AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON OCTOBER 25, 1996
REGISTRATION NO. 333-
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
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PRODUCTION GROUP INTERNATIONAL, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
2200 WILSON BOULEVARD, SUITE 200
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, SUITE 200
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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PROPOSED MAXIMUM
TITLE OF EACH CLASS OF AGGREGATE AMOUNT OF
SECURITIES TO BE REGISTERED OFFERING PRICE (1) REGISTRATION FEE
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Shares of Common Stock, par value $.01
per share............................. $56,810,000 $17,215
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(1) Estimated solely for purposes of determining the registration fee pursuant
to Rule 457(o) under the Securities Act.
----------------
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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++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+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
OCTOBER , 1996
[LOGO OF PGI APPEARS HERE]
Shares
Common Stock
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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.
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UNDERWRITING
PRICE TO DISCOUNTS AND PROCEEDS TO
PUBLIC COMMISSIONS COMPANY(1)
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Per Share............................... $ $ $
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Total(2)................................ $ $ $
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(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
, 1996.
--------
Alex. Brown & Sons
INCORPORATED
Montgomery Securities
Robertson, Stephens & Company
THE DATE OF THIS PROSPECTUS IS , 1996.
[PHOTOS OF PGI EXHIBITIONS AND BUSINESS COMMUNICATIONS EVENTS AND A
DESCRIPTION THEREOF APPEAR HERE]
----------------
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.
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.
3
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 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 fiscal 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)
predictable recurring revenue streams from successful shows that often sell out
in advance and (iv) the ability to benefit from initial marketing costs over 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 Common Stock offered hereby involves a high degree of risk. See "Risk
Factors."
THE OFFERING
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
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(1) Excludes (i) 1,027,995 shares of Common Stock issuable upon exercise of
stock options outstanding at October 15, 1996 at a weighted average
exercise price of approximately $1.19 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
SUMMARY CONSOLIDATED FINANCIAL AND OPERATING DATA
(IN THOUSANDS, EXCEPT PER SHARE AND OPERATING DATA)
FISCAL YEARS ENDED AUGUST 31,
---------------------------------------
1992 1993 1994 1995 1996
------ ------ ------- ------- -------
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 25,137
Reorganization and consoli-
dation expenses (1)........ -- -- -- 2,112 6,897
Operating income (loss)..... 289 176 (1,787) (7,632) (10,680)(2)
Net income (loss)........... 288 167 (1,551) (7,452) (12,086)
Net income (loss) per common
share (3)..................
Weighted average common
shares outstanding (3).....
OPERATING DATA:
Number of clients served
during period (4).......... 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
AUGUST 31, 1996
---------------------------
ACTUAL AS ADJUSTED (5)
-------- -----------------
CONSOLIDATED BALANCE SHEET DATA:
Working capital................................... $(18,588)
Total assets...................................... 43,723
Total debt (6).................................... 16,935
Total stockholders' equity ....................... 8,408
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(1) For fiscal 1995, includes a $2.1 million 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
consolidation of certain operations. See Notes 2 and 4 of Notes to
Consolidated Financial Statements.
(2) 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 an exercise price below the deemed fair value
and (iii) $215,000 of expenses associated with the write down of certain
fixed assets and the accelerated amortization of capitalized video library
costs, the operating loss would have been $2.2 million.
(3) 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.
(4) Includes only clients whose annual billings were in excess of $25,000.
(5) 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."
(6) 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 11 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
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. 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, 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.
6
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. 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."
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
7
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."
Ongoing Bank Negotiations. The Company and The First National Bank of
Maryland (the "Bank") are currently negotiating an amendment to the Company's
financing arrangement with the Bank. The working capital and equipment lines
under the arrangement have expired and the Company is in violation of certain
covenants relating to one of the lines. As of August 31, 1996, the aggregate
outstanding balance on these lines was $6.0 million. If negotiations are not
successfully completed, the Bank could accelerate the indebtedness and pursue
remedies, including foreclosure on the assets of the Company which serve as
collateral for the financing arrangement. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and Note 5 of Notes
to Consolidated Financial Statements.
International Activities. In fiscal 1996, approximately 10.2% of the
Company's revenues were generated from events that occurred outside North
America. 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
8
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.
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. 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."
9
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 October 15, 1996,
there were options outstanding under the 1995 Stock Plans and outside the
plans to purchase 1,027,995 shares of Common Stock at a weighted average
purchase price of $1.19 per share. 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."
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.
10
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.
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.
11
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:
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............................................................... $
===
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):
TOTAL
SHARES PURCHASED CONSIDERATION AVERAGE
----------------- ------------------- PRICE PER
NUMBER PERCENT AMOUNT PERCENT SHARE
--------- ------- ----------- ------- ---------
Existing stockholders........... 5,628,123 $28,212,000 $5.01
New investors...................
--------- --- ----------- ---
Total......................... 100% 100%
========= === =========== ===
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.
12
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.
AUGUST 31, 1996
--------------------
ACTUAL AS ADJUSTED
------- -----------
(IN THOUSANDS)
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)....................................... 6
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............................ $11,050
======= ===========
- --------
(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.
13
SELECTED CONSOLIDATED FINANCIAL AND OPERATING DATA
(IN THOUSANDS, EXCEPT PER SHARE AND OPERATING DATA)
The consolidated financial data set forth below for fiscal 1994, 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 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.
FISCAL YEARS ENDED AUGUST 31,
-----------------------------------------
1992 1993 1994 1995 1996
------ ------ ------- ------- --------
CONSOLIDATED STATEMENT OF
OPERATIONS DATA: (UNAUDITED)
Revenues......................... $3,755 $8,724 $25,213 $41,950 $ 78,290
Cost of services................. 2,459 6,246 18,976 32,272 53,153
------ ------ ------- ------- --------
Gross profit..................... 1,296 2,478 6,237 9,678 25,137
Selling and operating expenses... 685 1,647 6,474 11,792 22,328 (1)
Corporate general and administra-
tive expenses................... 322 655 1,458 3,167 5,923 (2)
Amortization of acquisition
costs........................... -- -- 92 229 669
Reorganization and consolidation
expenses (3).................... -- -- -- 2,122 6,897
------ ------ ------- ------- --------
Operating income (loss).......... 289 176 (1,787) (7,632) (10,680)(4)
------ ------ ------- ------- --------
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 consoli-
dated 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 (5)..
Weighted average common shares
outstanding (5).................
OPERATING DATA:
Number of clients served during
period (6)...................... 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 pe-
riod............................ 37 60 180 180 365
Number of offices at end of peri-
od.............................. 1 3 16 18 24
CONSOLIDATED BALANCE SHEET DATA
(AT YEAR END):
Working capital (deficit)........ $ 219 $ (161) $(2,347) $ (470) $(18,588)
Total assets..................... 674 4,492 11,847 15,238 43,723
Total debt (7)................... 16 1,314 2,341 2,085 16,935
Total stockholders' equity....... 335 1,244 (1,084) 5,427 8,408
- --------
(1) Includes approximately $215,000 of expenses associated with the write down
of certain fixed assets and the accelerated amortization of capitalized
video library costs.
(2) Includes a $1.3 million non-cash compensation expense related to the grant
of stock options at exercise prices below deemed fair value.
(3) Includes for fiscal 1995, a $2.1 million 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.
(4) In fiscal 1996, excluding the reorganization and consolidation expenses
and the expenses referred to in notes (1) and (2), the operating loss
would have been $2.2 million.
(5) 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.
(6) Includes only clients whose annual billings were in excess of $25,000.
(7) Includes bank debt, subordinated notes and outstanding borrowings on lines
of credit.
14
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15
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16
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."
17
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:
FISCAL YEARS ENDED AUGUST 31,
---------------------------------
1994 1995 1996
-------- -------- --------
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 0.9
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 (0.3) --
Income tax expense (benefit).............. (0.9) 0.0 0.9
------- ------- -------
Net income (loss)....................... (6.2)% (17.8)% (15.4)%
======= ======= =======
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 2.0%, 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 $3.8
million, or 10.5%. As a percentage of 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 business and, in
part, to increased purchasing power with vendors and contractors due to the
Company's larger scale. 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.
18
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 fixed assets and the accelerated
amortization of capitalized video library costs. 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 increased to 7.6% in fiscal 1996 from 7.5% 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 0.9% 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 associated with acquisitions that occurred during fiscal 1994
which the Company had determined were generating significant losses and were
projected to generate losses in the future. During fiscal 1996, the Company
wrote off investments in certain events that have generated losses historically
and are projected to generate losses in the future. The Company determined that
the carrying amounts of these investments were not recoverable based on an
evaluation of the future economic benefit of the investments and their
historical and future profitability measurements. 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.
19
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) $14.8 million related to a full year of revenues from
acquisitions made during fiscal 1994 and (iii) $595,000, or an increase of
4.0%, 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 a decline 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 4.0% 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 25.7% 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 7.5% 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.
Reorganization and consolidation expenses. In fiscal 1995, the Company wrote
off goodwill associated with an acquisition made in fiscal 1993 in accordance
with the Company's goodwill impairment policy. 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
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.
THREE MONTHS ENDED
---------------------------------------------
NOVEMBER 30, FEBRUARY 29, MAY 31, AUGUST 31,
1995 1996 1996 1996
------------ ------------ ------- ----------
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 6,490
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 (8,095)
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 (8,458)
Minority interests of
consolidated subsidiaries....... -- -- -- --
Income tax expense (benefit)..... 117 182 242 175
------- ------- ------- -------
Net income (loss)............... $(1,059) $(2,264) $ (130) $(8,633)
======= ======= ======= =======
Net income (loss) per share.....
Weighted average common shares
outstanding.....................
THREE MONTHS ENDED
---------------------------------------------
NOVEMBER 30, FEBRUARY 28, MAY 31, AUGUST 31,
1994 1995 1995 1995
------------ ------------ ------- ----------
Revenues......................... $11,818 $ 7,916 $12,068 $10,148
Cost of services................. 9,520 5,905 9,275 7,572
------- ------- ------- -------
Gross profit.................... 2,298 2,011 2,793 2,576
Selling and operating expenses... 2,353 2,622 3,077 3,740
Corporate general and
administrative expenses......... 578 814 894 881
Amortization of acquisition
costs........................... 53 53 53 70
Reorganization and consolidation
expenses........................ -- -- -- 2,122
------- ------- ------- -------
Operating income (loss)......... (686) (1,478) (1,231) (4,237)
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) (4,210)
Minority interests of
consolidated subsidiaries....... 10 (84) 5 (48)
Income tax expense (benefit)..... -- -- -- --
------- ------- ------- -------
Net income (loss)............... $ (706) $(1,408) $(1,176) $(4,162)
======= ======= ======= =======
Net income (loss) per share.....
Weighted average common shares
outstanding.....................
- -------
(1) Excluding the write down of certain fixed assets and the accelerated
amortization of capitalized video library costs, selling and operating
expenses would have been $4,065, $5,579, $5,979 and $6,490 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, $1,103 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.
21
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 matured on September 30,
1996, and a $1.0 million equipment line, which matured on September 30, 1996.
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 Note 5 of Notes to Consolidated Financial Statements.
The Company and the Bank are currently negotiating an amendment to the bank
financing arrangement. The working capital and equipment lines have expired
and the Company is in violation of certain convenants relating to one of the
lines. As of August 31, 1996, the outstanding balance on the three lines was
$6.0 million. The Company believes that these negotiations will be
successfully completed. However, if the negotiations are not successfully
completed, the Bank could accelerate the indebtedness and pursue remedies,
including foreclosure on the assets of the Company which serve as collateral
for the financing arrangement. See Note 5 of Notes to Consolidated Financial
Statements.
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 by 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
by investing activities in fiscal 1996 was $14.3 million and was used
primarily for acquisitions and the
22
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 by 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 by 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 by
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
$850,000 under employment agreements and payments of contingent purchase
prices. See Notes 6 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 and the payment of contingent considerations for
acquisitions, if any, for the next twelve months. If the Company makes
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
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 exhibitions being held during
1996 in North America. The Company believes that there is an increasing
24
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
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
26
relationship-building opportunities through client referrals and its 60-person
sales force. 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.
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.
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
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
27
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 and booking
. 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.
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 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
28
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 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
29
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 Note 2 of Notes to Consolidated Financial 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
30
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. 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.
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 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.
31
MANAGEMENT
EXECUTIVE OFFICERS AND DIRECTORS
The executive officers and directors of the Company are:
NAME AGE POSITION
---- --- --------
Mark N. Sirangelo (1)... 35 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
Richard S. Bartell...... 43 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......... 51 Senior Vice President
Robert C. McCormack
(1)(2)................. 56 Director
Peter C. Wendell (1)(2). 46 Director
- --------
(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. 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.
32
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. He currently serves on the
boards of directors of five private companies.
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.
33
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.
34
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)
LONG-TERM
COMPENSATION
AWARDS
------------
SECURITIES
1996 ANNUAL UNDERLYING
COMPENSATION OPTIONS
------------------ (NUMBER OF ALL OTHER
NAME AND POSITION SALARY BONUS (2) SHARES) COMPENSATION
----------------- -------- --------- ------------ ------------
Mark N. Sirangelo............... $250,008 $ -- 170,000 $ 877 (3)
Chairman of the Board of
Directors,
President and Chief Executive
Officer
Edward P. Doody................. 158,962 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
- --------
(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 $150,000. See "--Employment Agreements."
35
OPTION GRANTS AND HOLDINGS
The following table summarizes the options which were granted during the
fiscal year ended August 31, 1996 to the Named Executive Officers.
OPTION GRANTS IN LAST FISCAL YEAR
POTENTIAL
REALIZABLE
VALUE AT
INDIVIDUAL GRANTS ASSUMED ANNUAL
-------------------------------------------------- RATES OF STOCK
% OF TOTAL PRICE APPRECIATION
NUMBER OF OPTIONS FOR OPTION
SECURITIES GRANTED TO EXERCISE TERM (3)
UNDERLYING EMPLOYEES IN PRICE EXPIRATION ------------------
NAME OPTIONS (1) FISCAL YEAR (2) ($/SH) DATE 5% ($) 10% ($)
---- ----------- --------------- ----------- ---------- ------ -------
Mark N. Sirangelo....... 170,000 28.1% $1.40-$3.00 2006
Edward P. Doody......... 30,000 5.0 1.40 2006
Douglas L. Ducate....... 25,000 4.1 1.40 2006
Robert A. Kirkland...... 25,000 4.1 1.40 2006
Cyril M. Wismar......... 2,000 * 1.40 2006
- --------
* 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.
36
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
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
---- --------------- ------------- ----------- -------------
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
- --------
(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, including 250,000 shares authorized by the Board
of Directors subsequent to September 30, 1996. As of September 30, 1996,
options for 1,000 shares were exercised, options for 861,995 shares were
37
outstanding and 293,005 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
38
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 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.
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. 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.
39
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 $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.
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.
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, Mr. Ducate was awarded an option to purchase 25,000 shares of
Common Stock.
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 fiscal 1996, Mr. Green was awarded an
option to purchase 50,000 shares of Common Stock. 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.
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.
The agreements are automatically renewable for additional periods and
contain confidentiality, non-compete and severance provisions.
40
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 120,000 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 $100,000, to an affiliate of Mr. McCormack.
In November 1993, Sierra Ventures ("Sierra"), Trident Capital Partners Fund
("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.
41
PRINCIPAL STOCKHOLDERS
The following table sets forth information regarding the beneficial
ownership of the Company's Common Stock as of September 30, 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.
NUMBER OF SHARES PERCENTAGE PERCENTAGE
NAME AND ADDRESS OF BENEFICIAL OWNER BENEFICIALLY OWNED PRIOR TO OFFERING(1) AFTER OFFERING
- ------------------------------------ ------------------ -------------------- --------------
Sierra Ventures (2).................. 1,385,403 24.0%
3000 Sand Hill Road, Bldg. 4
Menlo Park, CA 94025
First Plaza Group Trust.............. 1,336,184 23.1
c/o Mellon Bank, N.A.
One Mellon Bank Center
Pittsburgh PA 15258-0001
Trident Capital, Inc. (3)............ 1,045,742 18.0
2480 Sand Hill Road,
Suite 201
Menlo Park, CA 94025
WLD/LAMONT Partners.................. 633,474 11.0
One East Broward Blvd.
Suite 1101
Fort Lauderdale, FL 33301
Mark N. Sirangelo (4) ............... 825,000 13.6
Darryl Hartley-Leonard .............. -- --
Edward P. Doody (5) ................. 20,000 *
Douglas L. Ducate (6) ............... 11,980 *
Robert A. Kirkland (7)............... 6,770 *
Cyril M. Wismar (8).................. 80,000 1.4
Robert C. McCormack (9).............. 845,752 14.6
Peter C. Wendell (10)................ 1,404,673 24.2
All executive officers
and directors as a
group (11 persons) (11)............. 3,211,873 51.6
- --------
* Less than 1%.
(1) Applicable percentage of ownership as of September 30, 1996 is based upon
5,782,555 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 October 25, 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.
42
(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.
(3) Includes (i) 781,194 shares beneficially owned by Trident Capital Partners
Fund-I, L.P., (ii) 45,278 shares beneficially owned by Trident Capital
Partners Fund-I, C.V., (such funds, collectively, the "Trident Capital
Funds"), (iii) 200,000 shares which the Trident Capital Funds have the
right to acquire pursuant to options granted to them by Mr. Sirangelo in
connection with a loan made by them to Mr. Sirangelo in February 1996 and
(iv) 19,270 shares issuable upon exercise of outstanding options granted
on August 31, 1996.
(4) Includes 270,000 shares issuable upon exercise of outstanding options,
5,000 shares issuable upon exercise of outstanding options held by Mr.
Sirangelo's mother, and 200,000 shares which are subject to the option
held by Trident Capital Funds.
(5) Includes 20,000 shares issuable upon exercise of outstanding options.
(6) Includes 11,980 shares issuable upon exercise of outstanding options.
(7) Includes 6,770 shares issuable upon exercise of outstanding options.
(8) Includes 70,000 shares issuable upon exercise of outstanding options.
(9) Includes (i) 826,472 shares beneficially owned by Trident Capital Funds,
(ii) 19,270 shares issuable upon exercise of outstanding options granted
to Trident Capital, Inc., on August 31, 1996, and (iii) 200,000 shares
which the Trident Capital Funds have the right to acquire pursuant to
options granted to them by Mr. Sirangelo in connection with a loan made by
them to Mr. Sirangelo in February 1996. Mr. McCormack is a limited partner
of Trident Capital, L.P. which is the general partner of the Trident
Capital Funds and thus 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 his beneficial
ownership with respect to these shares.
(10) 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) 19,270 shares issuable upon exercise of
outstanding options granted on August 31, 1996. Mr. Wendell is a General
Partner of Sierra Ventures, a venture capital firm focusing on
information technology, health care and service businesses.
(11) Includes 439,998 shares issuable upon exercise of outstanding options.
43
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
44
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 Boston EquiServe L.P. as the transfer agent and
registrar for the Common Stock.
45
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.
46
As of October 15, 1996, options to purchase 1,027,995 shares of Common Stock
were outstanding, of which 739,320 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."
47
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:
NUMBER
UNDERWRITER OF SHARES
----------- ---------
Alex. Brown & Sons Incorporated...........................................
Montgomery Securities.....................................................
Robertson, Stephens & Company L.L.C.......................................
---
Total..................................................................
===
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
48
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.
49
The financial statements of Epic Enterprises of Nevada, Inc. at December 31,
1994 and 1995 and 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, 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, 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 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.
50
INDEX TO FINANCIAL STATEMENTS
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 years ended December 31,
1993, 1994 and 1995 F-39
Statements of Cash Flows for the years ended December 31, 1993, 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, 1996 F-57
Notes to Consolidated Financial Statements F-58
Unaudited Pro Forma Combined Statement of Operations F-62
F-1
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
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 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 financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the 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
October 25, 1996
F-2
PRODUCTION GROUP INTERNATIONAL, INC.
CONSOLIDATED BALANCE SHEETS
PRO FORMA
AUGUST 31, AUGUST 31,
1995 1996 1996 (NOTE 11)
----------- ----------- --------------
(UNAUDITED)
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 --
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
=========== =========== ===========
See accompanying notes.
F-3
PRODUCTION GROUP INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED AUGUST 31,
1994 1995 1996
----------- ----------- ------------
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
============
See accompanying notes.
F-4
PRODUCTION GROUP INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
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
-------- ------- --------- ------- --------- ------- --------- ------- ------- ------ -----------
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
======== ======= ========= ======= ========= ======= ========= ======= ======= ====== ===========
FOREIGN RETAINED
UNEARNED CURRENCY EARNINGS TOTAL
STOCK TRANSLATION (ACCUMULATED STOCKHOLDERS'
COMPENSATION ADJUSTMENT DEFICIT) EQUITY (DEFICIT)
------------ ----------- ------------- ----------------
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
============ =========== ============= ================
See accompanying notes.
F-5
PRODUCTION GROUP INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED AUGUST 31
1994 1995 1996
----------- ----------- ------------
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 72,210 226,721 (12,166)
Deferred costs (482,474) 24,720 (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
=========== =========== ============
See accompanying notes.
F-6
PRODUCTION GROUP INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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.
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.
Asset Impairment
In accordance with FAS 121, "Accounting for the Impairment of Long-Lived
Assets and Long-Lived Assets to Be Disposed Of", the Company periodically
evaluates its long-term assets for impairment to determine if events or
changes in circumstances indicate that the carrying amount of an asset may not
be recoverable. 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.
Goodwill
On a quarterly basis, the Company evaluates the recoverability of its
goodwill to determine whether any events or changes in circumstances indicate
that the carrying amount may not be recoverable. 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 write off the goodwill balance once an impairment has been
determined. In accordance with this policy, the Company charged $2,122,468 and
$2,526,691 to expense in fiscal year 1995 and 1996, respectively to reduce the
goodwill balances to the estimated fair value. Goodwill consists of the
following:
F-7
PRODUCTION GROUP INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
AUGUST 31,
1995 1996
---------- -----------
Goodwill $5,300,185 $27,348,623
Accumulated Amortization 330,074 704,441
---------- -----------
$4,970,111 $26,644,182
========== ===========
Goodwill represents the excess of purchase price over the fair value of new
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 approximately $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. At August 31, 1995 and
1996, the Company had billings in excess of costs of approximately $426,845
and $1,211,115, respectively, and had recorded these amounts as deferred
revenues in the consolidated balance sheets. As of August 31, 1995 and 1996,
the Company had approximately $2,324,000 and $1,893,353, respectively, of
revenue 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.
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.
F-8
PRODUCTION GROUP INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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:
YEAR ENDED AUGUST 31,
--------------------------
1994 1995 1996
---- ---------- ----------
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
==== ========== ==========
During the years ended August 31, 1995 and 1996, the Company wrote down
goodwill in the amount of $2,122,468 and $2,526,691 respectively. The write-
offs related to acquisitions which occurred during fiscal 1993 and fiscal 1994
and were in accordance with the Company's goodwill impairment policy.
During 1996, the Company expensed $1,731,168 related to certain investments
in accordance with the Company's asset 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.
Net Loss Per Common 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
F-9
PRODUCTION GROUP INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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
common 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:
YEAR ENDED AUGUST 31,
-------------------------
1994 1995 1996
------- -------- --------
Interest paid $20,811 $127,907 $582,623
Income taxes paid $ 0 $ 65,000 $244,250
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:
AUGUST 31,
1995 1996
---------- ----------
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
========== ==========
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. The costs are stated at the lower of the unamortized
cost or estimated net realizable value, as periodically
F-10
PRODUCTION GROUP INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
3. PROPERTY AND EQUIPMENT (CONTINUED)
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 the sale of the video library and
as a result, accelerated the amortization of the capitalized video library
costs by approximately $1,100,000.
4. ACQUISITIONS
Since fiscal 1993, the Company has completed thirteen 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's 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 method and resulted in an
excess of purchase price over the fair value of net assets acquired of
approximately $1,173,979, 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
F-11
PRODUCTION GROUP INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
4. ACQUISITIONS (CONTINUED)
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's 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 is not in compliance with certain
covenants. The Company and the bank are currently negotiating an amendment to
the financing and security agreement to extend the working capital and
equipment facilities and to deal with violations of certain covenant
violations. As a result, all of the outstanding bank borrowings have been
classified as current.
The Company is charged an annual interest rate of prime + 2% on outstanding
borrowings under the credit facilities the Company made interest payments of
$107,496 in 1996. The credit facilities are secured by certain 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, (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 1995 fiscal and the
agreement was then terminated.
F-12
PRODUCTION GROUP INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
6. NOTES PAYABLE
Notes payable balances are as follows:
AUGUST 31,
1995 1996
----------- ------------
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 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
(768,839) (11,294,254)
----------- ------------
$ 1,316,231 $ 2,640,907
=========== ============
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:
1997 $11,294,254
1998 2,569,931
1999 70,976
-----------
$13,935,161
===========
F-13
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:
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
====================================
====================================
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 $850,000 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 $40 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:
FISCAL YEAR ENDED
AUGUST 31,
------------------------
1994 1995 1996
--------- ---- --------
Current:
Federal........................................ $(176,000) $-- $ --
State.......................................... (44,000) -- 290,000
Foreign........................................ -- -- 426,000
--------- ---- --------
$(220,000) $-- $716,000
========= ==== ========
Significant components of the Company's net deferred tax assets are
approximately:
AUGUST 31,
1995 1996
----------- -----------
Deferred tax assets............................. $ 3,212,810 $ 6,578,373
Deferred tax liabilities........................ (91,111) (243,299)
Valuation allowance............................. (3,121,699) (6,335,074)
----------- -----------
Net deferred tax assets......................... $ -- $ --
=========== ===========
F-14
PRODUCTION GROUP INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
8. INCOME TAXES (CONTINUED)
The principal items giving rise to the Company's net deferred tax assets are
net operating loss carryforwards, the excess of tax depreciation and
amortization over book depreciation and amortization and other accrued
expenses.
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
limitations.
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
$1,800,000 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:
1996
-----------
Tax (benefit) at statutory rates............................ $(3,866,000)
Non-deductible expenses..................................... 1,090,000
Valuation allowance change.................................. 2,700,000
State income tax net of federal benefit..................... 192,000
Foreign Income Taxes........................................ 427,000
Other....................................................... 173,000
-----------
$ 716,000
===========
For 1995 and 1994 similar items, other than foreign taxes, reconcile this
statutory rate to the actual rate.
9. STOCKHOLDERS' EQUITY
CONVERTIBLE PREFERRED STOCK
On March 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 balance sheet 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 $15.00 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
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:
NUMBER OF OPTION PRICE
SHARES (PER SHARE)
--------- ------------
Balance at August 31, 1994 370,000 $ 0.01
Granted 125,000 $ 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
=========
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 5,983,123 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") substantially all employees of the Company. Employees may
elect to contribute a percentage of their
F-16
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
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.
YEARS ENDED AUGUST 31,
1995 1996
----------- ------------
Revenues............................................. $78,461,000 $ 91,527,000
Net loss............................................. $(7,450,000) $(11,854,000)
=========== ============
Net loss per share...................................
=========== ============
F-17
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 Production, 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
RAY BLOCH PRODUCTIONS, INC.
CONSOLIDATED BALANCE SHEETS
DECEMBER 31,
1994 1995
---------- ----------
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
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
========== ==========
See accompanying notes.
F-19
RAY BLOCH PRODUCTIONS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
YEAR ENDED DECEMBER 31,
1993 1994 1995
----------- ----------- -----------
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)
=========== =========== ===========
See accompanying notes.
F-20
RAY BLOCH PRODUCTIONS, INC.
STATEMENTS OF STOCKHOLDER'S EQUITY
TOTAL
COMMON RETAINED STOCKHOLDER'S
STOCK EARNINGS EQUITY
------ --------- -------------
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
====== ========= =========
See accompanying notes.
F-21
RAY BLOCH PRODUCTIONS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEAR ENDED DECEMBER 31,
1993 1994 1995
---------- ----------- ----------
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
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)
Proceeds from stockholder................ 26,000
Advances of loans receivable............. (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 from line of
credit.................................. (443,316) -- 350,000
Proceeds from loan from stockholder...... -- -- 500,000
Repayments to 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
========== =========== ==========
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
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 records revenues using the completed contract method, whereby all
revenues and costs are deferred until the event occurs. 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
$1,492,400 and $1,803,795, respectively, related to future events and
classified these amounts as deferred revenues in the 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 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 accounts for income taxes under the liability method.
3. PROPERTY AND EQUIPMENT
Property and equipment consisted of the following:
DECEMBER 31,
----------------------
1994 1995
---------- ----------
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
========== ==========
F-23
RAY BLOCH PRODUCTIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Property and equipment are recorded at cost and are depreciated 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.
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 paid 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:
1996........................................................... $ 262,100
1997........................................................... 272,366
1998........................................................... 276,372
1999........................................................... 218,389
Thereafter..................................................... 68,950
----------
Total minimum lease payments................................... $1,098,177
==========
Rent expense amounted to approximately $272,881, $277,301 and $278,526
during 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 net operating loss
carryforwards, the excess of tax depreciation and amortization over book
depreciation and amortization, and other accrued expenses. Deferred taxes are
as follows:
DECEMBER 31,
---------------
1994 1995
------- -------
Deferred tax assets......................................... $10,879 $15,753
Deferred tax liabilities.................................... -- (7,609)
------- -------
Net deferred tax assets..................................... $10,879 $ 8,144
======= =======
F-24
RAY BLOCH PRODUCTIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Significant components of the provision for income taxes are as follows:
1993 1994 1995
-------- -------- --------
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
======== ======== ========
Ray Bloch's effective tax rate differs from the statutory federal income tax
rate as follows:
1993 1994 1995
---- ---- ----
Statutory federal income tax rate............................ 34% 34% 34%
Expenses not deductible for tax.............................. 10% 3% 802%
State income tax, net of federal............................. 8% 7% 147%
--- --- ---
52% 44% 983%
=== === ===
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 approximately $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 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
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
RAY BLOCH PRODUCTIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(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
approximately $73,199, $74,925, and $53,199 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 financial statements:
DECEMBER 31,
1994 1995
--------- ---------
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)
========= =========
YEAR ENDED DECEMBER 31,
1993 1994 1995
------- ------- -------
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
======= ======= =======
Key assumption used in the actuarial valuation were:
DECEMBER 31,
1994 1995
------ ------
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%
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 $3,174 and $3,599
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 $3,392,000 in cash and $3,000,000 in notes
payable. The agreement also stipulates additional payments of up to
$1,500,000.
F-26
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
EPIC ENTERPRISES, INC.
COMBINED BALANCE SHEETS
JANUARY 31,
1995 1996
---------- ----------
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
========== ==========
See accompanying notes.
F-28
EPIC ENTERPRISES, INC.
COMBINED STATEMENTS OF OPERATIONS
YEAR ENDED JANUARY 31,
1994 1995 1996
---------- ---------- ----------
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 income (loss).......................... $ (7,996) $ 989 $ (48,904)
========== ========== ==========
See accompanying notes.
F-29
EPIC ENTERPRISES, INC.
COMBINED STATEMENTS OF STOCKHOLDERS' DEFICIT
TOTAL
COMMON ACCUMULATED STOCKHOLDERS'
STOCK DEFICIT DEFICIT
------ ----------- -------------
Balance at January 31, 1993.................... $3,974 $ 3,971 $ 7,945
Net income................................... -- (7,996) (7,996)
Dividends.................................... -- (1,200) (1,200)
------ -------- --------
Balance at January 31, 1994.................... 3,974 (5,225) (1,251)
Net loss..................................... -- 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)
====== ======== ========
See accompanying notes.
F-30
EPIC ENTERPRISES, INC.
COMBINED STATEMENTS OF CASH FLOWS
YEAR ENDED JANUARY 31,
1994 1995 1996
---------- ---------- -----------
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)
---------- ---------- -----------
Net cash used in investing activities.... (13,568) (11,301) (5,994)
FINANCING ACTIVITIES
Loans to officers........................ (173,500) (106,181) 16,389
Loans related to note receivable from a
customer................................ -- (103,284) --
Proceeds related to note receivable from
a customer.............................. -- -- 31,878
Dividends................................ (1,200) (1,200) (1,200)
---------- ---------- -----------
Net cash (used in) provided by financing
activities.............................. (174,700) (210,665) 47,067
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
========== ========== ===========
See accompanying notes.
F-31
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
provision for income taxes 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. As of January 31,
1995 and 1996, Epic had made payments of approximately $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 approximately $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
provision for income taxes for Epic and Goren Epic has been calculated on a
combined basis.
F-32
EPIC ENTERPRISES, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
3. PROPERTY AND EQUIPMENT
Property and equipment consists of the following:
JANUARY 31,
1995 1996
-------- --------
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
======== ========
Property and equipment is recorded at cost. Depreciation is provided on a
straight-line basis over estimated useful lives ranging from five to seven
years.
4. DUE FROM OFFICERS
Epic loaned $317,292 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:
1997............................................................. $132,354
1998............................................................. 132,354
1999............................................................. 132,354
2000............................................................. 132,354
Thereafter....................................................... 11,030
--------
Total minimum lease payments..................................... $540,446
========
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
EPIC ENTERPRISES, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
JANUARY 31,
1995 1996
-------- --------
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.................................. $ -- $ --
======== ========
Significant components of the provision for (benefit from) income taxes are
as follows:
YEAR ENDED JANUARY 31,
1994 1995 1996
-------- ------- --------
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)
======== ======= ========
Epic's effective tax rate differs from the statutory federal income tax rate
as follows:
YEAR ENDED JANUARY 31,
1994 1995 1996
------- ------- -------
Statutory federal income tax rate.................. 34.0% 34.0% (34.0)%
Non-deductible expenses............................ 9.3 122.0 12.3
State taxes........................................ 7.8 28.0 .8
Valuation allowance................................ 67.2 (101.6) 1.3
------ ------- -------
118.3% 82.4% (19.6)%
====== ======= =======
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 $105,000,
$80,000, and $50,000 for the years ended January 31, 1994, 1995, and 1996,
respectively.
F-34
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
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
EPIC ENTERPRISES OF NEVADA, INC.
BALANCE SHEETS
DECEMBER 31,
1994 1995
--------- ---------
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
========= =========
See accompanying notes.
F-37
EPIC ENTERPRISES OF NEVADA, INC.
STATEMENTS OF OPERATIONS
JULY 15, 1993
(INCEPTION) TO SIX MONTHS
DECEMBER 31, YEAR ENDED DECEMBER 31, ENDED JUNE 30,
1993 1994 1995 1996
-------------- ----------- ----------- --------------
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)
======== =========== =========== ==========
See accompanying notes.
F-38
EPIC ENTERPRISES OF NEVADA, INC.
STATEMENTS OF STOCKHOLDERS' DEFICIT
TOTAL
COMMON ACCUMULATED STOCKHOLDER'S
STOCK DEFICIT EQUITY
------ ----------- -------------
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)
====== ========= =========
See accompanying notes.
F-39
EPIC ENTERPRISES OF NEVADA, INC.
STATEMENTS OF CASH FLOWS
JULY 15, 1993
(INCEPTION) TO SIX MONTHS
DECEMBER 31, YEAR ENDED DECEMBER 31, ENDED JUNE 30,
1993 1994 1995 1996
-------------- ----------- ----------- --------------
OPERATING ACTIVITIES
Net loss................ $(41,662) $(165,468) $(276,620) $(62,230)
Adjustments to reconcile
net loss to net cash
provided by (used in)
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 loan 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
======== =========== =========== ========
See accompanying notes.
F-40
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
referable payments of $338,044 related to future events, and has 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:
DECEMBER 31,
1994 1995
------- -------
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
======= =======
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 promissory notes in the aggregate amount of $371,000 with
certain officers. The notes bear interest at 6%. All accrued and unpaid
interest and remaining principal on notes are due and payable upon demand from
August 19, 1998 through May 30, 2001.
Subsequent to June 30, 1996, the outstanding loans from officers balance was
forgiven by the officers and reclassified to equity.
F-41
EPIC ENTERPRISES OF NEVADA, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
5. COMMITMENTS
Leases
Epic NV has entered into various operating lease agreements for office
space. 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:
1996............................................................. $ 70,908
1997............................................................. 106,362
1998............................................................. 106,362
1999............................................................. 106,362
Thereafter....................................................... 141,816
--------
Total minimum lease payments................................... $531,810
========
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 Box 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:
DECEMBER 31,
1994 1995
-------- --------
Deferred tax assets:
Net operating loss carryforwards....................... $ 23,461 $ 55,696
-------- --------
Total deferred tax assets................................ 23,461 55,696
Valuation allowance...................................... (23,461) (55,696)
-------- --------
Net deferred tax assets.................................. $ -- $ --
======== ========
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 $1,000,000 in cash and additional cash consideration of up
to $5,000,000.
F-42
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 audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the 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
TIMBERLINE PRODUCTIONS, INC.
BALANCE SHEETS
DECEMBER 31,
1994 1995
-------- ----------
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
Capital lease obligations, net of current portion.......... -- 40,072
Note payable to bank, net of current portion............... 187,500 125,000
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
======== ==========
See accompanying notes.
F-44
TIMBERLINE PRODUCTIONS, INC.
STATEMENTS OF OPERATIONS
THREE
MONTHS ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
1993 1994 1995 1996
---------- ---------- ---------- ------------
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 provision
for (benefit from) income
taxes........................ 288,621 (81,649) (36,339) (212,789)
Provision for (benefit from)
income taxes................. 117,250 (27,707) 8,251 (81,443)
---------- ---------- ---------- ----------
Net income (loss)............. $ 171,371 $ (53,942) $ (44,590) $ (131,346)
========== ========== ========== ==========
See accompanying notes.
F-45
TIMBERLINE PRODUCTIONS, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY
TOTAL
COMMON RETAINED STOCKHOLDERS'
STOCK EARNINGS EQUITY
------- --------- -------------
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
======= ========= =========
See accompanying notes.
F-46
TIMBERLINE PRODUCTIONS, INC.
STATEMENTS OF CASH FLOWS
THREE
MONTHS
ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
1993 1994 1995 1996
--------- --------- --------- ---------
OPERATING ACTIVITIES
Net income (loss)................. $ 171,371 $ (53,942) $ (44,590) $(131,346)
Adjustments to reconcile net in-
come (loss) to net cash provided
by (used in) operating activi-
ties:
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 cur-
rent assets.................... (10,931) (6,703) (7,047) (4,003)
Accounts payable and accrued ex-
penses......................... (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 ac-
tivities......................... 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 activi-
ties............................. (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 obliga-
tions............................ -- -- (16,572) (8,687)
--------- --------- --------- ---------
Net cash (used in) provided by fi-
nancing 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
========= ========= ========= =========
See accompanying notes.
F-47
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 produces 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 9). 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 net revenues
during the years December 31, 1993, 1994, and 1995, respectively, and two
customers accounted for approximately 47% of net 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:
DECEMBER 31,
1994 1995
----------- -----------
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
=========== ===========
F-48
TIMBERLINE PRODUCTIONS, INC.
NOTES TO FINANCIAL STATEMENTS--(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 9), 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 .5% 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 9), and the
agreement was then terminated.
5. COMMITMENTS
Timberline has entered into various non-cancelable 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 $83,248 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 9).
Future minimum lease payments under non-cancelable capital and operating
leases as of December 31, 1995 are:
CAPITAL OPERATING
LEASES LEASES
-------- ---------
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................................... (26,904)
--------
Capital lease obligations, net of current portion...... $ 40,072
========
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
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:
DECEMBER 31,
1994 1995
------- -------
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)
======= =======
Significant components of the provision for (benefit from) income taxes are
as follows:
THREE
MONTHS
ENDED
MARCH 31,
YEAR ENDED DECEMBER 31, ---------
1993 1994 1995 1996
-------- -------- ------- --------
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)
======== ======== ======= ========
Timberline's effective tax rate differs from the statutory federal income
tax rate as follows:
THREE
MONTHS ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
1993 1994 1995 1996
------- -------- -------- ------------
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)%
======= ======== ======== =====
F-50
TIMBERLINE PRODUCTIONS, INC.
NOTES TO FINANCIAL STATEMENTS--(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.
9. 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
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 the
Spearhead Exhibitions Limited's management. Our responsibility is to express
an opinion on these financial statements based on our audit.
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
the audit to obtain reasonable assurances 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 the 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 their operations and
their 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 States.
/s/ Ernst & Young
Chartered
Accountants
London, England
September 26, 1996
F-52
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 the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with 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.
As explained in note 8 to the financial statements, the consolidated
financial statements have been prepared in accordance with UK generally
accepted accounting principles and differ in one significant aspect from US
generally accepted accounting principles in that the group's investment in
Offshore Europe Partnership has been shown at valuation of (Pounds)600,000.
The historical cost of the investment was (Pounds)Nil. Under US generally
accepted accounting principles such a valuation is not permitted.
Except for the failure to comply with US generally accepted accounting
principles referred to above 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
States.
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 the Company's accounting policies,
financial position, consolidated results, cash flow and changes in shareholder
equity beyond that date.
/s/ Kingston Smith
Chartered
Accountants and
Registered Auditors
London, England
October 25, 1996
F-53
SPEARHEAD EXHIBITIONS LIMITED
CONSOLIDATED BALANCE SHEETS
(POUNDS STERLING)
MARCH 31,
1994 1995
--------- ---------
(Pounds) (Pounds)
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 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 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
========= =========
The accompanying notes are an integral part of these statements
F-54
SPEARHEAD EXHIBITIONS LIMITED
CONSOLIDATED STATEMENTS OF OPERATIONS
(POUNDS STERLING)
FIVE
MONTHS
YEAR ENDED ENDED
MARCH 31, MARCH 31, AUGUST 31,
1994 1995 1995
--------- --------- ----------
(Pounds) (Pounds) (Pounds)
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
--------- --------- --------
(Loss)/profit on ordinary activities before
taxation..................................... 382,340 (209,881) (36,478)
Provision for income taxes.................... (97,700) 66,265 13,045
--------- --------- --------
Net (loss)/income............................. 284,640 (143,616) (23,433)
========= ========= ========
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
SPEARHEAD EXHIBITIONS LIMITED
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY (POUNDS STERLING)
ADDITIONAL TOTAL
SHARE CAPITAL SUBSCRIPTION PAID-IN REVALUATION RETAINED SHAREHOLDERS'
SHARES AMOUNT RECEIVABLE CAPITAL RESERVE EARNINGS EQUITY
-------- -------- ------------ ---------- ----------- -------- -------------
(Pounds) (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
======== ======== ======== ======== ======== ======== =========
The accompanying notes are an integral part of these statements.
F-56
SPEARHEAD EXHIBITIONS LIMITED
CONSOLIDATED STATEMENT OF CASH FLOWS (POUNDS STERLING)
FIVE
MONTHS
YEAR ENDED MARCH ENDED
31, AUGUST 31,
1994 1995 1995
-------- -------- ----------
(Pounds) (Pounds) (Pounds)
CASH FLOWS FROM 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 payroll and related expenses and
other accrued liabilities................... 688,704 236,842 (280,919)
-------- -------- --------
Net cash provided by (used in) operating
activities.................................... 666,161 (170,330) 131,469
-------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from disposal of property and
assets...................................... 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
-------- -------- --------
CASH FLOWS FROM 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................ 617,763 (267,968) 119,317
Cash at beginning of period.................... 120,252 738,015 470,047
-------- -------- --------
Cash 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 --
======== ======== ========
The accompanying notes are an integral part of these statements
F-57
SPEARHEAD EXHIBITIONS LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF FINANCIAL STATEMENTS
(a) Principles of consolidation
The consolidated financial statements include the financial statements of
the Company 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"). The Company'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:
Motor vehicles -- over 4 years
Office equipment -- over 4 years
Office furniture -- over 5 years
Leasehold improvements -- over 5 years
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 sheet 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 sheet. The interest elements of
F-58
SPEARHEAD EXHIBITIONS LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(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 comprises:
MARCH 31,
1994 1995
-------- --------
(Pounds) (Pounds)
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
======= =======
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 the five month period ended
August 31, 1995, the company 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
SPEARHEAD EXHIBITIONS LIMITED
NOTES TO THE 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:
YEAR ENDED FIVE MONTHS
MARCH 31, ENDED
--------------- AUGUST 31,
1994(EST) 1995 1995
--------- ----- -----------
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)%
==== ===== =====
6. COMMITMENTS
The company leases its facilities under non-cancelable operating lease
agreements which expire at various dates through 2014. In addition, the
company 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:
MARCH 31, MARCH 31, AUGUST 31,
1994 1995 1995
--------- --------- ----------
(Pounds) (Pounds) (Pounds)
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
====== ======= ======
Future minimum annual lease payments under all non-cancelable operating and
capital leases are as follows:
OPERATING CAPITAL
YEAR ENDED AUGUST 31, LEASES LEASES
--------------------- --------- -------
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................................... (29,690)
-------
Lease obligations, long-term............................ 19,894
=======
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
SPEARHEAD EXHIBITIONS LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
7. CONCENTRATIONS OF CREDIT RISK AND SIGNIFICANT CUSTOMERS
Potential concentrations of credit risk to the company consist principally
of cash, cash equivalents and trade receivables. The Company 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
U.K. generally accepted accounting principles (U.K. GAAP), which differs in
certain significant 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 that are applicable to the company is set out below:
Revaluation Reserve
Under U.K. GAAP the group's investment in the Offshore Europe Partnership
has been shown at valuation of (Pounds)600,000. The historical cost of this
item was (Pounds) nil. Under U.S. GAAP such a valuation is not permitted.
9. SUBSEQUENT EVENT
Effective September 1, 1995, the stockholders 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 $2,532,000 in cash and $4,000,000 in notes payable.
F-61
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 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 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.
UNAUDITED PRO FORMA STATEMENT OF OPERATIONS
YEAR ENDED AUGUST 31, 1996
(IN THOUSANDS, EXCEPT PER SHARE DATA)
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
---------- ------------ ------------- ------------ ---------- --------------- ----------- --------
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............. 22,327 1,090 1,203 798 1,072 476 -- 26,966
Corporate general and
administrative
expenses............. 5,923 -- -- -- -- -- -- 5,923
Reorganization and
consolidation
expenses............. 6,898 -- -- -- -- -- -- 6,898
Amortization of
acquisition costs.... 669 -- -- -- -- -- 247(g) 916
------- ----- ----- ----- ----- ----- ---- -------
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)
Net income (loss)
per common share(j).
======= ===== ===== ===== ===== ===== ==== =======
Weighted average
common shares
outstanding(j)......
=======
F-62
- --------
(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.
(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-Corp 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
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
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
PAGE
----
Prospectus Summary........................................................ 3
Risk Factors.............................................................. 6
Historical Overview....................................................... 10
Use of Proceeds........................................................... 11
Dividend Policy........................................................... 11
Dilution.................................................................. 12
Capitalization............................................................ 13
Selected Consolidated Financial and Operating Data........................ 14
Management's Discussion and Analysis of Financial Condition and Results of
Operations............................................................... 17
Business.................................................................. 24
Management................................................................ 32
Certain Transactions...................................................... 41
Principal Stockholders.................................................... 42
Description of Capital Stock.............................................. 44
Shares Eligible for Future Sale........................................... 46
Underwriting.............................................................. 48
Legal Matters............................................................. 49
Experts................................................................... 49
Additional Information.................................................... 50
Index to Consolidated Financial Statements................................ F-1
------------
UNTIL , 1996 (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
, 1996
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
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.
Securities and Exchange Commission filing fee......................... $
National Association of Securities Dealers, Inc. filing fee...........
Nasdaq listing fee....................................................
Transfer agent's and registrar's fees.................................
Printing expenses.....................................................
Legal fees and expenses...............................................
Accounting fees and expenses..........................................
Blue Sky filing fees and expenses..................................... 5,000
Miscellaneous expenses................................................
-----
Total............................................................... $
=====
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
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 September 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 1,033,300 shares
of Common Stock which are exercisable at prices ranging from $0.01 to $5.00
per share, of which stock options for 1,000 shares have been exercised.
II-2
16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) Exhibits
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.
10.5 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.
II-3
SCHEDULE DESCRIPTION
- -------- -----------
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.
(b) Financial Statement Schedules
- --------
*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
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended, the
Company has duly caused this Registration Statement to be signed on its behalf
by the undersigned, thereunto duly authorized, in the County of Arlington,
Commonwealth of Virginia, on the 25th day of October, 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.
Each person whose signature appears below in so signing also makes,
constitutes and appoints Mark N. Sirangelo, Richard S. Bartell and Edwin M.
Martin, Jr. and each of them acting alone, his true and lawful attorney-in-
fact, with full power of substitution, for him in any and all capacities, to
execute and cause to be filed with the Securities and Exchange Commission any
and all amendments and post-effective amendments to this Registration
Statement, and any Registration Statement filed pursuant to Rule 424(b), with
exhibits thereto and other documents in connection therewith, and hereby
ratifies and confirms all that said attorney-in-fact or his substitute or
substitutes may do or cause to be done by virtue hereof.
SIGNATURE TITLE DATE
--------- ----- ----
/s/ Mark N. Sirangelo Chairman of the Board, October 25, 1996
- ------------------------------- President and Chief
MARK N. SIRANGELO Executive Officer
(Principal Executive
Officer)
/s/ Richard S. Bartell Senior Vice President and October 25, 1996
- ------------------------------- Chief Financial Officer
RICHARD S. BARTELL (Principal Financial
Accounting Officer)
/s/ Darryl Hartley-Leonard Director and Vice Chairman October 25, 1996
- ------------------------------- of the Board
DARRYL HARTLEY-LEONARD
/s/ Edward P. Doody Senior Vice President and October 25, 1996
- ------------------------------- Director
EDWARD P. DOODY
/s/ Robert C. McCormack Director October 25, 1996
- -------------------------------
ROBERT C. MCCORMACK
/s/ Peter C. Wendell Director October 25, 1996
- -------------------------------
PETER C. WENDELL
II-5
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
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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
October 25, 1996
SCHEDULE 1--VALUATION AND QUALIFYING ACCOUNT AND RESERVE
PRODUCTION GROUP INTERNATIONAL, INC.
BALANCE AT
BEGINNING OF BALANCE AT
CLASSIFICATION PERIOD ADDITIONS DEDUCTIONS END OF PERIOD
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Allowance for doubtful ac-
counts:
Year ended August 31,
1994..................... $100,000 264,400 (14,400) $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
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(1) Write off of accounts receivable.
EXHIBIT INDEX
EXHIBIT NO. DESCRIPTION OF EXHIBIT
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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.
10.5 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.
EXHIBIT NO. DESCRIPTION OF EXHIBIT
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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.
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* To be filed by Amendment.