UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
----------
FORM 10-Q
[X] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934
For the quarterly period ended September 30, 1999
or
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
333-46235
------------------------
(Commission File Number)
PRODUCTION RESOURCE GROUP, L.L.C.
------------------------------------------------------
(Exact name of Registrant as Specified in its Charter)
Delaware 14-1786937
- ----------------------------------------- ------------------------------------
(State or other Jurisdiction of Formation) (I.R.S. Employer Identification No.)
539 Temple Hill Road, New Windsor, New York 12553
- ------------------------------------------- ----------
(Address of Principal Executive Offices) (Zip Code)
(914) 567-5700
----------------------------------------------------
(Registrant's Telephone Number, Including Area Code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [ ]
Indicate the number of shares outstanding of each of the issuer's classes of
common stock as of September 30, 1999: Not Applicable
PRODUCTION RESOURCE GROUP, L.L.C.
Table Of Contents
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited):
Combined Balance Sheets as of September 30, 1999 and December 31,
1998
Combined Statements of Operations for the nine months and three
months ended September 30, 1999 and 1998
Combined Statements of Cash Flows for the nine months ended
September 30, 1999 and 1998
Notes to Combined Financial Statements
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Item 3. Quantitative and Qualitative Disclosures about Market Risk
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
Item 2. Changes in Securities and Use of Proceeds
Item 3. Defaults upon Senior Securities
Item 4. Submission of Matters to a Vote of Security Holders
Item 5. Other Information
Item 6. Exhibits and Reports on Form 8-K
Signatures
i
PRODUCTION RESOURCE GROUP, L.L.C.
Combined Balance Sheets
(In thousands)
September 30, December 31,
1999 1998*
------------ ------------
(unaudited)
Assets
Current assets:
Cash and cash equivalents $ 5,231 $ 6,014
Accounts receivable - net of allowance of $4,685 at
September 30, 1999 and $2,570 in 1998 54,561 35,415
Deferred production expenses 2,990 958
Inventories 15,791 10,755
Other current assets 12,640 6,760
--------- ---------
Total current assets 91,213 59,902
Property and equipment - net 85,580 82,096
Goodwill - net of accumulated amortization of $3,778 at
September 30, 1999 and $2,031 in 1998 49,094 46,116
Other assets 12,789 7,992
========= =========
Total assets $ 238,676 $ 196,106
========= =========
Liabilities and Members' Equity (Deficit)
Current liabilities:
Current portion of long-term debt $ 694 $ 8,046
Accounts payable 25,955 16,725
Payroll and sales taxes payable 4,204 3,164
Income taxes payable 927 1,659
Deferred revenue 8,752 4,797
Other current liabilities (including accrued interest of $2,744
at September 30, 1999 and $5,366 in 1998) 11,178 11,063
--------- ---------
Total current liabilities 51,710 45,454
Long-term debt:
Senior Subordinated Notes 100,000 100,000
Credit Facility 75,938 45,638
Other long-term debt 3,227 3,557
--------- ---------
Total long-term debt 179,165 149,195
Deferred income taxes 1,070 1,305
Minority interest -- 233
Total members' equity (deficit) (includes accumulated other
comprehensive gain of $11 at September 30, 1999 and a loss of
$13 in 1998) 6,731 (81)
========= =========
Total liabilities and members' equity (deficit) $ 238,676 $ 196,106
========= =========
Note: The combined balance sheet at December 31, 1998 has been derived from the
audited financial statements at that date.
* Certain items have been reclassified to conform to current period
presentation.
See accompanying notes.
1
PRODUCTION RESOURCE GROUP, L.L.C.
Combined Statements of Operations (Unaudited)
(In thousands)
Three months Ended Nine months Ended
September 30, September 30,
-------------------------- ---------------------------
1999 1998 1999 1998
-------- -------- --------- ---------
Revenues $ 72,632 $ 56,260 $ 194,511 $ 111,625
Direct production expenses:
Direct production costs 47,471 36,469 127,489 69,017
Depreciation expense 3,507 2,940 10,500 7,701
-------- -------- --------- ---------
50,978 39,409 137,989 76,718
Gross profit 21,654 16,851 56,522 34,907
Selling, general and administrative expenses 16,782 10,310 43,647 23,773
Other (income) expense (38) -- 16 --
Other depreciation and amortization 1,902 1,006 4,855 3,253
Restructuring charges 300 -- 2,035 --
Non-recurring compensation expense 125 -- 490 --
-------- -------- --------- ---------
Operating profit 2,583 5,535 5,479 7,881
Interest expense 4,554 3,952 13,905 10,185
Interest (income) (59) (73) (184) (506)
-------- -------- --------- ---------
Income (Loss) before income taxes, minority
interest and cumulative effect of
accounting change (1,912) 1,656 (8,242) (1,798)
Provision for income taxes 193 546 392 739
-------- -------- --------- ---------
Income (Loss) before cumulative effect of
accounting change and minority interest (2,105) 1,110 (8,634) (2,537)
Minority interest -- (19) (2) (30)
Cumulative effect of accounting change -- -- (263) --
-------- -------- --------- ---------
Net Income (Loss) $ (2,105) $ 1,091 $ (8,899) $ (2,567)
======== ======== ========= =========
See accompanying notes.
2
PRODUCTION RESOURCE GROUP, L.L.C.
Combined Statements of Cash Flows (Unaudited)
(In thousands)
Nine months Ended
September 30,
-------------------------
1999 1998*
-------- --------
Operating activities
Net loss $ (8,899) $ (2,567)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation 12,577 9,044
Amortization of goodwill and other 2,778 1,381
Amortization of debt-related costs 562 528
Minority interest, net (231) 30
Provision for doubtful accounts 692 596
Gain on sale of property and equipment (2,082) (2,092)
Cumulative effect of accounting change 263 --
Changes in operating assets and liabilities:
Accounts receivable (9,797) 1,610
Deferred production expenses (2,335) (2,526)
Inventories (725) (2,506)
Other current assets (5,051) (2,782)
Accounts payable 3,785 (12,114)
Payroll and sales taxes payable 140 (698)
Deferred revenue 1,164 6,152
Income taxes payable (732) 311
Other current liabilities (1,861) 4,395
-------- --------
Net cash used in operating activities (9,752) (1,238)
Investing activities
Acquisition of net assets of A-1 Audio, Inc., net of cash acquired (8,268) --
Acquisition of net assets of Ancha Electronics, Inc., net of cash
acquired (3,952) --
Acquisition of net assets of Presentation Technologies Division of
Caribiner Audio Visual Services, Inc. (2,000) --
Acquisition of net assets of Total Technical Excellence, Inc., net of
cash acquired (2,307) --
Acquisition of Midnight Designs Holdings Limited (2,242) --
Acquisition of net assets of The Spot Company, Ltd. (1,400) --
Acquisition of net assets of Production Arts, Inc., net of cash acquired -- (13,604)
Acquisition of net assets of Light & Sound Design Holdings Ltd., net of
cash acquired -- (14,525)
Acquisition of net assets of Pro-Mix, Inc., net of cash acquired -- (6,328)
Acquisition of net assets of CBE Events and Exhibits, net of cash acquired -- (2,378)
Acquisition of Signal Perfection, Ltd., net of cash acquired -- (6,595)
Purchases of property and equipment (15,104) (14,837)
Proceeds from sale of rental equipment and property 11,338 3,242
Additions to software development costs (214) (473)
Other assets (3,730) (798)
-------- --------
Net cash used in investing activities (27,879) (56,296)
Financing activities
Proceeds from long-term debt 39,690 42,838
Repayments of long-term debt (17,316) (738)
Additions to bond offering costs and deferred financing costs -- (388)
Issuance of preferred units 50 --
Member contributions 14,424 --
-------- --------
Net cash provided by financing activities 36,848 41,712
-------- --------
Net decrease in cash and cash equivalents (783) (15,822)
Cash and cash equivalents--beginning of period 6,014 27,164
-------- --------
Cash and cash equivalents--end of period $ 5,231 $ 11,342
======== ========
- ----------
* Certain items have been reclassified to conform to current period
presentation.
See accompanying notes.
3
PRODUCTION RESOURCE GROUP, L.L.C.
Notes to Combined Financial Statements (Unaudited)
1. General
Presentation
The accompanying unaudited combined financial statements of Production Resource
Group, L.L.C. (the "Company" or "PRG LLC") have been prepared in accordance with
generally accepted accounting principles for interim financial information and
with the instructions to Form 10-Q and Article 10 of Regulation S-X.
Accordingly, they do not include all of the information and footnotes required
by generally accepted accounting principles for complete financial statements.
In the opinion of management, all adjustments (consisting of normal recurring
accruals) considered necessary for a fair presentation have been included.
Operating results for the three months and nine months ended September 30, 1999
are not necessarily indicative of the results that may be expected for the year
ending December 31, 1999, due to fluctuations in the Company's varying markets.
For further information, refer to the combined financial statements and
footnotes thereto included in the Production Resource Group, L.L.C. Annual
Report on Form 10-K for the year ended December 31, 1998.
Business
The Company is an integrator, fabricator and supplier of a broad range of
entertainment technology for the live entertainment (live theatre, concert
touring and special events), corporate events (trade and industrial shows) and
themed entertainment (gaming, theme parks and themed retail) markets. The
Company operates through four segments: lighting, audio, event services and
scenery.
The lighting segment provides automated lighting systems and related products
for rental and sale. The Company's audio segment provides sound equipment for
sale and rental, as well as sound system design, installation and consulting
services to customers with large-scale systems such as casinos, sports stadiums
and corporations. The event services segment provides a variety of services,
primarily to corporate clients, including exhibit fabrication and production
management for trade and industrial shows. The scenery segment fabricates
scenery for sale and rents automation equipment that controls the motion of such
scenery.
Sale of Units
On June 15, 1999, the members of the Company (other than Harris Production
Services, Inc.) ("HPS") contributed their equity interests (membership units) in
the Company to Production Resource Group Inc. ("PRG Inc."), a Delaware
corporation, in exchange for stock of PRG Inc. Simultaneously with such
contribution, the shareholders of HPS contributed their stock in HPS to PRG Inc.
in exchange for stock in PRG Inc. and certain shareholders of PRG Inc. sold
shares of PRG Inc. to Boston Ventures Limited Partnership V, a Delaware limited
partnership ("BV"). Furthermore, BV made a contribution to the Company in the
amount of $12,000,000. Further, PRG Inc. then contributed the ownership
interests held in the Company to HPS making HPS a wholly-owned subsidiary of PRG
Inc. and as a result the Company became a wholly-owned subsidiary of HPS. The
Company incurred non-recurring compensation expense of approximately $365,000 in
June 1999 and $125,000 in August 1999 related to compensation of senior
management in connection with to the closure of the above transaction. PRG Inc.
also issued stock to the minority interest holders of
4
Light & Sound Design Holdings Ltd. ("Holdings") for the remaining shares not
owned by the Company. PRG Inc. then contributed such stock in Holdings to HPS
which, in turn, contributed such shares to the Company. Holdings subsequently
changed their name to Production Resource Group (Europe) Limited ("PRGE"). Other
than as described above and in Note 3 below, PRG Inc. had no operations or
transactions during the year and will continue to function solely as a holding
company. PRG LLC will continue to function as the operating entity.
2. Accounting Policies
Principles of Combination
The Company's combined financial statements include the accounts of all the
entities under common control of the members of the Company. The financial
statements do not include the accounts of PRG Inc. All intercompany balances and
transactions have been eliminated.
Recently Issued Accounting Standards
In April 1998, the American Institute of Certified Public Accountants issued
Statement of Position 98-5, "Reporting the Costs of Start-up Activities" (SOP
98-5). The statement is effective January 1, 1999, and requires that start-up
costs capitalized prior to January 1, 1999 be written off and any future
start-up costs be expensed as incurred. Accordingly, the Company wrote off the
unamortized balance of organization costs of approximately $263,000 effective
January 1, 1999, and reported the expense as a cumulative effect of accounting
change.
3. Acquisitions
The Company completed six acquisitions during the nine months ended September
30, 1999. All the acquisitions were financed using the Company's Credit
Facility. On April 5, 1999, the Company acquired all the assets and assumed
certain liabilities of A-1 Audio, Inc. ("A-1 Audio"). A-1 Audio, based in
Hollywood, California, provides audio products for sale and rental primarily to
the concert touring market. The acquired assets of A-1 Audio will operate as
part of the Company's audio segment. The Company paid approximately $8.3 million
for the acquisition.
On April 30, 1999, the Company acquired all of the assets and assumed certain
liabilities of Ancha Electronics, Inc. ("Ancha"). Ancha, based in Rolling
Meadows, Illinois with offices in Norcross, Georgia; Tampa, Florida; and
Houston, Texas, provides specialized audio and video systems for installation.
The acquired assets of Ancha will operate as part of the Company's audio
segment. The Company paid approximately $4.0 million for Ancha including the
issuance of 2,666 Preferred Units of the Company with a liquidation preference
of $100,000.
On August 19, 1999, the Company acquired certain assets and assumed certain
liabilities of the Presentation Technologies business of Caribiner Audio Visual
Services, Inc. (CAVS) a subsidiary of Caribiner International, Inc. and formed a
new division called SPL- Integrated Solutions (SPLIS). SPLIS provides complex
audio-visual presentation systems for corporations, universities, government
facilities and other commercial venues and operates primarily out of two offices
in Atlanta, Georgia and Minneapolis, Minnesota. SPLIS will operate as part of
the Company's audio segment. The Company has paid approximately $2.0 million for
SPLIS, through September 30, 1999. The final purchase price will be determined
upon completion of the valuation of the acquired
5
assets net of acquired liabilities.
On September 1, 1999, the Company acquired all of the assets and assumed certain
liabilities of Total Technical Excellence, Inc. ("TTE"). TTE is based in
Atlanta, Georgia, and provides exhibit design, fabrication, installation and
related products. The acquired assets of TTE will operate as part of the
Company's scenery segment. The Company paid approximately $2.5 million for TTE
and issued 1,309 shares of Series D convertible Preferred Stock of PRG Inc.,
which PRG Inc. had contributed to the Company.
On September 7, 1999, PRGE, which operates as a wholly-owned subsidiary of the
Company, acquired all of outstanding shares of Midnight Design, Ltd. ("Midnight
Design"). Midnight Design, based in the United Kingdom, provides full service
lighting solutions to corporations. Midnight Design will operate as part of the
Company's lighting segment. The Company paid approximately $2.2 million for
Midnight Design and issued 1,676 shares of Series D convertible Preferred Stock
of PRG Inc., which PRG Inc. had contributed to the Company.
On September 7, 1999, PRGE, acquired certain assets and assumed certain
liabilities of The Spot Company, Ltd. ("Spot Co"). Spot Co, based in the United
Kingdom, provides lighting services and equipment to the special event market.
The acquired assets of Spot Co will operate as part of the Company's lighting
segment. The Company paid approximately $1.4 million for Spot Co.
The pro forma results of operations for the nine months ended September 30, 1999
and 1998, assuming consummation of all 1999 and 1998 acquisitions as of January
1, 1998 are as follows:
(In thousands) Nine months Ended
September 30,
------------------------
1999 1998
-------- --------
Total revenues from continuing operations $207,837 $198,079
Net loss $(8,840) $ (501)
4. Reportable Segments
The Company's operations include four reportable segments: lighting, audio,
event services and scenery. Lighting has six primary operating units that
provide lighting equipment and systems to a highly diversified client base.
Audio consists of primarily four operating units that sell and rent audio
systems and products. Event services has three operating units that sell their
services and exhibits primarily to corporate clients. Scenery consists of three
operating units that fabricate scenery and rent computerized automation
equipment, primarily to live theatrical concerns.
Three month period ended September 30, 1999
- -------------------------------------------------------------------------------------------------
(In thousands)
Event
Lighting Audio Services Scenery Total
- -------------------------------------------------------------------------------------------------
Revenues from external customers $31,847 $18,814 $13,890 $ 8,081 $ 72,632
Intersegment revenues 1,491 1,033 1,037 745 4,306
Segment profit(1) 5,490 1,404 2,602 2,162 11,658
- -------------------------------------------------------------------------------------------------
6
Three month period ended September 30, 1998(2)
- -------------------------------------------------------------------------------------------------
(In thousands)
Event
Lighting Audio Services Scenery Total
- -------------------------------------------------------------------------------------------------
Revenues from external customers $31,080 $ 7,858 $ 5,420 $11,902 $ 56,260
Intersegment revenues 963 320 39 334 1,656
Segment profit 5,732 2,901 352 3,028 12,013
- -------------------------------------------------------------------------------------------------
Nine month period ended September 30, 1999
- -------------------------------------------------------------------------------------------------
(In thousands)
Event
Lighting Audio Services Scenery Total
- -------------------------------------------------------------------------------------------------
Revenues from external customers $85,896 $44,676 $38,174 $25,765 $194,511
Intersegment revenues 3,630 1,135 2,634 1,524 8,923
Segment profit(1) 14,764 4,847 4,924 7,973 32,508
- -------------------------------------------------------------------------------------------------
Nine month period ended September 30, 1998(2)
- -------------------------------------------------------------------------------------------------
(In thousands)
Event
Lighting Audio Services Scenery Total
- -------------------------------------------------------------------------------------------------
Revenues from external customers $57,153 $14,029 $16,399 $24,044 $111,625
Intersegment revenues 2,526 320 112 1,145 4,103
Segment profit 11,770 5,296 1,501 7,291 25,858
- -------------------------------------------------------------------------------------------------
- ----------
(1) Segment profit excludes restructuring charges and non-recurring
compensation expense.
(2) Certain items have been reclassified to conform to current period
presentation.
- --------------------------------------------------------------------------------------------------------
Three months Ended Nine months Ended
September 30, September 30,
------------------------ -------------------------
(In thousands) 1999 1998 1999 1998
-------- ------- -------- --------
Profit (loss)
Total profit for reportable segments $ 11,658 $12,013 $ 32,508 $ 25,858
Restructuring charges and
non-recurring compensation expense (425) -- (2,525) --
Unallocated amounts:
Corporate selling, general, and
administrative expenses (3,279) (2,532) (9,133) (7,023)
Depreciation and amortization (5,409) (3,946) (15,355) (10,954)
Interest expense, net (4,495) (3,879) (13,721) (9,679)
Other income (expense) 38 -- (16) --
-------- ------- -------- --------
Total loss before income taxes and
cumulative effect of accounting
change $ (1,912) $ 1,656 $ (8,242) $ (1,798)
======== ======= ======== ========
- --------------------------------------------------------------------------------------------------------
7
- --------------------------------------------------------------------------------
(In thousands) September 30, December 31,
1999 1998
------------- ------------
Assets
Total assets for reportable segments $ 137,509 $ 99,075
Unallocated amounts:
Goodwill 49,094 46,116
Corporate property and equipment 48,603 43,750
Corporate other assets 6,668 6,380
Elimination of intercompany receivables (5,729) (1,770)
--------- ---------
Total combined assets * $ 236,145 $ 193,551
========= =========
- --------------------------------------------------------------------------------
* The total combined assets as of September 30, 1999 and December 31, 1998
exclude assets associated with the previously discontinued Permanent
Installation Themed Attraction business of approximately $2.5 million and
$2.6 million, respectively.
5. Restructuring Charges
Restructuring charges relate to the implementation of a plan to close the
Company's Denver operations, operating in the event services segment, and the
closure of a New Jersey office within the lighting segment. The aggregate amount
of approximately $2.0 million primarily reflects rental payments for the
remaining lease periods, severance payments relating to workforce reductions and
the write-off of the net book value of furniture and leasehold improvements for
vacated properties. At September 30, 1999, approximately $1.7 million of cash
expenditures have been charged against the reserve.
6. Comprehensive Gain and Loss
Total comprehensive loss amounted to approximately $1.7 million and a
comprehensive gain of $1.1 million for the three months ended September 30, 1999
and 1998, respectively. Total comprehensive loss amounted to approximately $8.9
million and $2.6 million for the nine months ended September 30, 1999 and 1998,
respectively. The difference between net loss and total comprehensive loss for
the three month period and the nine month periods ended September 30, 1999 is
the result of foreign currency translation adjustments related to the Company's
United Kingdom subsidiaries acquired in June 1998 and September 1999.
7. Subsidiary Financial Information
The following table presents unaudited condensed combining financial statements
as of September
8
30, 1999 and for the nine months ended September 30, 1999 with respect to the
financial position and results of operations of the Company and its wholly-owned
and majority-owned subsidiaries. On December 24, 1997, the Company and PRG
Finance Corporation ("Finance Corp."), a Delaware Corporation, issued $100
million of 11 1/2% of Senior Subordinated Notes due 2008 (the "Notes"). The
Notes are fully and unconditionally guaranteed by the Company's domestic
subsidiaries other than Finance Corp. Seven of the Guarantors are wholly-owned
subsidiaries of the Company and the remaining Guarantor is 99% owned by the
Company (with the remaining 1% interest owned by a member of the Company). The
condensed combining financial statements are presented in lieu of separate
financial statements and other related disclosures of Finance Corp., and the
Guarantors as management has determined that such information is not material to
investors.
9
Condensed Combining Balance Sheet (Unaudited)
September 30, 1999
(In thousands)
Guarantor Non-Guarantor PRG
PRG* Subsidiaries Subsidiaries Adjustments Combined
-------- ------------ ------------- ----------- --------
Assets
Current assets:
Cash and cash equivalents $ 4,784 $ 1,093 $ (646) $ 5,231
Accounts receivable, net 35,828 17,051 1,682 54,561
Deferred production expenses 2,990 -- -- 2,990
Inventories 10,979 3,239 1,573 15,791
Intercompany receivables 1,784 (3,592) 1,808 --
Other current assets 6,102 3,080 3,458 12,640
-------- ------- ------- ------- --------
Total current assets 62,467 20,871 7,875 91,213
Property and equipment, net 66,426 11,468 7,686 85,580
Investment in subsidiaries 27,767 (27,767) --
Goodwill, net 26,586 8,518 1,531 12,459 49,094
Other assets 12,434 66 289 12,789
-------- ------- ------- ------- --------
Total assets $195,680 $40,923 $17,381 $(15,308) $238,676
======== ======= ======= ======== ========
Liabilities and Equity
Current liabilities:
Current portion of long-term debt $ 624 $ 70 $ -- $ 694
Accounts payable 13,126 9,568 3,261 25,955
Payroll and sales taxes payable 2,386 1,818 -- 4,204
Income taxes payable -- 927 -- 927
Deferred revenue 8,073 527 152 8,752
Other current liabilities 9,406 1,052 720 11,178
-------- ------- ------- ------- --------
Total current liabilities 33,615 13,962 4,133 51,710
Long-term debt
Senior Subordinated Notes 100,000 -- -- 100,000
Credit Facility 75,938 -- -- 75,938
Other long-term (receivable) debt 3,092 10,155 8,876 (18,896) 3,227
-------- ------- ------- ------- --------
179,030 10,155 8,876 (18,896) 179,165
Deferred income taxes 911 159 1,070
Equity (deficit) (16,965) 15,895 4,215 3,586 6,731
-------- ------- ------- ------- --------
$195,680 $40,923 $17,381 $(15,308) $238,676
======== ======= ======= ======= ========
- ----------
*Exclusive of Guarantor Subsidiaries and Non-Guarantor Subsidiaries.
10
Condensed Combining Statement of Operations (Unaudited)
Nine months Ended September 30, 1999
(In thousands)
Guarantor Non-Guarantor PRG
PRG* Subsidiaries Subsidiaries Combined
--------- ------------ ------------- --------
Revenues $ 129,737 $ 57,876 $ 6,898 $ 194,511
Direct production costs 83,451 40,187 3,851 127,489
Depreciation expense 8,517 1,165 818 10,500
--------- -------- ------- ---------
Gross profit 37,769 16,524 2,229 56,522
Selling, general and administrative
expenses 29,976 11,462 2,209 43,647
Other depreciation and amortization 3,765 709 381 4,855
Other (income) expenses 16 -- -- 16
Restructuring charges 2,035 -- -- 2,035
Non-recurring compensation 490 -- -- 490
--------- -------- ------- ---------
Operating profit (loss) 1,487 4,353 (361) 5,479
Interest expense 13,834 125 (54) 13,905
Interest (income) (150) (34) -- (184)
--------- -------- ------- ---------
Income (loss) before income taxes
and cumulative effect of
accounting change (12,197) 4,262 (307) (8,242)
Provision (benefit) for income taxes (39) 551 (120) 392
--------- -------- ------- ---------
Income (loss) before cumulative
effect of accounting change (12,158) 3,711 (187) (8,634)
Minority interest (2) (2)
Cumulative effect of accounting
change (263) -- (263)
--------- -------- ------- ---------
Net income (loss) $ (12,421) $ 3,711 $ (189) $ (8,899)
========= ======== ======= =========
- ----------
*Exclusive of Guarantor Subsidiaries and Non-Guarantor Subsidiaries.
11
Condensed Combining Statement of Cash Flows (Unaudited)
Nine months Ended September 30, 1999
(In thousands)
Guarantor Non-Guarantor PRG
PRG* Subsidiaries Subsidiaries Combined
-------- ------------ ------------- ---------
Net cash (used in) provided by
operating activities $(17,560) $ 1,809 $ 5,999 $ (9,752)
Investing activities
Acquisitions (16,527) (3,642) (20,169)
Purchases of property and equipment (7,980) (4,276) (2,848) (15,104)
Proceeds from sale of rental
equipment and property 11,017 321 -- 11,338
Additions to software development costs (214) -- -- (214)
Other assets (3,665) (65) -- (3,730)
-------- ------- -------- --------
Net cash used in investing
activities $(17,369) $(4,020) $ (6,490) $(27,879)
Financing activities
Proceeds from long-term debt 39,690 -- -- 39,690
Repayments of long-term debt (17,256) (60) -- (17,316)
Member contributions and issuance of
preferred units 14,474 -- -- 14,474
-------- ------- -------- --------
Net cash provided by (used in)
financing activities $ 36,908 $ (60) $ -- $ 36,848
-------- ------- -------- --------
Net increase (decrease) in cash and
cash equivalents 1,979 (2,271) (491) (783)
Cash and cash equivalents-beginning
of period 2,805 3,364 (155) 6,014
-------- ------- -------- --------
Cash and cash equivalents-end of
period $ 4,784 1,093 (646) 5,231
======== ======= ======== ========
- ----------
*Exclusive of Guarantor Subsidiaries and Non-Guarantor Subsidiaries.
12
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
SAFE HARBOR FOR FORWARD-LOOKING STATEMENTS
The Company is including the following cautionary statement in this Form 10-Q to
make applicable and take advantage of safe harbor provisions of the Private
Security Reform Act of 1995 for any forward-looking statements made by, or on
behalf of, the Company. Forward-looking statements include statements concerning
plans, objectives, goals, strategies, future events or performance and
underlying assumptions and other statements, which are other than statements of
historical facts. From time to time, the Company may publish or otherwise make
available forward-looking statements of this nature. All such subsequent
forward-looking statements, whether written or oral, and whether made by or on
behalf of the Company, are also expressly qualified by these cautionary
statements. Certain statements contained herein are forward-looking statements
and, accordingly, involve risk and uncertainties that could cause actual results
or outcomes to differ materially from those expressed in the forward-looking
statements.
General
The Company is a leading integrator, fabricator and supplier of a broad range of
entertainment technology for the live entertainment (live theater, concert
touring and special events), corporate events (trade and industrial shows) and
themed entertainment (gaming, theme parks and themed retail) markets. During
1999, the Company has focused on the integration of the prior year's
acquisitions and the consolidation of redundant facilities and operations. In
connection therewith, the Company's management authorized a restructuring plan
designed to close two facilities, and integrate their operations with remaining
business units.
The Company has also expanded its capabilities and geographic presence by
acquiring six companies during 1999. With the acquisitions of the net assets of
A-1 Audio, Ancha and the formation of SPLIS the audio segment now has a larger
inventory of audio products and has created a national delivery capability for
the engineering, fabrication and installation of audio, video and presentation
systems. The lighting segment has increased their presence in the United Kingdom
with the acquisitions of Midnight Design and Spot Co. The acquisition of TTE has
diversified the client base of the scenery segment to include more corporate
customers. The remainder of the year will focus on further integration of the
new acquisitions into the segments.
Results of Operations
Comparability of Periods
Financial results for the three and nine month periods ended September 30, 1999
are not fully comparable to prior periods due to the acquisitions of Light and
Sound Design (a wholly-owned subsidiary of PRGE), Production Arts, CBE, SPL, PLS
and Haas on June 19, June 30, July 31, August 19, October 23 and November 30,
1998, respectively, and the 1999 acquisitions of A-1 Audio, Ancha, TTE, Midnight
Design, Spot Co. and the formation of SPLIS, as previously discussed.
13
Three Months Ended September 30, 1999 Compared to Three Months Ended
September 30, 1998
Revenues. The Company's revenues increased $16.3 million, or 29.1%, to $72.6
million for the three months ended September 30, 1999, compared to $56.3 million
for the three months ended September 30, 1998. The revenue increase was
primarily attributable to revenues generated by operations acquired in and
subsequent to the third quarter of 1998. The lighting segment revenues were
$31.8 million for the three months ended September 30, 1999, an increase of $0.8
million, or 2.5%, when compared to the same period in the prior year. This
increase in revenue for the third quarter 1999 is primarily attributable to the
acquisition of PLS in October 1998. For the three months ended September 30,
1999, the audio segment revenues increased to $18.8 million, an increase of
$10.9 million, or 139.4% as compared to the same period in the prior year. The
acquisitions of SPL in August 1998, Ancha and A-1 Audio in April 1999, and the
formation of SPLIS provided an additional $2.3 million, $4.9 million, $1.5
million and $1.4 million in revenues, respectively, for the third quarter of
1999. Revenues in the event services segment increased approximately $8.5
million, or 156.3%, to $13.9 million for the third quarter 1999, compared to
$5.4 million in the third quarter 1998. The increase was primarily due to the
acquisition of Haas in November 1998, which provided an additional $6.4 million
in revenue for the third quarter 1999. Additionally, revenue related to
industrial shows and corporate events increased by approximately $2.1 million
for the third quarter 1999, as compared to the third quarter 1998. The scenery
segment reported revenues of $8.1 million for the three months ended September
30, 1999. This decrease of $3.8 million, or 32.1%, as compared to the three
months ended September 30, 1998, is attributable to a decrease in the size of
scenery fabrication projects completed in this quarter in the casino
marketplace.
Gross Profit. The Company's gross profit increased to $21.7 million for the
three months ended September 30, 1999, from $16.9 million for the same period in
1998, resulting in an increase of $4.8 million, or 28.5%. Gross profit margin
for the three months ended September 30, 1999 as a percentage of revenues was
29.8%, remaining relatively consistent with the gross margin as a percentage of
sales of 30.0% for the same period in 1998.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased to $16.8 million for the three months ended
September 30, 1999, compared to $10.3 million for the same period last year. The
increase was primarily attributable to incremental selling, general and
administrative expenses associated with the acquisitions of CBE, SPL, PLS, Haas,
and most recently, Ancha, A-1 Audio, TTE, Midnight Design, Spot Co. and the
formation of SPLIS. As a percentage of revenues, selling, general and
administrative expenses increased to 23.1% for three months ended September 30,
1999 as compared to 18.3% for the same period in 1998.
Restructuring Charges. The increase in restructuring charges relates to the
closure of the Denver operations within the event services segment. The
additional charge in the third quarter of approximately $0.3 million represented
primarily additional costs related to the contract settlement of the former Vice
President of the Denver operations.
Non-recurring compensation. The non-recurring compensation in the three month
period ended September 30, 1999, represented bonus payments paid to senior
management related to the sale of membership units to the BV (See "Sale of
Units" in the Notes to the Combined Financial Statements).
14
Operating Profit. Operating profit was $2.6 million for the three months ended
September 30, 1999, a decrease of $2.9 million from $5.5 million for the three
months ended September 30, 1998. The $2.9 million decrease in operating profit
was primarily attributable to the increased incremental selling, general and
administrative as a percentage of sales. Operating profit, as a percentage of
revenues, was 3.6% for the three month period ended September 30, 1999, down
from 9.8% for the same period last year. Operating profit would have been $3.0
million for the three months ended September 30, 1999, or 4.1% as a percentage
of revenues, excluding the restructuring charge of $300,000 and non-recurring
compensation of $125,000.
Interest Expense. Interest expense was $4.6 million for the three month period
ended September 30, 1999, an increase of $0.6 million, or 15.2%, as compared to
the three months ended September 30, 1998. The increase was primarily attributed
to the interest expense associated with the increased borrowings under the
Company's Credit Facility.
Income Taxes. For the three months ended September 30, 1999 and 1998, the
provision for income taxes represents state and foreign taxes for the acquired
subsidiaries that are subject to income tax.
Net Income/Loss. The Company had a net loss of $2.1 million for the three months
ended September 30, 1999, compared to a net income of $1.1 million for the three
months ended September 30, 1998. The net loss was primarily due to the
restructuring charge, and increases in other amortization and depreciation
expense and selling general and administrative expenses, as a percentage of
revenues.
Nine months Ended September 30, 1999 Compared to Nine months Ended
September 30, 1998
Revenues. The Company's revenues increased to $194.5 million for the nine months
ended September 30, 1999, an increase of $82.9 million, or 74.3%, from $111.6
million for the nine months ended September 30, 1998. The increase was primarily
attributable to revenues generated by operations acquired in and subsequent to
the third quarter of 1998. The lighting segment revenues were $85.9 million, an
increase of $28.7 million, or 50.3%, as compared to the same period in the prior
year. This increase was primarily related to the acquisitions of Light and Sound
Design and Production Arts in June 1998 and PLS in October 1998, which
collectively provided an additional $28.2 million of revenues. For the nine
months ended September 30, 1999, the audio segment revenues more than tripled to
$44.7 million, an increase of $30.7 million, or 218.4%, from the $14.0 million
for the nine months ended September 30, 1998. The acquisitions of SPL in August
1998, A-1 Audio and Ancha in April 1999, and the formation of SPLIS provided an
additional $15.0 million, $3.0 million, $8.0 million and $1.4 million in
revenues, respectively, for the nine months ended September 30, 1999. Revenues
in the event services segment more than doubled to $38.2 million, an increase of
$21.8 million, or 132.8%, from the $16.4 million reported by the segment for the
nine months ended September 30, 1998. The increase in revenues is attributable
to the acquisitions of CBE in July 1998 and Haas in November 1998, which
contributed additional revenues of $8.5 million and $13.2 million, respectively.
The scenery segment reported revenues of $25.7 million, an increase of $1.7
million, or 7.2%, as compared to the nine months ended September 30, 1998.
Revenues in the
15
segment increased primarily due to an increase in the number of scenery
fabrication projects.
Gross Profit. The Company's gross profit increased to $56.5 million for the nine
months ended September 30, 1999, from $34.9 million for the same period in 1998,
resulting in an increase of $21.6 million, or 61.9%. The increase in gross
profit was primarily due to the increase in revenues described above. Gross
profit margin decreased as a percentage of revenues from approximately 31.3% for
the nine months ended September 30, 1998, to 29.1% for the nine months ended
September 30, 1999. The decrease was primarily attributable to the shift in
revenue mix between rental revenues and sales and installation revenues. For the
nine months ended September 30, 1999, rental revenues comprised only 30.0% of
total revenues as compared to 35.8% for the same period in the prior year.
Rental revenues have a greater gross margin than sales and installation
revenues. The reason for the change in the revenue mix is primarily attributable
to the acquisitions of CBE, SPL, and Haas during 1998 and Ancha in 1999. These
operations do not have rental revenues.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased to $43.6 million for the nine months ended
September 30, 1999, compared to $23.8 million for the same period last year. The
increase was primarily attributable to incremental selling, general and
administrative expenses associated with the acquisitions of Light and Sound
Design, Production Arts, CBE, SPL, PLS, Haas in 1998 and Ancha and A-1 Audio in
1999. As a percentage of revenues, selling, general and administrative expenses
increased to 22.4% for nine months ended September 30, 1999, as compared to
21.2% for the same period in 1998.
Restructuring Charges. Restructuring charges relate to the closing of the
Denver operations of the event services segments and the closure of a New Jersey
office within the lighting segment. The aggregate amount of approximately $2.0
million primarily reflects rental payments for the remaining lease periods,
severance payments relating to workforce reductions, the write-off of furniture
and leasehold improvements, and other expenditures incurred for vacating the
properties.
Non-recurring compensation. The non-recurring compensation of $0.5 million was
recorded in the nine month period ended September 30, 1999, and represented
bonus payments paid to senior management related to the sale of membership units
to BV (See "Sale of Units" in "Notes to Combined Financial Statements").
Operating Profit. Operating profit was $5.5 million for the nine months ended
September 30, 1999, a decrease of $2.4 million, or 30.5%, from $7.9 million for
the nine months ended September 30, 1998. Operating profit, as a percentage of
revenues, was 2.8% for the nine month period ending September 30, 1999, down
from 7.1% for the same period last year. Operating profit would have been $8.0
million for the nine months ended September 30, 1999, or 4.1% as a percentage of
revenues, excluding the restructuring charge of $2.0 million and non-recurring
compensation of $490,000.
Interest Expense. Interest expense increased to $13.9 million for the nine month
period ended September 30, 1999, from $10.2 million for the nine months ended
September 30, 1998. The increase was primarily attributed to the interest
expense associated with the increased borrowings under the Company's Credit
Facility to fund the acquisitions.
Income Taxes. For the nine months ended September 30, 1999 and 1998, the net
provision for income
16
taxes represents corporate federal, state and foreign taxes for the acquired
subsidiaries that are subject to income tax.
Cumulative Effect of Accounting Change. The Company implemented Statement of
Position 98-5, "Reporting the Costs of Start-up Activities" (SOP 98-5), and,
accordingly, wrote off all capitalized start-up costs effective January 1, 1999.
Net Loss. The Company had a net loss of $8.9 million for the nine months ended
September 30, 1999, compared to a net loss of $2.6 million for the nine months
ended September 30, 1998. The net loss was primarily due to the restructuring
charges, the aforementioned decrease in gross profit as a percentage of revenue,
non-recurring compensation expense, increases in other depreciation and
amortization expense, selling, general and administrative expenses and interest
expense.
Liquidity and Capital Resources
During the nine months ended September 30, 1999, the Company repaid indebtedness
(principally bank borrowings) of approximately $17.3 million, and incurred
additional borrowings of approximately $39.7 million. In accordance with an
amendment to the Company's Credit Facility, the Company sold its facility in Las
Vegas, Nevada and entered into a sale and leaseback arrangement with an
unrelated party for this facility in March 1999. From the net proceeds, the
Company repaid approximately $6.5 million in bank borrowings under the Credit
Facility. Additionally, in conjunction with the sale of units (See Note 1 of
"Notes to Combined Financial Statements"), the Company repaid an additional
$10.0 million in bank borrowings under the Credit Facility with the capital
contributed by BV.
The Company's investing activities have been financed primarily from members'
contributions, proceeds from the sale of property and rental equipment and bank
borrowings under the existing $100 million, senior secured, reducing, revolving
Credit Facility due December 31, 2002. The Guarantors are restricted from making
distributions under the terms of the Indenture and the Credit Facility.
The following table sets forth certain information from the Company's Combined
Statements of Cash Flows for the nine months ended September 30, 1999 and 1998:
1999 1998
-------- --------
Net cash provided by (used in):
Operating activities $ (9,752) $ (1,238)
Investing activities (27,879) (56,296)
Financing activities 36,848 41,712
The Company believes that borrowings available under the Credit Facility should
be sufficient to meet operating needs and capital spending requirements for the
next twelve months. Borrowings under the Credit Facility are subject to the
maintenance of certain restrictive financial covenants including a minimum pro
forma interest coverage ratio and fixed charge coverage ratio and a maximum
leverage ratio.
The Credit Facility begins to reduce by $7.5 million per quarter beginning on
March 31, 2000 and then by $10.0 million per quarter beginning March 31, 2002.
The Senior Subordinated Notes are not redeemable except in certain circumstances
until January 15, 2003. Thereafter, the Notes are
17
subject to redemption at prices decreasing from 105.75 percent to 100 percent of
the face amount through 2006. On September 30, 1999, the Company obtained an
amendment to the Credit Facility, which, among other things, loosened certain
financial covenant ratios.
Year 2000
The Year 2000 Issue is the result of computer programs being written using two
digits rather than four to define the applicable year. Any of the Company's
computer programs or hardware or equipment purchased from vendors, which have
date-sensitive software or embedded chips may recognize a date using "00" as the
year 1900 rather than the year 2000. This could result in a system failure or
miscalculations causing disruptions of operations, including, among other
things, a temporary inability to operate computerized machinery or equipment,
process transactions, send invoices, or engage in similar normal business
activities.
Based on recent assessments, the Company determined that it would be required to
modify or replace certain portions of its software and certain hardware so that
those systems will properly utilize and recognize dates beyond December 31,
1999. The Company presently believes that with modifications or replacements of
existing software and certain hardware, the Company's exposure to the Year 2000
Issue can be mitigated so as to avoid materially adverse consequences. However,
if such modifications and replacements are not made, or are not completed
timely, there is no assurance that the Year 2000 Issue will not have a material
adverse impact on the operations of the Company.
Management's Plan. The Company's plan to address the Year 2000 Issue involves
the following four steps: assessment, remediation, testing and implementation.
To date, the Company has completed its assessment of all systems that could be
significantly affected by the Year 2000 problem for all divisions and
subsidiaries of the Company. The completed assessment concluded that several of
the Company's legacy financial applications (principally general ledger) needed
to be replaced or remedied. In addition, the Company identified a list of
hardware and software used throughout the Company requiring replacement.
Finally, the Company has queried its 100 most critical vendors and customers
that do not share information systems with the Company (external agents)
regarding their Year 2000 compliance. To date, the Company has received a 78%
response rate and is not yet aware of any external agent with a Year 2000 issue
that could reasonably be expected to materially impact the Company's results of
operations, liquidity or capital resources. The Company is continuing its
efforts to contact external agents that have yet to respond. However, the
Company has no means of ensuring that external agents will be Year 2000 ready.
The only enterprise system that interfaces directly outside the Company is its
outsourced payroll system (ADP). This system has been certified as fully year
2000 compliant.
The Company is approximately 90% complete in its remediation phase. The key
aspect of this phase is replacing the legacy financial applications that are not
Year 2000 compliant. In order to have Year 2000 compliant systems and to improve
access to business information through common, integrated computing systems
across the Company, a fully compliant Enterprise Resource Planner ("ERP")
(principally financial applications) was purchased from the Oracle Corporation
in 1997. The Company has implemented the ERP in approximately 60% of the
operating divisions and plans to have it implemented in most of the remaining
operating units during the fourth quarter 1999 and during 2000. For the
operating units that have not converted to the ERP system, the Company has
18
remedied all non-compliant systems (principally general ledger systems). The
remaining systems that are not compliant (principally procurement systems) are
being remedied in the fourth quarter 1999.
The testing phase and implementation phase of the Company's plan runs
concurrently with the implementation of the ERP and is similarly 60% complete.
The implementation phase also includes the investigation and replacement of
non-compliant operational and administrative software applications (e.g., e-mail
clients and word processors) and the hardware upgrade or replacement of
non-compliant or questionably compliant hardware and software.
Costs. The Company will utilize primarily internal resources to program,
replace, test and implement changes for the Year 2000 project. The total cost of
the project is anticipated to approximate $4.0 million including the cost of
acquiring hardware and software required for the ERP system. Of this amount,
approximately $3.8 million has been spent to date. The amount primarily
represents the purchase and rollout of the Company's ERP and the remediation of
legacy systems. The remainder will primarily entail software and hardware
upgrades and further rollout of the ERP. The Company does not track the portion
of these costs attributable to Year 2000 compliance and does not allocate
internal costs (primarily personnel costs of ITS personnel) to Year 2000
compliance.
Risks. Although no assurance can be given, Management of the Company believes it
has an effective program in place to resolve the Year 2000 issue in a timely
manner. The majority of the business is centralized or in the process of
becoming centralized. All centralized corporate functions are fully compliant.
In the event that the Company does not complete any additional phases, the
Company would be required to fully centralize all business functions until that
time that full compliance could be reached. The realistic worst case scenario is
that the Company fails to centralize its key functions in tandem with a failure
to complete the Year 2000 Project. The amount of potential liability lost
revenues and failed business processes resulting from the failure of the
Company's Year 2000 compliance program cannot be reasonably estimated at this
time. The failure to correct a material Year 2000 problem could result in an
interruption in, or a failure of, certain normal business activities or
operations. Such failures could materially and adversely affect the Company's
results of operations, liquidity and financial condition. Due to the general
uncertainty inherent in the Year 2000 problem, resulting in part from the
uncertainty of the Year 2000 readiness of third-party suppliers and customers,
the Company is unable to determine at this time whether the consequences of Year
2000 failures will have a material impact on the Company's results of
operations, liquidity or financial condition. The Year 2000 Project is expected
to significantly reduce the Company's level of uncertainty about the Year 2000
problem and, in particular, about the Year 2000 compliance and readiness of its
material external agents. The Company believes that, with the implementation of
new business systems and completion of the Year 2000 Project as scheduled, the
possibility of significant interruptions of normal operations should be reduced.
Contingency Plans. The Company has contingency plans for certain critical
applications. These contingency plans involve primarily include shifting
processing to the Corporate headquarters and manual work-arounds.
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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Market risks relating to the Company's operations result primarily from changes
in interest rates. The Company also has limited foreign currency risk associated
with its European operations.
Interest Rate Risk
The Company's interest rate risk management objective is to limit the impact of
interest rate changes on its earnings and cash flows and to lower its overall
borrowing cost.
Foreign Currency Exchange Risk
The Company does not conduct a significant portion of its sales activity in
foreign markets. Presently, the Company's primary foreign activities are
conducted in the United Kingdom. The Company's reported financial results could
be affected, however, by factors such as foreign currency exchange rates in the
markets where it operates. When the U.S. dollar strengthens against foreign
currencies, the reported U.S. dollar value of local currency operating profits
generally decreases; when the U.S. dollar weakens against such foreign
currencies, the reported U.S. dollar value of local currency operating profits
generally increases. Since the Company does not have significant foreign
operations, the Company does not believe it is necessary to enter into any
derivative financial instruments to reduce its exposure to foreign currency
exchange risk.
20
PART II
Other Information
Items 1,2,3,4, and 5 are not applicable.
ITEM 6.
EXHIBITS AND REPORTS ON FORM 8-K
Exhibits:
27.1 Financial Data Schedule*
* Filed herewith
(b) Reports on Form 8-K.
The Company filed a current report on Form 8-K, dated September 14, 1999 as
amended by Form 8-K/A filed November 15, 1999, reporting in Item 1,
"Acquisition or Disposition of Assets," its acquisition of Total Technical
Excellence, Inc.
21
PRODUCTION RESOURCE GROUP, L.L.C.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
PRODUCTION RESOURCE GROUP, L.L.C.
Dated: November 15, 1999 By: /s/ Bradley G. Miller
-------------------------------------
Bradley G. Miller
Chief Operating and Financial Officer
(Principal Financial Officer)
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