<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
FOR ANNUAL AND TRANSITION REPORTS PURSUANT TO SECTIONS 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
(X) ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1998
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to .
333-46235
---------
(Commission File Number)
PRODUCTION RESOURCE GROUP, L.L.C.
(Exact name of Registrant as Specified in its Charter)
Delaware 14-1786937
-------- ----------
(State or other Jurisdiction (I.R.S. Employer Identification No.)
of Formation)
539 Temple Hill Road, New Windsor, New York 12553
------------------------------------------- -----
(Address of Principal Executive Offices) (Zip Code)
(914) 567-5700
--------------
(Registrant's Telephone Number, Including Area Code)
Securities registered pursuant to Section 12 (b) of the Act: None
Securities registered pursuant to Section 12 (g) of the Act: None
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Exchange Act during the past 12 months
(or for such shorter period that the registrant was required to file such
reports), and (2) has been subject to such filing requirements for the past 90
days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K.[ ]
Aggregate Market Value of voting and non-voting common equity held by
non-affiliates of the Registrant: NOT APPLICABLE
Number of shares outstanding of each of Registrant's classes of common stock as
of March 31, 1999: NOT APPLICABLE
<PAGE>
PART I
ITEM 1. Business
General
Production Resource Group, L.L.C. (the "Company" or "PRG"), a Delaware limited
liability company formed in August 1995, is the successor to the theatrical
production management, scenery fabrication, and motion control business founded
by Jeremiah J. Harris, the Company's Chairman and Chief Executive Officer, in
1984. The Company is a leading integrator, fabricator and supplier of
entertainment technology to a marketplace which includes the live entertainment
(live theater, concert touring and special events), corporate events (trade and
industrial shows) and themed environment (gaming, theme parks and retail)
markets. In 1998, the Company operated through four segments: lighting, audio,
event services and scenery. Through these segments, the Company sells and rents
its products and services to a diverse client base in these markets. In March
1998, the Company discontinued its Themed Attraction Permanent Installation
("Themed Attraction") business.
During 1998, the Company significantly expanded through seven acquisitions.
The Company acquired three companies that now operate in the lighting segment,
two that operate in the event services segment and two that formed the audio
segment. As a result of the acquisitions, the Company believes it has
established itself as one of the largest theatrical lighting companies in the
world, broadened the product line into audio rentals and systems, provided new
geographic coverage, and accelerated its expansion into retail environments and
trade show exhibits. Additionally, the Company is in the process of
consolidating facilities in key markets, which will provide operational and
administrative efficiencies and provide a "one-stop shop" for customers.
Description of Products and Services by Segment (includes recent acquisitions)
Lighting Segment
The Company's lighting segment provides lighting products and systems for rental
and sale. Through three strategic acquisitions during 1998, the Company has
dramatically increased the size and capabilities of this segment. On June 19,
1998, the Company acquired primarily all of the stock (approximately 97.5% at
December 31, 1998) of Light and Sound Design Holdings Limited ("Holdings"), a
United Kingdom ("UK") company. Holdings, which operates as a subsidiary of PRG,
has two wholly-owned operating subsidiaries, Light & Sound Design Limited, a UK
company, which is based in Birmingham, England with an office in London, England
and operates exclusively in Europe, and Light & Sound Design, Inc., a California
corporation, which is based in Los Angeles, California and Nashville, Tennessee
and operates in the North American market. Light & Sound Design Limited and
Light & Sound Design, Inc. each provide rentals of lighting and other equipment
for use in the concert touring and industrial markets. This acquisition has
enabled the Company to enter into the concert touring market and to establish
operations in Europe.
On June 30, 1998, the Company acquired the net assets of Production Arts
Lighting Inc., a New York corporation, and two smaller affiliated companies
(collectively "Production Arts"). Production Arts was based in Moonachie, New
Jersey with smaller offices in California, New York and London, England, and
provides sales and rentals of primarily lighting equipment for use in the
installation, theatrical and industrial markets. Production Arts now operates as
a division of PRG within the lighting segment. In addition to expanding the
quantity and quality of lighting equipment for rental and sales, Production Arts
provides the Company with the ability to perform large-scale permanent
installations of lighting systems, which the Company did not have previously.
With the addition of Production Arts, the Company was able to consolidate its
existing New Jersey-based lighting facilities into one facility in February
1999.
On October 23, 1998, the Company acquired all of the outstanding common stock of
Production Lighting Systems, Inc. ("PLS"), a California corporation. PLS, which
is based in Glendale, California, primarily rents lighting equipment to the
television industry. This acquisition was strategically important because it
enabled the Company to enter the television market and provided the Company with
additional operations in the California market.
<PAGE>
The lighting segment accounted for approximately 50% of the Company's combined
revenues during 1998. Sales revenues accounted for 53% of the lighting segment's
revenues with approximately 47% related to rentals.
Audio Segment
The Company established the audio segment during 1998 with two strategic
acquisitions. On January 2, 1998, the Company acquired the net assets of
Pro-Mix, Inc., ("Pro-Mix"), a provider of sound equipment and acoustical and
sound design consulting services primarily to the live theatre market. The
majority of the revenues generated by Pro-Mix is from the rental of its sound
equipment (approximately 60% of its 1998 revenues) to the live entertainment and
corporate events markets pursuant to run-of-show contracts, which can range from
one day to the full run of a Broadway show or concert tour. Pro-Mix also sells
its consulting services usually for a fixed price fee in addition to selling
used equipment and other audio products. Pro-Mix is headquartered in Mount
Vernon, NY with an office in Orlando, Florida and operates as a division of PRG.
On August 13, 1998, the Company acquired all of the outstanding common stock of
Signal Perfection, Ltd. ("SPL"), a Maryland Corporation. SPL, which operates
as a wholly-owned subsidiary of PRG, is based in Columbia, Maryland and Las
Vegas, Nevada and provides specialized design, fabrication and installation of
audio systems. SPL has installed many large scale, complex audio systems in
large venues throughout the country, including sport stadiums and casinos.
With the acquisitions of SPL and Pro-Mix, the Company believes it has
established a foundation that will enable the audio segment to expand into other
areas of the country. Revenues generated from the audio segment approximated 13%
of the Company's combined revenues in 1998. Sales revenues accounted for 64% of
the audio segment's revenues with approximately 36% related to rental of audio
equipment.
Event Services Segment
The Company's event services segment sells a variety of services, primarily to
corporate clients, including exhibit fabrication, production management
and services for trade and industrial shows. Industrial shows are single
corporation events such as large sales meetings and new product launches. Trade
shows are events where many corporations in a particular industry or market
present their products and services to customers.
During 1998, two acquisitions added to the size and capabilities of this
segment. On July 31, 1998, the Company acquired substantially all of the net
assets of CBE Exhibits & Events, Incorporated, a Texas corporation ("CBE"). CBE
is based in Houston, Texas and provides support services, including logistic
support, booth and exhibit construction and storage to exhibitors at trade shows
and other major events. CBE operates as a division of PRG in the Company's event
services group. With the acquisition of CBE, the Company believes it has
expanded its customer base and has entered into a new geographic area of the
country in which it did not have a presence previously.
On November 30, 1998, the Company acquired all of the outstanding common stock
of Haas Multiples Environmental Marketing & Design, Inc. ("Haas"), a Minnesota
corporation. Haas, which is based in suburban Minneapolis, and operates as a
wholly-owned subsidiary of PRG, specializes in exhibit and retail design and
fabrication. The acquisition of Haas significantly increased the Company's
creative design capability, which the Company believes will enhance the
marketing and sales effort of the event services group. It has also enabled the
Company to enter the retail environmental design and fabrication market. The
event services segment accounted for approximately 16% of the Company's combined
revenues during 1998.
Scenery Segment
The Company's scenery segment consists of two operating units that fabricate
scenery and rent automation equipment that controls the motion of such scenery.
The Company sells its scenery primarily to the live theater market, corporate
events and to themed entertainment venues such as casinos. The Company generally
rents its proprietary automated motion control system, Stage Command System (R),
pursuant to run-of-show contracts, payable weekly, monthly or quarterly. Stage
Command System (R) is a state-of-the-art motion control system for moving
scenery, platforms, lifts, screens and other props. It is primarily used in the
Broadway show market. The U.S. Patent and Trademark Office has recently notified
the Company that its patent for the Stage Command System has been allowed. The
Company has paid the required fees and expects the patent to be issued in due
course.
<PAGE>
During 1998, the Company focused on restructuring the management team and
increasing sales efforts to the Broadway show and the Corporate Industrial show
marketplace. The scenery segment accounted for approximately 21% of the
Company's combined revenues. Sales revenues accounted for 70% of the scenery
segment's revenues with approximately 30% related to automation equipment and
other rentals.
Industry segment data for the year ended December 31, 1998, 1997 and 1996 are
included on pages F-15 through F-18 of the financial statements and are an
integral part of this section of Item 1.
Discontinued Operations
On March 2, 1998, the Company adopted a plan to discontinue its Themed
Attraction Permanent Installation ("Themed Attraction") business. The Themed
Attraction business operated primarily through a single division, which utilized
a turn-key approach of supplying project management, fabrication of scenic
elements and show action equipment and installation of such projects at a
customer's place of business. This division served customers who were primarily
owners and operators of amusement parks and casinos. The Company originally
reported the results of the Themed Attraction business as a discontinued
operation in its 1997 combined statement of operations and restated all prior
periods presented.
The loss from discontinued operations at December 31, 1998 primarily relates to
additional costs in connection with the phase-out period of the Themed
Attraction business in excess of amounts previously estimated. Costs in excess
of amounts estimated are the result of additional work performed by the Company
on its last remaining Themed Attraction project for an amusement park customer
(the "amusement park project"), that were not specifically addressed in the
contract. This work was performed under the direction of the customer's
management team. Both the customer and the Company are currently negotiating a
settlement or rider to the contract.
Additionally, the Company wrote off certain amounts receivable for a project
completed in March 1997. A portion of the contract payment was withheld by the
customer until the Company could make certain modifications to the attraction as
stipulated in the contract. The Company originally believed that it would be
able to satisfactorily complete the modifications. However, it was ultimately
unable to perform the modifications, primarily because equipment supplied by a
sub-contractor failed. The Company sued the sub-contractor and settled out of
court in February 1999. The settlement approximated $475,000 and after the
sub-contractor's counter-claim was satisfied and netting legal fees, the Company
will receive approximately $75,000, which reduced the write off of the withheld
contract payments.
The Company's assets related to the discontinued operations business are limited
to accounts receivable for the aforementioned amusement park project and for
work performed for LateNite Magic, Inc. ("LateNite") in 1997. LateNite stopped
its project in late 1997 as LateNite was unable to obtain adequate financing.
LateNite is continuing in its efforts to obtain financing and has provided
written assurance that upon receipt of the new financing, the Company's
receivable will be paid in full. The Company has placed a mechanic's lien on the
leasehold and on the building which houses the attraction to secure its claim
and ensure that the Company's obligation is satisfied either by LateNite or in a
lien foreclosure. The Company believes this balance will be realized.
Except for the amusement park project and the work related to LateNite, the
Company has now completed the discontinuation of the Themed Attraction business.
Sales and Marketing
The Company believes that it has developed a significant network of sales
representatives in the key markets throughout the country to sell its products
and services. Because this sales force was built up primarily through
acquisitions, the representatives are usually familiar with a particular product
(such as lighting or audio). The Company is in the process of training its sales
representatives to cross sell the products and services of the other segments.
In addition, the Company has been targeting large, multi-national corporations
with significant, recurring events that require fully integrated solutions. The
Company is also evaluating management information systems that will assist in
the tracking of its products and services by client in order to enhance its
cross-selling efforts.
<PAGE>
Vendors and Suppliers
The Company purchases products, components, raw materials and services as
required from a vast number of suppliers, none of which accounted for more than
10% of the Company's total purchases for 1998. The Company believes that there
are adequate alternative sources of supply at commercially reasonable rates for
all product, materials and services required by its operations.
Competition
The markets in each of the industry segments for the Company's products and
services are highly competitive and fragmented. The Company's competitors
include primarily small local or regional firms and several large national
firms, some of which may have greater financial, management and marketing
resources than the Company. Internationally, the Company competes with mostly
local and regional companies. The primary competitive factors vary by market but
include technological capability, range of products and services, price,
reputation, reliability, responsiveness to client needs and geographic proximity
to the client.
The Company believes that the quality of its products and services compete
favorably in each business segment. In addition, the Company believes that the
quantity and quality of its rental equipment in the lighting and audio segments
provide the Company with a competitive edge. The Company also believes its
scenery fabrication capabilities, and the quality of the Stage Command
System(R) in the scenery segment, allow it to compete favorably with its
competition.
Employees
At December 31, 1998, the Company had approximately 1,177 full-time employees.
The Company routinely hires a significant number of temporary employees on a
project basis. Approximately 124 of the Company's full-time employees are
members of the International Alliance of Theatrical Stage Employees. The current
union contracts for the Company's New York, New Jersey, Florida and Nevada
employees expire in August 2001 and December 2001, respectively. The Company has
not experienced any significant labor disputes with its employees. The Company
believes that its relationship with its employees is good.
ITEM 2. Properties
The following table sets forth information about the Company's principal
facilities at December 31, 1998 (except for the Las Vegas facility, which is
after the sale leaseback transaction, see Liquidity and Capital Resources):
<TABLE>
<CAPTION>
Location Facilities/Function Sq. Ft Own/Lease
<S> <C> <C>
New Windsor, NY 4 Principal executive offices, scenery fabrication,
testing and warehouse 190,000 Own
Golden Valley, MN 2 Administration, exhibit fabrication and warehouse 130,000 Lease
North Bergen, NJ 1 Administration, warehouse and lighting rental and sales 127,000 Lease
Las Vegas, NV 1 Administration, warehouse and lighting rental and sales 115,000 Lease
Orlando, FL 1 Administration, warehouse and lighting rental and sales 80,000 Lease
Denver, CO 2 Administration, exhibit fabrication and warehouse 77,000 Lease
Cornwall-on-Hudson, NY 1 Painting and Storage 62,000 Own
Birmingham, UK 1 Administration, warehouse and lighting rental and sales 60,000 Lease
Newbury Park, CA 1 Administration, warehouse and lighting rental and sales 35,000 Lease
Atlanta, GA 1 Administration, warehouse and lighting rental and sales 28,000 Lease
Houston, TX 1 Administration, warehouse, exhibit rental and sales 26,000 Lease
Mount Vernon, NY 1 Administration, warehouse and audio rental and sales 24,000 Lease
Glendale, CA 1 Administration, warehouse and lighting rental and sales 24,000 Lease
New York, NY 4 Administration 18,000 Lease
Columbia, MD 2 Administration, warehouse, audio sales 15,000 Lease
</TABLE>
<PAGE>
The Company believes that its facilities will be adequate for its operations for
the foreseeable future, although this may be affected by future acquisitions if
any.
ITEM 3. Legal Proceedings
The Company from time to time is involved in litigation arising in the
ordinary course of business. Although there can be no assurance, the Company
does not believe that any such litigation will, individually or in the
aggregate, have a material adverse effect on its business, results of operations
or financial condition. Michael Crawford, the former star of EFX!(TM) and Entco
Three, Inc. filed an action in the District Court for Clark County, Nevada on
January 30, 1998 against the Company and the other companies involved in
EFX!(TM), alleging negligence and careless conduct in failing to adequately
operate, manage, maintain, control, construct and or supervise the production of
EFX!(TM) and the special effects contained therein resulting in personal injury
to Mr. Crawford while performing therein. While the complaint does not specify
the damages claimed, prior to filing the litigation Mr. Crawford's attorneys
indicated that they would seek damages in excess of the Company's insurance. The
Company has denied liability and continues to vigorously defend such action. The
Company believes it has meritorious defenses to such actions.
ITEM 4. Submission of Matters to a Vote of Security Holders
None.
PART II
ITEM 5. Market for Registrant's Common Equity and Related Stockholder Matters
No class of equity of the Company is traded on an established security market.
<PAGE>
ITEM 6. Selected Financial Data
The following table sets forth selected historical combined financial data
for the Company as of and for each of the five years in the period ended
December 31, 1998. The selected historical combined financial data as of and for
each of the three years in the period ended December 31, 1998 are derived from
and should be read in conjunction with the audited combined financial statements
of the Company, including the notes thereto, included elsewhere in this report.
The selected historical combined financial data as of and for the years ended
December 31, 1994 and 1995 were derived from audited combined financial
statements of the Company that are not included herein.
The following table should be read in conjunction with "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
the Company's Combined Financial Statements and the notes thereto included
elsewhere in this report.
<TABLE>
<CAPTION>
(In thousands) Year Ended December 31,
-----------------------------------------------------------------------------
1998 (1) 1997 (2) 1996 (4) 1995 1994
-------- -------- -------- ---- ----
<S> <C> <C> <C> <C> <C>
Statement of Operations Data(3):
Revenues $ 174,603 $ 75,180 $ 49,434 $ 37,284 $ 31,040
Direct production costs 107,857 46,131 29,565 22,564 22,250
Depreciation expense 11,257 6,181 3,920 3,342 770
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Gross profit 55,489 22,868 15,949 11,378 8,020
Selling, general and administrative
expenses 37,393 16,185 8,676 5,794 4,813
Other depreciation and
amortization 4,005 2,182 715 445 461
Non-recurring compensation
expense (5) -- 2,125 -- -- --
-----------------------------------------------------------------------------
Operating profit 14,091 2,376 6,558 5,139 2,746
Loss on impairment of assets (6) 1,822 -- 495 -- --
Interest expense 14,769 3,956 1,292 632 279
Interest (income) (674) (117) (128) (268) (74)
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Income (loss) from continuing
operations before income taxes
and extraordinary item (1,826) (1,463) 4,899 4,775 2,541
Provision for income taxes 1,712 392 206 122 28
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Income(loss) from continuing
operations (3,538) (1,855) 4,693 4,653 2,513
Income (loss) from operations of
discontinued Themed Attraction
business (2,357) (5,302) 1,407 244 --
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Income (loss) before extraordinary
item (5,895) (7,157) 6,100 4,897 2,513
Minority interest (72) -- -- -- --
Extraordinary item (7) -- (614) -- -- --
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Net income (loss) $ (5,967) $ (7,771) $ 6,100 $ 4,897 $ 2,513
=============================================================================
Cash Flow Data:
Net cash provided by (used in)
operating activities $ 4,206 $ (2,971) $ 6,184 $ 8,974 $ 3,852
Net cash used in investing
activities (77,863) (40,538) (20,302) (9,862) (5,641)
Net cash provided by (used in)
financing activities 52,507 67,663 15,098 (651) 2,692
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
1998 (1) 1997 (2) 1996 (4) 1995 1994
-------- -------- -------- ---- ----
<S> <C> <C> <C> <C> <C>
Other Financial Data:
EBITDA (8) $ 29,353 $ 10,739 $ 11,193 $ 8,926 $ 3,977
Capital expenditures 21,728 18,151 17,456 9,621 5,467
Balance Sheet Data (at period
end):
Working capital (deficiency) $ 13,143 $ 35,232 $ (867) $ (3,164) $ 418
Total assets 196,106 128,252 51,995 24,876 20,222
Total debt 157,241 104,565 27,001 7,379 7,096
Members' equity (deficit) (81) 3,083 14,398 11,908 8,146
</TABLE>
See accompanying notes to Selected Combined Financial Data
NOTES TO SELECTED COMBINED FINANCIAL DATA
(1) The statement of operations data, cash flow data and other financial data
for the year ended December 31, 1998 reflect the results of operations of
Pro-Mix, Holdings, Production Arts, CBE, SPL, PLS and Haas since they were
acquired by the Company on January 2, 1998, June 19, 1998, June 30, 1998,
July 31, 1998, August 13, 1998, October 23 1998, and November 30, 1998,
respectively.
(2) The statement of operations data, cash flow data and other financial data
for the year ended December 31, 1997 reflect the results of operations of
Thoughtful Designs, Design Dynamics and Bash since they were acquired by
the Company on March 7, 1997, June 6, 1997 and August 15, 1997,
respectively.
(3) On March 2, 1998, the Company adopted a plan to discontinue its Themed
Attraction segment. The historical statement of operations data has been
restated to reflect this segment as a discontinued operation. Revenues of
the Themed Attraction segment were approximately $2.1 million, $13.1
million and $24.6 million for the years ended December 31, 1995, 1996 and
1997, respectively.
(4) The statement of operations data, cash flow data and other financial data
for the year ended December 31, 1996 reflect the results of operations of
Vanco and Cinema since they were acquired by the Company on January 18,
1996 and February 8, 1996, respectively.
(5) Non-recurring compensation expense for the year ended December 31, 1997
reflects bonuses of $2.125 million paid to the two former shareholders of
Bash and a former shareholder of Design Dynamics upon their execution of
employment agreements with the Company.
(6) Loss on impairment of assets for the year ended December 31, 1996 reflects
a writedown of $495,000 of the carrying value of the Company's former
principal fabrication facility in Cornwall-on-Hudson, NY. The loss on
impairment of assets in 1998 relates to the Company's subsequent sale and
leaseback transaction of its Las Vegas facility.
(7) Extraordinary item for the year ended December 31, 1997 reflects the
write-off of unamortized deferred financing costs of $614,000 related to
the refinancing of the Company's existing credit facility with the Credit
Facility on July 31, 1997.
(8) EBITDA is defined, as the sum of income before interest expense, provision
for taxes, depreciation and amortization and certain non-cash charges.
EBITDA is presented because it is a widely accepted financial indicator of
a company's ability to service indebtedness. However, EBITDA should not be
considered an alternative to operating income or cash flows from operating
activities (as determined in accordance with generally accepted accounting
principles) and should not be construed as an indication of a company's
operating performance or as a measure of liquidity. In addition, EBITDA may
not be comparable to similarly titled measures reported by other companies.
EBITDA is calculated as follows (in thousands):
<TABLE>
<CAPTION>
Year Ended December 31,
------------------------------------------------------------------------------
1998 1997 1996 1995 1994
------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Operating profit $ 14,091 $ 2,376 $ 6,558 $ 5,139 $ 2,746
Depreciation expense 11,257 6,181 3,920 3,342 770
Other depreciation and
amortization 4,005 2,182 715 445 461
------------------------------------------------------------------------------
$ 29,353 $ 10,739 $ 11,193 $ 8,926 $ 3,977
==============================================================================
</TABLE>
<PAGE>
ITEM 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Certain statements made in this report may be deemed to be forward-looking
statements as defined in the Safe Harbor Provisions of the Private Securities
Litigation Reform Act of 1995. Forward-looking statements involve known and
unknown risks and uncertainties, which may cause the Company's actual results in
future periods or plans for future periods to differ materially from what is
currently anticipated. Those risks include, among others, general competitive
factors, the Company's ability to develop and implement operational and
financial systems to manage rapidly growing operations, the Company's ability to
successfully complete and integrate its acquisitions and to implement
operational improvements in its acquired businesses, the episodic nature of the
Company's business and other risks and uncertainties detailed from time to time
in the Company's filings with the Securities and Exchange Commission.
General
The Company is a leading integrator, fabricator and supplier of a broad
range of entertainment technology for the live entertainment (live theater,
concert touring and special events), corporate events (trade and industrial
shows) and themed entertainment (gaming, theme parks and themed retail) markets.
During 1998, the Company's strategy was to expand its lighting segment and event
services segment through acquisitions and business development. In addition, the
Company formed an audio segment during 1998 through the acquisitions of Pro-Mix
and SPL. On March 2, 1998, the Company adopted a plan to discontinue its Themed
Attraction business. The Themed Attraction business operated primarily through a
single division, which utilized a turn-key approach of supplying project
management, fabrication of scenic elements and show action equipment and
installation of such projects at a customer's place of business. The Company
originally reported the results of the Themed Attraction business as a
discontinued operation in its 1997 combined statement of operations.
Revenue Recognition. Revenues consist of sales and rentals of the Company's
products and services. Sales of products (primarily scenery for live
entertainment and fabricated exhibits for events) and services to clients
(primarily production management services) for the events and live entertainment
markets are recognized upon delivery or when services are performed. All rental
revenues (principally on lighting and audio products and show and motion control
systems) are recognized ratably over the lives of the applicable rental
agreements. Revenues related to lighting and audio system installations and the
projects that were within the discontinued Themed Attraction segment are
recognized based on the percentage of total costs incurred to date to total
estimated costs.
Direct Production Costs. Direct production costs include costs related to the
integration and fabrication of certain of the Company's products, primarily raw
materials and labor. It also includes costs associated with the preparation and
maintenance of rental equipment, primarily lighting and audio equipment, and
motion and show control systems, and the depreciation expense related to such
equipment.
Gross Profit Margin. The Company's gross profit margins have been and will
continue to be affected primarily by acquisitions and the product and service
mix in the applicable period. Gross profit margins associated with rental
revenues are typically higher than those associated with sales.
Results of Operations
Comparability of Periods. Financial results for the periods ended December 31,
1998, 1997 and 1996 are not fully comparable to prior periods due to the
acquisitions of the net assets of Design Dynamics, Inc. ("DDE") and Bash
Theatrical Lighting and affiliates ("Bash") in June and August 1997,
respectively, and the acquisitions of Pro-Mix, Holdings, Production Arts, CBE,
SPL, PLS and Haas on January 2, June 19, June 30, July 31, August 13, October 23
and November 30, 1998, respectively. The Company's historical combined financial
statements for the year ended December 31, 1998 and 1997 include results of
operations from such acquired operations only from the dates of their respective
acquisitions.
Year ended December 31, 1998 Compared to Year ended December 31, 1997
- ---------------------------------------------------------------------
Revenues. The Company's revenues increased to $174.6 million for the year ended
December 31, 1998, an increase of $99.4 million or 132%, from $75.2 million in
1997. The increase was primarily attributable to revenues generated by
operations acquired during 1997 and 1998, and internal growth. Revenues
increased in the lighting systems and products segment by approximately $55.7
million. This increase was primarily related to the acquisitions of
<PAGE>
Holdings and Production Arts in June 1998 (approximately $32.8 million in
additional revenues) and the full year revenues related to the acquisition of
Bash in August 1997 (approximately $17.0 million in additional revenues) and
internal growth. The Company began operations of the audio segment in 1998,
with the acquisitions of Pro-Mix and SPL, that provided an additional $22.4
million in revenues for the year ended December 31, 1998. Revenues in the
scenery automation and fabrication segment increased by approximately $16.7
million primarily related to an increase in scenery fabrication projects. In
addition, revenues increased by approximately $4.7 million in the event services
group, primarily from the acquisitions of CBE and Haas, which provided
approximately $9.7 million of additional revenues which was offset by a decrease
in revenues related to industrial shows.
Gross Profit. The Company's gross profit increased to $55.5 million for the year
ended December 31, 1998, an increase of $32.6 million, or 142%, from $22.9
million in 1997. The increase in gross profit was primarily due to the increase
in revenues described above. Gross profit margin improved to 31.8% in 1998 from
30.4% for 1997. The improvement was primarily attributable to higher margins
associated with increased rental revenues as a percentage of total revenues. The
change in the revenue mix is primarily the result of the acquisitions of
Pro-Mix, Holdings, and Production Arts and a full year of Bash revenue, which
have a high proportion of rental revenues.
Selling, General and Administrative Expenses. As a percentage of revenues,
selling, general and administrative expenses remained consistent year to year,
at approximately 21.4% for the year ended December 31, 1998 as compared to 21.5%
for the year ended December 31, 1997. Selling, general and administrative
expenses increased $21.2 million to $37.4 million from $16.2 million for the
year ended December 31, 1998 compared to 1997. This was primarily attributable
to incremental selling, general and administrative expenses associated with the
acquisitions of Pro-Mix, Production Arts, Holdings, CBE, SPL, PLS and Haas
(approximately $12.8 million) and the full year effects of the 1997 acquisitions
of Bash and DDE (approximately $4.2 million). The remainder of the increase was
primarily attributable to the increase in personnel costs related to the hiring
of additional senior executives and other professionals to manage the Company's
information technology infrastructure, sales and marketing initiatives, and
human resources and finance departments. The Company does not expect selling,
general and administrative expenses to increase significantly, as a percentage
of sales, over the next twelve months even if more acquisitions are consummated.
Non-recurring compensation expense. Non-recurring compensation expense
represents employment incentives paid to the two former shareholders of Bash and
a former shareholder of DDE in connection with the signing of employment
contracts with the Company, which totaled approximately $2.1 million for the
year ended December 31, 1997. The Company had no such expense in 1998.
Operating Profit. Operating profit from continuing operations was $14.1 million
for the year ended December 31, 1998, an increase of $11.7 million from $2.4
million for 1997. Operating profit, as a percentage of revenues, was 8.1% for
1998 compared to 3.2% for the prior year. The increase was primarily due to the
increased gross margins, and the lack of non-recurring compensation expense in
1998.
Impairment loss. The Company is negotiating a sale and leaseback with an
unrelated party for the sale of its Las Vegas facility. Based on the anticipated
selling price of the facility, the Company recognized an impairment loss of
approximately $1,822,000.
Interest Expense. Interest expense increased to $14.8 million for the year ended
December 31, 1998 from $4.0 million for the year ended December 31, 1997. The
increase was primarily attributable to the interest expense of approximately
$11.5 million associated with the Senior Subordinated Notes issued in December
1997.
Income taxes. The provision for income taxes represents corporate, state and
foreign taxes for the subsidiaries that are subject to income tax. The
provision as a percentage of income before taxes was approximately 41% for the
year ended December 31, 1998 for the subsidiaries that are subject to income
tax.
Discontinued Operations. The Company had a loss from discontinued operations of
$2.4 million for the year ended December 31, 1998 compared to a loss of $5.3
million in 1997. Except for the two projects discussed in Business-Discontinued
Operations, the Company has now completed the discontinuation of the Themed
Attraction business and does not anticipate any significant future costs.
<PAGE>
Year ended December 31, 1997 Compared to Year ended December 31, 1996
- ---------------------------------------------------------------------
Revenues. The Company's revenues increased to $75.2 million in 1997, an increase
of $25.8 million, or 52.2%, from $49.4 million in 1996. The increase was
primarily attributable to the $16.4 million revenue increase attributed to the
lighting segment and the $10.2 million increase in revenues from the event
services segment, partially offset by a $0.8 million decline in revenues from
the scenery segment. The increase in the lighting segment revenues is primarily
attributable to the acquisition of Bash in August 1997 (approximately $12.1
million); and $2.0 million in incremental revenues related to the commencement
of lighting operations in Atlanta in March of 1997. The lighting segment also
benefited from the full year impact of the acquisition of the net assets of
Vanco in January 1996 and Cinema in February 1996 (combined $2.3 million of
incremental revenues). Revenues in the event services segment increased
primarily as a result of the June 1997 acquisition of the net assets of DDE
($8.9 million) and an increase in the number of industrial shows produced.
Gross Profit. The Company's gross profit increased to $22.9 million in 1997, an
increase of $7 million, or 44.0%, from $15.9 million in 1996. The increase in
gross profit was primarily due to the increase in revenues. Gross profit margin
declined slightly to 30.4% in 1997 from 32.3% in 1996. The decrease was
primarily attributable to lower margins resulting from the increase in revenues
related to the event services segment which lack rental revenues and therefore
have lower margins than the lighting segment and the scenery segment.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased to $16.2 million for 1997, an increase of $7.5
million, or 86%, from $8.7 million in 1996. The increase was primarily
attributable to incremental selling, general and administrative expenses
associated with the acquisitions of DDE and Bash and the commencement of
lighting operations in Atlanta, as well as increased overhead related to the
hiring of additional senior executives in connection with the overall growth of
the Company.
Non-recurring Compensation Expense. Non-recurring compensation expense, which
represents employment incentives paid to the two former shareholders of Bash and
a former shareholder of DDE in connection with the signing of employment
contracts with the Company, totaled $2.1 million, or 2.8% of revenues for the
year ended December 31, 1997.
Operating Profit. Operating profit declined to $2.4 million in 1997, a decrease
of $4.2 million, or 63.6%, from $6.6 million in 1996. Operating profit, as a
percentage of revenues, declined to 3.2% in 1997 from 13.3% in 1996, primarily
attributable to the lower gross profit margin, the non-recurring compensation
expense and higher selling, general and administrative expenses as a percentage
of revenues for the year.
Interest Expense. Interest expense increased to $4.0 million in 1997 from $1.3
million in 1996. The increase was primarily attributable to interest expense on
additional indebtedness incurred to finance the acquisitions of the net assets
of DDE, Bash and capital expenditures.
Discontinued Operations. The Company's loss from discontinued operations was
$5.3 million for 1997 compared to income from discontinued operations of $1.4
million in 1996.
Extraordinary Item. The Company recorded an extraordinary loss of $0.6 million
in 1997 resulting from the write-off of unamortized deferred financing costs
related to the replacement of the Company's then existing revolving credit
facility with the Credit Facility on July 31, 1997.
Net Income (Loss). The Company had a net loss of $7.8 million for 1997 compared
to net income of $6.1 million in 1996. The net loss was primarily due to the
losses related to the discontinued operations and the other factors discussed
above.
Liquidity and Capital Resources
During the year ended December 31, 1998, the Company's investing activities were
financed primarily from bank borrowings under the existing $100 million,
five-year, senior secured, reducing revolving credit facility (the "Credit
Facility") and excess proceeds related to the December 1997 issuance of 11 1/2%
Senior Subordinated Notes due 2008 (the "Offering"). The borrowings under the
Credit Facility and the excess cash related to the Offering were used to acquire
Pro-Mix, Holdings, Production Arts, CBE, SPL, PLS and Haas ($56.3 million) and
to pay for approximately $21.7 million in property and equipment additions.
Property and equipment additions were primarily
<PAGE>
related to the purchase of approximately $9.2 million in lighting, audio and
motion control rental equipment, $7.4 million related to the construction of a
facility in Las Vegas, $0.8 million in leasehold, building improvements and
furniture and fixtures, and an additional $1.2 million related to computer
hardware and the implementation of an Oracle information system.
The following table sets forth certain information from the Company's Combined
Statements of Cash Flows for the years ended December 31, 1997 and 1998:
For the Year Ended December 31,
--------------------------------
Net cash provided by (used in): 1998 1997
---- ----
Operating activities $ 4,206 $ (2,971)
Investing activities (77,863) (40,538)
Financing activities 52,507 67,663
------ ------
$ (21,150) $ 24,154
======================================
Sale and Leaseback of Las Vegas Facility
In accordance with an amendment to the Company's Credit Facility, the Company
is required to sell its facility ("the facility") in Las Vegas, Nevada. As a
result, the Company is in final negotiations on a sale and leaseback agreement
with an unrelated party for the facility. Net proceeds on the sale of the
facility are anticipated to be approximately $7,400,000 resulting in a loss of
approximately $1,822,000, which has been included in the combined statement of
operations for the year ended December 31, 1998 as an impairment loss. The sale
and leaseback transaction will enable the Company to consolidate four offices
and three warehouses into one facility.
The Company believes that cash flows from operations, proceeds from the
aforementioned sale and leaseback arrangement, and borrowings available under
the Credit Facility will be adequate to meet operating needs and capital
spending requirements for the next twelve months. Borrowings under the Credit
Facility are subject to the maintenance of certain restrictive financial
covenants including a minimum pro forma interest coverage ratio and fixed charge
coverage ratio and a maximum leverage ratio.
The Credit Facility begins to reduce by $7.5 million per quarter beginning on
March 31, 2000 and then by $10.0 million per quarter beginning March 31, 2002.
The Senior Subordinated Notes are not redeemable except in certain circumstances
until January 15, 2003. Thereafter, the Notes are subject to redemption at
prices decreasing from 105.75 percent to 100 percent of the face amount through
2006.
Effect of Inflation. The impact of inflation on the Company's operations has not
been significant in recent years. There can be no assurance, however, that a
high rate of inflation in the future will not have an adverse effect on the
Company's results of operations and financial condition.
Factors that may affect Future Operating Results
The Company cautions potential investors that the following important factors,
among others, could cause actual results to differ materially from those
expressed in any forward looking statements. The statements under this caption
are intended to serve as cautionary statements within the meaning of the Private
Securities Litigation Reform Act of 1995.
o Combined indebtedness that is substantial in relation to its members'
equity. As of December 31, 1998, the Company has total combined
indebtedness of approximately $157.2 million and members' (deficit) of
$81,000. For 1998, the current annual debt service requirement for existing
indebtedness is approximately $14.0 million.
o Difficulties of providing sufficient cash flow from operations to service
indebtedness and to meet other commitments.
o Ability of Company's management, administrative, operational and financial
resources to meet the demands of growth, changes in operations, and
potential future acquisitions. Any such acquisition will also involve
potential risks, including an increase in the Company's indebtedness, the
inability to integrate the operations of the acquired business or to
consolidate systems, facilities and employees, excessive expenses incurred
in connection with the acquisition, diversion of management's attention
from other business concerns and potential loss of key employees from the
acquired business.
o Risks associated with Stage Command System(R) in the live theater market.
As shows close, the Company seeks to replace lost rental revenues with new
shows.
o The ability to attract and retain key personnel. The success of the Company
depends in large part upon the abilities and continued service of its
executive officers and other key employees, particularly, Jeremiah J.
Harris, Chairman of the Board and Chief Executive Officer.
<PAGE>
o Competitive products and technological changes that may render the
Company's products or technologies uncompetitive or obsolete.
o Uncertainty in collection of accounts receivable due to the project nature
of certain parts of its business, as well as the Company's business and
industry practices.
o Failure of key suppliers to meet the Company's demand for services and
goods, in particular, components of the hardware of its Stage Command
System(R). The Company generally purchases these components pursuant to
purchase orders and has no guaranteed supply contracts.
o Product liability or personal injury claims which are an inherent business
risk in the event that the Company's products and services are alleged to
have resulted in injury or other adverse effects.
o Competition for projects and clients from primarily small local or regional
firms and several large national firms, some of which may have greater
financial, management and marketing resources than the Company.
Year 2000
The Year 2000 Issue is the result of computer programs being written using two
digits rather than four to define the applicable year. Any of the Company's
computer programs or hardware or equipment purchased from vendors, which have
date-sensitive software or embedded chips may recognize a date using "00" as the
year 1900 rather than the year 2000. This could result in a system failure or
miscalculations causing disruptions of operations, including, among other
things, a temporary inability to operate computerized machinery or equipment,
process transactions, send invoices, or engage in similar normal business
activities.
Based on recent assessments, the Company determined that it would be required to
modify or replace certain portions of its software and certain hardware so that
those systems will properly utilize and recognize dates beyond December 31,
1999. The Company presently believes that with modifications or replacements of
existing software and certain hardware, the Company's exposure to the Year 2000
Issue can be mitigated so as to avoid materially adverse consequences. However,
if such modifications and replacements are not made, or are not completed
timely, there is no assurance that the Year 2000 Issue will not have a material
adverse impact on the operations of the Company.
Management's Plan. The Company's plan to address the Year 2000 Issue involves
the following four steps: assessment, remediation, testing and implementation.
To date, the Company has completed its assessment of all systems that could be
significantly affected by the Year 2000 problem for all divisions and
subsidiaries of the Company included in the Company's 1998 financial statements.
The completed assessment concluded that several of the Company's legacy
financial applications (principally general ledger) needed to be replaced. In
addition, the Company has identified a list of hardware and software used
throughout the Company requiring replacement. Finally, the Company has queried
its 100 most critical vendors and customers that do not share information
systems with the Company (external agents) regarding their Year 2000 compliance.
To date, the Company has received a 44% response rate and is not yet aware of
any external agent with a Year 2000 issue that could reasonably be expected to
materially impact the Company's results of operations, liquidity or capital
resources. The Company anticipates completing its assessment of external agents
during the second quarter of 1999. However, the Company has no means of ensuring
that external agents will be Year 2000 ready. The only enterprise system that
interfaces directly outside the Company is its outsourced payroll system (ADP).
This system has been certified as fully Year 2000 compliant.
The Company is approximately 50% complete in its remediation phase. The key
aspect of this phase is replacing the legacy financial applications that are not
Year 2000 compliant. In order to have Year 2000 compliant systems and to improve
access to business information through common, integrated computing systems
across the Company, a fully compliant Enterprise Resource Planner ("ERP")
(principally financial applications) was purchased from the Oracle Corporation
in 1997. The Company has implemented the ERP in approximately half of the
operating divisions and plans to have it implemented in the remaining divisions
by the third quarter in 1999. The Company would have implemented the ERP without
regard to Year 2000 issues although the Year 2000 issues have accelerated the
Company's implementation of its ERP.
The testing phase and implementation phase of the Company's plan runs
concurrently with the implementation of the ERP and is similarly 50% complete.
The implementation phase also includes the investigation and replacement
<PAGE>
of non-compliant operational and administrative software applications (e.g.,
e-mail clients and word processors) and the hardware upgrade or replacement of
non-compliant or questionably compliant hardware and software.
Costs. The Company will utilize primarily internal resources to program,
replace, test and implement changes for the Year 2000 project. The total cost of
the project is anticipated to approximate $4.0 million including the cost of
acquiring hardware and software required for the ERP system. Of this amount,
approximately $3.0 million has been spent to date. The amount primarily
represents the purchase and rollout of the Company's ERP. The remainder will
primarily entail software and hardware upgrades and further rollout of the ERP.
The Company does not track the portion of these costs attributable to Year 2000
compliance and does not allocate internal costs (primarily personnel costs of
ITS personnel) to Year 2000 compliance.
Risks. Although no assurance can be given, Management of the Company believes it
has an effective program in place to resolve the Year 2000 issue in a timely
manner. The majority of the business is centralized or in the process of
becoming centralized. Most centralized corporate functions are fully compliant.
In the event that the Company does not complete any additional phases, the
Company would be required to fully centralize all business functions until that
time that full compliance could be reached. The realistic worst case scenario is
that the Company fails to centralize its key functions in tandem with a failure
to complete the Year 2000 Project. The amount of potential liability lost
revenues and failed business processes resulting from the failure of the
Company's Year 2000 compliance program cannot be reasonably estimated at this
time. The failure to correct a material Year 2000 problem could result in an
interruption in, or a failure of, certain normal business activities or
operations. Such failures could materially and adversely affect the Company's
results of operations, liquidity and financial condition. Due to the general
uncertainty inherent in the Year 2000 problem, resulting in part from the
uncertainty of the Year 2000 readiness of third-party suppliers and customers,
the Company is unable to determine at this time whether the consequences of Year
2000 failures will have a material impact on the Company's results of
operations, liquidity or financial condition. The Year 2000 Project is expected
to significantly reduce the Company's level of uncertainty about the Year 2000
problem and, in particular, about the Year 2000 compliance and readiness of its
material external agents. The Company believes that, with the implementation of
new business systems and completion of the Year 2000 Project as scheduled, the
possibility of significant interruptions of normal operations should be reduced.
Contingency Plans. The Company has contingency plans for certain critical
applications. These contingency plans involve primarily manual work-arounds. The
Company plans to evaluate the status of completion more thoroughly in April 1999
and determine the extent of further contingency planning, and formalize that
planning already arranged.
ITEM 7A. Quantitative and Qualitative Disclosures about Market Risk
Market risks relating to the Company's operations result primarily from changes
in interest rates. The Company also has limited foreign currency risk associated
with European operations.
Interest Rate Risk
The Company's interest rate risk management objective is to limit the impact of
interest rate changes on its earnings and cash flow and to lower its overall
borrowing cost.
<PAGE>
Foreign Currency Exchange Risk
The Company does not conduct a significant portion of its sales activity in
foreign markets. Presently, the Company's primary foreign activities are
conducted in the United Kingdom. The Company's reported financial results could
be affected, however, by factors such as foreign currency exchange rates in the
markets where it operates. When the U.S. dollar strengthens against foreign
currencies, the reported U.S. dollar value of local currency operating profits
generally decreases; when the U.S. dollar weakens against such foreign
currencies, the reported U.S. dollar value of local currency operating profits
generally increases. Since the Company does not have significant foreign
operations, the Company does not believe it is necessary to enter into any
derivative financial instruments to reduce its exposure to foreign currency
exchange risk.
ITEM 8. Financial Statements
The response to this item is submitted in a separate section of this report.
ITEM 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
None.
PART III
ITEM 10. Directors; Executive Officers, Promoters and Control Persons;
Compliance with Section 16(A) of the Exchange Act
The following table sets forth certain information with respect to persons who
are members of the Company's Board of Advisors (each an "Advisor"), executive
officers of the Company and other significant employees:
<TABLE>
<CAPTION>
Board Members and Executive Officers Name Age Positions(s)
- ----------------------------------------- --- ------------
<S> <C> <C>
Jeremiah J. Harris 44 Chairman and Chief Executive Officer
Bradley G. Miller 35 Chief Operating and Financial Officer and
Executive Vice President
Seth L. Klion 42 Chief Administrative Officer
Robert A. Manners 42 Senior Vice President, Business Affairs, and
General Counsel
James M. Mahoney 32 Vice President, Corporate Controller
Joseph W. Bartlett 65 Advisor
Joseph P. Harris 71 Advisor
Thomas D. Lips 54 Advisor
Mark A. Nagle 51 Advisor
</TABLE>
There are no family relationships between any persons identified above, except
that Joseph P. Harris is the father of Jeremiah J. Harris.
Jeremiah J. Harris founded the predecessor of Production Resource Group, L.L.C.
in 1984 and has served as the Company's Chairman and Chief Executive Officer
since its formation in 1995. Mr. Harris comes from a family with four
generations of theatrical experience. Since 1970, he has been involved with
production in the live theater market. Mr. Harris developed the original Stage
Command System(R) and other related technological advances. Mr.
<PAGE>
Harris is a member of the Board of Directors of Stage Technologies (UK) and F&D
Scene Changes Ltd. (Calgary, Canada). Mr. Harris is also a director of Beachport
Entertainment Corporation, a television production company.
Bradley G. Miller joined the Company in July 1997 as Chief Operating and
Financial Officer and Executive Vice President. From July 1988 until June 1997,
Mr. Miller was employed at the investment banking firm of Schroders PLC, most
recently as a Director in the investment banking department. Mr. Miller received
a BA in economics from Franklin and Marshall College in 1985 and an MBA from
Columbia University Business School in 1988. He is a director of Palomar
Technologies, Inc., a privately held manufacturer of various technology-based
industrial products.
Seth L. Klion joined the Company in October 1998 as Chief Administrative
Officer. Mr. Klion was formerly Chief Financial Officer of DDS Partners, LLC, a
management services company in New York City from March 1997 to October 1998.
Prior to his position at DDS, Mr. Klion served as Chief Financial Officer of
Collegiate Health Care of Norwalk and President of Collegiate Health Care
Canada, Inc. from January 1994 to March 1997. He has held several senior level
financial and administrative positions at Goldman Sachs & Company, Merrill Lynch
and Bankers Trust Company. Mr. Klion received a Bachelor of Science in Business
Management and Accounting from Cornell University and a Masters in Business
Administration in Corporate Financial Management from Pace University.
Robert A. Manners joined the Company in August 1997 as Senior Vice President,
Business Affairs and General Counsel. From June 1995 to August 1997, Mr. Manners
was a partner at Pepe & Hazard LLP in Hartford, Connecticut where he was
instrumental in the formation of the Company and worked primarily on its
matters. Prior to joining Pepe and Hazard LLP, Mr. Manners was Of Counsel to
Gibson, Dunn & Crutcher in New York City for seven years. Mr. Manners received a
BA from the University of Pennsylvania, a JD from Columbia University Law School
and an LLM (in Taxation) from New York University School of Law.
James M. Mahoney joined the Company in March 1997 as the Corporate Controller.
From November 1992 until March 1997 Mr. Mahoney was employed at Ernst & Young
LLP, most recently as an Audit Manager. Prior to that, Mr. Mahoney was a Senior
Accountant with Pannell Kerr Forster CPA's from 1990-1992. Mr. Mahoney received
a BBA in accounting from Siena College in 1988 and is a Certified Public
Accountant.
Joseph W. Bartlett has been a partner in the law firm of Morrison & Foerster LLP
since March 1996. From July 1991 until March 1996 he was a partner in the law
firm of Mayer, Brown & Platt. Mr. Bartlett has also been an Undersecretary of
the U.S. Department of Commerce and a law clerk to Chief Justice Earl Warren.
Mr. Bartlett is a member of the Council on Foreign Relations and is currently a
director of Cyrk, Inc., which designs, manufactures and distributes products for
promotional programs and Semele Group, Inc., which invests in real property and
other assets. Mr. Bartlett received a BA from Harvard University and an LLB from
Stanford Law School.
Joseph P. Harris is a producer of Broadway shows. For more than forty years,
Joseph P. Harris has been associated with more than 200 Broadway productions. He
has been general manager for many dramatic and musical productions. He has
co-produced many shows including Chicago, On the Twentieth Century and The 1940s
Radio Hour, and received Tony(R) Awards as co-producer of Bob Fosse's revival
production of Sweet Charity, Dancing at Lughnasa and An Inspector Calls. He also
co-produced the 1993 Tony(R) Award nominee for Best Play, Someone Who'll Watch
Over Me. Joseph P. Harris most recently co-produced Translations.
Thomas D. Lips has been a Senior Vice President--Investments of PaineWebber,
Inc. (and Kidder, Peabody & Co., prior to its acquisition by PaineWebber, Inc.)
in Hartford, Connecticut since 1990. Mr. Lips received a BA from Dartmouth
College in Liberal Arts and a JD from Harvard Law School.
Mark A. Nagle has served as President & Chairman of the Board of Czarnowski
Display Service, Inc. since 1978. Czarnowski is a leading designer, builder, and
service provider to the trade show and convention industry worldwide. Mr. Nagle
has over 25 years of experience in the industry and as such, has served on the
Board of Directors of the Exhibit Designers and Producers Association for the
last 14 years, serving one of these years as the Board's President. He has a
B.A. in Industrial Design from the University of Cincinnati.
ITEM 11. Executive Compensation.
The Company does not currently provide cash compensation to Advisors for
services provided in such capacity. However, the Company has granted Capital
Appreciation Units to each of its Advisors. The following summary compensation
table includes individual compensation information for the Company's Chief
Executive Officer and to the Company's four most highly compensated officers
other than the Chief Executive Officer whose total annual
<PAGE>
salaries and bonuses exceeded $100,000 for services rendered in all capacities
to the Company for the periods indicated.
Executive Compensation
<TABLE>
<CAPTION>
Annual Compensation
-------------------------------------------------------------
Name Principal Position Year Salary($) Bonus($)
- ---- ------------------ ---- --------- --------
<S> <C> <C> <C> <C>
Jeremiah J. Harris Chairman and Chief Executive
Officer 1998 $ 350,000 --
1997 $ 350,000 --
1996 $ 350,000 $ 150,000
Bradley G. Miller Chief Operating and Financial
Officer 1998 $175,000 --
1997 $ 84,918 $ 150,000
Robert A. Manners Senior Vice President,
Business Affairs and General
Counsel 1998 $175,000 --
James M. Mahoney Vice President, Corporate
Controller 1998 $108,000 --
</TABLE>
ITEM 12. Security Ownership of Certain Beneficial Owners and Management
Principal Unitholders. The following table sets forth certain information as of
the date hereof with respect to the beneficial ownership of the Company's
membership interests by (i) all persons known by the Company to be the
beneficial owner of more than five percent of the Company's membership
interests, (ii) all Advisors, (iii) all executive officers named in the table
under "Compensation of Executive Officers" and (iv) all executive officers and
advisors as a group. Unless otherwise indicated in the footnotes, all holders
have sole dispositive power with respect to the membership interests shown as
beneficially owned by such holder.
<TABLE>
<CAPTION>
Capital Percentage
Regular Appreciation Preferred of Total Voting
Name of Beneficial Owner Units (1) Units (2) Units (3) Units (4) Power
- ----------------------------- -------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Harris Production Services, 5,000,200 81.7% 96.2%
Inc. (5)
Jeremiah J. Harris (6) 5,000,200 81.7% 96.2%
Bradley G. Miller (7) 452,000 7.4% 0%
Robert Manners (8) 113,000 1.8% 0%
Joseph W. Bartlett (9) 10,000 0.2% 0%
Thomas D. Lips (10) 3,000 * 0%
Joseph P. Harris (10) 3,000 * 0%
Mark A. Nagle (10) 3,000
All Executive Officers and
Advisors as a group 5,000,200 694,000 93.0% 96.2%
</TABLE>
* Less than .1%
(1) Regular Units are the only Units entitling the holder to vote in the
Company's business and affairs. Each holder of Regular Units has sole
voting power with respect to such units.
(2) Capital Appreciation Units entitle their holder to an annual return of
$0.05 per Unit and upon a sale of the Company, an initial public offering
or a similar event, share in the appreciation of the Company above a
specified equity value (the "Threshold Value").
<PAGE>
(3) Preferred Units entitle the holder to share in distributions and
appreciation with the Regular Units and have a liquidation preference equal
to the amount paid for such Units ($2,250,000 in the aggregate).
(4) Percentage of Total Units represents the fraction of units held by such
beneficial owner divided by the sum of Regular Units, Capital Appreciation
Units, Convertible Preferred Units and Preferred Units outstanding.
(5) Mr. Jeremiah J. Harris, chief executive officer of the Company, owns 100%
of the voting stock of Harris Production Services, Inc. ("HPS") which owns
96.2% of the voting interests in the Company. The address of Harris
Production Services, Inc. and Jeremiah J. Harris is 539 Temple Hill Road,
New Windsor, New York 12553. Mr. Harris owns 38% of the economic interests
in HPS and the balance of the economic interests are owned 19% by each of
Messrs. Gallo, Sears and Wolf and 5% by Mr. Baxley.
(6) Includes 5,000,200 Regular Units owned by Harris Production Services, Inc.
Mr. Jeremiah J. Harris owns 100% of the voting stock of Harris Production
Services, Inc. See note (5) above.
(7) Mr. Miller has been issued four tranches of Units, each consisting of
113,000 units with Threshold Values, subject to adjustment, of $55 million,
$70 million and $85 million and $95 million, respectively. One-sixth of
each tranche was vested at the time of grant with an additional one-sixth
of each tranche vesting on the first through fifth anniversaries of Mr.
Miller's employment with the Company.
(8) Mr. Manners has been issued 113,000 Capital Appreciation Units in the
Company with a Threshold Value of $55 million, 20% of which were vested at
the time of grant and the balance of which vest 20% on the first, second
and third anniversaries of Mr. Manners' employment with the Company. The
final 20% of Mr. Manners' units will vest on the fourth anniversary of Mr.
Manners' employment subject to certain provisions.
(9) Mr. Bartlett has been issued Capital Appreciation Units with a $55 million
Threshold Value. Three-quarters of such units were vested at the time of
grant and the final one-quarter will vest on the first anniversary of the
date of grant.
(10) Mr. Lips, Mr. Joseph P. Harris and Mr. Mark A. Nagle have been issued
Capital Appreciation Units with a $55 million Threshold Value, one-half of
such units were vested at the time of grant and one-quarter will vest on
each of the first and second anniversaries of the date of grant.
ITEM 13. Certain Relationships and Related Transactions
In 1998, the Company had revenues of approximately $3.2 million, from an
affiliated advertising and production management company for industrial shows.
Members of the Company (Messrs. Harris, Baxley, Gallo, Sears and Wolf own 19%,
2.5%, 9.5%, 9.5%, and 9.5%, respectively) own a majority of the stock of this
company. In addition, the Company receives management fees for administrative
services from this affiliated company for which it was paid $60,000 in 1998.
In February 1999, the Company made loans to Mr. Harris that amounted to
$588,000. Such amounts are to be repaid before February 7, 2002 and accrue
interest at 4.52% per annum.
PART IV
ITEM 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K
(A) 1. Financial Statements
The financial statements filed as part of this report are listed on the Index to
Combined Financial Statements on page F-1.
2. Financial Statement Schedules
Schedule II - Valuation and Qualifying Accounts is submitted as a
separate section of this report.
3. Exhibits
ITEM 14(A)2. Financial Data Schedule
<PAGE>
Annual Report on Form 10-K
Item 8, Item 14(a)(1) and (2) and Item 14(d)
Financial Statements and Supplementary Data
List of Financial Statements
Year ended December 31, 1998
Production Resource Group, L.L.C.
New York, New York
<PAGE>
Item 8, Item 14(a)(1) and (2). Financial Statements and Supplementary Data
Production Resource Group, L.L.C.
Index to Combined Financial Statements
and Financial Statement Schedule
Production Resource Group, L.L.C.
Report of Independent Auditors.......................................... F-2
Combined Balance Sheets as of December 31, 1998 and 1997................ F-3
Combined Statements of Operations for the
years ended December 31, 1998, 1997 and 1996......................... F-4
Combined Statements of Members' Equity (Deficit) for the
years ended December 31, 1998, 1997 and 1996......................... F-5
Combined Statements of Cash Flows for the years ended
December 31, 1998, 1997 and 1996..................................... F-6
Notes to Combined Financial Statements.................................. F-7
Financial Statement Schedule
- ----------------------------
Valuation and Qualifying Accounts - Schedule II......................... F-34
All other schedules for which provision is made in the applicable accounting
regulation of the Securities and Exchange Commission are not required under the
related instructions or are inapplicable and therefore have been omitted.
F-1
<PAGE>
Report of Independent Auditors
Members
Production Resource Group, L.L.C.
We have audited the accompanying combined balance sheets of Production Resource
Group, L.L.C. (the "Company") as of December 31, 1998 and 1997, and the related
combined statements of operations, members' equity (deficit) and cash flows for
each of the three years in the period ended December 31, 1998. Our audits also
included the financial statement schedule listed in the Index at Item 14(a).
These financial statements and schedule are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements and schedule based on our audits.
We conducted our audits in accordance with 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 combined financial statements referred to above present
fairly, in all material respects, the combined financial position of Production
Resource Group, L.L.C. as of December 31, 1998 and 1997, and the combined
results of its operations and its cash flows for each of the three years in the
period ended December 31, 1998 in conformity with generally accepted accounting
principles. Also, in our opinion, the related financial statement schedule, when
considered in relation to the basic financial statements taken as a whole,
presents fairly in all material respects, the information set forth therein.
ERNST & YOUNG LLP
New York, New York
March 17, 1999
F-2
<PAGE>
Production Resource Group, L.L.C.
Combined Balance Sheets
(In thousands)
<TABLE>
<CAPTION>
December 31,
1998 1997
-------------- --------------
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents $ 6,014 $ 27,164
Accounts receivable, net of allowance of $2,570 in 1998
and $2,572 in 1997 35,415 23,783
Inventories 10,755 4,425
Other current assets 7,718 1,286
--------------- --------------
Total current assets 59,902 56,658
Property and equipment--net 82,096 49,236
Goodwill--net of accumulated amortization of $2,031 in 1998
and $540 in 1997 46,116 15,341
Other assets 7,992 7,017
--------------- --------------
$ 196,106 $ 128,252
=============== ==============
Liabilities and members' equity (deficit)
Current liabilities:
Current portion of long-term debt $ 8,046 $ 822
Accounts payable 16,725 15,809
Payroll and sales taxes payable 3,164 918
Income taxes payable 1,659 -
Deferred revenue 4,797 2,119
Other current liabilities (includes accrued interest of $5,366 in 1998
and $278 in 1997) 12,368 1,758
--------------- --------------
Total current liabilities 46,759 21,426
Long-term debt:
Senior Subordinated Notes 100,000 100,000
Credit facilities 45,638 -
Other long-term debt 3,557 3,743
--------------- --------------
Total long-term debt 149,195 103,743
Minority interest 233 -
Commitments
Total members' equity (deficit) (includes accumulated other comprehensive
loss of $13 in 1998) (81) 3,083
--------------- --------------
$ 196,106 $ 128,252
=============== ==============
</TABLE>
See accompanying notes.
F-3
<PAGE>
Production Resource Group, L.L.C.
Combined Statements of Operations
(In thousands)
<TABLE>
<CAPTION>
Year ended December 31,
1998 1997 1996
--------------------- -------------------- -------------------
<S> <C> <C> <C>
Revenues $ 174,603 $ 75,180 $ 49,434
Direct costs:
Direct production costs 107,857 46,131 29,565
Depreciation expense 11,257 6,181 3,920
--------------------- -------------------- --------------------
119,114 52,312 33,485
--------------------- -------------------- --------------------
Gross profit 55,489 22,868 15,949
Selling, general and administrative expenses 37,393 16,185 8,676
Other depreciation and amortization 4,005 2,182 715
Nonrecurring compensation expense - 2,125 -
--------------------- -------------------- --------------------
Operating profit 14,091 2,376 6,558
Loss on impairment of assets 1,822 - 495
Interest expense 14,769 3,956 1,292
Interest (income) (674) (117) (128)
--------------------- -------------------- --------------------
Income (loss) from continuing operations before income
taxes and extraordinary item (1,826) (1,463) 4,899
Provision for income taxes 1,712 392 206
--------------------- -------------------- --------------------
Income (loss) from continuing operations (3,538) (1,855) 4,693
Discontinued operations (Note 8):
Income (loss) from operations of discontinued Themed
Attraction Permanent Installation business
(2,357) (5,302) 1,407
--------------------- -------------------- --------------------
Income (loss) before extraordinary item (5,895) (7,157) 6,100
Extraordinary item - (614) -
Minority interest (72) - -
--------------------- -------------------- --------------------
Net income (loss) $ (5,967) $ (7,771) $ 6,100
===================== ==================== ====================
</TABLE>
See accompanying notes.
F-4
<PAGE>
Production Resource Group, L.L.C.
Combined Statements of Members' Equity (Deficit)
For the Years ended December 31, 1998, 1997 and 1996
(In thousands)
<TABLE>
<CAPTION>
Accumulated Total
Other Members'
Deferred Comprehensive Equity
Members' Equity Compensation Loss (Deficit)
--------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Balance, December 31, 1995 $ 11,908 $ - $ - $ 11,908
Net income, 1996 6,100 - - 6,100
Distributions (3,610) - - (3,610)
Issuance of Restricted units 258 (258) - -
----------------- ----------------- ----------------- -----------------
Balance, December 31, 1996 14,656 (258) 14,398
Net loss, 1997 (7,771) - - (7,771)
Distributions (3,596) - - (3,596)
Amortization of deferred
compensation - 52 - 52
---------------- --------------- --------------- --------------
Balance, December 31, 1997 3,289 (206) - 3,083
Comprehensive loss:
Net loss, 1998 (5,967) - (5,967)
Other Comprehensive loss--
foreign currency
translation adjustment,
1998 - - (13) (13)
--------------
Comprehensive loss (5,980)
Amortization of deferred
compensation - 52 - 52
Contributions 1,019 - - 1,019
Preferred units issued in
connection with
acquisitions (Note 2) 1,745 - - 1,745
---------------- --------------- --------------- --------------
Balance, December 31, 1998 $ 86 $ (154) $ (13) $ (81)
================= ================= ================= =================
</TABLE>
See accompanying notes.
F-5
<PAGE>
Production Resource Group, L.L.C.
Combined Statements of Cash Flows
(In thousands)
<TABLE>
<CAPTION>
Year ended December 31,
1998 1997 1996
------------- ------------- -------------
<S> <C> <C> <C>
Operating activities
Net income (loss) $ (5,967) $ (7,771) $6,100
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:
Extraordinary item - 614 -
Depreciation 13,104 7,419 4,459
Amortization of goodwill and other 2,157 787 114
Amortization of debt-related costs 712 157 62
Provision for doubtful accounts 2,116 2,512 311
Gain on sale of property and equipment (2,843) (1,645) (239)
Loss on impairment of assets 1,822 - 495
Changes in operating assets and liabilities:
Accounts receivable 2,385 (11,979) (6,644)
Inventories (349) 22 (1,864)
Other current assets (4,729) (460) (548)
Accounts payable (15,631) 7,837 670
Payroll and sales taxes payable 597 (254) 854
Income taxes payable 184 - -
Deferred revenue 800 (1,760) 2,465
Other current liabilities 9,848 1,550 (51)
------------- ------------- -------------
Net cash provided by (used in) operating activities 4,206 (2,971) 6,184
------------- ------------- -------------
Investing activities
Acquisition of net assets of Vanco Lighting Services Inc., net of - - (274)
cash acquired
Acquisition of net assets of Cinema Services of Las Vegas, Inc. - - (1,800)
Acquisition of net assets of Design Dynamics, Inc., net of cash - (3,980) -
acquired
Acquisition of net assets of Bash Theatrical Lighting, Inc. - (20,000) -
Acquisition of net assets of Pro-Mix, Inc., net of cash acquired (6,328) - -
Acquisition of net assets of Production Arts Lighting Inc. (13,603) - -
Acquisition of Light and Sound Design Holdings Limited, net of cash (15,966) - -
acquired
Acquisition of net assets of CBE Exhibits & Events, Incorporated,
net of cash acquired (2,378) - -
Acquisition of Signal Perfection, Ltd., net of cash acquired (6,595) - -
Acquisition of Production Lighting Systems, Inc., net of cash (5,359) - -
acquired
Acquisition of Haas Multiples Environmental Marketing & Design,
Inc., net of cash acquired (6,035) - -
Purchases of property and equipment (21,728) (18,151) (17,456)
Proceeds from sale of rental equipment 4,383 2,453 419
Additions to software development costs (717) - (586)
Organizational costs incurred - - (536)
Other assets (3,537) (860) (69)
------------- ------------- -------------
Net cash used in investing activities (77,863) (40,538) (20,302)
------------- ------------- -------------
Financing activities
Proceeds from long-term debt 53,038 178,400 35,400
Additions to deferred financing costs (122) (2,110) (446)
Additions to bond offering costs (376) (3,752) -
Repayments of long-term debt (1,104) (101,331) (16,246)
Contributions from (distributions to) members 1,071 (3,544) (3,610)
------------- ------------- -------------
Net cash provided by financing activities 52,507 67,663 15,098
------------- ------------- -------------
Net (decrease) increase in cash and cash equivalents (21,150) 24,154 980
Cash and cash equivalents--beginning of year 27,164 3,010 2,030
============= ============= =============
Cash and cash equivalents--end of year $ 6,014 $ 27,164 $ 3,010
============= ============= =============
</TABLE>
See accompanying notes.
F-6
<PAGE>
Production Resource Group, L.L.C.
Notes to Combined Financial Statements
1. Organization and Basis of Combination
Production Resource Group, L.L.C. (the "Company" or "PRG") was formed as a
Delaware limited liability company in August 1995 and began operations on July
25, 1996, when the accounts of the following entities under common control were
transferred to the Company in exchange for membership units in the Company:
Harris Production Services, Inc. ("HPS"), ECTS, A Scenic Technology Company,
Inc. ("ECTS"), Showpay, Inc. ("Showpay"), Theatre Techniques Associates, Inc.
("TTA"), ECTS Contracting of Las Vegas, Inc. ("STLV") and Scenic Properties, LLC
("SPLLC"). The exchange was accounted for in a manner similar to a pooling of
interests. In December 1997, STLV, ECTS and TTA were merged into HPS and the
units issued to Showpay were transferred to HPS.
The accompanying combined financial statements include the accounts of the
Company and its subsidiaries, seven of which are wholly-owned, one of which the
Company owns 99% of the outstanding membership interests, and another one of
which the Company owns approximately 97.5% of the outstanding shares.
Intercompany transactions and balances among all of the related entities have
been eliminated in combination.
The Company is an integrator, fabricator and supplier of a broad range of
products and services for the live entertainment (theatre, concert touring and
special events), corporate events (trade and industrial shows) themed
entertainment (gaming, theme parks) and retail marketing environments. The
Company operates through four segments: lighting, audio, scenery and event
services. The Company's themed attraction permanent installation ("Themed
Attraction") segment was discontinued in early 1998 and, accordingly, the
combined statements of operations for the years ended December 31, 1998, 1997
and 1996 reflect the Themed Attraction segment as a discontinued operation (see
Note 8). The Themed Attraction segment was presented as a discontinued operation
in the Company's prior year financial statements.
The lighting segment provides automated lighting systems and related products
for sale and rental. The scenery segment fabricates scenery for sale and
provides automated motion and show control equipment for rental. The Company's
event services segment provides a variety of services for corporate clients,
including unique exhibit fabrication and production management for trade shows
and events. The audio segment provides audio products for sale and rental.
Members of the Company are not personally liable for any indebtedness, liability
or obligation of the Company. In accordance with the Company's operating
agreement, the Company will terminate in 2094.
F-7
<PAGE>
Production Resource Group, L.L.C.
Notes to Combined Financial Statements (Continued)
2. Acquisitions
On January 18, 1996, the Company acquired substantially all of the assets and
assumed certain liabilities of Vanco Lighting Services, Inc. ("Vanco"), a
provider of theatrical lighting systems and related products for the rental and
retail marketplace. The purchase price of the acquisition was $1,000,000, which
was satisfied through the payment of $300,000 in cash and the issuance of an
adjustable $700,000 ten-year promissory note. Such note was subsequently
adjusted to approximately $468,000 to reflect certain adjustments arising from
the finalization of the purchase price for Vanco (see Note 7).
On February 8, 1996, the Company acquired substantially all of the assets,
excluding cash and accounts receivable, and assumed certain liabilities of
Cinema Services of Las Vegas, Inc. ("Cinema"), a provider of theatrical lighting
systems and related products for the rental and retail marketplace. The purchase
price of the acquisition was $1,800,000 in cash plus contingent payments not to
exceed $500,000. The Company is required to make annual payments equal to 20% of
the net profits of Cinema, as defined, for each calendar year through 2000,
payable within 30 days of the determination of such profit up to a cumulative
maximum payment of $500,000. The Company recorded goodwill of approximately
$900,000 related to the Cinema acquisition. As of December 31, 1998, a
contingent payment approximating $38,000 has been made to the former owner of
Cinema and has been reflected as an increase to goodwill. The Company will
record any future contingent payments as an addition to goodwill and will
amortize such additional amounts over the remaining life of the goodwill
originally recorded.
On June 6, 1997, the Company acquired substantially all of the assets and
assumed certain liabilities of Design Dynamics, Inc. ("Design Dynamics") for
$3,985,000 in cash. Design Dynamics specializes in fabricating trade show
exhibits and operates as part of the Company's event services group. The Company
recorded goodwill of approximately $3,134,000 related to the Design Dynamics
acquisition. A former shareholder of Design Dynamics entered into an employment
agreement with the Company (see Note 13).
On August 15, 1997, the Company acquired substantially all of the assets and
assumed certain liabilities of Bash Theatrical Lighting, Inc. and four
affiliated companies (collectively "Bash"), a supplier of theatrical lighting
systems and related products for the rental and retail marketplace. Bash
operates as part of the Company's lighting group. The purchase price of the
acquisition was $20,000,000. The Company recorded goodwill of approximately
$11,214,000 related to the Bash acquisition. The former shareholders of Bash
have entered into employment agreements with the Company (see Note 13).
On January 2, 1998, the Company acquired substantially all of the assets and
assumed certain liabilities of Pro-Mix, Inc., ("Pro-Mix"), a provider of sound
equipment and acoustical and sound design consulting services primarily to the
live theatre market. Pro-Mix will continue its business and operations as part
of the Company's audio group. The purchase price was approximately $7,800,000
plus a $1,500,000 contingent payment (the
F-8
<PAGE>
Production Resource Group, L.L.C.
Notes to Combined Financial Statements (Continued)
"contingent payment"), based upon performance goals. The $1,500,000 related to
the contingent payment was held in escrow during 1998 and was released to the
former shareholders of Pro-Mix in December 1998, as the stipulated performance
goals were attained. The purchase price also includes $939,000, representing the
approximate fair value of 79,179 of the Company's Preferred Units (with a
liquidation preference of $1,500,000) issued in connection with the Pro-Mix
acquisition. The Company recorded goodwill of approximately $2,425,000 related
to the acquisition.
On June 19, 1998, the Company acquired all of the Cumulative Participating
Preferred Ordinary Shares and Cumulative Redeemable Preference Shares and
approximately 95% of the Ordinary Shares of Light and Sound Design Holdings
Limited ("Holdings"), a United Kingdom ("UK") company, pursuant to a Share
Purchase Agreement dated June 19, 1998 among the shareholders of Holdings and
the Company. Pursuant to the Share Purchase Agreement, in exchange for the
aforementioned Holdings stock, the Company paid approximately $14,517,000 in
cash to the shareholders of Holdings. On December 3, 1998, the Company acquired
an additional 2.5% of the Ordinary Shares of Holdings from the minority
shareholder for $1,451,614.
Holdings has two wholly-owned operating subsidiaries, Light & Sound Design
Limited ("LSDL"), a UK company, which is based in Birmingham, England with an
office in London, England and operates exclusively in Europe, and Light & Sound
Design, Inc., a California corporation, which is based in Los Angeles,
California and Nashville, Tennessee and operates in the North American market.
Light & Sound Design Limited and Light & Sound Design, Inc. each provide rentals
of lighting and other equipment for use in the concert touring and industrial
markets. Light & Sound Design Limited and Light & Sound Design, Inc. will each
continue their business and operations as subsidiaries of Holdings, which is a
subsidiary of the Company, as part of the lighting group. The Company recorded
goodwill of approximately $8,275,000 relating to the acquisition of Holdings.
On June 30, 1998, the Company acquired substantially all of the assets subject
to substantially all of the operating liabilities, of Production Arts Lighting
Inc., a New York corporation, Production Arts Europe, Inc., a Delaware
corporation and Production Arts West, Inc., a California corporation
(collectively "Production Arts)." Production Arts was based in Moonachie, New
Jersey with offices in New York, Los Angeles and London, England, and provides
sales and rentals of lighting and other equipment for use in the permanent
installation, theatrical and industrial markets. The acquired assets of
Production Arts operate as part of the Company's lighting group. In exchange for
the assets of the three companies constituting Production Arts, the Company paid
$13,700,000 in cash to Production Arts and recorded goodwill of approximately
$4,331,000 relating to the transaction.
On July 31, 1998, the Company acquired substantially all of the assets subject
to substantially all of the operating liabilities, of CBE Exhibits & Events,
Incorporated ("CBE"), a Texas corporation. CBE is based in Houston, Texas and
provides support services including logistic support, booth and exhibit
construction and storage to exhibitors at trade shows and other major events.
The acquired assets of CBE will operate as part of the Company's event services
group. Pursuant to the acquisition agreement, in exchange for the assets of CBE,
the
F-9
<PAGE>
Production Resource Group, L.L.C.
Notes to Combined Financial Statements (Continued)
Company paid $3,000,000 in cash to CBE and agreed to make additional
payments of up to $7,000,000 subject to the satisfaction of performance targets.
A performance target established in the acquisition agreement was attained by
CBE. Accordingly, the Company has accrued the additional payment of $2,000,000
required to be made in April 1999 to the former shareholder of CBE. The Company
recorded approximately $3,102,000 in goodwill related to the CBE acquisition.
The Company will record any future payments as an addition to goodwill and will
amortize such additional amounts over the remaining life of the goodwill
originally recorded.
On August 13, 1998, the Company acquired all of the shares of the outstanding
common stock of Signal Perfection, Ltd., a Maryland Corporation, ("SPL"). SPL is
based in Columbia, Maryland and Las Vegas, Nevada and provides specialized
audio, video and show control design, fabrication and installation and related
products. SPL will continue its business and operations as part of the Company's
audio group. In exchange for the aforementioned SPL stock, the Company paid
approximately $6,700,000 in cash to the shareholders of SPL and agreed to make
additional payments of up to $7,100,000 subject to the satisfaction of
performance targets. The purchase price also included $806,000, representing the
approximate fair value of 52,721 of the Company's Preferred Units (with a
liquidation preference of $1,230,000) issued to the shareholders of SPL. The
Company recorded approximately $4,828,000 in goodwill related to the SPL
acquisition. The Company will record any future payments as an addition to
goodwill and will amortize such additional amounts over the remaining life of
the goodwill originally recorded.
On October 23, 1998, the Company acquired all of the outstanding common stock of
Production Lighting Systems, Inc. ("PLS") a California corporation for
approximately $6,750,000 in cash. PLS which is based in Glendale, California
provides sales and rentals of lighting equipment principally to the television
industry. PLS will continue to operate as part of the Company's lighting group.
The Company recorded goodwill of approximately $4,088,000 related to this
transaction.
On November 30, 1998, the Company acquired all of the outstanding common stock
of Haas Multiples Environmental Marketing & Design, Inc. ("Haas"), a Minnesota
corporation, for approximately $7,000,000 in cash. Haas, which is based in
Minneapolis, Minnesota specializes in the design and fabrication of trade show
and retail exhibits. Haas will continue its business and operations as part of
the Company's event services group. The Company recorded goodwill of
approximately $4,742,000 related to the Haas acquisition.
The aforementioned acquisitions were accounted for under the purchase method.
Accordingly, results relating to the acquired operations are included in the
Company's combined results of operations from their respective dates of
acquisition. The Company financed the majority of these acquisitions through its
Credit Facility (see Note 7).
The pro forma unaudited combined results of operations for the years ended
December 31, 1998 and 1997 assuming consummation of the above-mentioned
acquisitions as of the beginning of the respective year, is as follows:
F-10
<PAGE>
Production Resource Group, L.L.C.
Notes to Combined Financial Statements (Continued)
Year ended December 31,
(In thousands) 1998 1997
------------------------
Total revenue from continuing operations $245,331 $211,374
Income from continuing operations 2,300 5,094
Net (loss) income (129) 1,650
3. Summary of Significant Accounting Policies
Cash and Cash Equivalents
All highly liquid investments with a maturity of three months or less when
purchased are considered to be cash equivalents. At December 31, 1998 and 1997,
substantially all of the Company's cash and cash equivalents were held in one
financial institution.
Supplementary Cash Flow Information
Interest paid amounted to approximately $8,532,000, $3,859,000 and $1,095,000
for the years ended December 31, 1998, 1997 and 1996, respectively. Taxes paid
amounted to approximately $1,051,000, $391,000 and $330,000 for the years ended
December 31, 1998, 1997 and 1996, respectively.
Inventories
Raw materials and work-in-process inventories are stated at the lower of cost or
market. Raw materials consist of steel, aluminum, wood and electronic automation
parts. Work-in-process includes direct materials, direct labor and a ratable
share of manufacturing overhead on partially completed items principally related
to scenery and retail environment fabrication. Cost is determined by the
specific identification method. Also included in inventories are certain
lighting products. Cost for such inventory is determined using the average cost
method, which approximates the first-in, first-out method.
F-11
<PAGE>
Production Resource Group, L.L.C.
Notes to Combined Financial Statements (Continued)
Inventories consist of the following:
December 31,
(In thousands) 1998 1997
------------------------------
Raw materials $ 1,382 $ 1,603
Work-in-process 3,452 412
Lighting products 5,921 2,410
------------------------------
$ 10,755 $ 4,425
==============================
Property and Equipment
Property and equipment are stated at cost. Depreciation is computed using the
straight-line method over the estimated useful lives of the assets, which range
from five to 39 years. Rental equipment, which includes lighting and audio
equipment, as well as show and motion control systems, is included in property
and equipment and is being depreciated by the straight-line method over periods
ranging from five to seven years.
Goodwill
Goodwill represents the excess of the cost of assets acquired over the fair
market value of assets received and is being amortized using the straight-line
method over periods ranging from 15 to 25 years.
Intangible Assets
Intangible assets, which include organization, deferred financing and bond
offering costs, are stated at cost and are being amortized using the
straight-line method over (i) five years for organization costs and (ii) over
the term of the related debt for deferred financing and bond offering costs (see
Note 6).
In April 1998, the AICPA issued SOP 98-5, "Reporting the Costs of Start-up
Activities" ("SOP 98-5"). SOP 98-5 is effective January 1, 1999, and requires
that start-up costs capitalized prior to January 1, 1999 be written-off and any
future start-up costs be expensed as incurred. The unamortized balance of
organization costs ($263,000 at December 31, 1998) will be written off as a
cumulative effect of an accounting change as of January 1, 1999.
Software Development Costs
In accordance with Statement of Financial Accounting Standards ("SFAS") No. 86,
"Accounting for the Costs of Computer Software to Be Sold, Leased, or Otherwise
Marketed," all software development costs are charged to expense as incurred
until technological feasibility has been established for the product. Software
development costs incurred after technological feasibility has been established
have been capitalized and included in other assets (see Note 6). Such costs are
amortized, commencing with product use, using the straight-line method over
three years.
F-12
<PAGE>
Production Resource Group, L.L.C.
Notes to Combined Financial Statements (Continued)
In March 1998, the AICPA issued SOP 98-1, "Accounting For the Costs of Computer
Software Developed For or Obtained For Internal-Use", which requires the
capitalization of certain costs incurred after the date of adoption in
connection with developing or obtaining software for internal-use. The Company
adopted SOP 98-1 in 1998, as costs related to the development of internal-use
software were incurred.
Income Taxes
Since July 25, 1996, the Company has operated as a limited liability company
and, therefore, is not subject to federal, state and local income taxes. Income
taxes are payable by the individual members of the Company based on their
respective shares of the Company's income and, accordingly, have not been
reflected in the accompanying combined financial statements.
For the period from January 1, 1996 through July 24, 1996, the Company was taxed
under the provisions of Subchapter S of the Internal Revenue Code for federal
income tax purposes.
The provision for income taxes for the year ended December 31, 1998 includes
federal and state tax provisions related to various corporations acquired by the
Company during 1998 (see Note 12). Additionally, the provision for 1998 includes
foreign (UK) taxes related to Holdings. Corporation tax payable for these
acquired subsidiaries is provided on taxable income at the current rates.
Deferred income taxes are computed using the liability method pursuant to which
deferred tax assets and liabilities are determined based on differences between
financial reporting and tax bases of assets and liabilities and are measured
using enacted tax rates and laws that will be in effect when the differences are
expected to reverse.
Foreign Currency Translation
The financial statements of foreign subsidiaries have been translated into U.S.
dollars in accordance with SFAS No. 52, "Foreign Currency Translation." All
balance sheet accounts have been translated using the exchange rates in effect
at the balance sheet date. Income statement amounts have been translated using
the average exchange rate for the year. The gains and losses resulting from the
changes in exchange rates from year to year have been reported as other
comprehensive income (loss), which is included in members' equity (deficit). The
effect on the combined statements of operations of transaction gains and losses
is insignificant for all years presented.
Revenue Recognition and Deferred Revenue
Revenues consist of sales and rentals of the Company's products and services.
Sales of products (primarily scenery for live entertainment and fabricated
exhibits for events) and services to clients (primarily production
F-13
<PAGE>
Production Resource Group, L.L.C.
Notes to Combined Financial Statements (Continued)
management services) for the events and live entertainment markets are generally
recognized upon delivery or when services are performed. All rental revenues
(principally on lighting and audio products and show and motion control systems)
are recognized ratably over the lives of the applicable rental agreements.
Rental revenues amounted to approximately $60,686,000, $26,470,000 and
$21,579,000 for the years ended December 31, 1998, 1997 and 1996, respectively.
Revenues related to the installations of lighting and audio systems are
recognized generally based on the percentage of total costs incurred to date to
total estimated costs. Management reviews estimated total project costs on
individual projects and makes adjustments accordingly. Losses expected to be
incurred on projects in progress are charged to income as soon as such losses
are known. Amounts received in advance on sales, which exceeded revenue
recognized to date, are recorded as deferred revenue and recognized when earned.
Amounts reflected as revenue which exceeded billings to date are included in
accounts receivable and amounted to approximately $3,230,000 and $390,000 at
December 31, 1998 and 1997, respectively. In addition, projects in the
discontinued Themed Attraction segment also followed this accounting policy for
revenue recognition.
Unit-Based Compensation
SFAS No. 123, "Accounting for Stock-Based Compensation," ("SFAS 123") prescribes
accounting and reporting standards for all stock-based compensation. SFAS 123
requires compensation expense to be recorded (i) using the fair value method or
(ii) using accounting rules prescribed by Accounting Principles Board Opinion
No. 25, "Accounting for Stock Issued to Employees" ("APB 25"), with pro forma
disclosure of what net income would have been had the Company adopted the fair
value method. The Company accounts for its unit-based compensation in accordance
with the provisions of APB 25.
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 reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amount of revenue and expenses during the reporting period. The
principal area of estimation relates to determining total project costs. Actual
results could differ from those estimates.
Impairment of Long-Lived Assets
Long-lived assets to be held and used are reviewed for impairment whenever
events or changes of circumstances indicate that the related carrying amounts
may not be recoverable, such as a change in expected future undiscounted cash
flows. When required, impairment losses on assets to be held and used are
recognized based on the excess of the asset's carrying amount over its fair
value as determined by selling prices for similar assets or
F-14
<PAGE>
Production Resource Group, L.L.C.
Notes to Combined Financial Statements (Continued)
application of other appropriate valuation techniques. Long-lived assets to be
disposed of are reported at the lower of their carrying amount or fair value
less disposal costs.
Fair Value of Financial Instruments
The fair value of financial instruments is determined by reference to market
data and other valuation techniques as appropriate. The Company's financial
instruments consist of cash and cash equivalents, long-term debt, and an
interest rate swap agreement (in 1996). Unless otherwise disclosed, the fair
values of financial instruments approximate their recorded values.
Comprehensive Income
During 1998, the Company adopted SFAS No. 130, "Reporting Comprehensive Income."
SFAS No. 130 establishes standards for the reporting and display of
comprehensive income and its components in a full set of general-purpose
financial statements. This statement requires that all items that are required
to be recognized as components of comprehensive income be reported in a
financial statement with the same prominence as other financial statements.
4. Reportable Segments
In 1997, the Company adopted SFAS No. 131 "Disclosures about Segments of an
Enterprise and Related Information." The statement requires certain descriptive
information to be provided about an enterprise's reportable segments. This
information includes the factors that management uses to identify the reportable
segments of the Company, the types of products and services from which each
reportable segment derives its revenues, and how management measures segment
profit or loss and assets.
The Company's continuing operations include four reportable segments: the
Lighting Group, the Scenery Group, the Event Services Group, and the Audio
Group. The Company's Lighting Group has five primary operating units that
provide lighting equipment and systems to a highly diversified client base. The
Company's Scenery Group consists of two operating units that fabricate scenery
and rent automation equipment that controls the motion of such scenery. Sales of
this division are primarily to live theatrical concerns. The Company's Event
Services Group provides a variety of services primarily for corporate clients,
including unique exhibit fabrication and production management for trade shows
and events. During 1998, with the acquisition of Pro-Mix and SPL, the Company
established the Audio Group. Also during 1998, the Company discontinued its
Themed Attraction business. This segment had one primary operating unit which
designed, built and installed on a turn-key basis themed attractions primarily
for amusement parks and casinos (see Note 8).
F-15
<PAGE>
Production Resource Group, L.L.C.
Notes to Combined Financial Statements (Continued)
The Company evaluates performance and allocates resources based on the
reportable segments' profit or loss from operations before interest, income
taxes, depreciation and amortization. The accounting policies of the reportable
segments are the same as those described in the summary of significant
accounting policies (see Note 3). Intersegment sales and transfers are recorded
at the Company's cost; there is no intercompany profit or loss on intersegment
sales or transfers.
The Company's reportable segments are distinct business units that offer
different products and services. The reportable segments are each managed
separately because they manufacture and distribute distinct products with
different production processes. The customers of the Company's reportable
segments are located primarily in the United States (less than 5% of the
Company's current customers are located in Europe).
<TABLE>
<CAPTION>
Year ended or as of December 31, 1998
---------------------------------------------------------------------
(In thousands)
Event
Audio Services Scenery Lighting Total
---------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Revenues from external customers $22,365 $28,469 $37,076 $86,693 $174,603
Intersegment revenues 64 1,965 1,391 3,660 7,080
Segment profit 6,710 3,717 10,790 18,249 39,466
Segment assets 9,185 19,367 18,872 51,651 99,075
Expenditures for long-lived assets 3,517 664 1,344 8,949 14,474
<CAPTION>
Year ended or as of December 31, 1997
--------------------------------------------------------------
(In thousands)
Event
Services Scenery Lighting Total
--------------------------------------------------------------
<S> <C> <C> <C> <C>
Revenues from external customers $ 23,759 $ 20,382 $ 31,039 $ 75,180
Intersegment revenues - 7,675 2,319 9,994
Segment profit 2,762 10,063 6,828 19,653
Segment assets 7,988 19,929 33,515 61,432
Expenditures for long-lived assets 1,726 3,570 7,390 12,686
</TABLE>
F-16
<PAGE>
Production Resource Group, L.L.C.
Notes to Combined Financial Statements (Continued)
<TABLE>
<CAPTION>
Year ended or as of December 31, 1996
-------------------------------------------------------------
(In thousands) Event
Services Scenery Lighting Total
-------------------------------------------------------------
<S> <C> <C> <C> <C>
Revenues from external customers $ 13,586 $ 21,242 $ 14,606 $ 49,434
Intersegment revenues - 544 1,293 1,837
Segment profit 839 11,744 2,434 15,017
Segment assets 9,369 21,250 11,639 42,258
Expenditures for long-lived assets - 4,534 6,702 11,236
<CAPTION>
Year ended December 31,
(In thousands) 1998 1997 1996
----------------------------------------------
<S> <C> <C> <C>
Revenues
Total external revenues from reportable segments $174,603 $ 75,180 $ 49,434
Intersegment revenues for reportable segments 7,080 9,994 1,837
Elimination of intersegment revenues (7,080) (9,994) (1,837)
----------------------------------------------
Total revenues $174,603 $ 75,180 $ 49,434
==============================================
<CAPTION>
Year ended December 31,
(In thousands) 1998 1997 1996
-----------------------------------------------
<S> <C> <C> <C>
Profit (loss)
Total profit for reportable segments $ 39,466 $ 19,653 $ 15,017
Unallocated amounts:
Corporate selling, general and administrative expenses (10,113) (6,789) (3,824)
Depreciation and amortization (15,262) (8,363) (4,635)
Nonrecurring compensation - (2,125) -
Interest expense, net (14,095) (3,839) (1,164)
Loss on impairment of assets (1,822) - (495)
-----------------------------------------------
Total income (loss) from continuing operations before income
taxes and extraordinary item $ (1,826) $(1,463) $ 4,899
===============================================
</TABLE>
F-17
<PAGE>
Production Resource Group, L.L.C.
Notes to Combined Financial Statements (Continued)
<TABLE>
<CAPTION>
December 31,
(In thousands) 1998 1997 1996
-----------------------------------------------
<S> <C> <C> <C>
Assets
Total assets for reportable segments $ 99,075 $ 61,432 $ 42,258
Unallocated amounts:
Goodwill 46,116 15,341 879
Corporate property and equipment 43,750 14,215 5,820
Corporate other assets 6,380 32,207 -
Elimination of intercompany receivables (1,770) (407) -
-----------------------------------------------
Total combined assets related to continuing operations $ 193,551 $122,788 $ 48,957
===============================================
5. Property and Equipment
The following is a summary of property and equipment at December 31, 1998 and 1997:
<CAPTION>
(In thousands) 1998 1997
------------------------------
<S> <C> <C>
Land and buildings $ 14,605 $ 10,173
Building improvements 3,160 1,470
Rental equipment 80,356 46,692
Machinery and equipment 2,618 1,297
Furniture and fixtures and office equipment 10,017 5,208
Transportation equipment 1,068 552
Construction in progress 237 483
------------------------------
112,061 65,875
Less accumulated depreciation 29,965 16,639
------------------------------
Property and equipment--net $82,096 $ 49,236
==============================
</TABLE>
In accordance with an amendment to the Company's Credit Facility (see Note 7),
the Company is required to sell its facility ("the facility") in Las Vegas,
Nevada. As a result, the Company is negotiating a sale and leaseback agreement
with an unrelated party for the facility. It is anticipated that the facility
will be sold for approximately $7,400,000 resulting in a loss of approximately
$1,822,000, which has been included in the combined statement of operations for
the year ended December 31, 1998 as an impairment loss. Included in land and
buildings at December 31, 1998 is $7,622,000 which represents land and building
that will be sold in connection with this sale and leaseback. The Company
anticipates leasing the property for 15 years under a noncancelable operating
lease at a base annual rent of approximately $884,000 per annum. The Company is
required to use the proceeds to repay existing bank borrowings under the Credit
Facility.
During 1996, the Company transferred certain of its operations to a new facility
and placed the old facility up for sale. This circumstance called into question
the recoverability of the carrying amounts of the former building and related
improvements, and accordingly, an impairment loss of $495,000 was recognized
related to these assets.
F-18
<PAGE>
Production Resource Group, L.L.C.
Notes to Combined Financial Statements (Continued)
During 1997, as a result of the Company's growth, the old facility was returned
to service at its reduced carrying value of $301,000 and included in land and
buildings.
6. Other Assets
The following is a summary of other assets at December 31, 1998 and 1997:
<TABLE>
<CAPTION>
(In thousands) 1998 1997
-------------- --------------
<S> <C> <C>
Organization costs, net of accumulated amortization
of $273 in 1998 and $166 in 1997 $ 263 $ 371
Deferred financing costs, net of accumulated amortization
of $474 in 1998 and $150 in 1997 1,532 1,735
Bond offering costs, net of accumulated amortization
of $394 in 1998 and $7 in 1997 3,734 3,745
Software development costs, net of accumulated amortization
of $754 in 1998 and $195 in 1997 550 391
Other 1,913 775
-------------- --------------
$ 7,992 $ 7,017
============== ==============
7. Long-Term Debt
Long-term debt consisted of the following at December 31:
<CAPTION>
(In thousands) 1998 1997
------------------------------
<S> <C> <C>
Senior Subordinated Notes $ 100,000 $ 100,000
Credit facilities 53,038 -
Mortgages payable 3,147 3,820
Other 1,056 745
------------------------------
157,241 104,565
Less current portion 8,046 822
------------------------------
Long-term debt $ 149,195 $ 103,743
==============================
</TABLE>
F-19
<PAGE>
Production Resource Group, L.L.C.
Notes to Combined Financial Statements (Continued)
Senior Subordinated Notes
On December 24, 1997, the Company and PRG Finance Corporation, a Delaware
Corporation ("Finance Corp." and together with the Company, the "Issuers")
issued $100,000,000 of 11-1/2% Senior Subordinated Notes (the "Notes") due
January 15, 2008. Finance Corp., a wholly-owned, non-guarantor subsidiary of the
Company, was formed for the purpose of serving as a co-issuer of the Notes in
order to facilitate the offering of the Notes. Finance Corp. does not have any
operations, assets or revenues. Interest on the Notes is payable semiannually in
arrears on January 15 and July 15 of each year, to holders of record on the
immediately preceding January 1 and July 1, respectively.
The Notes are not redeemable, except in certain circumstances, prior to January
15, 2003. Thereafter, the Notes are subject to redemption at prices decreasing
from 105.75% to 100.00% of the face amount through 2006.
The Notes are fully and unconditionally guaranteed by the Company's domestic
subsidiaries other than Finance Corp. and LSDL (the "Guarantors") on a joint and
several basis. The Notes place certain restrictions on the Guarantors, including
restrictions on their ability to merge or consolidate operations with another
entity. Seven of the Guarantors are wholly-owned subsidiaries of the Company and
the remaining Guarantor is 99% owned by the Company (with the remaining 1%
interest owned by a member of the Company) (See Note 16).
The Company received proceeds from the offering of $97,000,000. Such proceeds
were used to repay the borrowings under the existing credit facility of
$68,300,000. Costs incurred related to the issuance of the Notes approximated
$4,128,000 and are being amortized over the life of the Notes. Certain
additional issuance costs of $376,000 were recorded in 1998 and are being
amortized over the remaining life of the Notes. The fair value of the Notes at
December 31, 1998 was $98,000,000. As of December 31, 1997, the fair value of
the debt approximated its carrying value. Such fair value estimates were based
on quoted market prices.
Credit Facilities
On June 30, 1996, the Company entered into a credit agreement (the "Credit
Agreement") with a bank to borrow funds in the amount of $17,500,000. Such funds
were used to refinance existing bank debt. The Credit Agreement consisted of a
revolving credit facility (the "Revolving Loan") and a term loan facility (the
"Term Loan") in the amount of $7,500,000 and $10,000,000, respectively, maturing
on December 31, 2000.
On December 13, 1996, the Company received additional funds, under similar terms
as the Credit Agreement, from the bank in the amount of $5,000,000 ("Bridge
Note"). The Bridge Note matured on June 30, 1997.
In connection with the Credit Agreement, the Company entered into an interest
rate swap agreement ("IRSA") with The Bank of New York to hedge the impact of
fluctuations in interest rates on its floating rate credit facilities. The IRSA
had an original notional amount of $8,750,000, which was subsequently increased
to
F-20
<PAGE>
Production Resource Group, L.L.C.
Notes to Combined Financial Statements (Continued)
$22,500,000. Gains and losses pertaining to the IRSA were recorded over its
life as an adjustment to interest expense. In January 1998, the Company
terminated the IRSA and recorded a loss of approximately $33,000.
On July 31, 1997, the Company entered into a credit agreement, as amended (the
"Credit Facility") with a syndicate of financial institutions that provided for
a reducing revolver for borrowings in a principal amount up to $100,000,000
through December 31, 2002. The borrowings were used to refinance the Credit
Agreement and Bridge Note and finance working capital requirements, including
acquisitions.
The refinancing of the Credit Agreement was treated as an early extinguishment
of debt and, accordingly, unamortized financing costs of approximately $614,000
were written off and included as an extraordinary item in the combined statement
of operations for the year ended December 31, 1997.
Amounts outstanding under the Credit Facility bear interest, at the Company's
option, at (i) certain spreads over the Eurodollar rate, or (ii) certain spreads
over the higher of (a) the Federal Funds rate plus .50%, or (b) the agent's
prime rate. The interest rate spreads are adjusted based on the Company's total
leverage ratio. In addition, during the commitment period (through December 31,
2002), the Company is obligated to pay a fee on the unused availability ranging
from .25% to .375% based on its total leverage ratio.
The Credit Facility contains certain restrictive financial covenants, including
the maintenance of a minimum pro forma interest coverage ratio and fixed charge
coverage ratio, a maximum leverage ratio and limitations on the issuance of
additional indebtedness. Borrowings under the Credit Facility are secured by a
security interest in all of the Company's tangible and intangible personal
property and fixtures and are guaranteed by the members and subsidiaries of the
Company. All such guarantees are collateralized by a security interest in the
tangible and intangible personal property and fixtures of the respective
guarantor. In addition, the members of the Company have pledged their equity
interests in the Company and in each of the subsidiaries as additional
collateral. As of December 31, 1998, the Company was in compliance with all
covenants of the Credit Facility. For the year ended December 31, 1998 the
weighted average interest rate charged under the Credit Facility was
approximately 8.4%. In connection with the Credit Facility, the Company incurred
approximately $2,007,000 of loan organization and syndication costs, which are
being amortized over the life of such agreement.
Mortgages Payable
At December 31, 1998 and 1997, the Company had two mortgage loans outstanding,
which are collateralized by its properties. The aggregate carrying value of
these properties at December 31, 1998 is approximately $7,117,000. The
mortgages require monthly payments of both principal and interest at varying
rates ranging from 7.4% to 8.7%. Maturity dates on these mortgages expire on
various dates through June 1, 2025.
F-21
<PAGE>
Production Resource Group, L.L.C.
Notes to Combined Financial Statements (Continued)
Other
Other long-term debt consists of an adjustable promissory note due in connection
with the purchase of the net assets of Vanco (see Note 2) and capital lease
obligations for purchases of equipment. The Company leases equipment under
noncancelable capital leases, and reflects the present value of net minimum
capital lease payments as capital lease obligations.
The following are future maturities of long-term debt outstanding at December
31, 1998 (in thousands):
Year ending December 31, Amount
1999 $ 8,046
2000 467
2001 452
2002 364
2003 305
Thereafter 147,607
-------------
$157,241
=============
8. Discontinued Operations
On March 2, 1998, the Company adopted a plan to discontinue its Themed
Attraction business. The Themed Attraction business operated primarily through a
single division, which utilized a turn-key approach of supplying project
management, fabrication of scenic elements and show action equipment and
installation of such projects at a customer's place of business. This division
served customers who were primarily owners and operators of amusement parks and
casinos. The Company originally reported the results of the Themed Attraction
business as a discontinued operation in its 1997 combined statement of
operations and restated all prior periods presented.
The loss at December 31, 1998 primarily relates to additional costs in
connection with the phase-out period of the Themed Attraction business in excess
of amounts previously estimated. Costs in excess of amounts estimated are the
result of additional work performed by the Company on its last remaining Themed
Attraction project that was not specifically addressed in the contract. This
work was performed under the direction of the customer's management team. Both
the customer and the Company agree that additional work was performed to the
satisfaction of the customer and both parties are currently negotiating a
settlement or rider to the contract.
Additionally, the Company wrote off certain amounts receivable for a project
completed in March 1997. A portion of the contract payments was withheld by the
customer until the Company could make certain modifications to the attraction as
stipulated in the contract. The Company originally believed that it would be
able to satisfactorily complete the modifications. However, it was ultimately
unable to perform the modifications, primarily because equipment supplied by a
sub-contractor failed. The Company sued the sub-contractor and
F-22
<PAGE>
Production Resource Group, L.L.C.
Notes to Combined Financial Statements (Continued)
settled its claim for a net amount of approximately $75,000, which reduced the
write off of the withheld contract payments to approximately $500,000.
There are no significant elements of the Company's property and equipment, which
were used exclusively by this division. At December 31, 1998, the principal
components of the net assets of the Company's Themed Attraction business are
accounts receivable of $2,555,000. The revenues of the Themed Attraction
business were approximately $24,600,000 in 1997 and $13,100,000 in 1996. The
Company recorded no revenues for the Themed Attraction business in 1998. These
receivables relate to amounts due under the original contract for the Company's
aforementioned last remaining Themed Attraction project and amounts due from a
project where work ceased in 1997 while the customer was trying to obtain
adequate financing. Regarding the latter receivable, the Company has placed a
mechanic's lien on the project's property to secure its claim and has received
written assurance that upon receipt of new financing, its claim will be paid in
full. The Company has now substantially completed the discontinuance of its
Themed Attraction business.
9. Membership Units
Description of Units
The Company's membership units consist of the following classes: Regular Units,
Preferred Units, Capital Appreciation Units, Preferred Capital Appreciation
Units, Convertible Preferred Units and SPLLC Units. Regular Units entitle the
holder thereof to share in the profits and losses of the Company, subject to
certain adjustments, and are the only class of voting equity of the Company.
Preferred Units entitle the holder thereof to the same rights and privileges as
holders of Regular Units, except that the holders of Preferred Units have the
right to receive liquidation distributions prior to the holders of Regular Units
and the Preferred Units do not have voting rights. Capital Appreciation Units
entitle the holder thereof to (i) an annual return of $0.05 per unit and (ii)
share in the appreciation in the value of the Company upon the occurrence of an
Initial Public Offering (as defined in the Operating Agreement), the sale of
substantially all of the assets of the Company or a sale of fifty percent or
more of the interests in the Company held by the Initial Members, as defined;
provided that such holder shall only be entitled to share in the appreciation in
value above the designated value provided in the Operating Agreement. Capital
Appreciation Units rank pari passu with Regular Units in right of payment in the
event of a liquidation of the Company. Preferred Capital Appreciation Units
entitle the holder thereof to the same rights and privileges as holders of
Capital Appreciation Units, except that the holders of Preferred Capital
Appreciation Units have the right to receive liquidation distributions prior to
the holders of Regular Units. Convertible Preferred Units entitle the holder
thereof to receive an 8% per annum cumulative distribution priority. The
Operating Agreement provides that such distribution shall accumulate currently
but not be paid. These units are senior in liquidation preference to the Regular
Units and are convertible into securities offered by the Company in an Initial
Public Offering at a price equal to 62.5% of the per share price of such
securities. For purposes of such conversion, the Operating Agreement provides
that all accrued distributions will be eliminated. In addition, upon the
earliest of the third anniversary of the issuance of the Convertible Preferred
Units or an Initial Public Offering, the holders of such units have the option
to require the Company to redeem their units.
F-23
<PAGE>
Production Resource Group, L.L.C.
Notes to Combined Financial Statements (Continued)
At December 31, 1998, the Company had outstanding the following membership
units: (i) 5,199,413 Regular Units, including those units issued under the Units
Plan, (ii) 733,497 Capital Appreciation Units, including approximately 525,000
units which will vest at various times over the next five years and (iii)
188,467 Preferred Units. The Company granted the two shareholders of Bash an
option to acquire up to $3 million of Convertible Preferred Units. This option
was determined to have no value and expired during 1998. There are no Preferred
Capital Appreciation Units outstanding. During 1998, an additional 79,179 and
52,721 Preferred Units were issued in connection with the Pro-Mix and SPL
acquisitions, respectively.
On December 27, 1997, the Company redeemed the SPLLC Units held by SPLLC in
exchange for its interests in real property located in New Windsor, N.Y.,
Cornwall-on Hudson, N.Y., and the Company's land in Las Vegas, NV, subject to
related mortgage debt. All of the equity interests of SPLLC are owned by
officers and beneficial owners of the Company, and SPLLC's assets and
liabilities which consist primarily of the aforementioned real estate and
related mortgages, are therefore combined into the Company.
Units Plan
On January 1, 1996, the Company established the Production Resource Group,
L.L.C. Restricted Limited Liability Company Unit Incentive Compensation Plan
(the "Restricted Plan") and the Phantom Limited Liability Company Unit Incentive
Compensation Plan (the "Phantom Plan") and, together with the Restricted Plan,
the ("Plans"). Participation in the Plans is limited to officers and other key
employees who are selected to participate in the Plans. Up to 750,000 Units
subject to anti-dilution adjustments may be awarded under each of the Restricted
Plan ("Restricted Units") and the Phantom Plan ("Phantom Units") and, together
with the Restricted Units, the "Units." Units granted under the Plans are
subject to significant restrictions on transferability, the securities laws and
the Operating Agreement of the Company. Restricted Units entitle the holder to
participate in the appreciation and profits of the Company but do not allow a
right to participate in management. Phantom Units entitle the holder to receive
a bonus equal to ten dollars per Phantom Unit upon a sale of the Company or at
certain other defined times. In no event shall a participant be entitled to
receive duplicate payments under the Phantom Plan and the Restricted Plan.
Restrictions on the Units lapse ratably over specified periods. Upon a Change in
Control or any termination other than for Cause (each as defined in the Plans),
all restrictions on the Units lapse and the value thereof becomes immediately
payable. Phantom Units will be canceled without any payments being required
thereon upon the occurrence of an initial public offering by the Company or a
successor in interest to the Company.
At December 31, 1998 and 1997, 109,184 and 145,578 Restricted Units,
respectively, are outstanding with restrictions that lapse in five annual
installments commencing January 1, 1997. The Company has included in Members'
Equity (Deficit) approximately $258,000, representing the fair value of these
Units. Compensation to employees of a similar amount has been recorded as a
reduction of Members' Equity (Deficit) and will be
F-24
<PAGE>
Production Resource Group, L.L.C.
Notes to Combined Financial Statements (Continued)
charged to income as the restrictions on these Units lapse. In both 1998 and
1997, compensation expense of approximately $52,000 was recorded with respect to
these Units.
Other Unit Transactions
During 1997, the Company entered into employment agreements with two of its
officers. In connection with these agreements, the Company issued 565,000 of its
Capital Appreciation Units (the "CAU's"). These units vest over periods ranging
from three to five years and were determined to have an insignificant value at
the time of issuance and, accordingly, no charge was recorded in connection with
these transactions. The pro forma compensation costs for the CAU's determined in
accordance with SFAS No. 123 is not significant.
During 1997, the Company issued 16,000 of its CAU's in connection with advisory
services provided to the Company. In 1998, an additional 3,000 of CAU's were
issued in connection with advisory services. These units vest within two years
and were determined to have an insignificant value at the time of issuance and,
accordingly, no charge was recorded in connection with these transactions.
During 1998, the Company entered into employment agreements with two of its
officers. In connection with these agreements, the Company issued 149,497 of its
CAU's, that vest over periods ranging from three to five years and were
determined to have an insignificant value at the time of issuance and,
accordingly, no charge was recorded in connection with these transactions. The
pro forma compensation costs for these CAU's determined in accordance with SFAS
No. 123 is not significant.
10. Commitments and Other Contingencies
Collective Bargaining Agreement
The Company is a party to various collective bargaining agreements of limited
duration concerning its labor union employees. The terms of those agreements
require contributions by the Company to a number of union employee benefit
plans. Contributions to all plans totaled approximately $1,219,000, $783,000 and
$621,000 for the years ended December 31, 1998, 1997 and 1996, respectively.
Benefit Plans
The Company has a defined contribution plan that qualifies under section 401(k)
of the Internal Revenue Code. The plan covers all employees who are not subject
to a collective bargaining agreement and have met the plan's age and service
requirements. The Company's 401(k) plan provides that eligible employees may
make contributions subject to Internal Revenue Code limitations. The Company
matches each employee's contributions
F-25
<PAGE>
Production Resource Group, L.L.C.
Notes to Combined Financial Statements (Continued)
up to a maximum of 3% of their salary. Such contributions aggregated
approximately $510,000, $260,000, and $150,000 for the years ended December 31,
1998, 1997 and 1996, respectively.
The Company also had a profit sharing plan that covered certain employees of the
Company. Contributions to the plan, which were determined by the members, are
based on the amount of an eligible employee's wages. Total contributions may not
exceed 15% of the annual compensation of all of the plan's participants. The
Company made no contributions in 1998, 1997 and 1996. The plan was terminated
in 1998 and all plan assets were distributed to the participants.
Operating Leases
The Company leases certain property and equipment under leases that expire at
various dates through 2008. As of December 31, 1998, future minimum lease
payments under noncancelable leases are as follows (in thousands):
Year ending December 31,
1999 $ 4,383
2000 4,511
2001 4,462
2002 3,872
2003 3,314
Thereafter 17,502
---------
$ 38,044
=========
Rent expense was approximately $3,744,000, $1,286,000 and $671,000 for the years
ended December 31, 1998, 1997 and 1996, respectively.
11. Related Party Transactions
The Company contracts work from an entity that is partially owned by related
parties. In connection therewith, the Company earned revenues of approximately
$3,237,000, $3,833,000, and $1,929,000 for the years ended December 31, 1998,
1997 and 1996, respectively. The Company incurred fees and other charges
amounting to $50,000 from this entity during the year ended December 31, 1996.
The Company had a receivable from this entity amounting to approximately
$179,000 and $272,000 at December 31, 1998 and 1997, respectively. Additionally,
the entity paid management fees for administrative services of approximately
$60,000, $60,000 and $90,000 to the Company during 1998, 1997 and 1996,
respectively.
F-26
<PAGE>
Production Resource Group, L.L.C.
Notes to Combined Financial Statements (Continued)
12. Income Taxes
The provision for income taxes for the years ended December 31 consist of the
following:
<TABLE>
<CAPTION>
(In thousands) 1998(1) 1997 1996
----------------- ----------------- -----------------
<S> <C> <C> <C>
Current
Federal $ 1,083 $ -- $ --
State 387 392 206
Foreign 283
----------------- ----------------- -----------------
1,753 392 206
----------------- ----------------- -----------------
Deferred
Federal (31) - -
State (10) - -
----------------- ----------------- -----------------
(41) - -
----------------- ----------------- -----------------
Provision for Income Taxes $ 1,712 $ 392 $ 206
================= ================= =================
</TABLE>
F-27
<PAGE>
Production Resource Group, L.L.C.
Notes to Combined Financial Statements (Continued)
(1) Includes federal, state, local and foreign taxes of SPL, a Maryland
corporation, PLS, a California-based corporation, Haas, a Minnesota-based
corporation, and Holdings, a UK company (and its wholly-owned U.S. subsidiary)
which were acquired in 1998, due to their corporate status.
Deferred income taxes reflect the tax effects of temporary differences between
the carrying amounts of assets and liabilities for financial reporting purposes
and the amounts used for income tax purposes for subsidiaries of the Company
subject to corporate income taxes. Components of the Company's deferred tax
assets and liabilities at December 31 are as follows:
<TABLE>
<CAPTION>
(In thousands) 1998 1997
-------------------- --------------------
<S> <C> <C>
Deferred tax liabilities
Depreciation $ 592 -
Accrual to cash 227 -
Contract Accounting 510 -
Other 211 -
-------------------- --------------------
1,540 -
Deferred tax assets
Bad debt 112 -
Accrued Expense 118 -
Other 43 -
-------------------- --------------------
273 -
-------------------- --------------------
Net Deferred Liability $ 1,267 -
==================== ====================
</TABLE>
The provision for income tax in 1998 is based on the following components of
income from continuing operations before income taxes:
<TABLE>
<CAPTION>
(In thousands) December 31, 1998
--------------------
<S> <C>
Income subject to federal income tax $ 3,462
Income subject to foreign income tax 892
Other (6,180)
--------------------
$ (1,826)
====================
</TABLE>
The reconciliation of income taxes computed at the U.S. federal statutory tax
rate to income tax expense is as follows:
F-28
<PAGE>
Production Resource Group, L.L.C.
Notes to Combined Financial Statements (Continued)
<TABLE>
<CAPTION>
Year ended December 31,
(In thousands) 1998 1997 1996
------------------ ------------------- ------------------
<S> <C> <C> <C>
Provision (Benefit) at Federal statutory - -
rate (34%) $ (621)
Losses for which no benefit is received 2,101 - -
Non-deductible Expenses 40 - -
Differential between U.S. and UK Tax
Rates (27) - -
State taxes, net of Federal tax benefit 205 $ 392 $ 259
Other 14 - -
------------------ ------------------- ------------------
$ 1,712 $ 392 $ 259
================== =================== ==================
</TABLE>
13. Non-recurring Compensation Expense
The non-recurring compensation expense of $2,125,000 in 1997 represents
employment incentives paid to the two former shareholders of Bash and a former
shareholder of Design Dynamics, in connection with their signing of employment
agreements with the Company.
14. Treasury Rate Lock
On October 27, 1997, in anticipation of the Company's offering of the Notes (see
Note 7), the Company entered into a Treasury Rate Lock agreement ("T-Lock") with
Bankers Trust Company (the "Counterparty") to hedge against the impact of rising
interest rates on the 10 year Treasury Note ("Reference Security"). The interest
rate on the Notes was to be based on the rate on the Reference Security plus a
market-determined spread thereon. The T-Lock had a notional amount of
$100,000,000. Upon the earlier of the Company's election to terminate the T-Lock
or December 15, 1997 ("Settle Date"), the rate on the 10 year Treasury Note
would be compared to the predetermined Lock Rate (5.863%). If the reference rate
were above the Lock Rate, the Counterparty would make a payment to the Company
equal to the present value of the difference between the reference rate and the
Lock Rate to the maturity of the Reference Security. If the reference rate were
below the Lock Rate, the Company would make a payment to the Counterparty equal
to the present value of the difference. On December 5, 1997, the Company elected
to terminate the T-Lock and received payment from the Counterparty of
approximately $425,000, which is being reflected as an adjustment to interest
expense over the life of the Notes.
15. Legal Proceedings
The Company does not believe that any such litigation will, individually or in
the aggregate, have a material adverse effect on its
F-29
<PAGE>
Production Resource Group, L.L.C.
Notes to Combined Financial Statements (Continued)
business, results of operations or financial condition. The Company, together
with other companies involved in the live entertainment production EFX! ((TM)),
was sued by Michael Crawford, the former star of EFX! ((TM)), with an action
related to personal injury claims. The Company has denied liability and
continues to vigorously defend such action. The Company believes it has
meritorious defenses to such actions. Although there can be no assurance as to
the outcome of this litigation, the Company does not believe that the eventual
outcome will have a material adverse effect on the Company's results of
operations, cash flows or financial condition. If the Plaintiff would prevail in
full and the Company were charged with the full amount of the judgement, the
magnitude being sought by this litigation would have a material adverse effect
on the financial condition or results of operations.
In addition, the Company is subject to various claims and proceedings in the
ordinary course of business. Based on information currently available, the
Company believes that none of such current claims, or proceedings, individually,
or in the aggregate, will have a material adverse effect on the Company's
financial condition or results of operations, although we can make no assurances
in this regard.
16. Subsidiary Information
The following represents unaudited condensed combining financial statements as
of December 31, 1998 and for the year ended December 31, 1998 with respect to
the financial position and results of operations of the Company and its
wholly-owned and majority-owned subsidiaries. On December 24, 1997, the Company
and PRG Finance Corporation ("Finance Corp."), a Delaware Corporation, issued
$100 million of 11 1/2% Senior Subordinated Notes due 2008 (the "Notes"). The
Notes are fully and unconditionally guaranteed by the Company's domestic
subsidiaries other than Finance Corp. and Holdings (the "Guarantors"). Seven of
the Guarantors are wholly-owned subsidiaries of the Company and the remaining
Guarantor is 99% owned by the Company (with the remaining 1% interest owned by a
member of the Company). The condensed combining financial statements are
presented in lieu of separate financial statements and other related disclosures
of Finance Corp., Holdings and the Guarantors as management has determined that
such information is not material to investors.
Condensed Combining Balance Sheet (Unaudited)
December 31, 1998
<TABLE>
<CAPTION>
(In thousands)
Guarantor Non-Guarantor Adjustments
PRG (1) Subsidiaries Subsidiaries (2) PRG Combined
--------------- --------------- -------------- --------------- ---------------
<S> <C> <C> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 2,805 $ 3,364 $ (155) $ - $ 6,014
Accounts receivable, net 22,820 11,908 687 35,415
Inventories 6,432 3,561 762 10,755
Intercompany receivables 1,800 (1,392) (408) -
</TABLE>
F-30
<PAGE>
Production Resource Group, L.L.C.
Notes to Combined Financial Statements (Continued)
<TABLE>
<S> <C> <C> <C> <C> <C>
Other current assets 4,075 1,423 2,220 7,718
--------------- --------------- -------------- --------------- ---------------
Total current assets 37,932 18,864 3,106 59,902
Property and equipment, net 68,582 8,954 4,560 82,096
Investment in subsidiary 27,767 (27,767)
Goodwill, net 32,505 8,783 4,828 46,116
Other assets 7,701 291 7,992
=============== =============== ============== =============== ===============
Total assets $ 174,487 $ 36,601 $ 7,957 $ (22,939) $ 196,106
=============== =============== ============== =============== ===============
</TABLE>
Condensed Combining Balance Sheet (Unaudited)
December 31, 1998
<TABLE>
<CAPTION>
(In thousands)
Guarantor Non-Guarantor Adjustments
PRG (*) Subsidiaries Subsidiaries (1) PRG Combined
--------------- --------------- -------------- --------------- ---------------
<S> <C> <C> <C> <C> <C>
LIABILITIES AND
EQUITY (DEFICIT)
Current liabilities:
Current portion of
long-term debt $ 7,789 $ 257 $ - $ - $ 8,046
Accounts 5,812 8,289 2,624 16,725
payable
Payroll and sales
taxes payable 2,037 1,127 3,164
Income taxes 1,514 145 1,659
payable
Deferred revenue 4,618 179 4,797
Other current 10,020 1,825 523 12,368
liabilities
--------------- --------------- -------------- --------------- ---------------
Total current 30,276 13,191 3,292 46,759
liabilities
Long-term debt:
Senior subordinated 100,000 100,000
notes
Credit 45,638 45,638
facilities
Other long-term
(receivable) debt (6,650) 10,207 3,557
Minority interest 233 233
Equity (deficit) 4,990 13,203 4,665 (22,939) (81)
=============== =============== ============== =============== ===============
Total liabilities and
Equity (deficit) $ 174,487 $ 36,601 $ 7,957 $ (22,939) $ 196,106
=============== =============== ============== =============== ===============
</TABLE>
F-31
<PAGE>
Production Resource Group, L.L.C.
Notes to Combined Financial Statements (Continued)
* Exclusive of Guarantor Subsidiaries and Non-Guarantor Subsidiaries.
(1) To record goodwill, eliminate equity, record fair value of units, and
eliminate purchase price.
F-32
<PAGE>
Production Resource Group, L.L.C.
Notes to Combined Financial Statements (Continued)
Condensed Combining Statement of Operations (Unaudited)
For the Year ended December 31, 1998
<TABLE>
<CAPTION>
(In thousands) Guarantor Non-Guarantor
PRG (*) Subsidiaries Subsidiaries PRG Combined
----------------- ---------------- ----------------- ----------------
<S> <C> <C> <C> <C>
Revenues $ 139,477 $ 28,359 $ 6,767 $ 174,603
Direct production costs 85,700 18,596 3,561 107,857
Depreciation expense 9,941 815 501 11,257
----------------- ---------------- ----------------- ----------------
Gross profit 43,836 8,948 2,705 55,489
Selling, general and
administrative expenses 30,829 4,892 1,672 37,393
Other depreciation and
amortization 3,782 136 87 4,005
----------------- ---------------- ----------------- ----------------
Operating profit 9,225 3,920 946 14,091
Loss on impairment of assets 1,822 1,822
Interest expense 14,507 229 33 14,769
Interest (income) (616) (56) (2) (674)
----------------- ---------------- ----------------- ----------------
Income (loss) from
continuing operations
before income taxes (6,488) 3,747 915 (1,826)
Provision for income taxes 77 1,346 289 1,712
----------------- ---------------- ----------------- ----------------
Income (loss) from
continuing operations (6,565) 2,401 626 (3,538)
Loss from operations of
discontinued Themed
Attraction Permanent
Installation business (2,357) (2,357)
Minority interest (72) (72)
----------------- ---------------- ----------------- ----------------
Net income (loss) $ (8,994) $ 2,401 $ 626 $ (5,967)
================= ================ ================= ================
</TABLE>
* Exclusive of Guarantor Subsidiaries and Non-Guarantor Subsidiaries.
F-33
<PAGE>
Schedule II
Valuation and Qualifying Accounts
(In thousands)
<TABLE>
<CAPTION>
Balance at Charged to Charged to Balance at
Year ended beginning Costs and Other end of
December 31 Description of year Expenses (3) Accounts (1) Deductions (2) year
- ------------- ----------- ------- ------------ ------------ -------------- ----
<S> <C> <C> <C> <C> <C> <C>
1998 Allowance for
doubtful accounts $2,572 $1,130 $358 $(1,490) $2,570
1997 Allowance for
doubtful accounts $323 $2,512 $(263) $2,572
1996 Allowance for
doubtful accounts $ 100 $ 311 $ (88) $ 323
</TABLE>
(1) Amounts assumed in connection with acquisitions.
(2) Uncollectible accounts written off.
(3) Does not include $986 of accounts receivable written off directly to bad
debts expense in 1998.
F-34
<PAGE>
INDEX TO EXHIBITS
Exhibit No. Document Description
3.1(a) Certificate of Formation of the Company
3.2(a) Second Amended and Restated Limited Liability Company Agreement of
the Company
4.1(a) Registration Rights Agreements, dated December 24, 1997, among the
Issuers, the Guarantors and the Initial Purchasers
4.2(a) Indenture, dated December 24, 1997 relating to $100,000,000
aggregate principal amount 11% Senior Subordinated Notes due 2008
between the Issuers and First Union National Bank, as trustee,
including the Form of Note
10.1(a) Acquisition Agreement dated as of July 3, 1997 among the Company
and Bash Theatrical Lighting, Inc. Bash Theatrical Lighting
Services, Inc., Bash Lighting Services, Inc., Bash Lighting
Services Mid-Atlantic, Inc., Bash Exposition Services, Inc. and
Donald Stern and Robert Cannon.
10.2(a) Employment Agreement dated as of January 1, 1996 between Jeremiah
J. Harris and the Company.
10.3(a) Employment Agreement dated as of June 6, 1997 between Kenneth L.
Shearer and the Company.
10.4(a) Employment Agreement dated as of June 7, 1997 between Bradley G.
Miller and the Company.
10.5(a) Employment Agreement dated as of August 6, 1997 between Robert A.
Manners and the Company.
10.6(a) Agreement of Lease dated September 11, 1997 between Danis
Properties Limited Partnership and the Company.
10.7(a) Credit Agreement, dated as of July 31, 1997, by and among the
Company, the lenders party thereto and the Bank of New York, as
agent.
10.8(a) First Amendment to Credit Agreement, dated as of December 12, 1997,
by and among the Company, the lenders party thereto and the Bank of
New York, as agent.
10.13(b) Merger Agreement among Production Resource Group, L.L.C., PRG
Acquisition II Corp., Raymond E. Andrews, Donald R. Bendickson,
James D. Bucher, William R. Dircks, Michael A. Maher and Thomas J.
Van Hercke as Stockholders, and Haas Multiples Environmental
Marketing & Design, Inc.
21.1(a) Subsidiaries of the Company
<PAGE>
27.1 Financial Data Schedule*
(a) This exhibit was filed as an exhibit to the Company's Registration
Statement in Form S-4 (file number 333-46235) and is incorporated
herein by reference.
(b) This exhibit was filed as an exhibit to the Company's Current
Report on Form 8-K dated December 15, 1998 and is incorporated
herein by reference.
* Filed herewith
(B) Reports on Form 8-K.
The Company filed a current report on Form 8-K, dated on December 15, 1998
reporting in Item 2, "Acquisition or Disposition of Assets," its acquisition of
Haas Multiples Environmental Marketing & Design, Inc. On February 16, 1999, the
Company filed amendments thereto on Form 8-K/A, providing in Item 7 financial
statements and pro forma financial information with respect to the acquisition
of Haas Multiples Environmental Marketing & Design, Inc.
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has caused this annual report on Form 10-K for the
year ended December 31, 1998, to be signed on its behalf by the undersigned,
thereunto duly authorized.
Dated: March xx, 1999
PRODUCTION RESOURCE GROUP, L.L.C.
By: /s/ Robert A. Manners
-----------------
Robert A. Manners
Title: Senior Vice President and General Counsel
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant in
the capacities indicated on March xx, 1999.
<TABLE>
<CAPTION>
Signature Title
- --------- -----
<S> <C>
Chief Executive Officer, sole Manager of the Board of Managers (Principal
/s/ Executive Officer)
- --------------------------------
Jeremiah J. Harris
Executive Vice President, Chief Operating and Financial Officer and
/s/ Director (Principal Financial Officer)
- --------------------------------
Bradley G. Miller
Senior Vice President and General Counsel (Principal
/s/ Executive Officer)
- --------------------------------
Robert A. Manners
/s/ Corporate Controller (Chief Accounting Officer)
- --------------------------------
James M. Mahoney
/s/ * Advisor
- --------------------------------
Joseph P. Harris
/s/ * Advisor
- --------------------------------
Joseph W. Bartlett
/s/ * Advisor
- --------------------------------
Thomas D. Lips
/s/ Robert A. Manners
- ----------------------
*By Robert A. Manners,
as Attorney-in-fact
</TABLE>
Supplemental Information to be furnished with reports filed pursuant to Section
15(d) of the Act by Registrants which have not registered securities Pursuant to
Section 12 of the Act.
No annual report to security holders covering the Registrants last fiscal year
or proxy statement has been sent to security holders.
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This Schedule contains summary financial information extracted from the combined
balance sheets of Production Resource Group, L.L.C. as of December 31, 1998 and
the related combined statements of Operations for the year ended December 31,
1998, end is qualified in its entirety by reference to such financial
statements.
</LEGEND>
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-1-1998
<PERIOD-END> DEC-1-1998
<CASH> 6,014
<SECURITIES> 0
<RECEIVABLES> 37,985
<ALLOWANCES> 2,570
<INVENTORY> 10,750
<CURRENT-ASSETS> 59,902
<PP&E> 112,061
<DEPRECIATION> 29,965
<TOTAL-ASSETS> 196,106
<CURRENT-LIABILITIES> 46,759
<BONDS> 149,195
0
0
<COMMON> 0
<OTHER-SE> (81)
<TOTAL-LIABILITY-AND-EQUITY> 196,106
<SALES> 174,603
<TOTAL-REVENUES> 174,603
<CGS> 107,857
<TOTAL-COSTS> 160,512
<OTHER-EXPENSES> 1,822
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 14,769
<INCOME-PRETAX> (1,826)
<INCOME-TAX> 1,712
<INCOME-CONTINUING> (3,538)
<DISCONTINUED> (2,357)
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (5,967)
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
