-26