<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-Q
[X] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934
For the quarterly period ended March 31, 1999
or
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934
333-46235
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(Commission File Number)
PRODUCTION RESOURCE GROUP, L.L.C.
------------------------------------------------------
(Exact name of Registrant as Specified in its Charter)
<TABLE>
<S> <C>
Delaware 14-1786937
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(State or other Jurisdiction of Formation) (I.R.S. Employer Identification No.)
</TABLE>
539 Temple Hill Road, New Windsor, New York 12553
- ------------------------------------------ -------
(Address of Principal Executive Offices) (Zip Code)
(914) 567-5700
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(Registrant's Telephone Number, Including Area Code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [ ]
Indicate the number of shares outstanding of each of the issuer's classes of
common stock as of March 31, 1999: Not Applicable
<PAGE>
PRODUCTION RESOURCE GROUP, L.L.C.
Table Of Contents
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited):
Combined Balance Sheets as of March 31, 1999 and December 31, 1998
Combined Statements of Operations for the three months ended March 31,
1999 and 1998
Combined Statements of Cash Flows for the three months ended March 31,
1999 and 1998
Notes to Combined Financial Statements
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Item 3. Quantitative and Qualitative Disclosures about Market Risk
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
Item 2. Changes in Securities and Use of Proceeds
Item 3. Defaults upon Senior Securities
Item 4. Submission of Matters to a Vote of Security Holders
Item 5. Other Information
Item 6. Exhibits and Reports on Form 8-K
Signatures
<PAGE>
PRODUCTION RESOURCE GROUP, L.L.C.
Combined Balance Sheets
(In thousands)
<TABLE>
<CAPTION>
March 31, December 31,
1999 1998 *
(unaudited)
------------------- -------------------
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents $ 6,768 $ 6,014
Accounts receivable, net of allowance of $2,677 at March 31,
1999 and $2,570 in 1998 36,131 35,415
Deferred production expenses 1,197 958
Inventories 12,025 10,755
Other current assets 10,280 6,760
------------------- -------------------
Total current assets 66,401 59,902
Property and equipment - net 76,551 82,096
Goodwill - net of accumulated amortization of $2,625 at March 31,
1999 and $2,031 in 1998 45,806 46,116
Other assets 8,719 7,992
------------------- -------------------
Total assets $ 197,477 $ 196,106
=================== ===================
Liabilities and Members' Deficit
Current liabilities:
Current portion of long-term debt $ 1,463 $ 8,046
Accounts payable 17,260 16,725
Payroll and sales taxes payable 3,327 3,164
Income taxes payable 2,011 1,659
Deferred revenue 7,246 4,797
Other current liabilities (including accrued interest of $2,491
at March 31, 1999 and $5,366 in 1998) 8,680 12,368
------------------- -------------------
Total current liabilities 39,987 46,759
Long-term debt:
Senior Subordinated Notes 100,000 100,000
Credit Facility 55,538 45,638
Other long-term debt 3,445 3,557
------------------- -------------------
Total long-term debt 158,983 149,195
Minority interest 233 233
Total members' deficit (includes accumulated other
Comprehensive loss of $120 at March 31, 1999 and $13 in 1998) (1,726) (81)
=================== ===================
Total Liabilities and Members' deficit $ 197,477 $ 196,106
=================== ===================
Note: The combined balance sheet at December 31, 1998 has been derived from the
audited financial statements at that date.
* Certain items have been reclassified to conform with current period
presentation.
</TABLE>
See accompanying notes.
<PAGE>
PRODUCTION RESOURCE GROUP, L.L.C.
Combined Statements of Operations (Unaudited)
(In thousands)
<TABLE>
<CAPTION>
Three Months Ended March 31,
1999 1998
--------------------- ---------------------
<S> <C> <C>
Revenues $ 55,531 $ 25,486
Direct production expenses:
Direct production costs 34,999 14,577
Depreciation expense 3,489 2,358
--------------------- ---------------------
38,488 16,935
Gross profit 17,043 8,551
Selling, general and administrative expenses 12,602 6,678
Other depreciation and amortization 1,504 1,045
Restructuring charges 1,173 -
--------------------- ---------------------
Operating profit 1,764 828
Interest expense 4,579 3,069
Interest (income) (58) (211)
--------------------- ---------------------
Loss before income taxes and cumulative effect of
accounting change (2,757) (2,030)
Provision for income taxes 246 23
--------------------- ---------------------
Loss before cumulative effect of accounting change ( 3,003) (2,053)
Cumulative effect of accounting change (263) -
--------------------- ---------------------
Net loss $ (3,266) $ (2,053)
===================== =====================
</TABLE>
See accompanying notes.
<PAGE>
PRODUCTION RESOURCE GROUP, L.L.C.
Combined Statements of Cash Flows (Unaudited)
(In thousands)
<TABLE>
<CAPTION>
Three Months Ended March 31,
1999 1998 *
--------------------- ---------------------
<S> <C> <C>
Operating activities
Net loss $ (3,266) $ (2,053)
Adjustments to reconcile net loss to net cash used in operating
activities:
Depreciation 4,003 2,881
Amortization of goodwill and other 990 347
Amortization of debt-related costs 255 175
Provision for doubtful accounts 205 272
Gain on sale of property and equipment (894) (479)
Cumulative effect of accounting change 263 -
Changes in operating assets and liabilities:
Accounts receivable (921) 4,287
Deferred production expenses (571) -
Inventories (1,270) (1,093)
Other current assets (2,520) (212)
Accounts payable 536 (8,595)
Payroll and sales taxes payable 163 408
Deferred revenue 2,449 617
Income taxes payable 352 -
Other current liabilities (3,581) 2,997
--------------------- ---------------------
Net cash used in operating activities (3,807) (448)
Investing activities
Acquisition of net assets of Pro-Mix, Inc., net of cash acquired - (6,328)
Purchases of property and equipment (6,599) (5,458)
Proceeds from sale of rental equipment and property 8,035 1,133
Additions to software development costs (56) (32)
Other assets (1,752) (1,902)
--------------------- ---------------------
Net cash used in investing activities (372) (12,587)
Financing activities
Proceeds from long-term debt 10,000 -
Repayments of long-term debt (6,795) (94)
Additions to bond offering costs - (32)
Issuance of preferred units 50 -
Member contributions 1,678 -
--------------------- ---------------------
Net cash provided by (used in) financing activities 4,933 (126)
--------------------- ---------------------
Net increase (decrease) in cash and cash equivalents 754 (13,161)
Cash and cash equivalents--beginning of period 6,014 27,164
--------------------- ---------------------
Cash and cash equivalents--end of period $ 6,768 $ 14,003
===================== =====================
</TABLE>
* Certain items have been reclassified to conform with current period
presentation.
See accompanying notes.
<PAGE>
PRODUCTION RESOURCE GROUP, L.L.C.
Notes to Combined Financial Statements (Unaudited)
1. General
Presentation
The accompanying unaudited combined financial statements of Production Resource
Group, L.L.C. (the "Company") have been prepared in accordance with generally
accepted accounting principles for interim financial information and with the
instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do
not include all of the information and footnotes required by generally accepted
accounting principles for complete financial statements. In the opinion of
management, all adjustments (consisting of normal recurring accruals) considered
necessary for a fair presentation have been included. Operating results for the
three months ended March 31, 1999 are not necessarily indicative of the results
that may be expected for the year ending December 31, 1999, due to fluctuations
in the Company's varying markets. For further information, refer to the combined
financial statements and footnotes thereto included in the Production Resource
Group, L.L.C. Annual Report on Form 10-K for the year ended December 31, 1998.
Business
The Company is an integrator, fabricator and supplier of a broad range of
entertainment technology for the live entertainment (live theatre, concert
touring and special events), corporate events (trade and industrial shows) and
themed entertainment (gaming, theme parks and themed retail) markets. The
Company operates through four segments: lighting, audio, event services and
scenery.
The lighting segment provides automated lighting systems and related products
for rental and sale. The Company's audio segment provides sound equipment for
sale and rental, as well as sound system design, installation and consulting
services to customers with large-scale systems such as casinos and sports
stadiums. The event services segment provides a variety of services, primarily
to corporate clients, including exhibit fabrication and production management
for trade and industrial shows. The scenery segment fabricates scenery for sale
and rents automation equipment that controls the motion of such scenery to the
live entertainment market.
2. Accounting Policies
Principles of Combination
The Company's combined financial statements include the accounts of all the
entities under common control of the members of the Company. All intercompany
balances and transactions have been eliminated.
<PAGE>
Recently Issued Accounting Standards
In April 1998, the American Institute of Certified Public Accountants issued
Statement of Position 98-5, "Reporting the Costs of Start-up Activities" (SOP
98-5). The statement 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. Accordingly, the Company wrote off the
unamortized balance of organization costs of approximately $263,000 effective
January 1, 1999, and reported the expense as a cumulative effect of accounting
change.
3. Acquisitions
Subsequent to March 31, 1999, the Company completed two acquisitions. On April
5, 1999, the Company acquired all the assets and assumed certain liabilities of
A-1 Audio, Inc. ("A-1"). A-1, based in Hollywood, California, provides audio
products for sale and rental primarily to the concert touring market. The
acquired assets of A-1 will operate as part of the Company's audio segment. The
Company paid approximately $8.3 million for the acquisition using its Credit
Facility.
On April 30, 1999, the Company acquired all of the assets and assumed certain
liabilities of Ancha Electronics, Inc. ("Ancha"). Ancha, based in Rolling
Meadows, Illinois with offices in Norcross, Georgia; Tampa, Florida; and
Houston, Texas, provides specialized audio and video systems for installation.
The acquired assets of Ancha will operate as part of the Company's audio
segment. The Company paid approximately $4.0 million for Ancha and issued 2,666
Preferred Units of the Company with a liquidation preference of $100,000. The
Company financed the acquisition using its Credit Facility.
The pro forma results of operations for the three months ended March 31, 1998,
assuming consummation of all six 1998 acquisitions as of January 1, 1998, are
as follows:
(In thousands) 1998
---------------
Total revenues from continuing operations $ 51,019
Net loss (691)
<PAGE>
4. Reportable Segments
The Company's operations include four reportable segments: lighting, audio,
event services and scenery. Lighting has five primary operating units that
provide lighting equipment and systems to a highly diversified client base.
Audio consists of primarily three operating units that sell and rent audio
systems and products. Event services has three operating units that sell their
services and exhibits primarily to corporate clients. Scenery consists of two
operating units that fabricate scenery and rent computerized automation
equipment, primarily to live theatrical concerns.
<TABLE>
<CAPTION>
Three month period ended March 31, 1999
----------------------------- ------------------ ------------------ ---------------- ----------------- -------------
(In thousands)
Event
Lighting Audio Services Scenery Total
----------------------------- ------------------ ------------------ ---------------- ----------------- -------------
<S> <C> <C> <C> <C> <C>
Revenues from external
customers $ 27,098 $ 10,173 $ 9,768 $ 8,492 $ 55,531
Intersegment revenues 1,371 12 328 447 2,158
Segment profit (1) 5,470 1,471 457 3,170 10,568
----------------------------- ------------------ ------------------ ---------------- ----------------- -------------
Three month period ended March 31, 1998 (2)
----------------------------- ------------------ ------------------ ---------------- ----------------- -------------
(In thousands)
Event
Lighting Audio Services Scenery Total
----------------------------- ------------------ ------------------ ---------------- ----------------- -------------
Revenues from external
customers $ 12,979 $2,702 $ 4,439 $ 5,366 $ 25,486
Intersegment revenues 487 - 70 465 1,022
Segment profit 2,349 961 591 2,511 6,412
----------------------------- ------------------ ------------------ ---------------- ----------------- -------------
(1) Segment profit excludes restructuring charges.
(2) Certain items have been reclassified to conform with current period presentation.
</TABLE>
<TABLE>
<CAPTION>
---------------------------------------------------------------- -----------------------------------------
Three month period ended March 31,
(In thousands) 1999 1998
---- ----
<S> <C> <C>
Profit (loss)
Total profit for reportable segments $ 10,568 $ 6,412
Restructuring charges (1,173) --
Unallocated amounts:
Corporate selling, general, and administrative expenses (2,638) (2,181)
Depreciation and amortization (4,993) (3,403)
Interest expense, net (4,521) (2,858)
==================== ====================
Total loss before income taxes and cumulative effect of
accounting change $ (2,757) $ (2,030)
---------------------------------------------------------------- ==================== ====================
</TABLE>
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<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------
(In thousands) March 31, December 31,
1999 1998
--------------------- ---------------------
<S> <C> <C>
Assets
Total assets for reportable segments $ 107,013 $ 99,075
Unallocated amounts:
Goodwill 45,806 46,116
Corporate property and equipment 39,327 43,750
Corporate other assets 6,000 6,380
Elimination of intercompany receivables (3,200) (1,770)
===================== =====================
Total combined assets * $ 194,946 $ 193,551
===================== =====================
------------------------------------------------------------------------------------------------------------
* The total combined assets as of March 31, 1999 and December 31, 1998 exclude
assets associated with the previously discontinued Permanent Installation
Themed Attraction business of approximately $2.5 million and $2.6 million,
respectively.
</TABLE>
5. Restructuring Charges
Restructuring charges relate to the implementation of a plan to close the
Company's Denver office, operating in the event services segment, and the
closure of a New Jersey office within the lighting segment. The aggregate amount
of approximately $1.2 million primarily reflects rental payments for the
remaining lease periods, severance payments relating to workforce reductions and
the write-off of the net book value of furniture and leasehold improvements for
vacated properties. At March 31, 1999, approximately $440,000 of cash
expenditures have been charged against this reserve.
6. Comprehensive Loss
Total comprehensive loss amounted to approximately $3.4 million and $2.1 million
for the three months ended March 31, 1999 and 1998, respectively. The difference
between net loss and total comprehensive loss for the three months ended March
31, 1999 is the result of foreign currency translation adjustments related to
the Company's United Kingdom Subsidiary acquired in June 1998.
7. Subsidiary Financial Information
The following table presents unaudited condensed combining financial statements
as of March 31, 1999 and for the three months ended March 31, 1999 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. 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.
<PAGE>
Condensed Combining Balance Sheet (Unaudited)
March 31, 1999
(In thousands)
<TABLE>
<CAPTION>
Guarantor Non-Guarantor PRG
PRG* Subsidiaries Subsidiaries Adjustments Combined
------------- ----------------- ---------------- --------------- ---------------
<S> <C> <C> <C> <C> <C>
Assets
Current assets:
Cash and cash equivalents $ 3,636 $ 3,408 $ (276) $ 6,768
Accounts receivable, net 23,428 12,533 170 36,131
Deferred production expenses 1,197 - - 1,197
Inventories 7,341 3,791 893 12,025
Intercompany receivables 3,280 (2,778) (502) -
Other current assets 6,384 2,139 1,757 10,280
------------- ----------------- ---------------- --------------- ---------------
Total current assets 45,266 19,093 2,042 66,401
Property and equipment, net 63,242 9,025 4,284 76,551
Investment in subsidiaries 27,767 - - $ (27,767) -
Goodwill, net 32,283 8,695 - 4,828 45,806
Other assets 8,435 - 284 8,719
============= ================= ================ =============== ===============
Total assets $ 176,993 $ 36,813 $ 6,610 $ (22,939) $ 197,477
============= ================= ================ =============== ===============
Liabilities and Equity (Deficit)
Current liabilities:
Current portion of long-term debt $ 1,389 $ 74 $ 1,463
Accounts payable 7,176 8,451 $ 1,633 17,260
Payroll and sales taxes payable 2,227 1,028 72 3,327
Income taxes payable - 1,425 586 2,011
Deferred revenue 7,006 240 - 7,246
Other current liabilities 7,271 942 467 8,680
------------- ----------------- ---------------- --------------- ---------------
Total current liabilities 25,069 12,160 2,758 39,987
Long-term debt
Senior Subordinated Notes 100,000 - - 100,000
Credit Facility 55,538 - - 55,538
Other long-term (receivable) debt (6,745) 10,634 (444) 3,445
------------- ----------------- ---------------- --------------- ---------------
148,793 10,634 (444) 158,983
Minority interest 233 - - 233
Equity (deficit) 2,898 14,019 4,296 $(22,939) (1,726)
============= ================= ================ =============== ===============
$ 176,993 $ 36,813 $ 6,610 $(22,939) $ 197,477
============= ================= ================ =============== ===============
</TABLE>
* Exclusive of Guarantor Subsidiaries and Non-Guarantor Subsidiaries.
<PAGE>
Condensed Combining Statement of Operations (Unaudited)
Three Months Ended March 31, 1999
(In thousands)
<TABLE>
<CAPTION>
Guarantor Non-Guarantor PRG
PRG* Subsidiaries Subsidiaries Combined
----------------- ---------------- ----------------- -----------------
<S> <C> <C> <C> <C>
Revenues $34,974 $18,804 $1,753 $55,531
Direct production costs 20,592 13,438 969 34,999
Depreciation expense 2,947 289 253 3,489
----------------- ---------------- ----------------- -----------------
Gross profit 11,435 5,077 531 17,043
Selling, general and administrative
expenses 8,387 3,454 761 12,602
Other depreciation and
amortization 1,223 236 45 1,504
Restructuring charges 1,173 - - 1,173
----------------- ---------------- ----------------- -----------------
Operating profit 652 1,387 (275) 1,764
Interest expense 4,258 280 41 4,579
Interest (income) (45) (13) - (58)
----------------- ---------------- ----------------- -----------------
Income (loss) before income taxes
and cumulative effect of
accounting change (3,561) 1,120 (316) (2,757)
Provision for income taxes
(benefit) (7) 305 (52) 246
----------------- ---------------- ----------------- -----------------
Income (loss) before cumulative
effect of accounting change (3,554) 815 (264) (3,003)
Cumulative effect of accounting
change (263) - - (263)
----------------- ---------------- ----------------- -----------------
Net income (loss) $(3,817) $ 815 $ (264) $(3,266)
================= ================ ================= =================
</TABLE>
* Exclusive of Guarantor Subsidiaries and Non-Guarantor Subsidiaries.
Condensed Combining Statement of Cash Flows (Unaudited)
Three Months Ended March 31, 1999
(In thousands)
<TABLE>
<CAPTION>
Guarantor Non-Guarantor PRG
PRG* Subsidiaries Subsidiaries Combined
------------- ----------------- ---------------- ---------------
<S> <C> <C> <C> <C>
Net cash provided by (used in)
operating activities $(4,458) $ 752 $(101) $(3,807)
Investing activities
Purchases of property and equipment (6,072) (507) (20) (6,599)
Proceeds from sale of rental
equipment and property 8,035 --- --- 8,035
Additions to software development costs (56) --- --- (56)
Other assets (1,752) (1,752)
------------- ----------------- ---------------- ---------------
Net cash provided by (used in)
investing activities 155 (507) (20) (372)
Financing activities
Proceeds from long-term debt 10,000 --- --- 10,000
Repayments of long-term debt (6,594) (201) --- (6,795)
Member contributions and issuance of
Preferred units 1,728 --- --- 1,728
------------- ----------------- ---------------- ---------------
Net cash provided by (used in)
financing activities 5,134 (201) --- 4,933
------------- ----------------- ---------------- ---------------
Net increase (decrease) in cash
and cash equivalents 831 44 (121) 754
Cash and cash equivalents--beginning
of period 2,805 3,364 (155) 6,014
------------- ----------------- ---------------- ---------------
Cash and cash equivalents--end of period $ 3,636 $3,408 $(276) $ 6,768
============= ================= ================ ===============
</TABLE>
* Exclusive of Guarantor Subsidiaries and Non-Guarantor Subsidiaries.
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
SAFE HARBOR FOR FORWARD-LOOKING STATEMENTS
The Company is including the following cautionary statement in this Form 10-Q to
make applicable and take advantage of safe harbor provisions of the Private
Security Reform Act of 1995 for any forward-looking statements made by, or on
behalf of, the Company. Forward-looking statements include statements concerning
plans, objectives, goals, strategies, future events or performance and
underlying assumptions and other statements, which are other than statements of
historical facts. From time to time, the Company may publish or otherwise make
available forward-looking statements of this nature. All such subsequent
forward-looking statements, whether written or oral, and whether made by or on
behalf of the Company, are also expressly qualified by these cautionary
statements. Certain statements contained herein are forward-looking statements
and, accordingly, involve risk and uncertainties that could cause actual results
or outcomes to differ materially from those expressed in the forward-looking
statements.
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 the
first quarter of 1999, the Company has focused on the integration of the prior
year's acquisitions and the consolidation of redundant facilities and
operations. In connection therewith, the Company's management authorized a
restructuring plan designed to close two facilities, and integrate their
operations with remaining business units.
Additionally, subsequent to March 31, 1999, the Company has expanded its audio
segment with the acquisitions of the net assets of A-1 Audio, Inc. and Ancha
Electronics, Inc. The acquisitions have given the audio segment a larger
inventory of audio products for rental, and have created a national delivery
system for audio installations.
Results of Operations
Comparability of Periods
Financial results for the three month period ended March 31, 1999 are not fully
comparable to prior periods due to the acquisitions of Holdings, Production
Arts, CBE, SPL, PLS and Haas on June 19, June 30, July 31, August 19, October 23
and November 30, 1998, respectively.
<PAGE>
Three Months Ended March 31, 1999 Compared to Three Months Ended March 31, 1998
Revenues. The Company's revenues more than doubled to $55.5 million for the
three months ended March 31, 1999 an increase of $30.0 million or 118%, from
$25.5 million for the three months ended March 31, 1998. The increase was
primarily attributable to revenues generated by operations acquired subsequent
to the first quarter of 1998. Revenues increased in the lighting segment by
approximately $14.1 million. This increase was primarily related to the
acquisitions of Holdings and Production Arts in June 1998. Revenues in the
scenery segment increased by approximately $3.2 million primarily related to an
increase in scenery fabrication projects. The acquisition of SPL in August 1998
provided an additional $6.6 million in revenues for the first three months in
1999 for the audio segment. Revenues in the event services segment increased
approximately $5.3 million primarily resulting from the acquisitions of CBE and
Haas in July and November, respectively. These acquisitions provided an
additional $7.7 million in revenues for the three months ended March 31, 1999,
which was partially offset by a decrease in trade show revenues.
Gross Profit. The Company's gross profit increased to $17.0 million for the
three months ended March 31, 1999, from $8.6 million for the same period in
1998, resulting in an increase of $8.4 million, or 98%. The increase in gross
profit was primarily due to the increase in revenues described above. Gross
profit margin decreased as a percentage of revenues from approximately 33.5% for
the three months ended March 31, 1998 to 30.7% for the three months ended March
31, 1999. The decrease was primarily attributable to the shift in revenue mix
between rental revenues and sales revenues. For the three months ended March 31,
1999, rental revenues comprised only 33% of total revenues as compared to 45%
for the same period in the prior year. Rental revenues have a greater gross
margin than sales revenues. The reason for the change in the revenue mix is
primarily attributable to the acquisitions of CBE, SPL, and Haas during 1998.
These operations do not have significant rental revenues.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased to $12.6 million for the three months ended
March 31, 1999 compared to $6.7 million for the same period last year. The
increase was primarily attributable to incremental selling, general and
administrative expenses associated with the acquisitions of Holdings, Production
Arts, CBE, SPL, PLS and Haas. These acquisitions added approximately $6.6
million in additional selling, general and administrative expenses. As a
percentage of revenues, selling, general and administrative expenses decreased
to 22.7% for three months ended March 31, 1999 as compared to 26.2 % for the
same period in 1998.
Restructuring Charges. Restructuring charges relate to the implementation of a
plan to close the Denver office of one of the event services operating units and
the closure of a New Jersey office within the lighting segment. The aggregate
amount of approximately $1.2 million primarily reflects rental payments for the
remaining lease period, severance payments relating to workforce reductions and
the write-off of the net book value of furniture and leasehold improvements for
vacated properties.
Operating Profit. Operating profit was $1.8 million for the three months ended
March 31, 1999, an increase of $0.9 million from $0.8 million for the three
months ended March 31, 1998. Operating profit, as a percentage of revenues, was
3.2% for both of the three month
<PAGE>
periods ending March 31, 1999 and 1998.
Interest Expense. Interest expense increased to $4.6 million for the three month
period ended March 31, 1999 from $3.1 million for the three months ended March
31, 1998. The increase was primarily attributed to the interest expense
associated with the increased borrowings under the Company's Credit Facility.
Income Taxes. The provision for income taxes represents corporate, state and
foreign taxes for the acquired subsidiaries that are subject to income tax. The
provision as a percentage of income before taxes for those subsidiaries was
approximately 41% for the three months ended March 31, 1999. For the three
months ended March 31, 1998, no subsidiaries were subject to Federal income
taxes.
Cumulative Effect of Accounting Change. The Company implemented Statement of
Position 98-5, "Reporting the Costs of Start-up Activities" (SOP 98-5), and,
accordingly, wrote off all capitalized start-up costs effective January 1, 1999.
Net Loss. The Company had a net loss of $3.3 million for the three months ended
March 31, 1999 compared to a net loss of $2.1 million for the three months ended
March 31, 1998. The net loss was primarily due to the aforementioned decrease in
gross profit as a percentage of revenue, the charge for restructuring and an
increase in interest expense, partially offset by the decline in selling,
general and administrative expenses, and depreciation expenses, as a percentage
of revenues.
Liquidity and Capital Resources
During the three months ended March 31, 1999, the Company repaid bank
borrowings of approximately $6.8 million, and incurred additional borrowings of
$10.0 million. In accordance with an amendment to the Company's Credit Facility,
the Company was required to sell its facility in Las Vegas, Nevada. As a result,
the Company completed a sale and leaseback arrangement with an unrelated party
for the facility in March 1999. The net proceeds of approximately $6.5 million
(excluding $1.0 million which has been held in escrow by the buyer pending final
execution of certain documents) were primarily used to repay the Credit
Facility. The Company recorded an impairment loss of approximately $1.8 million
related to this Facility in its combined statement of operations for the year
ended December 31, 1998.
The Company's other investing activities have been financed primarily from
members' contributions and bank borrowings under the existing $100 million,
senior secured, reducing, revolving Credit Facility due December 31, 2002. The
Guarantors are restricted from making distributions under the terms of the
Indenture and the Credit Facility.
<PAGE>
The following table sets forth certain information from the Company's Combined
Statements of Cash Flows for the three months ended March 31, 1999 and 1998:
1999 1998
---------------- ----------------
Net cash provided by (used in):
Operating activities $ (3,807) $ (448)
Investing activities (372) (12,587)
Financing activities 4,933 (126)
The Company believes that cash flows from operations and borrowings available
under the Credit Facility will be sufficient 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.
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.
<PAGE>
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 Company is currently assessing acquisitions made subsequent to March 31,
1999. 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 46% 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 third 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 most of the remaining
divisions by the fourth quarter of 1999. Additionally, the Company is
remediating all non-compliant systems in the event that certain operating
divisions are not implemented onto the ERP system. The Company would have
implemented the ERP without regard to Year 2000 issues although the Year 2000
issues have accelerated the Company's implementation.
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 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 $3.2 million has been spent to date. The amount primarily
represents the purchase and rollout of the Company's ERP and the remediation of
legacy systems. 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.
<PAGE>
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 July 1999
and determine the extent of further contingency planning, and formalize that
planning already arranged.
ITEM 3. 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 its 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 flows 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.
<PAGE>
PART II
Other Information
Items 1,2,3,4, and 5 are not applicable.
ITEM 6.
EXHIBITS AND REPORTS ON FORM 8-K
Exhibits:
27.1 Financial Data Schedule*
* Filed herewith
(b) Reports on Form 8-K.
The Company filed a current report on Form 8-K/A, dated February 16, 1999,
reporting in Item 2, "Acquisition or Disposition of Assets," its acquisition of
Haas Multiples Environmental Marketing & Design, Inc.
The Company filed a current report on Form 8-K, dated May 13, 1999, reporting
in Item 2, "Acquisition or Disposition of Assets," its acquisition of the assets
of Ancha Electronics, Inc.
<PAGE>
PRODUCTION RESOURCE GROUP, L.L.C.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
PRODUCTION RESOURCE GROUP, L.L.C.
Dated: May 14, 1999 By: /s/ Bradley G. Miller
--------------------------
Bradley G. Miller
Chief Operating and Financial Officer
(Principal Financial Officer)
<PAGE>
Exhibit Index
27.1 Financial Data Schedule
<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 March
31, 1999 and the related Combined Statements of Operations for the Three
months ended March 31, 1999, and is qualified in its entirety by reference
to such financial statements.
</LEGEND>
<MULTIPLIER> 1,000
<CURRENCY> U.S. Dollars
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> MAR-31-1999
<EXCHANGE-RATE> 1.000
<CASH> 6,768
<SECURITIES> 0
<RECEIVABLES> 38,808
<ALLOWANCES> 2,677
<INVENTORY> 12,025
<CURRENT-ASSETS> 66,401
<PP&E> 110,177
<DEPRECIATION> 33,626
<TOTAL-ASSETS> 197,477
<CURRENT-LIABILITIES> 39,987
<BONDS> 158,983
0
0
<COMMON> 0
<OTHER-SE> (1,726)
<TOTAL-LIABILITY-AND-EQUITY> 197,477
<SALES> 55,531
<TOTAL-REVENUES> 55,531
<CGS> 34,999
<TOTAL-COSTS> 52,594
<OTHER-EXPENSES> 1,173
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 4,579
<INCOME-PRETAX> (2,757)
<INCOME-TAX> 246
<INCOME-CONTINUING> (3,003)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> (263)
<NET-INCOME> (3,266)
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
