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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
ANNUAL REPORT
------------------------
FORM 10-KSB
(Mark One)
/x/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1998
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM _________ TO __________
COMMISSION FILE NUMBER 1-14215
SHOWPOWER, INC.
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(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
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<S> <C>
DELAWARE 95-4678707
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(STATE OR OTHER JURISDICTION OF INCORPORATION OR ORGANIZATION) (I.R.S. EMPLOYER IDENTIFICATION NO.)
18420 S. SANTA FE AVENUE,
RANCHO DOMINGUEZ, CALIFORNIA 90221
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(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
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Registrant's telephone number, including area code: (310) 604-9676
Securities registered pursuant to Section 12(b) of the Act:
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<S> <C>
Title of each class Name of each exchange on which registered
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COMMON STOCK, $.01 PAR VALUE THE AMERICAN STOCK EXCHANGE
</TABLE>
Securities registered pursuant to Section 12(g) of the Act: NONE
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the past 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days. Yes /x/ No / /
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-B is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-KSB or any amendment to
this Form 10-KSB. /x/
State issuer's revenues for its most recent fiscal year. $20,175,000
Aggregate market value of the voting stock held by nonaffiliates of the
Registrant based on the last sale price for such stock at March 1, 1999
(assuming solely for the purposes of this calculation that all Directors and
executive officers of the Registrant are 'affiliates'). $12,438,000
Number of shares of Common Stock, $.01 par value, outstanding at March 1, 1999:
3,421,842
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the following documents have been incorporated by reference into
this Annual Report on Form 10-KSB:
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<S> <C>
PARTS OF FORM 10-KSB INTO WHICH
IDENTITY OF DOCUMENT DOCUMENT IS INCORPORATED
Definitive Proxy Statement for the 1999 Annual PART III
Meeting of Shareholders
</TABLE>
Transitional Small Business Disclosure Format Yes / / No /x/
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<PAGE>
SHOWPOWER, INC.
RANCHO DOMINGUEZ, CALIFORNIA
ANNUAL REPORT TO SECURITIES AND EXCHANGE COMMISSION
DECEMBER 31, 1998
PART I
ITEM 1. DESCRIPTION OF BUSINESS.
GENERAL
Showpower, Inc. (the 'Company' or 'Showpower') provides temporary power
generation and temperature control rental equipment and support services on a
worldwide basis for entertainment, corporate and special events. The Company's
customers include corporations, event producers, television networks, motion
picture studios, facility operators and performers that need electric power
and/or temperature control services to support events at locations where these
services are inadequate or unavailable. In addition to rental equipment, the
Company provides fully integrated, value-added services, including planning,
technical advice, customized installation, on-site operation and support
personnel. The Company's power equipment consists of transportable,
diesel-powered electricity generators contained in acoustic enclosures, and
related power distribution equipment. Temperature control equipment consists
primarily of transportable, electrically-driven heating, ventilation and air
conditioning ('HVAC') units.
Showpower services three primary markets: corporate and special events;
concert touring; and television and motion pictures. Initially, the Company
provided power generation and distribution services only to concert touring
artists. In 1992, the Company began providing these services for live television
broadcasts and large-scale special events. In 1995, the Company began providing
power generation services to the corporate special events industry and
subsequently added temperature control services. In 1996, the Company began
marketing to the motion picture, trade show and convention industries.
The Company has expanded geographically by making acquisitions and opening
new branch offices. In March 1997, the Company acquired Templine, Ltd.
('Templine'), a generator and distribution rental company based in Bristol,
England, in order to expand its presence and scope of operations in Europe.
Since September 1996, the Company has opened branch offices in Richardson,
Texas, Fort Lauderdale, Florida and Rio de Janeiro, Brazil.
The Company's predecessor, Showpower, Inc., a California corporation, was
incorporated in 1991 to purchase the assets of a division of a theatrical
lighting company that had provided temporary power generation for touring
artists. In March 1998, the Company was reincorporated in Delaware.
The Company completed its initial public offering (the 'Offering') of
1,200,000 shares of common stock, $.01 par value (the 'Common Stock'), for
$11.00 per share on June 16, 1998. The Company received net proceeds of
$11,082,000, after deduction of underwriting discounts, commissions and
Offering-related expenses. On July 2, 1998, the Company sold an additional
180,000 shares of Common Stock for $11.00 per share to the underwriters of the
Offering pursuant to the exercise of the underwriter's over-allotment option.
The Company received additional net proceeds of $1,777,000.
SERVICES AND EQUIPMENT
The Company differentiates itself from other equipment rental companies by
providing fully integrated, value-added services, including planning, technical
advice, customized installation, on-site operation and support personnel,
maintenance and removal, in combination with rental equipment. Large-scale
projects or concert tours can take several months to plan, requiring research
and analysis, including site tours, development of technical specifications and
performance standards, coordination with other service vendors, production of
electrical drawings and assembly of equipment, which may be designed or
configured to meet projects needs.
The Company assembles equipment to meet the specific requirements of its
customers. Because equipment is transported regularly to locations around the
world and used in a wide variety of operating environments and climatic
conditions, emphasis is placed on durability, transportability, noise levels,
thermal efficiency and
<PAGE>
reliability. Many of the Company's rental power and temperature control units
and most of the Company's electrical distribution equipment are assembled at its
Rancho Dominguez, California headquarters and at Templine's Bristol, England
facility using components or subassemblies (engines, alternators, coils, cable
and pumps) purchased from OEMs. Other generators, temperature control units and
distribution equipment used by the Company are assembled by third-party
suppliers, often to Showpower's specifications. Major suppliers include
Caterpillar, Multiquip, Inc., Engine & Equipment Co., Inc., General Electric
Company, Siemens and York International Corporation.
Certain equipment is used principally to support 'local' rental operations,
which typically involve transportation and installation within 300 miles of a
Showpower branch office. Generally, local rental services involve smaller
equipment systems and rentals of one week or less. The majority of the Company's
rental assets are deployed in support of touring events or at specific
large-scale project locations around the United States and around the world. The
duration of such touring and large-scale events generally ranges from one week
to more than 18 months. The Company attempts to maximize the utilization of its
assets on a national and worldwide basis. To do so, the Company regularly
transfers assets and personnel from one branch office to another to meet
increases or decreases in demand.
The Company's power equipment consists of transportable, diesel-powered,
electricity generator sets contained in acoustic enclosures, and related
electrical distribution equipment that is used to transform and distribute
electricity. Individual generators provided by Showpower range in power output
from six kilowatts ('kW') to 1,750 kW. Generators can be connected in parallel
to increase total output; the Company has installed up to 28,000 kW of temporary
generating capacity at a single location. All of the Company's generators are
designed to operate at low noise levels (generally less than 60 db at 50 feet)
and to meet applicable U.S. and international standards for emission and
pollution control and are capable of providing power over a wide range of
voltages and frequencies.
Related electrical distribution equipment includes transformers, switchgear
and cabling needed to transform voltage supplied by Showpower generators to the
voltage requirements of its customers, to switch electricity between different
voltages and to deliver power to end-use locations. The Company maintains
distribution equipment inventories required for both U.S. and international
electrical systems and that comply with all applicable domestic and
international standards for electrical equipment and appliances.
Temperature control equipment consists of water chillers, air handlers, air
conditioners, heaters and combination air conditioning and heating units.
Individual temperature control units range in capacity from one ton to 300 tons
and can be connected in parallel to provide larger cooling capacities; the
Company has installed up to 3,000 tons of cooling capacity at a single location.
Individual electric heating units range in capacity from 15 kW to 250 kW and
also can be combined to produce greater total output. Temperature control units
are often powered by Showpower generators.
Management believes that the basic diesel engine, electricity generation
and temperature control technologies used by the Company are not likely to
become obsolete for the foreseeable future. However, changes in environmental
regulations require continuing improvements in emissions control and refrigerant
technologies. Management generally concentrates its technological efforts on
equipment design and assembly, while OEMs generally maintain responsibility for
ensuring that their products meet established and developing environmental
standards. See 'Governmental and Environmental Regulations.'
To supplement its owned equipment, the Company regularly rents power
generation and temperature control equipment from original equipment
manufacturers ('OEMs') and their dealers and distributors. The duration of such
rentals range from a single day to more than one year, generally with a
month-to-month or shorter rental term. Although numerous sources of rental
equipment exist, the Company has established close working relationships with
Caterpillar, Inc. and certain independent Caterpillar dealers as primary
suppliers of rental equipment. The Company expects to maintain these
relationships in the future.
2
<PAGE>
CUSTOMERS
The Company serves customers in three key markets of the entertainment and
related industries:
Corporate and Special Events. Customers in this category include
corporations, business communications firms, advertising and marketing firms,
event producers, lighting and set designers, event planners, public relations
firms, state or federal governments, and political, not-for-profit, spiritual
and religious organizations. The Company has provided services for many
prominent event producers and communications firms, including Robert Isabel,
Harris Productions, Merv Griffin Productions, Visual Services, Inc., Caribiner
International, Don Misher, and Momentum IMC. Showpower's systems also have been
used by or in events for the 1998 World Cup games in France, Nike, Inc., Cirque
du Soleil, Buena Vista Pictures, AT&T Corporation, Microsoft Corporation, The
Gap, Pope John Paul II, Republican National Convention, Deutsche Telekom, Inc.,
General Motors Corporation, Macy's, NASCAR, Georgio Armani, Paramount Pictures
Corporation, Viacom, the 1997 Presidential Inauguration, Nissan, Bell South,
Penske Motorsports, the Hong Kong Handover Ceremonies, the National Football
League and the United States Tennis Association.
Concert Touring. The Company provides power and/or temperature control
services for the worldwide concert tours of such artists as The Rolling Stones,
U2, Elton John, Billy Joel, Yanni, The Three Tenors, Guns 'n Roses, Luis Miguel,
Michael Jackson, Janet Jackson, Madonna, Jimmy Buffet, Paul McCartney, the
Eagles, Fleetwood Mac, Tina Turner, Aerosmith, Spice Girls, KISS, Bruce
Springsteen, Pink Floyd, Oasis, Whitney Houston, Garth Brooks and David Bowie,
as well as touring and single-location festivals, including Lollapalooza, Horde,
Warped, Amnesty International World Tour, Woodstock 1994, the Glastonbury
(England) Festival, Rock in Rio, Free Jazz (Brazil), and numerous outdoor
classical and orchestral performances.
Television and Film. Showpower has provided power and/or temperature
control services for NBC, ABC, CBS, Fox, HBO, ESPN, TBS, Showtime, BBC, TV
Globo, NHK, UPN, PAX, The Golf Channel, MTV, Nickelodeon and VH1 in connection
with more than 500 live broadcast events, including power for all of NBC's site
broadcasts from the Atlanta Olympic Games and from the World Track and Field
Championships in Athens, all scheduled broadcasts for The Golf Channel, and
coverage of professional sports contests, political conventions, criminal
trials, presidential debates and the 1997 Presidential Inauguration. The Company
has provided services for or in connection with award shows (Grammy's, MTV Music
Awards, European Music Awards, Miss World), and pay-per-view and HBO special
broadcasts (Garth Brooks in Central Park, professional boxing). The Company
provided power to CBS during the 1998 Winter Olympic Games in Nagano, Japan and
provided power and temperature control services to the organizing committee of
World Cup '98 in France. The Company provides services to the feature film
market, where power and/or temperature control services are required on
location, in studios and at special effects facilities. Recent film projects
include Flawless, Volcano, Dante's Peak, Starship Troopers, Broken Arrow and
Godzilla. Recent services for television production include Charmed and Love
Boat, the Next Voyage.
The Company provided services to more than 800 customers in 1998 and more
than 500 customers in 1997. In 1997, one customer accounted for 11% of the
Company's revenues; in 1998, no single customer accounted for more than 10% of
the Company's revenues. The 10 largest customers of the Company accounted for
47% and 35% of the Company's revenues during 1997 and 1998, respectively.
MARKETING AND SALES
The Company's Chief Executive Officer directs Showpower's overall marketing
activities, identifies new end- markets and develops selected new business
prospects. The Company's sales force currently consists of eight full-time
employees. The sales force concentrates on cultivating and developing long-term
relationships with customers and communicating the Company's technical strengths
and ability to solve customers' power and temperature control needs. Certain
sales personnel specialize in selected markets (e.g., special events or
broadcasting), or are responsible for specified geographic areas. Managers of
branch offices handle local sales as part of their overall responsibility.
The Company's marketing efforts are intended to create increased awareness
of the Company's services within relevant customer groups. The Company uses
brochures, participates in bid processes, attends trade shows and advertises in
trade publications as elements of its marketing strategy.
3
<PAGE>
TRAINING
Management believes highly trained, experienced and motivated employees are
critical to the Company's success as a value-added service provider. New
employees typically are assigned first to warehouse, maintenance or fabrication
positions before progressing to positions involving installation and operation
of power or temperature control equipment at project sites or in conjunction
with concert tours.
The Company organizes project teams to execute large projects and tours.
Project teams typically consist of a project manager and one or more
technicians. A project manager is responsible for planning, budgeting and
pricing, installation, operation and ongoing liaison with a customer's
production personnel. A Showpower employee generally must have at least two
years of service with the Company before promotion to the position of project
manager. The Company's current project managers have an average of more than
five years' experience with Showpower.
MAINTENANCE PROGRAM
The Company is responsible for repairing and maintaining its owned and
rented equipment. Showpower's preventive maintenance program establishes a
schedule of procedures customized to each equipment type and application.
Showpower establishes schedules that result in the performance of preventive
maintenance procedures at shorter intervals than are recommended by OEMs from
which the Company acquires components and equipment. Management and personnel
responsible for equipment operation meet regularly to review equipment
performance and maintenance procedures and to make modifications when needed.
Repairs and maintenance are performed at the Company's branch offices or at
project sites by Showpower employees or by authorized OEM dealers. Overhauls and
upgrades are performed at the Company's Rancho Dominguez, California, Bristol,
England and Rio de Janeiro, Brazil facilities. Warranty repairs are generally
the responsibility of OEMs.
GOVERNMENT AND ENVIRONMENTAL REGULATION
The Company and its operations are subject to numerous federal, state and
local rules and regulations, as well as regulations of foreign countries in
which the Company has operations, governing, among other things, worker safety,
air emissions, water discharge and the generation, handling, storage,
transportation and treatment and disposal of hazardous substances and wastes.
Under laws and regulations relating to air emissions, the Company is required to
operate equipment within strict standards, and is required in certain areas,
such as southern California, to obtain operating permits for individual
generator sets. The Company expects that it, and other operators of equipment
utilizing diesel engines, will, in the future, become subject to stricter air
emissions standards, including requirements that engine manufacturers produce
cleaner-running products. Based on current laws and regulations, the Company
believes that it is in compliance with such laws and regulations and that its
policies, practices and procedures are designed to prevent unreasonable risk of
environmental damage or violation of environmental laws and regulations and any
resulting financial liability to the Company. Further, the Company is not aware
of any federal, state or local laws or regulations, or laws or regulations of
foreign countries, that have been enacted or adopted, the compliance with which
would have a material adverse effect on the Company's results of operations or
that would require the Company to make any material capital expenditures. No
assurance can be given that future changes in such laws or regulations or
changes in the nature of the Company's operations or the effects of activities
of prior occupants or activities at neighboring facilities will not have an
adverse impact on the Company's operations.
INTELLECTUAL PROPERTY
The Company does not own any patents. The Company has registered trademarks
for the Showpower name and Showpower logo in the United States, Japan and Brazil
and has applied for registration in the European Union. The Company intends to
protect its distinctive name and logo throughout the areas of the world where it
maintains a presence and, accordingly, will expand trademark and service mark
registrations as foreign operations increase.
4
<PAGE>
COMPETITION
The Company believes that the temporary power and temperature control
rental services market is both highly competitive and fragmented. Showpower
faces significant competition in virtually all of its markets from general
equipment rental companies, specialized equipment rental companies, and OEMs and
their dealers or distributors. The Company also faces competition from utility
companies and from local and national electrical and HVAC contractors. Company
believes that Aggreko Ltd., a power, temperature control and air compressor
equipment rental company based in the U.K., provides services that are the most
comparable in type and scope to those of Showpower. Aggreko Ltd. is
substantially larger than the Company and has a total of over 70 depots in more
than 20 countries worldwide.
There are no significant barriers to entry into the power generation or
temperature control rental markets. Competition is based primarily on the
availability of equipment, price, reputation and service quality and
capabilities. Many of the Company's competitors are larger and have greater
financial and other resources than the Company.
Showpower believes that its principal competitive strengths are its: (i)
established reputation and the relationships that it has developed with
customers in the entertainment and related industries; (ii) ability to provide
planning, rental, technical and personnel support services on a fully integrated
basis; (iii) ability to seek out and manage a large number of projects
simultaneously; and (iv) ability to assemble and rapidly deploy complex
equipment systems throughout the world. The Company also believes that it has an
advantage over general equipment rental firms, and rental firms specializing in
serving industrial and commercial customers, where management believes that
service requirements and performance expectations are less stringent.
EMPLOYEES
As of December 31, 1998, the Company had approximately 118 full-time
employees. The Company also engages personnel, from time to time, on a part-time
or project-by-project basis. None of the Company's employees is covered by a
collective bargaining agreement. The Company believes that its relationship with
its employees is satisfactory.
ITEM 2. DESCRIPTION OF PROPERTY.
The Company leases all of its facilities, including its executive offices
and main shop and warehouse facility in Rancho Dominguez, California, and
regional offices in Richardson, Texas; Scotch Plains, New Jersey; Fort
Lauderdale, Florida; Bristol, England; Rio de Janeiro, Brazil and an
administrative office in Irvington, New York. Current lease terms range from one
to ten years. The Company believes all of its facilities are in good operating
condition.
ITEM 3. LEGAL PROCEEDINGS.
The Company is involved from time to time in various routine legal
proceedings incidental to its business. The Company is not engaged in any legal
proceeding that is expected to have a material adverse effect on the results of
operations or financial position of the Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
No matters were submitted to a vote of the holders of the Common Stock
during the fourth quarter of 1998.
5
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PART II
(IN THOUSANDS, EXCEPT SHARE DATA)
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
The Common Stock is traded on The American Stock Exchange under the symbol
SHO. The prices set forth below reflect the high and low sales quotations for
the Common Stock as reported by The American Stock Exchange for the calendar
periods indicated beginning with the date on which the Offering was completed.
As of March 1, 1999, there were approximately 2,000 holders of the Common Stock,
based on security position listings.
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<CAPTION>
1998
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HIGH LOW
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Second Quarter (From June 16, 1998) $15 1/8 $131/2
Third Quarter $17 $7 7/8
Fourth Quarter $12 1/4 $7
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In connection with the conversion of the Company's S corporation status to
C corporation status, the Company distributed $400 to its S Corporation
stockholders during 1998. The Company distributed $500 to its S Corporation
stockholders in 1997.
The Company does not anticipate paying any cash dividends on the Common
Stock in the foreseeable future and anticipates that any future earnings will be
retained to finance the Company's operations and expansion. The payment of cash
dividends in the future will be at the discretion of the Board of Directors and
will depend upon the Company's earnings levels, capital requirements,
restrictive loan covenants and other factors the Board of Directors may deem
relevant. The Company's bank line of credit agreement restricts payment of
dividends other than the dividends paid to S Corporation stockholders in 1998.
In the Offering, the Company sold 1,200,000 shares of its Common Stock
pursuant to a Registration Statement on Form SB-2 (Commission File No.
333-50595, declared effective June 16, 1998). The Offering was made through a
syndicate of underwriters, the representative of which was Prime Charter Ltd.
The shares were offered and sold by the underwriters at an initial public
offering price of $11.00 per share, resulting in aggregate gross offering
proceeds of $13,200. On July 2, 1998, the Company sold 180,000 additional shares
of Common Stock at a price of $11.00 per share to the underwriters of the
Offering pursuant to the exercise of their over-allotment option resulting in
aggregate gross offering proceeds of $1,980. The Company incurred expenses in
connection with the sale of shares:
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Underwriting discounts and commissions....... $ 1,063
Expenses paid to or for underwriters......... 640
Other Expenses............................... 618
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$ 2,321
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Through December 31, 1998, the Company has applied proceeds from the
Offering as follows:
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<S> <C>
Purchase of power generation and temperature
control equipment............................... $ 6,274
Repayment of indebtedness......................... 4,049
Working capital................................... 2,136
Distribution to S Corporation stockholders........ 400
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$12,859
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Neither the above application of the net offering proceeds nor expenses of
the Offering (except for the distribution to S Corporation stockholders and
reimbursement of travel-related expenses) were paid either directly or
indirectly to directors, officers of the Company or its associates, or to
persons owning more than 10% of any class of equity security of the Company or
to any affiliates of the Company.
There were no unregistered sales of securities by the Company during the
fourth quarter of 1998.
6
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ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS.
The following discussion should be read in conjunction with the Company's
consolidated financial statements, including the related notes thereto, and
other financial information included in this Form 10-KSB. Certain statements
made in this report relating to trends in the Company's operations or financial
results, as well as other statements, including words such as 'anticipate',
'believe', 'plan', 'estimate', 'expect', 'intend', and other similar
expressions, constitute forward-looking statements under the Private Securities
Litigation Reform Act of 1995. These forward-looking statements are subject to
known and unknown risks, uncertainties and other factors which would cause
actual results to be materially different from those contemplated by the
forward-looking statements, including the following risks and uncertainties: the
unpredictable nature of the Company's business; risks of foreign operations
including fluctuations in currency exchange ratios; the Company's dependance on
entertainment and related industries; the risks of the Company's growth strategy
through acquisitions and opening new branch offices in the U.S. and elsewhere;
the Company's dependence on suppliers of power generation equipment; the
Company's dependence on key management personnel; and risks of competition.
OVERVIEW
The Company provides temporary power generation and temperature control
rental equipment and support services on a worldwide basis for entertainment,
corporate and special events. The Company's customers include corporations,
event producers, television networks, motion picture studios, facility operators
and performers that need electric power and/or temperature control services to
support events at locations where these services are inadequate or unavailable.
In addition to rental equipment, the Company provides fully integrated,
value-added services, including planning, technical advice, customized
installations, on-site operations and support personnel. The Company's power
equipment consists of transportable, diesel-powered electricity generators
contained in acoustic enclosures and related power distribution equipment.
Temperature control equipment consists of transportable, electrically-driven
HVAC units.
The Company experiences quarterly, seasonal and annual variations in
revenues and net income (which can be material) as a result of several factors,
including the timing and scale of concert tours, broadcast events and special
events, delays in or cancellations of customers' tours and events, the presence
or absence of triennial, quadrennial and large-scale special events, as well as
changes in the Company's revenues mix and related profitability among its
various rental services offered. Accordingly, operating results in any quarter
should not be considered indicative of results for the year or any future
periods. Most of the events serviced by the Company are held outdoors in the
northern hemisphere and typically occur during the second and third quarters of
the year.
In 1998 the Company completed its initial public offering (the 'Offering'),
resulting in net proceeds of $12,859 which were applied primarily to reduce debt
and acquire power generation and temperature control equipment. Capital
expenditures in 1998 resulted in an increase in the Company's rental assets of
over $9,000 by December 31, 1998, representing a 79% increase in property and
equipment from 1997. The increase in rental assets allowed the Company to
establish operations in Brazil, expand in temperature control markets and reduce
its cost of equipment rented for use in its customers projects.
Although revenues increased $2,881 or 17% to $20,175 in 1998 from $17,294
in 1997, the Company posted an operating loss of $669 in 1998 compared to an
operating profit of $1,218 in the prior year. The Company experienced revenue
growth and recorded operating profits during each of the first three quarters of
1998, followed by lower revenues and an operating loss in the fourth quarter of
1998.
During the first three quarters of 1998, revenues rose $4,157 or 33%
compared to the first three quarters of 1997 due to increased concert touring
and special events activity, growth in local rental operations and commencement
of operations in Brazil. Operating profit during the first nine months of 1998
increased by $310 or 31% to $1,307 compared to $997 in the same period of 1997.
Revenues of $3,595 in the fourth quarter of 1998 decreased significantly,
both on a year-to-year and sequential-quarter basis, falling $1,276 or 26%
compared to the year-earlier quarter and by $3,128 or 47% from the third quarter
of 1998. Fourth quarter revenues decreased sharply due to the conclusion of
several large concert tours and special events, for which the Company had
provided services during the preceding four quarters, as
7
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well as a slowdown in television and film production in southern California and
weaker economic conditions in Brazil and Asia.
The Company recorded an operating loss of $1,976 in the fourth quarter of
1998 compared to an operating profit of $221 in the fourth quarter of 1997.
Operating expenses increased both on a year-to-year and sequential-quarter
basis, reflecting the Company's inability to reduce the costs of its operations
in the short term, as well as certain additional expenses recorded during the
period. The Company maintained personnel and other expenses at levels in excess
of those required by prevailing business conditions, in part to ensure the
availability of resources the Company expects will be needed during the
traditional summer peak season in 1999 and for millennium related projects which
are anticipated to materialize toward the end of 1999. The timing and increased
expenses associated with the Company's expansion, including the commencement and
physical expansion of operations in Brazil, amplified the impact of the
reduction in fourth quarter revenue.
During the fourth quarter, operations in Brazil were affected by slower
economic growth and start-up costs, which were charged against income. During
the fourth quarter, and in connection with its U.K. operations, the Company also
recorded charges of $261 relating to the termination of a consulting contract
and established reserves for certain doubtful accounts.
Subsequent to December 31, 1998, the Company implemented programs to lower
its fixed operating expenses and costs of sales on an ongoing basis, and to
improve its ability to respond to future seasonal and other fluctuations
inherent in the nature of its business.
Approximately 77% and 85% of Showpower's revenues for 1998 and 1997,
respectively, was denominated in U.S. dollars; 19% and 15%, respectively, was
denominated in British pounds sterling; and four percent was denominated in the
Brazilian real (the 'real') in 1998. Fluctuations in currency exchange rates
result in fluctuations in reported results of operations and financial position
of the Company for business conducted in currencies other than the U.S. dollar.
For transactions denominated in currencies other than the U.S. dollar, the
Company's results of operations are converted at average rates of exchange
during the reporting period and balance sheet amounts are translated at exchange
rates at the balance sheet date. The results from such conversion and changing
exchange rates are recorded as a separate component of stockholders' equity,
which increased stockholders' equity by $9 at December 31, 1998, and $17 at
December 31, 1997. The Company anticipates that foreign currency denominated
revenues will become a more significant part of the Company's total revenues as
it opens additional branch offices outside of the United States.
In January 1999 the Central Bank of Brazil altered its foreign exchange
policy, resulting in a devaluation of the real. The value of the real was 2.05
reals to the U.S. dollar at March 1, 1999 and 1.21 reals to the U.S. dollar at
December 31, 1998. The effects of the devaluation and related changes in
economic conditions on the Brazilian operations cannot be predicted with any
certainty and may have a material adverse effect on the Company's future
operating results. To reduce the impact of currency fluctuations in Brazil, the
Company is reducing or converting most of its ongoing U.S. dollar operating
costs to reals. To further reduce its exposure, the Company is also reducing the
rental equipment assets deployed there.
8
<PAGE>
RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, components of
the Company's statements of operations as a percentage of revenue.
<TABLE>
<CAPTION>
YEARS ENDED
DECEMBER 31,
-----------------
1998 1997
---- ----
<S> <C> <C>
Revenues 100% 100%
Cost of sales 63 57
---- ----
Gross profit 37 43
General and administrative 38 34
Depreciation and amortization 1 1
Stock compensation expense 1 1
---- ----
Operating (loss) income (3 ) 7
Other income and (expense) (1 ) (1 )
---- ----
(Loss) income before income taxes and minority
interest (4 ) 6
Income tax provision (4 ) (1 )
Minority interest -- --
---- ----
Net (loss) income (8 )% 5%
---- ----
---- ----
</TABLE>
YEAR ENDED DECEMBER 31, 1998 COMPARED TO YEAR ENDED DECEMBER 31, 1997
Revenues. Revenues increased to $20,175 in 1998 from $17,294 in 1997, an
increase of $2,881, or 17%. Of this increase, $1,751 or 61% was attributable to
an increase in concert touring and special events, $929 or 32% resulted from the
Company's operations in Brazil and $201 or 7% is due to a full year of
operations of the Company's U.K. subsidiary, Templine. The Company commenced
recognizing results of operations in Brazil in July 1998 and acquired Templine
in March 1997.
Cost of Sales. Cost of sales increased to $12,720 in 1998 from $9,790 in
1997, an increase of $2,930, or 30%. Cost of sales as a percentage of revenues
was 63% in 1998 and 57% in 1997. Personnel and travel costs increased to $5,341
(26% of revenues) in 1998 from $3,404 (20% of revenues) in 1997. The rise in
personnel and travel costs, which was due to increased concert touring and
special events, short-term labor requirements in the U.K., start-up costs and
operations in Brazil, and an increase in projects involving foreign and other
travel costs, accounted for 67% of the increase in cost of sales. Shipping and
transportation costs increased to $1,950 (10% of revenues) from $1,452 (8% of
revenues), due in part to start-up costs and operations in Brazil.
As a result of 1998 capital expenditures for power generation and
temperature control equipment, short-term equipment rental costs decreased $463
to $2,347 (12% of revenues) in 1998 from $2,810 (16% of revenues) in 1997 and
depreciation of rental equipment increased $683 to $1,564 (8% of revenues) in
1998 from $881 (5% of revenues) in 1997.
Gross Profit. Gross profit was $7,455 in 1998, approximating $7,504 in
1997. Gross profit as a percentage of revenues was 37% in 1998 and 43% in 1997.
Lower revenues in the fourth quarter of 1998 and increased fixed costs such as
depreciation expense contributed to the decline in the gross profit margin.
Start-up of operations in Brazil also reduced the gross profit margin.
General and Administrative Expenses. General and administrative expenses
increased to $7,708 in 1998 from $5,957 in 1997, an increase of $1,751 or 29%.
The increase, which included a $125 charge for termination of a consulting
contract, was a result of overall growth in operations, a full year of
operations of Templine, operations in Brazil which commenced in 1998 and the
addition of a new branch office in Florida. Salaries and other employee-related
costs increased to $4,476 in 1998 from $3,599 in 1997, an increase of $877 or
24% due to increased personnel to support growth in operations. Other general
and administrative expenses, including insurance, occupancy, vehicles, supplies,
equipment repairs and maintenance and telephone, increased to $3,232 in 1998
from $2,358 in 1997, an increase of $874, or 37% as a result of the increase in
rental assets, facilities and overall growth in operations.
9
<PAGE>
Depreciation and Amortization. Depreciation and amortization increased to
$274 in 1998 from $222 in 1997, an increase of $52 or 23%, due to increased
leasehold improvements and warehouse equipment in 1998.
Stock Compensation Expense. In March 1997, the Company made restricted
stock awards of an aggregate of 128,767 shares of common stock to certain
executive officers of the Company. The shares of common stock are restricted and
subject to forfeiture upon termination of employment. Stock compensation expense
is being recognized over the three-year vesting period based on the value of the
shares at the date of grant.
(Loss) Income From Operations. As a result of the above factors, the
Company posted an operating loss of $669 in 1998 as compared to operating income
of $1,218 in 1997, a decrease in operating income of $1,887.
Other Income and (Expense). Other expense increased to $216 in 1998 from
$171 in 1997, due primarily to higher borrowings in 1998 prior to the Offering
in June 1998.
(Loss) Income Before Income Taxes and Minority Interest. As a result of
the above factors, loss before income taxes and minority interest was $885 in
1998 compared to income before income taxes and minority interest of $1,047 in
1997.
Provision for Income Taxes. The income tax provision was $683 in 1998 and
$116 in 1997, an increase of $567. The provision for income taxes consists of a
provision for income taxes on earnings of foreign subsidiaries and a provision
for U.S. federal and state income tax since the date of the Offering. The
Company paid no income taxes on its U.S. operations prior to becoming a C
Corporation in June 1998. The 1998 provision includes a one-time non-cash charge
of $784 to record the deferred tax liability arising from the Company's
conversion from S Corporation to taxable C corporation status.
Minority Interest. Minority interest represents the 10% minority
shareholder interest in earnings of the Company's subsidiary, Showpower Brasil
S.A.
Net (Loss) Income. Net loss in 1998 was $1,575 as compared to net income
of $931 in 1997. On a pro forma basis, net (loss) income in 1998 and 1997 was
$(585) and $632, respectively. Pro forma net income reflects provisions for
federal and state income taxes as if the Company's U.S. operations had been
subject to federal and state income taxation as a C Corporation at an assumed
40% combined federal and state income tax rate during the periods presented.
LIQUIDITY AND CAPITAL RESOURCES
Following the application of the net proceeds from the Offering, working
capital increased $3,100 to $1,493 at December 31, 1998 from a working capital
deficit of $1,607 at December 31, 1997.
The Company currently has two asset-based financing commitments totaling
$6,500. The first commitment with Caterpillar Financial Services Corporation
('CAT Financial') provides for borrowings bearing interest at rates not to
exceed the 5-year treasury bond rate plus 3.5% per annum (approximately 8% at
December 31, 1998), with monthly principal and interest payments over a 5-year
term. The commitment expires April 30, 1999. At December 31, 1998, no borrowings
from CAT Financial were outstanding and the Company had additional availability
of approximately $3,500. At March 1, 1999, borrowings of $759 were outstanding
from CAT Financial and the Company had additional availability of approximately
$2,741. The other commitment is with Charter Financial, Inc. ('Charter') and
bears interest at a rate determined by the lender at the funding date, with
monthly principal and interest payments payable over a four-year term, and 20%
of the principal amount due at the end of the term. Prepayment prior to maturity
may be made in an amount equal to the sum of future principal and interest
payments, discounted at an annual rate of 6%. At December 31, 1998, borrowings
of $1,940 from Charter were outstanding and the Company had additional
availability of approximately $313. Borrowings under the asset-based
arrangements are collateralized by power generation and temperature control
equipment.
The Company has a commitment for a $2,000 line of credit facility from a
bank (the 'New Facility'). Interest under the New Facility will be payable
monthly at the lender's prime rate plus 1%, or, at the Company's option, LIBOR
plus 3.125%. The New Facility will have a term through April 2000. The New
Facility will include customary negative covenants, such as restrictions on the
Company's ability to incur debt, make acquisitions, pay dividends, make
investments or sell assets, as well as financial covenants regarding the
Company's tangible net worth, ratio of cash and accounts receivable to current
liabilities, ratio of liabilities to
10
<PAGE>
tangible net worth and cash flow to current portion of long term debt
obligations. The Company will also be required to maintain a specified level of
cash and cash equivalents under the terms of the New Facility.
The Company's U.K. subsidiary, Templine, also has a line of credit with a
bank in the amount of 125 British pounds sterling ($208 at December 31, 1998)
bearing interest based on the bank's reference rate (6.25% at December 31, 1998)
plus 2.5%, with a term through December 20, 1999. At December 31, 1998,
borrowings of $176 were outstanding under this credit line.
The Company had operating losses of approximately $351 in 1998 from
operations in Brazil, which commenced in 1998. The January 1999 currency
devaluation in Brazil, along with other factors that are likely to negatively
impact economic conditions in Brazil, such as high interest rates, import
restrictions and tax increases, may lead to inflation and a decrease in demand
for the Company's services. While the Company is reducing operating costs and
assets allocated to operations in Brazil, there can be no assurance that the
Company's operations in Brazil will be profitable or generate significant cash
flow from operations in the near term. The effect on 1999 operations of reducing
the Company's exposure in Brazil in 1999, including the costs of such reduction,
is not expected to exceed the operating loss from start-up and operations in
Brazil in 1998.
Capital expenditures (including assets acquired through capital lease and
note payable financing) were $9,630 and $2,903 for the years ended December 31,
1998 and 1997, respectively, consisting primarily of power generation,
distribution and temperature control equipment. The Company has applied
approximately $6,274 of the net proceeds of the Offering to acquire or construct
power generation and temperature control equipment.
Cash (used in) provided by operating activities for 1998 and 1997 totaled
$(523) and $2,363, respectively. The decrease of $2,142 in cash flow from
operations resulted primarily from the decrease in earnings and decrease in
customer deposits.
Cash used in investing activities for 1998 and 1997 totaled $5,694 and
$4,018, respectively. The increase of $1,676 resulted primarily from application
of the Offering proceeds for increased capital expenditures in 1998.
Cash provided by financing activities for 1998 and 1997 totaled $8,668 and
$1,955, respectively. In 1998, the Company issued a total of 1,380,000 shares of
Common Stock in the Offering for $11.00 per share. The net proceeds from the
sale of shares totaled $12,859, after deduction of underwriting discounts,
commissions and offering-related expenses. In 1997, the Company issued 754,000
shares of Common Stock for net cash proceeds of $2,043.
The Company believes that cash flows from operations and the Company's
available existing credit facilities are sufficient to meet operating needs and
capital spending requirements for at least the next twelve months.
YEAR 2000 COMPLIANCE
The Year 2000 Problem. Many information technology ('IT') hardware and
software systems ('IT Systems') and non-IT systems containing embedded
technology, such as microcontrollers and microchip processors ('Non-IT
Systems'), can only process dates with six digits (e.g., 06/26/98), instead of
eight digits (e.g., 06/26/1998). This limitation may cause IT Systems and Non-IT
Systems to experience problems processing information with dates after December
31, 1999 (e.g., 01/01/00 could be processed as 01/01/2000 or 01/01/1900) or with
other dates, such as September 9, 1999, which was traditionally used as a
default date by computer programmers. These problems may cause IT Systems and
Non-IT Systems to suffer miscalculations, malfunctions, or disruption. These
problems are commonly referred to as 'Year 2000' or 'Y2K' problems. While the
Company has no present assurance that all of its IT Systems, Non-IT Systems,
vendors and service providers are Year 2000 compliant, management believes the
potential risk and any associated cost resulting from the Year 2000 problem will
not be material to the Company's results of operations or financial condition.
The Company's State of Readiness. Based on representations of third
parties, the Company believes computer software applications on which the
Company relies for accounting, management and operating information are recent
releases of, or can be readily upgraded to, Year 2000 compliant, commercially
available applications. The Company is in the process of determining which, if
any, of those applications are not Year 2000 compliant.
11
<PAGE>
The Company is continuing its Year 2000 assessment as it relates to Non-IT
Systems and third parties with whom it has a material relationship. The Company
has initiated the process of surveying key vendors to insure they are Year 2000
compliant, which to date has consisted of requests of vendors to describe their
state of readiness. The Company is unaware of any key vendors who are not
compliant; however, such survey is not yet complete. The Company is unable to
ascertain when this process will be complete, as it has no control over the
responsiveness of such third parties. Third parties with whom the Company has a
material relationship consist of accounting and office software vendors, banks,
a transfer agent, and payroll service and telephone systems providers, among
others. The Company is not aware of any such third party for which alternate
sources of supply are unavailable. The Company plans to complete its assessment
by the third quarter of 1999 and replace or upgrade any applications or Non-IT
Systems that are not Year 2000 compliant by the fourth quarter of 1999.
The Company does not separately identify costs that are specifically
attributable to resolving the Year 2000 issue. Such costs to date consist
primarily of internal resources devoted to assessing the Company's state of
readiness and are not significant. Based on the Company's assessment to date,
the Company does not expect the future costs related to the resolution of this
matter to exceed $100.
To date, the Company has not identified any information technology assets
under the control of the Company that represent a material risk of not being
Year 2000 ready or for which a suitable alternative cannot be implemented.
Accordingly, the Company does not have a contingency plan with respect to the
Year 2000 issue if the information systems assessment and upgrades are not
completed or are delayed beyond the end of 1999.
EFFECTS OF INFLATION
Inflation has not had a material impact upon the operating results of the
Company. To date, in those instances in which the Company has experienced cost
increases, it has been able to increase selling prices to offset such increases
in cost. There can be no assurance, however, that the Company's business will
not be affected by inflation or that it can continue to increase its selling
prices to offset increased costs and remain competitive. The effects of
devaluation of the real in 1999 on the Company's Brazilian operations may result
in inflation in Brazil, which could have an adverse effect on future operating
results.
12
<PAGE>
ITEM 7. FINANCIAL STATEMENTS.
INDEPENDENT AUDITORS' REPORT
Showpower, Inc.
We have audited the accompanying consolidated balance sheet of Showpower, Inc.
and subsidiaries (the 'Company') as of December 31, 1998, and the related
consolidated statements of operations, stockholders' equity, and cash flows for
the years ended December 31, 1998 and 1997. 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, such consolidated financial statements present fairly, in all
material respects, the financial position of the Company as of December 31, 1998
and the results of its operations and its cash flows for the years ended
December 31, 1998 and 1997 in conformity with generally accepted accounting
principles.
DELOITTE & TOUCHE LLP
Los Angeles, California
March 24, 1999
13
<PAGE>
SHOWPOWER, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
DECEMBER 31, 1998 (IN THOUSANDS, EXCEPT SHARE DATA)
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 2,937
Accounts receivable, net of allowance for doubtful accounts of $310 1,387
Due from officers and employees (Note 11) 59
Prepaid expenses and other current assets 341
Refundable income taxes 75
Deferred income taxes (Note 8) 225
-------
Total current assets 5,024
-------
PROPERTY AND EQUIPMENT (Notes 4, 5 and 10):
Property and equipment 21,526
Accumulated depreciation and amortization (5,524)
-------
Property and equipment, net 16,002
-------
OTHER ASSETS:
Due from officers (Note 11) 80
Intangible assets, less accumulated amortization of $282 (Note 3) 1,212
Deposits and other assets 222
-------
Total other assets 1,514
-------
TOTAL $22,540
-------
-------
</TABLE>
See accompanying notes to consolidated financial statements.
14
<PAGE>
SHOWPOWER, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET (CONTINUED)
DECEMBER 31, 1998 (IN THOUSANDS, EXCEPT SHARE DATA)
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Bank line of credit (Note 5) $ 176
Current portion of long-term debt (Note 5) 644
Current portion of capital lease obligations (Note 10) 74
Accounts payable 1,723
Accrued payroll and related expenses 517
Other accrued expenses 351
Customer deposits 21
Accrued income taxes 3
Deferred income taxes (Note 8) 22
-------
Total current liabilities 3,531
-------
LONG-TERM LIABILITIES:
Long-term debt, net of current portion (Note 5) 1,496
Capital lease obligations, net of current portion (Note 10) 120
Deferred income taxes (Note 8) 987
Other long-term liabilities 70
-------
Total long-term liabilities 2,673
-------
Total liabilities 6,204
-------
MINORITY INTEREST 46
-------
COMMITMENTS AND CONTINGENCIES (Notes 9, 10 and 14)
STOCKHOLDERS' EQUITY (Note 6):
Preferred stock; $0.01 par value; authorized, 1,000,000 shares; none issued or outstanding
Common stock; $0.01 par value; authorized, 6,500,000 shares; issued and outstanding, 3,421,842 shares 34
Additional paid-in capital 19,645
Notes receivable from stockholders (513)
Cumulative foreign currency translation adjustment 9
Accumulated deficit (2,885)
-------
Total stockholders' equity 16,290
-------
TOTAL $22,540
-------
-------
</TABLE>
See accompanying notes to consolidated financial statements.
15
<PAGE>
SHOWPOWER, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 1998 AND 1997 (IN THOUSANDS, EXCEPT SHARE DATA)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1998 1997
<S> <C> <C>
REVENUES $20,175 $17,294
COST OF SALES, Including depreciation of rental assets of $1,564 in 1998 and $881 in 1997 12,720 9,790
------- -------
GROSS PROFIT 7,455 7,504
------- -------
OPERATING EXPENSES:
General and administrative 7,708 5,957
Depreciation and amortization 274 222
Stock compensation expense 142 107
------- -------
Total operating expenses 8,124 6,286
------- -------
(LOSS) INCOME FROM OPERATIONS (669) 1,218
------- -------
OTHER INCOME AND (EXPENSE):
Interest expense (395) (204)
Interest and other income 179 33
------- -------
Total other expense (216) (171)
------- -------
(LOSS) INCOME BEFORE INCOME TAXES AND MINORITY INTEREST (885) 1,047
INCOME TAX PROVISION, INCLUDING DEFERRED TAXES FROM S CORPORATION CONVERSION OF $784 IN 1998
(Note 8) 683 116
MINORITY INTEREST 7 --
------- -------
NET (LOSS) INCOME (1,575) 931
OTHER COMPREHENSIVE (LOSS) INCOME--
Foreign currency translation adjustment (8) 17
------- -------
COMPREHENSIVE (LOSS) INCOME $(1,583) $ 948
------- -------
------- -------
BASIC NET (LOSS) INCOME PER SHARE (Note 7) $ (0.59) $ 0.54
DILUTED NET (LOSS) INCOME PER SHARE (Note 7) $ (0.59) $ 0.52
PRO FORMA AMOUNTS (Unaudited) (Note 8):
(Loss) income before income taxes, as reported $ (885) $ 1,047
Minority interest 7 --
Pro forma income tax (benefit) provision (307) 415
------- -------
Pro forma net (loss) income $ (585) $ 632
------- -------
------- -------
Pro forma basic net (loss) income per share $ (0.18) $ 0.37
Pro forma diluted net (loss) income per share $ (0.18) $ 0.35
Supplemental pro forma basic net income per share $ 0.35
Supplemental pro forma diluted net income per share $ 0.34
</TABLE>
See accompanying notes to consolidated financial statements.
16
<PAGE>
SHOWPOWER, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1998 AND 1997 (IN THOUSANDS, EXCEPT SHARE DATA)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
CUMULATIVE
NOTES FOREIGN
ADDITIONAL RECEIVABLE CURRENCY
COMMON PAID-IN FROM TRANSLATION ACCUMULATED
SHARES STOCK CAPITAL STOCKHOLDERS ADJUSTMENT DEFICIT TOTAL
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE, JANUARY 1, 1997 1,159,075 $ 12 $ 4,060 $(1,341) $ 2,731
Issuance of common stock (Note 6) 754,000 7 2,493 2,500
Stock granted to officers (Note
6) 128,767 1 425 426
Unearned compensation expense
(Note 6) (320) (320)
Stockholders notes, including
accrued interest of $22 (Note
6) $ (479) (479)
Net income 931 931
Distribution to S Corporation
stockholders (500) (500)
Foreign currency translation
adjustment $ 17 17
--------- ------ ---------- ----- --- ----------- -------
BALANCE, DECEMBER 31, 1997 2,041,842 20 6,658 (479) 17 (910) 5,306
Issuance of common stock (Note 6) 1,380,000 14 12,845 12,859
Compensation expense (Note 6) 142 142
Net loss (1,575) (1,575)
Accrued interest (34) (34)
Distribution to S Corporation
stockholders (400) (400)
Foreign currency translation
adjustment (8) (8)
--------- ------ ---------- ----- --- ----------- -------
BALANCE, DECEMBER 31, 1998 3,421,842 $ 34 $ 19,645 $ (513) $ 9 $(2,885) $16,290
--------- ------ ---------- ----- --- ----------- -------
--------- ------ ---------- ----- --- ----------- -------
</TABLE>
See accompanying notes to consolidated financial statements.
17
<PAGE>
SHOWPOWER, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1998 AND 1997 (IN THOUSANDS)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1998 1997
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net (loss) income $(1,575) $ 931
Adjustments to reconcile net (loss) income to net cash (used in) provided by
operating activities:
Depreciation and amortization 1,838 1,103
Stock compensation expense 142 107
Gain on settlement (Note 12) -- (163)
Gain on disposal of property and equipment (221) --
Deferred income taxes 564 29
Minority interest 7 --
Changes in operating assets and liabilities:
Accounts receivable (80) (276)
Prepaid expenses and other current assets 68 (350)
Income taxes (298) 120
Other assets (148) 19
Accounts payable (440) 487
Due to affiliate (43) (53)
Other accrued expenses 220 (74)
Customer deposits (557) 483
------- -------
Net cash (used in) provided by operating activities (523) 2,363
------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition of businesses, net of cash acquired (100) (2,105)
Purchases of property and equipment (5,941) (1,904)
Proceeds from sale of property and equipment 347 --
Other -- (9)
------- -------
Net cash used in investing activities (5,694) (4,018)
------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of common stock 12,859 2,043
Proceeds from issuance of long-term debt 338 685
Net borrowings under bank line of credit 57 119
Principal payments on long-term debt (4,034) (242)
Principal payments on capital lease obligations (152) (150)
Distributions to S Corporation stockholders (400) (500)
------- -------
Net cash provided by financing activities 8,668 1,955
------- -------
NET INCREASE IN CASH AND CASH EQUIVALENTS 2,451 300
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR 486 186
------- -------
CASH AND CASH EQUIVALENTS, END OF YEAR $ 2,937 $ 486
------- -------
------- -------
SUPPLEMENTARY DISCLOSURE OF CASH FLOW INFORMATION (Note 12)
</TABLE>
See accompanying notes to consolidated financial statements.
18
<PAGE>
SHOWPOWER, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1998 AND 1997 (IN THOUSANDS, EXCEPT SHARE DATA)
- --------------------------------------------------------------------------------
1. ORGANIZATION
Showpower, Inc. and subsidiaries (the 'Company') provide temporary power
generation and temperature control rental equipment and support services on
a worldwide basis for entertainment, corporate and special events. The
Company's customers include corporations, event producers, television
networks, motion picture studios, facility operators and performers that
need electric power and/or temperature control services to support events at
locations where these services are inadequate or unavailable. In addition to
rental equipment, the Company provides fully integrated, value-added
services, including planning, technical advice, customized installations,
on-site operations and support personnel. The Company's power equipment
consists of transportable, diesel-powered electricity generators contained
in acoustic enclosures, and related power distribution equipment.
Temperature control equipment consists of transportable, electrically driven
ventilation, heating and air conditioning units.
The Company completed its Initial Public Offering of common stock (the
'Offering') on June 16, 1998.
The consolidated financial statements of Showpower, Inc. include the
accounts of Templine, Ltd. ('Templine'), a 100%-owned United Kingdom
corporation, and Showpower Brasil, S.A. ('SPB'), a 90%-owned Brazilian
corporation. All significant intercompany balances and transactions have
been eliminated in consolidation.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
CASH AND CASH EQUIVALENTS - The Company considers all highly liquid
investments purchased with a maturity of three months or less to be cash
equivalents.
PREPAID EXPENSES AND OTHER CURRENT ASSETS - Costs related to scheduled
future projects for which contracts are in place are deferred and charged to
expense in the period revenue is recognized.
PROPERTY AND EQUIPMENT - Property and equipment are stated at cost.
Leasehold improvements are amortized over the related lease term.
Depreciation is computed on a straight-line basis using the following
estimated useful lives:
<TABLE>
<S> <C>
Rental equipment 7-10 years
Vehicles 5 years
Furniture and fixtures 7 years
Other equipment 5-7 years
</TABLE>
A portion of the Company's interest expense was incurred to fund the
construction of certain assets. Interest capitalized during 1998 and 1997
amounted to $41 and $28, respectively.
REVENUE RECOGNITION - Revenue is recognized over the term of and
commensurate with the scope of services provided. Customer deposits and cash
received before services are performed are deferred and recorded as current
liabilities.
INTANGIBLE ASSETS - Intangible assets, primarily goodwill, are stated at
cost and are amortized using the straight-line method over estimated useful
lives ranging from 2 to 15 years.
INCOME TAXES - Deferred income taxes are provided for temporary differences
between the financial statement and income tax bases of the Company's assets
and liabilities, based on enacted tax rates. A valuation allowance is
provided when it is more likely than not that some portion or all of the
deferred income tax assets will not be realized. Prior to the Offering in
June 1998, the Company elected to be taxed under the provisions of
Subchapter S of the Internal Revenue Code and similar state tax provisions.
Under those provisions, the Company was not subject to federal corporate
income taxes. The earnings of S
19
<PAGE>
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--(CONTINUED)
corporations are reported on the tax returns of the stockholders. The
Company's United Kingdom and Brazilian subsidiaries are subject to income
tax in those foreign jurisdictions.
FOREIGN CURRENCY - The British pound sterling and Brazilian real are the
functional currencies for Templine and SPB, respectively. Results of
operations are converted at average rates of exchange during the year, and
balance sheet amounts are translated at exchange rates at the balance sheet
date. The effects of such conversion and changing exchange rates are a
component of comprehensive income and recorded as a separate component of
stockholders' equity.
EARNINGS PER SHARE - Basic EPS is calculated based on weighted average
outstanding shares. Diluted EPS includes the effect of restricted shares
issued to officers and employee stock options, to the extent they are
dilutive. The unaudited supplemental pro forma net income per share gives
effect to the increase in number of shares, the net proceeds of which would
have been sufficient to pay the distributions to stockholders from proceeds
from the Offering.
USE OF ESTIMATES - The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect certain amounts and disclosures.
Actual results could differ from those estimates.
FINANCIAL INSTRUMENTS - Financial instruments that subject the Company to
concentration of credit risk consist primarily of cash and cash equivalents
and accounts receivable. The Company's cash and cash equivalents are placed
primarily with institutions with high credit ratings, and the Company has
not experienced losses with respect to these items.
The concentration of credit risk with respect to accounts receivable is
generally diversified, as the Company has a broad customer base nationwide
and, to a lesser extent, worldwide. Customers are primarily within the
entertainment industry. Although receivables are unsecured, the Company
routinely assesses the financial strength of its customers and provides
allowances for potential credit losses. In 1997, one customer comprised 11%
of total revenues for the year.
The carrying values of cash and cash equivalents, accounts receivable, and
accounts payable approximate fair value due to the short maturities of such
instruments. Short-term and long-term notes payable are carried at amounts
approximating fair value based on current rates available to the Company for
debt with similar terms.
LONG-LIVED ASSETS - The Company reviews the recoverability of its long-lived
assets whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable. An impairment loss is
recognized when future estimated undiscounted cash flows expected to result
from the use of the asset and its eventual disposition are less than its
carrying amount.
NEW ACCOUNTING PRONOUNCEMENTS - In 1998, the Company adopted Statement of
Financial Accounting Standards ('SFAS') No. 130, 'Reporting Comprehensive
Income,' which establishes standards for reporting and displaying
comprehensive income and its components in a full set of financial
statements. SFAS No. 130 requires reclassification of comparative financial
statements for earlier periods, and the 1997 financial statements have been
reclassified to conform to the 1998 presentation.
In 1998, the Company adopted SFAS No. 131, 'Disclosures About Segments of an
Enterprise and Related Information,' which establishes standards for
reporting information about operating segments in annual and interim
financial statements.
In June 1998, the FASB issued SFAS No. 133, 'Accounting for Derivative
Instruments and Hedging Activities,' which is effective for the Company's
fiscal year ending December 31, 2000. SFAS No. 133 establishes accounting
and reporting standards for derivative instruments, including certain
derivative instruments embedded in other contracts, and for hedging
activities. Under the provisions of SFAS No. 133, an entity is required to
recognize all derivatives as either assets or liabilities in the statement
of financial position and measure those instruments at fair value. The
Company is currently evaluating the impact SFAS No. 133 will have on its
financial statements, if any.
20
<PAGE>
3. ACQUISITIONS
In January 1998, the Company acquired the assets (primarily rental
equipment) of Ed's Crystal Electric, Inc. at a total cost of $240. Goodwill
related to the acquisition totaled $58 and is being amortized over 15 years.
In March 1997, the Company acquired 100% of the common stock of Templine, at
a cost of $2,119, including acquisition costs. Goodwill related to the
acquisition, totaling $1,193, is being amortized over 15 years.
The Company accounted for both acquisitions using the purchase method of
accounting, and the results of operations have been included since the
acquisition dates. The acquired businesses operate in the same business as
the Company.
The following unaudited pro forma information presents results of operations
as though Templine had been acquired at the beginning of 1997:
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
1997
(UNAUDITED)
<S> <C>
Revenues $ 17,495
Income before income taxes $ 971
Net income $ 876
Basic net income per share $ 0.51
Diluted net income per share $ 0.49
</TABLE>
4. PROPERTY AND EQUIPMENT
Property and equipment consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
1998
<S> <C>
Rental equipment $ 18,061
Vehicles 989
Furniture and fixtures 249
Other equipment 916
Leasehold improvements 710
Work in process 601
------------
21,526
Accumulated depreciation and amortization (5,524)
------------
$ 16,002
------------
------------
</TABLE>
Depreciation and amortization expense in 1998 and 1997 was $1,713 and $992,
respectively.
5. LONG-TERM DEBT
The following is a summary of long-term debt:
<TABLE>
<S> <C>
Notes payable to Charter Financial, Inc., payable in monthly installments of $59 including
interest, due January 2001 to May 2002, bearing annual interest at rates ranging from
8.7% to 11.0%, collateralized by certain rental equipment $1,940
Notes payable, denominated in British pounds sterling, payable in monthly installments
including interest ranging from 5% to 24%, due November 2000, collateralized by certain
vehicles and rental equipment 98
Note payable in monthly installments including interest at 9.5%, due January 2001,
unsecured 102
------------
Total notes payable 2,140
Less current portion 644
------------
Long-term portion $1,496
------------
------------
</TABLE>
21
<PAGE>
5. LONG-TERM DEBT--(CONTINUED)
Maturities of long-term debt are as follows:
<TABLE>
<CAPTION>
YEAR ENDING DECEMBER 31,
DECEMBER 31, 1998
<S> <C>
1999 $ 644
2000 678
2001 611
2002 207
------------
Total $2,140
------------
------------
</TABLE>
Unused equipment financing availability totaled $3,813 at December 31, 1998.
Available financing under the arrangement with Caterpillar Financial
Services Corp. is $3,500 as of December 31, 1998, bearing interest at rates
not to exceed the 5-year Treasury Bond rate plus 3.5% (approximately 8% at
December 31, 1998) with monthly principal and interest payments over a
6-year term. Obligations may be repaid prior to maturity without penalty.
The available financing under the arrangement with Charter Financial, Inc.
is $313 as of December 31, 1998, bearing interest at a rate determined by
the lender at the funding date, with monthly principal and interest payments
over a 4-year term, with 20% of the interest and principal amount due at the
end of the term. Prepayment prior to maturity may be made at an amount equal
to the sum of future principal and interest payments, discounted at an
annual rate of 6%.
The Company has a $2,000 line of credit facility from a bank (the
'Facility'). Under the Facility, availability of funds in excess of $750 is
subject to an accounts receivable borrowing base formula, and interest is
payable monthly at the lender's prime rate (7.75% at December 31, 1998) plus
.75%, or, at the Company's option, the London Interbank Offered Rate
(LIBOR), plus 2.75%. The line of credit expires May 1, 1999. The Company has
a commitment for a $2,000 line of credit facility (the 'New Facility') which
it expects to replace the Facility. Interest under the New Facility will be
payable monthly at the lender's prime rate plus 1%, or, at the Company's
option, LIBOR plus 3.125%. The New Facility will expire April 2000. Both the
New Facility and the Facility include customary negative covenants such as
restrictions on the Company's ability to incur debt, make acquisitions, pay
dividends, make investments or sell assets, as well as financial covenants
regarding the Company's tangible net worth, ratio of cash and accounts
receivable to current liabilities, ratio of liabilities to tangible net
worth and cash flow to current portion of long-term obligations ratio. At
December 31, 1998, the Company had no borrowings under the Facility, and
would not have been permitted to borrow because it was not in compliance
with certain of the covenants. The bank subsequently waived compliance with
such covenants through May 1, 1999. The Company has a line of credit of 125
British pounds sterling (approximately $208 at December 31, 1998). The U.K.
line of credit bears interest based on the bank's reference rate (6.25% at
December 31, 1998) plus 3.5% and expires December 20, 1999. At December 31,
1998, $176 was outstanding under the U.K. line of credit.
6. STOCKHOLDERS' EQUITY
In March 1997, the Company issued 754,000 shares of common stock for $2,500,
including 137,913 shares issued to certain officers in exchange for recourse
promissory notes of $457. The notes, which bear interest at 6.25% per annum,
are due at maturity in September 2002. The notes are recorded as a reduction
of stockholders' equity.
In March 1998, the Company was reincorporated in Delaware. In connection
with the reincorporation, the Company is authorized to issue 6,500,000
shares of common stock, par value $0.01 per share, and 1,000,000 shares of
preferred stock, par value $0.01 per share. On April 6, 1998, the Company's
Board of Directors declared a 754-for-one stock split of the outstanding
common stock and effected the split by paying a stock dividend. All 1997
share and per share amounts have been restated to reflect the
reincorporation and the stock split.
In the Offering, the Company sold 1,200,000 shares of its common stock, $.01
par value, on June 16, 1998, pursuant to a Registration Statement on Form
SB-2. The shares were offered and sold by the underwriters at an initial
public offering price of $11.00 per share, resulting in aggregate gross
offering proceeds of $13,200. On July 2, 1998, the Company sold 180,000
additional shares of common stock at $11.00 per share to the underwriters of
the Offering pursuant to the exercise of their over-allotment option
resulting in aggregate
22
<PAGE>
6. STOCKHOLDERS' EQUITY--(CONTINUED)
gross offering proceeds of $1,980. The Company incurred expenses in
connection with the sale of shares as follows:
<TABLE>
<S> <C>
Underwriting discounts and commissions $1,063
Expenses paid to or for underwriters 640
Other expenses 618
------
$2,321
------
------
</TABLE>
Through December 31, 1998, the Company has applied net proceeds from the
Offering and exercise of over allotment option as follows:
<TABLE>
<S> <C>
Purchase of power generation and temperature control equipment $ 6,274
Repayment of indebtedness 4,049
Working capital 2,136
Distribution to S Corporation stockholders 400
-------
$12,859
-------
-------
</TABLE>
In March 1997, the Company granted certain officers 128,767 restricted
shares, which vest at the end of three years. Compensation expense based on
the fair value of the shares ($3.32 per share) is being recognized over the
vesting period.
Effective January 1, 1998, the Board of Directors and the stockholders of
the Company adopted the 1998 Stock Option and Incentive Plan (the '1998
Stock Option Plan'). Under the 1998 Stock Option Plan, the Company may award
stock options and performance shares to employees and directors of the
Company. The aggregate number of shares of common stock that may be awarded
under the 1998 Stock Option Plan is 565,500, subject to adjustment in
certain events. No individual participant may receive awards for more than
141,375 shares in any calendar year. In May 1998, the Company granted
non-qualified stock options to employees under the 1998 Stock Option Plan
for an aggregate of 479,563 shares of common stock, effective at the date of
the Offering. Each of such options has an exercise price of $11.00 per share
and has a term of 10 years. The options vest in three equal annual
installments, beginning at the date of the initial public offering. At
December 31, 1998, no options had been exercised or forfeited, 479,563
options were outstanding and 158,188 were vested.
No compensation cost has been recognized for the stock options. Had
compensation cost for the Company's stock options and restricted stock been
determined based on the fair value at the grant date, consistent with the
provisions in SFAS No. 123, the Company's net loss and loss per share (basic
and diluted) would have been $2,564 and $0.97, respectively, for 1998. The
per share value of the options granted during 1998 is estimated at $6.06 on
the date of grant. No options were granted prior to 1998. The fair values
were determined using a Black-Scholes option pricing model with the
assumption of no dividends payments, volatility of 80%, risk free interest
rate of 5.5% and expected life of 3 years.
7. EARNINGS PER SHARE
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------------------------------------------------------------
1998 1997
----------------------------------------- -----------------------------------------
LOSS SHARES PER SHARE INCOME SHARES PER SHARE
(NUMERATOR) (DENOMINATOR) AMOUNT (NUMERATOR) (DENOMINATOR) AMOUNT
<S> <C> <C> <C> <C> <C> <C>
BASIC NET (LOSS) INCOME
PER SHARE
Net (loss) income $(1,575) 2,653,787 $ (0.59) $ 931 1,724,580 $0.54
----------- --------- ----- ---------
----------- --------- ----- ---------
DILUTED NET INCOME PER
SHARE
Effect of restricted
stock - 76,563
------------- -------------
(Loss) income
attributed to common
stockholders and
effect of restricted
stock $(1,575) 2,653,787 $ (0.59) $ 931 1,801,143 $0.52
----------- ------------- --------- ----- ------------- ---------
----------- ------------- --------- ----- ------------- ---------
</TABLE>
23
<PAGE>
7. EARNINGS PER SHARE--(CONTINUED)
The dilutive effect of 128,767 shares of restricted stock (see Note 7) on
earnings per share in 1997 is calculated using the treasury stock method.
Assumed proceeds equal to unearned compensation divided by the initial
public offering price per share is used to reduce the dilutive effect of
restricted stock by the resulting number of shares.
8. INCOME TAXES
In connection with the Offering, the Company terminated its S Corporation
status. As a result, the Company is subject to income taxes at the corporate
level after June 16, 1998. The unaudited pro forma income tax provision in
the consolidated statements of operations, which relates to periods prior to
the Offering, is based upon an assumed 40% federal and state income tax rate
for the Company's U.S. operations.
In connection with the conversion of the Company's S Corporation status to C
Corporation status, the Company is required by FASB No. 109 to record
deferred income tax liabilities and deferred income tax assets. Such change
in the Company's tax status resulted in a net charge to earnings of $784
during 1998. This charge is a result of differences in the accounting and
tax treatment of certain of the Company's assets and liabilities and
resulted in an increase in net deferred income tax liabilities.
Significant components of the income tax provision are as follows:
<TABLE>
<CAPTION>
YEARS ENDED
DECEMBER 31,
---------------
1998 1997
<S> <C> <C>
Current:
Federal $ - $ -
State 15
Foreign 45 87
----- ----
60 87
----- ----
Deferred:
Deferred income taxes from change in tax status 784
Federal (209)
State (14)
Foreign 62 29
----- ----
623 29
----- ----
Income tax provision $ 683 $116
----- ----
----- ----
</TABLE>
A reconciliation of income taxes computed at the federal statutory tax rate
to the provision for income tax is as follows:
<TABLE>
<CAPTION>
YEARS ENDED
DECEMBER 31,
--------------
1998 1997
<S> <C> <C>
Tax (benefit) provision at federal statutory rate $(310) $ 366
Deferred income taxes from change in tax status 784 -
S Corporation tax (provision) benefit attributed to S Corporation
stockholders 14 (366)
Foreign income taxes 107 116
Permanent differences 43 -
Other 45 -
----- -----
Income tax provision $ 683 $ 116
----- -----
----- -----
</TABLE>
24
<PAGE>
The tax effects of significant items comprising the Company's net deferred
income taxes consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
1998
<S> <C>
Deferred income tax assets:
Net operating loss carryforwards $ 359
Allowance for doubtful accounts 150
Stock compensation 107
Federal benefit of deferred state income taxes 55
Foreign tax credit carryover 59
Other 76
------------
Total 806
------------
Deferred income tax liabilities:
Depreciation and amortization 1,490
Other 41
------------
Total 1,531
------------
Valuation allowance 59
------------
Net deferred income tax liabilities $ 784
------------
------------
</TABLE>
Foreign tax credits expire in 2003. Foreign taxes relate to the Company's
operations in the United Kingdom and Brazil, as well as withholding on other
foreign source income received in the U.S. The Company's net operating loss
carryforwards expire in 2018. Cumulative undistributed earnings of foreign
subsidiaries, which are expected to be reinvested indefinitely, and for which
no deferred taxes have been provided, approximated $95 at December 31, 1998.
The additional taxes payable on the earnings of foreign subsidiaries, if
remitted, would be substantially offset by U.S. tax credits for foreign taxes
paid. Foreign pretax income was $22 and $238 in 1998 and 1997, respectively.
9. RETIREMENT PLAN
The Company has a 401(k) plan covering employees who have completed one year
of service and are age 21 or older. The Company contributes 50% of employee
contributions, up to 6% of eligible compensation. The Company incurred $53
and $76 in retirement plan expense during 1998 and 1997, respectively.
10. LEASES
OPERATING LEASE OBLIGATIONS - The Company leases office and warehouse
facilities in California, New York, New Jersey, Texas and Bristol, England,
under operating leases expiring at various dates through 2008. The Company
has a $300 performance bond, which expires in August 1999, in favor of the
lessor of its facilities in Rancho Dominguez, California. The Company also
rents equipment under month-to-month rental agreements. Short-term during
rental expense of generators and other operating equipment was $2,322 and
$2,810 during 1998 and 1997, respectively. Other rental expense was $560 and
$230 in 1998 and 1997, respectively.
CAPITAL LEASE OBLIGATIONS - The Company leases various equipment under
capital leases. Amortization is computed by the straight-line method and has
been included in depreciation and amortization expense.
The following is a summary of property held under capital leases at December
31, 1998:
<TABLE>
<S> <C>
Rental equipment $ 425
Vehicles 67
Other equipment, furniture and fixtures 183
-----
Total property at cost 675
Accumulated amortization (225)
-----
Total $ 450
-----
-----
</TABLE>
25
<PAGE>
10. LEASES--(CONTINUED)
FUTURE MINIMUM LEASE PAYMENTS - The future minimum lease payments under
operating and capital leases are as follows at December 31, 1998:
<TABLE>
<CAPTION>
YEAR ENDING OPERATING CAPITAL
DECEMBER 31, LEASES LEASES
<S> <C> <C>
1999 $ 619 $ 86
2000 511 45
2001 422 39
2002 377 34
2003 368 17
Thereafter 1,401 -
--------- -------
Total minimum lease payments $ 3,698 221
---------
---------
Amount representing interest (27)
-------
Present value of net minimum lease payments 194
Current portion of capital lease obligations 74
-------
Long-term portion $ 120
-------
-------
</TABLE>
11. RELATED-PARTY TRANSACTIONS
DUE FROM OFFICERS - In addition to notes from stockholders (see Note 6), at
December 31, 1998, the Company held notes from officers of $80, $60 of which
are due in April 2000 with interest payable biweekly at the Company's bank
borrowing rate (8.5% at December 31, 1998), and $20 of which bear interest
at 6.25% per annum, due at maturity in September 2002. Other loans to
officers at December 31, 1998, totaled $38 and were repaid in March 1999.
TRANSACTIONS WITH AFFILIATES - The Company purchases freight forwarding
services and travel agency services (primarily airline tickets) from
entities with common ownership. The Company also purchases freight
forwarding and maintenance services from a company owned by an employee of
Templine. The Company's minority stockholder in SPB, has invoiced and
collected revenues on the Company's behalf and has incurred certain expenses
on the Company's behalf.
The following is a summary of transactions with the affiliates:
<TABLE>
<CAPTION>
YEARS ENDED
DECEMBER 31,
------------
1998 1997
<S> <C> <C>
Travel agency services $125 $118
Freight services $228 $217
Templine freight and maintenance services $ 61 $ 50
</TABLE>
INTELLECTUAL PROPERTY RIGHTS - In 1996, the Company purchased intellectual
property rights for $67 from one of its officers and stockholders. The
intellectual property rights, which have an estimated useful life of three
years, include a data acquisition system, control system, engine interface
module and generator interface module. The related amortization expense
totaled $6 and $22 in 1998 and 1997, respectively.
26
<PAGE>
12. SUPPLEMENTARY DISCLOSURE OF CASH FLOW INFORMATION
<TABLE>
<CAPTION>
YEARS ENDED
DECEMBER 31,
1998 1997
<S> <C> <C>
Cash paid for interest, net of amounts capitalized, and income taxes is as follows:
Interest expense $ 395 $ 204
Income taxes $ 268 $ 53
Summary of noncash investing and financing activities:
Acquisition of business through note payable financing $ 140 $ -
Purchases of assets financed through capital leases, notes payable and trade
payables to be converted to notes payable $3,689 $ 999
Repayment of stockholder notes through issuance of long-term debt $ - $1,327
</TABLE>
Assets acquired and (liabilities assumed) in connection with the acquisition
of Templine in 1997 were as follows:
<TABLE>
<S> <C>
Accounts receivable $ 213
Property and equipment 1,269
Goodwill 1,193
Accounts payable (87)
Accrued expenses (91)
Customer deposits (48)
Notes payable (97)
Income taxes payable (56)
Deferred income taxes (191)
------
Total $2,105
------
------
</TABLE>
In 1994, the Company entered into a cooperation agreement with Mitsuho
Electric, Ltd., Japan ('Mitsuho'). Under the terms of the agreement,
the companies were to share equally the gross revenues less certain
costs. As part of the agreement, Mitsuho advanced to the Company a
noninterest-bearing note payable of $400. The Company terminated the
agreement in 1997. The balance of the note at December 31, 1996 of $213
was disputed by the Company and settled for $50 in 1997, resulting in a
gain of $163.
13. SEGMENT INFORMATION
The Company's operations are organized around geographic areas. All of the
Company's segments provide similar temporary power generation and
temperature control rental equipment and support services. Information about
the Company's business segments is as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1998
-----------------------------------------------------------
ADJUSTMENTS
UNITED UNITED AND
STATES KINGDOM BRAZIL ELIMINATIONS CONSOLIDATED
<S> <C> <C> <C> <C> <C>
Revenues $15,453 $3,949 $ 929 $(156) $ 20,175
------- ------- ------ ----------- ------------
------- ------- ------ ----------- ------------
Operating loss $ (30) $ (168 ) $ (376) $ (95) $ (669)
------- ------- ------ ----------- ------------
------- ------- ------ ----------- ------------
Interest expense (395)
Interest and other income 179
------------
Loss before income taxes and minority
interest $ (885)
------------
------------
Identifiable assets $18,483 $3,375 $ 705 $ (19) $ 22,544
------- ------- ------ ----------- ------------
------- ------- ------ ----------- ------------
Capital expenditures $ 8,832 $ 555 $ 359 $(116) $ 9,630
------- ------- ------ ----------- ------------
------- ------- ------ ----------- ------------
EBITDA $ 1,613 $ 87 $ (351) $- $ 1,349
------- ------- ------ ----------- ------------
------- ------- ------ ----------- ------------
</TABLE>
27
<PAGE>
13. SEGMENT INFORMATION--(CONTINUED)
<TABLE>
<S> <C> <C> <C> <C> <C>
Depreciation and amortization $ 1,476 $ 255 $ 13 $ 94 $ 1,838
------- ------- ------ ----------- ------------
------- ------- ------ ----------- ------------
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1997
-------------------------------------------------
ADJUSTMENTS
UNITED UNITED AND
STATES KINGDOM ELIMINATIONS CONSOLIDATED
<S> <C> <C> <C> <C>
Revenues $14,803 $2,905 $ (414) $ 17,294
------- ------- ----------- ------------
------- ------- ----------- ------------
Operating profit $ 1,041 $ 197 $ (20) $ 1,218
------- ------- -----------
------- ------- -----------
Interest expense (204)
Interest and other income 33
------------
Income before income taxes $ 1,047
------------
------------
Identifiable assets $ 8,725 $3,284 $ (284) $ 11,725
------- ------- ----------- ------------
------- ------- ----------- ------------
Capital expenditures $ 2,568 $ 335 $ 2,903
------- ------- ------------
------- ------- ------------
EBITDA $ 1,942 $ 380 $ 2,321
------- ------- ------------
------- ------- ------------
Depreciation and amortization $ 901 $ 182 $ 20 $ 1,103
------- ------- ----------- ------------
------- ------- ----------- ------------
</TABLE>
Transactions between the United Kingdom and United States are recorded at
estimated fair value of services provided. Assets in use in Brazil through
temporary importation and the related depreciation are not allocated to the
Brazil segment. EBITDA represents earnings before interest expense, taxes,
depreciation and amortization. Corporate office costs are allocated to the
United States segment.
14. COMMITMENTS AND CONTINGENCIES
The Company is a party to potential claims arising in the ordinary course of
its business. In the opinion of management, the Company has adequate legal
defenses with respect to these matters, and the ultimate resolution will not
have a material adverse effect on the Company's financial position, results
of operations or cash flows.
15. FOURTH QUARTER ADJUSTMENTS
Significant year-end adjustments made in the fourth quarter of 1998 consist
of accrued costs to terminate a contract ($125) and increases in the
allowance for doubtful accounts relating to the collectibility of two
customers accounts ($136).
16. SUBSEQUENT EVENTS
In February 1999, the Company borrowed $759 from Caterpillar Financial
Services Corp., collateralized by certain rental equipment, bearing interest
at 9% per annum, with monthly payments of principal and interest over a
seven-year term.
In January 1999, the Central Bank of Brazil altered its foreign exchange
policy, resulting in a devaluation of the real. The value of the real was
2.05 reals to the U.S. dollar at March 1, 1999 and 1.21 reals to the U.S.
dollar at December 31, 1998.
In 1999, the Company is negotiating to sell certain rental equipment with a
net book value of approximately $2,000. Some of the equipment to be sold is
deployed in Brazil.
28
<PAGE>
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
Not applicable.
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS; COMPLIANCE
WITH SECTION 16(A) OF THE EXCHANGE ACT.
The information required by this Item concerning the Directors, nominees
for Director, executive officers of the Company and disclosure of delinquent
filers is incorporated herein by reference to the Company's definitive Proxy
Statement for its 1999 Annual Meeting of Shareholders, to be filed with the
Commission pursuant to Regulation 14A within 120 days after the end of the
Company's last fiscal year.
ITEM 10. EXECUTIVE COMPENSATION.
The information required by this Item concerning remuneration of the
Company's officers and Directors and information concerning material
transactions involving such officers and Directors is incorporated herein by
reference to the Company's definitive Proxy Statement for its 1999 Annual
Meeting of Shareholders which will be filed pursuant to Regulation 14A within
120 days after the end of the Company's last fiscal year.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The information required by this Item concerning the stock ownership of
management and five percent beneficial owners is incorporated herein by
reference to the Company's definitive Proxy Statement for its 1999 Annual
Meeting of Shareholders which will be filed pursuant to Regulation 14A within
120 days after the end of the Company's last fiscal year.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
The information required by this Item concerning certain relationships and
related transactions is incorporated herein by reference to the Company's
definitive Proxy Statement for its 1999 Annual Meeting of Shareholders which
will be filed pursuant to Regulation 14A within 120 days after the end of the
Company's last fiscal year.
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K.
(a) 1. Financial Statements:
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Independent Auditors' Report........................................ 13
Consolidated Balance Sheet as of December 31, 1998.................. 14
Consolidated Statements of Operations for the Years Ended
December 31, 1998 and 1997........................................ 16
Consolidated Statements of Stockholders' Equity for the Years
Ended December 31, 1998 and 1997.................................. 17
Consolidated Statements of Cash Flows for the Years Ended
December 31, 1998 and 1997........................................ 18
Notes to Consolidated Financial Statements.......................... 19
</TABLE>
2. Financial Statement Schedules:
All schedules are omitted because they are not applicable or not required
or because the required information is included in the consolidated financial
statements or related notes.
3. Exhibits:
A list of exhibits required to be filed as part of this report is set forth
in the Index to Exhibits appearing on page 31, which immediately precedes such
exhibits, and is incorporated herein by reference.
(b) Reports on Form 8-K
No Reports on Form 8-K were filed during the quarter ended December 31,
1998.
29
<PAGE>
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934, THE REGISTRANT HAS DULY CAUSED THIS REPORT TO BE SIGNED ON
ITS BEHALF BY THE UNDERSIGNED, THEREUNTO DULY AUTHORIZED.
SHOWPOWER, INC.
By: ________/s/ JOHN J. CAMPION_______
John J. Campion
Chief Executive Officer
Dated: March 31, 1999
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES EXCHANGE ACT OF 1934, THIS
REPORT HAS BEEN SIGNED BELOW BY THE FOLLOWING PERSONS ON BEHALF OF THE
REGISTRANT AND IN THE CAPACITIES AND ON THE DATES INDICATED.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- ------------------------------------------ ----------------------------------------------- ---------------
<C> <S> <C>
/s/ JOHN J. CAMPION Chief Executive Officer and Director (Principal March 31, 1999
- ------------------------------------------ Executive Officer)
John J. Campion
/s/ MICHAEL W. CRABBE Vice President and Chief Financial Officer March 31, 1999
- ------------------------------------------ (Principal Financial Officer and Principal
Michael W. Crabbe Accounting Officer)
/s/ JEFFREY B. STONE Chairman of the Board and Director March 31, 1999
- ------------------------------------------
Jeffrey B. Stone
/s/ JOSEPH A. ADES Director March 31, 1999
- ------------------------------------------
Joseph A. Ades
/s/ DAVID C. BERNSTEIN Director March 31, 1999
- ------------------------------------------
David C. Bernstein
/s/ VINCENT A. CARRINO Director March 31, 1999
- ------------------------------------------
Vincent A. Carrino
/s/ ROBERT E. MASTERSON Director March 31, 1999
- ------------------------------------------
Robert E. Masterson
/s/ ERIC C. JACKSON Director March 31, 1999
- ------------------------------------------
Eric C. Jackson
</TABLE>
30
<PAGE>
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT PAGE NO. IN
NO. DESCRIPTION THIS FILING
- ------- --------------------------------------------------------------------------------------------- ------------
<C> <C> <S> <C>
3.2 (1) By-laws of the Company.................................................................
10.1* (1) 1998 Stock Option and Incentive Plan...................................................
10.2* (1) Employment Agreement dated May 23, 1996 between the Registrant, John J. Campion and
Modular Energy Systems (Ireland), Ltd..................................................
10.3* (1) Employment Agreement dated May 23, 1996 between the Registrant and Laurence Anderson...
10.4* (1) Employment Agreement dated July 1, 1996 between the Registrant and Stephen R.
Bernstein..............................................................................
10.5 (1) Promissory Note and Security Agreement dated January 21, 1998 between the Registrant
and Caterpillar Financial Services Corporation.........................................
10.6.1 (1) Loan and Security Agreement dated December 30, 1996 between the Registrant and Charter
Financial, Inc.........................................................................
10.6.2 (1) Amendment dated January 9, 1997 to Loan and Security Agreement dated December 30, 1996
between the Registrant and Charter Financial, Inc......................................
10.7 (1) Revolving Credit Loan & Security Agreement dated March 2, 1998 between the Registrant
and Comerica Bank California...........................................................
10.8 (1) Variable rate-single payment note dated March 2, 1998 from the Registrant to Comerica
Bank California........................................................................
10.9* (1) Employment Agreement dated May 23, 1998 between the Registrant and Jeffrey B. Stone....
11 Statement re: Computation of Per Share Earnings........................................ 32
21 Subsidiaries of the Company............................................................ 33
23 Consent of Deloitte & Touche........................................................... 34
27 Financial Data Schedule................................................................
</TABLE>
- ------------------
* The indicated exhibit is a management contract, compensatory plan or
arrangement required to be filed by Item 601 of Regulation S-B.
(1) The copy of this exhibit filed as the same exhibit number to the Company's
Registration Statement on Form SB-2 (Registration No. 333-50595) is
incorporated herein by reference.
31
<PAGE>
EXHIBIT 11
SHOWPOWER, INC.
COMPUTATION OF INCOME PER COMMON SHARE
FOR THE PERIODS INDICATED
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
1998 1997
---------- ----------
<S> <C> <C>
Net (loss) income..................................................................... $ (1,575) $ 931
Weighted average shares outstanding................................................... 2,653,787 1,724,580
Dilutive effect of restricted stock after application of treasury stock method
Restricted shares................................................................... -- 76,563
Employee stock options.............................................................. -- --
Shares used in calculating diluted income per share................................... 2,653,787 1,801,143
Basic net (loss) income per share..................................................... $ (0.59) $ 0.54
Diluted net (loss) income per share................................................... $ (0.59) $ 0.52
</TABLE>
32
<PAGE>
EXHIBIT 21
SUBSIDIARIES OF THE COMPANY
<TABLE>
<CAPTION>
STATE OR OTHER JURISDICTION
OF
SUBSIDIARY INCORPORATION OR ORGANIZATION
- ------------------------ -----------------------------
<S> <C>
Showpower Overseas, LLC Indiana
Templine, Ltd. U.K.
Showpower Brasil, S.A. Brazil
</TABLE>
33
<PAGE>
EXHIBIT 23
INDEPENDENT AUDITORS' CONSENT
We consent to the incorporation by reference in Registration Statement No.
33-60709 of Showpower, Inc. on Form S-8 of our report dated March 24, 1999,
appearing in this Annual Report on Form 10-KSB of Showpower, Inc. for the year
ended December 31, 1998.
/s/ DELOITTE & TOUCHE
Los Angeles, California
March 29, 1999
34
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
financial statements of Showpower, Inc. for the year ended December 31, 1998,
and is qualified in its entirely by reference to such financial information.
</LEGEND>
<CIK> 0000828360
<NAME> Showpower, Inc.
<MULTIPLIER> 1,000
<CURRENCY> U. S. Dollars
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-1-1998
<PERIOD-END> DEC-31-1998
<EXCHANGE-RATE> 1.000
<CASH> 2,937
<SECURITIES> 0
<RECEIVABLES> 1,521
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 5,024
<PP&E> 21,526
<DEPRECIATION> (5,524)
<TOTAL-ASSETS> 22,540
<CURRENT-LIABILITIES> 3,531
<BONDS> 3,531
0
0
<COMMON> 19,679
<OTHER-SE> (3,389)
<TOTAL-LIABILITY-AND-EQUITY> 22,540
<SALES> 20,175
<TOTAL-REVENUES> 20,175
<CGS> 12,720
<TOTAL-COSTS> 8,124
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 395
<INCOME-PRETAX> (885)
<INCOME-TAX> 683
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,575)
<EPS-PRIMARY> (0.59)
<EPS-DILUTED> (0.59)
</TABLE>
