<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON DECEMBER 17, 1996
REGISTRATION NO. 333-14879
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------
AMENDMENT NO. 2
TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
----------------
PRODUCTION GROUP INTERNATIONAL, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
2200 WILSON BOULEVARD
ARLINGTON, VA 22201-3324
(703) 528-8484
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE OF
REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
----------------
DELAWARE 7389 52-1710407
(STATE OR OTHER (PRIMARY STANDARD (IRS EMPLOYER
JURISDICTION OF INDUSTRIAL IDENTIFICATION NO.)
INCORPORATION OR CLASSIFICATION CODE
ORGANIZATION) NUMBER)
----------------
MARK N. SIRANGELO, PRESIDENT
PRODUCTION GROUP INTERNATIONAL, INC.
2200 WILSON BOULEVARD
ARLINGTON, VA 22201-3324
(703) 528-8484
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE
OF AGENT FOR SERVICE)
----------------
COPIES TO:
EDWIN M. MARTIN, JR., ESQUIRE MICHAEL J. SILVER, ESQUIRE
NANCY A. SPANGLER, ESQUIRE HOGAN & HARTSON L.L.P.
PIPER & MARBURY L.L.P. 111 SOUTH CALVERT STREET
1200 19TH STREET, N.W. BALTIMORE, MD 21202
WASHINGTON, DC 20036 (410) 659-2700
(202) 861-3900
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after this Registration Statement becomes effective.
If any of the securities being registered on this form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, as amended (the "Securities Act") check the following box. [_]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. [_] ____________________
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_] ____________________
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [_]
CALCULATION OF REGISTRATION FEE
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<TABLE>
<CAPTION>
PROPOSED MAXIMUM
TITLE OF EACH CLASS OF AGGREGATE AMOUNT OF
SECURITIES TO BE REGISTERED OFFERING PRICE (1) REGISTRATION FEE
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<S> <C> <C>
Shares of Common Stock, par value $.01
per share............................. $56,810,000 $0(2)
</TABLE>
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(1) Estimated solely for purposes of determining the registration fee pursuant
to Rule 457(o) under the Securities Act.
(2) A registration fee of $17,215 was previously paid in connection with the
initial filing of the Registration Statement.
----------------
The registrant hereby amends this registration statement on such date or
dates as may be necessary to delay its effective date until the registrant
shall file a further amendment which specifically states that this
registration statement shall thereafter become effective in accordance with
Section 8(a) of the Securities Act of 1933, as amended, or until the
registration statement shall become effective on such date as the Commission,
acting pursuant to said Section 8(a), may determine.
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<PAGE>
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A +
+REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE +
+SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY +
+OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT +
+BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR +
+THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE +
+SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE +
+UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF +
+ANY SUCH STATE. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
SUBJECT TO COMPLETION
DECEMBER 17, 1996
[LOGO OF PGI APPEARS HERE]
Shares
Common Stock
--------
All of the shares of Common Stock offered hereby are being offered by
Production Group International, Inc. ("PGI" or the "Company"). Prior to this
offering, there has been no public market for the Common Stock. It is currently
estimated that the initial public offering price per share will be between $
and $ . See "Underwriting" for information relating to the factors to be
considered in determining the initial public offering price. The Company has
applied for quotation of the Common Stock on the Nasdaq National Market under
the symbol "PGII."
--------
THE COMMON STOCK OFFERED HEREBY INVOLVES A HIGH DEGREE OF RISK. SEE "RISK
FACTORS" COMMENCING ON PAGE 6.
--------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
<TABLE>
<CAPTION>
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UNDERWRITING
PRICE TO DISCOUNTS AND PROCEEDS TO
PUBLIC COMMISSIONS COMPANY(1)
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<S> <C> <C> <C>
Per Share............................... $ $ $
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Total(2)................................ $ $ $
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</TABLE>
(1) Before deducting expenses of the offering estimated at $ .
(2) The Company has granted to the Underwriters a 30-day option to purchase up
to additional shares of Common Stock solely to cover over-allotments,
if any. To the extent that the option is exercised, the Underwriters will
offer the additional shares at the Price to Public shown above. If the
option is exercised in full, the total Price to Public, Underwriting
Discounts and Commissions and Proceeds to Company will be $ , $ and
$ , respectively. See "Underwriting."
--------
The shares of Common Stock are offered by the several Underwriters, subject
to prior sale, when, as and if delivered to and accepted by them, and subject
to the right of the Underwriters to reject any order in whole or in part. It is
expected that delivery of the shares of Common Stock will be made at the
offices of Alex. Brown & Sons Incorporated, Baltimore, Maryland, on or about
, 1997.
--------
Alex. Brown & Sons
INCORPORATED
Montgomery Securities
Robertson, Stephens & Company
THE DATE OF THIS PROSPECTUS IS , 1997.
<PAGE>
[PHOTOS OF PGI EXHIBITIONS AND BUSINESS COMMUNICATIONS EVENTS AND A
DESCRIPTION THEREOF]
----------------
The Company intends to furnish its stockholders with annual reports
containing audited financial statements and quarterly reports containing
unaudited financial information for the first three quarters of each fiscal
year.
----------------
IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT
TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE COMMON STOCK
OF THE COMPANY AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN
MARKET. SUCH TRANSACTIONS MAY BE EFFECTED ON THE NASDAQ NATIONAL MARKET OR
OTHERWISE. SUCH STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME.
<PAGE>
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by the more detailed
information and the Consolidated Financial Statements, including the Notes
thereto, appearing elsewhere in this Prospectus.
Production Group International, Inc. ("PGI" or the "Company") is a leading
worldwide provider of event services on an outsourced basis for corporations,
associations and other organizations as well as on a proprietary basis for
exhibitions owned and managed by the Company. In fiscal 1996, PGI planned and
executed over 1,800 events attended by more than 900,000 people in
approximately 50 cities in 12 countries. In order to provide its clients with a
single source solution to their event planning needs, PGI offers a wide range
of services that encompass the event planning process, including general
management, concept creation, content creation and execution. In addition, the
Company owns and manages proprietary exhibitions that utilize these services.
The Company has developed internally and through acquisitions a vertically-
integrated infrastructure capable of providing event services on a
multinational basis. The Company believes that its vertically-integrated
organization, creative talent, network of 24 offices in the United States and
abroad, technological leadership and willingness to commit capital to acquire
or develop proprietary exhibitions are competitive advantages in a fragmented
industry where most vendors provide a limited set of services on a local basis.
PGI's revenues have increased at a compound annual rate of 76.2% from fiscal
1994 to fiscal 1996.
The events industry consists of companies that provide business
communications and event management services and organizations that own or
manage exhibitions. Corporations, associations and other organizations hold or
sponsor events on a frequent, often recurring, basis throughout the year in
order to communicate with customers, employees, members and other
constituencies and either produce these events internally or outsource their
production to third parties. Examples of business communications and event
management services are the design, production and execution of conventions,
sales meetings, conferences, executive presentations, shareholder and investor
meetings, training sessions and product launches. Examples of exhibitions are
trade shows, consumer shows and special events that provide a forum for face-
to-face interaction and communication, typically between buyers and sellers. A
recent study by Deloitte and Touche LLP estimated that the events industry
generated approximately $80 billion in direct spending during 1994 in the U.S.
alone, exclusive of travel and internal spending by corporations and
associations.
The Company believes that the market for event services is undergoing a shift
toward outsourced management as organizations focus on their core competencies
and seek to improve the professionalism, creativity and cost-efficiency of
their events. Most vendors of outsourced event services cannot provide the wide
range of services, international coverage, creative talent, purchasing power
and technological capabilities required by large corporations and associations.
The Company believes that there is an increasing trend on the part of
associations, historically the largest owners and operators of exhibitions, to
outsource the operational management and often the ownership of exhibitions as
they focus on their core missions and seek to improve efficiencies.
As a vertically-integrated service provider, PGI is able to offer a
comprehensive solution to these organizations with the assurance of high-
quality service and the opportunity to form a long-term relationship. PGI
provides its clients a wide range of services such as video and media design
and production, including creation and production of CD-ROMs and Internet
broadcasts, graphic design and production, speech writing, staging and lighting
design and the design of brochures and promotional materials. The Company
offers execution and fulfillment management capabilities, including on-site
quality and logistics control, hotel and venue coordination, transportation
management, entertainment and talent booking, permit and approval management,
food and beverage management and telemarketing services for the sale of
exhibition space. PGI concentrates its selling efforts on large corporations,
associations and other organizations with recurring needs to plan and execute a
wide range of events in diverse locations. The Company centralizes many of its
administrative and purchasing functions at its headquarters, while creative,
production and sales personnel service clients from PGI's field offices.
PGI believes that it differentiates itself through the creative talent,
energy and commitment of its professionals. The Company's full-time staff of
over 350 professionals is complemented by a pool of over 750 professionals
hired on a project-by-project basis who have distinguished themselves through
prior
3
<PAGE>
experience with PGI. For individual events, the Company brings together
professionals from a wide range of creative disciplines, including writers and
editors, video producers, digital media designers, graphic designers and
logistics experts. PGI seeks to attract and retain the best operational
personnel through attractive compensation, benefits and training programs and
long-term career opportunities that smaller competitors cannot duplicate. To
execute PGI's expansion plans, the Company has recruited a number of senior
executives with broad and diverse experience managing rapidly growing
international businesses.
Through fiscal 1996, PGI devoted substantial capital and management attention
to completing acquisitions that broadened its service offerings and geographic
presence. In fiscal 1995 and 1996, the Company incurred significant costs to
close certain unprofitable and redundant locations. Beginning in late fiscal
1996, PGI began to increase its focus on achieving marketing synergies among
its acquired operations. The Company believes that substantial opportunities
exist to develop new client relationships and to expand relationships with
existing clients by cross-selling the full range of the Company's services,
building out its international office network and expanding the Company's
multimedia services.
A major focus of the Company's growth strategy over the next several years
will be the ownership of proprietary exhibitions and special events, both
through acquisition and internal development. Exhibitions offer a number of
attractive economic characteristics including (i) relatively high gross
margins, (ii) attractive cash flow characteristics arising because revenues are
prepaid while expenses are generally paid following an exhibition, (iii) stable
revenue streams from successful shows that often sell out in advance and (iv)
the ability to benefit from utilizing initial marketing costs for a series of
exhibitions. PGI acquired its first proprietary exhibition in the first quarter
of fiscal 1996 and currently owns 18 trade shows, consumer shows and special
events. The Company's ownership of proprietary exhibitions and special events
gives it complete decision-making authority over all aspects of an event.
Owning and operating these events will permit the Company to capitalize on its
vertically-integrated infrastructure, increase recurring revenues, reduce
subcontracted costs and more efficiently allocate resources. Ownership of
exhibitions allows the Company to replicate successful exhibitions in new
locations, to spin off portions of exhibitions into stand-alone exhibitions and
to develop new exhibitions in geographic and product markets that are
underserved.
The Company's headquarters are located at 2200 Wilson Boulevard, Arlington,
VA 22201-3324 and its telephone number is (703) 528-8484.
RISK FACTORS
The Company's business, results of operations, financial condition and
ability to implement its growth strategy involve a high degree of risk. These
risks include: (i) the Company's limited operating history, including a history
of operating and net losses in excess of losses created by writing off goodwill
and recording reorganization expenses, (ii) the Company's vulnerability to
quarterly fluctuations in operating results and the episodic nature of its
business, (iii) the Company's ability to manage growth, both internally and
through acquisitions, (iv) the risks associated with future acquisitions, (v)
the dependence of the Company's success upon key personnel, in particular Mark
N. Sirangelo, Chairman of the Board, President and Chief Executive Officer,
(vi) competition with the Company's services and for acquisition candidates,
and (vii) the Company's dependence upon third party contractors and temporary
employees to perform certain functions. Before purchasing shares of Common
Stock offered hereby, prospective investors should consider carefully all of
the information set forth in this Prospectus including, in particular,
information set forth under "Risk Factors."
THE OFFERING
<TABLE>
<C> <S>
Common Stock offered by the Company... shares
Common Stock to be outstanding after
the offering ........................ shares (1)
Use of proceeds....................... To finance possible future
acquisitions and for general corporate
purposes.
Proposed Nasdaq National Market
symbol............................... PGII
</TABLE>
- --------
(1) Excludes (i) 1,034,604 shares of Common Stock issuable upon exercise of
stock options outstanding at December 15, 1996 at a weighted average
exercise price of approximately $1.23 per share and (ii) 393,004 additional
shares of Common Stock reserved for future issuance under the Company's
1995 Stock Option/Stock Issuance Plan (California), the 1995 Stock
Option/Stock Issuance Plan (Virginia) (collectively, the "1995 Stock
Plans") and the 1997 Directors' Stock Option Plan (the "Directors' Plan").
See "Management--Employee Stock and Other Benefit Plans."
4
<PAGE>
SUMMARY CONSOLIDATED FINANCIAL AND OPERATING DATA
(IN THOUSANDS, EXCEPT PER SHARE AND OPERATING DATA)
<TABLE>
<CAPTION>
FISCAL YEAR ENDED AUGUST 31,
----------------------------------------
1992 1993 1994 1995 1996
------ ------ ------- ------- ------
<S> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENT OF
OPERATIONS DATA:
Revenues.................. $3,755 $8,724 $25,213 $41,950 $78,290
Gross profit.............. 1,296 2,478 6,237 9,678(1) 25,137
Reorganization and consol-
idation expenses (2)..... -- -- -- 2,122 6,897
Operating income (loss)... 289 176 (1,787) (7,632) (10,680)(3)
Net income (loss)......... 130 120 (1,551) (7,452) (12,086)
Net income (loss) per
share (4)................
Weighted average common
shares
outstanding (4)..........
OPERATING DATA:
Number of significant cli-
ents served
during period (5)........ N/A N/A 156 204 648
Number of proprietary
exhibitions at end of
period................... -- -- -- -- 18
Number of managed
exhibitions held during
period................... 1 5 5 10 16
Number of employees at end
of period................ 37 60 180 180 365
Number of offices at end
of period................ 1 3 16 18 24
</TABLE>
<TABLE>
<CAPTION>
AUGUST 31, 1996
---------------------------
ACTUAL AS ADJUSTED (6)
-------- -----------------
<S> <C> <C>
CONSOLIDATED BALANCE SHEET DATA:
Working capital................................... $(18,588)
Total assets...................................... 43,723
Total debt (7).................................... 16,935
Total stockholders' equity ....................... 8,408
</TABLE>
- --------
(1) Includes $1.1 million of accelerated amortization expense related to
capitalized video library costs.
(2) For fiscal 1995, includes a write-off of goodwill associated with a fiscal
1994 acquisition. For fiscal 1996, includes the write-off of impaired
assets and goodwill associated with certain of the Company's acquisitions
completed prior to fiscal 1995, a write down related to certain investments
and accruals related to consolidation of certain operations. See Notes 2
and 4 of Notes to Consolidated Financial Statements.
(3) In fiscal 1996, excluding (i) the reorganization and consolidation
expenses, (ii) a $1.3 million non-cash compensation expense related to the
grant of stock options with exercise prices below the deemed fair value and
(iii) $215,000 of expenses primarily associated with the write down of
certain property and equipment, the operating loss would have been $2.2
million.
(4) For a description of the computation of the number of shares and the net
income (loss) per share, see Note 2 of Notes to Consolidated Financial
Statements.
(5) Includes only clients whose annual billings were in excess of $25,000.
(6) Adjusted to give effect to the issuance of shares of Common Stock
offered by the Company hereby (at an assumed initial public offering price
of $ per share) and the use of the net proceeds therefrom as set forth
in "Use of Proceeds."
(7) Includes bank term debt, subordinated notes and outstanding borrowings on
lines of credit.
Except as otherwise specified, all information in this Prospectus assumes no
exercise of the Underwriters' over-allotment option. Except for the
Consolidated Financial Statements and as otherwise noted, all information in
this Prospectus has been adjusted to give effect to the conversion of all
outstanding shares of convertible preferred stock (the "Convertible Preferred
Stock") into 5,231,555 shares of Common Stock on the closing of this offering.
See "Description of Capital Stock" and Note 9 of Notes to Consolidated
Financial Statements. The Company was incorporated in Delaware in October 1996
and is the successor by merger to a Virginia corporation incorporated in 1990.
Unless the context otherwise requires, all references to the "Company" shall
mean Production Group International, Inc., all of its subsidiaries and its
predecessor. The Company's fiscal year ends August 31.
5
<PAGE>
RISK FACTORS
An investment in the shares of Common Stock offered hereby involves a high
degree of risk. In addition to other information in this Prospectus,
prospective investors should carefully consider the following factors in
evaluating an investment in the shares of Common Stock offered by this
Prospectus.
Limited Operating History; Losses. The Company was founded in November 1990
and has experienced operating and net losses for each of the last three fiscal
years. These losses were attributable to operating losses arising from the
Company's rapid expansion, costs associated with integrating acquisitions and
additions to the senior management team. In addition, over the past two fiscal
years, the Company has recognized a write-off of a portion of the excess
purchase price over net assets acquired, the write-down of certain investments
and non-cash compensation expense related to the grant of stock options at
exercise prices below deemed fair value. As of August 31, 1996, the Company
had an accumulated deficit of $21.2 million. The Company's limited operating
history makes prediction of its future financial performance difficult.
Although the Company has experienced substantial revenue growth in recent
years, no assurance can be given that the Company will sustain revenue growth
or achieve profitability on a quarterly or annual basis. Much of the Company's
growth has occurred as a result of recent acquisitions of companies with which
the Company has little operating experience. The Company is in the process of
implementing additional common financial controls for the acquired businesses
and therefore its ability to forecast results of these businesses is limited.
See "Historical Overview" and "Management's Discussion and Analysis of
Financial Condition and Results of Operations."
Fluctuations in Quarterly Operating Results; Episodic Nature of
Business. The Company has experienced significant quarterly fluctuations in
its operating results and anticipates such fluctuations in the future.
Quarterly revenues and operating results depend on the scheduling of business
communications and event management services and exhibitions that are episodic
in nature and therefore difficult to forecast. For example, some of the events
owned or produced by the Company do not occur on an annual or recurring basis.
Operating results may also fluctuate on a quarterly basis due to factors such
as the timing of clients' business communications projects, delays in or
cancellation of clients' projects and changes in the Company's revenue mix
among its offered services. The Company's revenue recognition policy for
certain of its business communications and event management services requires
that both costs and revenues are deferred until a project is completed.
Accordingly, the Company believes that period-to-period comparisons of its
results of operations may not be meaningful and should not be relied upon as
an indication of future performance. Typically, revenues, operating income and
net income for the Company's second fiscal quarter are lower than those of the
other quarters because traditionally fewer events are scheduled during the
winter season.
The Company owns and manages exhibitions and provides business
communications and event management services on a project-by-project basis and
has few long-term agreements with its clients through which the services of
the Company are retained on an on-going basis. Accordingly, there can be no
assurance that any client will retain the Company for future projects although
the Company may in the past have produced similar projects for the client on a
regular basis. Because the Company's staffing and other operating expenses are
based on anticipated revenue levels, a substantial portion of which are not
related to identified projects, delays in the scheduling of projects can cause
significant variations in the Company's operating results from quarter to
quarter. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations."
Management of Growth; Growth Through Acquisitions. Since its inception, the
Company has experienced rapid and significant growth, particularly through
acquisitions. This growth and the related changes in the Company's operations
have placed significant demands on the Company's management, administrative,
operational and financial resources. Many of the acquisitions were in
geographically dispersed locations and involved activities not previously part
of the Company's business. If the Company is unable to successfully integrate
acquired businesses or otherwise manage growth effectively, the Company's
results of operations and financial condition will be materially adversely
affected. The Company's future growth will depend on the Company's increased
penetration of existing accounts,
6
<PAGE>
development of new large accounts, diversification of services provided and
acquisitions of proprietary exhibitions. The Company has a limited history in
penetrating client accounts gained through acquisition. The planned growth of
the Company's client base and services can be expected to continue to place a
significant strain on the Company's management and operations. The Company
plans to continue to expand its business in part through acquisitions. There
can be no assurance that the Company will be able to successfully identify,
finance, complete or integrate acquisitions or that any acquisition,
particularly those involving exhibitions, new services or new markets, such as
those overseas, will perform as expected or will contribute significant
revenue or profits to the Company. The Company incurred $2.1 million and $6.9
million of reorganization and consolidation expenses in fiscal 1995 and 1996,
respectively, relating in part to the write-off of goodwill and the impairment
of certain assets associated with acquisitions completed in prior years. See
"Historical Overview" and "Management's Discussion and Analysis of Financial
Condition and Results of Operations."
Risks Associated with Future Acquisitions. An element of the Company's
growth strategy is to pursue strategic acquisitions of proprietary exhibitions
and special events and companies that provide business communications and
event management services. In the event the Company identifies an appropriate
acquisition candidate, there is no assurance that the Company will be able to
successfully compete against other potential acquirors, negotiate terms
favorable to the Company, finance such acquisition and successfully integrate
the acquired business into the Company's operations. The negotiation of
potential acquisitions as well as the integration of an acquired business may
cause diversions of management time and resources. There can be no assurance
that a given acquisition, whether or not consummated, would not materially
adversely affect the Company's business, results of operations and financial
condition. The Company may find it necessary to incur substantial
restructuring and consolidation costs with respect to future acquisitions. If
the Company proceeds with one or more significant acquisitions in which the
consideration consists of cash, a substantial portion of the Company's
available cash, including proceeds of this offering, could be used to
consummate the acquisitions. Further, to the extent such acquisitions involve
contingent consideration, the Company's payment of such consideration may have
an adverse effect on the Company's financial condition at the time of such
payment. The Company may also be required to seek funding from third party
sources. There can be no assurance that the Company will be able to secure
such financing on favorable terms, if at all. If the Company consummates one
or more significant acquisitions in which the consideration consists of stock,
stockholders of the Company could suffer significant dilution. The Company
does not receive management fees for events that it owns. The revenue
generated by owned events is dependent upon the Company's success in
attracting exhibitors and attendees. There can be no assurance that events
acquired by the Company will generate revenue in the near term or whether they
will become profitable. See "Use of Proceeds" and "Management's Discussion and
Analysis of Financial Condition and Results of Operations."
Dependence Upon Key Personnel; Recent Management Additions. The success of
the Company will depend to a significant extent upon the ability and
experience of its senior executives and other key employees and, in
particular, those of Mr. Mark Sirangelo, Chairman of the Board, President and
Chief Executive Officer. Although the Company has entered into employment
agreements with its senior executives and key employees, the loss of the
services of any of these employees could adversely affect the Company's
business, results of operations and financial condition. During fiscal 1996,
the Company hired several senior executives including an Executive Vice
President and the Chief Financial Officer. Because the Company's management
team has been assembled only recently, there can be no assurance that the
management team will be able to work together effectively to manage the
Company's operations and to implement the Company's business and growth
strategies. The Company also believes that its future success will depend in
large part upon its ability to attract and retain experienced personnel. There
can be no assurance that the Company will be successful in retaining its key
employees or that it can attract or retain the additional personnel necessary
to expand its operations. The Company has non-competition agreements with
certain of its key employees. However, courts are at times reluctant to
enforce such agreements. Failure to enforce such agreements may have a
material adverse effect on the Company's business, results of operations and
financial condition. See "Management."
7
<PAGE>
Competition. The events industry is highly competitive and fragmented. The
Company competes with owners, operators and managers of exhibitions and with
providers of business communications and event management services. The
Company competes for the ownership of exhibitions with a wide variety of
potential owners including divisions of several large, multinational
publishing companies. PGI competes for management of exhibitions with
divisions of multinational publishing companies as well as with small to mid-
sized companies specializing in managing exhibitions. PGI competes for
exhibitors and attendees with corporations and associations that offer
alternative exhibitions. For business communications and event management
services, the Company competes primarily with Caribiner International, Inc. as
well as with small, independent and generally regional firms typically
offering a limited range of services. Because there are few barriers to entry
with respect to certain aspects of the Company's business, the Company
anticipates that as the industry evolves, additional competitors with greater
resources than the Company will enter the market, or particular segments of
the market, thereby intensifying competition. Some of the Company's current
and potential competitors have longer operating histories and greater
financial, technical, sales, marketing and other resources than the Company.
There can be no assurance that the Company will be able to compete
successfully against its current and future competitors or that competition
will not have a material adverse effect on the Company's business, results of
operations and financial condition. See "Business--Competition."
Dependence on Third Party Contractors and Temporary Employees. The Company
uses third party contractors and temporary employees to perform certain
functions. The Company's success is highly dependent upon its ability to hire
contractors and temporary employees who can provide services in a cost-
effective and professional manner. The production of an event may require the
Company to recruit, hire, train and retain qualified temporary employees at an
accelerated rate and, in some circumstances, upon short notice. Certain of the
Company's events are held in locations where the Company faces competition
with respect to retaining these third party contractors and temporary
employees. The Company's inability to retain qualified third party contractors
and temporary employees in a cost effective manner may have a material adverse
effect upon the Company's business, results of operations and financial
condition. See "Business--Services."
International Activities. In fiscal 1996, approximately 9.3% of the
Company's revenues were generated from its subsidiary in the United Kingdom.
The Company plans to expand further its operations outside North America where
historically corporations and associations have not often used the types of
advanced services provided by the Company. In addition, the Company intends to
continue to replicate exhibitions on a worldwide basis. There can be no
assurance that the Company will be able to successfully continue to expand
this business. Risks inherent in the Company's international activities
include adverse developments in the foreign political and economic
environment, difficulties in staffing and managing foreign operations,
fluctuations in foreign exchange rates and potentially adverse tax
consequences. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations."
No Prior Public Market for Common Stock; Determination of Offering Price;
Possible Volatility of Stock Price. Prior to this offering, there has been no
public market for the Common Stock, and there can be no assurance that an
active market will develop or be sustained. The offering price of the Common
Stock will be determined by negotiations between the Company and the
Representatives of the Underwriters and may not be indicative of the market
prices at which the Common Stock will trade after the offering. See
"Underwriting" for a description of the factors to be considered in
determining the initial public offering price. The trading price of the Common
Stock could be subject to wide fluctuations in response to actual and
anticipated variations in quarterly operating results, announcements by the
Company or its competitors, changes in estimates by securities analysts of the
Company's future financial performance, general market conditions and other
factors. In addition, the stock market has from time to time experienced
significant price and volume fluctuations that are often unrelated to the
operating performance of particular companies.
8
<PAGE>
Lack of Dividends. The Company has never paid or declared any dividends on
its Common Stock and does not expect to pay such dividends in the foreseeable
future. The Company's credit facility with The First National Bank of Maryland
prohibits the Company from paying cash dividends without the Bank's consent.
See "Dividend Policy."
Dilution. Purchasers of the shares of Common Stock offered hereby will
experience immediate and substantial dilution in the net tangible book value
per share of their Common Stock. At the assumed initial public offering price
of $ per share, investors in this offering will incur dilution of $ per
share. To the extent that currently outstanding options (some of which have
nominal exercise prices) to purchase shares of the Company's Common Stock are
exercised, investors will experience substantial further dilution.
See "Dilution."
Effective Control by Management. Immediately following this offering, the
Company's executive officers and directors, together with entities affiliated
with such individuals, will beneficially own approximately % of the
outstanding Common Stock (approximately % if the Underwriters' over-allotment
option is exercised in full). As a result of such ownership concentration,
these stockholders will be able to control most matters requiring approval by
the Company's stockholders, including the election of directors. Such
concentration of ownership could have the effect of delaying or preventing a
change in control of the Company. See "Management" and "Principal
Stockholders."
Antitakeover Considerations. Certain provisions of the Company's Certificate
of Incorporation and By-laws, certain sections of the Delaware General
Corporation Law and the ability of the Board of Directors to issue shares of
preferred stock and to establish the voting rights, preferences and other
terms of such preferred stock, may have an antitakeover effect and may
discourage takeover attempts not first approved by the Board of Directors
(including takeovers that certain stockholders may deem to be in their best
interests). These provisions could delay or frustrate the removal of incumbent
directors or the assumption of control by stockholders and could discourage or
make more difficult a merger, tender offer or proxy contest. Such provisions
include, among other things, a classified Board of Directors serving staggered
three-year terms, the elimination of stockholder voting by written consent,
the vesting of exclusive authority in the Board of Directors to determine the
size of the Board and (subject to certain limited exceptions) to fill
vacancies thereon, and the vesting of exclusive authority in the Board of
Directors (except as otherwise required by law) to call special meetings of
stockholders. See "Description of Capital Stock--Delaware Law and Certain
Charter Provisions."
Shares Eligible for Future Sale; Registration Rights. Sales of substantial
amounts of Common Stock in the public market after this offering could
adversely affect the market price of the Common Stock and could impair the
Company's ability to obtain additional capital through an offering of its
equity securities. In addition to the shares of Common Stock offered
hereby ( shares if the Underwriters' overallotment option is exercised in
full), up to approximately shares of Common Stock owned by current
stockholders of the Company will be eligible for immediate sale in the public
market without restriction unless held by affiliates of the Company. An
additional shares will be eligible for sale in accordance with Rule 144
promulgated by the Securities and Exchange Commission ("Rule 144") beginning
90 days after the date of this Prospectus. However, holders of substantially
all of these shares have agreed not to offer, sell or otherwise dispose of any
shares of Common Stock owned by them for 180 days from the date of this
Prospectus without the prior written consent of Alex. Brown & Sons
Incorporated. The holders of an aggregate of 5,231,555 shares of Common Stock
have the right in certain circumstances to require the Company to register
their shares under the Securities Act of 1933, as amended (the "Securities
Act"), for resale to the public. See "Description of Capital Stock--
Registration Rights of Certain Holders" and "Shares Eligible for Future Sale."
The Company also intends to file within 90 days following the date of this
Prospectus a registration statement covering shares of its Common Stock
reserved for issuance under its 1995 Stock Plans. As of December 15, 1996,
there were options outstanding under the 1995 Stock Plans and outside the
plans to
9
<PAGE>
purchase 1,034,604 shares of Common Stock at a weighted average purchase price
of $1.23 per share. Substantially all of the shares of Common Stock issuable
upon exercise of stock options will be subject to contractual lock-up
agreements with the Underwriters restricting sales of such shares for 180 days
following the date of this Prospectus. See "Shares Eligible for Future Sale."
10
<PAGE>
HISTORICAL OVERVIEW
PGI has pursued a number of strategic acquisitions to create a vertically-
integrated business communications and event management structure to serve the
Company's clients and PGI-owned events. Prior to fiscal 1996, the Company
acquired a number of business communications and event management companies in
key regions throughout the United States. In fiscal 1996, the Company
continued to acquire business communications and event management companies
and also made several strategic acquisitions of proprietary exhibitions and
companies that own and manage exhibitions and special events. Late in fiscal
1995 and continuing through fiscal 1996, the Company began consolidating
operations and administrative functions and closed certain unprofitable and
redundant locations. In addition, the Company invested in the personnel and
began to implement the systems necessary to support a larger organization by
hiring several senior executives and completing the first phase of installing
networked finance, accounting and MIS systems.
The Company's acquisitions of business communications and event management
companies prior to 1996 were intended to add geographic coverage to the
Company's existing businesses and to broaden the Company's service offerings.
From fiscal 1993 through fiscal 1995, PGI acquired five business
communications and event management companies, many of which specialized in
the on-site logistical aspects of the business communications and event
management industry. These businesses had offices in Boston, Dallas, Las
Vegas, New York, Orlando, Phoenix, San Diego, San Francisco and Washington,
D.C., and other locations that have since been consolidated with the Company's
operations.
During fiscal 1996, the Company continued to build its business
communications and event management infrastructure. In January 1996, the
Company acquired Encore Events Inc., a Palm Springs logistical services
company. In March 1996 (effective in January 1996), the Company acquired Ray
Bloch Productions, Inc., a leading business communications company
specializing in event production with operations in New York City, San Mateo,
Washington, D.C. and sales offices in other cities. In April 1996, the Company
acquired Timberline Productions, Inc., a Phoenix-based business communications
company specializing in event production, and in July 1996, PGI acquired Epic
Enterprises of Nevada, Inc., a Las Vegas-based company specializing in event
logistics.
Also in fiscal 1996, the Company began to implement its strategy of
acquiring proprietary exhibitions and during that year acquired two exhibition
companies and two proprietary exhibitions. In September 1995, the Company
acquired Spearhead Exhibitions, Ltd., an owner of 11 international
exhibitions, located in the United Kingdom, and in July 1996 (effective in
February 1996), the Company acquired Epic Enterprises, Inc., an owner of four
exhibitions and manager of eight exhibitions with an office in San Diego. In
June 1996, the Company purchased the two Destinations Showcase exhibitions
owned by the International Association of Convention and Visitor Bureaus
("IACVB") and entered into a ten year cooperative agreement under which the
IACVB continues to sponsor the events. After this acquisition, the Company
created a third Destinations Showcase exhibition by replicating the existing
exhibitions. In connection with its expansion into the proprietary exhibition
business, the Company opened offices in Hamburg (Germany) and Baku
(Azerbaijan). See "Business--Case Studies." In addition, in June 1996, PGI
acquired Regency Productions, Inc. ("Regency") from Hyatt Corporation. Regency
is a Chicago-based special event company specializing in sports and
entertainment events. Following the acquisition of Regency, Mr. Darryl
Hartley-Leonard, formerly the Chairman of the Board of Directors of Hyatt
Hotels Corporation, joined the Company as Vice Chairman of its Board of
Directors.
The Company paid an aggregate purchase price of approximately $27.1 million
for the businesses and exhibitions it acquired during fiscal 1996, excluding
contingent consideration. Consideration for the Company's acquisitions has
typically involved a combination of cash, promissory notes and contingent
payments. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations" and Note 4 of Notes to Consolidated Financial
Statements. The Company may, as it deems appropriate, use Common Stock as
consideration in future acquisitions.
11
<PAGE>
USE OF PROCEEDS
The net proceeds from the sale of the shares of Common Stock offered by
the Company hereby (at an assumed public offering price of $ per share,
after deducting underwriting discounts and commissions and estimated offering
expenses) are estimated to be approximately $ million ($ million if
the Underwriters' over-allotment option is exercised in full). A substantial
portion of the net proceeds are expected to be used to finance the expansion
of the Company's business, including primarily acquisitions, in accordance
with its acquisition strategy. To the extent that the proceeds are not used
for acquisitions, such proceeds will be used for general corporate purposes
and for working capital needs. The amount and timing of such uses will vary
depending on the availability of acquisition opportunities. Pending such uses,
the net proceeds will be invested in short-term investment grade securities.
The Company continues to evaluate potential acquisitions and negotiate with
several potential acquisition candidates. While the Company is not currently a
party to any agreements with respect to any such acquisitions, it is possible
that an agreement in principle or a definitive agreement as to one or more
acquisitions will be executed prior to the consummation of this offering.
There can be no assurance that any of these or any other acquisitions can be
consummated on terms favorable to the Company, if at all.
DIVIDEND POLICY
The Company has never paid cash dividends on its Common Stock. The Company's
credit facility with The First National Bank of Maryland prohibits the Company
from paying cash dividends without the Bank's consent. See Note 5 of Notes to
Consolidated Financial Statements. The Company does not anticipate paying cash
dividends in the foreseeable future.
12
<PAGE>
DILUTION
The pro forma net tangible book value of the Company's Common Stock as of
August 31, 1996, was $(16.9) million, or $(2.93) per share. Pro forma net
tangible book value per share represents the amount of the Company's
stockholders' equity, less intangible assets, divided by the number of shares
of Common Stock outstanding (assuming conversion of all outstanding shares of
Convertible Preferred Stock into 5,231,555 shares of Common Stock upon
completion of the offering).
Net tangible book value dilution per share represents the difference between
the amount per share paid by purchasers of the shares of Common Stock in
the offering made hereby and the pro forma net tangible book value per share
of Common Stock immediately after completion of this offering. After giving
effect to the sale of shares of Common Stock offered by the Company hereby
at an assumed initial public offering price of $ per share and application
of the estimated net proceeds therefrom as set forth in "Use of Proceeds," the
pro forma net tangible book value of the Company as of August 31, 1996 would
have been $ million, or $ per share. This represents an immediate increase
in the pro forma net tangible book value of $ per share to existing
stockholders and an immediate dilution in pro forma net tangible book value of
$ per share to purchasers of Common Stock in this offering, as illustrated
in the following table:
<TABLE>
<S> <C> <C>
Assumed public offering price per share............................ $
Pro forma net tangible book value per share at August 31, 1996... $(2.93)
Increase per share attributable to new investors.................
------
Pro forma net tangible book value per share after the offering.....
---
Pro forma net tangible book value dilution per share to new invest-
ors............................................................... $
===
</TABLE>
The following table sets forth as of August 31, 1996, the differences
between the existing stockholders and the purchasers of Common Stock in the
offering with respect to the number of shares purchased from the Company, the
total consideration paid and the average price per share paid (based upon an
assumed initial public offering price of $ per share):
<TABLE>
<CAPTION>
TOTAL
SHARES PURCHASED CONSIDERATION AVERAGE
----------------- ------------------- PRICE PER
NUMBER PERCENT AMOUNT PERCENT SHARE
--------- ------- ----------- ------- ---------
<S> <C> <C> <C> <C> <C>
Existing stockholders........... 5,628,123 $28,213,000 $5.01
New investors...................
--------- --- ----------- ---
Total......................... 100% 100%
========= === =========== ===
</TABLE>
The foregoing table assumes no exercise of any outstanding stock options or
the Underwriters' over-allotment option. As of August 31, 1996, there were
outstanding options to purchase 1,025,216 shares of Common Stock at a weighted
average exercise price of approximately $1.17 per share, of which
732,902 shares are fully vested and exercisable as of the date of this
Prospectus. See "Underwriting" for information concerning the Underwriters'
over-allotment option. To the extent that the outstanding options or any
options granted in the future are exercised, there will be further dilution to
new investors. See "Management--Employee Stock and Other Benefit Plans" and
Note 9 of Notes to Consolidated Financial Statements.
13
<PAGE>
CAPITALIZATION
The following table sets forth the capitalization of the Company as of
August 31, 1996 (i) on an actual basis and (ii) as adjusted to give effect to
the issuance of 154,432 shares of Convertible Preferred Stock in September
1996, the conversion of all of the Company's outstanding shares of Convertible
Preferred Stock into Common Stock upon the closing of this offering and the
issuance of shares of Common Stock at an assumed initial public offering
price of $ per share in this offering and the application of the net
proceeds therefrom.
<TABLE>
<CAPTION>
AUGUST 31, 1996
--------------------
ACTUAL AS ADJUSTED
------- -----------
(IN THOUSANDS)
<S> <C> <C> <C>
Short term debt:
Current portion of notes payable ................... $11,294
Bank lines of credit................................ 3,000
------- ----
Total short-term debt............................. $14,294
======= ====
Notes payable, less current portion................... $ 2,641
Stockholders' equity:
Preferred Stock, $.01 par value, 5,000,000 shares
authorized; no shares issued and outstanding actual
and as adjusted....................................
Convertible Preferred Stock, $.01 par value,
5,746,407 shares authorized; 5,077,123 shares
issued and outstanding actual; no shares
outstanding as adjusted (1)........................ 51
Common Stock, $.01 par value, 30,000,000 shares
authorized; 551,000 shares issued and outstanding
actual; shares issued and outstanding as
adjusted (1)....................................... 5
Additional paid-in capital.......................... 29,608
Unearned stock compensation......................... (133)
Foreign currency translation adjustment............. 119
Accumulated deficit................................. (21,242)
------- ----
Total stockholders' equity........................ 8,408
------- ----
Total capitalization............................ $11,049
======= ====
</TABLE>
- --------
(1) Excludes (i) 1,025,216 shares of Common Stock issuable upon exercise of
stock options at August 31, 1996 of which 732,902 shares are exercisable
at the date of this prospectus at a weighted average exercise price of
$1.17 per share, and (ii) 45,783 additional shares of Common Stock
reserved for future issuance at August 31, 1996 under the 1995 Stock
Plans. Subsequent to August 31, 1996, the Board of Directors increased by
250,000 the number of shares available under the 1995 Stock Plans, adopted
the Directors' Plan and issued stock options to purchase 3,000 shares of
Common Stock at an exercise price of $5.00 per share. See "Management--
Employee Stock and Other Benefit Plans" and Note 9 of Notes to
Consolidated Financial Statements.
14
<PAGE>
SELECTED CONSOLIDATED FINANCIAL AND OPERATING DATA
(IN THOUSANDS, EXCEPT PER SHARE AND OPERATING DATA)
The consolidated statement of operations data set forth below for fiscal
years ended August 31, 1994, 1995 and 1996 and consolidated balance sheet data
as of August 31, 1995 and 1996 (except pro forma amounts) have been derived
from the consolidated financial statements of the Company which have been
audited by Ernst & Young LLP and are included elsewhere in this Prospectus.
The consolidated financial data for fiscal 1992 and 1993 and the consolidated
balance sheet as of August 31, 1994 are derived from unaudited consolidated
financial statements of the Company not included herein. These statements
include all adjustments that the Company considers necessary for a fair
presentation of the information set forth herein. The selected financial data
set forth below are qualified in their entirety by, and should be read in
conjunction with, the Consolidated Financial Statements, the related Notes
thereto, the Pro Forma Statement of Operations and "Management's Discussion
and Analysis of Financial Condition and Results of Operations" included
elsewhere in this Prospectus.
<TABLE>
<CAPTION>
FISCAL YEAR ENDED AUGUST 31,
---------------------------------------------
1992 1993 1994 1995 1996
------ ------ ------- ------- --------
CONSOLIDATED STATEMENT OF
OPERATIONS DATA: (UNAUDITED)
<S> <C> <C> <C> <C> <C>
Revenues..................... $3,755 $8,724 $25,213 $41,950 $ 78,290
Cost of services............. 2,459 6,246 18,976 32,272 (1) 53,153
------ ------ ------- ------- --------
Gross profit................. 1,296 2,478 6,237 9,678 25,137
Selling and operating ex-
penses...................... 685 1,647 6,474 11,792 22,328 (2)
Corporate general and admin-
istrative expenses.......... 322 655 1,458 3,167 5,923 (3)
Amortization of acquisition
costs....................... -- -- 92 229 669
Reorganization and consolida-
tion expenses (4)........... -- -- -- 2,122 6,897
------ ------ ------- ------- --------
Operating income (loss)...... 289 176 (1,787) (7,632) (10,680)(5)
Interest expense (income),
net......................... 1 -- (14) (39) 935
Other income (expense)....... -- (9) 103 24 245
------ ------ ------- ------- --------
Income (loss) before minority
interests and income taxes.. 288 167 (1,670) (7,569) (11,370)
Minority interests of consol-
idated subsidiaries......... -- -- 101 (117) --
Income tax expense (benefit). 158 47 (220) -- 716
------ ------ ------- ------- --------
Net income (loss)............ $ 130 $ 120 $(1,551) $(7,452) $(12,086)
====== ====== ======= ======= ========
Net income (loss) per share
(6).........................
Weighted average common
shares
outstanding (6).............
OPERATING DATA:
Number of significant clients
served during period (7).... N/A N/A 156 204 648
Number of proprietary exhibi-
tions at end of period...... -- -- -- -- 18
Number of managed exhibitions
held during period.......... 1 5 5 10 16
Number of employees at end of
period...................... 37 60 180 180 365
Number of offices at end of
period...................... 1 3 16 18 24
CONSOLIDATED BALANCE SHEET
DATA (AT YEAR END):
Working capital (deficit).... $ (228) $4,214 $(3,308) $ (470) $(18,588)
Total assets................. 454 (397) 11,847 15,238 43,723
Total debt (8)............... 16 1,314 2,341 2,085 16,935
Total stockholders' equity... (112) 957 (2,321) 5,427 8,408
</TABLE>
- --------
(1) Includes $1.1 million of accelerated amortization expense related to
capitalized video library costs.
(2) Includes approximately $215,000 of expenses primarily associated with the
write down of certain property and equipment.
(3) Includes a $1.3 million non-cash compensation expense related to the grant
of stock options at exercise prices below deemed fair value.
(4) Includes for fiscal 1995, a write-off of goodwill associated with a fiscal
1994 acquisition. For fiscal 1996, includes the write-off of impaired
assets and goodwill associated with certain of the Company's acquisitions
completed prior to fiscal 1995, a write down related to certain
investments in proprietary events and accruals related to the
consolidation of certain operations. See Notes 2 and 4 of Notes to
Consolidated Financial Statements.
(5) In fiscal 1996, excluding the reorganization and consolidation expenses
and the expenses referred to in notes (2) and (3), the operating loss
would have been $2.2 million.
(6) For a description of the computation of the number of shares and the net
income (loss) per share, see Note 2 of Notes to Consolidated Financial
Statements.
(7) Includes only clients whose annual billings were in excess of $25,000.
(8) Includes bank debt, subordinated notes and outstanding borrowings on lines
of credit.
15
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
PGI has completed a number of strategic acquisitions to create a vertically-
integrated business communications and event management infrastructure to
serve the Company's clients and PGI-owned exhibitions and special events.
Prior to fiscal 1996, the Company acquired a number of business communications
and event management companies in key markets throughout the United States in
order to add geographic coverage and to broaden its service offerings. In
fiscal 1996, the Company continued to acquire business communications and
event management companies and began to implement its strategy of acquiring
proprietary exhibitions with its purchase of three companies that own and
manage exhibitions and special events and two proprietary exhibitions. See
"Historical Overview."
The Company's revenues have increased to $78.3 million in fiscal 1996 from
$25.2 million in fiscal 1994, a compound annual growth rate of 76.2%. The
Company's gross margins increased to 32.1% in fiscal 1996 from 24.7% in fiscal
1994. The improvement in gross margins is primarily attributable to the
increase in the percentage of the Company's revenues derived from the higher
margin exhibition business. Between fiscal 1994 and fiscal 1996, the
percentage of the Company's revenues generated by its exhibition business
increased from 4.1% to 17.0%.
Beginning in late fiscal 1995 and continuing through fiscal 1996, the
Company has been consolidating operations and administrative functions and has
closed certain unprofitable or redundant field offices. The Company has also
invested in the personnel and systems necessary to support a larger
organization by hiring a number of senior executives and by completing the
first phase of installing networked finance, accounting and MIS systems. The
Company's results of operations for fiscal 1996 reflect the expenses
associated with these activities.
In fiscal 1996, the Company recognized approximately $6.9 million in
reorganization and consolidation expenses. These expenses included the write-
off of impaired assets and goodwill associated with certain acquisitions
completed prior to fiscal 1995, a write down related to certain investments in
proprietary events and accruals related to the consolidation of certain
operations. In fiscal 1995, the Company recognized approximately $2.1 million
in reorganization and consolidation expenses for the write-off of goodwill
from an acquisition which occurred in fiscal 1994.
The Company recognizes revenues from short-term business communications and
event management projects (those under six months) on a completed contract
basis. The Company recognizes revenues from longer-term business
communications and event management projects and from the ownership and
management of exhibitions on a percentage of completion basis. Under the
completed contract method, revenues and costs are recognized when a project is
completed. Under the percentage of completion method, the Company recognizes
revenues in proportion to the ratio that costs incurred to date bear to the
total anticipated costs. Provisions for anticipated losses are made in the
period in which they first become determinable. Revenues from the Company's
significant international operations are generally denominated in U.S. dollars
or British pounds.
The Company experiences quarterly fluctuations in revenues, operating income
and net income as a result of several factors, including the timing of
exhibitions and events, the timing of business communications and event
management projects, the non-recurring nature of certain projects and changes
in the Company's revenue mix. Revenues tend to be lower in the second fiscal
quarter because traditionally fewer events are scheduled during the winter
season. The Company's quarterly results are also subject to fluctuations in
part because of the Company's use of the completed contract method to
recognize its shorter term business communication and event management
services revenues and expenses. See "Risk Factors--Fluctuations in Quarterly
Operating Results; Episodic Nature of Business."
16
<PAGE>
The Company accounts for its acquisitions under the purchase method of
accounting, with the goodwill incurred from acquisitions being amortized over
periods ranging from 15 to 40 years. The Company has often structured its
acquisitions with contingent payment provisions. These contingent payments are
generally accounted for as additional purchase price when earned. See Note 4
of Notes to Consolidated Financial Statements.
As of August 31, 1996, the Company had net operating loss carryforwards
("NOLs") of approximately $5.0 million, expiring at various dates through
2011.
RESULTS OF OPERATIONS
The following table presents for the periods indicated certain statement of
operations data as a percentage of the Company's revenues:
<TABLE>
<CAPTION>
FISCAL YEAR ENDED AUGUST 31,
----------------------------
1994 1995 1996
-------- -------- --------
<S> <C> <C> <C>
Revenues.................................. 100.0% 100.0% 100.0%
Cost of services.......................... 75.3 76.9 67.9
------- ------- -------
Gross profit............................ 24.7 23.1 32.1
Selling and operating expenses............ 25.6 28.1 28.5
Corporate general and administrative ex-
penses................................... 5.8 7.6 7.6
Amortization of acquisition costs......... 0.4 0.5 0.8
Reorganization and consolidation expenses. -- 5.1 8.8
------- ------- -------
Operating income (loss)................. (7.1) (18.2) (13.6)
Interest expense (income), net............ (0.1) (0.1) 1.2
Other income (expense).................... 0.4 0.1 0.3
------- ------- -------
Income (loss) before minority interests
and income taxes....................... (6.6) (18.0) (14.5)
Minority interests of consolidated subsid-
iaries................................... 0.5 (0.2) --
Income tax expense (benefit).............. (0.9) 0.0 0.9
------- ------- -------
Net income (loss)....................... (6.2)% (17.8)% (15.4)%
======= ======= =======
</TABLE>
FISCAL YEAR 1996 COMPARED TO FISCAL YEAR 1995
Revenues. Revenues increased $36.3 million, or 86.6%, to $78.3 million in
fiscal 1996 from $42.0 million in fiscal 1995. This change in revenues was due
to (i) $34.6 million in revenues from businesses acquired during fiscal 1996,
(ii) approximately $3.1 million in revenues related to a full year of revenues
from acquisitions made during fiscal 1995 and (iii) a decline in revenues of
approximately $1.3 million, or 3.2%, from operations owned by the Company
prior to fiscal 1995. The decrease in revenues from operations owned by the
Company prior to fiscal 1995 was attributable to the closures of certain
unprofitable and redundant locations. Excluding revenues from these closed
offices in both fiscal 1995 and fiscal 1996, revenues from operations owned by
the Company prior to fiscal 1995 would have increased by approximately $3.4
million, or 9.4%. As a percentage of total revenues, revenues from exhibitions
owned or managed by the Company increased to 17.0% in fiscal 1996 from 3.4% in
fiscal 1995.
Gross profit. Cost of services consists of direct costs related to projects
including production costs, certain labor costs and third-party subcontractor
costs. Gross profit increased $15.4 million, or 159.7%, to $25.1 million in
fiscal 1996 from $9.7 million in fiscal 1995. As a percentage of revenues,
gross profit increased to 32.1% in fiscal 1996 from 23.1% in fiscal 1995. This
increase was due primarily to the increased percentage of the Company's
revenues being generated from its higher margin exhibition
17
<PAGE>
business and, in part, to increased purchasing power with vendors and
contractors due to the Company's larger scale. Excluding the accelerated
amortization expense related to capitalized video library costs, gross profit
would have been $10.8 million in fiscal 1995, or 25.7% of revenues. If the
Company's strategy of increasing the percentage of revenues generated from
owned and managed exhibitions is successful, its gross profit margins should
increase accordingly.
Selling and operating expenses. Selling and operating expenses consist
primarily of payroll, administrative, sales commissions and occupancy expenses
and equipment depreciation at the Company's field operations. Selling and
operating expenses increased $10.5 million, or 89.3%, to $22.3 million in
fiscal 1996 from $11.8 million in fiscal 1995 as a result of the Company's
expanded operations and acquisition activities. As a percentage of revenues,
these expenses increased to 28.5% in fiscal 1996 from 28.1% in fiscal 1995,
reflecting the Company's write down of certain property and equipment.
Excluding these expenses (which totalled approximately $215,000), selling and
operating expenses as a percentage of total revenues would have been 28.2% in
fiscal 1996.
Corporate general and administrative expenses. Corporate general and
administrative expenses are central expenses that are incurred to support the
Company's infrastructure, including corporate management, headquarters
occupancy and centralized administrative functions such as finance and
accounting, human resources, marketing and MIS. Corporate general and
administrative expenses increased by $2.7 million, or 87.0%, to $5.9 million
in fiscal 1996 from $3.2 million in fiscal 1995, primarily reflecting the
increase in the corporate staff required to manage a significantly larger
organization and a $1.3 million non-cash compensation expense related to the
grant of stock options whose exercise prices were below deemed fair value. As
a percentage of revenues, these expenses were 7.6% in fiscal 1996 and in
fiscal 1995. Excluding the compensation expense related to the grant of stock
options, corporate general and administrative expenses would have increased by
$1.4 million in fiscal 1996 from fiscal 1995 and would have been 5.9% of
revenues. The Company anticipates that in the future corporate general and
administrative expenses should decline as a percentage of revenues as its
revenue base grows.
Amortization of acquisition costs. Amortization of acquisition costs
increased $440,000, or 192.1%, to $669,000 in fiscal 1996 from $229,000 in
fiscal 1995. As a percentage of revenues, amortization of acquisition costs
increased to 0.8% in fiscal 1996 from 0.5% in fiscal 1995. This increase
resulted from higher goodwill incurred in connection with the acquisitions
consummated during fiscal 1996.
Reorganization and consolidation expenses. In fiscal 1996, the Company wrote
off goodwill of $2.5 million associated with acquisitions that occurred during
fiscal 1993 and 1994. Goodwill associated with Washington, Inc. ("WINC"), an
event management company, accounted for the primary portion of the write off.
The write-offs were in accordance with the Company's goodwill impairment
policy. The episodic nature of WINC's business and lack of long-term contracts
has contributed to operating losses and makes revenue projections greater than
one year difficult to predict with dependable accuracy. Given WINC's
historical operating losses, the episodic nature of its business, the lack of
expectations for future profitability and the estimated undiscounted cash
flows analysis to assess the recoverability of the goodwill balance, the
Company determined that the future results would not support the
recoverability of the remaining goodwill balance, and, therefore, wrote down
the goodwill balance to the estimated fair value. See Note 2 of Notes to
Consolidated Financial Statements.
During fiscal 1996, the Company wrote off assets in the amount of $1,731,000
related to certain investments. The write-off primarily consisted of $463,000
related to an agreement for concert ticket sales, $458,000 related to a
theatrical production, and $278,000 related to the acquisition of an
exposition business. The Company has realized insignificant income and costs
related to these three investments.
18
<PAGE>
Also during fiscal 1996, the Company recorded certain accruals related to the
consolidation of unprofitable or redundant offices. These costs consist of
lease cancellation charges and the write-off of leasehold improvements. See
Note 2 of Notes to Consolidated Financial Statements.
Operating income (loss). Operating loss increased $3.1 million to $10.7
million in fiscal 1996 from a loss of $7.6 million in fiscal 1995. Excluding
(i) $6.9 million of reorganization and consolidation expenses, (ii) $215,000 of
selling and operating expenses and (iii) $1.3 million of corporate general and
administrative expenses, operating loss for fiscal 1996 would have been $2.2
million.
Interest expense (income), net. Net interest expense increased by $974,000 to
$935,000 in fiscal 1996 from interest income of $39,000 in fiscal 1995, due
primarily to increases in seller financing assumed in connection with the
acquisitions consummated in fiscal 1995 and fiscal 1996 and higher average debt
levels under the Company's working capital and acquisition lines of credit.
Other income. Other income consists primarily of management fees from
affiliates. Other income increased $221,000 to $245,000 in fiscal 1996 from
$24,000 in fiscal 1995.
Net income (loss). Net loss of $12.1 million in fiscal 1996 compares to a net
loss of $7.5 million in fiscal 1995. The Company has NOLs of $5.0 million
expiring beginning in 2011.
FISCAL YEAR 1995 COMPARED TO FISCAL YEAR 1994
Revenues. Revenues increased $16.8 million, or 66.4%, to $42.0 million in
fiscal 1995 from $25.2 million in fiscal 1994. This increase in revenues
included (i) $1.3 million in revenues from an acquisition completed during
fiscal 1995, (ii) $15.1 million related to a full year of revenues from
acquisitions made during fiscal 1994 and (iii) $304,000, or an increase of
1.2%, of revenues from operations owned prior to fiscal 1994.
Gross profit. Gross profit increased $3.5 million, or 55.2%, to $9.7 million
in fiscal 1995 from $6.2 million in fiscal 1994. As a percentage of revenues,
gross profit decreased to 23.1% in fiscal 1995 from 24.7% in fiscal 1994, due
primarily to an accelerated amortization expense of $1.1 million in 1995
related to capitalized video library costs. Excluding the accelerated
amortization expense related to capitalized video library costs, gross profit
would have been $10.8 million in fiscal 1995, or 25.7% of revenues due to an
increase in certain higher margin business in the business communication and
event management operations. As a percentage of revenues, revenues from managed
exhibitions accounted for 3.4% of revenues in fiscal 1995 as compared to 4.1%
of revenues in fiscal 1994.
Selling and operating expenses. Selling and operating expenses increased $5.3
million, or 82.1%, to $11.8 million in fiscal 1995 from $6.5 million in fiscal
1994, primarily as a result of additional expenses from acquired operations.
These expenses increased as a percentage of revenues to 28.1% in fiscal 1995
from 25.6% in fiscal 1994. This increase resulted primarily from a full year of
selling and operating expenses associated with acquisitions completed during
fiscal 1994.
Corporate general and administrative expenses. Corporate general and
administrative expenses increased by $1.7 million, or 117.3%, to $3.2 million
in fiscal 1995 from $1.5 million in fiscal 1994, due primarily to the hiring of
several management and administrative personnel and the investment in MIS
required to support a larger company. As a percentage of revenues, corporate
general and administrative expenses increased to 7.6% in fiscal 1995 from 5.8%
in fiscal 1994, because the Company built a larger corporate infrastructure in
anticipation of accelerated acquisition activity and internal growth.
Amortization of acquisition costs. Amortization of acquisition costs
increased $137,000, or 149.3%, to $229,000 in fiscal 1995 from $92,000 in
fiscal 1994, as a result of an acquisition made in fiscal 1995 and a full
period of amortization costs related to acquisitions made during fiscal 1994.
19
<PAGE>
Reorganization and consolidation expenses. In fiscal 1995, the Company wrote
off goodwill of $2.1 million associated with the Safaris Events, Inc.
("Safaris") acquisition completed during fiscal 1994 in accordance with the
Company's goodwill impairment policy. Subsequent to the acquisition, the
Company closed six of Safaris' offices considered to be unprofitable. These
factors contributed significantly to the decreased revenue base and the
operating losses recognized since the acquisition. The episodic nature of
Safaris' business and the lack of long-term contracts has contributed to
operating losses and makes revenue projections greater than one year difficult
to predict with dependable accuracy. Given Safaris' historical operating
losses, the episodic nature of its business, the lack of expectations for
future profitability, the closing of the unprofitable offices and the
estimated undiscounted cash flows analysis to assess the recoverability of the
goodwill balance, the Company determined that the future results would not
support the recoverability of the remaining goodwill balance, and, therefore,
wrote down the goodwill balance to the estimated fair value. See Note 2 of
Notes to Consolidated Financial Statements.
Operating income (loss). Operating loss increased $5.8 million to
$7.6 million in fiscal 1995 from $1.8 million in fiscal 1994. Excluding the
impact of $2.1 million of reorganization and consolidation expenses incurred
in fiscal 1995 associated with the write-off of goodwill from an acquisition
completed in fiscal 1993, operating loss in fiscal 1995 would have been $5.5
million.
Interest expense (income), net. Net interest income increased by $26,000 to
$39,000 in fiscal 1995 from $13,000 in fiscal 1994.
Other income. Other income decreased $79,000 to $24,000 in fiscal 1995 from
$103,000 in fiscal 1994.
Net income (loss). Net loss increased by $5.9 million to $7.5 million in
fiscal 1995 from $1.6 million in fiscal 1994.
20
<PAGE>
QUARTERLY RESULTS OF OPERATIONS AND SEASONALITY
The following tables set forth certain unaudited consolidated statement of
operations data for each of the four quarters in fiscal 1995 and fiscal 1996.
The unaudited consolidated financial statements have been prepared on the same
basis as the audited consolidated financial statements contained herein and
include all adjustments that the Company considers necessary for a fair
presentation of such information when read in conjunction with the Company's
Consolidated Financial Statements and Notes thereto appearing elsewhere in
this Prospectus. The Company believes that quarter-to-quarter comparisons of
its financial results are not necessarily meaningful and should not be relied
upon as an indication of future performance. See "Risk Factors--Fluctuations
in Quarterly Operating Results; Episodic Nature of Business." Amounts shown
are in thousands, except per share data.
<TABLE>
<CAPTION>
THREE MONTHS ENDED
----------------------------------------------
NOVEMBER 30, FEBRUARY 29, MAY 31, AUGUST 31,
1995 1996 1996 1996
------------ ------------ ------- ----------
<S> <C> <C> <C> <C>
Revenues......................... $15,612 $15,275 $24,165 $23,238
Cost of services................. 11,248 10,234 16,491 15,180
------- ------- ------- -------
Gross profit.................... 4,364 5,041 7,674 8,058
Selling and operating expenses
(1)............................. 4,065 5,794 5,979 6,489
Corporate general and
administrative expenses (2)..... 1,101 1,099 1,183 2,540
Amortization of acquisition
costs........................... 108 138 197 226
Reorganization and consolidation
expenses........................ -- -- -- 6,897
------- ------- ------- -------
Operating income (loss) (3)..... (910) (1,990) 315 (8,094)
Interest expense (income), net... 91 212 251 381
Other income (expense)........... 59 120 48 18
------- ------- ------- -------
Income (loss) before minority
interests and income taxes..... (942) (2,082) 112 (8,457)
Minority interests of
consolidated subsidiaries....... -- -- -- --
Income tax expense (benefit)..... 117 182 242 175
------- ------- ------- -------
Net income (loss)............... $(1,059) $(2,264) $ (130) $(8,632)
======= ======= ======= =======
Net income (loss) per share.....
Weighted average common shares
outstanding.....................
<CAPTION>
THREE MONTHS ENDED
----------------------------------------------
NOVEMBER 30, FEBRUARY 28, MAY 31, AUGUST 31,
1994 1995 1995 1995
------------ ------------ ------- ----------
<S> <C> <C> <C> <C>
Revenues......................... $11,818 $ 7,916 $12,068 $10,149
Cost of services................. 9,520(4) 5,905 9,275 7,572
------- ------- ------- -------
Gross profit.................... 2,298 2,011 2,793 2,577
Selling and operating expenses... 2,353 2,622 3,077 3,740
Corporate general and
administrative expenses......... 578 814 894 882
Amortization of acquisition
costs........................... 53 53 53 71
Reorganization and consolidation
expenses........................ -- -- -- 2,122
------- ------- ------- -------
Operating income (loss)......... (686) (1,478) (1,231) (4,238)
Interest expense (income), net... 16 20 (54) (21)
Other income (expense)........... 6 6 6 6
------- ------- ------- -------
Income (loss) before minority
interests and income taxes..... (696) (1,492) (1,171) (4,211)
Minority interests of
consolidated subsidiaries....... 10 (84) 5 (48)
Income tax expense (benefit)..... -- -- -- --
------- ------- ------- -------
Net income (loss)............... $ (706) $(1,408) $(1,176) $(4,163)
======= ======= ======= =======
Net income (loss) per share.....
Weighted average common shares
outstanding.....................
</TABLE>
- -------
(1) Excluding the write down of certain fixed assets, selling and operating
expenses would have been $4,065, $5,579, $5,979 and $6,489 for the four
fiscal 1996 quarters, respectively.
(2) Excluding the non-cash compensation expense related to the granting of
stock options, corporate general and administrative expenses would have
been $1,101, $1,099, $1,183 and $1,221 for the four fiscal 1996 quarters,
respectively.
(3) Excluding (i) the reorganization and consolidation expenses and (ii) the
expenses described in notes (1) and (2), operating income (loss) would
have been ($910) for the three months ended November 30, 1995, ($1,775)
for the three months ended February 29, 1996, $315 for the three months
ended May 31, 1996 and $122 for the three months ended August 31, 1996.
(4) Includes $1.1 million of accelerated amortization expense related to
capitalized video library costs.
21
<PAGE>
The Company has experienced significant quarterly fluctuations in its
operating results and anticipates such fluctuations in the future. Typically,
revenues, operating income and net income for the Company's second quarter are
lower than those of the other quarters because traditionally fewer events are
scheduled during the winter season. Accordingly, the Company believes that
period-to-period comparisons of its results of operations may not be
meaningful and should not be relied upon as an indication of future
performance.
Quarterly revenues and operating results depend on the scheduling of events
and communications services that are episodic in nature and therefore
difficult to forecast. For example, some of the events produced by the
Company, such as the introduction of a new management team or a product
launch, do not occur on an annual or recurring basis. Operating results may
also fluctuate on a quarterly basis due to factors such as the timing of
clients' projects, delays in or cancellation of clients' communications
services projects and changes in the Company's revenue mix among its offered
services. The Company produces events and provides business communications and
event management services on a project-by-project basis and has few long-term
agreements with its clients through which the services of the Company are
retained on an on-going basis. Because the Company's staffing and other
operating expenses are based on anticipated revenue levels, a substantial
portion of which is related to specific projects, delays in scheduling
projects can cause significant variations in the Company's operating results
from quarter to quarter.
LIQUIDITY AND CAPITAL RESOURCES
The Company has financed its operations and acquisitions primarily through
the issuance of Convertible Preferred Stock, supplemented by borrowings under
its acquisition, working capital and equipment lines of credit and by
subordinated notes issued to sellers of acquired businesses.
The Company has raised approximately $27.0 million through the issuance of
Convertible Preferred Stock since 1994 and $11.0 million through the issuance
of subordinated notes to sellers of acquired businesses. PGI's credit
facilities consist of a $5.0 million acquisition line of credit, which is
secured by a first lien on all of the Company's assets and matures on May 31,
1998, a $4.0 million revolving credit line used for working capital purposes
and the issuance of standby letters of credit, which is secured by a first
lien on all of the Company's assets and matures on March 31, 1997, and a $1.0
million equipment line, which is secured by a first lien on all of the
Company's assets and matures on March 31, 1997. As of August 31, 1996, $3.0
million had been drawn against the acquisition line (the notes related thereto
are repayable in monthly installments through early fiscal 1998) and
$3.0 million was outstanding under the revolving credit line. See Notes 5 and
6 of Notes to Consolidated Financial Statements.
On November 27, 1996, the Company and the Bank entered into an amendment and
restatement of the October 18, 1995 bank financing arrangement, pursuant to
which, among other things, the maturity dates of the working capital and
equipment lines of credit were extended. A certain covenant involving seller
financing was also amended. The Company would have been in compliance with
such covenant at August 31, 1996. As of November 30, 1996, the outstanding
balance on the three lines of credit was approximately $5.7 million.
Proceeds from these financing activities were used to pay the cash portion
of the purchase price net of the cash acquired through acquisitions during the
period from fiscal 1994 through fiscal 1996, totaling approximately $14.4
million. In addition to financing the Company's acquisition activities, the
funds generated from the sale of equity were used to fund operating activities
and capital expenditures and to repay subordinated notes and bank debt.
Cash used in operating activities in fiscal 1996 was $5.1 million. This was
the result of a net loss of $4.3 million before depreciation and amortization
and other non-cash charges including reorganization and consolidation expenses
offset by $790,000 of changes in operating assets and liabilities. Cash used
in investing activities in fiscal 1996 was $14.3 million and was used
primarily for acquisitions and the
22
<PAGE>
purchase of property and equipment. Net cash provided by financing activities
in fiscal 1996 was $18.5 million, which resulted from the issuance of
Convertible Preferred Stock, bank borrowings and subordinated notes issued to
sellers of acquired businesses.
Cash used in operating activities in fiscal 1995 was $3.6 million, which was
primarily the result of a net loss of $4.2 million before depreciation and
amortization, the write-off of goodwill associated with an acquisition
completed in fiscal 1994 and other non-cash charges. Cash used by investing
activities in fiscal 1995 was $1.5 million, which was used primarily for
acquisitions and the purchase of property and equipment. Net cash provided by
financing activities in fiscal 1995 was $8.7 million, which resulted from the
issuance of Convertible Preferred Stock partly offset by repayments of bank
borrowings and subordinated notes issued in acquisitions.
Cash used in operating activities in fiscal 1994 was approximately $1.3
million, which was primarily the result of a net loss of $546,000 before
depreciation and amortization and other non-cash charges. Cash used in
investing activities in fiscal 1994 was approximately $1.2 million, which was
primarily used for acquisitions and the purchase of property and equipment.
Net cash provided by financing activities was approximately $2.5 million in
fiscal 1994, which resulted from the issuance of Convertible Preferred Stock
and bank borrowings.
Capital expenditures were $687,000, $972,000 and $998,000 in fiscal years
1994, 1995 and 1996, respectively, primarily for video and computer equipment.
The Company expects to spend approximately $500,000 on capital expenditures in
fiscal 1997, primarily for replacement or upgrades of such equipment.
In fiscal 1997, the Company will be required to make payments of $2.2
million for noncancellable operating leases, certain long-term obligations to
lease facilities for certain exhibitions, minimum compensation obligations of
$1,420,000 under employment agreements and payments of contingent purchase
prices. See Notes 4 and 7 of Notes to Consolidated Financial Statements.
The Company believes that the net proceeds from the offering and cash
generated from operations, together with existing sources of liquidity, will
be sufficient to meet its needs for working capital, capital expenditures, the
repayment of debt, the payment of contingent considerations for prior
acquisitions, if any, and the payment of consideration for future acquisitions
consistent with the Company's acquisition strategy, for at least the next
twelve months. However, if the Company has the opportunity to make significant
acquisitions for cash, the Company may require additional financing. Depending
on the Company's future growth and acquisitions, the Company will consider
various financing alternatives and may seek to raise additional capital
through equity or debt financing. There can be no assurance, however, that
this funding will be available on terms acceptable to the Company, if at all.
See "Risk Factor--Risks Associated with Future Acquisitions."
RECENT PRONOUNCEMENTS
In October 1995, the Financial Accounting Standards Board issued SFAS No.
123, "Accounting for Stock-Based Compensation," which is effective for the
Company's fiscal 1997 financial statements. SFAS No. 123 allows companies to
account for stock-based compensation under either the new provisions of SFAS
No. 123 or under the provisions of APB No. 25, but requires pro forma
disclosures in the footnotes to the financial statements as if the measurement
provisions of SFAS No. 123 had been adopted. The Company intends to continue
accounting for its stock-based compensation in accordance with the provisions
of APB No. 25. As such, the adoption of SFAS No. 123 will not impact the
consolidated financial position or the results of operations of the Company.
INFLATION
The Company does not believe that inflation has had a material effect on its
results of operations in recent years. However, there can be no assurance that
the Company's business will not be affected by inflation in the future.
23
<PAGE>
BUSINESS
THE COMPANY
PGI is a leading worldwide provider of event services on an outsourced basis
for corporations, associations and other organizations as well as on a
proprietary basis for exhibitions owned and managed by the Company. In fiscal
1996, PGI planned and executed over 1,800 events attended by more than 900,000
people in approximately 50 cities in 12 countries. In order to provide its
clients with a single source solution to their event planning needs, PGI
offers a wide range of services that encompass the event planning process,
including general management, concept creation, content creation and
execution. In addition, the Company owns and manages proprietary exhibitions
that utilize these services. The Company has developed internally and through
acquisitions a vertically-integrated infrastructure capable of providing event
services on a multinational basis. The Company believes that its vertically
integrated organization, creative talent, network of 24 offices in the United
States and abroad, technological leadership and willingness to commit capital
to acquire or develop proprietary exhibitions and special events are
competitive advantages in a fragmented industry where most vendors provide a
limited set of services on a local basis. PGI's revenues have increased at a
compound annual rate of 76.2% from fiscal 1994 to fiscal 1996.
INDUSTRY OVERVIEW
The events industry consists of companies that provide business
communications and event management services and organizations that own or
manage exhibitions. Corporations, associations and other organizations hold or
sponsor events on a frequent, often recurring, basis throughout the year in
order to communicate with customers, employees, members and other
constituencies and either produce these events internally or outsource their
production to third parties. Examples of business communications and event
management services are the design, production and execution of conventions,
sales meetings, conferences, executive presentations, shareholder and investor
meetings, training sessions and product launches. Examples of exhibitions are
trade shows, consumer shows and special events that provide a forum for face-
to-face interaction and communication, typically between buyers and sellers. A
recent study by Deloitte and Touche LLP estimated that the events industry
generated approximately $80 billion in direct spending during 1994 in the U.S.
alone, exclusive of travel and internal spending by corporations and
associations.
Business Communications and Event Management. Business communications and
event management services involve the design, planning and execution of an
organization's message. These services include concept creation, content
creation, execution and general management of the entire event. Specific
services may include speech writing, staging, video and media development and
production, production of brochures, handouts and other collateral materials,
and the planning and execution of meetings and conventions. These services are
generally provided by local or regional firms offering a limited number of
services. Most work is performed on a project-oriented basis and services are
rendered on a fee basis.
Exhibitions. Associations and other organizations own or sponsor
exhibitions, typically as a means of bringing together buyers and sellers.
Exhibitions may be owned and operated by a single party or managed by third
party providers of management services on behalf of owners. Owners of
exhibitions earn revenues through the lease of exhibit space, the sale of
sponsorships and ticket sales, all payable in advance, while third-party
managers earn a management fee, typically under multi-year contracts, which
may be supplemented by an income sharing arrangement with the exhibition
owner. Exhibition owners and managers typically use a wide range of business
communications and event management services during production of an
exhibition. While the largest owner-managers of exhibitions are divisions of
several multinational publishing companies, competition in this industry
remains highly fragmented. The top ten management companies are expected to
manage approximately 9.0% of the estimated 4,400
24
<PAGE>
exhibitions being held during 1996 in North America. The Company believes that
there is an increasing trend on the part of associations, historically the
largest owners and operators of exhibitions, to outsource the operational
management and often the ownership of exhibitions as they focus on their core
missions and seek to improve efficiencies.
According to Tradeshow Week, an exhibition and trade show publication,
during 1995, the largest 200 shows attracted over 180,000 exhibiting companies
and over 4.4 million professional attendees and used 56.9 million square feet
of exhibition space. From 1991 to 1995, this group of shows produced a
compound annual revenue growth rate from the sale of exhibition space of
approximately 4.8%, a compound annual growth rate in the number of exhibiting
companies of approximately 5.2% and a compound annual growth rate in
attendance of approximately 5.9%. The Company believes that this growth has
been driven by the realization on the part of exhibitors that exhibitions are
a highly cost-effective way of communicating with a large number of customers
with relatively modest travel and marketing expense.
The Company believes that the market for event services is undergoing a
shift toward outsourced management as organizations focus on their core
competencies and seek to improve the professionalism, creativity and cost-
efficiency of their events. Most vendors of outsourced event services are
small, local companies that cannot provide the wide range of services,
international coverage, creative talent, purchasing power and technological
capabilities required by large corporations and associations. As a vertically-
integrated service provider, PGI is able to offer a comprehensive solution to
such organizations with the assurance of a high quality of service and the
opportunity to form a long-term relationship.
THE PGI BUSINESS MODEL
For client events as well as events owned or managed by the Company, PGI
offers a single source solution to event planning and execution. PGI believes
that the Company is able to differentiate itself through its consistently high
level of creativity. The key elements of the Company's business model are:
Vertical Integration. PGI offers a wide range of services to provide clients
a single source solution to their business communications and event management
requirements. These services are provided on an outsourced basis for large
corporations and associations as well as in support of exhibitions owned and
managed by the Company. PGI's services encompass the major aspects of the
event process, including general management, concept creation, content
creation and execution. The Company believes that the depth and breadth of its
service offerings are critical competitive advantages in an industry in which
most vendors offer only a limited set of services.
Exhibition Ownership. PGI seeks to leverage its vertically-integrated
infrastructure by owning and operating exhibitions. The Company believes that
its ownership and operation of exhibitions increases recurring revenues,
enhances management's control over decision-making, reduces subcontracted
costs and efficiently allocates resources. PGI owns the intellectual property
related to an exhibition allowing the Company to expand the concept for a
successful exhibition by replicating it in new geographic locations. As of the
end of fiscal 1996, the Company owned 18 exhibitions.
Long-Term Client Relationships. In an industry often characterized by short-
term, project-oriented work, PGI seeks to develop long-term relationships with
corporate clients, trade associations and other organizations that are
potential large-scale, recurring users of the Company's services. The Company
seeks to provide the high quality of service necessary to develop and maintain
long-term client relationships.
International Presence. A fundamental operating strategy of PGI is to create
a multinational presence in order to serve the needs of large corporations and
associations, both for U.S.-based organizations that have extensive operations
abroad as well as non U.S.-based organizations. PGI has expanded its
geographic coverage from two U.S. offices in 1992 to a network of 21 offices
in the United
25
<PAGE>
States and three offices abroad as of September 30, 1996. The Company planned
events in 12 countries during fiscal 1996. The Company owns or manages 12
exhibitions outside the United States.
Human Resource Excellence. A primary value PGI brings to its clients is the
creative talent, energy and commitment of its employees. PGI seeks to attract
and retain the best personnel by developing attractive compensation, benefits
and training programs and providing long-term career opportunities that its
smaller competitors cannot duplicate. The Company's full-time staff of over
350 professionals is complemented by a pool of over 750 professionals hired on
a project-by-project basis who have distinguished themselves through prior
experience with PGI. To execute PGI's expansion plans, the Company has
recruited a number of senior executives with broad and diverse experience
managing rapidly growing international businesses.
Centralized Administration and Purchasing. An important part of PGI's
business model is to rationalize its administrative and purchasing operations
to enhance cost efficiency and quality control. The Company's Arlington,
Virginia headquarters is the center for administration, MIS, finance,
accounting and human resources that are used by personnel both at headquarters
and in PGI's field offices. Because the Company often plans and executes
multiple events in a single geographic location using the same vendors, the
Company believes that it enjoys purchasing power and economies of scale
greater than that available to its local competitors.
Technological Leadership. The Company seeks to use advanced communications
technologies such as digitized presentations and multimedia applications to
provide high quality customer service. By allocating the technological
investment over its large event base, the Company believes that it can invest
more in technology than its local competitors and thereby become a leader in
utilizing advanced technologies. In addition, PGI is creating business
communication applications using new media, such as CD-ROMs, interactive video
and the Internet.
GROWTH STRATEGY
PGI's growth strategy has the following elements:
Acquire and Develop Proprietary Exhibitions and Special Events. The major
focus of the Company's growth strategy over the next several years will be the
acquisition and development of proprietary exhibitions and special events. The
Company plans to acquire exhibitions that are leaders in their markets, to
replicate successful exhibitions in new locations, to spin off portions of
exhibitions into separate exhibitions and to develop new exhibitions in
geographic and product markets that are underserved. Exhibitions and special
events will be managed and executed by various operating entities of PGI,
enhancing quality control and permitting PGI to capture a greater percentage
of the profits generated.
Extend Relationships with Existing Clients. The Company believes that
substantial opportunities exist to expand relationships with existing clients
by cross-selling the full range of the Company's services, building out its
international office network and expanding the Company's service offerings,
particularly with respect to multimedia capabilities. The Company seeks to
capitalize on the services provided to one division or operation of a client
by selling its services to other divisions or operations, including foreign
operations, of its clients. The Company recently initiated an advertising and
public relations program to enhance its brand recognition in the marketplace.
Build New Client Relationships. As organizations focus on their core
competencies and seek to improve the professionalism, creativity and cost-
efficiency of their events, the Company believes they will continue to
outsource the management of events. PGI believes that many opportunities exist
to add new clients with large-scale business communications and event
management needs. The Company seeks relationship-building opportunities
through client referrals and its 60-person sales force. The Company
26
<PAGE>
actively sponsors, manages, participates in and, in some cases, owns, industry
events attended by potential clients (such as meeting planners) highlighting
its capabilities and market presence.
Expand International Network. PGI believes that corporations, associations
and other organizations located abroad or with extensive operations abroad are
increasingly interested in building relationships with business communications
and event management firms and owners of events who can provide services on a
worldwide basis. In order to better serve these organizations, PGI plans to
expand its network of offices in Europe, and expand into Asia and Africa.
Make Selected Infrastructure Acquisitions. The Company believes that as the
event industry continues to consolidate there will be many domestic and
international acquisition opportunities. PGI may acquire or affiliate with
select additional companies to expand its client base, further build out its
infrastructure, add new service applications or provide additional operating
efficiencies and synergies, particularly in international markets. Over the
past three years, the Company has made 13 acquisitions to build a vertically-
integrated infrastructure capable of providing event services on a
multinational basis.
Expand Multimedia Services. The Company provides digital communications and
multimedia services to clients in such areas as exhibition promotion, training
programs and Internet home pages. The Company designs and develops Web sites,
CD-ROM materials, promotional videos, targeted marketing presentations and
other multimedia products. The Company believes that continued technological
advances, coupled with the growing need of organizations to more effectively
tailor their messages, will create opportunities for PGI to develop new
services for clients, particularly for business communications and event
management services.
Underlying the Company's growth strategy is a focus on leveraging its
infrastructure, overhead and systems to expand its business base while
increasing overall efficiency. Eliminating redundant costs through the
integration of acquired operations into its corporate administrative
infrastructure and utilizing its sales force to capitalize on cross-selling
opportunities with existing clients and add new clients is central to the
Company's ability to realize profits from its acquisitions and ongoing
operations. The Company's inability to control costs successfully as it
pursues its growth strategy may inhibit its growth and ability to operate
profitably.
SERVICES
In order to provide its clients with a single source solution for their
business communications and event management needs, PGI offers a wide range of
services that encompass the event planning process, including general
management, concept creation, content creation and execution. PGI provides
these services to its clients and for its own events.
General Management Services. PGI's general management services provide
clients with centralized coordination and execution of the overall event.
PGI's services for a client are coordinated by an executive producer who is
responsible for overseeing the production of an event or exhibition.
Specifically, PGI provides:
. Oversight of the project
. Oversight of the budget
. Quality assurance and control
. Project funding and sponsorship development
. Project control and accountability
. Event promotion and marketing creation
. Schedule management
. Management of fulfillment providers
27
<PAGE>
Concept Creation. PGI works with a client to craft the client's message, to
identify the best means of communicating the message and to develop cost-
effective, creative solutions. Specifically, PGI provides:
. Joint determination of client needs and goals
. Market research to support message creation and communication
. Design of the elements of the message
. Selection of types of media within budget constraints
. Initial project pricing and budgeting
Content Creation. Once the concept for an event is created, PGI
professionals then work to develop and produce the message. Specifically, PGI
provides:
. Composition of speeches
. Creation of speaker support graphics
. Video production
. Creation of digital media
. Design and distribution of collateral materials
. Entertainment and speaker scripting
. Theme and staging design
Execution. PGI uses its internal resources to execute the event. As client
needs dictate, PGI can structure its role to be transparent to event
participants. Specifically, PGI provides:
. On-site quality and logistics control
. Hotel and venue coordination and buying
. Transportation management
. Security coordination
. Telemarketing services for sale of exhibition space
. Hospitality management
. Registration management
. Cash and payment management
. Entertainment booking and coordination
. Design of tour programs
. Permit and approval procurement
. Food and beverage management
The last stage in the event process is fulfillment, the actual provision of
services such as catering, registration, transportation rental, audio/visual
equipment rental, decor rental and temporary on-site labor. PGI determines on
an event-by-event basis whether to hire third party vendors to provide the
fulfillment needs for a particular event.
The Company's services are provided in accordance with contractual
relationships entered into with the Company's clients or are utilized in
proprietary and sponsored events. PGI earns fees for proprietary exhibitions
through the lease of exhibit space, the sale of sponsorships and ticket sales,
all payable in advance. When the Company manages an exhibition, it earns a
management fee which may be supplemented by an income sharing arrangement with
the owner. The Company earns revenues for business communications projects on
a fee-for-service basis.
CASE STUDIES
PGI's integrated infrastructure and operations provide support to those
professionals in the Company who have direct client contact and fulfillment
responsibility. Generally, the Company staffs a particular project with a team
of three to seven core members who are responsible for the overall project
under the
28
<PAGE>
direction of an executive producer. This team selectively utilizes other PGI
resources in order to create the concept and content for an event and then to
prepare and execute the event. The Company managed over 1,800 events during
fiscal 1996, and the following are examples of PGI's vertically-integrated
services and creative capabilities.
Proprietary Exhibitions. During fiscal 1996, PGI acquired two exhibitions
known as Destinations Showcase from the International Association of
Convention and Visitors Bureaus (IACVB). These exhibitions serve the meeting
planning community and are typically attended by over 280 meeting planners.
Prior to the acquisition, there were two Destinations Showcase exhibitions,
one held in Washington, D.C. and one held in Chicago. Working together with
the IACVB, PGI created a third exhibition held in New York City by replicating
the existing exhibitions. PGI professionals created, designed and executed the
New York event using PGI's vertically-integrated infrastructure. PGI organized
and designed the trade show, organized panels, created multimedia
presentations shown during the event, and coordinated the third party vendors
that provided fulfillment services. PGI organized the exhibition so that it
concluded with PGI-scheduled entertainment in an effort to expose the
attending meeting planners to PGI's staging, production and entertainment
booking expertise. The Company promoted the event through direct mailings to
potential attendees, announcements in industry publications and advertisements
at the other Destinations Showcase exhibitions.
Business Communications and Event Management. A telecommunications company
sought to create a meeting that would introduce its new executive team to its
employees, establish an environment of cooperation between management and
employees and communicate its annual objectives. PGI created an event that
would reflect these themes and allow direct participation by employees. PGI
designed and created a series of interactive kiosks in which a digitized
photograph was taken of a participant who then created his or her own message
to senior management on a key pad. These messages, as well as images of
participants and management, were displayed during the event as a "video
wall," which participants could see as they moved around the meeting facility.
PGI created a follow-up video that was sent to each of the company's offices
that included a selection of the messages and images, an introduction of the
new executives and their communication of the company's annual objectives.
Integrated Services. PGI has managed events that have both an exhibition
services component as well as a business communication services component. For
example, a Fortune 50 company holds an annual conference and trade show for
its distributors and dealers to promote and strengthen the company's brand
name. Although the client initially believed that it needed to hire a number
of service providers to implement the conference and trade show, PGI won the
competitive bidding process and was engaged by the company to be the general
manager of the entire project based on its single source capabilities. PGI
worked with the client to create the concept and content of the trade show,
general sessions, seminars and special events. PGI professionals designed
speeches, video and digital speaker support, established a rehearsal schedule
for the conference presenters and created a resource center for the presenters
that brought together graphics, teleprompting and speech coach resources. In
order to create the appropriate atmosphere for the presentations, PGI designed
and created the stages and lighting plans and hired third party vendors to
construct them. The Company also managed numerous logistical services
including registration and housing reservations, air and ground
transportation, badging and credentials, reception services and catering. PGI
negotiated hotel arrangements, coordinated rooming lists, selected
entertainment, designed program marketing and print materials and hired
vendors, all within the client's specified budget.
SALES AND MARKETING
The Company has separate sales forces that target users of business
communications and event management services and exhibition management
services. The Company's senior management team and executive producers of
events are frequently influential in establishing and expanding new client
relationships. Sales personnel are compensated through a commission plan based
on a percentage of
29
<PAGE>
either gross profits or gross revenues. The Company recently initiated an
advertising and public relations program to enhance its brand recognition in
the marketplace. Under this program, the Company actively sponsors, manages,
participates in and, in some cases, owns, industry events attended by
potential clients (such as meeting planners), highlighting its capabilities
and market presence.
Business Communications and Event Management. The Company's sales force
comprises approximately 60 full-time sales people who identify prospects,
respond to requests for proposals and create solutions to clients' requests.
The Company has created compensation incentives to encourage the sales force
to sell the Company's wide range of services. New business is generated by (i)
pursuing client referrals from existing clients and other business contacts,
(ii) expanding sales to existing clients by providing additional services, and
(iii) new client solicitation. An executive sales person and an executive
producer maintain the ongoing client relationship. These team leaders develop
a close working relationship with clients that require a broad range of
services for their events.
Exhibitions. The Company expands through the addition of new exhibitions and
through expansion opportunities with existing exhibitions. Approximately ten
executives focus on adding new exhibitions through (i) the acquisition of
exhibitions, (ii) replication of an existing exhibition, (iii) identification
of a spin-off opportunity from an existing exhibition, (iv) creation and
development of a new exhibition, and (v) multi-year management agreements with
exhibition owners. These executives are also responsible for selling corporate
and association sponsorships for exhibitions and promoting attendance at
events. Once PGI has acquired an exhibition, or has been engaged to manage an
exhibition, members of the Company's 15 person exhibition sales staff are
assigned to sell floor space using targeted promotional mailings followed by
telemarketing and personal contact.
STRUCTURE AND INTEGRATION OF ACQUISITIONS
The Company has pursued a number of strategic acquisitions to create a
vertically-integrated business communications and event management structure
to serve the Company's clients and PGI-owned events. The Company's
acquisitions of business communications and event management companies were
intended to add geographic coverage to the Company's existing businesses and
to broaden the Company's service offerings. With this infrastructure in place,
the Company began to implement its strategy of acquiring proprietary
exhibitions and during fiscal 1996 acquired two exhibition companies and two
proprietary exhibitions.
The Company's acquisition strategy has been to acquire companies with
complementary assets, significant client relationships and technical
expertise. The Company also considers the ability of the candidate's
management team to contribute to the Company's operations, the synergistic
effect of the acquisition on the Company's operations and the attractiveness
of the candidate's location. The Company seeks to retain owners and managers
of the acquisition candidate. The Company has often structured its acquisition
agreements with contingent payment provisions. The Company continues to
evaluate potential acquisitions and negotiate with several potential
acquisition candidates. There can be no assurance, however, that the Company
will be able to identify and acquire desirable acquisition candidates on terms
favorable to the Company or in a timely manner. See "Risk Factors--Risks
Associated with Future Acquisitions."
Following an acquisition, the Company integrates the acquired business with
its existing operations and takes advantage of cross-selling opportunities.
The Company seeks to expand the acquired business into new markets
complementary to the Company's operations. The Company seeks to consolidate
operations and administrative functions, eliminate redundant facilities,
reduce administrative overhead and consolidate its purchasing power. In
connection with this rationalization, in fiscal 1995 and 1996, the Company has
recognized certain material reorganization and consolidation expenses related
to write-offs or write downs of acquired assets and facility closings. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and Notes 2 and 4 of Notes to Consolidated Financial
30
<PAGE>
Statements. The Company may find it necessary to incur substantial
restructuring and consolidation costs with respect to future acquisitions.
These costs may have an adverse impact on the financial results of the
Company.
OPERATIONS
PGI provides services through its headquarters and 20 field offices in the
United States as well as three international field offices. The Company's
full-time staff of over 350 professionals is complemented by a pool of over
750 project professionals hired on a project-by-project basis who have
distinguished themselves through prior experience with PGI. The Company
centralizes many of its administrative and purchasing functions at its
headquarters, while creative, production and sales personnel service clients
from PGI's field offices. Large, national clients are served by a sales person
who introduces the client to the Company's multinational execution
capabilities and is responsible, typically together with an executive
producer, for maintaining the client relationship at the local level.
The Company's operations are generally organized to serve the two principal
areas of the events industry, with separate groups responsible for the
exhibitions and the business communications and events management components
of the Company's business. PGI professionals in the Company's exhibition
management group oversee the management and marketing of exhibitions owned by
corporations and associations as well as those owned by the Company.
Professionals in the Company's business communications group provide creative
solutions for organizations seeking to develop and execute conventions,
meetings and other means of communicating with their intended audiences.
PGI's event planning and destination logistics group, its entertainment
production and distribution group and its multimedia and Internet services
group provide support for the Company's two industry groups. The Company's
professionals work closely together to develop, produce and execute an event
or communication. In addition, PGI's clients seeking a particular service may
engage any of these groups independently. See "--Services."
COMPETITION
The Company competes with owners and managers of exhibitions and with
vendors of business communications and event management services.
Exhibitions. The Company competes for the ownership of exhibitions with a
wide variety of potential owners including divisions of several multinational
publishing companies, including United Newspapers (U.K.) and Reed/Cahners, a
subsidiary of Reed/Elsevier, two of the largest exhibition owners, based on
the number of owned exhibitions. The Company competes for exhibition ownership
generally on the basis of management style, opportunities offered to owners
and employees of the acquired businesses and price. The Company competes for
the management of exhibitions with divisions of multinational publishing
companies as well as with small to mid-sized companies specializing in
managing exhibitions. PGI principally competes for the management of
exhibitions on the basis of quality of management, marketing ability and track
record. Once PGI owns or manages an exhibition, PGI competes for exhibitors
and attendees with corporations and associations that offer alternative
exhibitions. PGI principally competes for exhibitors on the basis of the
timing of the exhibition, participation by industry leaders, history of
audience attendance, location and availability of exhibition space. PGI
considers other exhibition owners or managers competitors only to the extent
they own or manage exhibitions in the same industry as those exhibitions owned
or managed by PGI.
Business Communications and Event Management. The Company competes for
business communications and event management projects primarily with a large
number of local and regional firms that generally provide a limited range of
services, although there are a few companies, such as Caribiner International,
Inc., with national presence and greater scope of services than those provided
by local
31
<PAGE>
vendors. The Company also competes with specialized vendors such as production
companies, meeting planning companies and destination logistics companies. The
Company principally competes on the basis of service breadth and quality,
creativity, responsiveness, geographic proximity to the client and price.
FACILITIES
PGI's corporate headquarters are located in Arlington, Virginia, in
approximately 22,000 square feet of leased office space. The Company's
headquarters lease expires in April 2003, with an option to renew for an
additional period of five years. As of September 30, 1996, PGI had 20 sales
and production offices in the United States in Atlanta; Boston; Chicago;
Dallas; Irvine, California; Las Vegas (2); New York (2); Orlando; Palm
Springs; Phoenix (2); San Antonio; San Diego (2); San Francisco; San Mateo;
Washington, D.C.; Wyckoff, New Jersey; and three international offices in
Hamburg (Germany); London (England); and Baku (Azerbaijan).
EMPLOYEES
As of September 30, 1996, the Company had 359 full-time and 20 part-time
employees. The Company has no collective bargaining or similar agreements with
unions; however, from time to time the Company independently contracts or
hires part-time union personnel, particularly during the production of a
particular meeting or event. The Company considers its relations with its
employees to be good.
LEGAL PROCEEDINGS
The Company is involved in routine legal proceedings incidental to the
conduct of its business. Management believes that none of these legal
proceedings will have a material adverse effect on the financial condition or
results of operations of the Company.
32
<PAGE>
MANAGEMENT
EXECUTIVE OFFICERS AND DIRECTORS
The executive officers and directors of the Company are:
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
Mark N. Sirangelo (1)... 36 Chairman of the Board of Directors, President,
and Chief Executive Officer
Darryl Hartley-Leonard.. 51 Vice Chairman of the Board of Directors
John M. Green........... 45 Executive Vice President and Chief Operating Officer
of U.S. Operations
Richard S. Bartell...... 44 Senior Vice President and Chief Financial Officer
Edward P. Doody......... 49 Senior Vice President and Director
Douglas L. Ducate....... 55 Senior Vice President
Mary C. King............ 35 Senior Vice President and Secretary
Robert A. Kirkland...... 54 Senior Vice President
Cyril M. Wismar......... 52 Senior Vice President
Robert C. McCormack
(1)(2)................. 57 Director
Peter C. Wendell (1)(2). 46 Director
</TABLE>
- --------
(1)Member of the Compensation Committee.
(2)Member of the Audit Committee.
Mr. Sirangelo founded the Company and has served as the Chairman of the
Board of Directors, President and Chief Executive Officer of the Company since
June 1991. He was Executive Vice President of National Trade Productions,
Inc., an exposition and trade show management company from July 1989 to May
1991. He was President and Chief Operating Officer of Rowley-Scher, Inc., a
graphics arts and communications company from February 1986 to June 1989. He
was Vice President of Repro-Tech, Inc., a publishing and printing company from
January 1983 to January 1985.
Mr. Hartley-Leonard has served as the Vice Chairman of the Board of
Directors of the Company since June 1996. He has served as the Vice Chairman
of Regency Productions/PGI, an event production and entertainment marketing
firm since June 1996. For over 30 years, he was employed by Hyatt Hotels
Corporation. From June 1994 until he joined the Company, Mr. Hartley-Leonard
was Chairman of the Board of Hyatt Hotels Corporation, and from 1983 until
June 1994, he was President of Hyatt Hotels Corporation. He is currently the
Chairman of the U.S. Department of Commerce Travel and Tourism Advisory Board
and the Travel and Tourism Government Affairs Council. He also serves on the
boards of directors of Royal Caribbean Cruise Lines and DART, Inc.
Mr. Green has served as the Company's Executive Vice President since
February 1996 and the Chief Operating Officer of U.S. Operations since
November 1996. He was Senior Vice President, Finance and Corporate Controller
of Marriott International Corporation from May 1995 to February 1996. He was
Senior Vice President, Chief Financial Officer and Planning with Host Marriott
Corporation from December 1991 to April 1995. Mr. Green also was Vice
President, Finance and Planning with Marriott Corporation from May 1989 to
December 1991. He was employed by PepsiCo, Inc. from July 1978 to April 1989,
most recently as Director of Corporate Planning.
Mr. Bartell has served as the Company's Chief Financial Officer since
February 1996. He was Senior Vice President of Finance for Citicorp Diners
Club, Inc. from August 1986 to January 1996. He was the Controller of Applied
Learning, a division of the National Education Corporation from January 1983
to June 1986.
33
<PAGE>
Mr. Doody has served as the Company's Senior Vice President since March 1994
and as an officer and a director since November 1993. He was Director of
International Sales and Marketing of NovAtel CARCOM, a manufacturer of
cellular phones, from February 1993 to March 1994. He was President and Chief
Operating Officer of National Cellular, Inc. from August 1992 to February
1993. From October 1984 to August 1992, he was President of Meteor-Siegen,
Inc., a subsidiary of Meteor-Siegen Apparatebau Paul Schmeck, a manufacturer
of printing, photographic and engineering support equipment.
Mr. Ducate joined the Company in January 1995 and has served as the
Company's Senior Vice President since February 1996. He was Associate
Executive Director of the Society of Petroleum Engineers from August 1968 to
December 1994. He served as Chairman of the Convention Liaison Council in
1992, President of the International Association for Exposition Management
from 1986 to 1992 and has served as a director of the American Society of
Association Executives and the Professional Convention Management Association
since 1994.
Ms. King has served as the Company's Senior Vice President since February
1996 and has been responsible for human resources management since she joined
the Company in February 1994. She was an independent consultant specializing
in human resources from August 1989 to February 1994. From December 1985 to
August 1989, she was Director of Human Resources for Rowley-Scher
Reprographics, Inc.
Mr. Kirkland joined the Company in October 1995 and has served as the
Company's Senior Vice President since February 1996. He was employed by
Maritz, Inc., an incentive travel, performance improvement and meeting
management company from October 1965 to February 1994, most recently as a
Corporate Vice President.
Mr. Wismar joined the Company in December 1990 and has served as the
Company's Senior Vice President since February 1996. He was President of
Wismar Creative Group, Inc., a communication concept, design and production
company from October 1986 to April 1991. From May 1983 to December 1986, he
was Executive Vice President and Executive Producer for Kartes Video
Communications, a video production and distribution company.
Mr. McCormack has served as a director of the Company since November 1993.
He has been the Co-Chairman of Trident Capital, Inc. since May 1993. From
January 1990 to January 1993, he was Assistant Secretary of the Navy
(Financial Management). Prior to that, he served in a variety of management
positions at the Department of Defense. Mr. McCormack also serves on the
boards of directors of DeVry, Inc., Illinois Tool Works, Inc. and MetroMail
Corporation.
Mr. Wendell has served as a director of the Company since November 1993.
Since 1982, Mr. Wendell has been a partner of Sierra Ventures, a $260 million
venture capital firm focusing on information technology, health care and
service businesses. Mr. Wendell also currently holds a faculty appointment at
Stanford University's Graduate School of Business.
Messrs. McCormack and Wendell were each originally elected to the Board
pursuant to a voting agreement entered into in connection with the sale of the
Company's Series C Preferred Stock in November 1993. That voting agreement
will terminate upon the closing of this offering.
DIRECTORS; COMMITTEES
The number of directors of the Company is currently fixed at five. Following
this offering, the Company's Board of Directors will be divided into three
classes, with members of each class of directors serving for staggered three-
year terms. The Board will consist of one Class I Director (Mr. Hartley-
Leonard), two Class II Directors (Messrs. McCormack and Wendell), and two
Class III Directors (Messrs. Doody and Sirangelo), whose initial terms will
expire at the 1997, 1998 and 1999 annual meetings of stockholders,
respectively.
34
<PAGE>
The Board of Directors has established an Audit Committee and a Compensation
Committee. The Audit Committee, consisting of Messrs. McCormack and Wendell,
recommends the firm to be appointed as independent accountants to audit
financial statements and to perform services related to the audit, reviews the
scope and results of the audit with the independent accountants, reviews with
management and the independent accountants the Company's annual operating
results, considers the adequacy of the internal accounting procedures and
audit procedures of the Company and reviews the non-audit services to be
performed by the independent accountants. The Compensation Committee,
consisting of Messrs. Sirangelo, McCormack and Wendell, reviews and recommends
the compensation arrangements for officers and other senior level employees,
reviews general compensation levels for other employees as a group, and
determines the options to be granted to eligible persons under the Company's
1995 Stock Plans.
COMPENSATION OF DIRECTORS
Directors of the Company to date have received no compensation for their
services in such capacity, but are reimbursed for out-of-pocket expenses in
connection with attendance at Board and committee meetings. Under the 1997
Directors' Stock Option Plan, directors of the Company who are not employees
of the Company are eligible to receive non-statutory options to purchase
shares of Common Stock. The plan was adopted by the Board of Directors in
October 1996. See "Management--Employee Stock and Other Benefit Plan."
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The Company did not have a Compensation Committee of the Board of Directors
prior to September 1996. Prior to that date, all executive officer
compensation decisions have been made by Mr. Sirangelo in consultation with
the Board of Directors.
35
<PAGE>
EXECUTIVE COMPENSATION
The following table sets forth information concerning compensation paid to
the Chief Executive Officer and the other four executive officers whose
aggregate salaries and bonuses exceed $100,000 (collectively, the "Named
Executive Officers") for all services rendered in all capacities to the
Company for the year ended August 31, 1996.
SUMMARY COMPENSATION TABLE(1)
<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
AWARDS
------------
SECURITIES
1996 ANNUAL UNDERLYING
COMPENSATION OPTIONS
------------------ (NUMBER OF ALL OTHER
NAME AND POSITION SALARY BONUS (2) SHARES) COMPENSATION
----------------- -------- --------- ------------ ------------
<S> <C> <C> <C> <C>
Mark N. Sirangelo............... $250,008 $ -- 170,000 $ 860 (3)
Chairman of the Board of
Directors,
President and Chief Executive
Officer
Edward P. Doody................. 147,503 30,000 30,000 --
Senior Vice President and Di-
rector
Douglas L. Ducate............... 178,339 -- 25,000 $1,665 (4)
Senior Vice President
Robert A. Kirkland(5)........... 127,086 -- 25,000 --
Senior Vice President
Cyril M. Wismar................. 150,006 60,000 2,000 --
Senior Vice President of
Marketing and Communications
</TABLE>
- --------
(1) Two executive officers, Messrs. Green and Bartell, joined the Company in
February 1996 and would have appeared in the table above had they been
employed by the Company for a full fiscal year.
(2) Amounts shown include bonuses accrued in 1995 and paid in 1996.
(3) Represents payment by the Company of the annual premium for key man
insurance.
(4) Represents payment by the Company of the annual premium for key man
insurance.
(5) Mr. Kirkland joined the Company in October 1995 and is compensated at an
annual base salary of $150,000. See "--Employment Agreements."
36
<PAGE>
OPTION GRANTS AND HOLDINGS
The following table summarizes the options which were granted during the
fiscal year ended August 31, 1996 to the Named Executive Officers.
OPTION GRANTS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
POTENTIAL REALIZABLE
INDIVIDUAL GRANTS VALUE AT
-------------------------------------------------- ASSUMED ANNUAL
% OF TOTAL RATES OF STOCK
NUMBER OF OPTIONS PRICE APPRECIATION
SECURITIES GRANTED TO EXERCISE FOR OPTION TERM (3)
UNDERLYING EMPLOYEES IN PRICE EXPIRATION ---------------------
NAME OPTIONS (1) FISCAL YEAR (2) ($/SH) DATE 5% ($) 10% ($)
---- ----------- --------------- ----------- ---------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Mark N. Sirangelo....... 170,000 28.1% $1.40-$3.00 2006 $432,330 $434,660
Edward P. Doody......... 30,000 5.0 1.40 2006 43,398 44,796
Douglas L. Ducate....... 25,000 4.1 1.40 2006 36,165 37,330
Robert A. Kirkland...... 25,000 4.1 1.40 2006 36,165 37,330
Cyril M. Wismar......... 2,000 * 1.40 2006 2,894 2,989
</TABLE>
- --------
* Less than 1%.
(1) The options are immediately exercisable upon grant; however, other than
with respect to Mr. Sirangelo's options, the Company has a repurchase
option that expires with respect to one-fourth of the shares on the first
anniversary of the grant date and declines thereafter in 36 monthly
increments provided that such officer remains continuously employed by the
Company. All options terminate ten years after the grant date, subject to
earlier termination in accordance with the Company's 1995 Stock Plans.
(2) Based on options to purchase 605,300 shares of Common Stock granted in
fiscal 1996.
(3) This column shows the hypothetical gains or "option spreads" of the
options granted based on the assumed annual compound stock appreciation
rates of 5% and 10% over the terms of the options. The 5% and 10% rates do
not represent the Company's estimate or projection of future Common Stock
prices. The gains shown are net of the option exercise price, but do not
include deductions for taxes or other expenses associated with the
exercise of the option or the sale of the underlying shares, or reflect
nontransferability, vesting or termination provisions. The actual gains,
if any, on the exercises of stock options will depend on the future
performance of the Common Stock.
37
<PAGE>
The following table summarizes information on aggregate option exercises in
the fiscal year ended August 31, 1996 and information with respect to the
value of unexercised options to purchase the Company's Common Stock for the
Named Executive Officers. None of the Named Executive Officers exercised any
stock options during 1996.
AGGREGATED EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR END OPTION VALUES
<TABLE>
<CAPTION>
NUMBER OF SECURITIES VALUE OF UNEXERCISED
UNDERLYING UNEXERCISED IN-THE-MONEY OPTIONS
OPTIONS AT FISCAL YEAR END AT FISCAL YEAR END (2)
----------------------------- -------------------------
NAME EXERCISABLE (1) UNEXERCISABLE EXERCISABLE UNEXERCISABLE
---- --------------- ------------- ----------- -------------
<S> <C> <C> <C> <C>
Mark N. Sirangelo............. 270,000 0
Edward P. Doody............... 17,500 12,500
Douglas L. Ducate............. 9,895 15,105
Robert A. Kirkland............ 0 25,000
Cyril M. Wismar............... 70,000 2,000
</TABLE>
- --------
(1) The options are immediately exercisable upon grant; however, other than
with respect to Mr. Sirangelo's options, the Company has a repurchase
option that expires with respect to one-fourth of the shares on the first
anniversary of the grant date and declines thereafter in 36 monthly
increments provided that such officer remains continuously employed by the
Company. All options terminate ten years after the grant date, subject to
earlier termination in accordance with the Company's 1995 Stock Plans.
(2) There was no public trading market for the Common Stock as of August 31,
1996. Accordingly these values have been calculated on the basis of an
assumed initial public offering price of $ per share, less the
applicable exercise price.
EMPLOYEE STOCK AND OTHER BENEFIT PLANS
401(k) Plan. Effective January 1994, the Company adopted a profit sharing
plan (the "401(k) Plan") covering all of the Company's employees who have
completed one year of service and have attained the age of 21. The 401(k) Plan
is intended to be a tax-qualified plan under Section 401(a) of the Code. The
401(k) Plan enables employees to reduce their taxable compensation by electing
to defer current compensation into the 401(k) Plan, up to the statutorily
prescribed annual limit. The Company may, but is not required to, make
matching contributions to the 401(k) Plan based on the discretion of the Board
of Directors. Each participant becomes fully vested in the Company's
contributions allocated to his or her account upon completion of six years of
service. The Company has never made any matching contributions.
Stock Option and Stock Issuance Plans. On March 15, 1995, the Company's
Board of Directors adopted and on April 20, 1995, the stockholders approved
the 1995 Stock Option/Stock Issuance Plan (California) (the "California Plan")
and the 1995 Stock Option/Stock Issuance Plan (Virginia) (the "Virginia Plan")
(collectively known as the "1995 Stock Plans"). The 1995 Stock Plans are
intended to motivate and reward designated officers and other key employees of
the Company and its subsidiaries who contribute to the growth of the Company
by granting them stock options for shares of Common Stock or by granting them
stock. Under the 1995 Stock Plans options and awards may be granted to
employees and consultants of the Company and each option and award are
evidenced by written agreements between the Company and the employee. As of
September 30, 1996, the Company has not granted any direct stock awards under
the 1995 Stock Plans.
The Company has authorized 1,156,000 shares of Common Stock for issuance
under the 1995 Stock Plans. As of December 15, 1996, options for 2,411 shares
were exercised, options for 868,605 shares were
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<PAGE>
outstanding and 284,984 shares remained available for future grant under the
1995 Stock Plans. During fiscal 1991 and 1995, options to purchase 20,000 and
95,000 shares were granted outside of the 1995 Stock Plans, respectively, at
an exercise price of $0.01 per share. During fiscal 1996, options for 1,000
shares were granted outside of the 1995 Stock Plans, at an exercise price of
$1.40 per share, and options for 50,000 shares were granted outside of the
1995 Stock Plans to two outside directors, at an exercise price of $3.00 per
share.
The 1995 Stock Plans are administered by the Compensation Committee, which
has the authority to determine the plans' participants and the terms and
conditions of the options and awards granted under the plans including the
number of shares or the amount of other awards, the price or performance goals
and vesting and termination provisions. The Committee has the authority to
construe and interpret the provisions of the 1995 Stock Plans.
Under the California Plan, the exercise price of stock options and the
purchase price of the Common Stock must be not less than 85% of the fair
market value of a share of Common Stock on the date the option is granted or
the date the stock is issued (110% with respect to persons who own stock
possessing more than 10% of the total combined voting power of all classes of
stock of the Company ("10% Owners")). Under the Virginia Plan, the exercise
price of the stock options and the purchase price of the Common Stock may be
less than, equal to or greater than the fair market value of a share of Common
Stock on the date of the grant or the date the stock is issued.
Options intended to qualify as incentive stock options under the Code or
nonqualified stock options may be granted under the 1995 Stock Plans. The
exercise price of incentive stock options granted under the 1995 Stock Plans
must be at least equal to the fair market value of the Common Stock on the
date of the grant except that the exercise price of an incentive stock option
granted to a 10% Owner must be at least 110% of the fair market value of the
Common Stock on the date of grant. The exercise price of nonqualified stock
options granted under the 1995 Stock Plans may not be less than the fair
market value of the Common Stock on the date of the grant. Options granted
under the 1995 Stock Plans will vest at such times as are specified by the
Committee. An option granted to a participant will expire on the date
determined by the Committee, which date may not exceed 10 years from the date
of grant, except that an incentive stock option granted to a 10% Owner must be
exercised within five years of the date of grant.
If a participant with outstanding options or awards is terminated for any
reason other than death or disability, the participant may exercise any
outstanding option or award, to the extent it has vested, for a period of
three months following termination. If the participant is terminated due to
temporary disability, he may exercise any outstanding option for a period of
six months from the date of termination and for a period of twelve months in
the case of permanent disability. If a participant with outstanding options
dies, such options may be exercised by the individual or his personal
representative within the period of one year after the date of death. If an
individual with outstanding options or awards ceases to be an employee on
account of termination for cause by the Company or a voluntary termination of
employment by the employee, any outstanding option or award shall terminate as
of the date he ceases to be an employee (except as the Committee may otherwise
provide). If the Company terminates a participant for any reason other than
those previously described, any outstanding option or award, to the extent
that it was exercisable on the date of such termination, may be exercised by
the holder within thirty days (or such shorter time as may be specified by the
Committee in the participant's agreement), but in no event later than the
expiration of the option or award.
The Board may amend or terminate the 1995 Stock Plans at any time, except
that the Board cannot amend the plans to materially increase the benefits
accruing to participants under the plans, increase the aggregate number (or
individual limit) of shares of Common Stock that may be issued or transferred
under the plans, or modify the requirements as to the eligibility for
participation in the plans without the approval by the stockholders. In
addition, the Board is prohibited from amending the 1995 Stock Plans if such
amendment would cause the plans or any option or award, or the exercise of any
right under the
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<PAGE>
plans to fail to comply with the requirements of Rule 16b-3 under the
Securities Exchange Act of 1934, as amended, or would cause the 1995 Stock
Plans, the option or award or the exercise of an incentive stock option under
the plans, to fail to comply with the requirements of Section 422 of the
Internal Revenue Code of 1986, as amended. No amendment of the plans may
adversely affect any outstanding options or awards without the consent of each
holder thereof.
1997 Directors' Stock Option Plan. The Director Plan was adopted by the
Board of Directors in October 1996, subject to approval by the stockholders.
Under the terms of the Director Plan, directors of the Company who are not
employees of the Company are eligible to receive non-statutory options to
purchase shares of the Common Stock. A total of 100,000 shares of Common Stock
may be issued upon exercise of options granted under the Director Plan. Unless
terminated sooner by the Board of Directors, the Director Plan will terminate
in 2006, or the date on which all shares available for issuance under the
Director Plan shall have been issued pursuant to the exercise of options
granted under the Director Plan.
Upon a member's initial election or appointment to the Board of Directors
after the date of this Prospectus, such member will be granted options to
purchase 10,000 shares of Common Stock. Annual options to purchase 2,500
shares of Common Stock will be granted to each eligible director on the date
of each annual meeting of stockholders commencing in 1998. Such annual options
will vest in full at the earliest of (i) the first anniversary of the date of
the grant or (ii) the date of the next annual meeting of stockholders. The
exercise price of options granted under the Director Plan will equal the
closing price per share of the Common Stock on the date of grant.
Options granted under the Directors Plan are not transferable by the
optionee except by will or by the laws of descent and distribution or pursuant
to a qualified domestic relations order. In the event an optionee ceases to
serve as a director, each option may be exercised by the optionee for the
portion then exercisable at any time within 60 days after the optionee ceases
to serve as a director; provided, however, that in the event that the optionee
ceases to serve as a director due to his death or disability, then the
optionee, or his or her administrator, executor or heirs, may exercise the
exercisable portion of the option for up to 180 days following the date the
optionee ceases to serve as a director. No option is exercisable after the
expiration of five years from the date of grant.
Upon a "Change in Control of the Company" as defined in the Director Plan,
any outstanding options issued pursuant to the Directors Plan prior to the
date of such Change in Control of the Company shall vest and be exercisable as
to 50% of the number of shares of Common Stock that remain unvested on the
date of such Change in Control.
EMPLOYMENT AGREEMENTS
Mr. Sirangelo has an employment agreement with the Company, which expires on
August 31, 1998. Mr. Sirangelo's agreement provides for an annual base salary
of $275,000 through August 31, 1997 and $300,000 during the following one year
period, eligibility for future stock option grants, an annual performance
bonus, and an annual car allowance. Pursuant to the agreement, in fiscal 1996,
Mr. Sirangelo was awarded an option to purchase 120,000 shares of Common
Stock, at an exercise price of $3.00 per share.
Mr. Hartley-Leonard has an employment agreement with the Company, which
expires on May 31, 1998. Mr. Hartley-Leonard's agreement provides for an
annual base salary of $150,000. Pursuant to the agreement in fiscal 1996, Mr.
Hartley-Leonard was awarded an option to purchase 40,000 shares of Common
Stock, at an exercise price of $1.67 per share. Such option will become fully
vested six months following the offering. If Mr. Hartley-Leonard is terminated
without cause during the six months following the offering, the option will
become fully vested upon termination.
Mr. Bartell has an employment agreement with the Company, which expires on
December 31, 1997. Mr. Bartell's agreement provides for an annual base salary
of $150,000 through December 31, 1996 and
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<PAGE>
$175,000 during the following one year period, eligibility for future stock
option grants and an annual performance bonus. Pursuant to the agreement in
fiscal 1996, Mr. Bartell was awarded an option to purchase 25,000 shares of
Common Stock, at an exercise price of $1.40 per share.
Mr. Doody has an employment agreement with the Company, which expires on
December 31, 1997. Mr. Doody's agreement provides for an annual base salary of
$170,000 through December 31, 1996 and $180,000 during the following one year
period, and eligibility for future stock option grants. Pursuant to the
agreement, Mr. Doody was awarded an option to purchase 30,000 shares of Common
Stock, at an exercise price of $1.40 per share.
Mr. Ducate has an employment agreement with the Company, which expires on
November 11, 1998. Mr. Ducate's agreement provides for an annual base salary
of $195,000, and eligibility for future stock option grants. Pursuant to the
agreement in January 1996, Mr. Ducate was awarded an option to purchase 25,000
shares of Common Stock, at an exercise price of $1.40 per share, and, in
November 1996, an option to purchase 2,500 shares of Common Stock at an
exercise price of $6.50 per share.
Mr. Green has an employment agreement with the Company, which expires on
August 31, 1997. Mr. Green's agreement provides for an annual base salary of
$180,000, eligibility for future stock option grants and an annual performance
bonus. Pursuant to the agreement, in February 1996, Mr. Green was awarded an
option to purchase 50,000 shares of Common Stock, at an exercise price of
$1.40 per share, and, in November 1996, an option to purchase 5,000 share of
Common Stock, at an exercise price of $6.50 per share. Such option will become
fully vested six months following the offering. If Mr. Green is terminated
without cause during the six months following the offering, the option will
become fully vested upon termination.
Mr. Kirkland has an employment agreement with the Company, which expires on
August 31, 1997. Mr. Kirkland's agreement provides for an annual base salary
of $150,000 and eligibility for future stock option grants. Pursuant to the
agreement, Mr. Kirkland was awarded an option to purchase 25,000 shares of
Common Stock, at an exercise price of $1.40 per share.
Mr. Wismar has an employment agreement with the Company, which expires on
January 1, 1997. Mr. Wismar's agreement provides for an annual base salary of
$150,000, eligibility for future stock option grants and an annual performance
bonus. Pursuant to the agreement, Mr. Wismar was awarded an option to purchase
2,000 shares of Common Stock, at an exercise price of $1.40 per share.
The agreements are automatically renewable for additional periods and
contain confidentiality, non-compete and severance provisions.
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<PAGE>
CERTAIN TRANSACTIONS
RELATED PARTY TRANSACTIONS
Since inception, the Company has financed its growth and acquisition
activities primarily through the sale of its Preferred Stock. In October 1992,
the Company sold an aggregate of 600,000 shares of Series A Convertible
Preferred Stock ("Series A Preferred Stock") at a purchase price of $0.84 per
share, for an aggregate consideration of $500,000, of which 120,000 shares
were sold to the Robert C. McCormack Revocable Trust, an affiliate of Mr.
McCormack.
In November 1993, Sierra Ventures ("Sierra"), Trident Capital Partners Fund-
I, L.P. and affiliated entities ("Trident") and other accredited investors, as
such term is defined in Rule 501 of the Securities Act ("Accredited
Investors"), purchased an aggregate of 1,231,151 of shares of Series C
Convertible Preferred Stock ("Series C Preferred Stock") at a purchase price
of $2.60 per share, for an aggregate consideration of approximately
$3.2 million. Subsequent to the transaction, Messrs. Wendell and McCormack
were elected to the Board of Directors as designees of Sierra and of the
holders of a majority of the outstanding shares of Series A Preferred Stock of
the Company respectively, pursuant to a voting agreement. Such voting
agreement will terminate upon the closing of the offering. In January 1994,
the Company issued an additional 29,000 shares of Series C Preferred Stock,
including 10,000 shares held by Mr. Wismar.
In February 1995, Sierra, Trident, First Plaza Group Trust ("First Plaza")
and other Accredited Investors purchased an aggregate of 1,574,997 shares of
Series D Convertible Preferred Stock ("Series D Preferred Stock") at a
purchase price of $7.00 per share, for an aggregate purchase price of
approximately $11 million.
Between February and September 1996, Sierra, Trident, First Plaza,
WLD/Lamont Partners and other Accredited Investors purchased an aggregate of
1,796,407 shares of Series E Convertible Preferred Stock ("Series E Preferred
Stock") at a purchase price of $8.35 per share, for an aggregate consideration
of approximately $15 million. All outstanding Series A, C, D and E Preferred
Stock will be converted into shares of Common Stock on a one for one basis
upon the closing of this offering.
On May 31, 1996, the Company acquired Regency Productions, Inc., a
subsidiary of Hyatt Hotels Corporation. Subsequent to the transaction, Mr.
Hartley-Leonard, formerly the Chairman of the Board of Directors of Hyatt
Hotels Corporation, was elected as Vice Chairman of the Board of Directors of
the Company. See "Historical Overview" and Note 4 of Notes to Consolidated
Financial Statements.
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<PAGE>
PRINCIPAL STOCKHOLDERS
The following table sets forth information regarding the beneficial
ownership of the Company's Common Stock as of December 15, 1996 by: (i) each
person known by the Company to own beneficially five percent or more of the
outstanding shares of Common Stock; (ii) each director of the Company; (iii)
each Named Executive Officer; and (iv) all executive officers and directors of
the Company as a group. Unless otherwise noted, each person or group
identified has sole voting and investment power with respect to the shares
shown.
<TABLE>
<CAPTION>
NUMBER OF SHARES PERCENTAGE PERCENTAGE
NAME AND ADDRESS OF BENEFICIAL OWNER BENEFICIALLY OWNED PRIOR TO OFFERING(1) AFTER OFFERING
- ------------------------------------ ------------------ -------------------- --------------
<S> <C> <C> <C>
Sierra Ventures (2)..... 1,385,403 24.0%
3000 Sand Hill Road,
Bldg. 4
Menlo Park, CA 94025
Mellon Bank, N.A. (3) as
trustee for............ 1,336,184 23.1
First Plaza Group Trust
One Mellon Bank Center
Pittsburgh PA 15258-
0001
Trident Capital Partners
Funds (4).............. 1,046,263 18.0
2480 Sand Hill Road
Menlo Park, CA 94025
WLD/LAMONT Partners (5). 633,474 11.0
One East Broward Blvd.
Suite 1101
Fort Lauderdale, FL
33301
Mark N. Sirangelo (6) .. 625,000 10.3
Darryl Hartley-Leonard . -- --
Edward P. Doody (7) .... 21,250 *
Douglas L. Ducate (8) .. 13,020 *
Robert A. Kirkland (9).. 7,812 *
Cyril M. Wismar (10).... 80,541 1.4
Robert C. McCormack
(11)................... 1,046,263 18.0
Peter C. Wendell (12)... 1,405,194 24.2
All executive officers
and directors as a
group (11 persons)
(13)................... 3,230,330 51.7
</TABLE>
- --------
* Less than 1%.
(1) Applicable percentage of ownership as of December 15, 1996 is based upon
5,783,966 shares of Common Stock outstanding, assuming the conversion of
all outstanding Convertible Preferred Stock into 5,231,555 shares of
Common Stock upon the closing of the offering. Beneficial ownership is
determined in accordance with the rules of the Securities and Exchange
Commission, and includes voting and investment power with respect to
shares. Shares of Common Stock subject to options currently exercisable or
exercisable within 60 days after December 15, 1996, are deemed outstanding
for computing the percentage ownership of the person holding such options,
but are not deemed outstanding for computing the percentage ownership of
any other person.
(2) Includes 1,332,065 shares beneficially owned by Sierra Ventures IV, L.P.
and 53,338 shares beneficially owned by Sierra Ventures IV, International
(collectively, "Sierra Ventures").
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<PAGE>
(3) Mellon Bank, N.A., acts as the trustree (the "Trustee") for First Plaza
Group Trust ("First Plaza"), a trust under and for the benefit of certain
employee benefit plans of General Motors Corporation ("GM") and its
subsidiaries. These shares may be deemed to be owned beneficially by
General Motors Investment Management Corporation ("GMIMCo"), a wholly
owned subsidiary of GM. GMIMCo's principal business is providing
investment advice and investment management services with respect to the
assets of certain employee benefit plans of GM and its subsidiaries and
with respect to the assets of certain direct and indirect subsidiaries of
GM and associated entities. GMIMCo is serving as First Plaza's investment
manager with respect to these shares and in that capacity it has the sole
power to direct the Trustee as to the voting and disposition of these
shares. Because of the Trustee's limited role, beneficial ownership of the
shares by the Trustee is disclaimed.
(4) Includes (i) 856,950 and 169,522 shares beneficially owned by Trident
Capital Partners Fund-I, L.P., and Trident Capital Partners Fund-I, C.V.,
respectively (such funds are referred to collectively as the "Trident
Capital Funds"), and (ii) 19,791 shares issuable upon exercise of
outstanding options granted to Trident Capital, L.P., on August 31, 1996.
(5) Douglas S. Luke is the General Partner of WLD/LAMONT Partners and as such
may be deemed to be the beneficial owner of all shares owned by WLD/LAMONT
Partners. Except to the extent of his pecuniary interest therein, Mr. Luke
disclaims beneficial ownership with respect to these shares.
(6) Includes 270,000 shares issuable upon exercise of outstanding options and
5,000 shares issuable upon exercise of outstanding options held by Mr.
Sirangelo's mother.
(7) Includes 21,250 shares issuable upon exercise of outstanding options.
(8) Includes 13,020 shares issuable upon exercise of outstanding options.
(9) Includes 7,812 shares issuable upon exercise of outstanding options.
(10) Includes 70,541 shares issuable upon exercise of outstanding options.
(11) Includes (i) 1,026,472 shares beneficially owned by Trident Capital Funds
and (ii) 19,791 shares issuable upon exercise of outstanding options
granted to Trident Capital, L.P., on August 31, 1996. Mr. McCormack is
the Co-Chairman of Trident Capital, Inc., the general partner of Trident
Capital, L.P. which is the general partner of the Trident Capital Funds,
and, as such, he may be deemed to be the beneficial owner of all shares
owned by the Trident Capital Funds. Except to the extent of his pecuniary
interest therein, Mr. McCormack disclaims beneficial ownership with
respect to these shares.
(12) Includes (i) 1,332,065 shares beneficially owned by Sierra Ventures IV,
L.P., (iii) 53,338 shares beneficially owned by Sierra Ventures IV,
International, and (iii) 19,791 shares issuable upon exercise of
outstanding options granted on August 31, 1996. Mr. Wendell is a General
Partner of Sierra Ventures and as such he may be deemed to be the
beneficial owner of all shares owned by Sierra Ventures. Except to the
extent of his pecuniary interest therein, Mr. Wendell disclaims
beneficial ownership with respect to such shares.
(13) Includes 458,455 shares issuable upon exercise of outstanding options.
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<PAGE>
DESCRIPTION OF CAPITAL STOCK
GENERAL
The authorized capital stock of the Company upon completion of this offering
will consist of 30,000,000 shares of Common Stock, of which shares will be
issued and outstanding, and 5,000,000 shares of undesignated preferred stock
issuable in one or more series by the Board of Directors ("Preferred Stock"),
of which no shares will be issued and outstanding immediately following the
closing of the offering.
COMMON STOCK
The holders of Common Stock are entitled to one vote per share on all
matters to be voted on by stockholders and are entitled to receive such
dividends, if any, as may be declared from time to time by the Board of
Directors from funds legally available therefor. Any issuance of Preferred
Stock with a dividend preference over Common Stock could adversely affect the
dividend rights of holders of Common Stock. Holders of Common Stock are not
entitled to cumulative voting rights. Therefore, the holders of a majority of
the shares voted in the election of directors can elect all of the directors
then standing for election, subject to any voting rights of the holders of any
then outstanding Preferred Stock. The holders of Common Stock have no
preemptive or other subscription rights, and there are no conversion rights or
redemption or sinking fund provisions with respect to the Common Stock, except
for contractual repurchase arrangements relative to unvested restricted stock
held by employees and directors upon termination of their employment or
service. All outstanding shares of Common Stock, including the shares offered
hereby, are, or will be upon completion of this offering, fully paid and non-
assessable.
The Company's By-Laws provide that the number of directors shall be fixed by
the Board of Directors. The directors are divided into three classes, as
nearly equal in number as possible, with each class serving for a three-year
term. Any director of the Company may be removed from office only with cause
and by the affirmative vote of at least 66 2/3% of the total votes with which
would be eligible to be cast by stockholders in the election of such director.
UNDESIGNATED PREFERRED STOCK
The Board of Directors of the Company is authorized, without further action
of the stockholders, to issue up to 5,000,000 shares of Preferred Stock in one
or more series and to fix the designations, powers, preferences and the
relative participating, optional or other special rights of the shares of each
series and any qualifications, limitations and restrictions thereon. Any such
Preferred Stock issued by the Company may rank prior to the Common Stock as to
dividend rights, liquidation preference or both, may have full or limited
voting rights and may be convertible into shares of Common Stock.
The issuance of Preferred Stock could have the effect of making it more
difficult for a third party to acquire, or of discouraging a third party from
acquiring or seeking to acquire, a significant portion of the outstanding
Common Stock.
REGISTRATION RIGHTS OF CERTAIN HOLDERS
Holders of 5,231,555 shares of Common Stock (the "Registrable Shares") are
entitled to certain rights with respect to the registration of such shares
under the Securities Act. Subject to certain limitations, at any time after
the earlier of (i) February 10, 1999 or (ii) three months after the effective
date of the first registration statement for a public offering of securities
of the Company, the Company is required, upon request of holders of at least
40% of the Registrable Shares then outstanding, to file a registration
statement under the Securities Act covering such Registrable Shares, provided
that the anticipated aggregate offering price to the public is greater than
$10 million (a "demand registration"). The Company is obligated to effect only
one such demand registration. In addition, the Company is also required, upon
request of
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<PAGE>
holders of at least 20% of the Registrable Shares then outstanding, to file an
unlimited number of registration statements on Form S-3 under the Securities
Act when such form is available for use by the Company, as long as the
aggregate offering price to the public is not less than $500,000. These
registration rights will expire after five years following the offering.
Such holders also are entitled to include their shares of Common Stock in a
registered offering of securities by the Company for its own account, subject
to certain conditions and restrictions. The holders have waived their right to
include their shares of Common Stock in the offering.
DELAWARE LAW AND CERTAIN CHARTER PROVISIONS
Section 203 of the Delaware General Corporation Law, as amended ("Section
203"), provides that, subject to certain exceptions specified therein, an
"interested stockholder" of a Delaware corporation shall not engage in any
business combination, including mergers or consolidations or acquisitions of
additional shares of the corporation, with the corporation for a three-year
period following the date at which the stockholder becomes an "interested
stockholder" unless (i) prior to such date, the board of directors of the
corporation approved either the business combination or the transaction which
resulted in the stockholder becoming an "interested stockholder," (ii) upon
consummation of the transaction which resulted in the stockholder becoming an
"interested stockholder," the interested stockholder owned at least 85% of the
voting stock of the corporation outstanding at the time that the transaction
commenced (excluding certain shares), or (iii) on or subsequent to such date,
the business combination is approved by the board of directors of the
corporation and authorized at an annual or special meeting of stockholders by
the affirmative vote of at least 66 2/3% of the outstanding voting stock which
is not owned by the "interested stockholder." Except as otherwise specified in
Section 203, an "interested stockholder" is defined to include (x) any person
which is the owner of 15% or more of the outstanding voting stock of the
corporation, or is an affiliate or associate of the corporation and was the
owner of 15% or more of the outstanding voting stock of the corporation at any
time within three years immediately prior to the relevant date and (y) the
affiliates and associates of any such person. The Company's stockholders, by
adopting an amendment to its Certificate of Incorporation or Bylaws, may elect
not to be governed by Section 203, effective twelve months after adoption.
Neither the Certificate of Incorporation nor the Bylaws presently excludes the
Company from the restrictions imposed by Section 203.
The Company's Certificate of Incorporation provides that, upon the closing
of the offering, any action required or permitted to be taken by the
stockholders of the Company may be taken only at a duly called annual or
special meeting of the stockholders and does not provide for cumulative voting
in the election of directors. The Certificate of Incorporation and Bylaws
restrict the right of stockholders to change the size of the Board of
Directors and to fill vacancies on the Board of Directors. The amendment of
any of these provisions would require approval by 66 2/3% of the outstanding
Common Stock.
In addition, the Company's Certificate of Incorporation contains other
provisions that may have the effect of delaying or preventing a change in
control of the Company: (i) a classified Board of Directors, (ii) undesignated
Preferred Stock and (iii) a limitation on stockholder action by written
consent. These and other provisions could have the effect of making it more
difficult for a third party to effect a change in the control of the Board of
Directors and therefore may discourage another person or entity from making a
tender offer for the Common Stock, including offers at a premium over the
market price of the Common Stock, and might result in a delay in changes in
control of management. In addition, these provisions could have the effect of
making it more difficult for proposals favored by the stockholders to be
presented for stockholder consideration.
TRANSFER AGENT AND REGISTRAR
The Company has selected The First National Bank of Boston as the transfer
agent and registrar for the Common Stock.
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<PAGE>
SHARES ELIGIBLE FOR FUTURE SALE
Upon completion of the offering, the Company will have a total of shares
of Common Stock outstanding. Of these shares, the shares of Common Stock
offered hereby and additional shares will be freely tradable without
restriction or registration under the Securities Act by persons other than
"affiliates" of the Company, as defined in the Securities Act, who would be
required to sell such shares under Rule 144 under the Securities Act. The
remaining shares of Common Stock outstanding will be "restricted
securities" as that term is defined by Rule 144 (the "Restricted Shares").
Of the Restricted Shares, Restricted Shares will be eligible for sale in
the public market pursuant to Rule 144, certain of which may be sold under
Rule 144 in accordance with Rule 701 under the Securities Act as described
below, beginning 90 days after the date of this Prospectus. Substantially all
of such shares are subject to the lock-up agreements described below. The
remaining Restricted Shares are subject to vesting provisions and will
become eligible for sale in the public market under Rule 144 at various times
as they become vested.
In general, under Rule 144 as currently in effect, a person (or persons
whose shares are aggregated) who has beneficially owned restricted securities
for at least two years (including the holding period of any prior owner except
an affiliate), including persons who may be deemed "affiliates" of the
Company, would be entitled to sell within any three-month period a number of
shares that does not exceed the greater of one percent of the number of shares
of Common Stock then outstanding (approximately shares upon completion of
the offering) or the average weekly trading volume of the Common Stock during
the four calendar weeks preceding the filing of a Form 144 with respect to
such sale. Sales under Rule 144 are also subject to certain manner of sale
provisions and notice requirements, and to the availability of current public
information about the Company. In addition, a person who is not deemed to have
been an affiliate of the Company at the time during the 90 days preceding a
sale, and who has beneficially owned the shares proposed to be sold at least
three years (including the holding period of any prior owner except an
affiliate), would be entitled to sell such shares under Rule 144(k) without
regard to the requirements described above. Rule 144 also provides that
affiliates who are selling shares that are not Restricted Shares must
nonetheless comply with the same restrictions applicable to Restricted Shares
with the exception of the holding period requirement. The Securities and
Exchange Commission has recently proposed to reduce the two- and three-year
holding periods under Rule 144 to one- and two-year holding periods. If
adopted such amendment will permit earlier resales of shares of Common Stock.
Rule 701 promulgated under the Securities Act provides that shares of Common
Stock acquired pursuant to the exercise of outstanding options or the grant of
Common Stock pursuant to written compensation plans or contracts prior to this
offering may be resold by persons other than affiliates, beginning 90 days
after the date of this Prospectus, subject only to the manner of sale
provisions of Rule 144, and by affiliates, beginning 90 days after the date of
this Prospectus, subject to all provisions of Rule 144 except its two-year
minimum holding period.
The Company's executive officers, directors and stockholders who hold
substantially all of the 5,782,555 Restricted Shares have agreed not to sell
or otherwise dispose of any shares of Common Stock currently held by them, any
right to acquire any shares of Common Stock or any securities exercisable for
or convertible into any shares of Common Stock for a period of 180 days after
the date of this Prospectus without the prior written consent of Alex. Brown &
Sons Incorporated. In addition, the Company has agreed that for a period of
180 days after the date of this Prospectus it will not, without the prior
written consent of Alex. Brown & Sons Incorporated, offer, sell or otherwise
dispose of any shares of Common Stock or options, warrants or securities
convertible into or exchangeable for shares of Common Stock except for the
shares of Common Stock offered hereby, shares issued and options granted
pursuant to the 1995 Stock Plans and shares to be issued in acquisitions,
if any.
47
<PAGE>
As of December 15, 1996, options to purchase 1,034,604 shares of Common
Stock were outstanding, of which 757,225 were exercisable. An additional
393,004 shares of Common Stock are reserved for future issuance under the 1995
Stock Plans and the Directors' Plan. See "Management--Employee Stock and Other
Benefit Plans." The Company intends to file a registration statement on Form
S-8 under the Securities Act to register all shares of Common Stock issuable
pursuant to the 1995 Stock Plans. The Company expects to file this
registration statement approximately 90 days following the date of this
Prospectus, and such registration statement will become effective upon filing.
Shares covered by such a registration statement will thereupon be eligible for
sale in the public markets, subject to Rule 144 limitations applicable to
affiliates and the lock-up agreements described above.
The holders of an aggregate of 5,231,555 shares of Common Stock have the
right in certain circumstances to require the Company to register their shares
under the Securities Act for resale to the public. See "Description of Capital
Stock--Registration Rights of Certain Holders."
Prior to the offering, there has been no public market for the Common Stock
and no predictions can be made of the effect, if any, that the sale or
availability for sale of shares of additional Common Stock will have on the
market price of the Common Stock. Nevertheless, sales of substantial amounts
of such shares in the public market, or the perception that such sales could
occur, could materially and adversely affect the market price of the Common
Stock and could impair the Company's future ability to raise capital through
an offering of its equity securities. See "Risk Factors--Shares Eligible for
Future Sale; Registration Rights."
48
<PAGE>
UNDERWRITING
Subject to the terms and conditions of the Underwriting Agreement, the
Underwriters named below (the "Underwriters"), through their Representatives,
Alex. Brown & Sons Incorporated, Montgomery Securities and Robertson, Stephens
& Company L.L.C., have severally agreed to purchase from the Company the
following respective numbers of shares of Common Stock at the initial public
offering price less the underwriting discounts and commissions set forth on
the cover page of this Prospectus:
<TABLE>
<CAPTION>
NUMBER
UNDERWRITER OF SHARES
----------- ---------
<S> <C>
Alex. Brown & Sons Incorporated...........................................
Montgomery Securities.....................................................
Robertson, Stephens & Company L.L.C.......................................
---
Total...................................................................
===
</TABLE>
The Underwriting Agreement provides that the obligations of the Underwriters
are subject to certain conditions precedent and that the Underwriters will
purchase all of the shares of the Common Stock offered hereby if any shares
are purchased.
The Company has been advised by the Representatives of the Underwriters that
the Underwriters propose to offer the shares of Common Stock to the public at
the initial public offering price set forth on the cover page of this
Prospectus and to certain dealers at such price less a concession not in
excess of $ per share. The Underwriters may allow, and such dealers may
reallow, a concession not in excess of $ per share to certain other dealers.
After the initial public offering, the offering price and other selling terms
may be changed by the Representatives of the Underwriters.
The Company has granted to the Underwriters an option, exercisable not later
than 30 days after the date of this Prospectus, to purchase up to
additional shares of Common Stock at the public offering price less the
underwriting discounts and commissions set forth on the cover page of this
Prospectus. To the extent that the Underwriters exercise such option, each of
the Underwriters will have a firm commitment to purchase approximately the
same percentage thereof that the number of shares of Common Stock to be
purchased by it shown in the above table bears to and the Company will be
obligated, pursuant to the option, to sell such shares to the Underwriters.
The Underwriters may exercise such option only to cover over-allotments made
in connection with the sale of Common Stock offered hereby. If purchased, the
Underwriters will offer such additional shares on the same terms as those on
which the shares are being offered.
The Company has agreed to indemnify the Underwriters against certain
liabilities, including liabilities under the Securities Act.
The Company has agreed not to offer, sell or otherwise dispose of any shares
of Common Stock or options, warrants or securities convertible into or
exchangeable for Common Stock for a period of 180
49
<PAGE>
days after the date of this Prospectus without the prior written consent of
Alex. Brown & Sons Incorporated, except for the shares of Common Stock offered
hereby, shares issued and options granted pursuant to the 1995 Stock Plans and
shares issued or to be issued in acquisitions, if any. The Company's executive
officers, directors and stockholders who hold substantially all of the
5,782,555 Restricted Shares have agreed not to sell, offer to sell or
otherwise dispose of any Common Stock for a period of 180 days after the date
of this Prospectus without the prior written consent of Alex. Brown & Sons
Incorporated. See "Shares Eligible for Future Sale."
The Representatives of the Underwriters have advised the Company that the
Underwriters do not intend to confirm sales to any account over which they
exercise discretionary authority.
Prior to this offering, there has been no public market for the Common
Stock. Consequently, the initial public offering price for the Common Stock
will be determined by negotiation between the Company and the Representatives
of the Underwriters. Among the factors considered in such negotiation will be
prevailing market conditions, the results of operations of the Company in
recent periods, the market capitalizations and stages of development of other
companies which the Company and the Representatives of the Underwriters
believe to be comparable to the Company, estimates of the business potential
of the Company, the present state of the Company's development and other
factors deemed relevant.
In June 1996, ABS Employee Venture Fund, L.P., a limited partnership of
which a subsidiary of Alex. Brown Incorporated is the general partner and
certain employees of Alex. Brown & Sons Incorporated are the limited partners,
purchased 55,151 shares of the Company's Series E Preferred Stock at a
purchase price of $8.35 per share. All outstanding shares of Series E
Preferred Stock will be converted into shares of Common Stock on a one-for-one
basis upon the closing of this offering.
LEGAL MATTERS
The validity of the shares of Common Stock offered hereby will be passed
upon for the Company by Piper & Marbury L.L.P., Washington, D.C. Certain legal
matters related to this offering will be passed upon for the Underwriters by
Hogan & Hartson L.L.P., Baltimore, Maryland.
EXPERTS
The consolidated financial statements of Production Group International,
Inc. at August 31, 1995 and 1996, and for each of the three years in the
period ended August 31, 1996, appearing in this Prospectus and Registration
Statement have been audited by Ernst & Young LLP, independent auditors, as set
forth in their report thereon appearing elsewhere herein, and are included in
reliance upon such report given upon the authority of such firm as experts in
accounting and auditing.
The consolidated financial statements of Ray Bloch Productions, Inc. at
December 31, 1994 and 1995, and for each of the three years in the period
ended December 31, 1995, appearing in this Prospectus and Registration
Statement have been audited by Ernst & Young LLP, independent auditors, as set
forth in their report thereon appearing elsewhere herein, and are included in
reliance upon such report given upon the authority of such firm as experts in
accounting and auditing.
The combined financial statements of Epic Enterprises, Inc. at January 31,
1995 and 1996, and for each of the three years in the period ended January 31,
1996, appearing in this Prospectus and Registration Statement have been
audited by Ernst & Young LLP, independent auditors, as set forth in their
report thereon appearing elsewhere herein, and are included in reliance upon
such report given upon the authority of such firm as experts in accounting and
auditing.
50
<PAGE>
The financial statements of Epic Enterprises of Nevada, Inc. at December 31,
1994 and 1995 and for the period from July 5, 1993 (inception) to December 31,
1993, for the years ended December 31, 1994 and 1995, and for the six months
ended June 30, 1996, appearing in this Prospectus and Registration Statement
have been audited by Ernst & Young LLP, independent auditors, as set forth in
their report thereon appearing elsewhere herein, and are included in reliance
upon such report given upon the authority of such firm as experts in
accounting and auditing.
The financial statements of Timberline Productions, Inc. at December 31,
1994 and 1995 and for each of the three years in the period ended December 31,
1995 and for the three month period ended March 31, 1996, appearing in this
Prospectus and Registration Statement have been audited by Ernst & Young LLP,
independent auditors, as set forth in their report thereon appearing elsewhere
herein, and are included in reliance upon such report given upon the authority
of such firm as experts in accounting and auditing.
The consolidated financial statements of Spearhead Exhibitions Limited for
the five month period ended August 31, 1995, appearing in this Prospectus and
Registration Statement have been audited by Ernst & Young, chartered
accountants, independent auditors, as set forth in their report thereon
appearing elsewhere herein, and are included in reliance upon such report
given upon the authority of such firm as experts in accounting and auditing.
The consolidated financial statements of Spearhead Exhibitions Limited at
March 31, 1994 and 1995 and for the years then ended, appearing in this
Prospectus and Registration Statement have been audited by Kingston Smith,
Chartered Accountants, as set forth in their report thereon appearing
elsewhere herein, and are included in reliance upon such report given upon the
authority of such firm as experts in accounting and auditing.
ADDITIONAL INFORMATION
The Company has filed with the Securities and Exchange Commission,
Washington, D.C., a registration statement on Form S-1 under the Securities
Act with respect to the Common Stock being offered by this Prospectus. This
Prospectus does not contain all of the information set forth in the
registration statement and the exhibits and schedules filed therewith. For
further information about the Company and the securities offered by this
Prospectus, reference is made to the registration statement and to the
financial statements, schedules and exhibits filed as a part of it. Statements
contained in this Prospectus about the contents of any contract or any other
documents are not necessarily complete, and in each instance, reference is
made to the copy of the contract or document filed as an exhibit to the
registration statement, each such statement being qualified in all respects by
such reference.
A copy of the registration statement may be inspected without charge and may
be obtained at prescribed rates from the Commission at the Public Reference
Section of the Commission, maintained by the Commission at its principal
office located at 450 Fifth Street, N.W., Washington, D.C. 20549, the New York
Regional Office located at Seven World Trade Center, New York, New York 10048,
and the Chicago Regional Office located at Northwestern Atrium Center, 500
West Madison Street, Suite 1400, Chicago, Illinois 60661. The Commission also
maintains a web site that contains reports, proxy statements and other
information regarding registrants, including the Company, that file such
information electronically with the Commission. The address of the
Commission's web site is http://www.sec.gov.
51
<PAGE>
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<S> <C>
PRODUCTION GROUP INTERNATIONAL, INC.
Report of Ernst & Young LLP, Independent Auditors F-2
Consolidated Balance Sheets as of August 31, 1995 and 1996 F-3
Consolidated Statements of Operations for the years ended August 31,
1994, 1995 and 1996 F-4
Consolidated Statements of Stockholders' Equity (Deficit) for the years
ended August 31, 1994, 1995 and 1996 F-5
Consolidated Statements of Cash Flows for the years ended August 31,
1994, 1995 and 1996 F-6
Notes to Consolidated Financial Statements F-7
RAY BLOCH PRODUCTIONS, INC.
Report of Ernst & Young LLP, Independent Auditors F-18
Consolidated Balance Sheets as of December 31, 1994 and 1995 F-19
Consolidated Statements of Operations for the years ended December 31,
1993, 1994 and 1995 F-20
Consolidated Statements of Stockholder's Equity for the years ended
December 31, 1993, 1994 and 1995 F-21
Consolidated Statements of Cash Flows for the years ended December 31,
1993, 1994 and 1995 F-22
Notes to Consolidated Financial Statements F-23
EPIC ENTERPRISES, INC.
Report of Ernst & Young LLP, Independent Auditors F-27
Combined Balance Sheets as of January 31, 1995 and 1996 F-28
Combined Statements of Operations for the years ended January 31, 1994,
1995 and 1996 F-29
Combined Statements of Stockholders' Deficit for the years ended January
31, 1994, 1995 and 1996 F-30
Combined Statements of Cash Flows for the years ended January 31, 1994,
1995 and 1996 F-31
Notes to Combined Financial Statements F-32
EPIC ENTERPRISES OF NEVADA, INC.
Report of Ernst & Young LLP, Independent Auditors F-36
Balance Sheets as of December 31, 1994 and 1995 F-37
Statements of Operations for the period from July 5, 1993 (inception) to
December 31, 1993, for the years ended December 31, 1994 and 1995 and
for the six months ended June 30, 1996 F-38
Statements of Stockholders' Deficit for the period from July 5, 1993
(inception) to December 31, 1993, for the years ended December 31, 1994
and 1995 F-39
Statements of Cash Flows for the period from July 5, 1993 (inception) to
December 31, 1993, for the years ended December 31, 1994 and 1995 and
for the six months ended June 30, 1996 F-40
Notes to Financial Statements F-41
TIMBERLINE PRODUCTIONS, INC.
Report of Ernst & Young LLP, Independent Auditors F-43
Balance Sheets as of December 31, 1994 and 1995 F-44
Statements of Operations for the years ended December 31, 1993, 1994 and
1995 and for the three month ended March 31, 1996 F-45
Statements of Stockholders' Equity for the years ended December 31, 1993,
1994 and 1995 F-46
Statements of Cash Flows for the years ended December 31, 1993, 1994 and
1995 and for the three month ended March 31, 1996 F-47
Notes to Financial Statements F-48
SPEARHEAD EXHIBITIONS LIMITED
Report of Ernst & Young Chartered Accountants, Independent Auditors F-52
Report of Kingston Smith Chartered Accountants, Independent Auditors F-53
Consolidated Balance Sheets as of March 31, 1994 and 1995 F-54
Consolidated Statements of Operations for the years ended March 31, 1994
and 1995 and for the five months ended August 31, 1995 F-55
Consolidated Statements of Shareholders' Equity for the years ended March
31, 1994 and 1995 F-56
Consolidated Statements of Cash Flows for the years ended March 31, 1994
and 1995 and for the five months ended August 31, 1995 F-57
Notes to Consolidated Financial Statements F-58
Unaudited Pro Forma Combined Statement of Operations F-62
</TABLE>
F-1
<PAGE>
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
The Board of Directors
Production Group International, Inc.
We have audited the accompanying consolidated balance sheets of Production
Group International, Inc. as of August 31, 1995 and 1996, and the related
consolidated statements of operations, stockholders' equity (deficit) and cash
flows for each of the three years in the period ended August 31, 1996. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position
of the Company at August 31, 1995 and 1996, and the consolidated results of
their operations and their cash flows for each of the three years in the
period ended August 31, 1996, in conformity with generally accepted accounting
principles.
Ernst & Young LLP
Vienna, Virginia
October 24, 1996
- -------------------------------------------------------------------------------
The foregoing report is in the form that will be signed upon the completion
of the net income (loss) per share calculation once the initial public
offering price is known.
/s/ Ernst & Young LLP
Vienna, Virginia
December 16, 1996
F-2
<PAGE>
PRODUCTION GROUP INTERNATIONAL, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
PRO FORMA
AUGUST 31, AUGUST 31,
1995 1996 1996 (NOTE 12)
----------- ----------- --------------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents............ $ 4,421,115 $ 3,599,446 $ 4,888,953
Accounts receivable, less allowance
of $444,000 and $825,000 at August
31, 1995 and 1996, respectively..... 2,310,291 8,011,187 8,011,187
Deferred costs....................... 426,845 1,211,115 1,211,115
Prepaid expenses and other current
assets............................... 624,810 917,085 917,085
----------- ----------- -----------
Total current assets.................. 7,783,061 13,738,833 15,028,340
Property and equipment, net........... 1,391,043 2,741,714 2,741,714
Goodwill, net......................... 4,970,111 26,644,182 26,644,182
Other assets.......................... 1,093,787 597,784 597,784
----------- ----------- -----------
Total assets.......................... $15,238,002 $43,722,513 $45,012,020
=========== =========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued
expenses............................. $ 4,959,959 $12,541,085 $12,541,085
Income taxes payable................. 28,692 776,300 776,300
Deferred revenues.................... 2,495,230 4,715,203 4,715,203
Bank lines of credit................. -- 3,000,000 3,000,000
Current portion of notes payable..... 768,839 11,294,254 11,294,254
----------- ----------- -----------
Total current liabilities............. 8,252,720 32,326,842 32,326,842
Deferred rent and other liabilities... 242,034 346,325 346,325
Notes payable, less current portion... 1,316,231 2,640,907 2,640,907
Commitments........................... -- -- --
Stockholders' equity:
Convertible Preferred Stock, $0.01
par value:
Series A, 600,000 shares authorized,
issued and outstanding; liquidation
preference of $504,000............. 6,000 6,000 --
Series B, 400,000 shares authorized;
no shares issued and outstanding... -- -- --
Series C, 1,350,000 shares
authorized; 1,260,151 shares issued
and outstanding; liquidation
preference of $3,276,393........... 12,602 12,602 --
Series D, 1,600,000 shares
authorized; 1,574,997 shares issued
and outstanding; liquidation
preference of $11,024,979.......... 15,750 15,750 --
Series E, 1,796,407 shares
authorized; 1,641,975 shares issued
and outstanding; liquidation
preference of $13,710,491.......... -- 16,420 --
Undesignated Preferred Stock, $.01
par value; 5,000,000 shares
authorized; no shares issued and
outstanding......................... -- -- --
Common stock, $0.01 par value;
30,000,000 shares authorized;
550,000 and 551,000 shares issued
and outstanding at August 31, 1995
and 1996, respectively (5,782,555
pro forma shares)................... 5,500 5,510 57,826
Additional paid-in capital........... 14,543,160 29,608,357 30,896,320
Unearned stock compensation.......... -- (133,134) (133,134)
Foreign currency translation
adjustment........................... -- 118,846 118,846
Accumulated deficit.................. (9,155,995) (21,241,912) (21,241,912)
----------- ----------- -----------
Total stockholders' equity............ 5,427,017 8,408,439 9,697,946
----------- ----------- -----------
Total liabilities and stockholders'
equity................................ $15,238,002 $43,722,513 $45,012,020
=========== =========== ===========
</TABLE>
See accompanying notes.
F-3
<PAGE>
PRODUCTION GROUP INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEARS ENDED AUGUST 31,
1994 1995 1996
----------- ----------- ------------
<S> <C> <C> <C>
Revenues $25,212,845 $41,950,495 $ 78,290,083
Cost of services 18,975,369 32,272,312 53,152,958
----------- ----------- ------------
Gross profit 6,237,476 9,678,183 25,137,125
Selling and operating expenses 6,474,695 11,792,239 22,327,367
Corporate general and administrative
expenses 1,457,704 3,167,243 5,923,000
Amortization of acquisition costs 91,748 228,722 669,365
Reorganization and consolidation
expenses -- 2,122,468 6,897,397
----------- ----------- ------------
Operating income (loss) (1,786,671) (7,632,489) (10,680,004)
Other income (expense) 103,231 23,633 245,000
Interest income 33,981 203,433 181,894
Interest expense (20,811) (163,970) (1,116,807)
----------- ----------- ------------
Income (loss) before minority
interests and income taxes (1,670,270) (7,569,393) (11,369,917)
Minority interests of consolidated
subsidiaries 100,606 (117,412) --
Income tax (benefit) expense (220,000) -- 716,000
----------- ----------- ------------
Net loss $(1,550,876) $(7,451,981) $(12,085,917)
=========== =========== ============
Net loss per share
=========== =========== ============
Weighted average shares outstanding
=========== =========== ============
Pro forma net loss per share
============
Pro forma weighted average shares
outstanding
============
</TABLE>
See accompanying notes.
F-4
<PAGE>
PRODUCTION GROUP INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
<TABLE>
<CAPTION>
SERIES A SERIES C SERIES D SERIES E ADDITIONAL
PREFERRED STOCK PREFERRED STOCK PREFERRED STOCK PREFERRED STOCK COMMON STOCK PAID-IN
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT CAPITAL
-------- ------- --------- ------- --------- ------- --------- ------- ------- ------ -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at August
31, 1993 600,000 $ 6,000 -- $ -- -- $ -- -- $ -- 550,000 $5,500 $ 1,098,225
Issuance of
Preferred Stock -- -- 1,270,151 12,702 -- -- -- -- -- -- 2,902,491
Net loss -- -- -- -- -- -- -- -- -- -- --
-------- ------- --------- ------- --------- ------- --------- ------- ------- ------ -----------
Balance at August
31, 1994 600,000 6,000 1,270,151 12,702 -- -- -- -- 550,000 5,500 4,000,716
Issuance of
Preferred Stock -- -- -- -- 1,574,997 15,750 -- -- -- -- 10,568,344
Repurchase of
Preferred Stock -- -- (10,000) (100) -- -- -- -- -- -- (25,900)
Net loss -- -- -- -- -- -- -- -- -- -- --
-------- ------- --------- ------- --------- ------- --------- ------- ------- ------ -----------
Balance at August
31, 1995 600,000 6,000 1,260,151 12,602 1,574,997 15,750 -- -- 550,000 5,500 14,543,160
Issuance of
Preferred Stock -- -- -- -- -- -- 1,641,975 16,420 -- -- 13,611,673
Exercise of
Common Stock
options -- -- -- -- -- -- -- -- 1,000 10 1,390
Stock
compensation
expenses related
to stock options -- -- -- -- -- -- -- -- -- -- 1,452,134
Foreign currency
translation
adjustment -- -- -- -- -- -- -- -- -- -- --
Net loss -- -- -- -- -- -- -- -- -- -- --
-------- ------- --------- ------- --------- ------- --------- ------- ------- ------ -----------
Balance at August
31, 1996 600,000 $ 6,000 1,260,151 $12,602 1,574,997 $15,750 1,641,975 $16,420 551,000 $5,510 $29,608,357
======== ======= ========= ======= ========= ======= ========= ======= ======= ====== ===========
<CAPTION>
FOREIGN
UNEARNED CURRENCY TOTAL
STOCK TRANSLATION (ACCUMULATED STOCKHOLDERS'
COMPENSATION ADJUSTMENT DEFICIT) EQUITY (DEFICIT)
------------ ----------- ------------- ----------------
<S> <C> <C> <C> <C>
Balance at August
31, 1993 $ -- $ -- $ (153,138) $ 956,587
Issuance of
Preferred Stock -- -- -- 2,915,193
Net loss -- -- (1,550,876) (1,550,876)
------------ ----------- ------------- ----------------
Balance at August
31, 1994 -- -- (1,704,014) (2,320,904)
Issuance of
Preferred Stock -- -- -- 10,584,094
Repurchase of
Preferred Stock -- -- -- (26,000)
Net loss -- -- (7,451,981) (7,451,981)
------------ ----------- ------------- ----------------
Balance at August
31, 1995 -- -- (9,155,995) 5,427,017
Issuance of
Preferred Stock -- -- -- 13,628,093
Exercise of
Common Stock
options -- -- -- 1,400
Stock
compensation
expenses related
to stock options (133,134) -- -- 1,319,000
Foreign currency
translation
adjustment -- 118,846 -- 118,846
Net loss -- -- (12,085,917) (12,085,917)
------------ ----------- ------------- ----------------
Balance at August
31, 1996 $(133,134) $118,846 $(21,241,912) $ 8,408,439
============ =========== ============= ================
</TABLE>
See accompanying notes.
F-5
<PAGE>
PRODUCTION GROUP INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEARS ENDED AUGUST 31
1994 1995 1996
----------- ----------- ------------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net loss $(1,550,876) $(7,451,981) $(12,085,917)
Adjustments to reconcile net loss to
net cash used in operating
activities:
Loss on disposal of property and
equipment -- 15,667 132,272
Provision for doubtful accounts 264,400 77,939 407,095
Depreciation and amortization 640,306 1,121,049 1,672,267
Minority interests in consolidated
subsidiaries 100,606 (117,412) --
Reorganization and consolidation
expenses -- 2,122,468 4,257,859
Stock option compensation expense -- -- 1,319,000
Changes in operating assets and
liabilities:
Accounts receivable (396,406) 698,195 (1,688,906)
Prepaid expenses and other current
assets 72,210 24,720 (12,166)
Deferred costs (482,474) 226,721 (119,441)
Income taxes receivable (289,437) -- --
Other assets (356,848) (328,457) (15,666)
Accounts payable and accrued
expenses 239,307 (6,160) (597,000)
Income taxes payable -- (49,119) (170,319)
Deferred revenues 455,558 67,635 1,919,564
Deferred rent and other liabilities 18,914 (35,270) (105,247)
----------- ----------- ------------
Net cash used in operating activities (1,284,740) (3,634,005) (5,086,605)
INVESTING ACTIVITIES
Acquisitions of businesses, net of
cash acquired (506,447) (648,928) (13,289,030)
Purchases of property and equipment (686,593) (972,408) (997,553)
Proceeds from the sale of property and
equipment -- 100,000 5,116
----------- ----------- ------------
Net cash used in investing activities (1,193,040) (1,521,336) (14,281,467)
FINANCING ACTIVITIES
Net proceeds from issuance of
convertible Preferred Stock 2,915,193 10,558,094 13,628,093
Net proceeds from issuance of Common
Stock -- -- 1,400
Proceeds from notes payable -- -- 3,300,000
Repayments of notes payable (570,047) (1,165,921) (1,383,090)
Net proceeds (repayments) of bank
lines of credit 200,000 (700,000) 3,000,000
----------- ----------- ------------
Net cash provided by financing
activities 2,545,146 8,692,173 18,546,403
----------- ----------- ------------
Net increase (decrease) in cash and
cash equivalents 67,366 3,536,832 (821,669)
Cash and cash equivalents at beginning
of year 816,917 884,283 4,421,115
----------- ----------- ------------
Cash and cash equivalents at end of
year $ 884,283 $ 4,421,115 $ 3,599,446
=========== =========== ============
SUPPLEMENTAL SCHEDULE OF NON CASH
INVESTING AND
FINANCING ACTIVITIES:
Fair value of assets acquired $ 6,352,083 $ 3,054,861 $ 38,799,825
Cash paid 934,303 500,000 16,265,856
Notes payable issued 900,231 1,512,656 6,418,010
----------- ----------- ------------
LIABILITIES ASSUMED $ 4,517,549 $ 1,042,205 $ 16,115,959
=========== =========== ============
</TABLE>
See accompanying notes.
F-6
<PAGE>
1. ORGANIZATION AND NATURE OF OPERATIONS
Production Group International, Inc. ("PGI" or the "Company") was
incorporated in Virginia in 1990 and reincorporated in Delaware in 1996. The
Company is a leading worldwide provider of event services on an outsourced
basis for corporations, associations and other organizations as well as on a
proprietary basis for exhibitions owned and managed by the Company. In order
to provide its clients with a single source solution to their event planning
needs, the Company offers a wide range of services that encompass the event
planning process, including general management, concept creation, content
creation and execution. These services are provided in accordance with
contractual relationships entered into with the Company's clients or are
utilized in proprietary and sponsored events.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation
The consolidated financial statements include the accounts of the Company
and its wholly-owned and majority-owned subsidiaries. The Company exercises
control through a majority voting interest in the stock of its majority-owned
subsidiaries. All significant intercompany accounts and transactions eliminate
upon consolidation.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect amounts in the financial statements and accompanying
notes. Actual results could differ from those estimates.
Cash and Cash Equivalents
The Company's cash and cash equivalents, which are stated at cost, consist
of liquid securities with original maturities of three months or less.
Long-lived Assets and Goodwill
In accordance with FAS 121, "Accounting for the Impairment of Long-Lived
Assets and Long-Lived Assets to Be Disposed Of", the Company on a quarterly
basis evaluates the recoverability of its long-lived assets and goodwill to
determine whether any events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable. For long-lived assets,
other than goodwill, the Company bases its evaluation on the nature of the
assets, the future economic benefit of the assets, and any historical or
future profitability measurements. For goodwill, the evaluation is based on
whether the acquired entity is profitable, is projecting profits, is
maintaining or increasing its revenue base or whether any other positive or
negative business factors exist. If the Company acquires a business which is
generating significant losses and is projecting losses in the future the
Company will recognize a loss for the difference between the carrying amount
and the estimated fair value of the asset, based on an analysis of the
estimated undiscounted cash flow. In accordance with this policy, the Company
charged $2,122,468 and $2,526,691 to expense in fiscal 1995 and 1996,
respectively, to reduce the goodwill balances to the estimated fair value.
Goodwill consists of the following:
PRODUCTION GROUP INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
F-7
<PAGE>
PRODUCTION GROUP INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
<TABLE>
<CAPTION>
AUGUST 31,
1995 1996
---------- -----------
<S> <C> <C>
Goodwill $5,300,185 $27,348,623
Accumulated Amortization 330,074 704,441
---------- -----------
$4,970,111 $26,644,182
========== ===========
</TABLE>
Goodwill represents the excess of purchase price over the fair value of net
assets acquired. Goodwill is amortized on a straight-line basis over periods
ranging from 15 to 40 years. The amortization period of the goodwill is based
on number of years in business, historical profitability, the nature of the
business and any other relevant factors.
Fair Values of Financial Instruments
The Company believes that the carrying amount of its assets and liabilities
reported in the balance sheets approximates their fair value.
Concentration of Credit Risk
Financial instruments that potentially subject the Company to concentrations
of credit risk consist primarily of cash equivalents and trade accounts
receivable. The Company places its cash and cash investments with high-credit
quality financial institutions. The Company periodically performs credit
evaluations of its customers' financial condition and generally does not
require collateral. However, the Company monitors its exposure for credit
losses and maintains allowances for anticipated losses.
Revenue Recognition
The Company accounts for revenues under long-term contracts (generally
greater than six months in duration) using the percentage-of-completion
method, whereby revenues are recorded in proportion with the ratio that costs
incurred to date bear to the total anticipated costs. At August 31, 1995 and
1996, the Company had received $171,230 and $2,821,850, respectively, related
to future events and has classified these amounts as deferred revenues in the
consolidated balance sheets.
The Company accounts for revenues under short-term contracts (generally less
than six months in duration), using the completed contract method, whereby
costs and revenues are deferred until the event occurs. The use of the
completed contract method for short-term contracts represents the economic
substance of the transactions and is based upon the performance requirements
of the Company's contracts. At August 31, 1995 and 1996, the Company had made
payments of approximately $427,000 and $1,211,000, respectively, and had
recorded these amounts as deferred costs in the consolidated balance sheets.
As of August 31, 1995 and 1996, the Company had billings in excess of costs of
approximately $2,324,000 and $1,893,000, respectively, related to future
events and had classified these amounts as deferred revenues in the
consolidated balance sheets.
Provisions for anticipated losses are made in the period in which they
first become determinable.
Revenues related to the video library are recognized either under the
percentage-of-completion or completed contract method. The determinant factor
is based on the long-term or short-term nature of the related business
communications contract.
The Company's policy for recognizing revenues and expenses associated with
proprietary and sponsored events is consistent with those policies related to
contractual relationships. However, for new
F-8
<PAGE>
PRODUCTION GROUP INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
events for which the Company cannot reasonably estimate dependable revenues
and costs, the completed contract method is used. Once the viability of an
event has been demonstrated and reasonably dependable estimates of revenues
and costs can be made, the percentage-of-completion method is employed.
Foreign Revenues
The Company operates predominately in a single industry as a provider of
event services. The Company is a multinational company with operations in the
United Kingdom. Revenues resulting from foreign operations amounted to
approximately $7,300,000 or 9.3% of consolidated net revenues.
Significant Customer
During the year ended August 31, 1994, one customer accounted for
approximately 10% of revenues.
Reorganization and Consolidation Expenses
The Company recognized reorganization and consolidation expenses consisting
of:
<TABLE>
<CAPTION>
YEARS ENDED AUGUST 31,
--------------------------
1994 1995 1996
---- ---------- ----------
<S> <C> <C> <C>
Writeoff of goodwill $-- $2,122,468 $2,526,691
Writeoff of investments -- -- 1,731,168
Reorganization expenses -- -- 1,877,686
Other -- -- 761,852
---- ---------- ----------
$-- $2,122,468 $6,897,397
==== ========== ==========
</TABLE>
In fiscal 1996, the Company wrote off goodwill of $2,527,000 associated with
acquisitions that occurred during fiscal 1993 and 1994. Goodwill associated
with Washington, Inc. ("WINC") accounted for the primary portion of the write-
off. In fiscal 1995, the Company wrote off the goodwill balance of $2,122,000
associated with the Safaris Events, Inc. acquisition that occurred during
fiscal 1994. The write-offs were in accordance with the Company's goodwill
impairment policy. Given the historical operating losses, the episodic nature
of the business, the lack of expectation for profits and the estimated
undiscounted cash flows (to assess the recoverability of the goodwill
balance), the Company determined that the future financial forecasts did not
support the recoverability of the remaining goodwill balance, and, therefore,
wrote down the goodwill balance to the estimated fair value.
During 1996, the Company expensed $1,731,168 related to certain investments
in accordance with the Company's long-lived asset and goodwill impairment
policy. The investments primarily related in investments in three events that
have generated losses historically and are projected to generate losses in the
future.
During 1996, the Company expensed certain reorganization costs of $1,877,636
related to the consolidation of unprofitable or redundant field offices in
accordance with a plan set forth and approved by the Company's management and
Board of Directors. The costs consist of lease cancellation charges and
leasehold improvement writeoffs. The unprofitable or redundant field offices
closed primarily resulted from acquisitions which occurred prior to fiscal
1995.
Income Taxes
The Company provides for income taxes in accordance with the liability
method. Under this method, deferred tax assets and liabilities are determined
based on differences between financial reporting and tax bases of assets and
liabilities and are measured using the enacted tax rates and laws that will be
in effect when the differences are expected to reverse.
F-9
<PAGE>
PRODUCTION GROUP INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Net Loss Per Share
The Company's net loss per share calculations are based upon the weighted
average number of shares of Common Stock outstanding. Pursuant to the
requirements of the Securities and Exchange Commission Staff Accounting
Bulletin No. 83, convertible Preferred Stock, Common Stock, and Common Stock
options issued at prices below the initial public offering price during the
twelve months immediately preceding the contemplated initial filing of the
registration statement relating to the initial public offering ("IPO") have
been included in the computation of net loss per share as if they were
outstanding for all periods presented (using the treasury method assuming
repurchase of Common Stock at the estimated IPO price). Other shares issuable
upon the exercise of Common Stock options and conversion of convertible
Preferred Stock have been excluded from the computation because the effect of
their inclusion would be antidilutive. Subsequent to the Company's IPO, Common
Stock options under the treasury stock method will be included to the extent
they are dilutive. Weighted average shares used to calculate pro forma net
loss per share for the year ended August 31, 1996 differs from the weighted
average on a historical basis due to the inclusion of the shares of Common
Stock resulting from the assumed conversion, at the beginning of the
applicable period, of convertible Preferred Stock as contemplated by the IPO.
Statements of Cash Flows
The supplemental cash flow information includes:
<TABLE>
<CAPTION>
YEARS ENDED AUGUST 31,
-------------------------
1994 1995 1996
------- -------- --------
<S> <C> <C> <C>
Interest paid $20,811 $127,907 $582,623
Income taxes paid $ 0 $ 64,189 $244,250
</TABLE>
Recent Pronouncements
In October 1995, the Financial Accounting Standards Board issued SFAS No.
123, "Accounting for Stock-Based Compensation," which is effective for the
Company's August 31, 1997 financial statements. SFAS No. 123 allows companies
to account for stock-based compensation under either the new provisions of
SFAS No. 123 or under the provisions of APB No. 25, but requires pro forma
disclosures in the footnotes to the financial statements as if the measurement
provisions of SFAS No. 123 had been adopted. The Company intends to continue
accounting for its stock-based compensation in accordance with the provisions
of APB No. 25. Accordingly, the adoption of SFAS No. 123 will not impact the
consolidated financial position or the results of operations of the Company.
3. PROPERTY AND EQUIPMENT
Property and equipment consists of the following:
<TABLE>
<CAPTION>
AUGUST 31,
1995 1996
---------- ----------
<S> <C> <C>
Office furniture and fixtures $ 434,058 $1,040,970
Computer and production equipment 1,317,256 2,265,449
Leasehold improvements 49,950 422,228
Capitalized video library costs 236,663 362,356
---------- ----------
2,037,927 4,091,003
Accumulated depreciation and amortization (646,884) (1,349,289)
---------- ----------
$1,391,043 $2,741,714
========== ==========
</TABLE>
F-10
<PAGE>
PRODUCTION GROUP INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
3. PROPERTY AND EQUIPMENT (CONTINUED)
Property and equipment are recorded at cost or fair market value if acquired
through an acquisition. Depreciation and amortization is calculated on a
straight-line basis over estimated useful lives ranging from five to seven
years. Leasehold improvements are amortized over the shorter of their
estimated useful lives or lease term, using the straight-line method.
Costs incurred to produce videos that are expected to produce future
revenues are capitalized. As of August 31, 1996, all videos have been released
and no videos are in production. The costs are stated at the lower of the
unamortized cost or estimated net realizable value, as periodically determined
on a video by video basis. The costs are amortized in proportion to the ratio
of current period related revenue to total estimated gross revenue for each
video. The Company periodically evaluates the value of its capitalized video
library costs to determine its net realizable value. In 1995, the Company
evaluated the expected future revenues from video library sales and as a
result, accelerated the amortization of the capitalized video library costs by
approximately $1,100,000. This additional amortization expense of $1,100,00
has been classified as cost of services in the statements of operations.
4. ACQUISITIONS
Since fiscal 1993, the Company has completed fourteen acquisitions accounted
for under the purchase method. These acquisitions were as follows:
Effective January 1, 1996, the Company acquired all the outstanding stock of
Ray Bloch Productions, Inc. ("Ray Bloch"). The aggregate purchase price was
(i) $3,372,000 in cash, (ii) $2,673,886 in a note payable, and (iii)
additional cash consideration in the aggregate amount of up to $1,500,000 to
be paid in the next two fiscal years contingent upon the achievement of
certain target revenue and net income levels by Ray Bloch. The transaction was
accounted for under the purchase method and resulted in an excess of purchase
price over the fair value of net assets acquired of approximately $5,542,000,
which the Company recorded as goodwill. If the additional cash consideration
is earned, the Company intends to account for the additional cash
consideration as purchase price. The results of operations of Ray Bloch have
been consolidated with those of the Company since the date of acquisition.
Effective February 1, 1996, the Company acquired all the outstanding stock
of Epic Enterprises Inc. ("Epic"), including Epic's 50% interest in a
partnership, Shelley Inc. The Company also purchased the remaining 50%
interest in Shelley Inc. from the other 50% owner (collectively the "Acquired
Business"). The aggregate purchase price was (i) $3,792,000 in cash, (ii)
$1,500,000 in a note payable, (iii) additional cash consideration of $500,000
contingent upon the execution of a major contract, and (iv) additional cash
consideration of up to $1,000,000 payable contingent upon the achievement of
certain target revenue and net income levels by the Acquired Business. If the
additional cash consideration is earned, the Company intends to account for
the additional cash consideration as purchase price. The transaction was
accounted for under the purchase method and resulted in an excess of purchase
price over the fair value of net assets acquired of approximately $5,534,000,
which the Company recorded as goodwill. Accordingly, the results of operations
of the Acquired Business have been consolidated with those of the Company
since the date of acquisition.
Effective July 1, 1996, the Company acquired all the outstanding stock of
Epic Enterprises of Nevada, Inc. ("Epic NV"). The purchase price was (i)
$1,085,000 in cash and (ii) additional cash consideration of up to $5,000,000
to be paid by December 31, 1998, if Epic NV achieves certain retained earnings
thresholds. If the additional cash consideration is earned, the Company
intends to account for the additional cash consideration as purchase price.
The transaction was accounted for under the purchase
F-11
<PAGE>
PRODUCTION GROUP INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
4. ACQUISITIONS (CONTINUED)
method and resulted in an excess of purchase price over the fair value of net
assets acquired of approximately $1,174,000, which the Company recorded as
goodwill. The results of operations of Epic NV have been consolidated with
those of the Company since the date of acquisition.
Effective April 1, 1996, the Company acquired all the outstanding stock of
Timberline Productions, Inc. ("Timberline"). The aggregate purchase price was
(i) $1,862,000 in cash, (ii) $506,502 in notes payable, and (iii) additional
cash consideration of up to $800,000 contingent upon the achievement of
certain target revenue and net income levels for the next two subsequent years
by Timberline. If the additional cash consideration is earned, the Company
intends to account for the additional cash consideration as purchase price.
The transaction was accounted for under the purchase method and resulted in an
excess of purchase price over the fair value of net assets acquired of
approximately $1,889,000, which the Company recorded as goodwill. The results
of operations of Timberline have been consolidated with those of the Company
since the date of acquisition.
Effective September 1, 1995, the Company acquired all the outstanding stock
of Spearhead Exhibitions Limited ("Spearhead"). The aggregate purchase price
was approximately (i) $4,500,000 in cash and (ii) $3,553,000 in a note
payable. The transaction was accounted for under the purchase method and
resulted in an excess of purchase price over the fair value of net assets
acquired of approximately $7,691,000, which the Company recorded as goodwill.
Accordingly, the results of operations of Spearhead have been consolidated
with those of the Company since the date of acquisition.
Since inception, the Company also acquired nine additional entities. The
aggregate purchase price was (i) $3,779,534 payable in cash, (ii) $4,661,664
in notes payable, and (iii) additional cash consideration contingent upon the
achievement of target revenue and net income levels by the various acquired
entities. The transactions were accounted for under the purchase method and
resulted in an excess of purchase price over the fair value of net assets
acquired of approximately $5,518,000, which the Company recorded as goodwill.
The results of operations of the acquired entities have been consolidated with
those of the Company since the dates of acquisition.
5. BANK LINES OF CREDIT
During fiscal 1996, the Company executed a financing and security agreement
with a bank whereby the Company could borrow up to $4,000,000, $5,000,000 and
$1,000,000 under working capital, acquisition and equipment facilities,
respectively. During 1996, the Company had borrowed approximately $3,000,000
under the acquisition facility, which was subsequently converted to a note
payable, due over an 18-month period (See Note 6). There were no other
borrowings under the acquisition facility during 1996. As of August 31, 1996,
the aggregate outstanding borrowings under the working capital and equipment
facilities were $3,000,000; these facilities terminated effective
September 30, 1996. At August 31, 1996 the Company was not in compliance with
certain covenants. As a result, at August 31, 1996, the outstanding bank
borrowings were classified as current. See Note 14.
The Company is charged an annual interest rate of prime plus 2% on
outstanding borrowings under the credit facilities. The Company made interest
payments of $107,496 in 1996. The credit facilities are secured by a first
lien on all of the assets of the Company. The bank had also agreed to issue
standby letters of credit in an amount not to exceed the available balance
under the working capital facility; however, such letters of credit are
subject to the negotiations discussed in the preceding paragraph. Under the
terms of the agreement in connection with the lines of credit above, the
Company is subject to certain restrictions which include, among other things,
restrictions on: (i) incurrence of additional indebtedness,
F-12
<PAGE>
PRODUCTION GROUP INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
5. BANK LINES OF CREDIT (CONTINUED)
(ii) working capital ratios and (iii) the prohibition from paying cash
dividends without the bank's consent.
During fiscal 1995, the Company had a bank line of credit and an equipment
line of credit for $2,000,000 and $1,000,000, respectively. The outstanding
balances on these credit facilities were repaid during fiscal 1995 and the
agreement was then terminated.
6. NOTES PAYABLE
Notes payable balances are as follows:
<TABLE>
<CAPTION>
AUGUST 31,
1995 1996
----------- ------------
<S> <C> <C>
Subordinated notes payable related to the
acquisition of Ray Bloch, which has been
discounted at an imputed interest rate of 8.5% and
recorded net of unamortized interest of $326,671.
$1,250,000 is due on March 27, 1996 with the
balance due in four equal quarterly installments
beginning on June 27, 1997. $ -- $ 2,673,886
Subordinated notes payable related to the
acquisition of Timberline, which has been
discounted at an imputed interest rate of 8.25%
and recorded net of unamortized interest of
$93,498. Note is due and payable in full on April
12, 1998. -- 506,502
Subordinated notes payable related to the
acquisition of Epic, which bears interest at a
rate of 5% per annum. Principal and interest is
due and payable in full on June 28, 1997. -- 1,500,000
Subordinated note payable related to the
acquisition of Spearhead, which has been
discounted at an imputed interest rate of 7.5% and
recorded net of unamortized interest of $446,568.
Note is due and payable in full on April 1, 1997. -- 3,553,432
Subordinated notes payable related to certain
acquisitions since fiscal 1994, which bear
interest rates ranging from 8.5% to prime plus
1.0%. These notes are scheduled to mature between
first quarter 1997 second quarter 1999. 2,085,070 2,723,563
Notes payable to a bank, due in monthly
installments through December 1997. As a result of
the covenant violation (see Notes) the outstanding
balances have been classified as current. Interest
is charged at an annual rate of prime plus .25%.
The notes payable are secured by certain assets of
the Company (weighted average rates of 8.25% at
August 31, 1996). -- 2,977,778
----------- ------------
2,085,070 13,935,161
Less current portion (768,839) (11,294,254)
----------- ------------
$ 1,316,231 $ 2,640,907
=========== ============
</TABLE>
All notes payable issued to sellers in conjunction with acquisition
agreements are subordinated to the bank's notes payable and credit facilities.
The aggregate annual maturities of notes payable outstanding at August 31,
1996 are as follows:
<TABLE>
<S> <C>
1997 $11,294,254
1998 2,569,931
1999 70,976
-----------
$13,935,161
===========
</TABLE>
F-13
<PAGE>
PRODUCTION GROUP INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
7. COMMITMENTS
The Company has entered into various operating lease agreements for office
space and equipment. The leases contain various renewal options. Future
minimum lease payments may be periodically adjusted based on changes in the
lessors' operating costs.
Future minimum lease payments under noncancelable operating leases at August
31, 1996 are approximately:
<TABLE>
<S> <C>
1997 $ 2,196,313
1998 1,985,286
1999 1,807,039
2000 1,305,112
2001 and thereafter 3,600,323
-----------
$10,894,073
===========
</TABLE>
Rent expense for fiscal years 1994, 1995, and 1996 amounted to $578,168,
$1,387,834, and $1,849,455, respectively.
Pursuant to employment agreements, the Company has obligations to pay
minimum salaries of approximately $1,420,000 as well as bonuses to certain key
employees.
Pursuant to an agreement, the Company is committed to host an exhibition
every two years through 2009 at a certain facility. The agreement sets forth a
minimum rental area of 10,000 per sqm in 1997 and thereafter. Rates are
indexed-linked and range from $39 to $53 per sqm (before indexation). Also,
the Company has certain non-cancelable contracts related to commitments for
rental of hotels and convention centers for its events; in 1997, the
commitments amount to approximately $445,000.
8. INCOME TAXES
The income tax (benefit) provision consists of:
<TABLE>
<CAPTION>
YEARS ENDED AUGUST 31,
------------------------
1994 1995 1996
--------- ---- --------
<S> <C> <C> <C>
Current:
Federal........................................ $(176,000) $-- $ --
State.......................................... (44,000) -- 290,000
Foreign........................................ -- -- 426,000
--------- ---- --------
$(220,000) $-- $716,000
========= ==== ========
</TABLE>
Significant components of the Company's net deferred tax assets are
approximately:
<TABLE>
<CAPTION>
AUGUST 31,
1995 1996
----------- -----------
<S> <C> <C>
Deferred tax assets:
Restructuring reserve......................... $ -- $ 3,130,000
Net operating loss carry forwards............. 1,675,000 1,950,000
Goodwill amortization......................... 791,000 810,000
Allowance for bad debts....................... 174,000 324,000
Accrued expenses.............................. 377,000 383,000
Other......................................... 390,000 285,000
----------- -----------
Total deferred tax assets....................... 3,407,000 6,882,000
Deferred tax liabilities:
Depreciation.................................. (91,000) (243,000)
Valuation allowance........................... (3,316,000) (6,639,000)
----------- -----------
Net deferred tax assets......................... $ -- $ --
=========== ===========
</TABLE>
F-14
<PAGE>
PRODUCTION GROUP INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
8. INCOME TAXES (CONTINUED)
At August 31, 1996, the Company has net operating loss carryforwards of
approximately $5,000,000 expiring through 2011. The Company has had ownership
for tax purposes but has no current significant net operating loss carryover
limitation.
The Company has recorded a 100% valuation allowance against the net deferred
tax assets due to the uncertainties surrounding realizability of the asset.
The valuation allowance for deferred taxes increased by approximately
$3,300,000 primarily as a result of increased net operating loss carryforwards
and expense accounts.
The reconciliation of income tax from the statutory rate of 34% is:
<TABLE>
<CAPTION>
YEARS ENDED AUGUST 31,
-----------------------------------
1994 1995 1996
--------- ----------- -----------
<S> <C> <C> <C>
Tax (benefit) at statutory rates....... $(568,000) $(2,574,000) $(3,866,000)
Non-deductible expenses................ 27,000 67,000 1,084,000
Valuation allowance change............. 381,000 2,900,000 3,323,000
Future State tax benefit............... -- (324,000) (461,000)
State income tax net of federal bene-
fit................................... (29,000) -- 191,000
Foreign taxes.......................... -- -- 426,000
Other.................................. (31,000) (69,000) 19,000
--------- ----------- -----------
$(220,000) $ -- $ 716,000
========= =========== ===========
</TABLE>
9. STOCKHOLDERS' EQUITY
CONVERTIBLE PREFERRED STOCK
On May 24, 1996, the Company amended its articles of incorporation to
authorize 5,746,407 shares of Convertible Preferred Stock. Each respective
series of Preferred Stock has similar rights, preferences, privileges and
restrictions as set forth in the amended articles of incorporation. Holders of
Series A, Series C, Series D and Series E shares of Convertible Preferred
Stock are entitled to dividends prior and in preference to any declaration or
payment of any dividend on the Common Stock of the Company at the per share
rate of $0.08, $0.26, $0.70 and $0.835 per annum, respectively. Rights to
these dividends are not cumulative. Series A, Series C, Series D and Series E
shares of Convertible Preferred Stock have liquidation preferences as
disclosed in the consolidated balance sheets ranging from $0.84 to $8.35 per
share, plus any declared but unpaid dividends.
Shares of Convertible Preferred Stock are convertible into Common Stock at
the option of the holder thereof, at any time after the date of issuance into
shares of Common Stock at a ratio of one to one. Shares of Convertible
Preferred Stock will automatically be converted into shares of Common Stock
immediately upon the consummation of an initial purchase offering of which the
price per share is not less than $9.00 and $12,000,000 in the aggregate.
Public holders of Convertible Preferred Stock have the right to one vote for
each share of Common Stock into which such Convertible Preferred Stock could
then be converted, and with respect to such vote, the holder has the rights
and powers equal to the voting rights of the Common Stock holders. Each share
of Convertible Preferred Stock will be automatically converted into Common
Stock upon the consummation of a qualifying underwritten public offering.
F-15
<PAGE>
PRODUCTION GROUP INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
9. STOCKHOLDERS' EQUITY (CONTINUED)
PRIVATE PLACEMENTS
In November 1993 and January 1994, the Company issued 1,270,151 shares of
Series C Convertible Preferred Stock for $2.60 per share to various employees
and new and existing investors resulting in net proceeds of approximately
$3,300,000.
In February 1995, the Company issued 1,574,997 shares of Series D
Convertible Preferred Stock for $7.00 per share to new and existing investors
resulting in net proceeds of approximately $11,000,000.
During 1996, the Company sold 1,641,975 shares of Series E Convertible
Preferred Stock for $8.35 per share to new and existing investors resulting in
net proceeds of approximately $13,700,000.
COMMON STOCK OPTIONS
During 1995, the Company adopted a stock option plan which includes two
components, an Options Grant Program ("OGP") and a Stock Issuance Program
("SIP"). The OGP provides for the granting of options to employees,
consultants and members of the Board of Directors of the Company ("eligible
persons") to purchase shares of Common Stock. The SIP allows shares of Common
Stock to be issued directly to eligible persons through immediate purchase or
as bonus for services rendered. The terms of stock options granted under the
OGP may not exceed ten years. The exercise prices for options granted under
the plan approximate fair value. At August 31, 1996, the maximum number of
shares of Common Stock which may be issued in the aggregate under this amended
Plan was 1,156,000.
Common Stock options activity is as follows:
<TABLE>
<CAPTION>
NUMBER OF OPTION PRICE
SHARES (PER SHARE)
--------- ------------
<S> <C> <C>
Balance at August 31, 1994 370,000 $ 0.01
Granted 125,000 $0.01--$1.40
Canceled (70,000) $ 0.01
Exercised -- --
--------- ------------
Balance at August 31, 1995 425,000 $0.01--$1.40
Granted 605,300 $1.40--$3.00
Canceled (4,084) $1.40--$1.67
Exercised (1,000) $ 1.40
--------- ------------
Balance at August 31, 1996 1,025,216 $0.01--$3.00
========= ============
Exercisable at August 31, 1996 732,902
=========
</TABLE>
The options generally vest over a period of four years. The Company granted
605,300 options during 1996, whose grant prices were less than the deemed fair
value of the Company's Common Stock. Also, the Company extended the exercise
period of 280,000 options, thereby creating a new measurement date. As a
result, the Company recognized $1,319,000 of compensation expense during 1996
for the vested options and the Company plans to recognize $133,134 of
compensation expense in future periods related to the unvested options.
RESERVE FOR ISSUANCE
The Company has reserved 6,233,123 shares of common stock for issuance upon
conversion of preferred stock and exercise of outstanding and future stock
options.
10. RETIREMENT PLAN
Effective December 1, 1993, the Company established a defined contribution
plan (the "Plan") for substantially all employees of the Company. Employees
may elect to contribute a percentage of their
F-16
<PAGE>
PRODUCTION GROUP INTERNATIONAL, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
10. RETIREMENT PLAN (CONTINUED)
annual compensation to the Plan up to a maximum of 15%, subject to certain IRS
regulations. The Company generally has not made contributions to the Plan.
11. MANAGEMENT PLANS
The Company intends to file a Registration Statement on Form S-1 with the
Securities and Exchange Commission on or about October 25, 1996 to offer
shares of its Common Stock to the public. Should the offering be delayed or
not occur, the Company's ability to fund operations and satisfy its debt
payments through April 1998 has been ensured through commitments from certain
preferred stock investors.
12. SUBSEQUENT EVENT AND RELATED PRO FORMA INFORMATION
Subsequent to August 31, 1996, the Board of Directors increased by 250,000
the number of shares available under the 1995 stock plans, adopted the
Directors' Plan and issued stock options to purchase 3,000 shares of Common
Stock at an exercise price of $5.00 per share.
In September 1996, the Company issued 154,432 shares of Series E convertible
Preferred Stock to new and existing investors resulting in net proceeds of
approximately $1,290,000 at a per share price of $8.35.
The financial statements include pro forma information as of August 31, 1996
to reflect the issuance of 154,432 shares of Series E Convertible Preferred
Stock and the conversion of all outstanding Convertible Preferred Stock to
shares of Common Stock on a one-to-one basis.
13. PRO FORMA STATEMENTS OF OPERATIONS
Following is a summary of selected pro forma information for the years ended
August 31, 1995 and 1996 as if the acquisitions completed during fiscal 1995
and 1996 had occurred on September 1, 1994.
<TABLE>
<CAPTION>
YEARS ENDED AUGUST 31,
1995 1996
----------- ------------
<S> <C> <C>
Revenues............................................. $78,096,000 $ 91,526,000
Net loss............................................. $(7,988,000) $(11,854,000)
Net loss per share................................... $ $
</TABLE>
14. EVENT SUBSEQUENT TO DATE OF AUDITOR'S REPORT
Subsequent to August 31, 1996, on November 27, 1996, the Company and the
bank amended and restated the financing and security agreement, pursuant to
which among other things, the maturity dates of the working capital and
equipment lines of credit were extended. A certain covenant relating to the
amortization of seller financing was also amended.
F-17
<PAGE>
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
The Board of Directors
Ray Bloch Productions, Inc.
We have audited the accompanying consolidated balance sheets of Ray Bloch
Productions, Inc. as of December 31, 1994 and 1995, and the related
consolidated statements of operations, stockholder's equity and cash flows for
each of the three years in the period ended December 31, 1995. These financial
statements are the responsibility of Ray Bloch Productions, Inc.'s management.
Our responsibility is to express an opinion on these financial statements
based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position
of Ray Bloch Productions, Inc. at December 31, 1994 and 1995, and the
consolidated results of its operations and its cash flows for each of the
three years in the period ended December 31, 1995, in conformity with
generally accepted accounting principles.
/s/ Ernst & Young LLP
Vienna, Virginia
October 4, 1996
F-18
<PAGE>
RAY BLOCH PRODUCTIONS, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
1994 1995
---------- ----------
<S> <C> <C>
ASSETS
Current assets:
Cash................................................... $1,576,535 $1,626,266
Accounts receivable.................................... 192,924 969,104
Due from stockholder................................... 74,000 122,635
Deferred costs......................................... 150,548 749,055
Deferred tax assets.................................... 10,879 8,144
Prepaid expenses and other current assets.............. 75,900 38,848
---------- ----------
Total current assets..................................... 2,080,786 3,514,052
Property and equipment, net.............................. 253,749 313,054
Other assets............................................. 70,273 23,069
---------- ----------
Total assets............................................. $2,404,808 $3,850,175
========== ==========
LIABILITIES AND STOCKHOLDER'S EQUITY
Current liabilities:
Accounts payable and accrued expenses.................. $ 275,716 $ 887,562
Bank line of credit.................................... -- 350,000
Due to stockholder..................................... -- 500,000
Income taxes payable................................... 199,092 75,872
Deferred revenues...................................... 1,492,400 1,803,795
---------- ----------
Total current liabilities................................ 1,967,208 3,617,229
Commitments.............................................. -- --
Stockholder's equity:
Common stock, no par value, 200 shares authorized; 82.5
shares issued and outstanding......................... 4,600 4,600
Retained earnings...................................... 433,000 228,346
---------- ----------
Total stockholder's equity............................... 437,600 232,946
---------- ----------
Total liabilities and stockholders' equity............... $2,404,808 $3,850,175
========== ==========
</TABLE>
See accompanying notes.
F-19
<PAGE>
RAY BLOCH PRODUCTIONS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
1993 1994 1995
----------- ----------- -----------
<S> <C> <C> <C>
Revenues................................ $10,198,763 $13,026,392 $16,929,067
Cost of services........................ 6,977,875 9,103,412 12,474,699
----------- ----------- -----------
Gross profit............................ 3,220,888 3,922,980 4,454,368
Selling, general and administrative..... 3,076,461 3,468,927 4,499,680
----------- ----------- -----------
Income (loss) from operations........... 144,427 454,053 (45,312)
Other income (expense):
Interest income....................... 28,350 48,425 68,424
Interest expense...................... (15,331) (11,636) (28,271)
(Loss) gain on disposal of fixed as-
sets................................. (7,890) 11,126 28,335
----------- ----------- -----------
5,129 47,915 68,488
----------- ----------- -----------
Income before income taxes.............. 149,556 501,968 23,176
Income tax provision.................... 77,764 219,151 227,830
----------- ----------- -----------
Net income (loss)....................... $ 71,792 $ 282,817 $ (204,654)
=========== =========== ===========
</TABLE>
See accompanying notes.
F-20
<PAGE>
RAY BLOCH PRODUCTIONS, INC.
STATEMENTS OF STOCKHOLDER'S EQUITY
<TABLE>
<CAPTION>
TOTAL
COMMON RETAINED STOCKHOLDER'S
STOCK EARNINGS EQUITY
------ --------- -------------
<S> <C> <C> <C>
Balance at December 31, 1992.................... $4,600 $ 78,391 $ 82,991
Net income.................................... -- 71,792 71,792
------ --------- ---------
Balance at December 31, 1993.................... 4,600 150,183 154,783
Net income.................................... -- 282,817 282,817
------ --------- ---------
Balance at December 31, 1994.................... 4,600 433,000 437,600
Net loss...................................... -- (204,654) (204,654)
------ --------- ---------
Balance at December 31, 1995.................... $4,600 $ 228,346 $ 232,946
====== ========= =========
</TABLE>
See accompanying notes.
F-21
<PAGE>
RAY BLOCH PRODUCTIONS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
1993 1994 1995
---------- ----------- ----------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net income (loss)........................ $ 71,792 $ 282,817 $ (204,654)
Adjustments to reconcile net income
(loss) to net cash provided by (used in)
operating activities:
Loss (gain) on disposal of property and
equipment............................. 7,890 (11,126) (28,335)
Depreciation and amortization.......... 143,721 94,573 92,208
Deferred income taxes.................. (34,793) (12,646) 2,735
Changes in operating assets and
liabilities:
Accounts receivable.................... (53,959) 85,403 (776,180)
Deferred costs......................... (286,497) 282,729 (598,507)
Prepaid expenses and other current
assets................................ (137,654) 78,454 37,052
Other assets........................... 12,177 (4,221) 47,204
Accounts payable and accrued expenses.. 8,285 37,486 611,846
Deferred revenues...................... 1,900,543 (1,171,012) 311,395
Income taxes payable................... 109,258 68,029 (123,220)
---------- ----------- ----------
Net cash provided by (used in) operating
activities.............................. 1,740,763 (269,514) (628,456)
INVESTING ACTIVITIES
Purchases of property and equipment...... (28,053) (75,537) (167,396)
Collections on loans to stockholder...... -- 26,000 --
Loans to stockholder..................... (6,000) -- (48,635)
Proceeds from disposal of property and
equipment............................... 113,233 12,088 44,218
---------- ----------- ----------
Net cash provided by (used in) investing
activities.............................. 79,180 (37,449) (171,813)
FINANCING ACTIVITIES
Net (payments) borrowings on line of
credit.................................. (443,316) -- 350,000
Proceeds from loan from stockholder...... -- -- 500,000
Repayments on loan from stockholder...... (100,000) -- --
---------- ----------- ----------
Net cash (used in) provided by financing
activities.............................. (543,316) -- 850,000
---------- ----------- ----------
Net increase (decrease) in cash.......... 1,276,627 (306,963) 49,731
Cash at beginning of year................ 606,871 1,883,498 1,576,535
---------- ----------- ----------
Cash at end of year...................... $1,883,498 $ 1,576,535 $1,626,266
========== =========== ==========
</TABLE>
SUPPLEMENTAL INFORMATION:
Ray Bloch paid interest of $15,331, $11,636 and $28,271 for the years ended
December 31, 1993, 1994 and 1995, respectively.
See accompanying notes.
F-22
<PAGE>
RAY BLOCH PRODUCTIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. ORGANIZATION
Ray Bloch Productions, Inc. ("Ray Bloch") was incorporated on January 4,
1960 under the laws of the state of New York. Ray Bloch specializes in
providing business communication services to serve the needs of large
corporations and associations.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
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 in the financial statements and
the accompanying notes. Actual results could differ from those estimates.
Basis of Presentation
The consolidated financial statements include the accounts of wholly-owned
subsidiaries. All significant intercompany balances and transactions are
eliminated upon consolidation.
Statements of Cash Flows
For purposes of the statements of cash flows, Ray Bloch considers all highly
liquid investments with an original maturity date of three months or less to
be cash equivalents.
Revenue Recognition
Ray Bloch accounts for revenues using the completed contract method and
records revenues and costs of revenues upon completion of the event.
Provisions for anticipated losses are made in the period in which they first
become determinable. As of December 31, 1994 and 1995, Ray Bloch had received
advance non-refundable payments of $1,492,400 and $1,803,795, respectively,
related to future events and had recorded these amounts as deferred revenues
in the consolidated balance sheets. As of December 31, 1994 and 1995, Ray
Bloch had incurred $150,548 and $749,055, respectively, in costs related to
future events and had classified these amounts as deferred costs in the
consolidated balance sheets.
One customer accounted for approximately 17% of net revenues for the year
ended December 31, 1993 and two customers accounted for approximately 30% of
net revenues for the year ended December 31, 1994.
Income Taxes
Ray Bloch provides for income taxes in accordance with the liability method.
3. PROPERTY AND EQUIPMENT
Property and equipment consisted of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------
1994 1995
---------- ----------
<S> <C> <C>
Furniture and fixtures............................... $ 763,973 $ 739,129
Computer and production equipment.................... 175,156 291,146
Leasehold improvements............................... 91,160 59,398
---------- ----------
1,030,289 1,089,673
Accumulated depreciation and amortization............ (776,540) (776,619)
---------- ----------
$ 253,749 $ 313,054
========== ==========
</TABLE>
F-23
<PAGE>
RAY BLOCH PRODUCTIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
3. PROPERTY AND EQUIPMENT (CONTINUED)
Property and equipment are recorded at cost and are depreciated using the
straight-line method over the estimated useful lives of the related assets
ranging from five to seven years. Leasehold improvements are amortized over
the shorter of their estimated useful lives or lease term, using the straight-
line method.
4. BANK LINE OF CREDIT
At December 31, 1994 and 1995, Ray Bloch had a credit facility with a bank
whereby Ray Bloch could borrow up to $1,000,000. The credit facility expired
on September 30, 1996. Ray Bloch had $350,000 of outstanding borrowings under
the line of credit at December 31, 1995, which was subsequently repaid in
conjunction with the stock purchase (see Note 9).
5. COMMITMENTS
Ray Bloch has entered into various operating lease agreements for office
space and equipment. Future minimum lease payments may be periodically
adjusted based on changes in the lessors' operating costs.
Future minimum lease payments under non-cancelable operating leases as of
December 31, 1995 are:
<TABLE>
<S> <C>
1996........................................................... $ 262,100
1997........................................................... 272,366
1998........................................................... 276,372
1999........................................................... 218,389
Thereafter..................................................... 68,950
----------
Total minimum lease payments................................... $1,098,177
==========
</TABLE>
Rent expense was $272,881, $277,301 and $278,526 for the years ended
December 31, 1993, 1994 and 1995, respectively.
6. INCOME TAXES
Deferred income taxes reflect the net 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. The principal items
giving rise to Ray Bloch's net deferred tax assets are the allowance for
doubtful accounts, the excess of tax depreciation and amortization over book
depreciation and amortization, and other accrued expenses. Ray Bloch's net
deferred tax assets and liabilities are:
<TABLE>
<CAPTION>
DECEMBER 31,
---------------
1994 1995
------- -------
<S> <C> <C>
Deferred tax assets......................................... $10,879 $15,753
Deferred tax liabilities.................................... -- (7,609)
------- -------
Net deferred tax assets..................................... $10,879 $ 8,144
======= =======
</TABLE>
F-24
<PAGE>
RAY BLOCH PRODUCTIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
6. INCOME TAXES (CONTINUED)
Significant components of the income tax provision are as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
1993 1994 1995
-------- -------- --------
<S> <C> <C> <C>
Current:
Federal.......................................... $ 86,252 $178,979 $174,140
State............................................ 26,305 52,818 50,955
-------- -------- --------
112,557 231,797 225,095
Deferred:
Federal.......................................... (26,662) (9,753) 2,100
State............................................ (8,131) (2,893) 635
-------- -------- --------
(34,793) (12,646) 2,735
-------- -------- --------
$ 77,764 $219,151 $227,830
======== ======== ========
</TABLE>
Ray Bloch's effective tax rate differs from the statutory federal income tax
rate as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
1993 1994 1995
------ ------ ------
<S> <C> <C> <C>
Statutory federal income tax rate................... 34% 34% 34%
Non-deductible expenses............................. 10% 3% 802%
State taxes......................................... 8% 7% 147%
------ ------ ------
52% 44% 983%
====== ====== ======
</TABLE>
In 1995, Ray Bloch, for book purposes, made a payment of $500,000 to an
employee, which is not deductible for tax purposes.
Ray Bloch paid $6,716, $153,392 and $303,274 in income taxes for the years
ended December 31, 1993, 1994 and 1995, respectively.
7. RELATED PARTY TRANSACTIONS
Due from stockholder
As of December 31, 1994 and 1995, Ray Bloch had advanced $74,000 and
$122,635, respectively, to the stockholder. These loans were non interest-
bearing. Subsequent to December 31, 1995, these amounts were repaid by the
stockholder.
Due to stockholder
At December 31, 1995, the stockholder loaned $500,000 to Ray Bloch, which
was repaid during 1996.
Interest expense associated with above loans is deemed immaterial to the
consolidated financial statements.
8. EMPLOYEE BENEFIT PLANS
Pension Plan
Ray Bloch sponsors a defined benefit pension plan covering substantially all
employees. Plan benefits are based upon years of service and the compensation
during the last year before retirement. Ray Bloch's funding policy is to
contribute the minimum required, as determined for ERISA purposes.
Contributions are intended to provide not only for benefits attributed to
service to date but also for those expected to
F-25
<PAGE>
RAY BLOCH PRODUCTIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
8. EMPLOYEE BENEFIT PLANS (CONTINUED)
Pension Plan (continued)
be earned in the future. The assets of the pension plan are invested in money
markets and corporate debt and equity instruments. Ray Bloch contributed to
the pension plan approximately $65,000, $75,000, and $49,536 during the years
ended December 31, 1993, 1994 and 1995, respectively.
The following table sets forth the pension plan's funded status as reported
on activity, and amounts recognized in Ray Bloch's consolidated financial
statements:
<TABLE>
<CAPTION>
DECEMBER 31,
1994 1995
--------- ---------
<S> <C> <C>
Actuarial present value of benefit obligations:
Accumulated benefit obligation, including vested
benefits of $491,827 in 1994, $550,658 in 1995....... $(545,352) $(622,029)
========= =========
Projected benefit obligation.......................... (718,449) (826,459)
Plan assets at fair value............................. 367,903 405,006
--------- ---------
Funded status--projected benefit obligation in excess
of fair value of plan assets......................... $(350,546) $(421,453)
========= =========
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
1993 1994 1995
------- ------- -------
<S> <C> <C> <C>
Net periodic pension cost:
Service cost......................................... $31,273 $72,508 $76,503
Interest cost........................................ 2,086 2,417 2,756
------- ------- -------
Total net periodic pension cost...................... $33,359 $74,925 $79,259
======= ======= =======
</TABLE>
Key assumptions used in the actuarial valuation were:
<TABLE>
<CAPTION>
DECEMBER 31,
1994 1995
------ ------
<S> <C> <C>
Weighted average discount note............................. 6.7% 6.5%
Rate of return on assets:
Pre-retirement........................................... 6.5% 6.5%
Post-retirement.......................................... 5.0% 5.0%
</TABLE>
401(k) Plan
Ray Bloch has adopted a 401(k) plan (the "401(k) Plan") covering
substantially all employees of Ray Bloch. Under the 401(k) Plan, employees may
elect to reduce their current compensation by up to 15%, subject to annual
limitations, and have the amount of such reduction contributed to the 401(k)
Plan. The 401(k) Plan requires additional matching contributions by Ray Bloch
equaling one-half of the first six percent of each employee's contributions.
Matching contributions by Ray Bloch to the 401(k) Plan amounted to $1,804 and
$35,748 for the years ended December 31, 1994, and 1995, respectively.
9. SUBSEQUENT EVENT
Effective January 1, 1996, the stockholder of Ray Bloch Productions, Inc.
entered into a stock purchase agreement with Production Group International,
Inc. (PGI) whereby all of the issued and outstanding shares of common stock of
Ray Bloch were sold to PGI for $3,372,000 in cash and $3,000,000 in notes
payable. The agreement also stipulates additional payments of up to
$1,500,000.
F-26
<PAGE>
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
The Board of Directors
Epic Enterprises, Inc.
We have audited the accompanying combined balance sheets of Epic
Enterprises, Inc. ("Epic") as of January 31, 1995 and 1996, and the related
combined statements of operations, stockholders' deficit and cash flows for
each of the three years in the period ended January 31, 1996. These financial
statements are the responsibility of Epic's management. Our responsibility is
to express an opinion on these combined financial statements based on our
audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits 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 financial position of Epic Enterprises,
Inc. at January 31, 1995 and 1996, and the results of their operations and
their cash flows for each of the three years in the period ended January 31,
1996, in conformity with generally accepted accounting principles.
/s/ Ernst & Young LLP
Vienna, Virginia
October 4, 1996
F-27
<PAGE>
EPIC ENTERPRISES, INC.
COMBINED BALANCE SHEETS
<TABLE>
<CAPTION>
JANUARY 31,
1995 1996
---------- ----------
<S> <C> <C>
ASSETS
Current assets:
Cash................................................. $ 988,557 $1,231,312
Accounts receivable.................................. 39,993 1,059,681
Prepaid expenses and other current assets............ 20,795 23,947
Deferred costs....................................... 893,729 890,515
---------- ----------
Total current assets................................... 1,943,074 3,205,455
Property and equipment, net............................ 29,632 26,608
Due from officers...................................... 333,681 317,292
Note receivable from a customer, less allowance of
$47,000 at January 31, 1995 and 1996.................. 56,284 24,406
---------- ----------
Total assets........................................... $2,362,671 $3,573,761
========== ==========
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities:
Accounts payable and accrued expenses................ $ 274,641 $ 210,465
Income taxes payable................................. 56,575 44,650
Deferred revenues.................................... 2,032,917 3,370,212
---------- ----------
Total current liabilities.............................. 2,364,133 3,625,327
Commitments............................................ -- --
Stockholders' deficit:
Common stock; no par value; 6,000 shares authorized,
3,974 shares issued and outstanding................. 3,974 3,974
Accumulated deficit.................................. (5,436) (55,540)
---------- ----------
Total stockholders' deficit............................ (1,462) (51,566)
---------- ----------
Total liabilities and stockholders' deficit............ $2,362,671 $3,573,761
========== ==========
</TABLE>
See accompanying notes.
F-28
<PAGE>
EPIC ENTERPRISES, INC.
COMBINED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED JANUARY 31,
1994 1995 1996
---------- ---------- ----------
<S> <C> <C> <C>
Revenues................................... $3,523,338 $4,001,556 $4,621,291
Cost of services........................... 1,508,952 1,643,506 2,345,200
---------- ---------- ----------
Gross profit............................... 2,014,386 2,358,050 2,276,091
Selling, general and administrative........ 2,031,439 2,426,916 2,432,911
---------- ---------- ----------
Loss from operations....................... (17,053) (68,866) (156,820)
Other income:
Interest income.......................... 21,771 28,178 75,876
Other income............................. 39,026 46,512 20,115
---------- ---------- ----------
60,797 74,690 95,991
---------- ---------- ----------
Income (loss) before income taxes.......... 43,744 5,824 (60,829)
Income tax provision (benefit)............. 51,740 4,835 (11,925)
---------- ---------- ----------
Net (loss) income.......................... $ (7,996) $ 989 $ (48,904)
========== ========== ==========
</TABLE>
See accompanying notes.
F-29
<PAGE>
EPIC ENTERPRISES, INC.
COMBINED STATEMENTS OF STOCKHOLDERS' DEFICIT
<TABLE>
<CAPTION>
TOTAL
COMMON ACCUMULATED STOCKHOLDERS'
STOCK DEFICIT DEFICIT
------ ----------- -------------
<S> <C> <C> <C>
Balance at January 31, 1993.................... $3,974 $ 3,971 $ 7,945
Net loss..................................... -- (7,996) (7,996)
Dividends.................................... -- (1,200) (1,200)
------ -------- --------
Balance at January 31, 1994.................... 3,974 (5,225) (1,251)
Net income................................... -- 989 989
Dividends.................................... -- (1,200) (1,200)
------ -------- --------
Balance at January 31, 1995.................... 3,974 (5,436) (1,462)
Net loss..................................... -- (48,904) (48,904)
Dividends.................................... -- (1,200) (1,200)
------ -------- --------
Balance at January 31, 1996.................... $3,974 $(55,540) $(51,566)
====== ======== ========
</TABLE>
See accompanying notes.
F-30
<PAGE>
EPIC ENTERPRISES, INC.
COMBINED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED JANUARY 31,
1994 1995 1996
---------- ---------- -----------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net (loss) income........................ $ (7,996) $ 989 $ (48,904)
Adjustments to reconcile net (loss)
income to net cash provided by operating
activities:
Depreciation........................... 4,835 6,714 9,018
Allowance for note receivable.......... -- 47,000 --
Changes in operating assets and
liabilities:
Accounts receivable.................... (156,916) 676,868 (1,019,688)
Prepaid expenses and other current
assets................................ 25,976 (10,302) (3,152)
Deferred costs......................... (61,305) (351,685) 3,214
Accounts payable and accrued expenses.. 15,173 65,221 (64,176)
Income taxes payable................... 51,740 4,835 (11,925)
Deferred revenues...................... 409,129 (270,226) 1,337,295
---------- ---------- -----------
Net cash provided by operating
activities.............................. 280,636 169,414 201,682
INVESTING ACTIVITIES
Purchases of property and equipment...... (13,568) (11,301) (5,994)
Loans to officers........................ (173,500) (106,181) 16,389
Loans related to note receivable from a
customer................................ -- (103,284) --
Collections on note receivable from a
customer................................ -- -- 31,878
---------- ---------- -----------
Net cash (used in) provided by investing
activities.............................. (187,068) (220,766) 42,273
FINANCING ACTIVITIES
Dividends................................ (1,200) (1,200) (1,200)
---------- ---------- -----------
Net cash used in financing activities.... (1,200) (1,200) (1,200)
Net increase (decrease) in cash.......... 92,368 (52,552) 242,755
Cash at beginning of year................ 948,741 1,041,109 988,557
---------- ---------- -----------
Cash at end of year...................... $1,041,109 $ 988,557 $ 1,231,312
========== ========== ===========
</TABLE>
See accompanying notes.
F-31
<PAGE>
EPIC ENTERPRISES, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS
1. ORGANIZATION
Epic Enterprises, Inc. ("Epic") was incorporated on January 23, 1980 in the
state of California. Epic specializes in managing exhibitions and conventions
to serve the needs of individual, corporate and governmental clients.
Basis of Presentation
The combined financial statements include the accounts of Epic and Goren
Epic, a partnership formed in 1984, in which Epic owned a fifty percent
interest. As of February 1, 1996, Production Group International, Inc.
acquired 100% of Epic and Goren Epic pursuant to a stock purchase agreement
(see Note 8). As a result, the combined financial statements of the two
entities (collectively, the "acquired business") have been presented and
include both entities as if they had been combined since January 31, 1993. The
income tax provision (benefit) for Epic and Goren Epic has been calculated on
a combined basis.
Goren Epic is engaged in the business of organizing and owning two trade
shows. Under the partnership agreement, Epic received annual management fees,
for each of the two trade shows, and profits and losses of the partnership
were distributed equally.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
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 in the financial statements and
accompanying notes. Actual results could differ from those estimates.
Revenue Recognition
Epic accounts for revenues using the completed contract method and records
revenues and costs of revenues upon completion of the event. Provisions for
anticipated losses are made in the period in which they first become
determinable. As of January 31, 1995 and 1996, Epic had made payments of
$893,729 and $890,515, respectively, related to future events and had
classified these payments as deferred costs in the balance sheets. As of
January 31, 1995 and 1996, Epic had received advance non-refundable payments
of $2,032,917 and $3,370,212, respectively, related to future events and had
recorded these amounts as deferred revenues in the balance sheets.
One customer accounted for approximately 15%, 15%, and 14% of total revenues
during the years ended January 31, 1994, 1995, and 1996, respectively.
Income Taxes
Epic provides for income taxes in accordance with the liability method. The
income tax provision (benefit) for Epic and Goren Epic has been calculated on
a combined basis.
F-32
<PAGE>
EPIC ENTERPRISES, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
3. PROPERTY AND EQUIPMENT
Property and equipment consisted of the following:
<TABLE>
<CAPTION>
JANUARY 31,
1995 1996
-------- --------
<S> <C> <C>
Furniture and fixtures................................... $ 22,990 $ 23,363
Computer equipment....................................... 34,758 40,379
-------- --------
57,748 63,742
Less accumulated depreciation............................ (28,116) (37,134)
-------- --------
$ 29,632 $ 26,608
======== ========
</TABLE>
Property and equipment are recorded at cost. Depreciation is computed using
the straight-line method over the estimated useful lives of the related assets
ranging from five to seven years.
4. DUE FROM OFFICERS
As of January 31, 1995 and 1996, Epic loaned $333,681 and $317,292,
respectively, to certain officers in exchange for promissory notes which bear
interest at 5%. All accrued and unpaid interest and remaining principal on the
promissory notes are due and payable upon demand from April 25, 1999 through
February 1, 2001.
Subsequent to year-end and in connection with the stock purchase agreement
(see Note 8), the note receivable balance at January 31, 1996 of $317,292 was
forgiven in exchange for 46 shares of common stock held by the officers.
5. COMMITMENTS
Epic has entered into various operating lease agreements for office space
and equipment. Future minimum lease payments for its office space may be
periodically adjusted based on changes in the lessors' operating costs.
Future minimum lease payments under non-cancelable operating leases as of
January 31, 1996 are:
<TABLE>
<S> <C>
1997............................................................. $132,354
1998............................................................. 132,354
1999............................................................. 132,354
2000............................................................. 132,354
Thereafter....................................................... 11,030
--------
Total minimum lease payments..................................... $540,446
========
</TABLE>
Rent expense was $89,202, $122,107 and $163,877 for the years ended January
31, 1994, 1995 and 1996, respectively.
Epic has certain non-cancelable contracts related to commitments for rental
of hotels and convention centers for its events. As of January 31, 1996, Epic
had commitments of approximately $270,000 related to these contracts.
6. INCOME TAXES
Deferred income taxes reflect the net 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. Significant components
of Epic's net deferred tax assets and liabilities are:
F-33
<PAGE>
EPIC ENTERPRISES, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
<TABLE>
<CAPTION>
JANUARY 31,
1995 1996
-------- --------
<S> <C> <C>
Deferred tax assets:
Accrued vacation....................................... $ 8,563 $ 9,507
Reserve for note receivable............................ 18,865 18,865
Other.................................................. 877 659
-------- --------
Deferred tax assets...................................... 28,305 29,031
Deferred tax liabilities................................. -- --
Valuation allowance...................................... (28,305) (29,031)
-------- --------
Net deferred tax assets.................................. $ -- $ --
======== ========
</TABLE>
Significant components of the income tax provision (benefit) are as follows:
<TABLE>
<CAPTION>
YEAR ENDED JANUARY 31,
1994 1995 1996
-------- ------- --------
<S> <C> <C> <C>
Current:
Federal....................................... $ 39,752 $ 3,715 $(12,841)
State......................................... 11,988 1,120 916
-------- ------- --------
51,740 4,835 (11,925)
Deferred:
Federal....................................... (22,576) 4,548 (558)
State......................................... (6,808) 1,372 (168)
Valuation allowance........................... 29,384 (5,920) 726
-------- ------- --------
-- -- --
-------- ------- --------
$ 51,740 $ 4,835 $(11,925)
======== ======= ========
</TABLE>
Epic's effective tax rate differs from the statutory federal income tax rate
as follows:
<TABLE>
<CAPTION>
YEAR ENDED JANUARY 31,
1994 1995 1996
------- ------- -------
<S> <C> <C> <C>
Statutory federal income tax rate.................. 34.0% 34.0% (34.0)%
Non-deductible expenses............................ 9.3 122.4 12.3
State taxes........................................ 7.8 28.2 .8
Valuation allowance................................ 67.2 (101.6) 1.3
------ ------- -------
118.3% 83.0% (19.6)%
====== ======= =======
</TABLE>
Epic paid approximately $9,480, $19,654, and $15,585 in income taxes for the
years ended January 31, 1994, 1995, and 1996, respectively.
7. PROFIT SHARING PLAN
Effective February 1, 1991, Epic established the Epic Enterprises, Inc.
Profit Sharing Plan (the "Plan") covering eligible employees. Contributions by
Epic are discretionary and employees are not permitted to make contributions
to the Plan. Employer contributions are allocated to participants' accounts in
the ratio that the sum of each participant's total compensation bears to all
participants' total compensation. Contributions to the Plan were approximately
$105,000, $80,000, and $50,000 for the years ended January 31, 1994, 1995, and
1996, respectively.
F-34
<PAGE>
EPIC ENTERPRISES, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
8. SUBSEQUENT EVENT
On February 1, 1996, the stockholders of Epic and the partners of Goren Epic
completed a stock purchase agreement with Production Group International, Inc.
("PGI") whereby PGI purchased all the outstanding shares of Epic and
outstanding partnership interests of Goren Epic for $3,792,000 in cash and
$1,500,000 in notes payable. The stock purchase agreement also provides for
additional cash consideration of up to $1,500,000.
F-35
<PAGE>
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
The Board of Directors
Epic Enterprises of Nevada, Inc.
We have audited the accompanying balance sheets of Epic Enterprises of
Nevada, Inc. as of December 31, 1994 and 1995, and the related statements of
operations, stockholders' deficit and cash flows for the period from July 15,
1993 (inception) to December 31, 1993, for the years ended December 31, 1994
and 1995, and for the six months ended June 30, 1996. These financial
statements are the responsibility of Epic Enterprises of Nevada, Inc.'s
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits 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 financial statements referred to above present fairly,
in all material respects, the financial position of Epic Enterprises of
Nevada, Inc. at December 31, 1994 and 1995, and the results of its operations
and its cash flows for the period from July 15, 1993 (inception) to December
31, 1993, for the years ended December 31, 1994 and 1995, and for the six
months ended June 30, 1996, in conformity with generally accepted accounting
principles.
/s/ Ernst & Young LLP
Vienna, Virginia
October 4, 1996
F-36
<PAGE>
EPIC ENTERPRISES OF NEVADA, INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
1994 1995
--------- ---------
<S> <C> <C>
ASSETS
Current assets:
Cash................................................... $ 15,792 $ 54,057
Accounts receivable.................................... 17,841 77,857
--------- ---------
Total current assets..................................... 33,633 131,914
Property and equipment, net.............................. 17,753 29,694
Other assets............................................. 8,712 10,326
--------- ---------
Total assets............................................. $ 60,098 $ 171,934
========= =========
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities:
Accounts payable and accrued expenses.................. $ 40,228 $ 90,640
Deferred revenues...................................... -- 338,044
--------- ---------
Total current liabilities................................ 40,228 428,684
Loans from officers...................................... 226,000 226,000
Commitments.............................................. -- --
Stockholders' deficit:
Common stock; no par value; 1,000 shares authorized,
issued and outstanding................................ 1,000 1,000
Accumulated deficit.................................... (207,130) (483,750)
--------- ---------
Total stockholders' deficit.............................. (206,130) (482,750)
--------- ---------
Total liabilities and stockholders' deficit.............. $ 60,098 $ 171,934
========= =========
</TABLE>
See accompanying notes.
F-37
<PAGE>
EPIC ENTERPRISES OF NEVADA, INC.
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
JULY 15, 1993
(INCEPTION) TO SIX MONTHS
DECEMBER 31, YEAR ENDED DECEMBER 31, ENDED JUNE 30,
1993 1994 1995 1996
-------------- ----------- ----------- --------------
<S> <C> <C> <C> <C>
Revenues................ $ 77,628 $ 440,103 $ 611,015 $1,599,881
Cost of services........ 31,814 195,223 325,817 905,960
-------- ----------- ----------- ----------
Gross profit............ 45,814 244,880 285,198 693,921
Selling, general and ad-
ministrative........... 87,476 410,348 569,339 778,340
-------- ----------- ----------- ----------
Loss from operations.... (41,662) (165,468) (284,141) (84,419)
Other income............ -- -- 7,521 22,189
-------- ----------- ----------- ----------
Net loss................ $(41,662) $(165,468) $(276,620) $ (62,230)
======== =========== =========== ==========
</TABLE>
See accompanying notes.
F-38
<PAGE>
EPIC ENTERPRISES OF NEVADA, INC.
STATEMENTS OF STOCKHOLDERS' DEFICIT
<TABLE>
<CAPTION>
TOTAL
COMMON ACCUMULATED STOCKHOLDERS'
STOCK DEFICIT DEFICIT
------ ----------- -------------
<S> <C> <C> <C>
Balance at July 15, 1993 (inception)........... $1,000 $ -- $ 1,000
Net loss..................................... -- (41,662) (41,662)
------ --------- ---------
Balance at December 31, 1993................... 1,000 (41,662) (40,662)
Net loss..................................... -- (165,468) (165,468)
------ --------- ---------
Balance at December 31, 1994................... 1,000 (207,130) (206,130)
Net loss..................................... -- (276,620) (276,620)
------ --------- ---------
Balance at December 31, 1995................... $1,000 $(483,750) $(482,750)
====== ========= =========
</TABLE>
See accompanying notes.
F-39
<PAGE>
EPIC ENTERPRISES OF NEVADA, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
JULY 15, 1993
(INCEPTION) TO SIX MONTHS
DECEMBER 31, YEAR ENDED DECEMBER 31, ENDED JUNE 30,
1993 1994 1995 1996
-------------- ----------- ----------- --------------
<S> <C> <C> <C> <C>
OPERATING ACTIVITIES
Net loss................ $(41,662) $(165,468) $(276,620) $(62,230)
Adjustments to reconcile
net loss to net cash
(used in) provided by
operating activities:
Depreciation and amor-
tization............. 952 6,501 1,911 3,162
Allowance for doubtful
accounts............. -- -- -- 40,000
Changes in operating as-
sets and liabilities:
Accounts receivable... (3,892) (13,949) (60,016) (18,021)
Other assets.......... (7,528) (1,184) (1,614) (42,147)
Accounts payable and
accrued expenses..... 6,652 33,576 50,412 86,423
Deferred revenues..... -- -- 338,044 (257,496)
-------- ----------- ----------- --------
Net cash (used in) pro-
vided by operating ac-
tivities............... (45,478) (140,524) 52,117 (250,309)
INVESTING ACTIVITIES
Purchases of property
and equipment.......... (21,236) (3,970) (13,852) (59,870)
-------- ----------- ----------- --------
Net cash used in invest-
ing activities......... (21,236) (3,970) (13,852) (59,870)
FINANCING ACTIVITIES
Proceeds from sale of
common stock........... 1,000 -- -- --
Proceeds from loans from
officers............... 81,000 145,000 -- 145,000
Proceeds from loans from
affiliate.............. -- -- -- 135,000
-------- ----------- ----------- --------
Net cash provided by fi-
nancing activities..... 82,000 145,000 -- 280,000
Net increase (decrease)
in cash................ 15,286 506 38,265 (30,179)
Cash at beginning of pe-
riod................... -- 15,286 15,792 54,057
-------- ----------- ----------- --------
Cash at end of period... $ 15,286 $ 15,792 $ 54,057 $ 23,878
======== =========== =========== ========
Supplemental
information:
Interest paid.......... $ -- $ -- $ -- $ 24,748
======== =========== =========== ========
</TABLE>
See accompanying notes.
F-40
<PAGE>
EPIC ENTERPRISES OF NEVADA, INC.
NOTES TO FINANCIAL STATEMENTS
1. ORGANIZATION
Epic Enterprises of Nevada, Inc. ("Epic NV") was incorporated on July 15,
1993 in Nevada. Epic NV specializes in providing leisure and convention
housing services, destination management services, and business center
services through a franchise agreement with Mail Boxes Etc. USA, Inc.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
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 in the financial statements and
accompanying notes. Actual results could differ from those estimates.
Revenue Recognition
Epic NV accounts for revenues under short-term contracts using the completed
contract method whereby revenues and costs of revenues are deferred until the
event occurs. As of December 31, 1995, Epic NV had received advanced non-
refundable payments of $338,044 related to future events, and had recorded
this amount as deferred revenues in the balance sheets.
One customer accounted for approximately 14% of total revenues for the six
months ended June 30, 1996.
Income Taxes
Epic NV accounts for income taxes under the liability method.
3. PROPERTY AND EQUIPMENT
Property and equipment consisted of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
1994 1995
------- -------
<S> <C> <C>
Furniture and fixtures..................................... $ 6,667 $ 8,318
Computer equipment......................................... 6,065 17,234
Leasehold improvements..................................... 12,474 13,506
------- -------
25,206 39,058
Less accumulated depreciation and amortization............. (7,453) (9,364)
------- -------
$17,753 $29,694
======= =======
</TABLE>
Property and equipment are recorded at cost. Depreciation is computed using
straight-line methods over the estimated useful lives of the related assets
ranging from five to seven years. Leasehold improvements are amortized on a
straight-line method over the lesser of the term of the lease or the life of
the improvements.
4. DUE TO OFFICERS
Epic NV executed various promissory notes with certain officers; the balance
of the promissory notes at December 1994 and 1995 was $226,000, respectively.
The notes bear interest at 6%. All accrued and unpaid interest and remaining
principal on the notes are due and payable upon demand from August 19, 1998
through May 31, 2001. Interest expense related to these notes amounted to
$1,305, $9,660, $13,783, and $0 for the period from July 15, 1993 (inception)
to December 31, 1993, for the years ended December 31, 1994 and 1995, and for
the six months ended June 30, 1996, respectively.
Subsequent to June 30, 1996, the outstanding loan balance from officers of
$371,000 was forgiven by the officers and reclassified to equity.
F-41
<PAGE>
EPIC ENTERPRISES OF NEVADA, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
5. COMMITMENTS
Leases
Epic NV has entered into an operating lease agreement for office space.
Future minimum lease payments may be periodically adjusted based on changes in
the lessors' operating costs.
Future minimum lease payments under the non-cancelable operating lease as of
December 31, 1995 are:
<TABLE>
<S> <C>
1996............................................................. $ 70,908
1997............................................................. 106,362
1998............................................................. 106,362
1999............................................................. 106,362
Thereafter....................................................... 141,816
--------
Total minimum lease payments................................... $531,810
========
</TABLE>
Rent expense amounted to approximately $11,000, $39,000, $51,000 and $42,000
for the period from July 15, 1993 (inception) to December 31, 1993, for the
years ended December 31, 1994 and 1995, and for the six months ended June 30,
1996, respectively.
Franchise Agreements
During 1996, Epic NV entered into a franchise agreement with Mail Boxes Etc.
USA, Inc., whereby Epic NV will operate Mail Boxes Etc. business centers in
four hotels/convention centers. The term of the agreements is ten years with
renewal options. The aggregate franchise fees amounted to approximately
$25,000. Epic NV is required to pay royalties to Mail Boxes Etc. USA, Inc.
equivalent to 5% of gross revenues of each business center and is required to
pay marketing fees equivalent to 3.5% of gross revenues of each business
center.
6. INCOME TAXES
Deferred income taxes reflect the net 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. Significant components
of Epic NV's net deferred tax assets are approximately:
<TABLE>
<CAPTION>
DECEMBER 31,
1994 1995
-------- ---------
<S> <C> <C>
Deferred tax assets:
Net operating loss carryforwards...................... $ 69,004 $ 162,048
-------- ---------
Total deferred tax assets............................... 69,004 162,048
Valuation allowance................................... (69,004) (162,048)
-------- ---------
Net deferred tax assets................................. $ -- $ --
======== =========
</TABLE>
AT December 31, 1995, the Company had net operating loss carryforwards of
approximately $475,000 that will expire by 2010. Epic NV made no federal or
state income tax payments for the period from July 15, 1993 (inception) to
December 31, 1993, for the years ended December 31, 1994 and 1995, and for the
six months ended June 30, 1996.
7. SUBSEQUENT EVENT
On July 1, 1996, the stockholders of Epic NV completed a stock purchase
agreement with Production Group International, Inc. ("PGI") whereby PGI
acquired all of the outstanding common stock of Epic NV. The aggregate
purchase price was $1,085,000 in cash and additional cash consideration of up
to $5,000,000.
F-42
<PAGE>
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
The Board of Directors
Timberline Productions, Inc.
We have audited the accompanying balance sheets of Timberline Productions,
Inc. as of December 31, 1994 and 1995, and the related statements of
operations, stockholders' equity and cash flows for each of the three years in
the period ended December 31, 1995 and for the three months ended March 31,
1996. These financial statements are the responsibility of Timberline
Productions Inc.'s management. Our responsibility is to express an opinion on
these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits 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 financial statements referred to above present fairly,
in all material respects, the financial position of Timberline Productions,
Inc. at December 31, 1994 and 1995, and the results of its operations and its
cash flows for each of the three years in the period ended December 31, 1995
and for the three months ended March 31, 1996, in conformity with generally
accepted accounting principles.
/s/ Ernst & Young LLP
Vienna, Virginia
October 7, 1996
F-43
<PAGE>
TIMBERLINE PRODUCTIONS, INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
1994 1995
-------- ----------
<S> <C> <C>
ASSETS
Current assets:
Cash..................................................... $ 48,839 $ 55,908
Accounts receivable...................................... 403,236 545,869
Prepaid expenses and other current assets................ 18,084 25,131
-------- ----------
Total current assets....................................... 470,159 626,908
Property and equipment, net................................ 451,583 603,448
-------- ----------
Total assets............................................... $921,742 $1,230,356
======== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses.................... $117,730 $ 267,491
Deferred revenues........................................ 81,236 91,112
Note payable to bank-current portion..................... 62,500 62,500
Bank lines of credit..................................... 59,753 281,793
Capital lease obligations-current portion................ -- 26,904
Income taxes payable..................................... 61,128 78,869
Deferred tax liabilities................................. 9,844 354
-------- ----------
Total current liabilities.................................. 392,191 809,023
Note payable to bank, net of current portion............... 187,500 125,000
Capital lease obligations, net of current portion.......... -- 40,072
Commitments................................................ -- --
Stockholders' equity:
Common stock; $100 par value; 10,000 shares authorized,
681 shares issued and outstanding....................... 68,100 68,100
Retained earnings........................................ 273,951 188,161
-------- ----------
Total stockholders' equity................................. 342,051 256,261
-------- ----------
Total liabilities and stockholders' equity................. $921,742 $1,230,356
======== ==========
</TABLE>
See accompanying notes.
F-44
<PAGE>
TIMBERLINE PRODUCTIONS, INC.
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
THREE
MONTHS ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
1993 1994 1995 1996
---------- ---------- ---------- ------------
<S> <C> <C> <C> <C>
Revenues...................... $5,262,440 $4,237,824 $4,345,563 $1,020,388
Cost of services.............. 3,020,943 2,550,873 2,723,817 707,821
---------- ---------- ---------- ----------
Gross profit.................. 2,241,497 1,686,951 1,621,746 312,567
Selling, general and adminis-
trative...................... 1,941,053 1,744,506 1,625,257 519,953
---------- ---------- ---------- ----------
Income (loss) from operations. 300,444 (57,555) (3,511) (207,386)
Interest expense.............. (11,823) (24,094) (32,828) (5,403)
---------- ---------- ---------- ----------
Income (loss) before income
tax provision (benefit)...... 288,621 (81,649) (36,339) (212,789)
Income tax provision (bene-
fit)......................... 117,250 (27,707) 8,251 (81,443)
---------- ---------- ---------- ----------
Net income (loss)............. $ 171,371 $ (53,942) $ (44,590) $ (131,346)
========== ========== ========== ==========
</TABLE>
See accompanying notes.
F-45
<PAGE>
TIMBERLINE PRODUCTIONS, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
TOTAL
COMMON RETAINED STOCKHOLDERS'
STOCK EARNINGS EQUITY
------- --------- -------------
<S> <C> <C> <C>
Balance at December 31, 1992................... $68,100 $ 386,362 $ 454,462
Distributions................................ -- (182,840) (182,840)
Net income................................... -- 171,371 171,371
------- --------- ---------
Balance at December 31, 1993................... 68,100 374,893 442,993
Distributions................................ -- (47,000) (47,000)
Net loss..................................... -- (53,942) (53,942)
------- --------- ---------
Balance at December 31, 1994................... 68,100 273,951 342,051
Distributions................................ -- (41,200) (41,200)
Net loss..................................... -- (44,590) (44,590)
------- --------- ---------
Balance at December 31, 1995................... $68,100 $ 188,161 $ 256,261
======= ========= =========
</TABLE>
See accompanying notes.
F-46
<PAGE>
TIMBERLINE PRODUCTIONS, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
THREE
MONTHS ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
1993 1994 1995 1996
--------- --------- --------- ------------
<S> <C> <C> <C> <C>
OPERATING ACTIVITIES
Net income (loss)............... $ 171,371 $ (53,942) $ (44,590) $(131,346)
Adjustments to reconcile net in-
come (loss) to net cash pro-
vided by operating activities:
Depreciation and amortization. 190,048 192,447 189,867 55,634
Deferred income taxes......... 23,125 5,294 (9,490) (8,510)
Changes in operating assets and
liabilities:
Accounts receivable........... (147,297) 56,419 (142,633) 255,659
Prepaid expenses and other
current assets............... (10,931) (6,703) (7,047) (4,003)
Accounts payable and accrued
expenses..................... (52,333) 79,937 149,761 129,200
Deferred revenues............. (91,331) 57,567 9,876 (27,837)
Income taxes payable.......... 94,125 (33,000) 17,741 (72,933)
--------- --------- --------- ---------
Net cash provided by operating
activities..................... 176,777 298,019 163,485 195,864
INVESTING ACTIVITIES
Purchases of property and equip-
ment........................... (150,400) (218,260) (258,184) (10,444)
--------- --------- --------- ---------
Net cash used in investing ac-
tivities....................... (150,400) (218,260) (258,184) (10,444)
FINANCING ACTIVITIES
Distributions to stockholders... (182,840) (47,000) (41,200) --
Net proceeds (payments) on bank
lines of credit................ 105,000 (110,247) 222,040 (150,000)
Proceeds from note payable to
bank........................... -- 250,000 -- --
Payments on note payable to
bank........................... (63,365) (123,673) (62,500) (15,625)
Payments on capital lease obli-
gations........................ -- -- (16,572) (8,687)
--------- --------- --------- ---------
Net cash (used in) provided by
financing activities........... (141,205) (30,920) 101,768 (174,312)
Net (decrease) increase in cash. (114,828) 48,839 7,069 11,108
Cash at beginning of period..... 114,828 -- 48,839 55,908
--------- --------- --------- ---------
Cash at end of period........... $ -- $ 48,839 $ 55,908 $ 67,016
========= ========= ========= =========
Supplemental information:
Interest paid................. $ 11,823 $ 24,094 $ 32,828 $ 5,403
========= ========= ========= =========
</TABLE>
See accompanying notes.
F-47
<PAGE>
TIMBERLINE PRODUCTIONS, INC.
NOTES TO FINANCIAL STATEMENTS
1. ORGANIZATION
Timberline Productions, Inc. ("Timberline") was incorporated on April 8,
1983 under the laws of the state of Arizona. Timberline provides business
communication services for clients at locations throughout the United States
and Canada.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
As of April 1, 1996, Timberline was acquired by Production Group
International, Inc. (see Note 8). Prior to the acquisition, Timberline was an
S-Corporation and therefore the income tax liability was borne by the
stockholders. However, the financial statements have been presented to reflect
income taxes, as if Timberline had been taxed as a C-Corporation. The income
taxes have been calculated using the liability method.
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 in the financial statements and
accompanying notes. Actual results could differ from those estimates.
Revenue Recognition
Timberline accounts for revenues using the percentage-of-completion method
whereby revenues are recognized in proportion with the ratio that expenses
incurred to date bear to total anticipated expenses. Provisions for
anticipated losses are made in the period in which they first become
determinable. As of December 31, 1994, and 1995, Timberline had received
advance non-refundable payments related to future events of approximately
$81,236 and $91,112, respectively, and had recorded these amounts as deferred
revenues in the balance sheets.
One customer accounted for approximately 13%, 16%, and 14% of total revenues
during the years December 31, 1993, 1994, and 1995, respectively, and two
customers accounted for approximately 47% of total revenues for the three
months ended March 31, 1996.
Distributions
Distributions were made to stockholders pursuant to authorization of the
stockholders.
3. PROPERTY AND EQUIPMENT
Property and equipment consisted of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
1994 1995
----------- -----------
<S> <C> <C>
Furniture and fixtures............................. $ 98,866 $ 101,366
Computer and video equipment....................... 2,060,049 2,399,281
Leasehold improvements............................. 107,900 107,900
----------- -----------
2,266,815 2,608,547
Less accumulated depreciation and amortization..... (1,815,232) (2,005,099)
----------- -----------
$ 451,583 $ 603,448
=========== ===========
</TABLE>
F-48
<PAGE>
TIMBERLINE PRODUCTIONS, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
3. PROPERTY AND EQUIPMENT (CONTINUED)
Property and equipment are recorded at cost. Depreciation and amortization
is computed using the straight-line method over five years. Leasehold
improvements are amortized on a straight-line method over the lesser of the
term of the lease or the life of the improvements.
4. DEBT
Bank Lines of Credit
Timberline had two line of credit facilities with a bank, whereby Timberline
could borrow up to an aggregate $425,000. Timberline was charged an interest
rate equivalent to the bank's prime rate plus .75% on outstanding borrowings.
These credit facilities were collateralized by certain of Timberline's assets
and were personally guaranteed by the stockholders. The outstanding balances
on these credit facilities were repaid during April 1996 in conjunction with
the stock purchase (see Note 8), and the facilities were then terminated.
Note Payable
Timberline had a term loan with a bank for $250,000, which charged interest
at an annual rate of .75% over the bank's prime rate. The term loan was
collateralized by certain assets of Timberline and is personally guaranteed by
the stockholders. The outstanding balance on this line of credit was repaid
during April 1996 in conjunction with the stock purchase (see Note 8), and the
agreement was then terminated.
5. COMMITMENTS
Timberline has entered into various operating lease agreements for office
space and equipment. Future minimum lease payments may be periodically
adjusted based on changes in the lessors' operating costs.
Timberline leases certain equipment under agreements which are classified as
capital leases. As of December 31, 1995, the cost of assets under capital
leases was $83,548 and the accumulated depreciation of assets under capital
leases was $11,099. Amortization expense of capital leases is included in
depreciation and amortization on the statements of cashflows. The outstanding
capital lease obligations were repaid subsequent to March 31, 1996, in
connection with the stock purchase agreement. (See Note 8).
Future minimum lease payments under non-cancelable capital and operating
leases as of December 31, 1995 are:
<TABLE>
<CAPTION>
CAPITAL OPERATING
LEASES LEASES
-------- ---------
<S> <C> <C>
1996................................................... $ 32,112 $ 77,523
1997................................................... 32,112 110,698
1998................................................... 10,704 119,250
1999................................................... -- 10,004
-------- --------
Total minimum lease payments........................... 74,928 $317,475
========
Less amounts representing interest..................... (7,952)
--------
Present value of minimum capital lease obligations..... 66,976
Less current portion of capital lease obligations...... (26,904)
--------
Capital lease obligations, net of current portion...... $ 40,072
========
</TABLE>
Rent expense amounted to approximately $91,442, $86,924, $90,995, and
$16,407 for the years ended December 31, 1993, 1994 and 1995, and for the
three months ended March 31, 1996, respectively.
F-49
<PAGE>
TIMBERLINE PRODUCTIONS, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
6. EMPLOYEE CONTRIBUTION PLAN
Effective October 1, 1993, Timberline adopted a qualified 401(k) employee
savings plan for the benefit of all eligible employees. Under the plan,
employees can defer a portion of their compensation and contribute it to the
plan. Matching contributions are made at the discretion of the Board of
Directors. Contributions for the years ended December 31, 1993, 1994, and
1995, and for the three months ended March 31, 1996 were approximately $2,300,
$5,200, $3,000, and $1,900, respectively.
7. INCOME TAXES
Deferred income taxes reflect the net 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. Significant components
of Timberline's net deferred tax liabilities are:
<TABLE>
<CAPTION>
DECEMBER 31,
1994 1995
------- -------
<S> <C> <C>
Deferred tax assets:
Accounts receivable................................... $ -- $ 4,858
------- -------
Deferred tax assets..................................... -- 4,858
Deferred tax liabilities:
Property and equipment................................ (9,844) (5,212)
------- -------
Net deferred tax liabilities............................ $(9,844) $ (354)
======= =======
</TABLE>
Significant components of the income tax provision (benefit) are as follows:
<TABLE>
<CAPTION>
THREE
MONTHS ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
1993 1994 1995 1996
-------- -------- ------- ------------
<S> <C> <C> <C> <C>
Current:
Federal......................... $72,915 $(25,565) $13,742 $(56,499)
State........................... 21,210 (7,436) 3,999 (16,434)
-------- -------- ------- --------
94,125 (33,001) 17,741 (72,933)
Deferred:
Federal......................... 17,914 4,099 (7,351) (6,592)
State........................... 5,211 1,195 (2,139) (1,918)
-------- -------- ------- --------
23,125 5,294 (9,490) (8,510)
-------- -------- ------- --------
$117,250 $(27,707) $ 8,251 $(81,443)
======== ======== ======= ========
</TABLE>
Timberline's effective tax rate differs from the statutory federal income
tax rate as follows:
<TABLE>
<CAPTION>
THREE
MONTHS ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
1993 1994 1995 1996
------- -------- -------- ------------
<S> <C> <C> <C> <C>
Statutory federal income tax
rate.......................... 34.0% (34.0)% (34.0)% (34.0)%
Non-deductible expenses........ .6 5.1 53.3 1.4
State taxes.................... 6.0 (5.0) 3.4 (5.7)
------- -------- -------- -----
40.6% (33.9)% 22.7 % (38.3)%
======= ======== ======== =====
</TABLE>
F-50
<PAGE>
TIMBERLINE PRODUCTIONS, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
7. INCOME TAXES (CONTINUED)
Timberline made no federal or state income tax payments for the years ended
December 31, 1993, 1994, and 1995 and for the three months ended March 31,
1996.
8. SUBSEQUENT EVENT
On April 1, 1996, the stockholders of Timberline entered into a stock
purchase agreement with Production Group International, Inc. (PGI) whereby all
of the issued and outstanding shares of common stock of Timberline were
acquired by PGI. The purchase price consisted of cash of $1,862,000 due at
closing and notes payable of $600,000 due two years after closing. The stock
purchase agreement also stipulates additional cash payments to the sellers.
F-51
<PAGE>
REPORT OF ERNST & YOUNG, INDEPENDENT AUDITORS
The Board of Directors and Shareholders
Spearhead Exhibitions Limited
We have audited the accompanying consolidated statements of operations and
cash flows of Spearhead Exhibitions Limited for the five month period ended
August 31, 1995. These financial statements are the responsibility of
Spearhead Exhibitions Limited's management. Our responsibility is to express
an opinion on these financial statements based on our audit.
We conducted our audit in accordance with United Kingdom auditing standards
which do not differ in any significant respect from United States generally
accepted auditing standards. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on
a test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used
and significant estimates made by management, as well as evaluating the
overall financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated results of operations and cash
flows of Spearhead Exhibitions Limited for the five month period ended August
31, 1995, in conformity with accounting principles generally accepted in the
United Kingdom which differ in certain respects from those followed in the
United States (see Note 8 of Notes to Consolidated Financial Statements).
/s/ Ernst & Young
Chartered
Accountants
London, England
October 23, 1996
F-52
<PAGE>
REPORT OF KINGSTON SMITH, INDEPENDENT AUDITORS
The Board of Directors and Shareholders of
Spearhead Exhibitions Limited
We have audited the accompanying consolidated balance sheets of Spearhead
Exhibitions Limited as at March 31, 1994 and 1995 and the related consolidated
statements of operations, cash flows and changes in shareholders' equity for
the years then ended. These financial statements are the responsibility of
Spearhead Exhibitions Limited's management. Our responsibility is to express
an opinion on these financial statements based on our audits.
We conducted our audits in accordance with United Kingdom auditing standards
which do not differ in any significant respect from United States generally
accepted auditing standards. Those standards require that we plan and perform
an audit to obtain reasonable assurance about whether the financial statements
are free from 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 the management, as well as evaluating the
overall financial statements presentation. We believe that our audits provide
a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Spearhead
Exhibitions Limited at March 31, 1994 and 1995 and the consolidated results of
its operations and cash flows for the years then ended in conformity with
accounting principles generally accepted in the United Kingdom.
Our audits for the years ended March 31, 1994 and 1995 were completed on
January 30, 1995 and October 16, 1995, respectively. We have not conducted any
audit work on Spearhead Exhibitions Limited for any periods subsequent to
March 31, 1995 and we express no opinion on Spearhead Exhibitions Limited's
accounting policies, consolidated financial position, results of operations,
cash flows and changes in shareholders' equity beyond that date.
/s/ Kingston Smith
Chartered
Accountants and
Registered Auditors
London, England
October 25, 1996
F-53
<PAGE>
SPEARHEAD EXHIBITIONS LIMITED
CONSOLIDATED BALANCE SHEETS
(POUNDS STERLING)
<TABLE>
<CAPTION>
MARCH 31,
1994 1995
--------- ---------
(Pounds) (Pounds)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents............................... 738,015 470,047
Accounts receivable..................................... 556,129 892,162
Other receivables....................................... 28,482 16,563
Work in progress........................................ 219,681 239,635
Prepaid expenses........................................ -- 123,850
--------- ---------
Total current assets...................................... 1,542,307 1,742,257
Property and equipment, net............................... 45,117 140,364
Other assets.............................................. 15,150 14,841
Investment in Offshore Europe Partnership................. 600,000 600,000
Due from Spearhead Communications Limited................. 170,197 169,120
--------- ---------
Total assets.............................................. 2,372,771 2,666,582
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable........................................ 258,957 407,681
Accrued liabilities and deferred income................. 849,743 1,085,196
Current portion of capital lease obligations............ 13,793 33,642
Income taxes payable.................................... 104,475 25,111
Other taxes............................................. 15,227 105,147
Other current liabilities............................... 20,792 11,625
--------- ---------
Total current liabilities................................. 1,262,987 1,668,402
--------- ---------
Non-current liabilities
Long-term portion of capital lease obligations.......... 7,131 29,144
--------- ---------
Total non-current liabilities......................... 7,131 29,144
--------- ---------
Total liabilities......................................... 1,270,118 1,697,546
--------- ---------
Shareholders' equity:
Ordinary shares, (Pounds)1 par value
10,000 shares authorised, issued and outstanding at
March 31, 1994......................................... 10,000 --
10,526 shares authorised, issued and outstanding at
March 31, 1995......................................... -- 10,526
Subscription receivable................................. -- (263)
Additional paid-in capital.............................. -- 9,736
Revaluation reserve..................................... 600,000 600,000
Retained earnings....................................... 492,653 349,037
--------- ---------
Total shareholders' equity................................ 1,102,653 969,036
--------- ---------
Total liabilities and shareholders' equity................ 2,372,771 2,666,582
========= =========
</TABLE>
The accompanying notes are an integral part of these statements.
F-54
<PAGE>
SPEARHEAD EXHIBITIONS LIMITED
CONSOLIDATED STATEMENTS OF OPERATIONS
(POUNDS STERLING)
<TABLE>
<CAPTION>
FIVE
YEAR ENDED MARCH MONTHS ENDED
31, AUGUST 31,
1994 1995 1995
--------- --------- ------------
(Pounds) (Pounds) (Pounds)
<S> <C> <C> <C>
Revenues.................................... 1,711,318 2,194,050 695,017
Cost of services............................ 1,061,696 1,339,933 565,745
--------- --------- --------
Gross profit................................ 649,622 854,117 129,272
Selling, general and administrative......... 1,133,261 1,077,033 460,645
--------- --------- --------
Loss from operations........................ (483,639) (222,916) (331,373)
Other income................................ 854,353 7,472 292,223
Net interest receivable..................... 11,626 5,563 2,672
--------- --------- --------
Profit (loss) on ordinary activities before
taxation................................... 382,340 (209,881) (36,478)
Income tax (benefit) provision.............. (97,700) 66,265 13,045
--------- --------- --------
Net income (loss)........................... 284,640 (143,616) (23,433)
========= ========= ========
</TABLE>
There were no recognised gains or losses in each of the periods above, other
than the retained income (loss) for the period.
The accompanying notes are an integral part of these statements.
F-55
<PAGE>
SPEARHEAD EXHIBITIONS LIMITED
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY (POUNDS STERLING)
<TABLE>
<CAPTION>
ADDITIONAL TOTAL
SHARE CAPITAL SUBSCRIPTION PAID-IN REVALUATION RETAINED SHAREHOLDERS'
SHARES AMOUNT RECEIVABLE CAPITAL RESERVE EARNINGS EQUITY
------ -------- ------------ ---------- ----------- -------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
(Pounds) (Pounds) (Pounds) (Pounds) (Pounds) (Pounds)
Balance at March 31,
1993................... 10,000 10,000 -- -- 600,000 208,013 818,013
Net income............ 284,640 284,640
------ -------- -------- -------- -------- -------- ---------
Balance at March 31,
1994................... 10,000 10,000 -- -- 600,000 492,653 1,102,653
Issuance of shares.... 526 526 (263) 9,736 -- -- 9,999
Net loss.............. -- -- -- -- -- (143,616) (143,616)
------ -------- -------- -------- -------- -------- ---------
Balance at March 31,
1995................... 10,526 10,526 (263) 9,736 600,000 349,037 969,036
====== ======== ======== ======== ======== ======== =========
</TABLE>
The accompanying notes are an integral part of these statements.
F-56
<PAGE>
SPEARHEAD EXHIBITIONS LIMITED
CONSOLIDATED STATEMENT OF CASH FLOWS (POUNDS STERLING)
<TABLE>
<CAPTION>
FIVE
MONTHS
YEAR ENDED MARCH ENDED
31, AUGUST 31,
1994 1995 1995
-------- -------- ----------
(Pounds) (Pounds) (Pounds)
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net income (loss)............................... 284,640 (143,616) (23,433)
Adjustments to reconcile net income (loss) to
net cash provided by (used in) operating
activities:
Depreciation and amortization................. 29,030 54,561 24,366
Changes in operating assets and liabilities:
Accounts receivable........................... (303,736) (336,033) 675,910
Prepaid expenses and other assets............. (147,960) (130,808) (33,545)
Accounts payable.............................. 115,483 148,724 (230,910)
Accrued liabilities and deferred income, tax
liabilities, and other current liabilities... 688,704 236,842 (280,919)
-------- -------- --------
Net cash provided by (used in) operating
activities..................................... 666,161 (170,330) 131,469
-------- -------- --------
INVESTING ACTIVITIES
Proceeds from disposal of property and
equipment.................................... 21,213 12,687 14,841
Purchases of property and equipment........... (63,201) (99,393) (13,237)
-------- -------- --------
Net cash (used in) provided by investing
activities..................................... (41,988) (86,706) 1,604
-------- -------- --------
FINANCING ACTIVITIES
Repayment of capital lease obligations........ (6,410) (20,931) (13,756)
Proceeds from issuance of shares.............. -- 9,999 --
-------- -------- --------
Net cash used in financing activities........... (6,410) (10,932) (13,756)
-------- -------- --------
Net increase (decrease) in cash and cash
equivalents.................................... 617,763 (267,968) 119,317
Cash and cash equivalents at beginning of
period......................................... 120,252 738,015 470,047
-------- -------- --------
Cash and cash equivalents at end of period...... 738,015 470,047 589,364
======== ======== ========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Interest paid................................. 10,194 10,495 2,100
======== ======== ========
Taxes paid.................................... -- 13,099 --
======== ======== ========
NON-CASH INVESTING AND FINANCING ACTIVITIES
Acquisition of property and equipment through
capital leases............................... -- 62,793 --
======== ======== ========
</TABLE>
The accompanying notes are an integral part of these statements.
F-57
<PAGE>
SPEARHEAD EXHIBITIONS LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF FINANCIAL STATEMENTS
(a) Principles of consolidation
The consolidated financial statements include the financial statements of
Spearhead Exhibitions Limited ("Spearhead") and its wholly owned subsidiaries.
All material intercompany balances and transactions have been eliminated in
consolidation.
(b) Use of estimates
The preparation of financial statements in conformity with United States
generally accepted accounting principles ("U.S. GAAP") requires management to
make estimates and assumptions that affect the amounts reported in the
financial statements and accompanying notes. Actual results could differ from
these estimates.
(c) Companies Act 1985
These financial statements do not comprise statutory accounts within the
meaning of section 240 of the Companies Act 1985 of Great Britain (the
"Companies Act"). Spearhead's statutory accounts, which are its primary
financial statements, are prepared in accordance with accounting principles
generally accepted in the United Kingdom ("U.K. GAAP") in compliance with the
Companies Act and are presented in pounds sterling. Statutory accounts for the
years ended March 31, 1995 and 1994 have been prepared and the auditors have
given unqualified audit reports thereon. Such accounts have been delivered to
the Registrar of Companies for England and Wales. The accounts for the five
month period ended August 31, 1995 are non-statutory accounts.
2. SIGNIFICANT ACCOUNTING POLICIES
Depreciation
Depreciation is provided on all tangible fixed assets at rates calculated to
write off the cost, less estimated residual value, of each asset evenly over
its expected useful life as follows:
<TABLE>
<S> <C> <C>
Motor vehicles -- over 4 years
Office equipment -- over 4 years
Office furniture -- over 5 years
Leasehold improvements -- over 5 years
</TABLE>
Deferred taxation
Deferred taxation is provided using the liability method on all timing
differences to the extent that they are expected to reverse in the future
without being replaced, calculated at the rate at which it is anticipated the
timing differences will reverse.
Leasing and hire purchase commitments
Assets held under finance leases, which are leases where substantially all
the risks and reward of ownership of the assets have passed to the group, and
hire purchase contracts are capitalised in the balance sheets and are
depreciated over their useful lives. The capital elements of future
obligations under leases and hire purchase contracts are included as
liabilities in the balance sheets. The interest elements of
F-58
<PAGE>
SPEARHEAD EXHIBITIONS LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
2. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Leasing and hire purchase commitments (continued)
the rental obligations are charged in the profit and loss account over the
periods of the leases and hire purchase contracts and represent a constant
proportion of the balance of capital repayments outstanding.
Rentals payable under operating leases are charged in the profit and loss
account on a straight-line basis over the lease term.
Work in progress
Work in progress is stated at the lower of cost and net realisable value.
Cost includes all direct costs incurred which relate to exhibitions held
subsequent to the balance sheet date.
Revenues
Revenues represents the invoiced value of services provided net of value
added tax in respect of exhibitions and conferences held in the period.
3. PROPERTY AND EQUIPMENT
Property and equipment comprise:
<TABLE>
<CAPTION>
MARCH 31,
1994 1995
-------- --------
(Pounds) (Pounds)
<S> <C> <C>
Furniture and equipment.................................. 119,488 79,324
Motor vehicles........................................... 81,259 106,125
Leasehold improvements................................... -- 43,736
------- -------
200,747 229,185
Less accumulated depreciation............................ 155,630 88,821
------- -------
45,117 140,364
======= =======
</TABLE>
4. EMPLOYEE PENSION PLANS
The group operates a non-contributory, discretionary pension scheme for
certain employees. The assets of the scheme are held separately from the
assets of the group. Contributions have been expensed as they become payable.
The amount of contributions expensed were (Pounds)57,069 for the year ended
March 31, 1994, (Pounds)100,000 for the year ended March 31, 1995 and
(Pounds) nil for the five month period ended August 31, 1995.
5. INCOME TAXES
For the years ended March 31, 1994 and 1995, and for the five month period
ended August 31, 1995, Spearhead and all of its subsidiaries were subject to
U.K. taxation only. Accordingly, income taxes have been provided based on
applicable U.K. tax rates.
F-59
<PAGE>
SPEARHEAD EXHIBITIONS LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
5. INCOME TAXES (CONTINUED)
The following table analyses the difference between the U.K. tax rate and the
effective tax rate:
<TABLE>
<CAPTION>
FIVE
MONTHS ENDED
YEAR ENDED MARCH 31 AUGUST 31,
1994 (EST) 1995 1995
------------ ---------- ------------
<S> <C> <C> <C>
U.K. statutory rate..................... 33.0 (33.0) (33.0)
Permanent disallowables for U.K. tax.... 0.9 0.9 .7
Utilisation of net operating losses..... (8.6) (2.9) --
Deferred tax adjustments................ 0.3 1.2 .8
Other net--prior year adjustment........ -- 2.2 (4.2)
--------- ---------- -----
Effective tax rate...................... 25.6% (31.6)% (35.7)%
========= ========== =====
</TABLE>
6. COMMITMENTS
Spearhead leases its facilities under non-cancelable operating lease
agreements which expire at various dates through 2014. In addition, Spearhead
leases certain equipment under long-term lease agreements that are classified
as capital leases. These capital leases terminate at various dates through
1999. Total equipment acquired under these capitalised leases, which
collateralise such borrowings, are as follows:
<TABLE>
<CAPTION>
MARCH 31, MARCH 31, AUGUST 31,
1994 1995 1995
--------- --------- ----------
(Pounds) (Pounds) (Pounds)
<S> <C> <C> <C>
Motor vehicles................................... 58,430 79,325 88,225
Office equipment................................. -- 25,662 --
------ ------- ------
58,430 104,987 88,225
Less accumulated depreciation.................... 37,413 33,979 44,726
------ ------- ------
21,017 71,008 43,499
====== ======= ======
</TABLE>
Future minimum annual lease payments under all non-cancelable operating and
capital leases are as follows:
<TABLE>
<CAPTION>
OPERATING CAPITAL
YEAR ENDED AUGUST 31, LEASES LEASES
--------------------- --------- --------
(Pounds) (Pounds)
<S> <C> <C>
1996................................................... 65,022 33,489
1997................................................... 63,702 16,481
1998................................................... 60,770 4,925
1999................................................... 58,727 --
2000................................................... 55,790 --
2001................................................... 55,330 --
2002-2014.............................................. 701,350 --
--------- -------
Total minimum payments................................. 1,060,691 54,895
=========
Less amounts representing interest..................... (5,311)
-------
Present value of capital lease obligations............. 49,584
Less current portion of capital lease obligations...... (29,690)
-------
Long-term portion of capital lease obligations......... 19,894
=======
</TABLE>
Rental expenses under operating leases totalled (Pounds)54,555 and
(Pounds)50,083 for the years ended March 31, 1994 and 1995, respectively, and
(Pounds)25,973 for the five month period ended August 31, 1995.
F-60
<PAGE>
SPEARHEAD EXHIBITIONS LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
7. CONCENTRATIONS OF CREDIT RISK AND SIGNIFICANT CUSTOMERS
Potential concentrations of credit risk to Spearhead consist principally of
cash, cash equivalents and trade receivables. Spearhead only deposits short-
term cash surpluses with high credit quality banks.
8. UNITED STATES GENERALLY ACCEPTED ACCOUNTING PRINCIPLES
The consolidated financial statements have been prepared in accordance with
accounting principles generally accepted in the U.K. (U.K. GAAP), which differ
in certain respects from U.S. generally accepted accounting principles (U.S.
GAAP). A description of the significant difference between U.K. GAAP and U.S.
GAAP applicable to Spearhead is set out below:
Revaluation Reserve
Under U.K. GAAP the group's investment in the Offshore Europe Partnership
has been shown at a valuation of (Pounds)600,000. Under U.S. GAAP such a
valuation is not permitted and the investment would be carried at its
historical cost of (Pounds)nil. Accordingly, under U.S. GAAP, the revaluation
reserve would be eliminated and shareholders' equity would be reduced by
(Pounds)600,000 at March 31, 1994 and 1995.
9. SUBSEQUENT EVENT
Effective September 1, 1995, the shareholders of Spearhead Exhibitions
Limited entered into a stock purchase agreement with Production Group
International, Inc. ("PGI") whereby PGI purchased all of the outstanding
shares of Spearhead for $4,532,000 in cash and $4,000,000 in notes payable.
F-61
<PAGE>
UNAUDITED PRO FORMA COMBINED STATEMENT OF OPERATIONS
The unaudited pro forma combined statement of operations for the year ended
August 31, 1996 gives effect to the acquisition of (i) Ray Bloch Productions,
Inc., (ii) Timberline Productions, Inc., (iii) Epic Enterprises, Inc., (iv)
Epic Enterprises of Nevada, Inc., and (v) other acquisitions completed during
fiscal year 1996 as if they had occurred on September 1, 1995.
The unaudited pro forma combined statement of operations is based on
available information and on certain assumptions and adjustments described in
the accompanying notes which the Company believes are reasonable. The
unaudited pro forma combined statement of operations is provided for
informational purposes only and does not purport to present the results of
operations of the Company had the transactions assumed therein occurred on or
as of the dates indicated, nor are they necessarily indicative of the results
of operations which may be achieved in the future. The unaudited pro forma
combined statement of operations should be read in conjunction with
Management's Discussion and Analysis of Financial Conditions and Results of
Operations and the financial statements of the Company, including the notes
thereto, included elsewhere in this Prospectus.
YEAR ENDED AUGUST 31, 1996
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
HISTORICAL HISTORICAL PRO
HISTORICAL HISTORICAL HISTORICAL EPIC EPIC OTHER ACQUISITION FORMA
PGI(A) RAY BLOCH(B) TIMBERLINE(C) SAN DIEGO(D) NEVADA(E) ACQUISITIONS(F) ADJUSTMENTS COMBINED
---------- ------------ ------------- ------------ ---------- --------------- ----------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues......... $ 78,290 $4,571 $2,620 $2,884 $2,095 $1,066 $ -- $ 91,526
Cost of
services........ 53,153 3,442 1,559 1,521 1,061 697 -- 61,433
-------- ------ ------ ------ ------ ------- ----- --------
Gross profit.... 25,137 1,129 1,061 1,363 1,034 369 -- 30,093
Selling and
operating
expenses........ 22,328 1,090 1,203 798 1,072 476 -- 26,966
Corporate general
and
administrative
expenses........ 5,923 -- -- -- -- -- -- 5,923
Amortization of
acquisition
costs........... 669 -- -- -- -- -- 247(g) 916
Reorganization
and
consolidation
expenses........ 6,897 -- -- -- -- -- -- 6,898
-------- ------ ------ ------ ------ ------- ----- --------
Operating income
(loss)......... (10,680) 39 (142) 565 (38) (107) (247) (10,610)
Interest income
(expense), net.. (935) 39 (11) 46 (4) -- (69)(h) (934)
Other income..... 245 4 22 12 28 11 322
-------- ------ ------ ------ ------ ------- ----- --------
Income (loss)
before taxes.... (11,370) 82 (131) 623 (14) (96) (316) (11,222)
Income tax
provision
(benefit)....... (716) 31 -- -- -- -- 53(i) (632)
-------- ------ ------ ------ ------ ------- ----- --------
Net income
(loss)......... $(12,086) $ 113 $ (131) $ 623 $ (14) $ (96) $(263) $(11,854)
======== ====== ====== ====== ====== ======= ===== ========
Pro forma net
income (loss)
per common
share(j)....... $
========
Weighted average
shares
outstanding....
======== ===
</TABLE>
- -------
(a) Statement of Operations for the year ended August 31, 1996 for PGI.
(b) Statement of Operations for the period from September 1, 1995 through
December 31, 1995 for Ray Bloch Productions, Inc.
F-62
<PAGE>
(c) Statement of Operations for the period from September 1, 1995 through
March 31, 1996 for Timberline Productions, Inc.
(d) Statement of Operations for the period from September 1, 1995 through
January 31, 1996 for Epic Enterprises, Inc.
(e) Statement of Operations for the period from September 1, 1995 through June
30, 1996 for Epic Enterprises of Nevada, Inc.
(f) Statement of operations for other acquisitions for the period from
September 1, 1995 through the acquisition date.
(g) Adjustments to reflect $247,000 of amortization expense related to
goodwill based on amortization periods ranging from 15 to 40 years.
(h) Adjustments to reflect $69,000 of interest expense related to subordinated
notes payable for the 1996 acquisitions.
(i) Adjustments to reflect income tax benefit of $53,000 for Timberline as if
Timberline had been taxed as a C corporation, prior to acquisition,
Timberline was an S Corporation and accordingly, did not record any
corporate income taxes.
(j) See Note 2 of Notes to Consolidated Financial Statements for a description
of the determination of weighted average of common shares outstanding.
F-63
<PAGE>
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
NO PERSON HAS BEEN AUTHORIZED IN CONNECTION WITH THE OFFERING TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATION NOT CONTAINED IN THIS PROSPECTUS
AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATION MUST NOT BE RELIED
UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY OR ANY UNDERWRITER. THIS PRO-
SPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF ANY OFFER TO
BUY ANY OF THE SECURITIES OFFERED HEREBY TO ANY PERSON OR BY ANYONE IN ANY JU-
RISDICTION IN WHICH IT IS UNLAWFUL TO MAKE SUCH OFFER OR SOLICITATION. NEITHER
THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER ANY
CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THE INFORMATION CONTAINED HEREIN IS
CORRECT AS OF ANY TIME SUBSEQUENT TO THE DATE HEREOF.
------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary........................................................ 3
Risk Factors.............................................................. 6
Historical Overview....................................................... 11
Use of Proceeds........................................................... 12
Dividend Policy........................................................... 12
Dilution.................................................................. 13
Capitalization............................................................ 14
Selected Consolidated Financial and Operating Data........................ 15
Management's Discussion and Analysis of Financial Condition and Results of
Operations............................................................... 16
Business.................................................................. 24
Management................................................................ 33
Certain Transactions...................................................... 42
Principal Stockholders.................................................... 43
Description of Capital Stock.............................................. 45
Shares Eligible for Future Sale........................................... 47
Underwriting.............................................................. 49
Legal Matters............................................................. 50
Experts................................................................... 50
Additional Information.................................................... 51
Index to Consolidated Financial Statements................................ F-1
</TABLE>
------------
UNTIL , 1997 (25 DAYS AFTER THE DATE OF THIS PROSPECTUS), ALL DEALERS EF-
FECTING TRANSACTIONS IN THE COMMON STOCK OFFERED HEREBY, WHETHER OR NOT PAR-
TICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS. THIS
DELIVERY REQUIREMENT IS IN ADDITION TO THE OBLIGATION OF DEALERS TO DELIVER A
PROSPECTUS WHEN ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOT-
MENTS OR SUBSCRIPTIONS.
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
Shares
[LOGO OF PGI APPEARS HERE]
Common Stock
------------
PROSPECTUS
------------
Alex. Brown & Sons
INCORPORATED
Montgomery Securities
Robertson, Stephens & Company
, 1997
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following table sets forth the various expenses in connection with the
sale and distribution of the securities offered hereby, other than
underwriting discounts and commissions. All of the amounts shown are estimated
except the Securities and Exchange Commission registration fee, the NASD
filing fee and the Nasdaq listing fee.
<TABLE>
<S> <C>
Securities and Exchange Commission filing fee....................... $17,215
National Association of Securities Dealers, Inc. filing fee......... 6,181
Nasdaq listing fee.................................................. 42,000
Transfer agent's and registrar's fees............................... 11,400
Printing expenses................................................... 250,000
Legal fees and expenses.............................................
Accounting fees and expenses........................................
Blue Sky filing fees and expenses................................... 5,000
Miscellaneous expenses..............................................
-------
Total............................................................. $
=======
</TABLE>
14. INDEMNIFICATION OF OFFICERS AND DIRECTORS
Section 145 of the Delaware General Corporation Law ("Section 145") permits
indemnification of directors, officers, agents and controlling persons of a
corporation under certain conditions and subject to certain limitations. The
Registrant's Bylaws include provisions to require the Registrant to indemnify
its directors and officers to the fullest extent permitted by Section 145,
including circumstances in which indemnification is otherwise discretionary.
Section 145 also empowers the Registrant to purchase and maintain insurance
that protects its officers, directors, employees and agents against any
liabilities incurred in connection with their service in such positions.
At present, there is no pending litigation or proceeding involving a
director or officer of the Registrant as to which indemnification is being
sought nor is the Registrant aware of any threatened litigation that may
result in claims for indemnification by any officer or director.
The Underwriting Agreement filed as Exhibit 1 to this Registration Statement
provides for indemnification by the Underwriters of the Registrant and its
directors and officers, and by the Registrant of the Underwriters, for certain
liabilities arising under the Securities Act of 1933, as amended (the "Act")
or otherwise.
15. RECENT SALES OF UNREGISTERED SECURITIES
A. The Registrant was reincorporated in Delaware in October 1996. During the
past three years, the Registrant's predecessor has issued unregistered
securities in the transactions described below. Securities issued in such
transactions were offered and sold in reliance upon the exemption from
registration under Section 4(2) of the Act, relating to sales by an issuer not
involving any public offering, or under Rule 701 under the Act. The sales of
securities were made without the use of an underwriter and the certificates
evidencing the shares bear a restrictive legend permitting the transfer
thereof only upon registration of the shares or an exemption under the Act.
(1) In November 1993, the Company issued and sold an aggregate of 1,231,151
shares of Series C Preferred Stock to six accredited investors, as such term
is defined in Rule 501 of the Act ("Accredited Investors") at a purchase price
of $2.60 per share. In January 1994, the Company issued and sold
II-1
<PAGE>
additional 29,000 shares of Series C Preferred Stock to four employees at a
purchase price of $2.60 per share. The Company received an aggregate
consideration of approximately $3.3 million for such sales.
(2) In February 1995, the Company issued and sold an aggregate of 1,574,997
shares of Series D Preferred Stock to eight Accredited Investors at a purchase
price of $7.00 per share. The Company received an aggregate consideration of
approximately $11 million.
(3) In February 1996, the Company issued and sold an aggregate of 646,707
shares of Series E Preferred Stock to ten Accredited Investors at a purchase
price of $8.35 per share. In April 1996, the Company issued and sold
additional 718,563 shares of Series E Preferred Stock to 11 Accredited
Investors at a purchase of $8.35 per share. In June 1996, the Company issued
and sold additional 276,705 shares of Series E Preferred Stock to five
Accredited Investors at a purchase price of $8.35 per share. In September
1996, the Company issued and sold additional 154,432 shares of Series E
Preferred Stock to an Accredited Investor at a purchase price of $8.35 per
share. The Company received an aggregate consideration of approximately $15
million for sales of an aggregate of 1,796,407 shares of Series E Preferred
Stock.
(4) From January 1991 through December 15, 1996, the Company granted to
various employees and consultants stock options under the Company's 1995 stock
plans and other stock option agreements to purchase an aggregate of 1,041,800
shares of Common Stock which are exercisable at prices ranging from $0.01 to
$6.50 per share, of which stock options for 2,411 shares have been exercised.
II-2
<PAGE>
16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) Exhibits
<TABLE>
<C> <S>
1.1* Form of Underwriting Agreement.
3.1 Certificate of Incorporation of the Registrant, as amended.
3.2 By-Laws of the Registrant.
4.1* Specimen stock certificate for shares of Common Stock of the
Registrant.
5.1* Opinion of Piper & Marbury L.L.P. regarding legality of securities
being registered.
10.1* Registrant's 1995 Stock Option/Stock Issuance Plan (Virginia).
10.2* Registrant's 1995 Stock Option/Stock Issuance Plan (California).
10.3 Registrant's 1997 Directors' Stock Option Plan.
10.4 Registrant's Financing and Security Agreement with The First National
Bank of Maryland, dated as of October 18, 1995.
10.4.1* Registrant's Amended and Restated Financing and Security Agreement
with the First National Bank of Maryland, dated as of November 27,
1996.
10.5 Contract for Employment for Executive Management by and between
Douglas L. Ducate, dated as of November 22, 1994.
10.6 Contract for Employment for Executive Management by and between the
Registrant and Cyril M. Wismar, dated as of December 28, 1994.
10.7 Contract for Employment for Executive Management by and between Robert
A. Kirkland, dated as of October 11, 1995.
10.8 Contract for Employment for Executive Management by and between John
M. Green, dated as of November 21, 1995.
10.9 Contract for Employment for Executive Management by and between
Richard S. Bartell, dated as of January 19, 1996.
10.10 Contract for Employment for Executive Management by and between the
Registrant and Edward P. Doody, dated as of March 21, 1996.
10.11 Contract for Employment for Executive Management by and between the
Registrant and Mark N. Sirangelo, dated as of September 1, 1996.
10.12 Share Acquisition Agreement by and between the Registrant and the
parties named therein, dated as of September 5, 1995.
10.13 Stock Purchase Agreement by and between the Registrant and the parties
named therein, dated as of January 1, 1996.
10.14 Stock Purchase Agreement by and between the Registrant and the parties
named therein, dated as of February 1, 1996, as amended.
10.15 Stock Purchase Agreement by and between the Registrant and the parties
named therein, dated as of April 1, 1996
10.16 Stock Purchase Agreement by and between the Registrant and the parties
named therein, dated as of July 1, 1996, as amended.
10.17 Series D Convertible Preferred Stock Purchase Agreement by and between
the Registrant and the parties named therein, dated as of February 10,
1995.
10.18 Series E Convertible Preferred Stock Purchase Agreement by and between
the Registrant and the parties named therein, dated as of February 22,
1996.
10.19 Amendment No. 1 to Series E Convertible Preferred Stock Purchase
Agreement by and between the Registrant and the parties named therein,
dated as of June 19, 1996.
10.20 Amendment No. 2 to Series E Convertible Preferred Stock Purchase
Agreement by and between the Registrant and the parties named therein,
dated as of September 26, 1996.
</TABLE>
II-3
<PAGE>
<TABLE>
<C> <S>
10.21 Second Restated Investors' Rights Agreement, dated as of February 22,
1996.
11.1+ Statement of computation of loss per share.
21.1 Subsidiaries of the Registrant.
23.1* Consent of Ernst & Young LLP
23.2* Consent of Kingston Smith, Chartered Accountants
23.3* Consent of Ernst & Young, Chartered Accountants
23.4* Consent of Piper & Marbury L.L.P. (to be included as part of Exhibit 5.1
hereto).
24.1 Power of Attorney (included in signature pages).
27.1* Financial Data Schedule.
</TABLE>
(b) Financial Statement Schedules
SCHEDULE DESCRIPTION
-------- -----------
- --------
* Filed herewith.
+To be filed by amendment.
17. UNDERTAKINGS
A. The undersigned Registrant hereby undertakes to provide to the
Underwriter at the closing specified in the Underwriting Agreement
certificates in such denominations and registered in such names as required by
the Underwriter to permit prompt delivery to each purchaser.
B. Insofar as indemnification for liabilities arising under the Securities
Act of 1933 may be permitted to directors, officers and controlling persons of
the Registrant pursuant to the Delaware General Corporate Law, the Certificate
of Incorporation and the Bylaws, or otherwise, the Registrant has been advised
that in the opinion of the Securities and Exchange Commission such
indemnification is against public policy as expressed in the Act and is,
therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the registrant of expenses
incurred or paid by a director, officer or controlling person of the
Registrant in the successful defense of any action, suit, or proceeding) is
asserted by such director, officer or controlling person in connection with
the securities being registered, the Registrant will, unless in the opinion of
its counsel the matter has been settled by controlling precedent, submit to a
court of appropriate jurisdiction the question of whether such indemnification
by it is against public policy as expressed in the Act and will be governed by
the final adjudication of such issue.
C. (1) For purposes of determining any liability under the Securities Act of
1933, the information omitted from the form of prospectus filed as part of
this registration statement in reliance upon Rule 430A and contained in a form
of prospectus filed by the Registrant pursuant to Rule 424(b)(1) or (4) or
497(h) under the Securities Act shall be deemed to be a part of this
registration statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the Securities Act of
1933, each post-effective amendment that contains a form of prospectus shall
be deemed to be a new registration statement relating to the securities
offered therein, and the offering of such securities at that time shall be
deemed to be the initial bona fide offering thereof.
II-4
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended, the
Company has duly caused this Amendment No. 2 to Registration Statement to be
signed on its behalf by the undersigned, thereunto duly authorized, in the
County of Arlington, Commonwealth of Virginia, on the 17th day of December,
1996.
Production Group International, Inc.
By: /s/ Mark N. Sirangelo
---------------------------------
MARK N. SIRANGELO
CHAIRMAN OF THE BOARD, PRESIDENT
AND CHIEF EXECUTIVE OFFICER
POWER OF ATTORNEY
Pursuant to the requirements of the Securities Act of 1933, as amended, this
Registration Statement has been signed below by the following persons in the
capacities and on the date indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
/s/ Mark N. Sirangelo Chairman of the Board, December 17, 1996
- ------------------------------- President and Chief
MARK N. SIRANGELO Executive Officer
(Principal Executive
Officer)
/s/ Richard S. Bartell Senior Vice President and December 17, 1996
- ------------------------------- Chief Financial Officer
RICHARD S. BARTELL (Principal Financial
Accounting Officer)
* Director and Vice Chairman December 17, 1996
- ------------------------------- of the Board
DARRYL HARTLEY-LEONARD
* Senior Vice President and December 17, 1996
- ------------------------------- Director
EDWARD P. DOODY
* Director December 17, 1996
- -------------------------------
ROBERT C. MCCORMACK
* Director December 17, 1996
- -------------------------------
PETER C. WENDELL
</TABLE>
*By: /s/ Edwin M. Martin, Jr.
--------------------------
EDWIN M. MARTIN, JR.
Attorney-in-Fact
II-5
<PAGE>
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
The Board of Directors
Production Group International, Inc.
We have audited the consolidated financial statements of Production Group
International, Inc. as of August 31, 1995 and 1996, and for each of the three
years in the period ended August 31, 1996 and have issued our report thereon
dated October 24, 1996 (included elsewhere in this Registration Statement).
Our audits also included the financial statement schedule listed in Item 16(b)
of this Registration Statement. The schedule is the responsibility of the
Company's management. Our responsibility is to express an opinion based on our
audit.
In our opinion, the financial statement schedule referred to above, 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
Vienna, Virginia
October 24, 1996
- -------------------------------------------------------------------------------
The foregoing report is in the form that will be signed upon the completion
of the net income (loss) per share calculation once the initial public
offering price is known.
/s/ Ernst & Young LLP
Vienna, Virginia
December 16, 1996
<PAGE>
SCHEDULE 1--VALUATION AND QUALIFYING ACCOUNT AND RESERVE
PRODUCTION GROUP INTERNATIONAL, INC.
<TABLE>
<CAPTION>
BALANCE AT
BEGINNING OF BALANCE AT
CLASSIFICATION PERIOD ADDITIONS DEDUCTIONS END OF PERIOD
-------------- ------------ --------- ---------- -------------
<S> <C> <C> <C> <C>
Allowance for doubtful ac-
counts:
Year ended August 31,
1994..................... $100,000 264,400 (14,400)(1) $350,000
Year ended August 31,
1995..................... $350,000 694,500 (600,500)(1) $444,000
Year ended August 31,
1996..................... $444,000 708,484 (327,484)(1) $825,000
</TABLE>
- --------
(1) Write off of accounts receivable.
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION OF EXHIBIT
----------- ----------------------
<C> <S>
1.1* Form of Underwriting Agreement.
3.1 Certificate of Incorporation of the Registrant, as amended.
3.2 By-Laws of the Registrant.
4.1* Specimen stock certificate for shares of Common Stock of the
Registrant.
5.1* Opinion of Piper & Marbury L.L.P. regarding legality of securities
being registered.
10.1* Registrant's 1995 Stock Option/Stock Issuance Plan (Virginia).
10.2* Registrant's 1995 Stock Option/Stock Issuance Plan (California).
10.3 Registrant's 1997 Directors' Stock Option Plan.
10.4 Registrant's Financing and Security Agreement with The First
National Bank of Maryland, dated as of October 18, 1995.
10.4.1* Registrant's Amended and Restated Financing and Security Agreement
with the First National Bank of Maryland, dated as of November 27,
1996.
10.5 Contract for Employment for Executive Management by and between
Douglas L. Ducate, dated as of November 22, 1994.
10.6 Contract for Employment for Executive Management by and between
the Registrant and Cyril B. Wismar, dated as of December 28, 1994.
10.7 Contract for Employment for Executive Management by and between
Robert A. Kirkland, dated as of October 11, 1995.
10.8 Contract for Employment for Executive Management by and between
John M. Green, dated as of November 21, 1995.
10.9 Contract for Employment for Executive Management by and between
Richard S. Bartell, dated as of January 19, 1996.
10.10 Contract for Employment for Executive Management by and between
the Registrant and Edward P. Doody, dated as of March 21, 1996.
10.11 Contract for Employment for Executive Management by and between
the Registrant and Mark N. Sirangelo, dated as of September 1,
1996.
10.12 Share Acquisition Agreement by and between the Registrant and the
parties named therein, dated as of September 5, 1995.
10.13 Stock Purchase Agreement by and between the Registrant and the
parties named therein, dated as of January 1, 1996.
10.14 Stock Purchase Agreement by and between the Registrant and the
parties named therein, dated as of February 1, 1996, as amended.
10.15 Stock Purchase Agreement by and between the Registrant and the
parties named therein, dated as of April 1, 1996
10.16 Stock Purchase Agreement by and between the Registrant and the
parties named therein, dated as of July 1, 1996, as amended.
10.17 Series D Convertible Preferred Stock Purchase Agreement by and
between the Registrant and the parties named therein, dated as of
February 10, 1995.
10.18 Series E Convertible Preferred Stock Purchase Agreement by and
between the Registrant and the parties named therein, dated as of
February 22, 1996.
10.19 Amendment No. 1 to Series E Convertible Preferred Stock Purchase
Agreement by and between the Registrant and the parties named
therein, dated as of June 19, 1996.
10.20 Amendment No. 2 to Series E Convertible Preferred Stock Purchase
Agreement by and between the Registrant and the parties named
therein, dated as of September 26, 1996.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION OF EXHIBIT
----------- ----------------------
<C> <S>
10.21 Second Restated Investors' Rights Agreement, dated as of February
22, 1996.
11.1+ Statement of computation of loss per share.
21.1 Subsidiaries of the Registrant.
23.1* Consent of Ernst & Young LLP
23.2* Consent of Kingston Smith, Chartered Accountants
23.3* Consent of Ernst & Young, Chartered Accountants
23.4* Consent of Piper & Marbury L.L.P. (to be included as part of
Exhibit 5.1 hereto).
24.1 Power of Attorney (included in signature pages).
27.1* Financial Data Schedule.
</TABLE>
- --------
* Filed herewith.
<PAGE>
Exhibit 1.1
_______________ Shares
PRODUCTION GROUP INTERNATIONAL, INC.
Common Stock
($.01 Par Value)
UNDERWRITING AGREEMENT
----------------------
December __, 1996
Alex. Brown & Sons Incorporated
Montgomery Securities
Robertson, Stephens & Company
As Representatives of the
Several Underwriters
c/o Alex. Brown & Sons Incorporated
135 East Baltimore Street
Baltimore, Maryland 21202
Gentlemen:
Production Group International, Inc., a Delaware corporation (the
"Company"), proposes to sell to the several underwriters (the "Underwriters")
named in Schedule I hereto for whom you are acting as Representatives (the
"Representatives") an aggregate of __________ shares of the Company's Common
Stock, $.01 par value (the "Firm Shares"). The respective amounts of the Firm
Shares to be so purchased by the several Underwriters are set forth opposite
their names in Schedule I hereto. The Company also proposes to sell at the
Underwriters' option an aggregate of up to __________ additional shares of the
Company's Common Stock (the "Option Shares") as set forth below.
As the Representatives, you have advised the Company (a) that you
are authorized to enter into this Agreement on behalf of the several
Underwriters,
<PAGE>
and (b) that the several Underwriters are willing, acting severally and not
jointly, to purchase the numbers of Firm Shares set forth opposite their
respective names in Schedule I, plus their pro rata portion of the Option Shares
if you elect to exercise the over-allotment option in whole or in part for the
accounts of the several Underwriters. The Firm Shares and the Option Shares (to
the extent the aforementioned option is exercised) are herein collectively
called the "Shares."
In consideration of the mutual agreements contained herein and of the
interests of the parties in the transactions contemplated hereby, the parties
hereto agree as follows:
1. Representations and Warranties of the Company
----------------------------------------------
The Company represents and warrants to each of the Underwriters as follows:
(a) A registration statement on Form S-1 (File No. 333-14879) with
respect to the Shares has been carefully prepared by the Company in
conformity with the requirements of the Securities Act of 1933, as amended
(the "Act"), and the Rules and Regulations (the "Rules and Regulations") of
the Securities and Exchange Commission (the "Commission") thereunder and
has been filed with the Commission. Copies of such registration statement,
including any amendments thereto, the preliminary prospectuses (meeting the
requirements of the Rules and Regulations) contained therein and the
exhibits, financial statements and schedules, as finally amended and
revised, have heretofore been delivered by the Company to you. Such
registration statement, together with any registration statement filed by
the Company pursuant to Rule 462 (b) of the Act, herein referred to as the
"Registration Statement," which shall be deemed to include all information
omitted therefrom in reliance upon Rule 430A and contained in the
Prospectus referred to below, has come effective under the Act and no post-
effective amendment to the Registration Statement has been filed as of the
date of this Agreement. "Prospectus" means (a) the form of prospectus
first filed with the Commission pursuant to Rule 424(b) or (b) the last
preliminary prospectus included in the Registration Statement filed prior
to the time it becomes effective or filed pursuant to Rule 424(a) under the
Act that is delivered by the Company to the Underwriters for delivery to
purchasers of the Shares, together with any term sheet or abbreviated term
sheet filed with the Commission pursuant to Rule 424(b)(7) under the Act.
Each preliminary prospectus included in the Registration Statement prior to
the time it becomes effective is herein referred to as a "Preliminary
Prospectus."
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(b) The Company has been duly organized and is validly existing as a
corporation in good standing under the laws of the State of Delaware, with
corporate power and authority to own or lease its properties and conduct
its business as described in the Registration Statement. Each of the
subsidiaries of the Company as listed in Exhibit 21 to Item 16(a) of the
Registration Statement (collectively, the "Subsidiaries") has been duly
organized and is validly existing as a corporation in good standing under
the laws of the jurisdiction of its incorporation, with corporate power and
authority to own or lease its properties and conduct its business as
described in the Registration Statement. The Subsidiaries are the only
subsidiaries, direct or indirect, of the Company. The Company and each of
the Subsidiaries are duly qualified to transact business in all
jurisdictions in which the conduct of their business requires such
qualification. The outstanding shares of capital stock of each of the
Subsidiaries have been duly authorized and validly issued, are fully paid
and non-assessable and, except as set forth on Exhibit A hereto, are owned
by the Company or another Subsidiary free and clear of all liens,
encumbrances and equities and claims; and no options, warrants or other
rights to purchase, agreements or other obligations to issue or other
rights to convert any obligations into shares of capital stock or ownership
interests in the Subsidiaries are outstanding.
(c) The outstanding shares of Common Stock and Preferred Stock of the
Company have been duly authorized and validly issued and are fully paid and
non-assessable; all of the outstanding shares of the Preferred Stock of the
Company will be converted into an equivalent number of shares of Common
Stock automatically effective immediately prior to the closing referred to
below, and all of such shares so issued upon conversion will be duly
authorized validly received, fully paid and nontransferrable; the Shares to
be issued and sold by the Company have been duly authorized and when issued
and paid for as contemplated herein will be validly issued, fully paid and
non-assessable; and no preemptive rights of stockholders exist with respect
to any of the Shares or the issue and sale thereof. Neither the filing of
the Registration Statement nor the offering or sale of the Shares as
contemplated by this Agreement gives rise to any rights, other than those
which have been waived or satisfied, for or relating to the registration of
any shares of Common Stock.
(d) The information set forth under the caption "Capitalization" in the
Prospectus is true and correct. All of the Shares conform to the
description thereof contained in the Registration Statement. The form of
certificates for the Shares conforms to the requirements of the Delaware
General Corporation Law.
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(e) The Commission has not issued an order preventing or suspending the
use of any Prospectus relating to the proposed offering of the Shares nor
instituted proceedings for that purpose. The Registration Statement
contains, and the Prospectus and any amendments or supplements thereto will
contain, all statements which are required to be stated therein by, and
will conform, to the requirements of the Act and the Rules and Regulations.
The Registration Statement and any amendment thereto do not contain, and
will not contain, any untrue statement of a material fact and do not omit,
and will not omit, to state any material fact required to be stated therein
or necessary to make the statements therein not misleading. The Prospectus
and any amendments and supplements thereto do not contain, and will not
contain, any untrue statement of material fact; and do not omit, and will
not omit, to state any material fact required to be stated therein or
necessary to make the statements therein, in the light of the circumstances
under which they were made, not misleading; provided, however, that the
Company makes no representations or warranties as to information contained
in or omitted from the Registration Statement or the Prospectus, or any
such amendment or supplement, in reliance upon, and in conformity with,
written information furnished to the Company by or on behalf of any
Underwriter through the Representatives, specifically for use in the
preparation thereof.
(f) The consolidated financial statements of the Company and the
Subsidiaries, together with related notes and schedules as set forth in the
Registration Statement, present fairly the financial position and the
results of operations and cash flows of the Company and the consolidated
Subsidiaries, at the indicated dates and for the indicated periods. Such
financial statements and related schedules have been prepared in accordance
with generally accepted principles of accounting, consistently applied
throughout the periods involved, except as disclosed herein, and all
adjustments necessary for a fair presentation of results for such periods
have been made. The summary financial and statistical data included in the
Registration Statement presents fairly the information shown therein and
such data has been compiled on a basis consistent with the financial
statements presented therein and the books and records of the Company.
The unaudited pro forma combined statements of operations included in the
Registration Statement and the Prospectus present fairly the information
shown therein, have been prepared in accordance with the Commission's rules
and guidelines with respect to pro forma financial statements, have been
properly compiled on the pro forma bases described therein, and, in the
opinion of the Company, the assumptions used in the preparation thereof are
reasonable and the adjustments used
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therein are appropriate to give effect to the transactions or circumstances
referred to therein.
(g) Ernst & Young LLP, Ernst & Young Chartered Accountants and Kingston
Smith Chartered Accountants, who have certified certain of the financial
statements filed with the Commission as part of the Registration Statement,
are independent public accountants as required by the Act and the Rules and
Regulations.
(h) There is no action, suit, claim or proceeding pending or, to the
knowledge of the Company, threatened against the Company or any of the
Subsidiaries before any court or administrative agency or otherwise which
if determined adversely to the Company or any of its Subsidiaries might
result in any material adverse change in the earnings, business,
management, properties, assets, rights, operations, condition (financial or
otherwise) or prospects of the Company and of the Subsidiaries taken as a
whole or to prevent the consummation of the transactions contemplated
hereby, except as set forth in the Registration Statement.
(i) The Company and the Subsidiaries have good and marketable title to all
of the properties and assets reflected in the financial statements (or as
described in the Registration Statement) hereinabove described, subject to
no lien, mortgage, pledge, charge or encumbrance of any kind except those
reflected in such financial statements (or as described in the Registration
Statement) or which are not material in amount. The Company and the
Subsidiaries occupy their leased properties under valid and binding leases
conforming in all material respects to the descriptions thereof, if any,
set forth in the Registration Statement.
(j) The Company and the Subsidiaries have filed all Federal, State, local
and foreign income tax returns which have been required to be filed and
have paid all taxes indicated by said returns and all assessments received
by them or any of them to the extent that such taxes have become due. All
tax liabilities have been adequately provided for in the financial
statements of the Company.
(k) Since the respective dates as of which information is given in the
Registration Statement, as it may be amended or supplemented, there has not
been any material adverse change or any development involving a prospective
material adverse change in or affecting the earnings, business,
management, properties, assets, rights, operations, condition (financial or
otherwise) or prospects of the Company and its Subsidiaries taken as a
whole, whether or not occurring in the ordinary course of business, and
there
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has not been any material transaction entered into or any material
transaction that is probable of being entered into by the Company or the
Subsidiaries, other than transactions in the ordinary course of business
and changes and transactions described in the Registration Statement, as it
may be amended or supplemented. The Company and the Subsidiaries have no
material contingent obligations which are not disclosed in the Company's
financial statements which are included in the Registration Statement.
(l) Neither the Company nor any of the Subsidiaries is or with the giving
of notice or lapse of time or both, will be, in violation of or in default
under its Certificate of Incorporation or By-Laws or under any agreement,
lease, contract, indenture or other instrument or obligation to which it is
a party or by which it, or any of its properties, is bound and which
default is of material significance in respect of the condition, financial
or otherwise of the Company and its Subsidiaries taken as a whole or the
business, management, properties, assets, rights, operations, condition
(financial or otherwise) or prospects of the Company and the Subsidiaries
taken as a whole. The execution and delivery of this Agreement and the
consummation of the transactions herein contemplated and the fulfillment of
the terms hereof will not conflict with or result in a breach of any of the
terms or provisions of, or constitute a default under, any indenture,
mortgage, deed of trust or other agreement or instrument to which the
Company or any Subsidiary is a party, or of the Certificate of
Incorporation or By-Laws of the Company or any order, rule or regulation
applicable to the Company or any Subsidiary of any court or of any
regulatory body or administrative agency or other governmental body having
jurisdiction.
(m) Each approval, consent, order, authorization, designation, declaration
or filing by or with any regulatory, administrative or other governmental
body necessary in connection with the execution and delivery by the Company
of this Agreement and the consummation of the transactions herein
contemplated (except such additional steps as may be required by the
Commission or the National Association of Securities Dealers, Inc. (the
"NASD") or such additional steps as may be necessary to qualify the Shares
for public offering by the Underwriters under state securities or Blue Sky
laws) has been obtained or made and is in full force and effect.
(n) The Company and each of the Subsidiaries holds all material licenses,
certificates and permits from governmental authorities which are necessary
to the conduct of their businesses; and neither the Company nor any of the
Subsidiaries has infringed any patents, patent rights, trade names,
trademarks or copyrights, which infringement is material to the business of
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the Company and the Subsidiaries taken as a whole. The Company knows of no
material infringement by others of patents, patent rights, trade names,
trademarks or copyrights owned by or licensed to the Company.
(o) Neither the Company, nor to the Company's best knowledge, any of its
affiliates, has taken or may take, directly or indirectly, any action
designed to cause or result in, or which has constituted or which might
reasonably be expected to constitute, the stabilization or manipulation of
the price of the shares of Common Stock to facilitate the sale or resale of
the Shares.
(p) Neither the Company nor any Subsidiary is or will become as a result
of the sale of the Shares, an "investment company" within the meaning of
such term under the Investment Company Act of 1940, as amended, (the "1940
Act") and the rules and regulations of the Commission thereunder.
(q) The Company maintains a system of internal accounting controls
sufficient to provide reasonable assurances that (i) transactions are
executed in accordance with management's general or specific authorization;
(ii) transactions are recorded as necessary to permit preparation of
financial statements in conformity with generally accepted accounting
principles and to maintain accountability for assets; (iii) access to
assets is permitted only in accordance with management's general or
specific authorization; and (iv) the recorded accountability for assets is
compared with existing assets at reasonable intervals and appropriate
action is taken with respect to any differences.
(r) The Company and each of its Subsidiaries carry, or are covered by,
insurance in such amounts and covering such risks as is adequate for the
conduct of their respective businesses and the value of their respective
properties and as is customary for companies engaged in similar industries.
(s) The Company is in compliance in all material respects with all
presently applicable provisions of the Employee Retirement Income Security
Act of 1974, as amended, including the regulations and published
interpretations thereunder ("ERISA"); no "reportable event" (as defined in
ERISA) has occurred with respect to any "pension plan" (as defined in
ERISA) for which the Company would have any liability; the Company has not
incurred and does not expect to incur liability under (i) Title IV of ERISA
with respect to termination of, or withdrawal from, any "pension plan" or
(ii) Sections 412 or 4971 of the Internal Revenue Code of 1986, as amended,
including the regulations and published interpretations thereunder (the
"Code"); and each "pension plan" for which the Company would have any
liability that is
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intended to be qualified under Section 401(a) of the Code is so qualified
in all material respects and nothing has occurred, whether by action or by
failure to act, which would cause the loss of such qualification.
(t) The Company confirms as of the date hereof that it is in compliance
with all provisions of Section 1 of Laws of Florida, Chapter 92-198,
An Act Relating to Disclosure of doing Business with Cuba, and the Company
---------------------------------------------------------
further agrees that if it commences engaging in business with the
government of Cuba or with any person or affiliate located in Cuba after
the date the Registration Statement becomes or has become effective with
the Commission or with the Florida Department of Banking and Finance (the
"Department"), whichever date is later, or if the information reported or
incorporated by reference in the Prospectus, if any, concerning the
Company's business with Cuba or with any person or affiliate located in
Cuba changes in any material way, the Company will provide the Department
notice of such business or change, as appropriate, in a form acceptable to
the Department.
2. Purchase, Sale and Delivery of the Firm Shares.
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(a) On the basis of the representations, warranties and covenants herein
contained, and subject to the conditions herein set forth, the Company
agrees to sell to the Underwriters and each Underwriter agrees, severally
and not jointly, to purchase, at a price of $_____ per share, the number of
Firm Shares set forth opposite the name of each Underwriter in Schedule I
hereof, subject to adjustments in accordance with Section 9 hereof.
(b) Payment for the Firm Shares to be sold hereunder is to be made in same
day funds via wire transfer or by certified or bank cashier's checks drawn
to the order of the Company, as specified by the Company, against delivery
of certificates therefor to the Representatives for the several accounts of
the Underwriters. Such payment and delivery are to be made at the offices
of Alex. Brown & Sons Incorporated, 135 East Baltimore Street, Baltimore,
Maryland, at 10:00 a.m., Baltimore time, on the third business day after
the date of this Agreement or at such other time and date not later than
five business days thereafter as you and the Company shall agree upon, such
time and date being herein referred to as the "Closing Date." (As used
herein, "business day" means a day on which the New York Stock Exchange is
open for trading and on which banks in New York are open for business and
are not permitted by law or executive order to be closed.) The certificates
for the Firm Shares will be delivered in such denominations and in such
registrations as the Representatives request in writing not later than the
second full business day prior to the Closing Date, and will be made
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available for inspection by the Representatives at least one business day
prior to the Closing Date.
(c) In addition, on the basis of the representations and warranties herein
contained and subject to the terms and conditions herein set forth, the
Company hereby grants an option to the several Underwriters to purchase the
Option Shares at the price per share as set forth in the first paragraph of
this Section 2. The option granted hereby may be exercised in whole or in
part by giving written notice (i) at any time before the Closing Date and
(ii) only once thereafter within 30 days after the date of this Agreement,
by you, as Representatives of the several Underwriters, to the Company
setting forth the number of Option Shares as to which the several
Underwriters are exercising the option, the names and denominations in
which the Option Shares are to be registered and the time and date at which
such certificates are to be delivered. The time and date at which
certificates for Option Shares are to be delivered shall be determined by
the Representatives but shall not be earlier than three nor later than 10
full business days after the exercise of such option, nor in any event
prior to the Closing Date (such time and date being herein referred to as
the "Option Closing Date"). If the date of exercise of the option is three
or more days before the Closing Date, the notice of exercise shall set the
Closing Date as the Option Closing Date. The number of Option Shares to be
purchased by each Underwriter shall be in the same proportion to the total
number of Option Shares being purchased as the number of Firm Shares being
purchased by such Underwriter bears to __________, adjusted by you in such
manner as to avoid fractional shares. The option with respect to the
Option Shares granted hereunder may be exercised only to cover over-
allotments in the sale of the Firm Shares by the Underwriters. You, as
Representatives of the several Underwriters, may cancel such option at any
time prior to its expiration by giving written notice of such cancellation
to the Company. To the extent, if any, that the option is exercised,
payment for the Option Shares shall be made on the Option Closing Date in
same day funds via wire transfer or by certified or bank cashier's check
drawn to the order of the Company, as specified by the Company, against
delivery of certificates therefor at the offices of Alex. Brown & Sons
Incorporated, 135 East Baltimore Street, Baltimore, Maryland.
3. Offering by the Underwriters.
----------------------------
It is understood that the several Underwriters are to make a public
offering of the Firm Shares as soon as the Representatives deem it
advisable to do so. The Firm Shares are to be initially offered to the
public at the initial public offering price set forth in the Prospectus.
The Representatives
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may from time to time thereafter change the public offering price and other
selling terms. To the extent, if at all, that any Option Shares are
purchased pursuant to Section 2 hereof, the Underwriters will offer them to
the public on the foregoing terms.
It is further understood that you will act as the Representatives for
the Underwriters in the offering and sale of the Shares in accordance with
a Master Agreement Among Underwriters entered into by you and the several
other Underwriters.
4. Covenants of the Company.
------------------------
The Company covenants and agrees with the several Underwriters that:
(a) The Company will (A) use its best efforts to cause the Registration
Statement to become effective or, if the procedure in Rule 430A of the
Rules and Regulations is followed, to prepare and timely file with the
Commission under Rule 424(b) of the Rules and Regulations a Prospectus in a
form approved by the Representatives containing information previously
omitted at the time of effectiveness of the Registration Statement in
reliance on Rule 430A of the Rules and Regulations and (B) not file any
amendment to the Registration Statement or supplement to the Prospectus of
which the Representatives shall not previously have been advised and
furnished with a copy or to which the Representatives shall have reasonably
objected in writing or which is not in compliance with the Rules and
Regulations.
(b) The Company will advise the Representatives promptly (A) when the
Registration Statement or any post-effective amendment thereto shall have
become effective, (B) of receipt of any comments from the Commission,
(C) of any request of the Commission for amendment of the Registration
Statement or for supplement to the Prospectus or for any additional
information, and (D) of the issuance by the Commission of any stop order
suspending the effectiveness of the Registration Statement or the use of
the Prospectus or of the institution of any proceedings for that purpose.
The Company will use its best efforts to prevent the issuance of any such
stop order preventing or suspending the use of the Prospectus and to obtain
as soon as possible the lifting thereof, if issued.
(c) The Company will cooperate with the Representatives in endeavoring to
qualify the Shares for sale under the securities laws of such jurisdictions
as the Representatives may reasonably have designated in writing and will
make such applications, file such documents, and furnish such information
as
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may be reasonably required for that purpose, provided the Company shall
not be required to qualify as a foreign corporation or to file a general
consent to service of process in any jurisdiction where it is not now so
qualified or required to file such a consent. The Company will, from time
to time, prepare and file such statements, reports, and other documents, as
are or may be required to continue such qualifications in effect for so
long a period as the Representatives may reasonably request for
distribution of the Shares.
(d) The Company will deliver to, or upon the order of, the
Representatives, from time to time, as many copies of any Preliminary
Prospectus as the Representatives may reasonably request. The Company will
deliver to, or upon the order of, the Representatives during the period
when delivery of a Prospectus is required under the Act, as many copies of
the Prospectus in final form, or as thereafter amended or supplemented, as
the Representatives may reasonably request. The Company will deliver to
the Representatives at or before the Closing Date, four signed copies of
the Registration Statement and all amendments thereto including all
exhibits filed therewith, and will deliver to the Representatives such
number of copies of the Registration Statement (including such number of
copies of the exhibits filed therewith that may reasonably be requested)
and of all amendments thereto, as the Representatives may reasonably
request.
(e) The Company will comply with the Act and the Rules and Regulations,
and the Securities Exchange Act of 1934 (the "Exchange Act"), and the rules
and regulations of the Commission thereunder, so as to permit the
completion of the distribution of the Shares as contemplated in this
Agreement and the Prospectus. If during the period in which a prospectus
is required by law to be delivered by an Underwriter or dealer, any event
shall occur as a result of which, in the judgment of the Company or in the
reasonable opinion of the Underwriters, it becomes necessary to amend or
supplement the Prospectus in order to make the statements therein, in the
light of the circumstances existing at the time the Prospectus is delivered
to a purchaser, not misleading, or, if it is necessary at any time to amend
or supplement the Prospectus to comply with any law, the Company promptly
will prepare and file with the Commission an appropriate amendment to the
Registration Statement or supplement to the Prospectus so that the
Prospectus as so amended or supplemented will not, in the light of the
circumstances when it is so delivered, be misleading, or so that the
Prospectus will comply with the law.
(f) The Company will make generally available to its security holders, as
soon as it is practicable to do so, but in any event not later than
15 months
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after the effective date of the Registration Statement, an earning
statement (which need not be audited) in reasonable detail, covering a
period of at least 12 consecutive months beginning after the effective date
of the Registration Statement, which earning statement shall satisfy the
requirements of Section 11(a) of the Act and Rule 158 of the Rules and
Regulations and will advise you in writing when such statement has been so
made available.
(g) The Company will, for a period of five years from the Closing Date,
deliver to the Representatives copies of annual reports and copies of all
other documents, reports and information furnished by the Company to its
stockholders or filed with any securities exchange pursuant to the
requirements of such exchange or with the Commission pursuant to the Act or
the Securities Exchange Act of 1934, as amended. The Company will deliver
to the Representatives similar reports with respect to significant
subsidiaries, as that term is defined in the Rules and Regulations, which
are not consolidated in the Company's financial statements.
(h) No offering, sale, short sale or other disposition of any shares of
Common Stock of the Company or other securities convertible into or
exchangeable or exercisable for shares of Common Stock or derivative of
Common Stock (or agreement for such), except for shares issued pursuant to
the exercise of stock options outstanding as of the date hereof or
subsequently granted under the Company's stock option plans will be made
for a period of 180 days after the date of this Agreement, directly or
indirectly, by the Company otherwise than hereunder or with the prior
written consent of Alex. Brown & Sons Incorporated.
(i) The Company will use its best efforts to list, subject to notice of
issuance, the Shares on The NASDAQ Stock Market (National Market).
(j) The Company has caused each executive officer and director, specific
stockholders and specific holders of options exercisable within 185 days of
the date here ("Option Holders") of the Company to furnish to you, on or
prior to the date of this Agreement, a letter or letters, in form and
substance satisfactory to the Underwriters, pursuant to which each such
person shall agree not to offer, sell, sell short or otherwise dispose of
any shares of Common Stock of the Company or other capital stock of the
Company, or any other securities convertible, exchangeable or exercisable
for Common Shares or derivative of Common Shares owned by such person or
request the registration for the offer or sale of any of the foregoing (or
as to which such person has the right to direct the disposition of) for a
period of 180 days after the date of this Agreement, directly or
indirectly, except with the prior written consent of Alex. Brown & Sons
Incorporated ("Lockup Agreements").
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(k) The Company shall apply the net proceeds of its sale of the Shares as
set forth in the Prospectus and shall file such reports with the Commission
with respect to the sale of the Shares and the application of the proceeds
therefrom as may be required in accordance with Rule 463 under the Act.
(l) The Company shall not invest, or otherwise use the proceeds received
by the Company from its sale of the Shares in such a manner as would
require the Company or any of the Subsidiaries to register as an investment
company under the the 1940 Act.
(m) The Company will maintain a transfer agent and, if necessary under the
jurisdiction of incorporation of the Company, a registrar for the Common
Stock.
(n) The Company will not take, directly or indirectly, any action designed
to cause or result in, or that has constituted or might reasonably be
expected to constitute, the stabilization or manipulation of the price of
any securities of the Company.
5. Costs and Expenses.
------------------
The Company will pay all costs, expenses and fees incident to the
performance of the obligations of the Company under this Agreement,
including, without limiting the generality of the foregoing, the following:
accounting fees of the Company; the fees and disbursements of counsel for
the Company; the cost of printing and delivering to, or as requested by,
the Underwriters copies of the Registration Statement, Preliminary
Prospectuses, the Prospectus, this Agreement, the Underwriters' Selling
Memorandum, the Underwriters' Invitation Letter, the Listing Application,
the Blue Sky Survey and any supplements or amendments thereto; the filing
fees of the Commission; the filing fees and expenses (including legal fees
and disbursements) incident to securing any required review by the National
Association of Securities Dealers, Inc. (the "NASD") of the terms of the
sale of the Shares; the listing fees of the NASDAQ Stock Market; and the
expenses, including the fees and disbursements of counsel for the
Underwriters, incurred in connection with the qualification of the Shares
under State securities or Blue Sky laws. The Company agrees to pay all
costs and expenses of the Underwriters, including the fees and
disbursements of counsel for the Underwriters, incident to the offer and
sale of directed shares of the Common Stock by the Underwriters to
employees and persons having business relationships with the Company and
its Subsidiaries. The Company
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shall not, however, be required to pay for any of the Underwriters'
expenses (other than those related to qualification under NASD regulation
and State securities or Blue Sky laws and as set forth in the preceding
sentence) except that, if this Agreement shall not be consummated because
the conditions in Section 6 hereof are not satisfied, or because this
Agreement is terminated by the Representatives pursuant to Section 11
hereof, or by reason of any failure, refusal or inability on the part of
the Company to perform any undertaking or satisfy any condition of this
Agreement or to comply with any of the terms hereof on its part to be
performed, unless such failure to satisfy said condition or to comply with
said terms be due to the default or omission of any Underwriter, then the
Company shall reimburse the several Underwriters for reasonable
out-of-pocket expenses, including fees and disbursements of counsel,
reasonably incurred in connection with investigating, marketing and
proposing to market the Shares or in contemplation of performing their
obligations hereunder; but the Company shall not in any event be liable to
any of the several Underwriters for damages on account of loss of
anticipated profits from the sale by them of the Shares.
6. Conditions of Obligations of the Underwriters.
---------------------------------------------
The several obligations of the Underwriters to purchase the Firm
Shares on the Closing Date and the Option Shares, if any, on the Option
Closing Date are subject to the accuracy, as of the Closing Date or the
Option Closing Date, as the case may be, of the representations and
warranties of the Company contained herein, and to the performance by the
Company in all material aspects of its covenants and obligations hereunder
and to the following additional conditions:
(a) The Registration Statement and all post-effective amendments thereto
shall have become effective and any and all filings required by Rule 424
and Rule 430A of the Rules and Regulations shall have been made, and any
request of the Commission for additional information (to be included in the
Registration Statement or otherwise) shall have been disclosed to the
Representatives and complied with to their reasonable satisfaction. No
stop order suspending the effectiveness of the Registration Statement, as
amended from time to time, shall have been issued and no proceedings for
that purpose shall have been taken or, to the knowledge of the Company,
shall be contemplated by the Commission and no injunction, restraining
order, or order of any nature by a Federal or state court of competent
jurisdiction shall have been issued as of the Closing Date which would
prevent the issuance of the Shares.
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(b) The Representatives shall have received on the Closing Date or the
Option Closing Date, as the case may be, the opinion of Piper & Marbury
L.L.P., counsel for the Company, dated the Closing Date or the Option
Closing Date, as the case may be, addressed to the Underwriters (and
stating that, to the extent stated in Section 6(c), it may be relied upon
by counsel to the Underwriters) to the effect that:
(i) The Company has been duly organized and is validly existing
as a corporation in good standing under the laws of the State of
Delaware, with corporate power and authority to own or lease its
properties and conduct its business as described in the Registration
Statement; each of the Subsidiaries has been duly organized and is
validly existing as a corporation in good standing under the laws of
the jurisdiction of its incorporation, with corporate power and
authority to own or lease its properties and conduct its business as
described in the Registration Statement; the Company and each of the
Subsidiaries are duly qualified to transact business in all
jurisdictions in which the conduct of their business requires such
qualification, or in which the failure to qualify would have a
materially adverse effect upon the business of the Company and the
Subsidiaries taken as a whole; and the outstanding shares of capital
stock of each of the Subsidiaries have been duly authorized and
validly issued and are fully paid and non-assessable and, except as
set forth on Exhibit A hereto, are owned by the Company or a
Subsidiary; and, to the best of such counsel's knowledge, the
outstanding shares of capital stock of each of the Subsidiaries is
owned free and clear of all liens, encumbrances and equities and
claims, and no options, warrants or other rights to purchase,
agreements or other obligations to issue or other rights to convert
any obligations into any shares of capital stock or of ownership
interests in the Subsidiaries are outstanding.
(ii) The Company has authorized and outstanding capital stock as
set forth under the caption "Capitalization" in the Prospectus; the
authorized shares of the Company's Common Stock have been duly
authorized; the outstanding shares of the Company's Common Stock have
been duly authorized and validly issued and are fully paid and non-
assessable; all of the Shares conform to the description thereof
contained in the Prospectus; the certificates for the Shares, assuming
they are in the form filed with the Commission, are in due and proper
form; the shares of Common Stock, including the Option Shares, if any,
to be sold by the Company pursuant to this Agreement have been duly
authorized and will be validly issued, fully paid and non-assessable
when issued and paid for as contemplated by this Agreement; and no
15
<PAGE>
preemptive rights of stockholders exist with respect to any of the
Shares or the issue or sale thereof.
(iii) Except as described in or contemplated by the Prospectus,
to the knowledge of such counsel, there are no outstanding securities
of the Company convertible or exchangeable into or evidencing the
right to purchase or subscribe for any shares of capital stock of the
Company and there are no outstanding or authorized options, warrants
or rights of any character obligating the Company to issue any shares
of its capital stock or any securities convertible or exchangeable
into or evidencing the right to purchase or subscribe for any shares
of such stock; and except as described in the Prospectus, to the
knowledge of such counsel, no holder of any securities of the Company
or any other person has the right, contractual or otherwise, which has
not been satisfied or effectively waived, to cause the Company to
sell or otherwise issue to them, or to permit them to underwrite the
sale of, any of the Shares or the right to have any Common Shares or
other securities of the Company included in the Registration Statement
or the right, as a result of the filing of the Registration Statement,
to require registration under the Act of any shares of Common Stock or
other securities of the Company.
(iv) The Registration Statement has become effective under the
Act and, to the best of the knowledge of such counsel, no stop order
proceedings with respect thereto have been instituted or are pending
or threatened under the Act.
(v) The Registration Statement, the Prospectus and each
amendment or supplement thereto comply as to form in all material
respects with the requirements of the Act and the applicable rules and
regulations thereunder (except that such counsel need express no
opinion as to the financial statements and related schedules therein).
(vi) The statements under the captions "Business-Facilities,"
"Management-Employee Stock and Other Benefit Plans," "Description of
Capital Stock," "Shares Eligible for Future Sale" and "Management-
Employment Agreements" in the Prospectus, insofar as such statements
constitute a summary of documents referred to therein or matters of
law, fairly summarize in all material respects the information called
for with respect to such documents and matters.
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<PAGE>
(vii) Such counsel does not know of any contracts or documents
required to be filed as exhibits to the Registration Statement or
described in the Registration Statement or the Prospectus which are
not so filed or described as required, and such contracts and
documents as are summarized in the Registration Statement or the
Prospectus are fairly summarized in all material respects.
(viii) Such counsel knows of no material legal or governmental
proceedings pending or threatened against the Company or any of the
Subsidiaries except as set forth in the Prospectus.
(ix) The execution and delivery of this Agreement and the
consummation of the transactions herein contemplated do not and will
not conflict with or result in a breach of any of the terms or
provisions of, or constitute a default under, the Certificate of
Incorporation or By-Laws of the Company, or any agreement or
instrument filed as an exhibit to the Registration Statement and such
other agreements or instruments set forth on a schedule to the
opinion.
(x) This Agreement has been duly authorized, executed and
delivered by the Company.
(xi) No approval, consent, order, authorization, designation,
declaration or filing by or with any regulatory, administrative or
other governmental body is necessary in connection with the execution
and delivery of this Agreement and the consummation of the
transactions herein contemplated (other than as may be required by the
NASD or as required by State securities and Blue Sky laws as to which
such counsel need express no opinion) except such as have been
obtained or made, specifying the same.
(xii) The Company is not, and will not become, as a result of
the consummation of the transactions contemplated by this Agreement,
and application of the net proceeds therefrom as described in the
Prospectus, required to register as an investment company under the
1940 Act.
In rendering such opinion Piper & Marbury L.L.P. may rely as to
matters governed by the laws of jurisdictions other than Delaware,
17
<PAGE>
Maryland, New York, Pennsylvania or the District of Columbia or Federal
laws on local counsel in such jurisdictions, provided that in each case
Piper & Marbury L.L.P. shall state that they believe that they and the
Underwriters are justified in relying on such other counsel. In addition
to the matters set forth above, such opinion shall also include a statement
to the effect that (A) to such counsel's knowledge, the Shares have been
approved for listing on the Nasdaq Stock Market and (B) nothing has come
to the attention of such counsel which leads them to believe that (i) the
Registration Statement, at the time it became effective under the Act (but
after giving effect to any modifications incorporated therein pursuant to
Rule 430A under the Act) and as of the Closing Date or the Option Closing
Date, as the case may be, contained an untrue statement of a material fact
or omitted to state a material fact required to be stated therein or
necessary to make the statements therein not misleading, and (ii) the
Prospectus, or any supplement thereto, on the date it was filed pursuant to
the Rules and Regulations and as of the Closing Date or the Option Closing
Date, as the case may be, contained an untrue statement of a material fact
or omitted to state a material fact necessary in order to make the
statements, in the light of the circumstances under which they are made,
not misleading (except that such counsel need express no view as to
financial statements, schedules and statistical information therein or
omitted therefrom). With respect to such statement, Piper & Marbury L.L.P.
may state that their belief is based upon the procedures set forth therein,
but is without independent check and verification.
(c) The Representatives shall have received from Hogan & Hartson L.L.P.,
counsel for the Underwriters, an opinion dated the Closing Date or the
Option Closing Date, as the case may be, with respect to the matters
specified in subparagraphs (ii), (iii), (iv), and (x) of Paragraph (b) of
this Section 6, and that the Company was incorporated and is a validly
existing corporation under the laws of the State of Delaware. In rendering
such opinion Hogan & Hartson L.L.P. may rely as to all matters governed
other than by the laws of the District of Columbia, the State of Maryland
and the Delaware General Corporation Law or Federal laws on the opinion of
counsel referred to in Paragraph (b) of this Section 6. In addition to the
matters set forth above, such opinion shall also include a statement to the
effect that no facts have come to the attention of such counsel which lead
them to believe that (i) the Registration Statement, at the time it became
effective under the Act (but after giving effect to any modifications
incorporated therein pursuant to Rule 430A under the Act) contained an
untrue statement of a material fact or omitted to state a material fact
required to be stated therein or necessary to make the statements therein
not misleading, and (ii) the Prospectus, or any supplement thereto, on the
date it was filed pursuant to the Rules and Regulations and as of the
Closing Date or the Option Closing
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<PAGE>
Date, as the case may be, contained an untrue statement of a material fact
or omitted to state a material fact, necessary in order to make the
statements therein, in the light of the circumstances under which they are
made, not misleading (except that such counsel need express no view as to
financial statements, schedules and statistical information therein or
omitted therefrom). With respect to such statement, Hogan & Hartson L.L.P.
may state that their belief is based upon the procedures set forth therein,
but is without independent check and verification.
(d) The Representatives shall have received at or prior to the Closing
Date from Hogan & Hartson L.L.P. a memorandum or summary, in form and
substance satisfactory to the Representatives, with respect to the
qualification for offering and sale by the Underwriters of the Shares under
the State securities or Blue Sky laws of such jurisdictions as the
Representatives may reasonably have designated to the Company.
(e) You shall have received, on each of the dates hereof, the Closing Date
and the Option Closing Date, as the case may be, a letter dated the date
hereof, the Closing Date or the Option Closing Date, as the case may be, in
form and substance satisfactory to you, of Ernst & Young L.L.P., Ernst &
Young Chartered Accountants and Kingston Smith Chartered Accountants,
confirming that they are independent public accountants within the meaning
of the Act and the applicable published Rules and Regulations thereunder
and stating that in their opinion the financial statements and schedules
examined by them and included in the Registration Statement comply in form
in all material respects with the applicable accounting requirements of the
Act and the related published Rules and Regulations; and containing such
other statements and information as is ordinarily included in accountants'
"comfort letters" to Underwriters with respect to the financial statements
and certain financial and statistical information contained in the
Registration Statement and Prospectus.
(f) The Representatives shall have received on the Closing Date or the
Option Closing Date, as the case may be, a certificate or certificates of
the Chief Executive Officer and the Chief Financial Officer of the Company
to the effect that, as of the Closing Date or the Option Closing Date, as
the case may be, each of them severally represents as follows:
(i) The Registration Statement has become effective under the
Act and no stop order suspending the effectiveness of the
Registrations Statement has been issued, and no proceedings for such
purpose have been taken or are, to his knowledge, contemplated by the
Commission;
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<PAGE>
(ii) The representations and warranties of the Company contained
in Section 1 hereof are true and correct as of the Closing Date or the
Option Closing Date, as the case may be;
(iii) All filings required to have been made pursuant to Rules
424 or 430A under the Act have been made;
(iv) He or she has carefully examined the Registration Statement
and the Prospectus and, in his or her opinion, as of the effective
date of the Registration Statement, the statements contained in the
Registration Statement were true and correct, and such Registration
Statement and Prospectus did not omit to state a material fact
required to be stated therein or necessary in order to make the
statements therein not misleading, and since the effective date of the
Registration Statement, no event has occurred which should have been
set forth in a supplement to or an amendment of the Prospectus which
has not been so set forth in such supplement or amendment; and
(v) Since the respective dates as of which information is given
in the Registration Statement and Prospectus, there has not been any
material adverse change or any development that is reasonably likely
to result in a material adverse change in or affecting the condition,
financial or otherwise, of the Company and its Subsidiaries taken as a
whole or the earnings, business, management, properties, assets,
rights, operations, condition (financial or otherwise) or prospects of
the Company and the Subsidiaries taken as a whole, whether or not
arising in the ordinary course of business.
(g) The Company shall have furnished to the Representatives such further
certificates and documents confirming the representations and warranties,
covenants and conditions contained herein and related matters as the
Representatives may reasonably have requested.
(h) The Firm Shares and Option Shares, if any, have been approved for
listing upon notice of issuance on The NASDAQ Stock Market (National
Market).
(i) The Lockup Agreements described in Section 4 (j) are in full
force and effect.
The opinions and certificates mentioned in this Agreement shall be
deemed to be in compliance with the provisions hereof only if they are in
all
20
<PAGE>
material respects satisfactory to the Representatives and to Hogan &
Hartson L.L.P., counsel for the Underwriters.
If any of the conditions hereinabove provided for in this Section 6
shall not have been fulfilled when and as required by this Agreement to be
fulfilled, the obligations of the Underwriters hereunder may be terminated
by the Representatives by notifying the Company of such termination in
writing or by telegram at or prior to the Closing Date or the Option
Closing Date, as the case may be.
In such event, the Company and the Underwriters shall not be under any
obligation to each other (except to the extent provided in Sections 5 and 8
hereof).
7. Conditions of the Obligations of the Company.
--------------------------------------------
The obligations of the Company to sell and deliver the portion of the
Shares required to be delivered as and when specified in this Agreement are
subject to the conditions that at the Closing Date or the Option Closing
Date, as the case may be, no stop order suspending the effectiveness of the
Registration Statement shall have been issued and in effect or proceedings
therefor initiated or threatened.
8. Indemnification.
---------------
(a) The Company agrees to indemnify and hold harmless each Underwriter and
each person, if any, who controls any Underwriter within the meaning of the
Act, against any losses, claims, damages or liabilities to which such
Underwriter or any such controlling person may become subject under the Act
or otherwise, insofar as such losses, claims, damages or liabilities (or
actions or proceedings in respect thereof) arise out of or are based upon
(i) any untrue statement or alleged untrue statement of any material fact
contained in the Registration Statement, any Preliminary Prospectus, the
Prospectus or any amendment or supplement thereto, or (ii) the omission or
alleged omission to state therein a material fact required to be stated
therein or necessary to make the statements therein not misleading, in the
light of the circumstances under which they were made; and will reimburse
each Underwriter and each such controlling person upon demand for any legal
or other expenses reasonably incurred by such Underwriter or such
controlling person in connection with investigating or defending any such
loss, claim, damage or liability, action or proceeding or in responding to
a subpoena or governmental inquiry related to the offering of the Shares,
whether or not
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<PAGE>
such Underwriter or controlling person is a party to any action or
proceeding; provided, however, that the Company will not be liable in any
such case to the extent that any such loss, claim, damage or liability
arises out of or is based upon an untrue statement or alleged untrue
statement, or omission or alleged omission made in the Registration
Statement, any Preliminary Prospectus, the Prospectus, or such amendment or
supplement, in reliance upon and in conformity with written information
furnished to the Company by or through the Representatives specifically for
use in the preparation thereof. This indemnity agreement will be in
addition to any liability which the Company may otherwise have.
(b) Each Underwriter severally and not jointly will indemnify and hold
harmless the Company, each of its directors, each of its officers who have
signed the Registration Statement and each person, if any, who controls the
Company within the meaning of the Act, against any losses, claims, damages
or liabilities to which the Company or any such director, officer or
controlling person may become subject under the Act or otherwise, insofar
as such losses, claims, damages or liabilities (or actions or proceedings
in respect thereof) arise out of or are based upon (i) any untrue
statement or alleged untrue statement of any material fact contained in
the Registration Statement, any Preliminary Prospectus, the Prospectus or
any amendment or supplement thereto, or (ii) the omission or the alleged
omission to state therein a material fact required to be stated therein or
necessary to make the statements therein not misleading in the light of the
circumstances under which they were made; and will reimburse any legal or
other expenses reasonably incurred by the Company or any such director,
officer or controlling person in connection with investigating or defending
any such loss, claim, damage, liability, action or proceeding; provided,
however, that each Underwriter will be liable in each case to the extent,
but only to the extent, that such untrue statement or alleged untrue
statement or omission or alleged omission has been made in the Registration
Statement, any Preliminary Prospectus, the Prospectus or such amendment or
supplement, in reliance upon and in conformity with written information
furnished to the Company by or through the Representatives specifically for
use in the preparation thereof. This indemnity agreement will be in
addition to any liability which such Underwriter may otherwise have.
(c) In case any proceeding (including any governmental investigation)
shall be instituted involving any person in respect of which indemnity may
be sought pursuant to this Section 8, such person (the "indemnified party")
shall promptly notify the person against whom such indemnity may be sought
(the "indemnifying party") in writing. No indemnification provided for in
Section
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<PAGE>
8(a) or (b) shall be available to any party who shall fail to give
notice as provided in this Section 8(c) if the party to whom notice was not
given was unaware of the proceeding to which such notice would have related
and was materially prejudiced by the failure to give such notice, but the
failure to give such notice shall not relieve the indemnifying party or
parties from any liability which it or they may have to the indemnified
party for contribution or otherwise than on account of the provisions of
Section 8(a) or (b). In case any such proceeding shall be brought against
any indemnified party and it shall notify the indemnifying party of the
commencement thereof, the indemnifying party shall be entitled to
participate therein and, to the extent that it shall wish, jointly with any
other indemnifying party similarly notified, to assume the defense thereof,
with counsel satisfactory to such indemnified party and shall pay as
incurred (or within 30 days of presentation) the fees and disbursements of
such counsel related to such proceeding. In any such proceeding, any
indemnified party shall have the right to retain its own counsel at its own
expense. Notwithstanding the foregoing, the indemnifying party shall pay
as incurred (within 30 days of presentation) the fees and expenses of the
counsel retained by the indemnified party in the event (i) the indemnifying
party and the indemnified party shall have mutually agreed to the retention
of such counsel, (ii) the named parties to any such proceeding (including
any impleaded parties) include both the indemnifying party and the
indemnified party and representation of both parties by the same counsel
would be inappropriate due to actual or potential differing interests
between them or (iii) the indemnifying party shall have failed to assume
the defense and employ counsel acceptable to the indemnified party within a
reasonable period of time after notice of commencement of the action. It is
understood that the indemnifying party shall not, in connection with any
proceeding or related proceedings in the same jurisdiction, be liable for
the reasonable fees and expenses of more than one separate firm for all
such indemnified parties. Such firm shall be designated in writing by you
in the case of parties indemnified pursuant to Section 8(a) and by the
Company in the case of parties indemnified pursuant to Section 8(b). The
indemnifying party shall not be liable for any settlement of any proceeding
effected without its written consent but if settled with such consent or if
there be a final judgment for the plaintiff, the indemnifying party agrees
to indemnify the indemnified party from and against any loss or liability
by reason of such settlement or judgment. In addition, the indemnifying
party will not, without the prior written consent of the indemnified party,
settle or compromise or consent to the entry of any judgment in any pending
or threatened claim, action or proceeding of which indemnification may be
sought hereunder (whether or not any indemnified party is an actual or
potential party to such claim, action or proceeding) unless such
settlement, compromise or consent includes an
23
<PAGE>
unconditional release of each indemnified party from all liability arising
out of such claim, action or proceeding.
(d) If the indemnification provided for in this Section 8 is unavailable
to or insufficient to hold harmless an indemnified party under Section 8(a)
or (b) above in respect of any losses, claims, damages or liabilities (or
actions or proceedings in respect thereof) referred to therein, then each
indemnifying party shall contribute to the amount paid or payable by such
indemnified party as a result of such losses, claims, damages or
liabilities (or actions or proceedings in respect thereof) in such
proportion as is appropriate to reflect the relative benefits received by
the Company on the one hand and the Underwriters on the other from the
offering of the Shares. If, however, the allocation provided by the
immediately preceding sentence is not permitted by applicable law then each
indemnifying party shall contribute to such amount paid or payable by such
indemnified party in such proportion as is appropriate to reflect not only
such relative benefits but also the relative fault of the Company on the
one hand and the Underwriters on the other in connection with the
statements or omissions which resulted in such losses, claims, damages or
liabilities (or actions or proceedings in respect thereof), as well as any
other relevant equitable considerations. The relative benefits received by
the Company on the one hand and the Underwriters on the other shall be
deemed to be in the same proportion as the total net proceeds from the
offering (before deducting expenses) received by the Company bear to the
total underwriting discounts and commissions received by the Underwriters,
in each case as set forth in the table on the cover page of the Prospectus.
The relative fault shall be determined by reference to, among other things,
whether the untrue or alleged untrue statement of a material fact or the
omission or alleged omission to state a material fact relates to
information supplied by the Company on the one hand or the Underwriters on
the other and the parties' relative intent, knowledge, access to
information and opportunity to correct or prevent such statement or
omission.
The Company and the Underwriters agree that it would not be just and
equitable if contributions pursuant to this Section 8(d) were determined by
pro rata allocation (even if the Underwriters were treated as one entity
for such purpose) or by any other method of allocation which does not take
account of the equitable considerations referred to above in this Section
8(d). The amount paid or payable by an indemnified party as a result of
the losses, claims, damages or liabilities (or actions or proceedings in
respect thereof) referred to above in this Section 8(d) shall be deemed to
include any legal or other expenses reasonably incurred by such indemnified
party in connection with investigating or defending any such action or
claim. Notwithstanding
24
<PAGE>
the provisions of this subsection (d), (i) no Underwriter shall be required
to contribute any amount in excess of the underwriting discounts and
commissions applicable to the Shares purchased by such Underwriter and (ii)
no person guilty of fraudulent misrepresentation (within the meaning of
Section 11(f) of the Act) shall be entitled to contribution from any person
who was not guilty of such fraudulent misrepresentation. The Underwriters'
obligations in this Section 8(d) to contribute are several in proportion to
their respective underwriting obligations and not joint.
(e) In any proceeding relating to the Registration Statement, any
Preliminary Prospectus, the Prospectus or any supplement or amendment
thereto, each party against whom contribution may be sought under this
Section 8 hereby consents to the jurisdiction of any court having
jurisdiction over any other contributing party, agrees that process issuing
from such court may be served upon him or it by any other contributing
party and consents to the service of such process and agrees that any other
contributing party may join him or it as an additional defendant in any
such proceeding in which such other contributing party is a party.
(f) Any losses, claims, damages, liabilities or expenses for which an
indemnified party is entitled to indemnification or contribution under this
Section 8 shall be paid by the indemnifying party to the indemnified party
as such losses, claims, damages, liabilities or expenses are incurred. The
indemnity and contribution agreements contained in this Section 8 and the
representations and warranties of the Company set forth in this Agreement
shall remain operative and in full force and effect, regardless of (i) any
investigation made by or on behalf of any Underwriter or any person
controlling any Underwriter, the Company, its directors or officers or any
persons controlling the Company, (ii) acceptance of any Shares and payment
therefor hereunder, and (iii) any termination of this Agreement. A
successor to any Underwriter, or to the Company, its directors or officers,
or any person controlling the Company, shall be entitled to the benefits of
the indemnity, contribution and reimbursement agreements contained in this
Section 8.
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<PAGE>
9. Default by Underwriters.
-----------------------
If on the Closing Date or the Option Closing Date, as the case may be,
any Underwriter shall fail to purchase and pay for the portion of the
Shares which such Underwriter has agreed to purchase and pay for on such
date (otherwise than by reason of any default on the part of the Company),
you, as Representatives of the Underwriters, shall use your reasonable
efforts to procure within 36 hours thereafter one or more of the other
Underwriters, or any others, to purchase from the Company such amounts as
may be agreed upon and upon the terms set forth herein, the Firm Shares or
Option Shares, as the case may be, which the defaulting Underwriter or
Underwriters failed to purchase. If during such 36 hours you, as such
Representatives, shall not have procured such other Underwriters, or any
others, to purchase the Firm Shares or Option Shares, as the case may be,
agreed to be purchased by the defaulting Underwriter or Underwriters, then
(a) if the aggregate number of shares with respect to which such default
shall occur does not exceed 10% of the Firm Shares or Option Shares, as the
case may be, covered hereby, the other Underwriters shall be obligated,
severally, in proportion to the respective numbers of Firm Shares or Option
Shares, as the case may be, which they are obligated to purchase hereunder,
to purchase the Firm Shares or Option Shares, as the case may be, which
such defaulting Underwriter or Underwriters failed to purchase, or (b) if
the aggregate number of shares of Firm Shares or Option Shares, as the case
may be, with respect to which such default shall occur exceeds 10% of the
Firm Shares or Option Shares, as the case may be, covered hereby, the
Company or you as the Representatives of the Underwriters will have the
right, by written notice given within the next 36-hour period to the
parties to this Agreement, to terminate this Agreement without liability on
the part of the non-defaulting Underwriters or of the Company except to the
extent provided in Section 8 hereof. In the event of a default by any
Underwriter or Underwriters, as set forth in this Section 9, the Closing
Date or Option Closing Date, as the case may be, may be postponed for such
period, not exceeding seven days, as you, as Representatives, may determine
in order that the required changes in the Registration Statement or in the
Prospectus or in any other documents or arrangements may be effected. The
term "Underwriter" includes any person substituted for a defaulting
Underwriter. Any action taken under this Section 9 shall not relieve any
defaulting Underwriter from liability in respect of any default of such
Underwriter under this Agreement.
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<PAGE>
10. Notices.
-------
All communications hereunder shall be in writing and, except as
otherwise provided herein, will be mailed, delivered, telecopied or
telegraphed and confirmed as follows: if to the Underwriters, to Alex.
Brown & Sons Incorporated, 135 East Baltimore Street, Baltimore, Maryland
21202, Attention: Phillip A. Clough; with a copy to Alex. Brown & Sons
Incorporated, 135 East Baltimore Street, Baltimore, Maryland 21202.
Attention: General Counsel; if to the Company, to Production Group
International, Inc., 2200 Wilson Boulevard, Arlington, VA 22201,
Attention: President.
11. Termination.
-----------
This Agreement may be terminated by you by notice to the Company as
follows:
(a) at any time prior to the earlier of (i) the time the Shares are
released by you for sale by notice to the Underwriters, or (ii) 11:30 a.m.
on the first business day following the date of this Agreement;
(b) at any time prior to the Closing Date if any of the following has
occurred: (i) since the respective dates as of which information is given
in the Registration Statement and the Prospectus, any material adverse
change or any development that is reasonably likely to result in a
material adverse change in or affecting the condition, financial or
otherwise, of the Company and its Subsidiaries taken as a whole or the
earnings, business, management, properties, assets, rights, operations,
condition (financial or otherwise) or prospects of the Company and its
Subsidiaries taken as a whole, whether or not arising in the ordinary
course of business, (ii) any outbreak or escalation of hostilities or
declaration of war or national emergency or other national or international
calamity or crisis or change in economic or political conditions if the
effect of such outbreak, escalation, declaration, emergency, calamity,
crisis or change on the financial markets of the United States would, in
your reasonable judgment, make it impracticable to market the Shares or to
enforce contracts for the sale of the Shares, or (iii) suspension of
trading in securities generally on the New York Stock Exchange or the
American Stock Exchange or limitation on prices (other than limitations on
hours or numbers of days of trading) for securities on either such
Exchange, (iv) the enactment, publication, decree or other promulgation of
any statute, regulation, rule or order of any court or other governmental
authority which in your opinion
27
<PAGE>
materially and adversely affects or may materially and adversely affect the
business or operations of the Company, (v) declaration of a banking
moratorium by United States or New York State authorities, (vi) the
suspension of trading of the Company's common stock by the Commission on
the Nasdaq Stock Market or (vii) the taking of any action by any
governmental body or agency in respect of its monetary or fiscal affairs
which in your reasonable opinion has a material adverse effect on the
securities markets in the United States; or
(c) as provided in Sections 6 and 9 of this Agreement.
12. Successors.
----------
This Agreement has been and is made solely for the benefit of the
Underwriters and the Company and their respective successors, executors,
administrators, heirs and assigns, and the officers, directors and
controlling persons referred to herein, and no other person will have any
right or obligation hereunder. No purchaser of any of the Shares from any
Underwriter shall be deemed a successor or assign merely because of such
purchase.
13. Information Provided by Underwriters.
------------------------------------
The Company and the Underwriters acknowledge and agree that the only
information furnished or to be furnished by any Underwriter to the Company
for inclusion in any Prospectus or the Registration Statement consists of
the information set forth in the last paragraph on the front cover page
(insofar as such information relates to the Underwriters), legends required
by Item 502(d) of Regulation S-K under the Act and the information under
the caption "Underwriting" in the Prospectus.
14. Miscellaneous.
-------------
The reimbursement, indemnification and contribution agreements
contained in this Agreement and the representations, warranties and
covenants in this Agreement shall remain in full force and effect
regardless of (a) any termination of this Agreement, (b) any
investigation made by or on behalf of any Underwriter or controlling person
thereof, or by or on behalf of
28
<PAGE>
the Company or its directors or officers and (c) delivery of and payment
for the Shares under this Agreement.
This Agreement may be executed in two or more counterparts, each of
which shall be deemed an original, but all of which together shall
constitute one and the same instrument.
This Agreement shall be governed by, and construed in accordance with,
the laws of the State of Maryland.
If the foregoing letter is in accordance with your understanding of
our agreement, please sign and return to us the enclosed duplicates hereof,
whereupon it will become a binding agreement among the Company and the
several Underwriters in accordance with its terms.
Very truly yours,
PRODUCTION GROUP INTERNATIONAL, INC.
By: ____________________________________
President
29
<PAGE>
The foregoing Underwriting Agreement
is hereby confirmed and accepted as
of the date first above written.
ALEX. BROWN & SONS INCORPORATED
MONTGOMERY SECURITIES
ROBERTSON, STEPHENS & COMPANY
As Representatives of the several
Underwriters listed on Schedule I
By: Alex. Brown & Sons Incorporated
By: ____________________________________
Authorized Officer
30
<PAGE>
SCHEDULE I
Schedule of Underwriters
Number of Firm Shares
Underwriter to be Purchased
----------- -------------------
Alex. Brown & Sons Incorporated
Montgomery Securities
Robertson, Stephens & Company
__________
Total __________
31
<PAGE>
Specimen of Common Stock Certificate
[FRONT OF CERTIFICATE]
[LOGO]
COMMON STOCK COMMON STOCK
NUMBER SHARES
INCORPORATED UNDER THE LAWS SEE REVERSE FOR
OF THE STATE OF DELAWARE CERTAIN DEFINITIONS
AND LEGENDS
THIS CERTIFIES THAT
is the owner of
FULLY PAID AND NON-ASSESSABLE SHARES OF COMMON STOCK, $.01 PAR VALUE OF
PRODUCTION GROUP INTERNATIONAL, INC.
(hereinafter called the Corporation), transferable on the books of the
Corporation by the holder hereof in person or by duly authorized attorney upon
surrender of this certificate properly endorsed.
This certificate is not valid until countersigned and registered by the
Transfer Agent and Registrar.
Witness the facsimile signatures of the Corporation's duly authorized
officers.
Dated:
PRESIDENT AND [SEAL] SECRETARY
CHIEF EXECUTIVE OFFICER
<PAGE>
[BACK OF CERTIFICATE]
PRODUCTION GROUP INTERNATIONAL, INC.
The Corporation will furnish without charge to each stockholder who so
requests a statement of the powers, designations, preferences and relative,
participating, optional, or other special rights of each class of stock or
series thereof and the qualifications, limitations or restrictions of such
preferences and/or rights.
- --------------------------------------------------------------------------------
The following abbreviations, when used in the inscription on the face of this
certificate, shall be construed as though they were written out in full
according to
applicable laws or regulations:
TEN COM- as tenants in common UNIF GIFT MIN ACT-______Custodian_____
TEN ENT- as tenants by the (cust) (Minor)
entireties
JT TEN- as joint tenants with
right of survivorship
and not as tenants in under Uniform Gifts to Minors Act
common
-------------------------
(State)
Additional abbreviations may also be used not in the above list
For Value Received, ___________ hereby sell, assign transfer unto
PLEASE INSERT SOCIAL SECURITY OR OTHER
IDENTIFYING NUMBER OF ASSIGNEE
- ----------------------------------------------
_____________________________________________ Shares
of the capital stock represented by the within
Certificate, and do hereby irrevocably constitute and appoint
- ----------------------------------------------
Attorney to transfer the said Stock on the books of the within-named
Corporation with the full power of substitution in the premises.
Dated ________________19___
In the presence of
- ---------------------- -----------------------
SIGNATURE GUARANTEED:
-------------------------------
THE SIGNATURE(S) SHOULD BE GUARANTEED BY AN ELIGIBLE
GUARANTOR INSTITUTION (BANKS, STOCKBROKERS, SAVINGS AND
LOAN ASSOCIATIONS AND CREDIT UNIONS WITH MEMBERSHIP IN AN
APPROVED SIGNATURE GUARANTEE MEDALLION PROGRAM), PURSUANT
TO S.E.C. RULE 17Ad-15.
<PAGE>
[LETTERHEAD OF PIPER & MARBURY L.L.P. APPEARS HERE]
December 17, 1996
Production Group International, Inc.
2200 Wilson Boulevard, Second Floor
Arlington, Virginia 22201
Gentlemen:
We have assisted in the preparation and filing with the Securities and
Exchange Commission of a Registration Statement on form S-1, file No. 333-14879
(the "Registration Statement"), relating to the shares of Common Stock
(including shares to cover over-allotments, if any), $0.01 par value per share,
of Production Group International, Inc., a Delaware corporation (the "Company"),
to be offered to the public pursuant to the Registration Statement.
We have examined the Certificate of Incorporation and Bylaws of the
Company, and all amendments thereto, and have examined and relied upon the
originals, or copies certified to our satisfaction, of such records of meetings
of the directors and stockholders of the Company, documents and other
instruments as in our judgment are necessary or appropriate to enable us to
render the opinions expressed below.
In examining the foregoing documents, we have assumed the genuineness of
all signatures and the authenticity of all documents submitted to us as
originals, the conformity to original documents of all documents submitted to us
as certified or photostatic copies, and the authenticity of the originals of
such latter documents.
Based on the foregoing, we are of the opinion that the shares of Common
Stock have been duly authorized for issuance and, after payment therefor in
advance with the terms and provisions of the Underwriting Agreement among the
Company, Alex. Brown & Sons, Incorporated, Montgomery Securities, and Robertson,
Stephens & Company, and issuance of the certificates therefor by the Company,
will be duly and validly issued, fully paid and nonassessable.
<PAGE>
PIPER & MARBURY
L.L.P.
Production Group International, Inc.
December 17, 1996
Page 2
We hereby consent to the use of our name in the Registration Statement and
under the caption "Legal Matters" in the related Prospectus and consent to the
filing of this opinion as an exhibit to the Registration Statement.
Very truly yours,
/s/ Piper & Marbury
<PAGE>
Exhibit 10.1
PRODUCTION GROUP INTERNATIONAL, INC.
1995 STOCK OPTION/STOCK ISSUANCE PLAN (VIRGINIA)
------------------------------------------------
ARTICLE ONE
GENERAL PROVISIONS
------------------
I. PURPOSE OF THE PLAN
This 1995 Stock Option/Stock Issuance Plan (Virginia) is intended to
promote the interests of Production Group International, Inc., a Virginia
corporation, by providing eligible persons with the opportunity to acquire a
proprietary interest, or otherwise increase their proprietary interest, in the
Corporation as an incentive for them to remain in the service of the
Corporation.
Capitalized terms herein shall have the meanings assigned to such
terms in the attached Appendix.
This Plan shall serve as the successor to the Predecessor Plan and no
further option grants shall be made under the Predecessor Plan from and after
the effective date of this Plan. All options outstanding under the Predecessor
Plan on the effective date of this Plan are hereby incorporated into this Plan
and shall accordingly be treated as outstanding options under this Plan.
However, each outstanding option so incorporated shall continue to be governed
solely by the express terms and conditions of the instrument evidencing such
option, and no provision of this Plan shall be deemed to affect or otherwise
modify the rights or obligations of the holders of such incorporated options
with respect to their acquisition of shares of the Corporation's Common Stock
thereunder.
II. STRUCTURE OF THE PLAN
A. The Plan shall be divided into two (2) separate components: the
Option Grant Program and the Stock Issuance Program. Under the Option Grant
Program, eligible persons may, at the discretion of the Plan Administrator, be
granted options to purchase shares of Common Stock. Under the Stock Issuance
Program, eligible persons may, at the discretion of the Plan Administrator, be
issued shares of Common Stock directly, either through the immediate purchase of
such shares or as a bonus for services rendered or to be rendered the
Corporation (or any Parent or Subsidiary).
B. The provisions of Articles One and Four shall apply to both the
Option Grant and Stock Issuance Programs and shall accordingly govern the
interests of all persons under the Plan.
<PAGE>
III. ADMINISTRATION OF THE PLAN
A. The Plan shall be administered by the Board. However, any or all
administrative functions otherwise exercisable by the Board may be delegated to
the Committee. Members of the Committee shall serve for such period of time as
the Board may determine and shall be subject to removal by the Board at any
time. The Board may also at any time terminate the functions of the Committee
and reassume all powers and authority previously delegated to the Committee.
B. The Plan Administrator shall have full power and authority
(subject to the provisions of the Plan) to establish such rules and regulations
as it may deem appropriate for proper administration of the Plan and to make
such determinations under, and issue such interpretations of, the Plan and any
outstanding options and stock issuances as it may deem necessary or advisable.
Decisions of the Plan Administrator shall be final and binding on all parties
who have an interest in the Plan or any option or stock issuance thereunder.
IV. ELIGIBILITY
A. The persons eligible to receive option grants under the Plan are
as follows:
(i) Employees,
(ii) non-employee members of the Board or the non-employee
members of the board of directors of any Parent or Subsidiary, who are not
resident in the State of Virginia, and
(iii) consultants who provide services to the Corporation (or
any Parent or Subsidiary) and who are not resident in the State of
Virginia.
B. The Plan Administrator shall have full authority to determine,
(i) with respect to the option grants under the Option Grant Program, which
eligible persons are to receive option grants, the time or times when such
option grants are to be made, the number of shares to be covered by each such
grant, the status of the granted option as either an Incentive Option or a Non-
Statutory Option, the time or times at which each option is to become
exercisable, the vesting schedule (if any) applicable to the option shares and
the maximum term for which the option is to remain outstanding, and (ii) with
respect to stock issuances under the Stock Issuance Program, which eligible
persons are to receive stock issuances, the time or times when such issuances
are to be made, the number of shares to be issued to each
-2-
<PAGE>
Participant, the vesting schedule (if any) applicable to the issued shares and
the consideration to be paid by the Participant for such shares.
C. The Plan Administrator shall have the absolute discretion either
to grant options in accordance with the Option Grant Program or to effect stock
issuances in accordance with the Stock Issuance Program.
V. STOCK SUBJECT TO THE PLAN
A. The stock issuable under the Plan shall be shares of authorized
but unissued or reacquired Common Stock. The maximum number of shares of Common
Stock which may be issued in the aggregate under the Plan and the California
Plan shall not exceed 706,000 shares. The 706,000-share reserve is comprised of
(i) the 280,000 shares subject to options outstanding under the Predecessor Plan
as of the effective date of this Plan and incorporated herein, plus (ii) the
additional 426,000 shares authorized by the Board for issuance under this Plan,
subject to stockholder approval.
B. Shares of Common Stock subject to outstanding options under this
Plan (including outstanding options under the Predecessor Plan which have been
incorporated into this Plan) shall be available for subsequent issuance under
this Plan or under the California Plan to the extent (i) the options expire or
terminate for any reason prior to exercise in full or (ii) the options are
cancelled in accordance with the cancellation-regrant provisions of Article Two.
All shares issued under this Plan or the California Plan, whether or not those
shares are subsequently repurchased by the Corporation pursuant to its
repurchase rights under this Plan or the California Plan, shall reduce on a
share-for-share basis the aggregate number of shares of Common Stock available
for subsequent issuance under this Plan and the California Plan.
C. In the event any change is made to the Common Stock by reason of
any stock split, stock dividend, recapitalization, combination of shares,
exchange of shares or other change affecting the outstanding Common Stock as a
class without the Corporation's receipt of consideration, appropriate
adjustments shall be made to (i) the maximum number and/or class of securities
issuable in the aggregate under this Plan and the California Plan, (ii) the
maximum number and/or class of securities by which the share reserve under this
Plan is to be reduced for shares issued under the California Plan, (iii) the
number and/or class of securities and the exercise price per share in effect
under each outstanding option under this Plan and (iv) the number and/or class
of securities and the exercise price per share in effect under each outstanding
option incorporated into this Plan from the Predecessor Plan in order to prevent
the dilution or enlargement of benefits thereunder. The adjustments determined
by the Plan Administrator shall be final, binding and conclusive. In no event
shall any such adjustments be made in connection with the conversion of one or
more outstanding shares of the Corporation's preferred stock into shares of
Common Stock.
-3-
<PAGE>
ARTICLE TWO
OPTION GRANT PROGRAM
--------------------
I. OPTION TERMS
Each option shall be evidenced by one or more documents in the form
approved by the Plan Administrator; provided, however, that each such document
--------
shall comply with the terms specified below. Each document evidencing an
Incentive Option shall, in addition, be subject to the provisions of the Plan
applicable to such options.
A. EXERCISE PRICE.
--------------
1. The exercise price per share shall be fixed by the Plan
Administrator and may be less than, equal to or greater than the Fair Market
Value per share of Common Stock on the option grant date.
2. The exercise price shall become immediately due upon
exercise of the option and shall, subject to the provisions of Section I of
Article Four and the documents evidencing the option grant, be payable in cash
or check made payable to the Corporation. Should the Common Stock be registered
under Section 12(g) of the 1934 Act at the time the option is exercised, then
the exercise price may also be paid as follows:
(i) in shares of Common Stock held for the requisite period
necessary to avoid a charge to the Corporation's earnings for financial
reporting purposes and valued at Fair Market Value on the Exercise Date, or
(ii) to the extent the option is exercised for vested shares,
through a special sale and remittance procedure pursuant to which the
Optionee shall concurrently provide irrevocable written instructions (a) to
a Corporation-designated brokerage firm to effect the immediate sale of the
purchased shares and remit to the Corporation, out of the sale proceeds
available on the settlement date, sufficient funds to cover the aggregate
exercise price payable for the purchased shares plus all applicable
Federal, state and local income and employment taxes required to be
withheld by the Corporation by reason of such exercise and (b) to the
Corporation to deliver the certificates for the purchased shares directly
to such brokerage firm in order to complete the sale transaction.
-4-
<PAGE>
Except to the extent such sale and remittance procedure is utilized,
payment of the exercise price for the purchased shares must be made on the
Exercise Date.
B. EXERCISE AND TERM OF OPTIONS. Each option shall be exercisable
----------------------------
at such time or times, during such period and for such number of shares as shall
be determined by the Plan Administrator and set forth in the documents
evidencing the option grant. However, no option shall have a term in excess of
ten (10) years measured from the option grant date.
C. EFFECT OF TERMINATION OF SERVICE.
--------------------------------
1. The following provisions shall govern the exercise of any
options held by the Optionee at the time of cessation of Service or death:
(i) Should the Optionee cease to remain in Service for any
reason other than Permanent Disability or death, then the Optionee shall
have a period of three (3) months following the date of such cessation of
Service during which to exercise each outstanding option held by such
Optionee.
(ii) Should the Optionee's Service terminate by reason of
Permanent Disability, then the Optionee shall have a period of twelve (12)
months following the date of such cessation of Service during which to
exercise each outstanding option held by such Optionee.
(iii) Should the Optionee die while holding one or more
outstanding options, then the personal representative of the Optionee's
estate or the person or persons to whom the option is transferred pursuant
to the Optionee's will or in accordance with the laws of descent and
distribution shall have a period of twelve (12) months following the date
of the Optionee's death during which to exercise each such option.
(iv) Under no circumstances, however, shall any such option
be exercisable after the specified expiration of the option term.
(v) During the applicable post-Service exercise period, the
option may not be exercised in the aggregate for more than the number of
vested shares for which the option is exercisable on the date of the
Optionee's cessation of Service. Upon the expiration of the applicable
exercise period or (if earlier) upon the expiration of the option term, the
option shall terminate and cease to be outstanding for any vested shares
for which the option has not been exercised. However, the option shall,
immediately upon the Optionee's
-5-
<PAGE>
cessation of Service, terminate and cease to be outstanding to the extent
it is not exercisable for vested shares on the date of such cessation of
Service.
(vi) Should the Optionee's Service be terminated for
Misconduct, all outstanding options held by such Optionee shall terminate
immediately and cease to remain outstanding.
(vii) Upon the occurrence of a Corporate Transaction, the
provisions of Section III of this Article Two shall, to the extent
applicable, govern the period for which any outstanding options held by the
Optionee are to remain exercisable following an Involuntary Termination of
his or her Service and shall supersede any provisions to the contrary in
this section.
2. The Plan Administrator shall have the discretion, exercisable
either at the time an option is granted or at any time while the option remains
outstanding, to:
(i) extend the period of time for which the option is to
remain exercisable following the Optionee's cessation of Service or death
from the limited period otherwise in effect for that option to such greater
period of time as the Plan Administrator shall deem appropriate; provided,
--------
that in no event shall such option be exercisable after the specified
expiration of the option term, and/or
(ii) permit the option to be exercised, during the
applicable post-Service exercise period, not only with respect to the
number of vested shares of Common Stock for which such option is
exercisable at the time of the Optionee's cessation of Service or death but
also with respect to one or more additional installments in which the
Optionee would have vested under the option had the Optionee continued in
Service.
D. SHAREHOLDER RIGHTS. The holder of an option shall have no
------------------
shareholder rights with respect to the shares subject to the option until such
person shall have exercised the option, paid the exercise price and become a
holder of record of the purchased shares. In addition, each such record holder
shall be required to execute and deliver to the Corporation a Voting Trust
Agreement in the form approved by the Plan Administrator with respect to such
purchased shares.
E. REPURCHASE OF UNVESTED SHARES. The Plan Administrator shall have
-----------------------------
the discretion to grant options which are exercisable for unvested shares of
Common Stock. Should the Optionee cease Service while holding such unvested
shares, the Corporation shall have the right to repurchase, at the exercise
price paid per share, any or all of those unvested
-6-
<PAGE>
shares. The terms upon which such repurchase right shall be exercisable
(including the period and procedure for exercise and the appropriate vesting
schedule for the purchased shares) shall be established by the Plan
Administrator and set forth in the document evidencing such repurchase right.
F. REPURCHASE OF VESTED SHARES. Until such time as the Common Stock
---------------------------
is first registered under Section 12(g) of the 1934 Act, upon the Optionee's
cessation of Service, the Corporation shall have the right to repurchase, at the
Fair Market Value per share on the date of such cessation of Service, any or all
vested shares of Common Stock held by the Optionee under the Option Grant
Program. Such repurchase right shall be exercisable in accordance with the
terms established by the Plan Administrator and set forth in the document
evidencing such right.
G. FIRST REFUSAL RIGHTS. Until such time as the Common Stock is
--------------------
first registered under Section 12(g) of the 1934 Act, the Corporation shall have
the right of first refusal with respect to any proposed disposition by the
Optionee (or any successor in interest) of any shares of Common Stock issued
under the Option Grant Program. Such right of first refusal shall be
exercisable in accordance with the terms established by the Plan Administrator
and set forth in the document evidencing such right.
H. LIMITED TRANSFERABILITY OF OPTIONS. During the lifetime of the
----------------------------------
Optionee, the option shall be exercisable only by the Optionee and shall not be
assignable or transferable other than by will or by the laws of descent and
distribution following the Optionee's death. However, a Non-Statutory Option
may be assigned in accordance with the terms of a Qualified Domestic Relations
Order. The assigned option may only be exercised by the person or persons who
acquire a proprietary interest in the option pursuant to such Qualified Domestic
Relations Order. The terms applicable to the assigned option (or portion
thereof) shall be the same as those in effect for the option immediately prior
to such assignment and shall be set forth in such documents issued to the
assignee as the Plan Administrator may deem appropriate.
II. INCENTIVE OPTIONS
The terms specified below shall be applicable to all Incentive
Options. Except as modified by the provisions of this Section II, all the
provisions of Articles One, Two and Four shall be applicable to Incentive
Options. Options which are specifically designated as Non-Statutory Options
shall not be subject to the terms specified in this Section II.
---
A. EXERCISE PRICE. The exercise price per share shall not be less
--------------
than one hundred percent (100%) of the Fair Market Value per share of Common
Stock on the option grant date.
-7-
<PAGE>
B. DOLLAR LIMITATION. The aggregate Fair Market Value of the shares
-----------------
of Common Stock (determined as of the respective date or dates of grant) for
which one or more options granted to any Optionee under the Plan (or any other
option plan of the Corporation or any Parent or Subsidiary) may for the first
time become exercisable as Incentive Options during any one (1) calendar year
shall not exceed the sum of One Hundred Thousand Dollars ($100,000). To the
extent the Optionee holds two (2) or more such options which become exercisable
for the first time in the same calendar year, the foregoing limitation on the
exercisability of such options as Incentive Options shall be applied on the
basis of the order in which such options are granted.
C. 10% SHAREHOLDER. If any Optionee to whom an Incentive Option is
---------------
granted is a 10% Shareholder, then the exercise price per share shall not be
less than one hundred ten percent (110%) of the Fair Market Value per share of
Common Stock on the option grant date and the option term shall not exceed five
(5) years measured from the option grant date.
III. CORPORATE TRANSACTION
A. In the event of any Corporate Transaction, each outstanding
option shall, immediately prior to the effective date of such Corporate
Transaction, automatically accelerate with respect to the additional number of
option shares which would otherwise have vested in the twelve (12)-month period
measured from and after the effective date of such Corporate Transaction had the
Optionee remained in Service during such period (the "Accelerated Option
Shares"), and each such option shall become fully exercisable with respect to
the Accelerated Option Shares and may be exercised for all or any portion of
such shares as fully-vested shares. However, an outstanding option shall not so
accelerate and the shares subject to that option shall not immediately vest if
and to the extent the acceleration of such option or the vesting of the option
shares is subject to other limitations imposed by the Plan Administrator at the
time of the option grant.
B. Immediately following the consummation of the Corporate
Transaction, all outstanding options shall terminate and cease to remain
outstanding, except to the extent assumed by the successor corporation (or
parent thereof).
C. Upon an Involuntary Termination of Optionee's status as an
Employee within eighteen (18) months after the effective date of a Corporate
Transaction in which his or her outstanding options are assumed by the successor
corporation (or parent thereof) and the Corporation's repurchase rights with
respect to the unvested shares subject to those options are assigned to the
successor corporation (or parent thereof) or such outstanding options are to be
replaced with a comparable option to purchase shares of the capital stock of the
successor
-8-
<PAGE>
corporation (or parent thereof), each option assumed or replaced shall
automatically accelerate and the shares subject to that option shall vest in
full so that the option shall become fully exercisable with respect to the total
number of shares of Common Stock at the time subject to such option and may be
exercised for all or any portion of such shares as fully-vested shares. The
option as so accelerated for fully-vested shares shall remain exercisable until
the earlier of (i) the expiration of the option term or (ii) the expiration of
-------
the one (1)-year period measured from the date of such Involuntary Termination.
D. Each option which is assumed in connection with a Corporate
Transaction shall be appropriately adjusted, immediately after such Corporate
Transaction, to apply to the number and class of securities which would have
been issuable to the Optionee in the consummation of such Corporate Transaction,
had the option been exercised immediately prior to such Corporate Transaction.
Appropriate adjustments shall also be made to (i) the number and class of
securities available for issuance in the aggregate under the Plan and the
California Plan following the consummation of such Corporate Transaction and
(ii) the exercise price payable per share under each outstanding option,
provided the aggregate exercise price payable for such securities shall remain
- --------
the same.
E. The grant of options under the Plan shall in no way affect the
right of the Corporation to adjust, reclassify, reorganize or otherwise change
its capital or business structure or to merge, consolidate, dissolve, liquidate
or sell or transfer all or any part of its business or assets.
IV. CANCELLATION AND REGRANT OF OPTIONS
The Plan Administrator shall have the authority to effect, at any time
and from time to time, with the consent of the affected option holders, the
cancellation of any or all outstanding options under the Option Grant Program
(including outstanding options under the Predecessor Plan incorporated into this
Plan) and to grant in substitution therefor new options covering the same or
different numbers of shares of Common Stock but with an exercise price per share
based on the Fair Market Value per share of Common Stock on the new option grant
date.
-9-
<PAGE>
ARTICLE THREE
STOCK ISSUANCE PROGRAM
----------------------
I. STOCK ISSUANCE TERMS
Shares of Common Stock may be issued under the Stock Issuance Program
through direct and immediate issuances without any intervening option grants.
Each such stock issuance shall be evidenced by a Stock Issuance Agreement which
complies with the terms specified below.
A. PURCHASE PRICE.
--------------
1. The purchase price per share shall be fixed by the Plan
Administrator and may be less than, equal to or greater than the Fair Market
Value per share of Common Stock on the issuance date.
2. Subject to the provisions of Section I of Article Four,
shares of Common Stock may be issued under the Stock Issuance Program for one or
more of the following items of consideration which the Plan Administrator may
deem appropriate in each individual instance:
(i) cash or check made payable to the Corporation,
(ii) past services rendered to the Corporation (or any
Parent or Subsidiary), or
(iii) one or more contracts for future services to be
rendered to the Corporation (or any Parent or Subsidiary), to the extent
permitted under the Virginia Stock Corporation Act.
B. VESTING PROVISIONS.
------------------
1. Shares of Common Stock issued under the Stock Issuance
Program may, in the discretion of the Plan Administrator, be fully and
immediately vested upon issuance or may vest in one or more installments over
the Participant's period of Service or upon attainment of specified performance
objectives. The elements of the vesting schedule applicable to any unvested
shares of Common Stock issued under the Stock Issuance Program, namely:
-10-
<PAGE>
(i) the Service period to be completed by the Participant
or the performance objectives to be attained,
(ii) the number of installments in which the shares are to
vest,
(iii) the interval or intervals (if any) which are to lapse
between installments, and
(iv) the effect which death, Permanent Disability or other
event designated by the Plan Administrator is to have upon the vesting
schedule,
shall be determined by the Plan Administrator and incorporated into the Stock
Issuance Agreement.
2. Any new, additional or different securities or other property
(including money paid other than as a regular cash dividend) which the
Participant may have the right to receive with respect to his or her unvested
shares by reason of any stock dividend, stock split, recapitalization,
combination of shares, exchange of shares or other change affecting the
outstanding Common Stock as a class without the Corporation's receipt of
consideration shall be issued subject to (i) the same vesting requirements
applicable to the Participant's unvested shares and (ii) such escrow
arrangements as the Plan Administrator shall deem appropriate.
3. The Participant shall have full shareholder rights with respect
to any shares of Common Stock issued to him or her under the Stock Issuance
Program, whether or not his or her interest in those shares is vested.
Accordingly, the Participant shall have the right to vote such shares and to
receive any regular cash dividends paid on such shares. However, one or more
Participants may be required to execute and deliver to the Corporation a Voting
Trust Agreement in the form approved by the Plan Administrator with respect to
such shares.
4. Should the Participant cease to remain in Service while holding
one or more unvested shares of Common Stock issued under the Stock Issuance
Program or should the performance objectives not be attained with respect to one
or more such unvested shares of Common Stock, then those shares shall be
immediately surrendered to the Corporation for cancellation, and the Participant
shall have no further shareholder rights with respect to those shares. To the
extent the surrendered shares were previously issued to the Participant for
consideration paid in cash or cash equivalent (including the Participant's
purchase-money indebtedness), the Corporation shall repay to the Participant the
cash
-11-
<PAGE>
consideration paid for the surrendered shares and shall cancel the unpaid
principal balance of any outstanding purchase-money note of the Participant
attributable to such surrendered shares.
5. The Plan Administrator may in its discretion waive the surrender
and cancellation of one or more unvested shares of Common Stock (or other assets
attributable thereto) which would otherwise occur upon the non-completion of the
vesting schedule applicable to such shares. Such waiver shall result in the
immediate vesting of the Participant's interest in the shares of Common Stock as
to which the waiver applies. Such waiver may be effected at any time, whether
before or after the Participant's cessation of Service or the attainment or non-
attainment of the applicable performance objectives.
6. Until such time as the Common Stock is first registered under
Section 12(g) of the 1934 Act, upon cessation of the Participant's Service, the
Corporation shall have the right to repurchase at the Fair Market Value per
share on the date of such cessation of Service, any or all vested shares of
Common Stock held by the Participant under the Stock Issuance Program. Such
repurchase right shall be exercisable in accordance with the terms established
by the Plan Administrator and set forth in the document evidencing such right.
C. FIRST REFUSAL RIGHTS. Until such time as the Common Stock is
--------------------
first registered under Section 12(g) of the 1934 Act, the Corporation shall have
the right of first refusal with respect to any proposed disposition by the
Participant (or any successor in interest) of any shares of Common Stock issued
under the Stock Issuance Program. Such right of first refusal shall be
exercisable in accordance with the terms established by the Plan Administrator
and set forth in the document evidencing such right.
II. CORPORATE TRANSACTION
A. In the event of a Corporate Transaction, the Corporation's
outstanding repurchase rights shall terminate automatically with respect to the
additional number of unvested shares which would otherwise have vested in the
twelve (12)-month period measured from and after the effective date of such
Corporate Transaction had the Participant remained in Service during such period
(the "Accelerated Shares").
B. To the extent any of the Corporation's repurchase rights with
respect to the unvested shares held by a Participant are assigned to the
successor corporation (or parent thereof) in connection with a Corporate
Transaction, those repurchase rights shall subsequently terminate, and all the
shares subject to those terminated rights shall immediately vest in full, upon
the Involuntary Termination of the Participant's status as an Employee within
eighteen (18) months after the effective date of the Corporate Transaction.
III. SHARE ESCROW/LEGENDS
Unvested shares may, in the Plan Administrator's discretion, be held
in escrow by the Corporation until the Participant's interest in such shares
vests or may be issued directly to the Participant with restrictive legends on
the certificates evidencing those unvested shares.
-12-
<PAGE>
ARTICLE FOUR
MISCELLANEOUS
-------------
I. FINANCING
The Plan Administrator may permit any Optionee or Participant to pay
the option exercise price or the purchase price for shares issued to such
individual under the Plan by delivering a promissory note payable in one or more
installments. The terms of any such promissory note (including the interest
rate and the terms of repayment) shall be established by the Plan Administrator
in its sole discretion. Promissory notes may be authorized with or without
security or collateral. In all events, the maximum credit available to each
Optionee or Participant may not exceed the sum of (i) the aggregate option
---
exercise price or purchase price payable for the purchased shares plus (ii) any
Federal, state and local income and employment tax liability incurred by the
Optionee or the Participant in connection with the option exercise or share
purchase.
II. EFFECTIVE DATE AND TERM OF PLAN
A. The Plan shall become effective when adopted by the Board, but no
option granted under the Plan may be exercised, and no shares shall be issued
under the Plan, until the Plan shall have been approved by the Corporation's
shareholders. If such shareholder approval is not obtained within twelve (12)
months after the date of the Board's adoption of the Plan, then all options
previously granted under the Plan shall terminate and cease to be outstanding,
and no further options shall be granted and no shares shall be issued under the
Plan. Subject to such limitation, the Plan Administrator may grant options and
issue shares under the Plan at any time after the effective date of the Plan and
before the date fixed herein for termination of the Plan. No further option
grants shall be made under the Predecessor Plan after such effective date.
B. Each option issued and outstanding under the Predecessor Plan
immediately prior to the effective date of this Plan shall be incorporated into
this Plan and treated as an outstanding option under this Plan, but each such
option shall continue to be governed solely by the terms and conditions of the
instrument evidencing such grant, and nothing in this Plan shall be deemed to
affect or otherwise modify the rights or obligations of the holders of such
options with respect to their acquisition of shares of Common Stock thereunder.
-13-
<PAGE>
C. The Plan shall terminate upon the earliest of (i) the expiration
--------
of the ten (10)-year period measured from the date the Plan is adopted by the
Board, (ii) the date on which all shares available for issuance under the Plan
shall have been issued or (iii) the termination of all outstanding options in
connection with a Corporate Transaction. Should the Plan terminate under clause
(i), each option and unvested share issuance at the time outstanding under the
Plan shall continue to have full force and effect in accordance with the
provisions of the documents evidencing that option or share issuance.
III. AMENDMENT OF THE PLAN
A. The Board shall have complete and exclusive power and authority
to amend or modify the Plan in any or all respects. However, no such amendment
or modification shall adversely affect the rights and obligations of any
Optionee with respect to options at the time outstanding under the Plan, nor
adversely affect the rights and obligations of any Participant with respect to
Common Stock issued under the Plan prior to such action, unless the Optionee or
the Participant consents to such amendment or modification. In addition, the
Board shall not, without the approval of the Corporation's shareholders, (i)
increase the maximum number of shares issuable under the Plan, except for
permissible adjustments in the event of certain changes in the Corporation's
capitalization, (ii) materially modify the eligibility requirements for
participation in the Plan or (iii) otherwise materially increase the benefits
accruing to persons who participate in the Plan.
B. Options to purchase shares of Common Stock may be granted under
the Plan and shares of Common Stock may be issued under the Plan that are in
both instances in excess of the number of shares then available for issuance
under the Plan, provided any excess shares actually issued under the Plan are
--------
held in escrow until the shareholders approve an amendment sufficiently
increasing the number of shares of Common Stock available for issuance under the
Plan. If such shareholder approval is not obtained within twelve (12) months
after the date the first such excess issuances are made, then (i) any
unexercised options granted on the basis of such excess shares shall terminate
and cease to be outstanding and (ii) the Corporation shall promptly refund to
the Optionees and the Participants the exercise or purchase price paid for any
excess shares issued under the Plan and held in escrow, together with interest
(at the applicable Short-Term Federal Rate) for the period the shares were held
in escrow, and such shares shall thereupon be automatically cancelled and cease
to be outstanding.
IV. USE OF PROCEEDS
Any cash proceeds received by the Corporation from the sale of shares
of Common Stock under the Plan shall be used for general corporate purposes.
-14-
<PAGE>
V. WITHHOLDING
The Corporation's obligation to deliver shares of Common Stock upon
the exercise of any options or upon the issuance or vesting of any shares issued
under the Plan shall be subject to the satisfaction of all applicable Federal,
state and local income and employment tax withholding requirements.
VI. REGULATORY APPROVALS
The implementation of the Plan, the granting of any options under the
Plan and the issuance of Common Stock (i) upon the exercise of any option or
(ii) under the Stock Issuance Program shall be subject to the Corporation's
procurement of all approvals and permits required by regulatory authorities
having jurisdiction over the Plan, the options granted under it and the shares
of Common Stock issued pursuant to it.
VII. NO EMPLOYMENT OR SERVICE RIGHTS
Nothing in the Plan shall confer upon the Optionee or the Participant
any right to continue in Service for any period of specific duration or
interfere with or otherwise restrict in any way the rights of the Corporation
(or any Parent or Subsidiary employing or retaining Optionee or the Participant)
or of the Optionee or the Participant, which rights are hereby expressly
reserved by each, to terminate the Service of the Optionee or the Participant at
any time for any reason, with or without cause.
-15-
<PAGE>
APPENDIX
The following definitions shall be in effect under the Plan:
A. BOARD shall mean the Corporation's Board of Directors.
-----
B. CALIFORNIA PLAN shall mean the Corporation's 1995 Stock Option/Stock
---------------
Issuance Plan (California).
C. CODE shall mean the Internal Revenue Code of 1986, as amended.
----
D. COMMITTEE shall mean a committee of one (1) or more Board members
---------
appointed by the Board to exercise one or more administrative functions under
the Plan.
E. COMMON STOCK shall mean the Corporation's common stock.
------------
F. CORPORATE TRANSACTION shall mean either of the following shareholder-
---------------------
approved transactions to which the Corporation is a party:
(a) a merger or consolidation in which securities possessing more
than fifty percent (50%) of the total combined voting power of the
Corporation's outstanding securities are transferred to a person or persons
different from the persons holding those securities immediately prior to
such transaction, or
(b) the sale, transfer or other disposition of all or
substantially all of the Corporation's assets in complete liquidation or
dissolution of the Corporation.
G. CORPORATION shall mean Production Group International, Inc., a
-----------
Virginia corporation.
H. DOMESTIC RELATIONS ORDER shall mean any judgment, decree or order
------------------------
(including approval of a property settlement agreement) which provides or
otherwise conveys, pursuant to applicable State domestic relations laws
(including community property laws), marital property rights to any spouse or
former spouse of the Optionee.
I. EMPLOYEE shall mean an individual who is in the employ of the
--------
Corporation (or any Parent or Subsidiary), subject to the control and direction
of the employer entity as to both the work to be performed and the manner and
method of performance.
J. EXERCISE DATE shall mean the date on which the Corporation shall have
-------------
received written notice of the option exercise.
A-1
<PAGE>
K. FAIR MARKET VALUE per share of Common Stock on any relevant date shall
-----------------
be determined in accordance with the following provisions:
(a) If the Common Stock is at the time traded on the Nasdaq
National Market, the Fair Market Value shall be the closing selling price
per share of Common Stock on the date in question, as such price is
reported by the National Association of Securities Dealers on the Nasdaq
National Market or any successor system. If there is no closing selling
price for the Common Stock on the date in question, then the Fair Market
Value shall be the closing selling price on the last preceding date for
which such quotation exists.
(b) If the Common Stock is at the time listed on any Stock
Exchange, then the Fair Market Value shall be the closing selling price per
share of Common Stock on the date in question on the Stock Exchange
determined by the Plan Administrator to be the primary market for the
Common Stock, as such price is officially quoted in the composite tape of
transactions on such exchange. If there is no closing selling price for
the Common Stock on the date in question, then the Fair Market Value shall
be the closing selling price on the last preceding date for which such
quotation exists.
(c) If the Common Stock is at the time neither listed on any
Stock Exchange nor traded on the Nasdaq National Market, then the Fair
Market Value shall be determined by the Board after taking into account
such factors as the Board shall deem appropriate.
L. INCENTIVE OPTION shall mean an option which satisfies the requirements
----------------
of Code Section 422.
M. INVOLUNTARY TERMINATION shall mean the termination of Service of any
-----------------------
individual which occurs by reason of:
(a) such individual's involuntary dismissal or discharge by the
Corporation for reasons other than Misconduct, or
(b) such individual's voluntary resignation following (A) a
change in his or her position with the Corporation which materially reduces
his or her level of responsibility, (B) a reduction in his or her level of
compensation (including base salary, fringe benefits and any non-
discretionary and objective-standard incentive payment or bonus award) by
more than fifteen percent (15%) or (C) a relocation of such individual's
place of employment by more than
A-2
<PAGE>
fifty (50) miles, provided and only if such change, reduction or relocation
is effected without the individual's consent.
N. MISCONDUCT shall mean the commission of any act of fraud, embezzlement
----------
or dishonesty by the Optionee or Participant, any unauthorized use or disclosure
by such individual of confidential information or trade secrets of the
Corporation (or any Parent or Subsidiary), or any other intentional misconduct
by such individual adversely affecting the business or affairs of the
Corporation (or any Parent or Subsidiary) in a material manner. The foregoing
definition shall not be deemed to be inclusive of all the acts or omissions
which the Corporation (or any Parent or Subsidiary) may consider as grounds for
the dismissal or discharge of such individual or any other person in the Service
of the Corporation (or any Parent or Subsidiary).
O. 1934 ACT shall mean the Securities Exchange Act of 1934, as amended.
--------
P. NON-STATUTORY OPTION shall mean an option not intended to satisfy the
--------------------
requirements of Code Section 422.
Q. OPTION GRANT PROGRAM shall mean the option grant program in effect
--------------------
under the Plan.
R. OPTIONEE shall mean any person to whom an option is granted under the
--------
Option Grant Program.
S. PARENT shall mean any corporation (other than the Corporation) in an
------
unbroken chain of corporations ending with the Corporation, provided each
corporation in the unbroken chain (other than the Corporation) owns, at the time
of the determination, stock possessing fifty percent (50%) or more of the total
combined voting power of all classes of stock in one of the other corporations
in such chain.
T. PARTICIPANT shall mean any person who is issued shares of Common Stock
-----------
under the Stock Issuance Program.
U. PERMANENT DISABILITY shall mean the inability of an individual to
--------------------
engage in any substantial gainful activity by reason of any medically
determinable physical or mental impairment expected to result in death or to be
of continuous duration of twelve (12) months or more.
V. PLAN shall mean the Corporation's 1995 Stock Option/Stock Issuance
----
Plan (Virginia), as set forth in this document.
A-3
<PAGE>
W. PLAN ADMINISTRATOR shall mean either the Board or the Committee, to
------------------
the extent the Committee is at the time responsible for the administration of
the Plan.
X. PREDECESSOR PLAN shall mean the Corporation's previous Stock Option
----------------
Plan.
Y. QUALIFIED DOMESTIC RELATIONS ORDER shall mean a Domestic Relations
----------------------------------
Order which substantially complies with the requirements of Code Section 414(p).
The Plan Administrator shall have the sole discretion to determine whether a
Domestic Relations Order is a Qualified Domestic Relations Order.
Z. SERVICE shall mean the provision of services to the Corporation (or
-------
any Parent or Subsidiary) by a person in the capacity of an Employee, a non-
employee member of the board of directors or a consultant.
AA. STOCK EXCHANGE shall mean either the American Stock Exchange or the
--------------
New York Stock Exchange.
AB. STOCK ISSUANCE AGREEMENT shall mean the agreement entered into by the
------------------------
Corporation and the Participant at the time of issuance of shares of Common
Stock under the Stock Issuance Program.
AC. STOCK ISSUANCE PROGRAM shall mean the stock issuance program in effect
----------------------
under the Plan.
AD. SUBSIDIARY shall mean any corporation (other than the Corporation) in
----------
an unbroken chain of corporations beginning with the Corporation, provided each
corporation (other than the last corporation) in the unbroken chain owns, at the
time of the determination, stock possessing fifty percent (50%) or more of the
total combined voting power of all classes of stock in one of the other
corporations in such chain.
AE. 10% SHAREHOLDER shall mean the owner of stock (as determined under
---------------
Code Section 424(d)) possessing ten percent (10%) or more of the total combined
voting power of all classes of stock of the Corporation (or any Parent or
Subsidiary).
AF. VOTING TRUST AGREEMENT shall mean the agreement, in form and substance
----------------------
satisfactory to the Plan Administrator, which the Optionee or Participant must
execute and deliver to the Corporation at the time of the option exercise or
direct stock issuance. Under the Voting Trust Agreement, certain designated
officers of the Corporation will be authorized to vote the acquired shares of
Common Stock in such manner as they deem appropriate upon all matters submitted
to the Corporation's shareholders for approval.
A-4
<PAGE>
Exhibit 10.2
PRODUCTION GROUP INTERNATIONAL INC.
1995 STOCK OPTION/STOCK ISSUANCE PLAN (CALIFORNIA)
--------------------------------------------------
ARTICLE ONE
GENERAL PROVISIONS
------------------
I. PURPOSE OF THE PLAN
This 1995 Stock Option/Stock Issuance Plan (California) is intended to
promote the interests of Production Group International, Inc., a Virginia
corporation, by providing eligible persons with the opportunity to acquire a
proprietary interest, or otherwise increase their proprietary interest, in the
Corporation as an incentive for them to remain in the service of the
Corporation.
Capitalized terms herein shall have the meanings assigned to such
terms in the attached Appendix.
II. STRUCTURE OF THE PLAN
A. The Plan shall be divided into two (2) separate equity programs:
(i) the Option Grant Program under which eligible persons may, at
the discretion of the Plan Administrator, be granted options to purchase
shares of Common Stock, and
(ii) the Stock Issuance Program under which eligible persons may,
at the discretion of the Plan Administrator, be issued shares of Common
Stock directly, either through the immediate purchase of such shares or as
a bonus for services rendered the Corporation (or any Parent or
Subsidiary).
B. The provisions of Articles One and Four shall apply to both the
equity programs under the Plan and shall accordingly govern the interests of
all persons under the Plan.
III. ADMINISTRATION OF THE PLAN
A. The Plan shall be administered by the Board. However, any or all
administrative functions otherwise exercisable by the Board may be delegated to
the Committee. Members of the Committee shall serve for such period of time as
the Board may determine and shall be subject to removal by the Board at any
time. The Board may also at any time terminate the functions of the Committee
and reassume all powers and authority previously delegated to the Committee.
<PAGE>
B. The Plan Administrator shall have full power and authority
(subject to the provisions of the Plan) to establish such rules and regulations
as it may deem appropriate for proper administration of the Plan and to make
such determinations under, and issue such interpretations of, the Plan and any
outstanding options or stock issuances thereunder as it may deem necessary or
advisable. Decisions of the Plan Administrator shall be final and binding on
all parties who have an interest in the Plan or any option or stock issuance
thereunder.
IV. ELIGIBILITY
A. The persons eligible to participate in the Plan are residents of
the State of California who are:
(i) Employees,
(ii) non-employee members of the Board or the non-employee
members of the board of directors of any Parent or Subsidiary, and
(iii) consultants who provide services to the Corporation (or
any Parent or Subsidiary).
B. The Plan Administrator shall have full authority to determine,
(i) with respect to the option grants under the Option Grant Program, which
eligible persons are to receive option grants, the time or times when such
option grants are to be made, the number of shares to be covered by each such
grant, the status of the granted option as either an Incentive Option or a Non-
Statutory Option, the time or times at which each option is to become
execrable, the vesting schedule (if any) applicable to the option shares and
the maximum term for which the option is to remain outstanding, and (ii) with
respect to stock issuances under the Stock Issuance Program, which eligible
persons are to receive stock issuances, the time or times when such issuances
are to be made, the number of shares to be issued to each Participant, the
vesting schedule (if any) applicable to the issued shares and the consideration
to be paid by the Participant for such shares.
C. The Plan Administrator shall have the absolute discretion either
to grant options in accordance with the Option Grant Program or to effect stock
issuances in accordance with the Stock Issuance Program.
-2-
<PAGE>
V. STOCK SUBJECT TO THE PLAN
A. The stock issuable under the Plan shall be shares of authorized
but unissued or reacquired Common Stock. The maximum number of shares of
Common Stock which may be issued in the aggregate under this Plan and the
Virginia Plan shall not exceed 706,000 shares.
B. Shares of Common Stock subject to outstanding options under this
Plan shall be available for subsequent issuance under this Plan or under the
Virginia Plan to the extent (i) the options expire or terminate for any reason
prior to exercise in full or (ii) the options are canceled in accordance with
the cancellation-regrant provisions of Article Two. All shares issued under
this Plan and the Virginia Plan, whether or not those shares are subsequently
repurchased by the Corporation pursuant to its repurchase rights under this
Plan and the Virginia Plan, shall reduce on a share-for-share basis the
aggregate number of shares of Common Stock available for subsequent issuance
under this Plan and the Virginia Plan.
C. Should any change be made to the Common Stock by reason of any
stock split, stock dividend, recapitalization, combination of shares, exchange
of shares or other change affecting the outstanding Common Stock as a class
without the Corporation's receipt of consideration, appropriate adjustments
shall be made to (i) the maximum number and/or class of securities issuable in
the aggregate under this Plan and the California Plan, (ii) the maximum number
and/or class of securities by which the share reserve under this Plan is to be
reduced for shares issued under the Virginia Plan and (iii) the number and/or
class of securities and the exercise price per share in effect under each
outstanding option in order, to prevent the dilution or enlargement of benefits
thereunder. The adjustments determined by the Plan Administrator shall be
final, binding and conclusive. In no event shall any such adjustments be made
in connection with the conversion of one or more outstanding shares of the
Corporation's preferred stock into shares of Common Stock.
-3-
<PAGE>
ARTICLE TWO
OPTION GRANT PROGRAM
--------------------
I. OPTION TERMS
Each option shall be evidenced by one or more documents in the form
approved by the Plan Administrator; provided, however, that each such document
--------
shall comply with the terms specified below. Each document evidencing an
Incentive Option shall, in addition, be subject to the provisions of the Plan
applicable to such options.
A. EXERCISE PRICE.
--------------
1. The exercise price per share shall be fixed by the Plan
Administrator in accordance with the following provisions:
(i) The exercise price per share shall not be less than eighty-
five percent (85%) of the Fair Market Value per share of Common Stock on
the option grant date.
(ii) If the person to whom the option is granted is a 10%
Shareholder, then the exercise price per share shall not be less than one
hundred ten percent (110%) of the Fair Market Value per share of Common
Stock on the option grant date.
2. The exercise price shall become immediately due upon
exercise of the option and shall, subject to the provisions of Section I of
Article Four and the documents evidencing the option, be payable in cash or
check made payable to the Corporation. Should the Common Stock be registered
under Section 12(g) of the 1934 Act at the time the option is exercised, then
the exercise price may also be paid as follows:
(i) in shares of Common Stock held for the requisite period
necessary to avoid a charge to the Corporation's earnings for financial
reporting purposes and valued at Fair Market Value on the Exercise Date, or
(ii) to the extent the option is exercised for vested shares,
through a special sale and remittance procedure pursuant to which the
Optionee shall concurrently provide irrevocable written instructions (a)
to a Corporation-designated brokerage firm to effect the immediate sale of
the purchased shares and remit to the Corporation, out of the sale
proceeds available on the settlement date, sufficient funds to cover the
aggregate exercise price payable for the purchased shares plus all
applicable Federal, state and local income and employment taxes required
to be withheld by the Corporation by reason of such exercise and (b) to
the Corporation to deliver the certificates for the purchased shares
directly to such brokerage firm in order to complete the sale transaction.
-4-
<PAGE>
Except to the extent such sale and remittance procedure is utilized,
payment of the exercise price for the purchased shares must be made on the
Exercise Date.
B. EXERCISE AND TERM OF OPTIONS. Each option shall be exercisable at
----------------------------
such time or times, during such period and for such number of shares as shall
be determined by the Plan Administrator and set forth in the documents
evidencing the option. However, no option shall have a term in excess of ten
(10) years measured from the option grant date.
C. EFFECT OF TERMINATION OF SERVICE. The following provisions shall
--------------------------------
govern the exercise of any options held by the Optionee at the time of
cessation of Service or death:
(i) Should the Optionee cease to remain in Service for any reason
other than Disability or death, then the Optionee shall have a period of
three (3) months following the date of such cessation of Service during
which to exercise each outstanding option held by such Optionee.
(ii) Should such Service terminate by reason of Disability, then
the Optionee shall have a period of six (6) months following the date of
such cessation of Service during which to exercise each outstanding option
held by such Optionee. However, should such Disability be deemed to
constitute Permanent Disability, then the period during which each
outstanding option held by the Optionee is to remain exercisable shall be
extended by an additional six (6) months so that the exercise period shall
be the twelve (12)-month period following the date of the Optionee's
cessation of Service by reason of such Permanent Disability.
(iii) Should the Optionee die while holding one or more
outstanding options, then the personal representative of the Optionee's
estate or the person or persons to whom the option is transferred pursuant
to the Optionee's will or in accordance with the laws of descent and
distribution shall have a period of twelve (12) months following the date
of the Optionee's death during which to exercise each such option.
(iv) Under no circumstances, however, shall any such option be
exercisable after the specified expiration of the option term.
(v) During the applicable post-Service exercise period, the
option may not be exercised in the aggregate for more than the number of
vested shares for which the option is exercisable on the date of the
Optionee's cessation of Service. Upon the expiration of the applicable
exercise period or (if earlier) upon the expiration of the option term, the
option shall terminate and cease to be outstanding for any vested shares
for which the option has not been exercised. However, the option shall,
immediately upon the Optionee's cessation of Service, terminate and cease
-5-
<PAGE>
to be outstanding to the extent it is not exercisable for vested shares on
the date of such cessation of Service.
D. SHAREHOLDER RIGHTS. The holder of an option shall have no
------------------
shareholder rights with respect to the shares subject to the option until such
person shall have exercised the option, paid the exercise price and become a
holder of record of the purchased shares. In addition, each such record holder
shall be required to execute and deliver to the Corporation a Voting Trust
Agreement in the form approved by the Plan Administrator with respect to such
purchased shares.
E. UNVESTED SHARES. The Plan Administrator shall have the discretion
---------------
to grant options which are exercisable for unvested shares of Common Stock.
Should the Optionee cease Service while holding such unvested shares, the
Corporation shall have the right to repurchase, at the exercise price paid per
share, all or (at the discretion of the Corporation and with the consent of the
Optionee) any of those unvested shares. The terms upon which such repurchase
right shall be exercisable (including the period and procedure for exercise and
the appropriate vesting schedule for the purchased shares) shall be established
by the Plan Administrator and set forth in the document evidencing such
repurchase right. The Plan Administrator may not impose a vesting schedule
upon any option grant or any shares of Common Stock subject to the option which
is more restrictive than twenty percent (20%) per year vesting, beginning one
(1) year after the option grant date. However, this minimum vesting
requirement shall not be applicable with respect to any option granted to a
Highly-Compensated Person.
F. VESTED SHARES. Until such time as the Common Stock is first
-------------
registered under Section 12(g) of the 1934 Act, upon the Optionee's cessation
of Service, the Corporation shall have the right to repurchase, at the price
per share equal to the higher of (i) the exercise price or (ii) the Fair Market
Value on the date of such cessation of Service, any or all vested shares held
by the Optionee under the Option Grant Program. Such repurchase right shall be
exercisable in accordance with the terms established by the Plan Administrator
and set forth in the document evidencing such right.
G. FIRST REFUSAL RIGHTS. Until such time as the Common Stock is
--------------------
first registered under Section 12(g) of the 1934 Act, the Corporation shall
have the right of first refusal with respect to any proposed disposition by the
Optionee (or any successor in interest) of any shares of Common Stock issued
under the Option Grant Program. Such right of first refusal shall be
exercisable in accordance with the terms established by the Plan Administrator
and set forth in the document evidencing such right.
H. LIMITED TRANSFERABILITY OF OPTIONS. During the lifetime of the
----------------------------------
Optionee, the option shall be exercisable only by the Optionee and shall not be
assignable or transferable other than by will or by the laws of descent and
distribution following the Optionee's death. However, a Non-Statutory Option
may be assigned in accordance with the terms of a Qualified Domestic Relations
Order. The assigned option may only be exercised by the person or persons
-6-
<PAGE>
who acquire a proprietary interest in the option pursuant to such Qualified
Domestic Relations Order. The terms applicable to the assigned option (or
portion thereof) shall be the same as those in effect for the option
immediately prior to such assignment and shall be set forth in such documents
issued to the assignee as the Plan Administrator may deem appropriate.
II. INCENTIVE OPTIONS
The terms specified below shall be applicable to all Incentive
Options. Except as modified by the provisions of this Section II, all the
provisions of Articles One, Two and Four shall be applicable to Incentive
Options. Options which are specifically designated as Non-Statutory Options
shall not be subject to the terms of this Section II.
A. ELIGIBILITY. Incentive Options may only be granted to Employees.
-----------
B. EXERCISE PRICE. The exercise price per share shall not be less
--------------
than one hundred percent (100%) of the Fair Market Value per share of Common
Stock on the option grant date.
C. DOLLAR LIMITATION. The aggregate Fair Market Value of the shares
------------------
of Common Stock (determined as of the respective date or dates of grant) for
which one or more options granted to any Employee under the Plan (or any other
option plan of the Corporation or any Parent or Subsidiary) may for the first
time become exercisable as Incentive Options during any one (1) calendar year
shall not exceed the sum of One Hundred Thousand Dollars ($100,000). To the
extent the Employee holds two (2) or more such options which become exercisable
for the first time in the same calendar year, the foregoing limitation on the
exercisability of such options as Incentive Options shall be applied on the
basis of the order in which such options are granted.
D. 10% SHAREHOLDER. If any Employee to whom an Incentive Option is
---------------
granted is a 10% Shareholder, then the option term shall not exceed five (5)
years measured from the option grant date.
-7-
<PAGE>
III. CORPORATE TRANSACTION
A. In the event of any Corporate Transaction, each outstanding
option shall terminate and cease to be outstanding, except to the extent
assumed by the successor corporation (or parent thereof) in connection with
such Corporate Transaction. In addition, all outstanding repurchase rights
shall terminate automatically in the event of any Corporate Transaction, except
to the extent the repurchase rights are assigned to the successor corporation
(or parent thereof) in connection with such Corporate Transaction.
B. Each option which is assumed in connection with a Corporate
Transaction shall be appropriately adjusted, immediately after such Corporate
Transaction, to apply to the number and class of securities which would have
been issuable to the Optionee in the consummation of such Corporate
Transaction, had the option been exercised immediately prior to such Corporate
Transaction. Appropriate adjustments shall also be made to (i) the number and
class of securities available for issuance in the aggregate under the Plan and
the Virginia Plan following the consummation of such Corporate Transaction and
(ii) the exercise price payable per share under each outstanding option,
provided the aggregate exercise price payable for such securities shall remain
--------
the same.
C. The grant of options under the Plan shall in no way affect the
right of the Corporation to adjust, reclassify, reorganize or otherwise change
its capital or business structure or to merge, consolidate, dissolve, liquidate
or sell or transfer all or any part of its business or assets.
IV. CANCELLATION AND REGRANT OF OPTIONS
The Plan Administrator shall have the authority to effect at any time
and from time to time, with the consent of the affected option holders, the
cancellation of any or all outstanding options under the Option Grant Program
and to grant in substitution therefor new options covering the same or
different numbers of shares of Common Stock but with an exercise price per
share based on the Fair Market Value per share of Common Stock on the new
option grant date.
V. ADDITIONAL AUTHORITY
The Plan Administrator shall have the discretion, exercisable either
at the time an option is granted or at any time while the option remains
outstanding, to:
(i) extend the period of time for which the option is to remain
exercisable following the Optionee's cessation of Service or death from the
limited period otherwise in effect for that option to such greater period
of time as the Plan Administrator shall deem appropriate, but in no event
beyond the expiration of the option term, and/or
(ii) permit the option to be exercised, during the applicable
post-Service exercise period, not only with respect to the number of vested
shares of Common Stock for which such option is exercisable at the time of
the Optionee's cessation of Service or death but also with respect to one
or more additional installments in which the Optionee would have vested
under the option had the Optionee continued in Service.
-8-
<PAGE>
ARTICLE THREE
STOCK ISSUANCE PROGRAM
----------------------
I. STOCK ISSUANCE TERMS
Shares of Common Stock may be issued under the Stock Issuance Program
through direct and immediate issuances without any intervening option grants.
Each such stock issuance shall be evidenced by a Stock Issuance Agreement which
complies with the terms specified below.
A. PURCHASE PRICE.
--------------
1. The purchase price per share shall be fixed by the Plan
Administrator in accordance with the following provisions:
(i) The purchase price per share shall not be less than eighty-
five percent (85%) of the Fair Market Value per share of Common Stock on
the stock issuance date.
(ii) If the person to whom the stock issuance is made is a 10%
Shareholder, then the purchase price per share shall not be less than one
hundred ten percent (110%) of the Fair Market Value per share of Common
Stock on the stock issuance date.
2. Subject to the provisions of Section I of Article Four, shares of
Common Stock may be issued under the Stock Issuance Program for one or both of
the following items of consideration which the Plan Administrator may deem
appropriate in each individual instance:
(i) cash or check made payable to Corporation, or
(ii) past services rendered to the Corporation (or any Parent or
Subsidiary), or
(iii) one or more contracts for further services to be rendered
to the Corporation (or any Parent or Subsidiary), to the extent permitted
under the Virginia Stock Corporation Act.
-9-
<PAGE>
B. VESTING PROVISIONS.
------------------
1. Shares of Common Stock issued under the Stock Issuance Program
may, in the discretion of the Plan Administrator, be fully and immediately
vested upon issuance or may vest in one or more installments over the
Participant's period of Service or upon attainment of specified performance
objectives. The elements of the vesting schedule applicable to any unvested
shares of Common Stock issued under the Stock Issuance Program, namely:
(i) the Service period to be completed by the Participant or the
performance objectives to be attained,
(ii) the number of installments in which the shares are to vest,
(iii) the interval or intervals (if any) which are to lapse
between installments, and
(iv) the effect which death, Disability or other event designated
by the Plan Administrator is to have upon the vesting schedule,
shall be determined by the Plan Administrator and incorporated into the Stock
Issuance Agreement. The Plan Administrator may not impose a vesting schedule
upon any stock issuance effected under the Stock Issuance Program which is more
restrictive than twenty percent (20%) per year vesting, beginning one (1) year
after the stock issuance date. However, this minimum vesting requirement shall
not be applicable with respect to any stock issued to a Highly-Compensated
Person.
2. Any new, substituted or additional securities or other property
(including money paid other than as a regular cash dividend) which the
Participant may have the right to receive with respect to the Participant's
unvested shares of Common Stock by reason of any stock dividend, stock split,
recapitalization, combination of shares, exchange of shares or other change
affecting the outstanding Common Stock as a class without the Corporation's
receipt of consideration shall be issued subject to (i) the same vesting
requirements applicable to the Participant's unvested shares of Common Stock and
(ii) such escrow arrangements as the Plan Administrator shall deem appropriate.
3. The Participant shall have full shareholder rights with respect
to any shares of Common Stock issued to the Participant under the Stock Issuance
Program, whether or not the Participant's interest in those shares is vested.
Accordingly, the Participant shall have the right to vote such shares and to
receive any regular cash dividends paid on such shares. However, one or more
Participants may be required to execute and deliver to the Corporation a Voting
Trust Agreement in the form approved by the Plan Administrator with respect to
such shares.
4. Should the Participant cease to remain in Service while holding
one or more unvested shares of Common Stock issued under the Stock Issuance
Program or -should
-10-
<PAGE>
the performance objectives not be attained with respect to one or more such
unvested shares of Common Stock, then those shares shall be immediately
surrendered to the Corporation for cancellation, and the Participant shall have
no further shareholder rights with respect to those shares. To the extent the
surrendered shares were previously issued to the Participant for consideration
paid in cash or cash equivalent (including the Participant's purchase-money
indebtedness), the Corporation shall repay to the Participant the cash
consideration paid for the surrendered shares and shall cancel the unpaid
principal balance of any outstanding purchase-money note of the Participant
attributable to such surrendered shares.
5. The Plan Administrator may in its discretion waive the surrender
and cancellation of one or more unvested shares of Common Stock (or other assets
attributable thereto) which would otherwise occur upon the non-completion of the
vesting schedule applicable to such shares. Such waiver shall result in the
immediate vesting of the Participant's interest in the shares of Common Stock as
to which the waiver applies. Such waiver may be effected at any time, whether
before or after the Participant's cessation of Service or the attainment or non-
attainment of the applicable performance objectives.
6. Until such time as the Common Stock is first registered under
Section 12(g) of the 1934 Act upon cessation of the Participant's Service, the
Corporation shall have the right to repurchase, at the price per share equal to
the higher of (i) the purchase price or (ii) the Fair Market Value on the date
of such cessation of Service, any or all vested shares held by the Participant
under the Stock Issuance Program. Such repurchase right shall be exercisable in
accordance with the terms established by the Plan Administrator and set forth in
the document evidencing such right.
C. FIRST REFUSAL RIGHTS. Until such time as the Common Stock is
--------------------
first registered under Section 12(g) of the 1934 Act, the Corporation shall
have the right of first refusal with respect to any proposed disposition by the
Participant (or any successor in interest) of any shares of Common Stock issued
under the Stock Issuance Program. Such right of first refusal shall be
exercisable in accordance with the terms established by the Plan Administrator
and set forth in the document evidencing such right.
II. CORPORATE TRANSACTION
All of the outstanding repurchase rights under the Stock Issuance
Program shall terminate automatically in the event of any Corporate
Transaction, except to the extent the repurchase rights are assigned to the
successor corporation (or parent thereof) in connection with such Corporate
Transaction.
III. SHARE ESCROW/LEGENDS
Unvested shares may, in the Plan Administrator's discretion, be held
in escrow by the Corporation until the Participant's interest in such shares
vests or may be issued directly to the Participant with restrictive legends on
the certificates evidencing those unvested shares.
-11-
<PAGE>
ARTICLE FOUR
MISCELLANEOUS
-------------
I. FINANCING
The Plan Administrator may permit any Optionee or Participant to pay
the option exercise price or the purchase price for shares issued to such
person under the Plan by delivering a promissory note payable in one or more
installments. The terms of any such promissory note (including the interest
rate and the terms of repayment) shall be established by the Plan Administrator
in its sole discretion. Promissory notes may be authorized with or without
security or collateral. However, any promissory notes delivered by a
consultant must be secured by property other than the purchased shares of
Common Stock. In all events, the maximum credit available to the Optionee or
Participant may not exceed the sum of (i) the aggregate option exercise price
---
or purchase price payable for the purchased shares plus (ii) any Federal, state
and local income and employment tax liability incurred by the Optionee or the
Participant in connection with the option exercise or share purchase.
II. EFFECTIVE DATE AND TERM OF THE PLAN
A. The Plan shall become effective when adopted by the Board, but no
option granted under the Plan may be exercised, and no shares shall be issued
under the Plan, until the Plan is approved by the Corporation's shareholders.
If such shareholder approval is not obtained within twelve (12) months after
the date of the Board's adoption of the Plan, then all options previously
granted under the Plan shall terminate and cease to be outstanding, and no
further options shall be granted and no shares shall be issued under the Plan.
Subject to such limitation, the Plan Administrator may grant options and issue
shares under the Plan at any time after the effective date of the Plan and
before the date fixed herein for termination of the Plan.
B. The Plan shall terminate upon the earliest of (i) the expiration
--------
of the ten (10)-year period measured from the date the Plan is adopted by the
Board, (ii) the date on which all shares available for issuance under the Plan
shall have been issued pursuant to the exercise of options or the issuance of
shares (whether vested or unvested) under the Plan or (iii) the termination of
all outstanding options in connection with a Corporate Transaction. Upon such
Plan termination, all options and unvested stock issuances outstanding under
the Plan shall continue to have full force and effect in accordance with the
provisions of the documents evidencing such options or issuances.
-12-
<PAGE>
III. AMENDMENT OF THE PLAN
A. The Board shall have complete and exclusive power and authority
to amend or modify the Plan in any or all respects. However, no such amendment
or modification shall adversely affect the rights and obligations with respect
to options or unvested stock issuances at the time outstanding under the Plan,
unless the Optionee or the Participant consents to such amendment or
modification. In addition, the Board shall not, without the approval of the
Corporation's shareholders, (i) increase the maximum number of shares issuable
under the Plan, except for permissible adjustments in the event of certain
changes in the Corporation's capitalization, (ii) materially modify the
eligibility requirements for Plan participation or (iii) materially increase
the benefits accruing to Plan participants.
B. Options to purchase shares of Common Stock may be granted under
the Plan and shares of Common Stock may be issued under the Plan that are in
each instance in excess of the number of shares then available for issuance
under the Plan, provided any excess shakes actually issued under the Plan are
held in escrow until there is obtained shareholder approval of an amendment
sufficiently increasing the number of shares of Common Stock available for
issuance under the Plan. If such shareholder approval is not obtained within
twelve (12) months after the date the first such excess issuances are made,
then (i) any unexercised options granted on the basis of such excess shares
shall terminate and cease to be outstanding and (ii) the Corporation shall
promptly refund to the Optionees and the Participants the exercise or purchase
price paid for any excess shares issued under the Plan and held in escrow,
together with interest (at the applicable Short-Term Federal Rate) for the
period the shares were held in escrow, and such shares shall thereupon be
automatically canceled and cease to be outstanding.
IV. USE OF PROCEEDS
Any cash proceeds received by the Corporation from the sale of shares
of Common Stock under the Plan shall be used for general corporate purposes.
V. WITHHOLDING
The Corporation's obligation to deliver shares of Common Stock upon
the exercise of any options or upon the issuance or vesting of any shares
issued under the Plan shall be subject to the satisfaction of all applicable
Federal, state and local income and employment tax withholding requirements.
-13-
<PAGE>
VI. REGULATORY APPROVALS
The implementation of the Plan, the granting of any options under the
Plan and the issuance of any shares of Common Stock (i) upon the exercise of
any option or (ii) under the Stock Issuance Program shall be subject to the
Corporation's procurement of all approvals and permits required by regulatory
authorities having jurisdiction over the Plan, the options granted under it and
the shares of Common Stock issued pursuant to it.
VII. NO EMPLOYMENT OR SERVICE RIGHTS
Nothing in the Plan shall confer upon the Optionee or the Participant
any right to continue in Service for any period of specific duration or
interfere with or otherwise restrict in any way the rights of the Corporation
(or any Parent or Subsidiary employing or retaining such person) or of the
Optionee or the Participant, which rights are hereby expressly reserved by
each, to terminate such person's Service at any time for any reason, with or
without cause.
VIII. FINANCIAL REPORTS
The Corporation shall deliver a balance sheet and an income statement
at least annually to each individual holding an outstanding option under and
each Participant in the Plan, unless such individual is a key Employee whose
duties in connection with the Corporation (or any Parent or Subsidiary) assure
such individual access to equivalent information.
-14-
<PAGE>
APPENDIX
The following definitions shall be in effect under the Plan:
A. BOARD shall mean the Corporation's Board of Directors.
-----
B. CODE shall mean the Internal Revenue Code of 1986, as amended.
----
C. COMMITTEE shall mean a committee of one (1) or more Board members
---------
appointed by the Board. to exercise one or more administrative functions under
the Plan.
D. COMMON STOCK shall mean the Corporation's common stock.
------------
E. CORPORATE TRANSACTION shall mean either of the following shareholder
---------------------
approved transactions to which the Corporation is a party:
(i) a merger or consolidation in which securities possessing more
than fifty percent (50%) of the total combined voting power of the
Corporation's outstanding securities are transferred to a person or persons
different from the persons holding those securities immediately prior to
-----------
such transaction, or
(ii) the sale, transfer or other disposition of all or
substantially all of the Corporation's assets in complete liquidation or
dissolution of the Corporation.
F. CORPORATION shall mean Production Group International, Inc., a
-----------
Virginia corporation.
G. DISABILITY shall mean the inability of the Optionee or the Participant
----------
to engage in any substantial gainful activity by reason of any medically
determinable physical or mental impairment and shall be determined by the Plan
Administrator on the basis of such medical evidence as the Plan Administrator
deems warranted under the circumstances. Disability shall be deemed to
constitute Permanent Disability in the event that such Disability is expected to
result in death or has lasted or can be expected to last for a continuous period
of twelve (12) months or more.
H. DOMESTIC RELATIONS ORDER shall mean any judgment, decree or order
------------------------
(including approval of a property settlement agreement) which provides or
otherwise conveys, pursuant to applicable State domestic relations laws
(including community property laws), marital property rights to any spouse or
former spouse of the Optionee.
I. EMPLOYEE shall mean an individual who is in the employ of the
--------
Corporation (or any Parent or Subsidiary), subject to the control and direction
of the employer entity as to both the work to be performed and the manner and
method of performance.
A-1
<PAGE>
J. EXERCISE DATE shall mean the date on which the Corporation shall have
-------------
received written notice of the option exercise.
K. FAIR MARKET VALUE per share of Common Stock on any relevant date shall
-----------------
be determined in accordance with the following provisions:
(i) If the Common Stock is at the time traded on the Nasdaq
National Market; then the Fair Market Value shall be the closing selling
price per share of Common Stock on the date in question, as such price is
reported by the National Association of Securities Dealers on the Nasdaq
National Market or any successor system. If there is no closing selling
price for the Common Stock on the date in question, then the Fair Market
Value shall be the closing selling price on the last preceding date for
which such quotation exists.
(ii) If the Common Stock is at the time listed on any Stock
Exchange, then the Fair Market Value shall be the closing selling price per
share of Common Stock on the date in question on the Stock Exchange
determined by the Plan Administrator to be the primary market for the
Common Stock, as such price is officially quoted in the composite tape of
transactions on such exchange. If there is no closing selling price for
the Common Stock on the date in question, then the Fair Market Value shall
be the closing selling price on the last preceding date for which such
quotation exists.
(iii) If the Common Stock is at the time neither listed on any
Stock Exchange nor traded on the Nasdaq National Market, then the Fair
Market Value shall be determined by the Board after taking into account
such factors as the Board shall deem appropriate.
L. HIGHLY-COMPENSATED PERSON shall mean an Employee, a non-employee
-------------------------
member of the board of directors or a consultant (i) whose earnings per calendar
year from the Corporation (or any Parent or Subsidiary) equals or exceeds Sixty
Thousand Dollars ($60,000) in the aggregate and (ii) who has previously received
one or more option grants or stock issuances under the Plan.
M. INCENTIVE OPTION shall mean an option which satisfies the requirements
----------------
of Code Section 422.
N. 1934 ACT shall mean the Securities Exchange Act of 1934, as amended.
--------
O. NON-STATUTORY OPTION shall mean an option not intended to satisfy the
--------------------
requirements of Code Section 422.
P. OPTION GRANT PROGRAM shall mean the option grant program in effect
--------------------
under the Plan.
A-2
<PAGE>
Q. OPTIONEE shall mean any person to whom an option is granted under the
--------
Option Grant Program.
R. PARENT shall mean any corporation (other than the Corporation) in an
------
unbroken chain of corporations ending with the Corporation, provided each
corporation in the unbroken chain (other than the Corporation) owns, at the time
of the determination, stock possessing fifty percent (50%) or more of the total
combined voting power of all classes of stock in one of the other corporations
in such chain.
S. PARTICIPANT shall mean any person who is issued shares of Common Stock
-----------
under the Stock Issuance Program.
T. PLAN shall mean the Corporation's 1995 Stock Option/Stock Issuance
----
Plan California, as set forth in this document.
U. PLAN ADMINISTRATOR shall mean either the Board or the Committee, to
------------------
the extent the Committee is at the time responsible for the administration of
the Plan.
V. QUALIFIED DOMESTIC RELATIONS ORDER shall mean a Domestic Relations
----------------------------------
Order which substantially complies with the requirements of Code Section 414(p).
The Plan Administrator shall have the sole discretion to determine whether a
Domestic Relations Order is a Qualified Domestic Relations Order.
W. SERVICE shall mean the provision of services to the Corporation (or
-------
any Parent or Subsidiary) by a person in the capacity of an Employee, a non-
employee member of the board of directors or a consultant, except to the extent
otherwise specifically provided in the documents evidencing the option grant or
stock issuance.
X. STOCK EXCHANGE shall mean either the American Stock Exchange or the
--------------
New York Stock Exchange.
Y. STOCK ISSUANCE AGREEMENT shall mean the agreement entered into by the
------------------------
Corporation and the Participant at the time of issuance of shares of Common
Stock under the Stock Issuance Program.
Z. STOCK ISSUANCE PROGRAM shall mean the stock issuance program in effect
----------------------
under the Plan.
AA. SUBSIDIARY shall mean any corporation (other than the Corporation) in
----------
an unbroken chain of corporations beginning with the Corporation, provided each
corporation (other than the last corporation) in the unbroken chain owns, at the
time of the determination, stock possessing fifty percent (50%) or more of the
total combined voting power of all classes of stock in one of the other
corporations in such chain.
A-3
<PAGE>
AB. 10% SHAREHOLDER shall mean the owner of stock (as determined under
---------------
Code Section 424(d)) possessing ten percent (10%) or more of the total combined
voting power of all classes of stock of the Corporation (or any Parent or
Subsidiary).
AC. VIRGINIA PLAN shall mean the Corporation's 1995 Stock Option/Stock
-------------
Issuance Plan (Virginia).
AD. VOTING TRUST AGREEMENT shall mean the agreement, in form and
----------------------
substance satisfactory to the Plan Administrator, which the Optionee or
Participant must execute and deliver to the Corporation at the time of the
option exercise or direct stock issuance. Under the Voting Trust Agreement
certain designated officers of the Corporation will be authorized to vote the
acquired shares of Common Stock in such manner as they deem appropriate upon all
matters submitted to the Corporation's shareholders for approval.
A-4
<PAGE>
AMENDED AND RESTATED
FINANCING AND SECURITY AGREEMENT
Dated as of November 27, 1996
by and among
THE FIRST NATIONAL BANK OF MARYLAND
and
PRODUCTION GROUP INTERNATIONAL, INC.
EXECUTOURS, INC.
SAFARIS EVENTS, INC.
KALEIDOSCOPE EVENTS, INC.
AGENDA WASHINGTON INC.
WASHINGTON, INC.
C.H.L. VENTURES, INC.
PGI ACQUISITION COMPANY E
PGI ACQUISITION COMPANY A
PGI ACQUISITION COMPANY B
PGI COMPANY F
PGI ACQUISITION COMPANY I
PGI COMPANY S
PGI COMPANY H
PGI COMPANY P
PGI COMPANY Q
PGI COMPANY R
PGI COMPANY J
PGI COMPANY X
SPEARHEAD EXHIBITIONS LIMITED
PGI EUROPE LIMITED
RAY BLOCH PRODUCTIONS, WASHINGTON, D.C., INC.
RAY BLOCH PRODUCTIONS, INC.
RAY BLOCH PRODUCTIONS, NEW JERSEY, INC.
RAY BLOCH PRODUCTIONS-ATLANTA, INC.
RAY BLOCH PRODUCTIONS WEST, INC.
RMR PRODUCTION SERVICES, INC.
TIMBERLINE WORLDWIDE, INC.
EPIC ENTERPRISES, INC.
and
EPIC ENTERPRISES OF NEVADA, INC.
<PAGE>
TABLE OF CONTENTS
-----------------
Page
----
ARTICLE I
DEFINITIONS............................................................ 2
1.1 Defined Terms............................................... 2
1.2 Uniform Commercial Code Terms............................... 14
1.3 Accounting Terms............................................ 14
1.4 ERISA Terms................................................. 14
1.5 Other Definitional Provisions............................... 15
ARTICLE II
THE WORKING CAPITAL LINE OF CREDIT..................................... 15
2.1 Working Capital Line of Credit Advances..................... 15
2.2 Repayment and Prepayment of Working Capital Line
of Credit Advances.......................................... 16
ARTICLE III
THE ACQUISITION FACILITY............................................... 17
3.1 Advances under the Acquisition Facility..................... 17
3.2 Repayment and Prepayment of Advances of the
Acquisition Facility........................................ 18
ARTICLE IV
THE EQUIPMENT FACILITY................................................. 18
4.1 Advances of the Equipment Facility.......................... 18
4.2 Repayment and Prepayment of Advances of the
Equipment Facility.......................................... 18
ARTICLE V
GENERAL CREDIT PROVISIONS.............................................. 19
5.1 Payments.................................................... 19
5.2 Illegality.................................................. 20
5.3 Increased Costs............................................. 20
5.4 Computations................................................ 22
5.5 Application of Payments..................................... 22
5.6 Reliance by Bank on Communications and
Authorizations from Production Group on behalf
of the Borrowers............................................ 22
Section 5.7 Joint and Several Liability; Right
of Contribution............................................. 22
ARTICLE VI
SECURITY............................................................... 23
6.1 Financing Documents......................................... 23
6.2 Collateral.................................................. 23
6.3 Location of Collateral; Principal Place of
Business.................................................... 24
6.4 Loss of Collateral.......................................... 25
6.5 Filing of Financing Statements; Perfection of
Security Interest in Collateral............................. 25
i
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TABLE OF CONTENTS
-----------------
Page
----
ARTICLE VII
REPRESENTATIONS AND WARRANTIES.......................................... 26
7.1 Subsidiaries................................................. 26
7.2 Good Standing................................................ 26
7.3 Corporate Authority.......................................... 26
7.4 Binding Obligations.......................................... 27
7.5 Litigation................................................... 27
7.6 No Conflicting Agreements.................................... 27
7.7 Financial Condition.......................................... 27
7.8 Tax Returns.................................................. 28
7.10 Margin Stock................................................. 28
7.11 ERISA........................................................ 28
7.12 Governmental Consents........................................ 29
7.13 No Default or Event of Default............................... 29
7.14 Other Liens.................................................. 29
7.15 Prior Names; Trade Names; Principal Place of
Business..................................................... 29
7.16 Nature of Financing; Usury................................... 29
7.17 Purposes..................................................... 29
ARTICLE VIII
CONDITIONS PRECEDENT.................................................... 30
8.1 Receipt and Approval of Documents Required by
Bank Commitment Letter....................................... 30
8.2 Approval of Bank's Counsel................................... 30
8.3 Compliance................................................... 30
8.4 Bank's Fees and Expenses..................................... 30
8.5 Principal Payment............................................ 30
8.6 Conditions to Execution of this Agreement.................... 30
8.7 Acquisitions by the Borrowers................................ 31
8.8 Termination of Standby Letters of Credit..................... 31
ARTICLE IX
AFFIRMATIVE COVENANTS................................................... 31
9.1 Financial Reporting.......................................... 31
9.2 Taxes and Claims............................................. 33
9.3 Insurance.................................................... 33
9.4 Corporate Existence.......................................... 34
9.5 Chance in Management......................................... 34
9.6 Compliance With Laws Generally............................... 34
9.7 Books and Records; Inspection................................ 34
9.8 Litigation................................................... 34
9.9 Notification of Certain Events, Events of
Default and Adverse Developments............................. 34
9.10 Addition of New Subsidiaries as Borrowers.................... 35
9.11 Debt Service Guaranty........................................ 35
9.12 Receivables Collection....................................... 36
9.13 Cash Management System....................................... 36
9.14 Inspections.................................................. 36
9.15 Further Assurances........................................... 36
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TABLE OF CONTENTS
-----------------
Page
----
9.16 Attendance at Closings of Eligible Acquisitions............. 37
ARTICLE X
FINANCIAL COVENANTS.................................................... 37
10.1 Net Worth................................................... 37
10.2 Reserved.................................................... 37
10.3 Current Ratio............................................... 37
10.4 Total Debt Service Ratio.................................... 37
10.5 Subordinated Debt Service Ratio............................. 38
10.6 Leverage Ratio.............................................. 38
10.7 Intangible Levels........................................... 38
ARTICLE XI
NEGATIVE COVENANTS..................................................... 38
11.1 Impairment of Security...................................... 38
11.2 No Change in Control........................................ 39
11.3 Stock in Subsidiaries....................................... 39
11.4 Sale, Transfer or Encumbrance of Collateral................. 39
11.5 No Additional Indebtedness.................................. 39
11.6 Merger; Dissolution or Sale of Assets....................... 39
11.7 Distributions or Dividends to Stockholders.................. 40
11.8 Payments, Advances and Salaries to Stockholders............. 40
11.9 ERISA Compliance............................................ 40
11.10 Purposes.................................................... 41
ARTICLE XII
EVENTS OF DEFAULT; REMEDIES............................................ 41
12.1 Events of Default........................................... 41
12.2 Remedies.................................................... 43
ARTICLE XIII
MISCELLANEOUS.......................................................... 46
13.1 Notices..................................................... 46
13.2 Survival of Agreement; Successors and Assigns............... 47
13.3 Fees and Expenses of Bank................................... 48
13.4 Applicable Law; Jurisdiction; Consent to Service
of Process.................................................. 49
13.5 Waiver of Trial by Jury..................................... 49
13.6 Confession of Judgment...................................... 50
13.7 Modifications............................................... 50
13.8 No Waiver of Rights by Bank................................. 50
13.9 No Liability of Bank........................................ 50
13.10 Indemnification............................................. 51
13.11 No Partnership.............................................. 52
13.12 Time of Essence............................................. 52
13.13 Illegality.................................................. 52
13.14 Counterparts................................................ 52
13.15 Captions and Headings....................................... 52
13.16 Borrowers' Obligations Absolute and
Unconditional............................................... 52
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TABLE OF CONTENTS
-----------------
Page
----
13.17 Extension of Termination Date............................... 52
13.18 Confidentiality............................................. 53
13.19 Initial Public Offering..................................... 53
EXHIBITS AND SCHEDULES
- ----------------------
EXHIBIT A - Form of Application and Agreement for Standby
Letter of Credit
EXHIBIT B - Form of Borrowing Base Certificate Production
Group Int'l, Inc. et al. Working Capital Line
-- ---
of Credit
EXHIBIT C - [Not used.]
EXHIBIT D - Form of Subordination Agreement
EXHIBIT E - Form of Assumption Agreement for New
Subsidiaries
EXHIBIT F - Form of Debt Service Guaranty
Schedule I - Description of Permitted Liens
Schedule II - Schedule of Prior Names; Trade Names;
Principal Places of Business
Schedule III - Field Examination Conditions to be Corrected
Schedule IV - Restricted Borrowers
Schedule V - Officers and Directors
Schedule VI - Outstanding Subordinated Financings
Schedule VII - Conditions Subsequent to Closing
iv
<PAGE>
AMENDED AND RESTATED
FINANCING AND SECURITY AGREEMENT
--------------------------------
THIS AMENDED AND RESTATED FINANCING AND SECURITY AGREEMENT (this
"Agreement") is made as of this 27 day of November, 1996, among THE FIRST
NATIONAL BANK OF MARYLAND, a national banking association (the "Bank"), and
PRODUCTION GROUP INTERNATIONAL, INC., a Delaware corporation ("Production
Group"), and its subsidiaries, EXECUTOURS, INC., a Massachusetts corporation,
SAFARIS EVENTS, INC., a Virginia corporation, KALEIDOSCOPE EVENTS, INC., a
Virginia corporation, AGENDA WASHINGTON INC., a Virginia corporation,
WASHINGTON, INC., a District of Columbia corporation, C.H.L. VENTURES, INC., a
California corporation, PGI ACQUISITION COMPANY E, a Virginia corporation, PGI
COMPANY A, a Virginia corporation, PGI COMPANY B, a Virginia corporation, PGI
COMPANY F, a Virginia corporation, PGI COMPANY I, a Virginia corporation, PGI
COMPANY S, a Virginia corporation, PGI COMPANY H, a Virginia corporation, PGI
COMPANY P, a Virginia corporation, PGI COMPANY Q, a Virginia corporation, PGI
COMPANY R, a Virginia corporation, PGI COMPANY J, a Virginia corporation, PGI
COMPANY X, a Virginia corporation, SPEARHEAD EXHIBITIONS LIMITED, a United
Kingdom corporation, PGI EUROPE LIMITED, a United Kingdom corporation, RAY BLOCH
PRODUCTIONS, WASHINGTON, D.C., INC., a District of Columbia corporation, RAY
BLOCH PRODUCTIONS, INC., a New York corporation, RAY BLOCH PRODUCTIONS, NEW
JERSEY, INC., a New Jersey corporation, RAY BLOCH PRODUCTIONS-ATLANTA, INC.,
Georgia corporation, RAY BLOCH PRODUCTIONS WEST, INC., a California corporation,
RMR PRODUCTION SERVICES, INC., an Arizona corporation, TIMBERLINE WORLDWIDE,
INC., an Arizona corporation, and EPIC ENTERPRISES, INC., a California
corporation, and EPIC ENTERPRISES OF NEVADA, INC., a Nevada corporation
(Production Group and each of its identified subsidiaries being hereinafter
identified each as a "Borrower" and collectively as the "Borrowers").
RECITALS
--------
WHEREAS, the Borrowers and the Bank entered into a Financing and Security
Agreement, dated as of October 18, 1995 (the "Original Agreement"), pursuant to
which the Bank agreed, subject to the conditions set forth therein, to provide a
Working Capital Line of Credit, an Acquisition Facility and an Equipment
Facility (collectively, the "Credit Facilities") for certain financing needs
arising from time to time of the Borrowers;
WHEREAS, pursuant to the Credit Facilities, the Borrowers have become
obligated to the Bank to repay, inter alia, outstanding principal in an amount
----- ----
equal to $5,794,444.48 as of November 27, 1996;
WHEREAS, the Borrowers and the Bank have agreed to amend and restate the
Original Agreement to, among other things, provide for (i) the modification of
certain covenants, (ii) the addition of certain financial covenants and (iii)
the modification of certain terms of the Credit Facilities;
<PAGE>
WHEREAS, the Borrowers hereby acknowledge, and the Borrowers and the Bank
hereby agree that the amendment and restatement of the Original Agreement shall
not (i) constitute a novation or other satisfaction of any indebtedness or
obligation owed to the Bank by the Borrowers pursuant to the Original Agreement
or otherwise, (ii) constitute the creation of indebtedness separate and apart
from any existing indebtedness of the Borrowers and (iii) create a security
interest separate and apart from any security interest previously created by the
Borrowers for the benefit of the Bank; and
WHEREAS, the Borrowers and the Bank have agreed to amend and restate the
Original Agreement to be effective as of the date hereof.
AGREEMENTS
----------
NOW, THEREFORE, in consideration of the mutual agreements herein and other
good and valuable consideration, the Borrowers and the Bank hereby agree as
follows:
ARTICLE I
DEFINITIONS
Section 1.1 Defined Terms. As used in this Agreement, the following
-------------
terms shall have the following meanings:
"Acquisition Facility" shall mean the line of credit established
--------------------
pursuant to Article III of this Agreement to finance Eligible Acquisitions and
-----------
the purchase of shares from minority shareholders by any Borrower.
"Acquisition Facility Commitment" shall mean the commitment by the
-------------------------------
Bank to make direct loan advances to any Borrower to fund any of the approved
purposes for which the Acquisition Facility was established, in the aggregate
principal amount at any one time outstanding not to exceed United States Five
Million Dollars (U.S. $5,000,000).
"Acquisition Facility Obligations" shall mean the joint and several
--------------------------------
obligations of the Borrowers to repay all advances of the Acquisition Facility,
with interest thereon, at the times and in the amounts provided in the
Acquisition Facility Promissory Note, and any related obligations for the
payment of fees and expenses provided for by the terms of this Agreement.
"Acquisition Facility Promissory Note" shall mean the promissory note
------------------------------------
of even date herewith executed by the Borrowers in favor of the Bank and
containing the terms and conditions under which the principal amount of advances
made under the Acquisition Facility, together with interest thereon, will be
repaid.
2
<PAGE>
"Advance Rate Percentage" shall mean 80% of the Borrowers' Eligible
-----------------------
Receivables for purposes of determining the Receivables Collateral Value.
"Agreement" shall mean this Amended and Restated Financing and
---------
Security Agreement, as it may from time to time be amended, supplemented or
otherwise modified in accordance with the terms hereof.
"Application and Agreement for Standby Letter of Credit" shall mean an
------------------------------------------------------
Application and Agreement for Standby Letter of Credit in the form attached
hereto as Exhibit A and made a part hereof, or in such other form which is
---------
provided by the Bank to the Borrowers as the form of Application and Agreement
which is then in use by the Bank in connection with the issuance of its Standby
Letters of Credit, which is executed by a Borrower and delivered to the Bank in
connection with a request for the issuance of a Standby Letter of Credit.
"Available Acquisition Facility Commitment" shall mean, at any
-----------------------------------------
particular time, an amount equal to the amount of the Acquisition Facility
Commitment at such time, minus the Utilized Portion of the Acquisition Facility
-----
Commitment.
"Available Equipment Facility Commitment" shall mean, at any
---------------------------------------
particular time, an amount equal to the amount of the Equipment Facility
Commitment at such time, minus the Utilized Portion of the Equipment Facility
-----
Commitment.
"Available Working Capital Line of Credit Commitment" shall mean, at
---------------------------------------------------
any particular time, an amount equal to the lesser of (a) the amount of the
Working Capital Line of Credit Commitment at such time, and (b) the Receivables
Collateral Value at such time, minus the Utilized Portion of the Working Capital
-----
Line of Credit Commitment.
"Bank Commitment Letter" shall mean the Bank's Commitment Letter dated
----------------------
August 30, 1995, addressed to the Borrowers.
"Borrowers' Account" shall mean the Production Group account with the
------------------
Bank.
"Borrowers' Obligations" shall mean, collectively, (i) the Acquisition
----------------------
Facility Obligations, the Equipment Facility Obligations and the Working Capital
Line of Credit Obligations, together with all other sums due from the Borrowers
to the Bank under the terms of the Financing Documents and (ii) all covenants,
agreements and requirements of the Borrowers under the terms of this Agreement
and the other Financing Documents.
"Business Day" shall mean a day on which commercial banking
------------
institutions are open for business in Baltimore, Maryland.
3
<PAGE>
"Collateral" shall have the meaning given to such term in Section 6.2
---------- -----------
of this Agreement.
"Commitment Period" shall mean the period during which each of the
-----------------
Acquisition Facility Commitment, the Equipment Facility Commitment and the
Working Capital Facility Commitment, respectively, will be available to be
accessed by the Borrowers, which period begins on the date of this Agreement and
ends on the Termination Date applicable to each of the Credit Facilities.
"Consolidated EBITDA" shall mean an amount equal to the consolidated
-------------------
net income (or loss) of Borrowers as determined under GAAP for the period in
question, before (i) any provision or benefit for income taxes, (ii) any
interest income or expense, and (iii) any depreciation and amortization
(including any amortization related to granted options on the capital stock of
the Borrowers), all as determined under GAAP.
"Credit Facilities" shall mean, collectively, the Acquisition
-----------------
Facility, the Equipment Facility and the Working Capital Line of Credit.
"Current Assets" shall mean the current assets of the Borrowers as
--------------
determined under GAAP and shall include, but not be limited to, cash and
investments, Receivables and prepaid expenses.
"Current Liabilities" shall mean the current liabilities of the
-------------------
Borrowers as determined under GAAP and shall include, but not be limited to,
accounts payable, accrued expenses and current portion of long term liabilities.
"Current Ratio" shall mean the ratio of the Borrowers' Current Assets
-------------
to Current Liabilities.
"Default" shall mean any of the events specified in Section 12.1
------- ------------
hereof, whether or not any requirement for the giving of notice, the lapse of
time, or both, or any other condition, has been satisfied.
"Dollars" and the sign "$" shall mean dollars in lawful money of the
------- -
United States of America and, in relation to all payments in Dollars hereunder,
(i) same day funds paid through the Baltimore Clearing House Interbank Payments
Systems, (ii) immediately available funds paid through the Baltimore Federal
Reserve Bank or (iii) such other funds as may then be required by the customary
procedure of member banks of the Baltimore Clearing House Association for the
settlement of payments in Dollars.
"Eligible Acquisitions" shall mean any corporation which satisfies the
---------------------
following eligibility requirements or is otherwise approved in writing by the
Bank for financing under the Acquisition Facility:
4
<PAGE>
(a) at least 30 days prior to the proposed date of acquisition,
Production Group has delivered to the Bank notice of the pending Eligible
Acquisition and financial information concerning (i) the entity to be acquired
and (ii) the effects of such acquisition on the Borrowers on a consolidated
basis all in form and substance satisfactory to Bank in its sole discretion;
(b) the corporation conducts a business which is within the same or
related lines of service businesses as those conducted by the Borrowers;
(c) the corporation has not been generating net losses on an
historical basis, taking into account any adjustments which are typically made
in accordance with GAAP as interpreted by the "Big 6" international accounting
firms when filing pro-forma post-acquisition financial statements with the
Securities and Exchange Commission (the "SEC") (i.e. the inclusion of debt and
related interest costs incurred to finance the acquisition and the exclusion of
income, charges and operating costs and owner compensation beyond customary and
reasonable salary all of which are non-recurring in nature and which will be
non-recurring following the acquisition);
(d) Production Group has delivered to the Bank at least 10 Business
Days prior to the proposed date of consummation of such Eligible Acquisition a
certificate of its chief financial officer or chief executive officer and, in
---
the event that the total purchase price of the Eligible Acquisition exceeds
$2,000,000, of Production Group's independent auditors or another independent
auditor who is engaged by Production Group to represent it in connection with
the Acquisition, to the effect that, (i) on a pro-forma combined basis for the
most recent fiscal quarter of the Borrowers, the purchase of the Eligible
Acquisition, if it had occurred during such fiscal quarter, would not have
resulted in a violation of any of the financial covenants contained in the
Financing Documents; taking into account any adjustments which are typically
made in accordance with GAAP as interpreted by the "Big 6" international
accounting firms when filing pro-forma post-acquisition financial statements
with the SEC (i.e. the inclusion of debt and related interest costs incurred to
finance the acquisition and the exclusion of income, charges and operating costs
which are non-recurring in nature and which will be nonrecurring following the
acquisition) and (ii) on a pro-forma basis for (x) the most recent fiscal year
based on a combination of the Borrowers' consolidated financial information for
such period and the most recent twelve months' financial information available
for the corporation to be acquired pursuant to the Acquisition Facility, and (y)
each fiscal year remaining until the Termination Date of the Acquisition
Facility based on both (1) the Borrowers' projections of financial condition
delivered in accordance with Section 7.7 hereof and (2) the Borrowers'
-----------
projections of financial condition delivered in accordance with Section 9.1(d)
--------------
hereof, the purchase of the Eligible Acquisition, if it had occurred during the
5
<PAGE>
applicable period, would not have resulted in a violation of the financial
covenants set forth in Section 10.4 hereof;
------------
(e) any financing extended to the Borrowers by one or more sellers of
the corporation shall be (i) repaid (on an average weighted basis) over a period
in excess of that which would be determined on the basis of (x) a three-year
straight-line amortization schedule for any financing extended prior to the date
of this Agreement and (y) a two-year straight-line amortization schedule for any
financing extended on or after the date of this Agreement, except for those
financings outstanding on the date hereof and listed on Schedule VI attached
hereto, which does not satisfy this requirement and (ii) subordinated as to
collection to the Borrowers' Obligations to the Bank in respect of the
Acquisition Facility, which subordination shall be documented in an agreement
among the seller(s), Borrowers and Bank in substantially the form attached
hereto as Exhibit D and made a part hereof;
---------
(f) Production Group has delivered to the Bank at least 10 Business
Days prior to the date of consummation of such Eligible Acquisition a
certificate of its chief financial officer or chief executive officer to the
effect that the purchase by the Borrowers of the corporation shall not
immediately or with the passage of time cause a Default or an Event of Default
under this Agreement or the other Financing Documents; and
(g) the purchase by the Borrowers of the corporation shall not
immediately or with the passage of time cause a Default or an Event of Default
under the Financing Documents
"Eligible Receivable" and "Eligible Receivables" mean, at any time of
------------------- --------------------
determination thereof, each account which conforms and continues to conform to
the following criteria to the satisfaction of the Bank. A Receivable which is
at any time an Eligible Receivable, but which subsequently fails to meet the
requirements of the Bank for eligibility shall cease for all purposes to be an
Eligible Receivable. In addition to any other criteria for eligibility
determined by the Bank, a Receivable shall not be deemed to be eligible unless
it meets the following minimum requirements (except as the Bank may otherwise
expressly consent in writing):
(a) the Receivable is genuine and is in all respects what it purports
to be;
(b) the Receivable arose in the ordinary course of the business of any
Borrower from a bona fide outright sale or lease of goods by a Borrower, or from
services performed by a Borrower, and (i) such goods have been delivered to the
appropriate account debtor or its designees, the appropriate Borrower has in its
possession shipping and delivery receipts evidencing such shipment and delivery,
no return, rejection or repossession has occurred, and such goods have been
finally accepted by the account debtor, or
6
<PAGE>
(ii) such services have been satisfactorily completed and accepted by the
appropriate account debtor;
(c) the Receivable is based upon an enforceable written contract for
goods delivered or for services performed, and the same were shipped, held or
performed in accordance with such order or contract; it being the intention that
advance billings not be considered as Receivables until such time as performance
is completed by the relevant Borrower;
(d) the title of the appropriate Borrower to the Receivable is
absolute and is not subject to any lien or security interest except in favor of
the Bank, and the appropriate Borrower otherwise has the full and unqualified
right and power to assign and grant a security interest in the Receivable to the
Bank as security and collateral for the payment of the Borrowers' Obligations in
respect hereof;
(e) the amount, which is shown on the books of the appropriate
Borrower and on any invoice, certificate, schedule or statement delivered to the
Bank, is owing to such borrower and no partial payment has been received unless
accurately reflected and deducted from the principal amount of the Receivable
then due and owing;
(f) the Receivable is not at that time and will not to the knowledge
of the Borrower be subject to any claim of reduction, counterclaim, setoff,
recoupment or other defense in law or equity, or any claim for credit,
allowances or adjustments by the account debtor because of returned, inferior or
damaged goods or unsatisfactory services, or for any other reason;
(g) the account debtor has not returned or refused to retain, or
otherwise notified the Borrower of any dispute concerning, or claimed
nonconformity of, any of the goods or services from the sale of which gave rise
to the account;
(h) the account debtor is not the subject of any bankruptcy or
insolvency proceedings, and the Receivable is not in the Bank's opinion unlikely
to be paid because of insolvency, potential bankruptcy, death or any other
reason;
(i) the Receivable is not subject to any potential claim of a surety
or bonding company;
(j) the Receivable does not arise from any transactions with any
affiliated entity or person of any Borrower, or employee of any Borrower;
(k) the Receivable does not represent the payment obligation of any
account debtor incorporated in or primarily conducting business outside of the
United States or United Kingdom, unless (i) the transaction giving rise to the
Receivable is supported by a letter of credit, acceptance or other credit
7
<PAGE>
enhancement acceptable to the Bank or (ii) the Receivable represents a credit
risk which is otherwise acceptable to the Bank, is denominated in U.S. Dollars,
British Sterling or other currency acceptable to the Bank and the assignment of
the Receivable to the Bank as security for the Borrowers' Obligations has been
perfected to the satisfaction of the Bank;
(l) the Receivable does not arise from any sales on approval or
consignments, and the Receivable is not otherwise subject to any repurchase or
return agreements;
(m) if the account debtor is the United States or any instrumentality
thereof, the appropriate Borrower has assigned the rights to receive payment to
the Bank in compliance with the Assignment of Claims Act of 1940, as amended,
and any applicable regulations;
(n) the aggregate dollar amount of Receivables due from any single
account debtor does not exceed (i) 10% of the Borrower's aggregate annual
revenue and (ii) 25% of the Borrower's aggregate Receivables represented in any
---
one monthly aging report;
(o) no more than 120 days have elapsed from the invoice date and no
more than 90 days have elapsed from the date on which payment was due under the
invoice;
(p) the Receivable is not payable by an account debtor with respect to
which 50% or more of the dollar amount of such account debtor's Receivables to
any Borrower are more than 120 days from the date of invoice or more than 90
days due from the date on which payment was due under the invoice;
(q) the Receivable is not evidenced by Chattel Paper or Instruments
unless and until (i) the Bank has agreed in writing that it may be deemed
eligible and (ii) all originals of such Chattel Paper or Instruments have been
endorsed and delivered to the Bank;
(r) the Receivable is not subject to any offset and is not payable by
any account debtor who is owed any sum by any Borrower except for unrelated
trade debt owned by any Borrower to a provider of services in the ordinary
course of business;
(s) no part of the Receivable represents a progress billing or a
retainage;
(t) the Bank in the exercise of its sole and absolute discretion has
not deemed the Receivable ineligible because of uncertainty as to the
creditworthiness of the account debtor or because the Bank otherwise considers
the collateral value thereof to the Bank to be impaired or its ability to
realize such value to be insecure;
8
<PAGE>
(u) on December 31, 1996, the Bank possesses a perfected, first
priority security interest in the assets (including the Receivables) of each of
the Borrowers listed on Schedule IV attached hereto as demonstrated by a UCC-11
search form or other comparable document obtained by the Bank at the sole cost
and expense of the Borrowers; provided, however, that to the extent the Bank
-------- -------
does not possess such perfected, first priority security interest on such date
the Borrowers, at the Bank's sole discretion and to its satisfaction, may take
all necessary steps to cure such defect as soon as possible; and
(v) to the extent Safaris Events, Inc. is the Borrower which has
performed the services related to the Receivable, the Receivable shall have been
reported on an actual invoice date satisfactory to the Bank.
In the event of any dispute, under the foregoing criteria, as to
whether an account is, or has ceased to be, an Eligible Receivable, the decision
of the Bank in the exercise of its sole and absolute discretion shall control.
"Equipment" shall mean goods purchased for or used primarily in
---------
business in which a security interest in favor of the Bank may be perfected by
the filing of UCC-1 financing statements, and shall include capital assets that
are depreciated in accordance with the Internal Revenue Code of 1986, as
amended.
"Equipment Facility" shall mean the line of credit established
------------------
pursuant to Article IV of this Agreement to fund the purchase of new equipment
----------
or refinancing of existing equipment financing by any Borrower.
"Equipment Facility Commitment" shall mean the commitment by the Bank
-----------------------------
to make direct loan advances to any Borrower to fund any of the approved
purposes for which the Equipment Facility was established in the aggregate
principal amount at any one time outstanding not to exceed United States One
Million Dollars (U.S. $1,000,000).
"Equipment Facility Obligations" shall mean the joint and several
------------------------------
obligations of the Borrowers to repay all advances of the Equipment Facility,
with interest thereon, at the times and in the amounts provided in the Equipment
Facility Promissory Note, and any related obligations for the payment of fees
and expenses provided for by the terms of this Agreement.
"Equipment Facility Promissory Note" shall mean the promissory note
----------------------------------
of even date herewith executed by the Borrowers in favor of the Bank and
containing the terms and conditions under which the principal amount of advances
made under the Equipment Facility, together with interest thereon, will be
repaid.
"Event of Default" shall mean any of the events specified in Section
---------------- -------
12.1 hereof, provided that any requirement for the
- ----
9
<PAGE>
giving of notice, the lapse of time, or both, or any other condition, has been
satisfied.
"Expiry Date" shall mean, with respect to any Standby Letter of Credit
-----------
issued by the Bank hereunder, the date upon which the Bank is no longer
obligated to honor a drawing upon such Standby Letter of Credit.
"Financing Documents" shall mean, collectively, this Agreement, all
-------------------
Applications and Agreements for Standby Letters of Credit and Standby Letters of
Credit issued pursuant thereto, the Acquisition Facility Promissory Note, the
Equipment Facility Promissory Note and the Working Capital Line of Credit
Promissory Note and any other documents, certificates and agreements which are
hereafter executed and delivered by one or more Borrowers or any other Person in
connection with any of the Borrowers' Obligations.
"GAAP" shall mean United States generally accepted accounting
----
principles applied on a uniform basis consistent with principles promulgated or
adopted by the Financial Accounting Standards Board ("FASB") and its
predecessors in effect on August 31, 1996 and to the extent consistent with such
principles, the accounting practice of the Borrowers reflected in their
financial statements for their most recently ended fiscal year; provided that,
if FASB, after the date hereof, shall promulgate or adopt principles that are
materially different from those in effect on August 31, 1996, the Borrowers and
the Bank will endeavor in good faith to amend this Agreement in order to amend
the definition of GAAP to include different principles and provisions so as to
reflect in substance the same limitations and restrictions in effect prior to
such amendment to the definition of GAAP hereunder.
"Governmental Authority or Authorities" shall mean any governmental or
-------------------------------------
quasi-governmental entity, court or tribunal including, without limitation, any
department, commission, board, bureau, agency, administration, service or other
instrumentality of any foreign or domestic governmental entity.
"Initial Public Offering" shall mean the initial offering by
-----------------------
Production Group of a portion of its capital stock in a public or private
transaction.
"Intangibles" shall mean intangible assets as determined under GAAP
-----------
for the period in question and shall include but not be limited to goodwill,
investment in subsidiaries, other assets deposits, general intangibles and video
libraries.
"Leverage Ratio" shall mean, for any date, the ratio of all
--------------
outstanding borrowings and indebtedness (including but not limited to the face
amount of any letters of credit and the portion of any amount payable in
connection with any borrowing or indebtedness included in Current Liabilities
but specifically excluding trade payables incurred in the ordinary course of
business) of the Borrowers on such date to Total Equity on such date.
10
<PAGE>
"Original Agreement" shall have the meaning given such term in the
------------------
Recitals herein.
"Participating Interest" shall mean the acquisition of a financial,
----------------------
economic or voting interest in any asset.
"Permitted Liens" shall mean (a) liens or security interests in favor
---------------
of the Bank; (b) existing liens or leases described in Schedule I attached
----------
hereto and made a part hereof; (c) liens arising or created in the future with
the prior written consent of the Bank; and (d) purchase money security interests
in equipment, except to the extent that such equipment is financed or refinanced
under the Equipment Facility.
"Person" shall mean an individual, a partnership, a limited liability
------
company, a corporation, a trust, any other organization or entity or any
government or governmental body or authority.
"Prime Rate" shall mean the greater of (a) the floating and
----------
fluctuating per annum prime rate of interest established and declared by the
Bank from time to time, and (b) the average rate, rounded to the nearest one-
tenth of one percent (0.1%), for 90-day maturity dealer-placed commercial paper
for the week most recently reported in the Federal Reserve Statistical Release
number H15, entitled "Selected Interest Rates" (or any succeeding publication).
The Prime Rate is an index determined by the Bank and does not represent the
lowest rate of interest charged by the Bank to any borrower or class of
borrowers. Each time the Prime Rate shall change, the rate of interest, which
is applicable to any of the Borrowers' Obligations bear interest on the basis of
the Prime Rate, shall change immediately and contemporaneously with each such
change of the Prime Rate.
"Proceeds" or "proceeds" shall mean, when used with respect to any
-------- --------
of the Collateral, all cash and non-cash proceeds within the meaning of the
Uniform Commercial Code as adopted by the state in which the Collateral to which
such Proceeds relate is or was located, and shall include the proceeds of any
and all insurance policies.
"Receivables Collateral Value" shall mean the Advance Rate Percentage
----------------------------
multiplied by the aggregate amount of the Borrowers' Eligible Receivables for
purposes of determining the Available Working Capital Line of Credit Commitment.
"Standby Letter of Credit" shall mean a Standby Letter of Credit
------------------------
issued by the Bank under the Working Capital Line of Credit to a designated
beneficiary for the account of a Borrower, upon receipt of an executed
Application and Agreement for Standby Letter of Credit, which Standby Letter of
Credit will be in form and content satisfactory to the Bank in all respects.
11
<PAGE>
"Subsidiary" shall mean, with respect to any Person, any other Person
----------
owning or controlling (a) securities having ordinary voting power to elect a
majority of the board of directors (or Persons having a similar function), or
(b) other ownership interests constituting a majority voting interest.
"Subordinated Debt Service Ratio" shall mean, for any date, the ratio
-------------------------------
of Consolidated EBITDA to Subordinated Debt Service.
"Subordinated Debt Service" shall mean, for any date, an amount equal
-------------------------
to the sum of all regularly scheduled payments of principal, interest, fees and
other amounts payable during the period in question by the Borrowers with
respect to obligations, contingent or otherwise, subordinate in right of payment
to the Borrowers' Obligations including any redeemable common stock.
"Taxes" shall mean the taxes and assessments whether general or
-----
special, ordinary or extraordinary, or foreseen or unforeseen, which at any time
may be assessed, levied, confirmed or imposed on any Borrower or on any of its
properties or assets or any part thereof or in respect of any of its franchises,
businesses, income or profits.
"Termination Date" shall mean, for each of the Credit Facilities, the
----------------
date set forth below:
Credit Facility Termination Date
- ---------------- ----------------
Acquisition Facility May 31, 1998
Equipment Facility March 31, 1997
Working Capital Line of Credit March 31, 1997
(unless such date is not a Business Day, in which case the Termination Date
shall be the next succeeding Business Day), unless the Termination Date is
otherwise accelerated in accordance with Section 12.2 hereof or unless such
------------
Termination Date is extended in accordance with Section 13.17 hereof. The
-------------
effectiveness of this Agreement and of each of the other Financing Documents
shall not be determined on the basis of the Termination Date, it being the
intention of the parties that this Agreement and each of the other Financing
Documents remain in full force and effect until the Borrowers' Obligations have
been paid and performed in full.
"Total Debt Service Ratio" shall mean, on any date, the ratio of
------------------------
Consolidated EBITDA to Total Debt Service.
"Total Debt Service" shall mean, for any date, an amount equal to the
------------------
sum of all regularly scheduled payments of principal, interest, fees and other
amounts payable during the period in question with respect to all obligations
(excluding accounts payable outstanding 90 day or less), contingent or
otherwise, which in accordance with GAAP should be classified on a balance sheet
as liabilities(including obligations subordinate in right of payment
12
<PAGE>
to the Borrowers' Obligations), but in any event including accounts payable
outstanding for more than 90 days, liabilities secured by any lien or security
interest on, or any pledge of, property of any of the Borrowers, whether or not
such secured liability is with or without recourse, capital leases and
subleases, redeemable common stock, letters of credit and contingent liabilities
(excluding endorsement of instruments for deposit or collection in the ordinary
course of business).
"Total Equity" shall mean all capital contributed to or retained by
------------
the Borrowers as may be referred to as shareholders' equity or another such term
in accordance with GAAP.
"Utilized Portion of the Acquisition Facility Commitment" shall mean
-------------------------------------------------------
the sum of all outstanding advances under the Acquisition Facility with respect
to which the Borrowers have not satisfied in full their Acquisition Facility
Obligations.
"Utilized Portion of the Equipment Facility Commitment" shall mean the
-----------------------------------------------------
sum of all outstanding advances under the Equipment Facility with respect to
which the Borrowers have not satisfied in full their Equipment Facility
Obligations.
"Utilized Portion of the Working Capital Line of Credit Commitment"
-----------------------------------------------------------------
shall mean the sum of (a) all outstanding loan advances with respect to which
the Borrowers have not satisfied in full their Working Capital Line of Credit
Advance Obligations, and (b) all amounts which have been drawn and not
reimbursed or are then available to be drawn by the beneficiaries of all Standby
Letters of Credit with respect to which the Borrowers have not satisfied in full
their Working Capital Line of Credit Obligations.
"Working Capital Line of Credit" shall mean the line of credit
------------------------------
established pursuant to Article II of this Agreement to provide direct loan
----------
advances and Standby Letters of Credit to finance the working capital needs of
any Borrower.
"Working Capital Line of Credit Commitment" shall mean the commitment
-----------------------------------------
by the Bank to make direct loan advances to any Borrower and to issue Standby
Letters of Credit for the account of any Borrower to satisfy any of the approved
financing needs for which the Working Capital Line of Credit was established,
the Borrowers' Obligations with respect to which shall not exceed United States
Four Million Dollars (U.S. $4,000,000) in the aggregate principal amount at any
one time outstanding.
"Working Capital Line of Credit Obligations" shall mean the joint and
------------------------------------------
several obligations of the Borrowers to repay all loan advances under the
Working Capital Line of Credit with interest thereon, at the time and in the
amounts provided in the Working Capital Line of Credit Promissory Note, and to
---
reimburse the Bank for all drawings under Standby Letters of Credit, with
interest thereon, at the times and in the amounts provided in the Applications
and Agreements for Standby Letters of Credit, and any
13
<PAGE>
related obligations for the payment of fees and expenses provided for by the
terms of this Agreement.
"Working Capital Line of Credit Promissory Note" shall mean the
----------------------------------------------
promissory note of even date herewith executed by the Borrowers in favor of the
Bank and containing the terms and conditions under which the principal amount of
loan advances made under the Working Capital Line of Credit, together with
interest thereon, will be repaid.
Section 1.2 Uniform Commercial Code Terms.
-----------------------------
"Accounts," "Chattel Paper," "Contract Rights," "Equipment," "General
-------- ------------- --------------- --------- -------
Intangibles," "Instruments" and "Inventory" shall, in addition to any meaning
- ----------- ---------- ---------
given to such term in this Agreement, have the respective meanings as are given
to those terms in the Uniform Commercial Code as presently adopted and in effect
in the States in which any portion of the Collateral may be located, and shall
also cover, without limitation, (a) any property specifically included in this
Amended and Restated Agreement, (b) all property included in these respective
terms, whether now owned or existing or hereafter acquired or created and (c)
all proceeds (cash and noncash) of the foregoing and proceeds of such proceeds.
"Receivables" shall mean the Borrower's now owned or hereafter
-----------
acquired Accounts, Chattel Paper, Contract Rights, General Intangibles and
Instruments, and all cash and non-cash proceeds thereof and proceeds of such
proceeds.
Section 1.3 Accounting Terms. Unless specifically provided otherwise,
----------------
all accounting terms (such as, by way of example, "Tangible Net Worth," "Net
Worth," "Debt," and "Debt Service" shall have the definitions given to them in
accordance with GAAP as applied to the applicable Person and its Subsidiaries,
if any, on a consistent basis by its accountants in the preparation of its
previous annual financial statements, and unless otherwise indicated, all
accounting terms and covenants shall be applied on a consolidated basis. For
purposes of the financial covenants contained in Article X of this Agreement,
---------
subordinated debt which satisfies the requirements of clause (d) of the
definition of "Eligible Acquisitions" shall be treated as equity.
Section 1.4 ERISA Terms. Certain terms used in this Agreement are
-----------
defined in the Employee Retirement Income Security Act of 1974, as amended
("ERISA"), or are otherwise defined in the Internal Revenue Code of 1986, as
amended (the "Code"). When and if used in this Agreement, such terms shall have
the meanings given them in ERISA. Specifically, the following terms shall have
the following meanings:
"Accumulated Funding Deficiency" means an accumulated funding
------------------------------
deficiency, as defined in Section 302 of ERISA or Section 412(a) of the Code.
14
<PAGE>
"Commonly Controlled Entity" means any Subsidiary or any other trade
--------------------------
or business (whether or not incorporated) which is under "common control" (as
defined in the Code) and of which any Borrower or any of its Subsidiaries is a
part.
"Multiemployer Plan" means a multiemployer plan (as defined in ERISA)
------------------
to which any Borrower or any Commonly Controlled Entity, as appropriate, has or
had an obligation to contribute.
"Plan" means any pension, profit sharing, savings, stock bonus or
----
other deferred compensation plan which is subject to the requirements of ERISA,
together with any related trusts.
"Prohibited Transaction" means a "prohibited transaction" as defined
----------------------
in Section 406 of ERISA or Section 4975 of the Code.
"Reportable Event" means a "reportable event" as defined by Title IV
----------------
of ERISA.
Section 1.5 Other Definitional Provisions.
-----------------------------
(a) All terms defined in this Agreement shall have their defined
meanings when used in any certificate or other document made or delivered
pursuant hereto.
(b) The words "hereof," "herein" and "hereunder" and words of similar
import, when used in this Agreement shall refer to this Agreement as a whole and
not to any particular provision of this Agreement, and section, subsection,
schedule and exhibit references are to this Agreement unless otherwise
specified.
ARTICLE II
THE WORKING CAPITAL LINE OF CREDIT
Section 2.1 Working Capital Line of Credit Advances.
---------------------------------------
(a) Direct Loan Advances. Subject to the provisions of this
--------------------
Agreement, including the satisfaction of the conditions precedent described in
Article VIII hereof, the Bank agrees to make direct loan advances under the
- ------------
Working Capital Line of Credit in Dollars from time to time during the
Commitment Period, in amounts not to exceed the then Available Working Capital
Line of Credit Commitment. Direct loan advances will be made by the Bank under
the Working Capital Line of Credit in amounts of not less than $100,000 to the
Borrowers' Account within one Business Day following receipt by the Bank of a
written request therefor, together with a completed and executed Borrowing Base
Certificate substantially in the form of Exhibit B attached hereto and made a
---------
part hereof.
(b) Issuance of Standby Letters of Credit. Subject to the provisions
-------------------------------------
of this Agreement, including the satisfaction of the conditions precedent
described in Article VIII hereof, and upon
------------
15
<PAGE>
receipt of a completed and executed Application and Agreement for Standby Letter
of Credit and a completed and executed Borrowing Base Certificate in
substantially the form attached hereto as Exhibit B and made a part hereof, the
---------
Bank agrees to issue from time to time during the Commitment Period, Standby
Letters of Credit under the Working Capital Line of Credit to beneficiaries
designated by a Borrower, in stated amounts denominated in Dollars, not to
exceed the then Available Working Capital Line of Credit Commitment. No Standby
Letter of Credit shall have an Expiry Date which is later than one calendar year
from the date of its issuance. In the event that the Expiry Date of any Standby
Letter of Credit occurs after the Termination Date, the Borrowers will be
obligated to prepay all of their Working Capital Line of Credit Obligations
relating to such Standby Letter of Credit on the day immediately preceding the
Termination Date. Standby Letters of Credit will be issued by the Bank as soon
as practicable following receipt of the related Application and Agreement, the
Borrowing Base Certificate and any other information which the Bank may require
in order to issue the requested Standby Letter of Credit all in form and content
satisfactory to the Bank in all respects.
Section 2.2 Repayment and Prepayment of Working Capital Line of Credit
----------------------------------------------------------
Advances.
- --------
(a) Repayment and Prepayment of Direct Loan Advances. All direct loan
------------------------------------------------
advances under the Working Capital Line of Credit, together with interest
thereon, must be repaid in accordance with the terms of the Working Capital Line
of Credit Promissory Note. The Borrowers' Working Capital Line of Credit
Obligations with respect to direct loan advances may be prepaid under the terms
of the Working Capital Line of Credit Promissory Note and must be prepaid from
Proceeds of Receivables received by any Borrower, as provided in the Working
Capital Line of Credit Promissory Note.
(b) Reimbursement of Drawings under Standby Letters of Credit.
---------------------------------------------------------
(i) The Borrowers' Working Capital Line of Credit Obligations in
respect of each Standby Letter of Credit, including (without limitation) the
Borrowers' obligations to reimburse the Bank for all drawings honored under each
Standby Letter of Credit, together with any interest thereon, shall be set forth
in the related Application and Agreement.
(ii) The terms of each Application and Agreement for Standby Letters
of Credit are incorporated herein by reference. To the extent that there is any
direct conflict between the terms of any Application and Agreement for Standby
Letter of Credit and this Agreement, the terms of this Agreement will prevail,
except to the extent of (A) definitions contained in any Application and
Agreement or (B) any provision contained in any Application and Agreement which
subjects the Standby Letter of Credit issued pursuant thereto to the "Uniform
Customs and Practice for
16
<PAGE>
Documentary Credits" of the International Chamber of Commerce, as adopted from
time to time.
(iii) (A) Working Capital Line of Credit Obligations may be prepaid by
the Borrowers, in whole but not in part for any one Standby Letter of Credit, at
any time, without premium or penalty; provided, however, that the Borrowers
shall give the Bank written notice of any prepayment no later than 12 noon on
the date of such prepayment, and the Borrowers shall not be entitled to (1) a
rebate of the amount so prepaid, unless the Standby Letter of Credit to which
such prepayment relates expires without having been drawn by the beneficiary
thereof, or (2) any interest on the amount so prepaid, unless the Borrowers
elect to prepay the Working Capital Line of Credit Obligations relating to
Standby Letters of Credit due to the imposition by the Bank of increased costs
in accordance with the provisions of Section 5.3 hereof, in which case, at the
-----------
time that either (A) the stated amount of each such Standby Letter of Credit is
fully drawn by the beneficiary thereof and such drawing is honored by the Bank,
or (B) each such Standby Letter of Credit expires without having been drawn by
the beneficiary thereof, the Bank shall remit to the Borrowers interest on the
amount prepaid, for the period from the date of prepayment to the date of the
occurrence described in clause (A) or (B) above, at a rate equal to the bid rate
obtainable by the Bank in the Interbank Eurodollar Market one Business Day after
the date of the prepayment for deposits in a principal amount equal to the
amount prepaid and with a maturity approximating the period from the date of
prepayment to the date of the occurrence described in clause (A) or (B), minus
all reasonable costs and expenses of the Bank incurred as a result of such
prepayment and/or as a result of the investment of such prepaid sums.
(B) Working Capital Line of Credit Obligations relating to any Standby
Letter of Credit having an Expiry Date which is later than the Termination Date
must be prepaid in full on the day immediately preceding the Termination Date,
as this date may be accelerated in accordance with Section 12.2(a) of this
---------------
Agreement or extended in the sole and absolute discretion of the Bank in
accordance with Section 13.17 of this Agreement.
-------------
(C) Unless the remaining Receivables Collateral Value continues to
support the then outstanding Borrowers' Working Capital Line of Credit
Obligations, the Borrowers' Working Capital Line of Credit Obligations relating
to Standby Letters of Credit must be prepaid from Proceeds of Receivables
received by any Borrower in amounts which exceed the Borrowers' Working Capital
Line of Credit Obligations relating to direct loan advances.
ARTICLE III
THE ACQUISITION FACILITY
Section 3.1 Advances under the Acquisition Facility. Subject to the
---------------------------------------
provisions of this Agreement, including the
17
<PAGE>
satisfaction of the conditions precedent described in Article VIII hereof, the
------------
Bank agrees to make direct loan advances under the Acquisition Facility in
Dollars from time to time during the Commitment Period, in amounts not to exceed
the then Available Acquisition Facility Commitment. Direct loan advances under
the Acquisition Facility will be made by the Bank in amounts of not less than
$100,000 to the Borrowers' Account within one Business Day following receipt by
the Bank of written request therefore, together with all of the documents needed
to substantiate the financing of an Eligible Acquisition. On or about the
Effective Date of this Agreement and provided that all conditions precedent
described in Article VIII hereof have been satisfied, an initial advance of the
------------
Acquisition Facility will be made for the purpose of refinancing the bridge loan
in the original principal amount of $2,500,000 which was extended to the
Borrowers pursuant to the terms of the Bank Commitment Letter and related loan
documents.
Section 3.2 Repayment and Prepayment of Advances of the Acquisition
-------------------------------------------------------
Facility. The principal amount of all direct loan advances under the
- --------
Acquisition Facility, together with interest thereon, must be repaid and may be
prepaid in accordance with the terms of the Acquisition Facility Promissory
Note.
ARTICLE IV
THE EQUIPMENT FACILITY
Section 4.1 Advances of the Equipment Facility. (a) Subject to the
----------------------------------
provisions of this Agreement, including the satisfaction of the conditions
precedent described in Article VIII hereof, the Bank agrees to make direct loan
------------
advances under the Equipment Facility in Dollars from time to time during the
Commitment Period, in the amount of up to 75% of the cost of new Equipment or
60% of the cost of used Equipment, not to exceed the then Available Equipment
Facility Commitment. Direct loan advances under the Equipment Facility will be
made by the Bank in amounts of not less than $100,000 to the Borrowers' Account
within one Business Day following receipt by take Bank of a written request
therefor, together with a completed and executed Borrowing Base Certificate in
substantially the form attached hereto as Exhibit B-2 and made a part hereof and
-----------
information describing the particular items of equipment to be financed or
refinanced and evidence of the release and termination of record of any liens
covering such equipment.
(b) At the written request of a Borrower, advances will be made in the
form of a loan by the Bank to fund the purchase of a portion of the cost of a
particular item of Equipment (with the balance of the purchase price to be paid
in cash by applicable Borrower prior to purchase), subject to an Equipment lease
to the Borrower.
Section 4.2 Repayment and Prepayment of Advances of the Equipment
-----------------------------------------------------
Facility. (a) The principal amount of all direct loan
- --------
18
<PAGE>
advances under the Equipment Facility, together with interest thereon, must be
repaid and may be prepaid in accordance with the terms of the Equipment Facility
Promissory Note. The Equipment Facility Obligations must be prepaid from any
Proceeds of the Equipment resulting from any sale for fair market value,
casualty or otherwise, as provided in the Equipment Facility Promissory Note.
(b) In the event that advances of the Equipment Facility are made to
finance a portion of the purchase price of the cost of a particular item of
equipment by the Bank, subject to a lease to a Borrower, the repayment of the
advances, together with the financing cost associated with the lease
transaction, will be made in accordance with an equipment lease between the Bank
and applicable Borrower, with the joint and several guaranty of the other
Borrowers, in the standard form used by the Bank in connection with similar
equipment lease transactions.
ARTICLE V
GENERAL CREDIT PROVISIONS
Section 5.1 Payments.
--------
(a) All payments by the Borrowers under this Agreement and the other
Financing Documents of the Borrowers' Obligations, except as may be otherwise
specifically provided in the Financing Documents, shall be made to the Bank at
its office located at 25 South Charles Street, Baltimore, Maryland 21201, not
later than 2:00 P.M., prevailing Washington, D.C. time, on the due date for such
payment. If any amount payable to the Bank hereunder by the Borrowers shall not
be paid when due or the payment is made in funds which are not immediately
available, the Borrowers agree to pay to the Bank interest, to the extent
permitted by applicable law, on such amount from such due date until such amount
shall be paid in full or until funds are immediately available, as the case may
be, at a rate which is at all times equal to (i) the then applicable rate for
such overdue Borrowers' Obligations, plus two percent (2%) per annum, or (ii) in
---- --- -----
the case of overdue fees and expense reimbursements as to which no interest rate
is anticipated, the Prime Rate, plus two percent (2%) per annum. If any amount
---- --- -----
payable hereunder shall become due on a day other than a Business Day, then such
due date shall be the next succeeding Business Day.
(b) All payments to be made hereunder by the Borrowers shall be made
in Dollars, without set-off or counterclaim and free and clear of, and without
deduction for or on account of, any present or future income, stamp or other
taxes, levies, imposts, duties, charges, fees, deductions, withholdings or
restrictions or conditions of any nature whatsoever now or hereafter imposed,
levied, collected, withheld or assessed against any Borrower (collectively
referred to in this paragraph as "Withholding Taxes"). If any Withholding Taxes
are imposed and required to be withheld from any such payment, the Borrowers
shall (i) increase
19
<PAGE>
the amount of such payment so that the Bank will receive a net amount (after
giving effect to the payment of such additional amount and to the deduction of
all Withholding Taxes) equal to the amount due hereunder, (ii) pay such
Withholding Taxes to the appropriate taxing authority for the account of the
Bank, and (iii) as promptly as possible thereafter, send the Bank an original
receipt (or a copy thereof that has been stamped by the appropriate taxing
authority to certify payment) showing payment thereof, together with such
additional documentary evidence as the Bank may from time to time reasonably
require. If the Borrowers fail to perform their obligations to the Bank under
parts (ii) or (iii) of the preceding sentence, the Borrowers shall jointly and
severally indemnify the Bank for any such Withholding Taxes that are paid by the
Bank plus all incremental Withholding Taxes, interest or penalties that may
----
become payable as a consequence of such failure.
Section 5.2 Illegality. Notwithstanding any other provision of this
----------
Agreement, in the event that it shall become unlawful for the Bank to maintain
any aspect of its commitment to provide the Credit Facilities contemplated by
this Agreement, including (without limitation) the issuance of Credit Facilities
for the benefit of, or in connection with any transaction involving, any Person
resident of a country in which the Bank is not permitted by the Office of
Foreign Assets and Control of the United States Treasury Department or any other
Governmental Authority to do business, the commitment of the Bank to extend any
of the Credit Facilities so affected shall be cancelled, and, the Borrowers
agree to prepay to the Bank, within thirty (30) calendar days of receipt of
written demand by the Bank, all of the outstanding Borrowers' Obligations to
which that portion of the commitment which is terminated as a result of
illegality relates. The Bank agrees that it will take such steps as may be
reasonably available to it to avoid or mitigate any illegality, provided that
the taking of such steps shall not in the opinion of the Bank be materially
prejudicial to it.
Section 5.3 Increased Costs. In the event that any change in applicable
---------------
law, treaty, regulation or directive, or in the interpretation or application
thereof, or compliance by the Bank with any request (whether or not having the
force of law) of any relevant central bank or other comparable agency, shall
affect obligations such as the Borrowers' Obligations or credit facilities such
as the Credit Facilities with the result of any of the following:
(a) subject the Bank to any tax of any kind whatsoever (other than
Withholding Taxes referred to in Section 5.1(b) hereof for which the Bank was
--------------
reimbursed by the Borrowers pursuant to the terms of that Section) with respect
to this Agreement or any of the other Financing Documents, any portion of the
Credit Facilities which are contemplated to be extended hereunder or of the
Borrowers' Obligations with respect thereto, or any other transactions
contemplated hereby or by the terms of any of the other Financing Documents, or
20
<PAGE>
(b) change the basis of taxation of payments to the Bank of any
portion of the Borrowers' Obligations, fees, commissions or any other amounts
payable under this Agreement or under the other Financing Documents (except for
changes in the rate of tax on the overall net income of the Bank), or
(c) impose, modify or deem applicable any reserve, special deposit or
similar requirement against foreign assets held by, or deposits in or for the
account of, or advances or loans by, or acceptances created by, or any other
acquisition of funds by, any office of the Bank, or
(d) increase the amount of capital required or expected to be
maintained by the Bank, or by any corporation controlling the Bank (a "Parent"),
or reduce the rate of return on capital earned by the Bank or any Parent, (as
determined by the Bank or any Parent taking into consideration their internal
policies with respect to capital adequacy and desired return on capital), which
increased capital or reduced rate of return on capital is applied to assets such
as the Credit Facilities or Borrowers' Obligations or any portion thereof, or
(e) impose upon the Bank any other condition with respect to this
Agreement or the transactions contemplated hereby or by the other Financing
Documents, the result of which is to increase the actual cost to the Bank of
extending any of the Credit Facilities under this Agreement or the other
Financing Documents or to reduce any amount receivable by the Bank under this
Agreement or under the other Financing Documents or to increase the capital or
reduce the rate of return on capital which the Bank or any Parent is required or
expected to maintain as a result of this Agreement, the other Financing
Documents, the Credit Facilities, the Borrowers' Obligations or any portion
thereof, then the Borrowers shall pay to the Bank within thirty (30) days of a
----
written demand by the Bank, additional amounts which will compensate the Bank or
any Parent so affected for such increased cost, reduced amount Receivable,
increased capital or reduced return on capital, as the case may be. Each such
demand by the Bank shall be accompanied by a certificate setting forth in
reasonable detail (i) the change that gave rise to such increased cost, reduced
amount receivable, increased capital or reduced rate of return on capital, (ii)
the additional amounts payable pursuant to the foregoing sentence, and (iii) a
calculation of such amount, which certificate shall be conclusive absent
manifest error.
Upon the occurrence of any of the foregoing events, the Borrowers
shall have the option, upon not less than five (5) Business Days' prior written
notice to the Bank, to prepay to the Bank all of the then outstanding Borrowers'
Obligations to which such increased costs relate and all other related sums due
by the Borrowers under the terms of this Agreement and the other Financing
Documents, in which event that portion of the Bank's commitment to extend the
Credit Facilities so affected shall immediately be cancelled. In the event that
the Borrowers elect to prepay the
21
<PAGE>
Borrowers' Obligations or any portion thereof in accordance with the preceding
sentence, all provisions herein regarding prepayment shall apply and the
Borrower will still be obligated to pay to the Bank the additional amounts
described by this Section 5.3 with respect to all periods in which the affected
-----------
Borrowers' Obligations remained outstanding.
Section 5.4 Computations. All computations of interest and fees shall
------------
be made on the basis of a 360-day year of twelve 30-day months.
Section 5.5 Application of Payments. All payments (including
-----------------------
prepayments) made by the Borrower in respect of the Borrowers' Obligations shall
be applied by the Bank first to the payment of any prepayment fee then due,
-----
second to the payment of accrued and unpaid interest, and then to the payment of
- ------ ----
the principal amount of the Borrowers' Obligations to which such payment
pertains. All partial prepayments of the Acquisition Facility and the Equipment
Facility shall be applied to principal installments in the inverse order of
their maturity as specified in the Acquisition Facility Promissory Note and the
Equipment Facility Promissory Note, respectively. All partial prepayments of
the Working Capital Line of Credit shall be applied first to the repayment of
direct loan advances and then to prepayment of reimbursement obligations in
respect of Standby Letters of Credit.
Section 5.6 Reliance by Bank on Communications and Authorizations from
----------------------------------------------------------
Production Group on behalf of the Borrowers. In making advances or issuing the
- -------------------------------------------
Standby Letters of Credit under any of the Credit Facilities contemplated by
this Agreement, the Bank shall be authorized to rely on any request, direction,
notice or other communication which appears to have been executed and delivered
by any one or more of the authorized of officers of Production Group who are
designated in the certificate delivered to the Bank as required by the terms of
the Bank Commitment Letter or pursuant to this Agreement and the other Financing
Documents. In the event that the officer(s) authorized to deliver such
documents or to take action hereunder on behalf of the Borrowers become
unavailable or unable to do so, the President of Production Group shall appoint
a successor or successors and shall furnish the Bank with a certified copy of
the authorizing resolution and the specimen signature of each officer so
appointed to act on behalf of the Borrowers pursuant to this Agreement and the
other Financing Documents.
Section 5.7 Joint and Several Liability; Right of Contribution. All of
--------------------------------------------------
the Borrowers' Obligations are the joint and several obligations of all of the
Borrowers and all parties which hereafter become Subsidiaries of any Borrower,
which are required by the terms of Section 9.10 of this Agreement to become
------------
Borrowers by executing and delivering an Assumption Agreement in the form
attached hereto as Exhibit E and made a part hereof.
---------
22
<PAGE>
Notwithstanding the foregoing, each Borrower shall have a right of
contribution to obtain reimbursement from each other Borrower for any payment
made by such Borrower in respect of the Borrowers' Obligations to the extent
that such payment exceeds the benefit realized by such Borrower under the Credit
Facilities. Any right of contribution among the Borrowers which arises as a
result of payments made in respect of the Borrowers' Obligations under the
Financing Documents shall be subordinate in all respect to the Bank's right to
receive payment in full of the Borrowers' Obligations. The Borrowers
acknowledge and agree that the right of contribution set forth above shall not
in any event be construed in a manner inconsistent with the joint and several
liability of each of the Borrowers for the Borrowers' Obligations.
ARTICLE VI
SECURITY
Section 6.1 Financing Documents. The Borrowers' Obligations to the Bank
-------------------
in respect of the Credit Facilities are evidenced and secured by the Financing
Documents. This Agreement together with each of the other Financing Documents
and such filings, recordations and possessions as required hereby and thereby
collectively create a first priority, valid and enforceable security interest in
the Collateral.
Section 6.2 Collateral. As security and collateral for the repayment of
----------
the Borrowers' Obligations, each Borrower hereby grants to the Bank a lien on
and security interest in all of the following (collectively, the "Collateral"),
subject only to Permitted Liens securing purchase money or lease financing of
equipment which has not been refinanced under the Equipment Facility:
(a) All Equipment. All of the now owned and hereafter acquired
-------------
machinery, Equipment, furniture, fixtures (whether or not attached to real
property), vehicles, supplies and other tangible personal property of the
Borrower, including any leasehold interests therein and all substitutions,
replacement parts and annexations thereto, and including all improvements and
accessions thereto and all spare parts, tools, accessories and attachments now
owned or hereafter acquired in connection therewith, and any maintenance
agreements applicable thereto, and all proceeds and products thereof, including
sales proceeds, and all rights thereto.
(b) Receivables. All of the Borrower's now owned and hereafter
-----------
acquired and/or created accounts, accounts receivable, contracts, contract
rights, instruments, documents, chattel paper, notes, notes receivable, drafts,
acceptances, general intangibles (including, but not limited to, trademarks,
trade names, licenses and patents), and other choses in action (not including
salary or wages), and all proceeds and products thereof, and all rights thereto,
including, but not limited to, proceeds of inventory and returned goods and
proceeds arising from the sale or lease of or
23
<PAGE>
the providing of inventory, goods, or services by the Borrower, as well as all
other rights of any kind, contingent or non-contingent, of each Borrower to
receive payment, benefit or credit from any person or entity, including, but not
limited to, the right to receive tax refunds or tax rebates.
(c) Inventory. All of the Borrower's now owned and hereafter acquired
---------
inventory, wherever located, including, but not limited to, goods, wares,
merchandise, materials, raw materials, parts, containers, goods in process,
finished goods, work in progress, bindings or component materials, packaging and
shipping materials and other tangible or intangible personal property held for
sale or lease or furnished or to be furnished under contracts of service or
which contribute to the finished products or the sale, promotion, storage and
shipment thereof, all goods returned for credit, repossessed, reclaimed or
otherwise reacquired by the Borrower, whether located at facilities owned or
leased by the Borrower, in the course of transport to or from account debtors,
placed on consignment, or held at storage locations, and all proceeds and
products thereof and all rights thereto, including, but not limited to, all
sales proceeds, all chattel paper related to any of the foregoing and all
documents, including, but not limited to, documents of title, bills of lading
and warehouse receipts related to any of the foregoing.
(d) Other Property. All now owned and hereafter acquired assets of
--------------
the Borrower, other than receivables, equipment and inventory, including, but
not limited to, all advances, leases, rents, chattels, leasehold improvements,
installment purchase and/or sales contracts, bonds, stocks, certificates,
deposits, trademarks, tradenames, licenses, patents and insurance policies,
including cash values.
Notwithstanding the foregoing, the Bank acknowledges and agrees that
the Collateral does not include (i) deposits held in escrow or trust by any
Borrower for another Person, or (ii) deposits held for payroll taxes.
The Borrowers further agree that the Bank shall have in respect of the
Collateral all of the rights and remedies of a secured party under the Uniform
Commercial Code of each of the States in which the Collateral or any portion
thereof is located, as well as those provided in this Agreement.
Section 6.3 Location of Collateral; Principal Place of Business. Each
---------------------------------------------------
Borrower agrees to (a) keep the Bank informed as to the location of the
Collateral and the address of the Borrower's principal place of business, (b)
give the Bank prior notice of any contemplated changes of location of Collateral
(other than any changes to the location of any other Borrower's principal place
of business or other office location described in Schedule II attached hereto
-----------
and made a part hereof), (c) give the Bank prior notice of any contemplated
changes in the Borrower's principal place of business and (d) not change the
location of any of the Collateral
24
<PAGE>
(other than any changes to the location of any other Borrower's principal place
of business or other office location described in Schedule II attached hereto
-----------
and made a part hereof), or the Borrower's principal place of business, without
the prior written consent of the Bank.
Section 6.4 Loss of Collateral. The Bank shall not be liable for any
------------------
loss of any Collateral in its possession other than losses which occur as a
direct result of the gross negligence or wilful misconduct of the Bank's
officers, directors or employees. No loss of any Collateral shall diminish the
debt due pursuant to this Agreement and the other Financing Documents.
Section 6.5 Filing of Financing Statements; Perfection of Security
------------------------------------------------------
Interest in Collateral. Whenever permitted, the security interest created by
- ----------------------
this Agreement shall be perfected by the filing of financing statements which
fully comply with Article 9 of the Uniform Commercial Code, as adopted by each
of the States in which the Collateral or any portion thereof may be located, in
such offices as may be required by the Bank. In all other cases the security
interest created by this Agreement shall be perfected in accordance with all
applicable governing law. The parties agree that:
(a) with respect to any such financing statement, a carbon,
photographic or other reproduction of a security agreement or a financing
statement is sufficient as a financing statement for purposes of Section 9-402
of the Uniform Commercial Code;
(b) all necessary continuation statements shall be filed by the
secured party or its assigns named therein within the time prescribed by Article
9 of the Uniform Commercial Code, as adopted by each of the States in which the
Collateral or any portion thereof may be located, in order to continue the
perfection of the security interests created by this Agreement;
(c) if at any time any of the information contained in any financing
statement filed in connection with the security interests created by this
Agreement, including without limitation, the description or location of the
Collateral or the name and address of the applicable Borrower, shall change in
such manner as to cause such financing statement to become misleading in any
material respect or as may impair the perfection of the security interests
intended to be created by this Agreement, then the appropriate Borrower shall
promptly prepare an amendment to such financing statement as may be necessary to
continue the perfection of the security interest intended to be created by this
Agreement, obtain the signatures of the debtor and secured party upon such
amendment, and file the same in any office where such amendment is required to
be filed to continue the perfection of the security interests created by this
Agreement;
(d) upon the request of the Bank, the Borrowers shall prepare, have
executed and file any amendments to the financing
25
<PAGE>
statements filed with respect to the security interests created by this
Agreement in such form as the Bank may require;
(e) the Borrower shall bear all costs of any and all of the filings
described in this Section 6.5, including any recordation taxes payable as a
-----------
result of such filings; and
(f) upon request by the Bank (i) at any time after the occurrence of a
Default or an Event of Default under the Financing Agreement or any of the other
Financing Documents referred to therein, (ii) for the purpose of enabling the
Bank to comply with the Financial Institutions Reform, Recovery and Enforcement
Act of 1989, as amended, or (iii) at any time that the Bank reasonably believes
that the security for the Borrowers' Obligations may be impaired, the Borrowers
shall provide, at their expense, an opinion of counsel as to the effectiveness
and perfection of the Bank's lien on the Collateral or any portion thereof.
ARTICLE VII
REPRESENTATIONS AND WARRANTIES
To induce the Bank to make the Credit Facilities available to the
Borrowers pursuant to this Agreement and the other Financing Documents, each
Borrower represents and warrants to the Bank as follows, each of such
representations and warranties to be reconfirmed by each Borrower at the time
each direct loan advance is made and each Standby Letter of Credit is issued
under any of the Credit Facilities, it being the affirmative obligation of each
Borrower to notify the Bank in writing of any facts which would in any way
affect its ability to make the representations contained in the Article VII at
-----------
any subsequent date:
Section 7.1 Subsidiaries. The only subsidiaries of Production Group
------------
International, Inc. are the other Borrowers. No other Borrower has any
Subsidiaries.
Section 7.2 Good Standing. Except as set forth on Schedule VII attached
-------------
hereto, the Borrower (i) is a corporation duly organized and existing, in good
standing, under the laws of the jurisdiction of its incorporation, (ii) has the
corporate power to own its property and to carry on its business as now being
conducted, and (iii) is duly qualified to do business and is in good standing in
each jurisdiction in which the character of the properties owned by it therein
or in which the transaction of its business makes such qualification necessary.
Section 7.3 Corporate Authority. The Borrower has full corporate power
-------------------
and authority to enter into and execute and deliver this Agreement and each of
the other Financing Documents executed and delivered by the Borrower, and to
incur and perform the Borrowers' Obligations provided for herein and therein,
all of which have been duly authorized by all proper and necessary corporate
action and all material governmental licenses,
26
<PAGE>
authorizations, consents and approvals required. No consent or approval of
stockholders or of any other person or public authority or regulatory body is
required as a condition to the validity or enforceability of this Agreement or
any of the other Financing Documents, or if required the same has been duly
obtained.
Section 7.4 Binding Obligations. This Agreement and each of the other
-------------------
Financing Documents executed and delivered by the Borrower have been properly
executed by the Borrower, constitute valid and legally binding obligations of
the Borrower, and are fully enforceable against the Borrower in accordance with
their respective terms.
Section 7.5 Litigation. There is no litigation or proceeding pending
----------
or, so far as the Borrower knows, threatened before any court or administrative
agency which, in the opinion of the officers of the Borrower, will materially
adversely affect the financial condition or operations of the Borrower or the
authority of the Borrower to enter into, or the validity or enforceability of,
this Agreement or any of the other Financing Documents executed and delivered by
the Borrower.
Section 7.6 No Conflicting Agreements. There is (i) no charter, by-law
-------------------------
or preference stock provision of the Borrower and no provision of any existing
contract or agreement binding on the Borrower or affecting its property, and
(ii) to the knowledge of the Borrower, no law binding upon the Borrower or
affecting any of its property, which would conflict with or in any way prevent
the execution, delivery or performance of the terms of this Agreement or of any
of the other Financing Documents executed and delivered by the Borrower, or
which would be in default or violated as a result of such execution, delivery or
performance.
Section 7.7 Financial Condition. The consolidated and consolidating
-------------------
balance sheets of the Borrowers as of August 31, 1995 (certified by Ernst &
Young) and June 30, 1996, together with statements of profit and loss and of
surplus for the period then ended, together with the ten month interim statement
for the period ended June 30, 1996, prepared by the Borrowers, and together with
the projections of financial condition for fiscal years ending August 31, 1996,
August 31, 1997 and August 31, 1998, prepared by the Borrowers, all of which
were heretofore delivered to the Bank, are complete and correct and fairly
present the financial position of the Borrowers and the results of their
operations and transactions in their surplus account(s) as of the dates and for
the periods referred to and have been prepared in accordance with GAAP applied
on a consistent basis throughout the period involved; provided, however, that to
the extent such balance sheets reflect the financial information of any
corporation acquired by the Borrowers during the current fiscal year, such
financial information complies with GAAP to the best of the Borrower's knowledge
except as specifically noted, since full audit of the acquired corporation's
financial information will not take place until the fiscal year end. There are
no liabilities (of the type
27
<PAGE>
required to be reflected on balance sheets prepared in accordance with GAAP),
direct or indirect, fixed or contingent, of any Borrower as of the date of such
balance sheets which are not reflected therein or in the notes thereto. There
has been no material adverse change in the financial condition or operations of
any Borrower since the date of such balance sheets (and to any Borrower's
knowledge no such material adverse change is pending or threatened), and no
Borrower has guaranteed the obligations of, or made any investment in or loans
to, any person except as disclosed in such balance sheets. Each Borrower has
good and marketable title to all of its properties and assets, and all of such
properties and assets are free and clear of encumbrances, except as reflected on
such balance sheets or in the notes thereto.
Section 7.8 Tax Returns. The Borrower has filed or caused to be filed
-----------
all required federal, state and local tax returns and has paid all taxes as
shown on such returns to the extent that such taxes have become due. No claims
have been assessed and are unpaid with respect to such taxes except as shown in
the financial statements referred to in Section 7.7 above.
-----------
Section 7.9 Compliance with Laws Generally. To the best of its
------------------------------
knowledge, the Borrower is not in violation of any law, ordinance, governmental
rule or regulation to which the Borrower is subject (including, without
limitation, any laws relating to employment practices or to environmental,
occupational and health standards and controls) and the violation of which would
have a material adverse effect on the conduct of the Borrower's business, and
the Borrower has obtained any and all licenses, permits, franchises and other
governmental authorizations necessary for the ownership and operation of its
properties and business.
Section 7.10 Margin Stock. None of the proceeds of any of the Credit
------------
Facilities will be used, directly or indirectly, by the Borrower for the purpose
of purchasing or carrying, or for the purpose of reducing or retiring any
indebtedness which was originally incurred to purchase or carry, any "margin
security" within the meaning of Regulation G (12 CFR Part 207), or "margin
stock" within the meaning of Regulation U (12 CFR Part 221), of the board of
Governors of the Federal Reserve System (herein called "margin security" and
"margin stock") or for any other purpose which might make the transactions
contemplated herein a "purpose credit" within the meaning of said Regulation G
or Regulation U, or cause this Agreement to violate any other regulation of the
Board of Governors of the Federal Reserve System or the Securities Exchange Act
of 1934, as amended, or the Small Business Investment Act of 1958, as amended,
or any rules or regulations promulgated under any of such statutes.
Section 7.11 ERISA. (i) Any Plan established and maintained by the
-----
Borrower or any Commonly Controlled Entity is a qualifying plan under the
applicable requirements of ERISA, and there is no current matter which would
materially adversely affect the qualified tax-exempt status of any Plan; (ii)
neither the Borrower
28
<PAGE>
nor any Commonly Controlled Entity has engaged in or is engaging in any
Prohibited Transaction or has incurred any Accumulated Funding Deficiency in
connection with any such Plan, whether or not waived, and no Reportable Event
has occurred with respect to any Plan subject to the minimum funding
requirements of Section 412 of the Code; (iii) no Multiemployer Plan has
terminated, as that term is defined in ERISA; (iv) neither the Borrower nor any
Commonly Controlled Entity has "withdrawn" or "partially withdrawn" from any
Multiemployer Plan; and (v) no Multiemployer Plan is in "reorganization" nor has
notice been received from the administrator of any Multiemployer Plan that any
such Plan will be placed in "reorganization."
Section 7.12 Governmental Consents. Neither the nature of the Borrower's
---------------------
business or properties, nor any relationship between the Borrower and any other
entity or person, nor any circumstance in connection with the extension of the
Credit Facilities is such as to require a consent, approval or authorization of,
or filing, registration or qualification with, any Governmental Authority, on
the part of the Borrower, as a condition to the execution and delivery of this
Agreement or any of the other Financing Documents.
Section 7.13 No Default or Event of Default. No event has occurred which
------------------------------
would constitute a Default or an Event of Default under this Agreement or any of
the other Financing Documents. The Borrower is not in default under the terms of
any other agreement or instrument to which the Borrower may be a party or by
which any of the security for any of the Credit Facilities may be bound or
subject.
Section 7.14 Other Liens. The Borrower represents and warrants that,
-----------
except for Permitted Liens, there are no liens or encumbrances of any kind
affecting the Collateral or any of the Borrower's assets or property, and the
Borrower has made no contract or arrangement of any kind the performance of
which by the other party thereto would give rise to a lien on the Collateral or
any other security for the Borrowers' Obligations.
Section 7.15 Prior Names; Trade Names; Principal Place of Business. The
-----------------------------------------------------
Borrower's correct name, including any prior names and trade names, and the
location of its principal place of business, within the meaning of the Uniform
Commercial Code, and any other offices maintained by it are correctly
represented in Schedule II attached hereto and made a part hereof.
-----------
Section 7.16 Nature of Financing; Usury. The Credit Facilities are being
--------------------------
extended to a business or commercial organization, or solely for the purpose of
enabling the Borrowers to conduct a business or commercial enterprise.
Section 7.17 Purposes. None of the Borrowers have utilized any funds
--------
previously drawn under the Working Capital Line of Credit to finance, refinance
or secure an acquisition, merger or other
29
<PAGE>
transaction whereby a Borrower would obtain an equity or other Participating
Interest in another entity.
ARTICLE VIII
CONDITIONS PRECEDENT
The obligation of the Bank to extend any of the Credit Facilities to
or on behalf of any Borrower is subject to the following conditions precedent:
Section 8.1 Receipt and Approval of Documents Required by Bank
--------------------------------------------------
Commitment Letter. All of the documents required by the Bank Commitment Letter
- -----------------
shall have been received and approved by the Bank and its counsel, and the Bank
shall be satisfied that the Borrowers have otherwise complied with all of the
terms and conditions of the Bank Commitment Letter.
Section 8.2 Approval of Bank's Counsel. All legal matters incident to
--------------------------
the Credit Facilities and all documents necessary in the opinion of the Bank to
the extension of such Credit Facilities shall be satisfactory in all respects to
counsel for the Bank.
Section 8.3 Compliance. As of the date of the execution and delivery of
----------
this Agreement, (a) the Borrowers shall have complied with, and shall then be in
compliance with, all the terms, covenants and conditions of this Agreement and
in the other Financing Documents which are binding upon it, (b) there shall
exist no Default or Event of Default, and (c) the representations and warranties
contained in Article VII hereof shall be true and correct.
-----------
Section 8.4 Bank's Fees and Expenses. The Borrowers shall have paid all
------------------------
of the fees and expenses described in Section 13.3 hereof which are then due and
------------
payable.
Section 8.5 Principal Payment. On November 27, 1996, the Borrowers
-----------------
shall pay to the Bank $500,000 as a repayment of principal of a portion of the
Acquisition Facility.
Section 8.6 Conditions to Execution of this Agreement. In connection
-----------------------------------------
with the execution and delivery of this Agreement, each of the Borrowers shall
have delivered:
(a) an opinion of counsel as to its due authority to enter into this
Agreement and the enforceability of its obligations hereunder in form and
substance satisfactory to the Bank and the Bank's counsel;
(b) certified organizational documents for such Borrower;
(c) resolutions of such Borrower approving the execution, delivery and
performance of this Agreement;
30
<PAGE>
(d) an officer's certificate indicating persons authorized to execute
this Agreement on behalf of such Borrower;
(e) each subordination agreement entered into by a party listed on
Schedule VI except for Barbara Boggs, Ellen Proxmire, Harriet Schwartz, and
David Elmore (Safaris Events, Inc.); and
(f) with respect to each investor entering into a debt service
guaranty pursuant to Section 9.11 hereof, an opinion of counsel as to due
authority and enforceability of such debt service guaranty.
Section 8.7 Acquisitions by the Borrowers. Any acquisition, merger or
-----------------------------
other transaction whereby a Borrower would obtain an equity or other
Participating Interest in another entity shall be an Eligible Acquisition
regardless of whether such acquisition was funded from the Acquisition Facility.
Section 8.8 Termination of Standby Letters of Credit. The Borrowers
----------------------------------------
shall:
(a) provide the Bank with written notice of each Letter of Credit,
Commercial Guaranty or other financing arrangement (the "L/C Debt") entered into
with any bank other than the Bank;
(b) by December 20, 1996, remit to the Bank as collateral security an
amount equal to the aggregate outstanding L/C Debt (which amount shall be
returned to the Borrowers by the Bank upon satisfaction of each condition set
forth in this Section 8.8 determined in the Bank's sole discretion);
(c) by December 6, 1996, make an application with the Bank pursuant to
the terms and conditions hereof for Standby Letters of Credit in an aggregate
amount equal to the aggregate outstanding L/C Debt; and
(d) not cause the renewal or extension of any outstanding L/C Debt or
the issuance of any additional L/C Debt, terminate any credit facility or
arrangement with San Diego National Bank and, to the extent acceptable by the
applicable beneficiary of L/C Debt, return to San Diego National Bank all
outstanding L/C Debt for immediate cancellation.
ARTICLE IX
AFFIRMATIVE COVENANTS
Until payment and performance in full of the Borrowers' Obligations,
each Borrower will perform each of the covenants contained in this Article IX.
----------
Section 9.1 Financial Reporting. The Borrower shall provide to the Bank
-------------------
the following financial information:
31
<PAGE>
(a) as soon as available but in no event more than 45 days after the
end of each fiscal quarter, a consolidated balance sheet of the Borrowers as of
the close of such period and consolidated income and expense statements and a
consolidated statement of cash flows for such period, prepared in accordance
with GAAP and certified by the chief financial officer or chief executive
officer of Production Group and accompanied by a certificate of that officer as
to (i) compliance with all covenants contained in the Financing Documents and
(ii) the occurrence of any Default or Event of Default under this Agreement or
any of the other Financing Documents, and, if so, stating the facts with respect
thereto; and
(b) as soon as available but in no event more than 120 days after the
close of Production Group's fiscal year, the Borrowers shall provide the Bank
with a copy of their consolidated balance sheets as of the close of such period
and their consolidated income and expense statements and a consolidated
statement of cash flows for such period, prepared in accordance with United
States generally accepted accounting principals and examined and certified by an
independent accountant satisfactory to the Bank and accompanied by a certificate
of the chief financial officer or chief executive officer of Production Group as
to (i) compliance with all covenants contained in the Financing Documents and
(ii) the occurrence of any Default under this Agreement or any of the other
Financing Documents, and, if so, stating the facts with respect thereto;
(c) as soon as available but in no event more than 30 days after
filing with the Internal Revenue Service, the Borrowers shall provide the Bank
with a copy of their Federal income tax return for the immediately preceding
fiscal year;
(d) as soon as available but in no event more than 45 days after close
of Production Group's fiscal quarter, the Borrowers shall provide the Bank with
a copy of their projections of financial condition for each of the fiscal years
remaining until the Termination Date of the Acquisition Facility;
(e) whenever requested by the Bank, but in any event no less
frequently than once per calendar month, within 30 days after the end of the
previous month, reports with respect to (i) the Borrowers' Receivables, which
reports shall include (without limitation) customer name, dollar amount, invoice
date and number of days outstanding for each Receivable and (ii) the aging of
the Borrowers' Receivables setting forth sufficient detail concerning the length
of time each Receivable has been outstanding, collections for the prior month
and delinquencies in the prior month all satisfactory in form to the Bank; and
(f) such other information, reports or statements as the Bank may from
time to time reasonably request.
32
<PAGE>
Section 9.2 Taxes and Claims. The Borrower shall pay and discharge all
----------------
Taxes due and owing by the Borrower to all governmental authorities, prior to
the date on which penalties attach thereto, and all lawful claims which, if
unpaid, might become a lien or encumbrance upon any of its properties; provided,
however, that in the event of a good faith dispute over Taxes, the Borrower
shall provide the Bank with a bond or other evidence satisfactory to the Bank in
its discretion of the Borrower's ability to pay such Taxes, together with any
applicable interest and penalties.
Section 9.3 Insurance. The Borrowers shall provide or cause to be
---------
provided to the Bank, and shall maintain, or cause to be maintained, in full
force and effect at all times during the term of any of the Credit Facilities
and at all times prior to the payment and performance in full of the Borrowers'
Obligations, such policies of insurance as are normally maintained by similar
businesses operating in the same vicinity as each of the Borrowers, which are
underwritten by a company or companies reasonably satisfactory to the Bank and
are in form and amounts reasonably satisfactory to the Bank, including, by way
of example and not by way of limitation, at least the following:
(a) permanent fire and hazard insurance or property damage insurance
covering all real property improvements and all Equipment and Inventory and
other personal property of all Borrowers wherever located, affording protection
against at least loss or damage by fire or other hazards covered by the standard
all-risk "extended coverage" endorsement (non-reporting form), including
vandalism and malicious mischief and such other risks as shall be customarily
covered with respect to similar property or as the Bank may from time to time
otherwise require, in amounts not less than the lesser of (i) the aggregate
principal amount of the Credit Facilities (whether or not such Credit Facilities
have been fully utilized by the Borrowers from time to time) and (ii) the
maximum amount available to the Borrowers from time to time, naming the Bank as
mortgagee and loss payee;
(b) public liability and property damage insurance for each Borrower
to afford protection in amounts of not less than (i) $1,000,000 per occurrence
and $3,000,000 for all annual occurrences in respect of bodily injury, and (ii)
$250,000 per occurrence and $500,000 for all annual occurrences in respect of
property damage, together with an endorsement naming the Bank as an additional
insured;
(c) workers' compensation insurance of each Borrower with coverage
limits in accordance with the requirements of applicable laws or regulations;
and
(d) key man life insurance on Mark Sirangelo in the amount of not less
than $4,000,000, together with an endorsement naming the Bank as an additional
insured.
33
<PAGE>
Each such policy shall provide that the policy may not be surrendered,
cancelled or substantially modified (including, without limitation, cancellation
for nonpayment of premiums) without at least thirty (30) days' prior written
notice to the Bank.
Section 9.4 Corporate Existence. The Borrower shall maintain in good
-------------------
standing its existence in the State of its incorporation and shall maintain its
qualification to do business in each jurisdiction in which such qualification is
necessary for the conduct of its business in such jurisdiction.
Section 9.5 Chance in Management. The Borrower shall give the Bank
--------------------
written notice within thirty (30) days following any change in the offices of
president, chief executive officer or chief financial officer of any Borrower.
Section 9.6 Compliance With Laws Generally. The Borrower shall comply
------------------------------
with all applicable laws, ordinances, governmental rules or regulations to which
the Borrower is or becomes subject (including, without limitation, any laws
relating to employment practices or to environmental, occupational and health
standards and controls) and the violation of which would have a material adverse
effect on the conduct of the Borrower's business, and the Borrower will maintain
any and all licenses, permits, franchises and other governmental authorizations
necessary for the ownership and operation of its properties and business.
Section 9.7 Books and Records; Inspection. The Borrower will keep
-----------------------------
adequate records and books of account with respect to its business, in
accordance with GAAP; and permit the Bank, by its accountants, attorneys,
officers or other agents to examine such records and books of account and to
discuss the affairs, finances and accounts pertaining thereto with of officers
of the Borrower at its offices at any time during normal business hours.
Section 9.8 Litigation. The Borrower shall give prompt notice in
----------
writing, with a full description to the Bank, of all litigation and any other
proceedings before any court or any governmental or regulatory agency affecting
the Borrower which, if adversely decided, would materially adversely affect the
conduct of the Borrower's business, the financial condition of the Borrower, or
in any manner affect the security for the Credit Facilities or the Borrowers'
Obligations.
Section 9.9 Notification of Certain Events, Events of Default and
-----------------------------------------------------
Adverse Developments. The Borrower shall promptly notify the Bank in writing
- --------------------
within fifteen (15) Business Days of obtaining knowledge of the occurrence of
the following (in each case describing in detail satisfactory to the Bank the
nature thereof and the action the Borrower proposes to take with respect
thereto):
34
<PAGE>
(a) any Default or Event of Default under this Agreement or any of the
other Financing Documents;
(b) all actions, suits and proceedings before any court or
governmental department, commission, board, bureau, agency, or instrumentality,
domestic or foreign, affecting the Borrower which, if determined adversely to
the Borrower, could have a materially adverse effect on the financial condition,
properties or operations of the Borrower or could materially adversely affect
the security for the Borrowers' Obligations or the ability of each Borrower to
pay or perform in full the Borrowers' Obligations;
(c) any notice, claim or demand from any governmental agency which
alleges that the Borrower is in violation of any of the terms of, or has failed
to comply with, any applicable order issued pursuant to any federal or state
statute regulating its operation of business, including, but not limited to, the
Occupational Safety and Health Act and the Environmental Protection Act; or
(d) any other development in the business or affairs of the Borrower
which could have a material adverse effect on the Borrower or could adversely
affect the security for the Borrowers' Obligations of the ability of each
Borrower to pay or perform in full the Borrowers' Obligations.
Section 9.10 Addition of New Subsidiaries as Borrowers. The Borrower
-----------------------------------------
hereby agrees to cause any entity which becomes a Subsidiary to become a
Borrower under this Agreement by executing and delivering to the Bank an
Assumption Agreement in substantially the form attached hereto as Exhibit D and
---------
made a part hereof, whereupon such new Subsidiary shall become jointly and
severally liable, together with all other Borrowers, for the Borrowers'
Obligations and will be entitled to have access to each of the Credit Facilities
to the same extent as all other Borrowers. As a condition precedent to having
access to the Credit Facilities, each new Subsidiary shall provide the Bank with
certified copies of its corporate documents, resolutions authorizing the
incurrence of joint and several liability for the Borrowers' Obligations, and
Uniform Commercial Code, tax lien, judgment and pending suit searches in all
jurisdictions designated by the Bank. The Borrower hereby acknowledges that any
failure to act or delay in acting by the Bank in connection with its review of
or comment upon any materials supplied by the Borrower pursuant to this Section
9.10 or otherwise shall not result in any liability, cost or expense to the
Bank.
Section 9.11 Debt Service Guaranty. Production Group hereby agrees to
---------------------
cause Sierra Ventures IV, L.P., Trident Capital Partners Fund-I, L.P., Trident
Capital Partners Fund-I, C.V., WLD/Lamont Partners, T. Rowe Price Threshold Fund
III, L.P. and First Plaza Group Trust to enter into a debt service guaranty
substantially in the form of Exhibit F attached hereto.
---------
35
<PAGE>
Section 9.12 Receivables Collection. Except with respect to Spearhead
----------------------
Exhibitions Limited and PGI Europe Limited, (a) by December 31, 1996, the
Borrower shall (i) have completed and executed all paperwork and opened each
account necessary to establish a lockbox account system at the Bank and (ii) be
required to cause all amounts in any account controlled by it to be deposited to
an account of such Borrower located at and under the control of the Bank (the
"Lockbox Account") by the close of business on each Business Day thereafter, and
(b) by January 31, 1997, the Borrower shall be required to cause each account
debtor who is obligated to such Borrower for a Receivable to pay the full amount
of such Receivable to the Lockbox Account. The Borrower shall immediately
deposit any amount it receives directly from an account debtor with respect to
any Receivable into the Lockbox Account.
Section 9.13 Cash Management System. By December 31, 1996, the Borrower
----------------------
shall have completed and executed all paperwork and opened each account
necessary to establish a collection, concentration and disbursement system at
the Bank. By January 31, 1997, the Borrower shall deposit all revenues earned
and received to, and make all payments to creditors, vendors and other
applicable parties from, such collection, concentration and disbursement system
that will include payroll, investments and any lockbox or other deposit account
(including the Lockbox Account defined in Section 9.12 hereof).
------------
Section 9.14 Inspections. The Borrowers shall permit the Bank to enter
-----------
its premises for the purpose of conducting inspections into the condition of the
Borrowers' operations, including but not limited to the financial condition;
provided that, prior to the occurrence of an Event of Default, (a) only upon
twenty-four hours prior written notice and (b) only during normal business
hours. By the end of February, 1997, the Borrowers shall have adopted
procedures or established new systems to alleviate, and must have corrected, the
conditions set forth on Schedule III attached hereto and such other conditions
------------
as may be identified by the Bank.
Section 9.15 Further Assurances. The Borrower shall promptly execute and
------------------
deliver all further instruments, documents, agreements, blank instruments of
transfer and assignments including, without limitation, financing or
continuation statements, or amendments thereto, and take all further action that
may be necessary or desirable in the reasonable judgment of the Bank in order to
obtain, maintain, perfect and protect any security interest granted or purported
to be granted hereunder, including the security interest in after-acquired
Collateral granted herein, to enable the Bank to comply with the Federal
Assignment of Claims Act or any other federal or state law in order to obtain or
perfect the Bank's interest in the Collateral, to obtain dividends,
distributions and proceeds of the Collateral as provided herein and to enable
the Bank to exercise and enforce its rights and remedies hereunder and under the
Financing Documents.
36
<PAGE>
Section 9.16 Attendance at Closings of Eligible Acquisitions. At
-----------------------------------------------
sole cost and expense (including but not limited to travel, lodging and related
costs and expenses) of the Borrower, the Bank and any counsel selected by the
Bank may attend any closing of an Eligible Acquisition without regard to
location of such closing for the primary purpose of witnessing the execution of
and collecting the documents related to such Eligible Acquisition. The Borrower
shall inform the Bank of the date and place of such closing a reasonable time
prior to such date.
ARTICLE X
FINANCIAL COVENANTS
Until payment and performance in full of the Borrowers' Obligations,
the Borrowers will comply with each of the financial covenants contained in this
Article X, each determined as of the end of the applicable fiscal quarter.
- ---------
Section 10.1 Net Worth. On a consolidated basis, the Borrowers shall
---------
maintain Net Worth (defined in accordance with GAAP) of not less than
$22,900,000 as of June 30, 1996, which amount shall be increased on a cumulative
basis by an amount equal to 50% of the consolidated net income generated during
each fiscal quarter; provided, however, that, at the express written consent of
-------- -------
the Bank, Net Worth may be decreased by certain non-cash related downward
adjustments in an amount not in excess of $14,500,000, as of August 31, 1996 in
connection with the Initial Public Offering; and provided, further, that all net
-------- -------
proceeds of the Initial Public Offering may be deemed to further adjust the
required minimum Net Worth such further adjustment to be at the sole discretion
of the Bank.
Section 10.2 Reserved.
Section 10.3 Current Ratio. On a consolidated basis, the Borrowers shall
-------------
maintain a Current Ratio of not less than:
0.35 for the period from November 27, 1996 through and including
November 30, 1996;
0.30 for the period from December 1, 1996 through and including
February 28, 1997;
0.50 for the period from March 1, 1997 through and including May 31,
1997;
0.30 for the period from June 1, 1997 through and including August 31,
1997;
0.40 for the period from September 1, 1997 through and including
February 28, 1998; and
0.35 for the period from March 1, 1998 through and including the
Termination Date.
Section 10.4 Total Debt Service Ratio. On a consolidated basis, the
------------------------
Borrowers shall maintain a Total Debt Service Ratio of not less than:
37
<PAGE>
1.10 for the period from November 27, 1996 through and including
August 31, 1997; and
1.50 for the period from September 1, 1997 through and including the
Termination Date.
Section 10.5 Subordinated Debt Service Ratio. On a consolidated basis,
-------------------------------
the Borrowers shall maintain a Subordinated Debt Service Ratio of not less than:
2.00 for the period from November 27, 1996 through and including
August 31, 1997; and
3.00 for the period from September 1, 1997 through and including the
Termination Date.
Section 10.6 Leverage Ratio. On a consolidated basis, the Borrowers
--------------
shall maintain a Leverage Ratio not greater than:
1.80 for the period from November 27, 1996 through and including
November 30, 1996;
1.80 for the period from December 1, 1996 through and including
February 28, 1997; and
1.00 for the period from March 1, 1997 through and including the
Termination Date.
Section 10.7 Intangible Levels. On a consolidated basis, the Borrowers'
-----------------
Intangibles may not exceed Total Equity by:
$18,500,000 for the period from November 27, 1996 through and
including November 30, 1996;
$19,000,000 for the period from December 1, 1996 through and including
February 28, 1997;
$11,500,000 for the period from March 1, 1997 through and including
August 31, 1997;
$10,500,000 for the period from September 1, 1997 through and
including February 28, 1998; and
$9,000,000 for the period from March 1, 1998 through and including the
Termination Date.
ARTICLE XI
NEGATIVE COVENANTS
Until payment and performance in full of all of the Borrowers'
Obligations, without the written consent of the Bank, none of the Borrowers will
fail to comply with any of the following covenants.
Section 11.1 Impairment of Security. The Borrower shall not take any
----------------------
action, and shall not permit any Person to take any action, which shall impair
in any manner the value of the Collateral or any portion thereof or any other
security for the Borrowers' Obligations or the validity, priority or security of
the security interest granted to the Bank in the Collateral.
38
<PAGE>
Section 11.2 No Change in Control.
--------------------
(a) Except in connection with the Initial Public Offering at the
express written consent of the Bank, no Borrower shall cause or permit any
change to occur in the ownership of the controlling interest in the voting stock
in Production Group.
(b) Notwithstanding anything to the contrary in the foregoing
paragraph (a) without the prior written consent of the Bank, the Borrowers may
not cause, and may not permit, Mark Sirangelo to be removed or replaced as an
officer or director, as the case may be, of a Borrower.
Section 11.3 Stock in Subsidiaries. Production Group shall not sell,
---------------------
transfer or otherwise encumber any shares of capital stock now or hereafter
owned by it in any of the other Borrowers, except for the pledge of shares in
any acquired corporation to secure seller financing which satisfies the criteria
for an Eligible Acquisition.
Section 11.4 Sale, Transfer or Encumbrance of Collateral. Except for (a)
-------------------------------------------
the sale of Inventory in the ordinary course of business, (b) sales or transfers
of equipment for fair market value in the ordinary course of business, (c)
Permitted Liens, (d) the liens or security interests listed in Item 1d. of
Schedule VII hereof, but only for so long as permitted by Section 12.1(m), (e)
the lien or security interest granted by C.H.L. Ventures, Inc. in favor of
Christopher H. Lee identified as File No. 9520060351 of the Secretary of State
of California, and (e) the lien or security interest granted by Epic Enterprises
of Nevada, Inc. in favor of San Diego National Bank identified as File No.
9600229 of the Secretary of State of California, the Borrower shall not sell,
transfer, lease or further encumber, or permit any Person to sell, transfer,
lease or further encumber, any of its assets, including the Collateral or any
other security for the Borrowers' Obligations.
Section 11.5 No Additional Indebtedness. Without the prior written
--------------------------
consent of the Bank, the Borrowers will not create or incur any liability for
borrowed money or obligations in respect of operating leases in excess of
$250,000 in the aggregate at any one time outstanding, except for (a) short-term
trade indebtedness incurred in the ordinary course of the business operations of
the Borrowers, (b) subordinated debt to the seller of an acquired corporation
which debt satisfies all of the requirements of clause (d) of the definition of
"Eligible Acquisition", (c) obligations secured or evidenced by Permitted Liens,
and (d) the L/C Debt as defined in Section 8.8 hereof, subject to the
restrictions of Section 8.8.
Section 11.6 Merger; Dissolution or Sale of Assets. The Borrower shall
-------------------------------------
not enter into any merger, consolidation or dissolution or sale, lease or other
disposition of any substantial portion of its assets (except assets disposed of
in the ordinary
39
<PAGE>
course of business for fair market value), except for (a) Collateral covered by
Permitted Liens, (b) mergers and consolidations of any Borrower into any other
Borrower, and (c) the merger of Production Group with and into Production Group
International, Inc., a Delaware corporation.
Section 11.7 Distributions or Dividends to Stockholders. Upon the
------------------------------------------
occurrence or continuation of a Default or an Event of Default, none of the
Borrowers will make any distribution, loan, advance or payment of dividend to
any of its stockholders for any purpose whatsoever at any time without the
express written consent of the Bank.
Section 11.8 Payments, Advances and Salaries to Stockholders. No Borrower
-----------------------------------------------
will pay, advance or lend, or permit any payment (including the payment of
salaries in excess of amounts contemplated by existing employment contracts to
holders of more than 5% of stock in any Borrower who are also officers of any
Borrower), advance or loan of, either directly or indirectly, any sum or sums of
money to any of its stockholders or directors for any purpose whatsoever (except
the reimbursement of expenses incurred in the normal course of business on
behalf of any Borrowers) in excess of the lesser of (a) $250,000 in the
aggregate determined by taking into account all such advances or loans, and (b)
---
any amount which would cause the Borrowers to default in compliance with any
financial covenant contained in the Financing Documents.
Section 11.9 ERISA Compliance. The Borrower shall not (a) restate or
----------------
amend any Plan established and maintained by the Borrower or any Commonly
Controlled Entity, in a manner designed to disqualify such Plan under the
applicable requirements of the Code; (b) permit any officers of the Borrower or
any Commonly Controlled Entity to materially adversely affect the qualified tax-
exempt status of any Plan of the Borrower or any Commonly Controlled Entity; (c)
engage in or permit any Commonly Controlled Entity to engage in any Prohibited
Transaction; (d) incur or permit any Commonly Controlled Entity to incur any
Accumulated Funding Deficiency, whether or not waived, in connection with any
Plan; (e) take or permit any Commonly Controlled Entity to take any action or
fail to take any action which causes a termination of any Plan in a manner which
could result in the imposition of a lien on the property of the Borrower or any
Commonly Controlled Entity pursuant to Section 4068 of ERISA; (f) fail to notify
the Bank that notice has been received of a termination of any Multiemployer
Plan to which the Borrower or any Commonly Controlled Entity has an obligation
to contribute; (g) incur or permit any Commonly Controlled Entity to incur a
complete or partial withdrawal from any Multiemployer Plan to which the Borrower
or any Commonly Controlled Entity has an obligation to contribute; or (h) fail
to notify the Bank that notice has been received from the administrator of any
Multiemployer Plan to which the Borrower or any Commonly Controlled Entity has
an obligation to contribute that any such plan will be placed in
"reorganization."
40
<PAGE>
Section 11.10 Purposes. The Borrower shall not, without the prior written
--------
consent of the Bank, utilize any funds drawn under the Working Capital Line of
Credit to finance, refinance or secure an acquisition, merger or other
transaction whereby the Borrower obtains an equity or other Participating
Interest in another entity.
ARTICLE XII
EVENTS OF DEFAULT; REMEDIES
Section 12.1 Events of Default. Any one or more of the following events
-----------------
shall constitute an Event of Default under this Agreement:
(a) Failure to Pay Borrowers' Obligations. The Borrowers shall fail
-------------------------------------
to pay the amount of any of the Borrowers' Obligations as and when the same are
due and payable in accordance with the terms of this Agreement and the other
Financing Documents.
(b) Breach of Representation and Warranties. Any representation or
---------------------------------------
warranty made herein or in any of the Financing Documents, or in any report,
certificate, opinion (including any opinion of counsel for the Borrowers),
financial statement or other instrument delivered in connection with this
Agreement or any of the other Financing Documents shall prove to be false or
misleading in any material respect when made.
(c) Failure to Comply with Covenants. Default shall be made in the
--------------------------------
due observance or performance of any covenant, conditions or agreement contained
in Section 9.2, Section 9.3, Article X or Article XI hereof.
-------------------------------------------------
(d) Other Defaults. Default shall be made in the due observance or
--------------
performance of any other term, covenant or agreement contained in this Agreement
or in any of the other Financing Documents, and such default shall have
continued unremedied for a period of thirty (30) days after written notice
thereof shall have been given to Production Group by the Bank, or default shall
occur under any of the other Financing Documents.
(e) Change in Control. A change shall occur in the ownership of the
-----------------
controlling interest in the voting stock in Production Group to the extent such
change results in a violation of the covenant contained in Section 11.2 of this
------------
Agreement.
(f) Default Under Other Indebtedness. Default shall be made with
--------------------------------
respect to any other evidence of indebtedness or liability for borrowed money of
any Borrower (i) to the Bank, or (ii) to any other Person, if, in the case of
clause (ii) only, the effect of such default is to accelerate the maturity of
such evidence of indebtedness or liability or to permit the holder or obligee
thereof to cause any indebtedness to become due prior to
41
<PAGE>
its stated maturity, or any such indebtedness shall not be paid as and when due
and payable.
(g) Receiver; Bankruptcy. Any Borrower shall (i) apply for or
--------------------
consent to the appointment of a receiver, trustee or liquidator of itself or any
of its property, (ii) admit in writing its inability to pay its debts as they
mature, (iii) make a general assignment for the benefit of creditors, (iv) be
adjudicated as bankrupt or insolvent or (v) file a voluntary petition in
bankruptcy, or a petition or an answer seeking reorganization or an arrangement
with creditors or to take advantage of any bankruptcy, reorganization,
insolvency, readjustment of debt, dissolution or liquidation law or statute, or
an answer admitting the material allegations of a petition filed against it in
any proceeding under any such law, or if corporate action shall be taken by any
Borrower for the purposes of effecting any of the foregoing, or (vi) by any act
indicate its consent to, approval or acquiescence in any such proceeding or the
appointment of any receiver of or trustee for any Borrower or any substantial
part of its property, or suffers any such receivership, trusteeship or
proceeding to continue undischarged for a period of 30 days.
(h) Involuntary Receiver; Bankruptcy. An order, judgment or decree
--------------------------------
shall be entered, without the application, approval or consent of any Borrower
by any court of competent jurisdiction, approving a petition seeking
reorganization of any Borrower or of all or a substantial part of the assets of
any Borrower or appointing a receiver, trustee or liquidator of any Borrower and
such order, judgment or decree shall continue unstayed and in effect for a
period of 30 days.
(i) Judgments. Any judgment in excess of $250,000 or judgments
---------
aggregating in excess of $500,000 against one or more Borrowers or any
attachment or other levy against the property of any Borrower with respect to a
claim, remains unpaid, unstayed on appeal, undischarged, unbonded or undismissed
for a period of 30 days.
(j) Execution; Attachment. Any execution or attachment shall be
---------------------
levied against the Collateral or any other security for the Borrowers'
Obligations, and such execution or attachment shall not be set aside, discharged
or stayed within thirty (30) days after the same shall have been levied.
(k) Collateral Value Exceeded. The Working Capital Line of Credit
-------------------------
Obligations shall exceed the Receivables Collateral Value, and the Borrowers
shall fail to either reduce the outstanding Working Capital Line of Credit
Obligations or satisfy the Bank that the Receivables Collateral Value will be
increased, within five (5) Business Days after written notice thereof shall have
been given to Production Group by the Bank.
(l) Debt Service Guaranty. Any party obligated to the Bank pursuant
---------------------
to a debt service guaranty entered into in accordance
42
<PAGE>
with Section 9.11 hereof shall fail to extend its obligations thereunder in the
------------
manner, and within the time period, specified therein to a date thirty days
subsequent to the Termination Date of the last outstanding Credit Facility.
(m) Conditions Subsequent to Closing. Any of the conditions set forth
--------------------------------
on Schedule VII shall not have been met to the Bank's sole satisfaction by the
close of business on the dates set forth on Schedule VII.
Section 12.2 Remedies. Upon the occurrence of any Event of Default, and
--------
in every such Event of Default and at any time thereafter, unless such Event of
Default shall be cured to the satisfaction of the Bank, the Bank may exercise
any one or more of the following remedies.
(a) Accelerate Termination Date. Accelerate the Termination Date
---------------------------
whereupon the Acquisition Facility Commitment, the Equipment Facility Commitment
and the Working Capital Line of Credit Commitment shall terminate as of the
accelerated Termination Date.
(b) Accelerate the Borrowers' Obligations. Demand immediate payment
-------------------------------------
in full of all of the Borrowers' Obligations under this Agreement and the other
Financing Documents, including (without limitation) all accrued and unpaid
interest thereon, whether or not the Credit Facilities to which such Borrowers'
Obligations relate have become due and payable or, as in the case of Standby
Letters of Credit, may remain outstanding following repayment of the Borrowers'
Obligations relating thereto, whereupon all outstanding Borrowers' Obligations
shall become immediately due and payable without presentment, demand, protest or
any other notice of any kind, all of which are hereby expressly waived, anything
contained in this Agreement or in the other Financing Documents to the contrary
notwithstanding. The occurrence or non-occurrence of an Event of Default under
this Agreement shall in no way affect or condition the right of the Bank to
demand payment at any time of any of the Borrowers' Obligations which are
payable on demand regardless of whether or not an Event of Default has occurred.
(c) Liquidation of Security Interest in Collateral. Upon the
----------------------------------------------
occurrence of any Event of Default, and at any time during the continuance
thereof, the Bank shall have, in addition to all other rights and remedies, the
remedies of a secured party under the Uniform Commercial Code, or under any
other governing laws, including, without limitation, the right to take
possession of the Collateral (to which the Borrowers hereby specifically
consent), and for that purpose the Bank may, so far as the Borrowers can give
authority therefor, enter upon any premises on which the Collateral may be
situated and remove the same therefrom. Upon request of the Bank, the Borrowers
shall assemble and make the Collateral available to the Bank at a place to be
designated by the Bank. Unless the Collateral is perishable or threatens to
rapidly decline
43
<PAGE>
in value, or is of a type customarily sold on a recognized market, the Bank
shall give the Borrowers at least five (5) days' prior notice of the time and
place of any public sale or the time after which any private sale or any other
intended disposition is to be made. The Bank may at any time in its discretion
transfer any securities (i.e., stock or bonds) or other property constituting
-----
the Collateral into its own name or that of its nominee and receive the income
thereon and hold the same as collateral for Borrowers' Obligations or apply it
to principal, or interest or other costs, fees or charges due on, or with
respect to, the Borrowers' Obligations. The Borrowers hereby irrevocably
constitute and appoint the Bank as the Borrowers' true and lawful attorney in
fact, with full power of substitution, at the sole cost and expense of the
Borrowers, but for the sole benefit of the Bank, to convert the Collateral to
cash, including without limitation, completing the manufacturing process of work
in process, and the sale (either public or private) of all or any portion of the
Collateral, to enforce collection of the Collateral, either in its own name or
in the name of, the Borrowers, compromising or settling with any account debtors
and prosecuting, defending, compromising or releasing any action relating to the
Collateral; to receive, open and dispose of all mail addressed to the Borrowers
and to take therefrom any remittances on or proceeds of the Collateral in which
Bank has a security interest; to notify United States Post Office authorities to
change the address for delivery of mail addressed to the Borrowers to such
address as the Bank may designate; to endorse the name of the Borrowers in favor
of the Bank upon any and all checks, drafts, money orders, notes, acceptances or
other instruments of the same or different nature; to sign and endorse the name
of the Borrowers on and to receive as secured party any of the Collateral, any
invoices, schedules of collateral, freight or express receipts and/or other
documents of title of the same or different nature relating to the Collateral;
to sign the name of the Borrowers on any notice to the account debtors or on
verification of the Collateral; and to sign and file or record on behalf of the
Borrowers any financing or continuation statements or other statements in order
to perfect, keep perfected or protect the Bank's security interest in the
Collateral. The Bank shall not be obliged to do any of the acts or exercise any
of the powers hereinabove authorized, but if the Bank elects to do any such act
or exercise any such power, it shall not be responsible to the Borrowers except
for the Bank's own willful misconduct or gross negligence. All powers conferred
upon the Bank by this Agreement, being coupled with an interest, shall be
irrevocable as long as any of the Borrowers' Obligations to the Bank shall
remain unpaid.
Upon the occurrence of any Event of Default hereunder, the Borrowers
shall assemble all of the Collateral and make the same available at a central
location designated by the Bank. Any notification required by Section 9-504 of
the Uniform Commercial Code shall be deemed reasonably and properly given if
given in the manner specified for other notices under this Agreement, at least 5
days before any sale or other disposition of the Collateral, which time period
may be decreased in the event that the Bank
44
<PAGE>
reasonably determines that it is necessary to dispose of any portion of the
Collateral in a more expeditious manner because declining Collateral Value or
the like so dictates. Disposition shall be deemed commercially reasonable if
made pursuant to a public offering advertised at least twice in a newspaper of
general circulation in the community where the Collateral is located.
(d) Borrowers Remain Liable for Deficiency. The Borrowers are liable
--------------------------------------
for the entire amount of the Borrowers' Obligations and will remain responsible
for any deficiency in any proceeds realized upon any liquidation of Collateral.
(e) Other Rights and Remedies. In addition to any other rights or
-------------------------
remedies specifically set forth herein, the Bank shall have available to it all
rights and remedies under any of the Financing Documents and any other rights
and remedies afforded to it at law or in equity.
(f) Performance by Bank. If the Borrowers shall fail to pay any of
-------------------
the Borrowers' Obligations or the Borrowers shall otherwise fail to perform,
observe or comply with any of the conditions, covenants, terms, stipulations or
agreements contained in this Agreement or any of the other Financing Documents
and the same results in an Event of Default hereunder, the Bank, without notice
to or demand upon any Borrower, and without waiving or releasing any of the
Borrowers' Obligations or any Event of Default, and in addition to any rights or
remedies available to it under any of the other Financing Documents, may (but
shall be under no obligation to) at any time thereafter make such payment or
perform such act for the account and at the expense of the Borrowers, and may,
to the extent permitted by law, enter upon the premises of any Borrower for that
purpose and take all such action thereon as the Bank may consider necessary or
appropriate for such purpose. All sums so paid or advanced by the Bank and all
costs and expenses (including, without limitation, reasonable attorneys' fees
and expenses) incurred in connection therewith (the "Expense Payments") together
with interest thereon from the date of payment, advance or incurring until paid
in full at the rate of two percent (2%) per annum in excess of the Prime Rate
shall be paid by the Borrowers to the Bank on demand and shall constitute and
become a part of the Borrowers' Obligations.
(g) No Conditions Precedent to Exercise of Remedies. The Borrowers
-----------------------------------------------
shall not be relieved of any obligation by reason of the failure of the Bank to
comply with any request of any Borrower or of any other person to take action to
sell any of the Collateral, or otherwise to enforce any provision of the
Financing Documents, or by reason of the release, regardless of consideration,
of all or any part of the Collateral or other security for the Borrowers'
Obligations, or by reason of any agreement or stipulation between any subsequent
owner of the Collateral or other security for the Borrowers' Obligations, or the
Bank extending the time of payment or modifying the terms of the Financing
Documents without first having obtained the consent of
45
<PAGE>
any Borrower; and in the latter event, the Borrowers shall continue to be liable
to make payments according to the terms of any such extension or modification
agreement, unless expressly released and discharged in writing by the Bank.
(h) Remedies Cumulative and Concurrent. No remedy herein conferred
----------------------------------
upon or reserved to the Bank is intended to be exclusive of any other remedies
provided for in the Financing Documents, and each and every such remedy shall be
cumulative, and shall be in addition to every other remedy given hereunder, or
under the Financing Documents, or now or hereafter existing at law or in equity
or by statute. Every right, power and remedy given by the Financing Documents
to the Bank shall be concurrent and may be pursued separately, successively or
together against the Borrowers or any of them, the Collateral or other security
for the Borrowers' Obligations or any part thereof, and every right, power and
remedy given by the Financing Documents may be exercised from time to time as
often as may be deemed expedient by the Bank.
(i) No Waiver. No delay or omission of the Bank to exercise any
---------
right, power or remedy accruing upon the happening of an Event of Default shall
impair any such right, power or remedy or shall be construed to be a waiver of
any such Event of Default or any acquiescence therein. No delay or omission on
the part of the Bank to exercise any remedy hereunder, or acceptance by the Bank
of any partial payment on account of the Borrowers' Obligations shall constitute
a waiver of any such Event of Default and each of the remedies herein provided
shall remain continuously available to the Bank.
ARTICLE XIII
MISCELLANEOUS
Section 13.1 Notices. All communications between the parties or notices
-------
in connection with this Agreement and any of the other Financing Documents shall
be in writing (unless otherwise specified herein), hand delivered or sent by
registered airmail, postage prepaid, or by telex, telecopy or other electronic
transmission, addressed to the intended recipient at the address therefor set
forth below. All such communications and notices shall be effective upon
delivery. Either party may change its address or other information for notices
by giving notice to the other party in accordance with the provisions of this
Section.
46
<PAGE>
(a) if to the Borrowers:
Production Group International, Inc.
One Courthouse Metro, Suite 500
2200 Wilson Boulevard
Arlington, Virginia 22201
Attn: Mark Sirangelo
President
Telephone: 703-528-8484
Telecopy: 703-276-1484
with a copy to:
Mitchell S. Marder, Esq.
Piper & Marbury L.L.P.
1200 Nineteenth Street, N.W.
Washington, D.C. 20036
Telephone: 202-861-3900
Telecopy: 202-223-2085
(b) if to the Bank:
The First National Bank of Maryland
1800 K Street, N.W.
Washington, D.C. 20006
Attn: Shaun E. Murphy
Vice President
Telephone: 202-775-4831
Telecopy: 202-775-4838
with a copy to:
David C. Roseman, Esq.
Jones, Day, Reavis & Pogue
1450 G Street, N.W.
Washington, D.C. 20005
Telephone: 202-879-3939
Telecopy: 202-737-2832
Section 13.2 Survival of Agreement; Successors and Assigns.
---------------------------------------------
(a) All covenants, agreements, representations and warranties made
herein and in the certificates delivered pursuant hereto shall survive the
extension by the Bank of any of the Credit Facilities, and the execution and
delivery to the Bank of this Agreement and all of the other Financing Documents
and shall continue in full force and effect until all of the Borrowers'
Obligations have been paid and performed in full.
47
<PAGE>
(b) Whenever in this Agreement any of the parties hereto is referred
to, such reference shall be deemed to include the successors and assigns of such
party; and all covenants, promises and agreements by or on behalf of the
Borrowers which are contained in this Agreement or in the other Financing
Documents shall inure to the benefit of the successors and assigns of the Bank.
No Borrower may assign any interest that it may have under this Agreement,
including (without limitation) the right to receive the benefit of any of the
Credit Facilities to be extended hereunder, without the prior written consent of
the Bank. Any assignment made or attempted by any Borrower without the prior
written consent of the Bank shall be void and of no effect. No consent by the
Bank to an assignment by any Borrower shall release the Borrowers as the parties
primarily obligated and liable under the terms of this Agreement unless any
Borrower shall be released specifically by the Bank in writing. No consent by
the Bank to an assignment shall be deemed to be a waiver of the requirement of
prior written consent by the Bank with respect to each and every further
assignment and as a condition precedent to the effectiveness of such assignment.
Section 13.3 Fees and Expenses of Bank. (a) Expenses. The Borrowers
------------------------- --------
will pay all out-of-pocket expenses incurred by the Bank in connection with (i)
the preparation and negotiation of this Agreement and the other Financing
Documents, (ii) the extension by the Bank of any of the Credit Facilities, (iii)
the protection of the Collateral and any other security for the repayment of the
Borrowers' Obligations, and (iv) the enforcement and protection of the rights of
the Bank in connection with this Agreement or any of the other Financing
Documents, including, but not limited to (A) the fees and disbursements of
Jones, Day, Reavis & Pogue, Washington, D.C., or other counsel employed by the
Bank, and (B) the fees of the Bank's auditors.
(b) Fees Relating to Working Capital Line of Credit. (i) On
-----------------------------------------------
December 1, 1995, and on the first day of each fiscal quarter thereafter prior
to the maturity of the Working Capital Line of Credit, the Borrowers shall pay
to the Bank a fee in the amount of one quarter of one percent (1/4 of 1%) of the
average daily unused portion of the Working Capital Line of Credit Commitment
without regard to whether availability is constrained by the borrowing base.
The unused commitment fee shall be deemed to have been earned by the Bank for
the previous quarter at the time of billing and shall be non-refundable.
(ii) At the time of issuance of each Standby Letter of Credit, the
Borrowers shall pay the Bank an issuance fee in the amount of 1% per annum of
--- -----
the stated amount thereof, subject to a minimum issuance fee of $500. The
issuance fee for each Standby Letter of Credit shall be deemed to have been
earned by the Bank at the time of billing and shall be non-refundable.
(iii) On November 27, 1996, the Borrowers shall pay the Bank a
non-refundable underwriting fee equal to $50,000 for the underwriting performed
in connection with the extension and
48
<PAGE>
restructuring of the Credit Facilities. This fee shall be deemed earned,
irrespective of whether the extension and restructuring in fact closes.
(c) Fee Relating to the Acquisition Facility. Upon execution and
----------------------------------------
delivery of the Original Agreement, the Borrowers shall pay to the Bank a
facility fee in the amount of one-half of one percent (1/2 of 1%) of the
Acquisition Facility Commitment, or $25,000. This fee shall be deemed to have
-------
been earned by the Bank at the time of billing and shall be non-refundable.
(The Bank hereby acknowledges that the fees described in this subsection have
been previously paid.)
(d) Fee Relating to the Equipment Facility. Upon execution and
--------------------------------------
delivery of the Original Agreement, the Borrowers shall pay to the Bank a
facility fee in the amount of the lesser of one-half of one percent (1/2 of 1%)
of the Equipment Facility Commitment, or $5,000. This fee shall be deemed to
------
have been earned by the Bank at the time of billing and shall be non-refundable.
(The Bank hereby acknowledges that the fees described in this subsection have
been previously paid.)
Section 13.4 Applicable Law; Jurisdiction; Consent to Service of Process.
-----------------------------------------------------------
This Agreement and all of the other Financing Documents (except where expressly,
indicated therein to the contrary) shall be construed in accordance with and
governed by the laws of the State of Maryland. The Bank and the Borrower hereby
submit to the non-exclusive jurisdiction of any Maryland court or federal court
sitting in Baltimore City over any suit, action or proceeding arising out of or
relating to this Agreement. The Borrowers hereby collectively and irrevocably
appoint the President of Production Group at the address set forth in Section
-------
13.1 of this Agreement to act as agent to accept service of process for them and
- ----
on their behalf in any proceeding brought pursuant to the provisions of this
subsection and to receive any notices required pursuant to or by the terms of
this Agreement.
Section 13.5 Waiver of Trial by Jury. Each of the Borrowers and the Bank
-----------------------
hereby waive trial by jury in any action or proceeding to which the Borrowers or
any of them and the Bank may be parties, arising out of or in any way pertaining
to this Agreement or any of the other Financing Documents. It is agreed and
understood that this waiver constitutes a waiver of trial by jury of all claims
against all parties to such actions or proceedings, including claims against
parties who are not parties to this Agreement.
This waiver is knowingly, willingly and voluntarily made by each of
the Borrowers and the Bank, and the Borrowers hereby represent that no
representations of fact or opinion have been made by any individual to induce
this waiver of trial by jury or to in any way modify or nullify its effect. The
Borrowers further represent that they have had the opportunity to be represented
in the signing of this Agreement and in the making of this waiver by independent
legal counsel, selected of their own free will, and
49
<PAGE>
that they have had the opportunity to discuss this waiver with counsel.
Section 13.6 Confession of Judgment. EACH BORROWER HEREBY AUTHORIZES ANY
----------------------
ATTORNEY DESIGNATED BY THE BANK OR ANY CLERK OF ANY COURT OF RECORD TO APPEAR
FOR THE BORROWER IN ANY COURT OF RECORD AND CONFESS JUDGMENT WITHOUT PRIOR
HEARING AGAINST THE BORROWER IN FAVOR OF THE BANK FOR AND IN THE AMOUNT OF THE
UNPAID BORROWERS' OBLIGATIONS UNDER THIS AGREEMENT AND ANY OF THE OTHER
FINANCING DOCUMENTS, COSTS OF SUIT, AND ATTORNEYS' FEES OF FIFTEEN PERCENT (15%)
OF THE UNPAID BORROWERS' OBLIGATIONS. NOTWITHSTANDING THE FACT THAT THE AMOUNT
OF THE JUDGMENT WHICH MAY BE CONFESSED AGAINST THE BORROWER MAY INCLUDE
ATTORNEYS' FEE OF FIFTEEN PERCENT (15%) OF THE UNPAID BORROWERS' OBLIGATIONS,
THE BANK SHALL BE ENTITLED TO COLLECT ONLY ITS ACTUAL ATTORNEYS' FEES, WHETHER
SUCH AMOUNT SHALL BE GREATER OR LESS THAN FIFTEEN PERCENT (15%) OF THE UNPAID
BORROWERS' OBLIGATIONS. THE AUTHORITY AND POWER TO APPEAR FOR AND ENTER
JUDGMENT AGAINST THE BORROWER SHALL NOT BE EXHAUSTED BY ONE OR MORE EXERCISES
THEREOF OR BY ANY IMPERFECT EXERCISE THEREOF AND SHALL NOT BE EXTINGUISHED BY
ANY JUDGMENT ENTERED PURSUANT THERETO. SUCH AUTHORITY MAY BE EXERCISED ON ONE
OR MORE OCCASIONS OR FROM TIME TO TIME IN THE SAME OR DIFFERENT JURISDICTIONS AS
OFTEN AS THE BANK SHALL DEEM NECESSARY OR DESIRABLE, FOR ALL OF WHICH THIS
AGREEMENT SHALL BE A SUFFICIENT WARRANT.
It is understood and agreed that this power of attorney shall be
deemed to be a power coupled with an interest which cannot be revoked. Said
attorney-in-fact shall also have the power to prosecute and defend all actions
or proceedings in connection with the Collateral and all other security for the
Borrowers' Obligations and to take such actions and to require such performance
as the Bank may deem necessary.
Section 13.7 Modifications. No modification or waiver of any provision
-------------
of this Agreement or of any of the other Financing Documents, nor consent to any
departure by any Borrower therefrom, shall be effective unless the same shall be
in writing, and then such waiver or consent shall be effective only in the
specific instance and for the purpose for which it is given. No notice to or
demand on any Borrower in any case shall entitle any Borrower to any other or
further notice or demand in the same, similar or other circumstances.
Section 13.8 No Waiver of Rights by Bank. Neither any failure nor any
---------------------------
delay on the part of the Bank in exercising any right, power or privilege
hereunder or under this Agreement or any of the other Financing Documents shall
operate as a waiver thereof, nor shall a single or partial exercise thereof
preclude any other or further exercise or the exercise of any other right, power
or privilege.
Section 13.9 No Liability of Bank. The Bank shall not be liable for any
--------------------
act or omission by it pursuant to the provisions of this Agreement in the
absence of fraud or gross negligence. The
50
<PAGE>
Borrowers hereby agree that the Bank shall not be chargeable for any negligence,
mistake, act or omission of any accountant, examiner, agency or attorney
employed by the Bank in making examinations, investigations or collections, or
otherwise in perfecting, maintaining, protecting or realizing upon any lien or
security interest or any other interest in the Collateral or any other security
for the Borrowers' Obligations. The Bank shall incur no liability to any
Borrower or any other party in connection with the acts or omissions of the Bank
in reliance upon any certificate or other paper believed by the Bank to be
genuine or with respect to any other thing which the Bank may do or refrain from
doing, unless such act or omission amounts to fraud or gross negligence.
By accepting or approving anything required to be observed, performed
or fulfilled by the Borrowers or to be given to the Bank pursuant to this
Agreement, including, without limitation, any certificate, balance sheet,
statement of profit and loss or other financial statement, survey, receipt,
appraisal or insurance policy, the Bank shall not be deemed to have warranted or
represented the sufficiency, legality, effectiveness or legal effect of the
same, or of any term, provision or condition thereof and any such acceptance or
approval thereof shall not be or constitute any warranty or representation with
respect thereto by the Bank.
Section 13.10 Indemnification. All acts, including any failure to act,
---------------
relating to the Collateral and any other security for the Borrowers' Obligations
by any agent, representative or designee of the Bank are performed solely for
the benefit of the Bank to assure repayment of the Borrowers' Obligations and
are not for the benefit of the Borrowers, or for the benefit of any other
person, including without limitation, purchasers, tenants or other occupants.
The Borrowers agree to jointly and severally indemnify the Bank and to hold the
Bank harmless against any loss or expense (including reasonable attorneys' fees
and expenses) resulting from any and all claims, actions, settlements or
liability for acts or failure to act in connection with the Collateral and any
other security for the Borrowers' Obligations, except for those claims which
directly result from the gross negligence or wilful misconduct of the Bank's
officers, directors or employees. In addition to all amounts payable hereunder,
the Borrowers hereby jointly and severally protect, indemnify and hold harmless
the Bank from and against, and hereby agree to defend the Bank against, any and
all claims, damages, losses, liabilities, costs or expenses whatsoever which the
Bank may, at any time, sustain or incur by reason of or in consequence of or
arising out of the extension of the Credit Facilities; it being the intention of
the parties that this Agreement shall be construed and applied to protect and
indemnify the Bank against any and all risks involved in the extension of the
Credit Facilities, including (without limitation) the issuance of the Standby
Letters of Credit, all of which risks are hereby assumed by the Borrowers,
including, without limitation, any and all risks of the acts or omissions,
whether rightful or
51
<PAGE>
wrongful, of any present or future de jeure or de facto Governmental Authority.
-------- --------
The provisions of this Section shall survive the expiration of the Credit
Facilities, this Agreement and the other Financing Documents.
Section 13.11 No Partnership. Nothing contained in this Agreement shall
--------------
be construed in a manner to create any relationship between the Borrowers and
the Bank other than the relationship of borrowers and lender, and the Borrowers
and the Bank shall not be considered partners or co-venturers for any purpose on
account of this Agreement.
Section 13.12 Time of Essence. Time shall be of the essence for each and
---------------
every provision of this Agreement of which time is an element.
Section 13.13 Illegality. If fulfillment of any provision hereof or any
----------
transaction related hereto or to any of the other Financing Documents, at the
time performance of such provision shall be due, shall involve transcending the
limit of validity prescribed by law, then ipso facto, the obligation to be
----------
fulfilled shall be reduced to the limit of such validity; and if any clause or
provisions herein contained other than the provisions hereof pertaining to
repayment of the Borrowers' Obligations operates or would prospectively operate
to invalidate this Agreement in whole or in part, then such clause or provision
only shall be void, as though not herein contained, and the remainder of this
Agreement shall remain operative and in full force and effect; and if such
provision pertains to repayment of the Borrowers' Obligations, then, at the
option of the Bank, all of the Borrowers' Obligations to the Bank shall become
immediately due and payable.
Section 13.14 Counterparts. This Agreement may be executed in any number
------------
of counterparts, each of which shall be considered an original for all purposes;
provided, however, that all such counterparts shall together constitute one and
the same instrument.
Section 13.15 Captions and Headings. The captions and headings contained
---------------------
in this Agreement are included herein for convenience of reference only and
shall not be considered a part hereof and are not in any way intended to limit
or enlarge the terms hereof.
Section 13.16 Borrowers' Obligations Absolute and Unconditional. All of
-------------------------------------------------
the Borrowers' Obligations shall be absolute and unconditional, irrespective of
any set-off or counterclaim or the genuineness, validity, priority or
enforceability of this Agreement or any of the other Financing Documents or any
other circumstance which might otherwise constitute a legal or equitable
discharge.
Section 13.17 Extension of Termination Date. The Bank shall have the
-----------------------------
option, in its sole and absolute discretion, to extend the Termination Date with
respect to any one of the Credit Facilities
52
<PAGE>
for additional periods. In the event that the Bank determines to make one or
more extensions of the Termination Date, it will give written notice to
Production Group not more than thirty (30) and no fewer than ten (10) days prior
to the then scheduled Termination Date. If Production Group does not receive
written notice from the Bank, during the time period specified in the preceding
sentence, indicating that the Bank has extended the Termination Date, the then
scheduled Termination Date shall be effective for all purposes of this
Agreement.
Section 13.18 Confidentiality. The Bank agrees that any confidential
---------------
information obtained from the Borrowers in connection with the Bank's initial
underwriting and ongoing administration of the Credit Facilities shall not be
disclosed to any Person, except for its regulators or any other Government
Authority requesting or requiring such information or any perspective
participant in the Credit Facilities, without the prior written consent of
Production Group, on behalf of the Borrowers. Notwithstanding the foregoing,
the Bank shall not be required to treat as confidential any legal, marketing,
financial or technical information concerning the Borrowers which:
(a) was already in possession of the Bank prior to receipt of such
information from the Borrowers;
(b) is, or becomes, the subject of a publication, or is otherwise made
available to the public without the fault of the Bank; or
(c) is received by the Bank without restriction of confidentiality
from a third party who is not under, or in violation of any obligation of
confidentiality to the Borrowers. The Bank agrees to obtain the written consent
of Production Group, on behalf of the Borrowers, prior to advertising the
provision of the Credit Facilities.
Section 13.19 Initial Public Offering. UPON THE SALE PURSUANT TO THE
-----------------------
INITIAL PUBLIC OFFERING BY ANY OF THE BORROWERS OF CAPITAL STOCK TO ANY
UNDERWRITER OR OTHER THIRD PARTY, THE BANK MAY, IN ITS SOLE DISCRETION, REVISE
THROUGH AN AMENDMENT TO THIS AGREEMENT ANY AND ALL OF THE COVENANTS OF THE
BORROWERS SET FORTH HEREIN.
53
<PAGE>
IN WITNESS WHEREOF, each of the Borrowers and the Bank have caused
this Financing Agreement to be duly executed, sealed and delivered by their duly
authorized officers on the day and year first above written.
WITNESS: THE FIRST NATIONAL BANK OF MARYLAND
/s/ Kevin Long By: /s/ Shaun E. Murphy (SEAL)
- ---------------------- -----------------------------
Name: Shaun E. Murphy,
Title: Vice President
ATTEST: PRODUCTION GROUP INTERNATIONAL, INC.
/s/ Mary C. King By: /s/ Mark N. Sirangelo (SEAL)
- ---------------------- -----------------------------
Name: Mark N. Sirangelo
Title: President and Chief
Executive Officer
EXEC-U-TOURS, INC.
/s/ Mary C. King By: /s/ Mark N. Sirangelo (SEAL)
- ---------------------- -----------------------------
Name: Mark N. Sirangelo
Title: Chief Executive Officer
SAFARIS EVENTS, INC.
/s/ Mary C. King By: /s/ Mark N. Sirangelo (SEAL)
- ---------------------- -----------------------------
Name: Mark N. Sirangelo
Title: Chief Executive Officer
KALEIDOSCOPE EVENTS, INC.
/s/ Mary C. King By: /s/ Mark N. Sirangelo (SEAL)
- ---------------------- -----------------------------
Name: Mark N. Sirangelo
Title: Chief Executive Officer
54
<PAGE>
ATTEST: AGENDA WASHINGTON INC.
/s/ Mary C. King By: /s/ Mark N. Sirangelo (SEAL)
- ---------------------- -----------------------------
Name: Mark N. Sirangelo
Title: President
WASHINGTON INC.
/s/ Mary C. King By: /s/ Mark N. Sirangelo (SEAL)
- ---------------------- -----------------------------
Name: Mark N. Sirangelo
Title: Chief Executive Officer and
Vice President
C.H.L. VENTURES, INC.
/s/ Mary C. King By: /s/ Mark N. Sirangelo (SEAL)
- ---------------------- -----------------------------
Name: Mark N. Sirangelo
Title: Chief Executive Officer
PGI ACQUISITION COMPANY E
/s/ Mary C. King By: /s/ Mark N. Sirangelo (SEAL)
- ---------------------- -----------------------------
Name: Mark N. Sirangelo
Title: President
PGI ACQUISITION COMPANY A
/s/ Mary C. King By: /s/ Mark N. Sirangelo (SEAL)
- ---------------------- -----------------------------
Name: Mark N. Sirangelo
Title: President
55
<PAGE>
PGI ACQUISITION COMPANY I
/s/ Mary C. King By: /s/ Mark N. Sirangelo (SEAL)
- ---------------------- -----------------------------
Name: Mark N. Sirangelo
Title: Chief Executive Officer
PGI ACQUISITION COMPANY B
/s/ Mary C. King By: /s/ Mark N. Sirangelo (SEAL)
- ---------------------- -----------------------------
Name: Mark N. Sirangelo
Title: President
PGI ACQUISITION COMPANY F
/s/ Mary C. King By: /s/ Mark N. Sirangelo (SEAL)
- ---------------------- -----------------------------
Name: Mark N. Sirangelo
Title: President
PGI COMPANY S
/s/ Mary C. King By: /s/ Mark N. Sirangelo (SEAL)
- ---------------------- -----------------------------
Name: Mark N. Sirangelo
Title: President
PGI COMPANY H
/s/ Mary C. King By: /s/ Mark N. Sirangelo (SEAL)
- ---------------------- -----------------------------
Name: Mark N. Sirangelo
Title: President
PGI COMPANY P
/s/ Mary C. King By: /s/ Mark N. Sirangelo (SEAL)
- ---------------------- -----------------------------
Name: Mark N. Sirangelo
Title: President
56
<PAGE>
PGI COMPANY Q
/s/ Mary C. King By: /s/ Mark N. Sirangelo (SEAL)
- ---------------------- -----------------------------
Name: Mark N. Sirangelo
Title: President
PGI COMPANY R
/s/ Mary C. King By: /s/ Mark N. Sirangelo (SEAL)
- ---------------------- -----------------------------
Name: Mark N. Sirangelo
Title: President
PGI COMPANY J
/s/ Mary C. King By: /s/ Mark N. Sirangelo (SEAL)
- ---------------------- -----------------------------
Name: Mark N. Sirangelo
Title: President
PGI COMPANY X
/s/ Mary C. King By: /s/ Mark N. Sirangelo (SEAL)
- ---------------------- -----------------------------
Name: Mark N. Sirangelo
Title: President
SPEARHEAD EXHIBITIONS LIMITED
/s/ Mary C. King By: /s/ Mark N. Sirangelo (SEAL)
- ---------------------- -----------------------------
Name: Mark N. Sirangelo
Title: Director
57
<PAGE>
PGI EUROPE LIMITED
/s/ Mary C. King By: /s/ Mark N. Sirangelo (SEAL)
- ---------------------- -----------------------------
Name: Mark N. Sirangelo
Title: Director
RAY BLOCH PRODUCTIONS,
WASHINGTON, D.C., INC.
/s/ Mary C. King By: /s/ Mark N. Sirangelo (SEAL)
- ---------------------- -----------------------------
Name: Mark N. Sirangelo
Title: Chief Executive Officer
RAY BLOCH PRODUCTIONS, INC.
/s/ Mary C. King By: /s/ Mark N. Sirangelo (SEAL)
- ---------------------- -----------------------------
Name: Mark N. Sirangelo
Title: Chief Executive Officer
RAY BLOCH PRODUCTIONS,
NEW JERSEY, INC.
/s/ Mary C. King By: /s/ Mark N. Sirangelo (SEAL)
- ---------------------- -----------------------------
Name: Mark N. Sirangelo
Title: Chief Executive Officer
RAY BLOCH PRODUCTIONS-ATLANTA, INC.
/s/ Mary C. King By: /s/ Mark N. Sirangelo (SEAL)
- ---------------------- -----------------------------
Name: Mark N. Sirangelo
Title: Chief Executive Officer
58
<PAGE>
RAY BLOCH PRODUCTIONS WEST, INC.
/s/ Mary C. King By: /s/ Mark N. Sirangelo (SEAL)
- ---------------------- -----------------------------
Name: Mark N. Sirangelo
Title: Chief Executive Officer
RMR PRODUCTION SERVICES, INC.
/s/ Mary C. King By: /s/ Mark N. Sirangelo (SEAL)
- ---------------------- -----------------------------
Name: Mark N. Sirangelo
Title: President
TIMBERLINE WORLDWIDE, INC.
/s/ Mary C. King By: /s/ Mark N. Sirangelo (SEAL)
- ---------------------- -----------------------------
Name: Mark N. Sirangelo
Title: President
EPIC ENTERPRISES, INC.
/s/ Mary C. King By: /s/ Mark N. Sirangelo (SEAL)
- ---------------------- -----------------------------
Name: Mark N. Sirangelo
Title: Chief Executive Officer
EPIC ENTERPRISES OF NEVADA, INC.
/s/ Mary C. King By: /s/ Mark N. Sirangelo (SEAL)
- ---------------------- -----------------------------
Name: Mark N. Sirangelo
Title: President
59
<PAGE>
Exhibit 23.1
CONSENT
We consent to the reference to our firm under the caption "SELECTED CONSOLIDATED
FINANCIAL AND OPERATING DATA" and under the caption "Experts" and to the
use of our reports dated October 24, 1996, in Amendment No. 2 to the
Registration Statement (Form S-1 No. 333-14879) and related Prospectus of
Production Group International, Inc. for the registration of XXX,XXX shares of
its common stock.
Ernst & Young LLP
Vienna, Virginia
October 24, 1996
- --------------------------------------------------------------------------------
The foregoing consent is in the form that will be signed upon the completion of
the net income (loss) per share calculation once the initial public offering
price is known.
/s/ Ernst & Young LLP
Vienna, Virginia
December 16, 1996
<PAGE>
CONSENT
We consent to the reference to our firm under the caption "Experts" and to the
use of our report of Ray Bloch Productions, Inc. dated October 4, 1996, in
Amendment No. 2 to the Registration Statement (Form S-1 No. 333-14879) and
related Prospectus of Production Group International, Inc. for the registration
of XXX,XXX shares of its common stock.
/s/ Ernst & Young LLP
Vienna, Virginia
December 16, 1996
<PAGE>
CONSENT
We consent to the reference to our firm under the caption "Experts" and to the
use of our report of Epic Enterprises, Inc. dated October 4, 1996, in Amendment
No. 2 to the Registration Statement (Form S-1 No. 333-14879) and related
Prospectus of Production Group International, Inc. for the registration of
XXX,XXX shares of its common stock.
/s/ Ernst & Young LLP
Vienna, Virginia
December 16, 1996
<PAGE>
CONSENT
We consent to the reference to our firm under the caption "Experts" and to the
use of our report of Epic Enterprises of Nevada, Inc. dated October 4, 1996, in
Amendment No. 2 to the Registration Statement (Form S-1 No. 333-14879) and
related Prospectus of Production Group International, Inc. for the registration
of XXX,XXX shares of its common stock.
/s/ Ernst & Young LLP
Vienna, Virginia
December 16, 1996
<PAGE>
CONSENT
We consent to the reference to our firm under the caption "Experts" and to the
use of our report of Timberline Productions, Inc. dated October 7, 1996, in
Amendment No. 2 to the Registration Statement (Form S-1 No. 333-14879) and
related Prospectus of Production Group International, Inc. for the registration
of XXX,XXX shares of its common stock.
/s/ Ernst & Young LLP
Vienna, Virginia
December 16, 1996
<PAGE>
EXHIBIT 23.2
CONSENT
We have been requested by Production Group International, Inc. to allow
reference to our Firm under the caption 'Experts' and to the use of our report
as Independent Auditors dated December 17, 1996 in Amendment No. 2 to the
Registration Statement (Form S-1 No: 333-14879) and related Prospectus of
Production Group International, Inc. for the registration of [not yet known]
shares of its common stock.
Our audit of the consolidated financial statements of Spearhead Exhibitions
Limited at March 31, 1994 and 1995 and for the years then ended, were not
planned or conducted in contemplation nor for the purpose of the proposed sale
of shares in Production Group International, Inc. to the public.
Our role as 'Experts' has been confined to that of Registered Auditors
regulated by the Institute of Chartered Accountants in England and Wales, solely
for the purpose of forming an opinion on the stated consolidated financial
statements of Spearhead Exhibitions Limited referred to above in accordance with
the statutory requirements for the audit of United Kingdom companies.
On the above understanding, we consent to the reference of our Firm under the
caption 'Experts' and to the use of our report dated December 17, 1996 in the
Amendment No. 2 to Registraton Statement (Form S-1 No 333-14879) and related
Prospectus of Production Group International, Inc. for the registration of [not
yet known] shares in its common stock.
/s/ KINGSTON SMITH
Chartered Accountants
and Registered Auditors
London
England
December 17, 1996
<PAGE>
Exhibit 23.3
CONSENT
We consent to the reference to our firm under the caption "Experts" and to the
use of our report of Spearhead Exhibitions Limited dated September 26, 1996, in
Amendment No. 2 to the Registration Statement (Form S-1 No. 333-14879) and
related Prospectus of Production Group International, Inc. for the registration
of XXX,XXX shares of its common stock.
/s/ Ernst & Young
Chartered Accountants
London, England
16 December 1996
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> AUG-31-1996
<PERIOD-END> AUG-31-1996
<CASH> 3,599,446
<SECURITIES> 0
<RECEIVABLES> 8,836,187
<ALLOWANCES> 0
<INVENTORY> 825,000
<CURRENT-ASSETS> 0
<PP&E> 4,091,003
<DEPRECIATION> 1,349,289
<TOTAL-ASSETS> 2,741,714
<CURRENT-LIABILITIES> 32,326,842
<BONDS> 0
0
50,772
<COMMON> 551,000
<OTHER-SE> 8,408,439
<TOTAL-LIABILITY-AND-EQUITY> 43,722,513
<SALES> 78,290,083
<TOTAL-REVENUES> 78,290,083
<CGS> 53,152,958
<TOTAL-COSTS> 35,817,129
<OTHER-EXPENSES> (426,894)
<LOSS-PROVISION> 716,000
<INTEREST-EXPENSE> 1,116,807
<INCOME-PRETAX> (11,369,917)
<INCOME-TAX> (12,085,917)
<INCOME-CONTINUING> 12,085,917
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (12,085,917)
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
