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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
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ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED JULY 31, 1996 COMMISSION FILE NUMBER 0-26230
WESTERN POWER & EQUIPMENT CORP.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 91-1688446
(State or other jurisdiction of (I.R.S. Employer Identification Number)
incorporation or organization)
4601 NE 77TH AVE, SUITE 200, VANCOUVER, WA 98662
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (360)253-2346
Securities registered pursuant to Section 12(b) of the Act:
None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $.001 par value
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(Title of Class)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. YES X NO
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Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulations S-K 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-K or any
amendment to the Form 10-K. [ X ]
As of October 21, 1996: (a) 3,533,462 shares of Common Stock, $.001 par
value, of the registrant (the "Common Stock") were outstanding; (b) 1,533,462
shares of Common Stock were held by non-affiliates ; and (c) the aggregate
market value of the Common Stock held by non-affiliates was $5,750,483 based on
the closing sale price of $4.75 per share on October 21, 1996.
PART I
ITEM 1. BUSINESS
GENERAL
Western Power & Equipment Corp., a Delaware corporation (the "Company"), is
engaged in the sale, rental and servicing of light, medium-sized and heavy
construction equipment, parts and related products which are manufactured
principally by Case Corporation ("Case"). The Company believes, based upon the
number of locations owned and operated, that it is the largest independent
dealer of Case construction equipment in the United States. Products sold,
rented and serviced by the Company include backhoes, excavators, crawler dozers,
skid steer loaders, forklifts, compactors, log loaders, trenchers, street
sweepers, sewer vacuums and highway signs.
The Company operates out of eighteen retail distribution facilities located
in the States of Washington, Oregon, Nevada and in Northern California. The
equipment distributed by the Company is furnished to contractors, governmental
agencies and other customers, primarily for use in the construction of
residential and commercial buildings, roads, levees, dams, underground power
projects, forestry projects, municipal construction and other projects.
The Company's strategy is to accelerate the growth of its distribution
business in the future. In such connection, it may seek to operate additional
Case or other equipment retail distributorships, and sell, lease and service
additional lines of construction equipment and related products not manufactured
by Case. See "Growth Strategy."
HISTORY AND ACQUISITIONS
The Company was initially organized in August 1992, solely for the purpose
of acquiring certain retail distribution facilities from Case. The Company
became a wholly-owned subsidiary of American United Global, Inc. ("AUGI"),
simultaneous with such acquisition.
Effective November 1, 1992, the Company completed the purchase from Case of
certain assets used in connection with seven separate Case retail construction
equipment distribution operations located in the cities of Portland, Salem and
Springfield, Oregon; and in the cities of Spokane, Everett, Pasco, and Auburn,
Washington. The purchase included approximately $32,669,000 of assets,
including inventories of new and used Case construction equipment and spare
parts, as well as ownership of the Case real estate used in the Auburn,
Washington retail operation. The purchase price was paid $1,940,000 in cash,
$10,749,000 in installment notes payable to Case and $19,980,000 through
inventory floor planning dealer financing agreements with Case and its
affiliates for the purchase of new equipment held for sale at the acquired
retail operations.
In September 1994, the Company purchased from Case certain assets used in
connection with two additional Case retail construction equipment distribution
outlets located in Sparks, Nevada and Fremont, California (the "1994
Acquisition"). The Company relocated its retail outlet in Fremont to Hayward,
California in December 1994. The 1994 Acquisition included approximately
$9,729,000 of various assets, including inventories of new and used Case
construction equipment and service parts, as well as the real estate and
buildings located in Sparks, Nevada. The purchase price was paid as follows:
(i) approximately $557,000 in cash; (ii) approximately $1,978,000 financed
through installment notes bearing interest at a bank prime rate plus 2% and
payable to Case over various periods through September 1996 for parts, used
equipment, new allied equipment (non-Case manufactured items), shop tools and
other assets; (iii) $2,175,000 in the form of the Sparks Real Estate Note due
October 10, 1995; and (iv) approximately $5,019,000 for new Case manufactured
equipment through secured inventory floor planning dealer
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financing with Case and its affiliates. The Sparks Real Estate Note was retired
October 10, 1995 using proceeds from the initial public offering. The Company
has financed the property with an institutional lender in the amount of
$1,330,000, secured by the Sparks, Nevada real estate.
Effective February 29, 1996, the Company acquired the assets and operations
of two additional factory-owned stores of Case in the state of California. The
acquisition was consummated for approximately $630,000 in cash, $1,590,000 in
installment notes payable to Case and the assumption of $3,965,000 in inventory
floor plan debt with Case and its affiliates. The accounts of these two stores
have been included in the Company's accounts from the effective date of the
acquisition.
In addition, effective June 11, 1996, the Company acquired the assets and
operations of GCS, Inc. ("GCS"), a California-based closely-held distributor of
heavy equipment primarily marketed to municipal and state government agencies
responsible for highway maintenance. The acquisition was consummated for
approximately $1,655,000 in cash.
GROWTH STRATEGY
The Company's growth strategy focuses on acquiring additional existing
distributorships, opening new locations and increasing sales at its existing
locations.
As opportunities arise, the Company intends to make strategic acquisitions
of other authorized Case construction equipment retail dealers located outside
of the Pacific Northwest, Northern California and Nevada, as well as of dealers
or distributors of industrial or construction equipment, and related parts,
manufactured by companies other than Case.
In addition to acquisitions, the Company plans to grow by opening new
dealerships. The strategy in opening additional dealerships has been to test
market areas by placing sales, parts and service personnel in the target
market. If the results are favorable, a retail outlet is opened with its own
inventory of equipment. This approach reduces both the business risk and the
cost of market development.
The Company's third strategy for growth is to expand sales at its
existing locations in three ways. First, the Company will continue to
broaden its product line by adding equipment and parts produced by
manufacturers other than Case. The Company has already added to its
inventories products produced by quality manufacturers such as Hamm, Waldon,
TCM, Champion and Takeuchi, Tymco and Vactor. Second, the Company will seek
to increase sales of parts and service--both of which have considerably
higher margins than equipment sales. This growth will be accomplished through
the continued diversification of our parts product lines and the servicing of
equipment produced by manufacturers other than Case. Third, the Company
plans to further develop its fleet of rental equipment. As the cost of
purchasing equipment escalates, short and long-term rental will become
increasingly attractive to the Company's customers. Management anticipates
that rental of equipment will make up an increasing share of its revenues.
PRODUCTS
NEW CASE CONSTRUCTION EQUIPMENT.
The construction equipment (the "Equipment") sold, rented and serviced by
the Company generally consists of: backhoes (used to dig large, wide and deep
trenches); excavators (used to dig deeply for the construction of foundations,
basements, and other projects); log loaders (used to cut, process and load
logs); crawler dozers (bulldozers used for earth moving, leveling and shallower
digging than excavators); wheel loaders (used for loading trucks and other
carriers with excavated dirt, gravel and rock); roller compactors (used to
compact roads and other surfaces); trenchers (a smaller machine that digs
trenches for sewer lines, electrical power and other utility pipes and wires);
forklifts (used to load and unload pallets of materials); and skid steer loaders
(smaller version of a wheel loader, used to load and transport small
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quantities of material--e.g., dirt and rocks-- around a job site). Selling
prices for these units range from $15,000 to $350,000 per piece of Equipment.
Under the terms of standard Case dealer agreements, the Company is an
authorized Case dealer for sales of Equipment and related parts and services at
locations in the states of Oregon, Washington and Nevada and in Northern
California (the "Territory"). The dealer agreements have no defined term or
duration, but are reviewed on an annual basis by both parties, and can be
terminated without cause at any time either by the Company on 30 days' notice or
by Case on 90 days' notice. Although the dealer agreements do not prevent Case
from arbitrarily exercising its right of termination, based upon Case's
established history of dealer relationships and industry practice, the Company
does not believe that Case would terminate its dealer agreements without good
cause.
The dealer agreements do not contain requirements for specific minimum
purchases from Case. In consideration for the Company's agreement to act as
dealer, Case supplies to the Company items of Equipment for sale and lease,
parts, cooperative advertising benefits, marketing brochures related to Case
products, access to Case product specialists for field support, the ability to
use the Case name and logo in connection with the Company's sales of Case
products, and access to Case floor plan financing for Equipment purchases. Such
floor planning arrangement currently provides the Company with interest free
credit terms on new equipment purchases ranging from four to twelve months,
after which interest commences to accrue monthly at a rate per annum equal to 2%
over the prime rate of interest. The invoice price of each item of Equipment is
payable at the earlier of the time of its sale by the Company or 12 months after
the date of shipment to the Company by Case.
OTHER PRODUCTS.
Although the principal products sold, leased and serviced by the Company
are manufactured by Case, the Company also sells, rents and services equipment
and sells related parts (e.g., tires, trailers and compaction equipment)
manufactured by others. Approximately 25% of the Company's net sales for fiscal
year 1996 resulted from sales, rental and servicing of products manufactured by
companies other than Case.
The Company's distribution business is generally divided into four
categories of activity: (i) New Equipment sales and rentals, (ii) Used Equipment
sales and rentals, (iii) Equipment servicing, and (iv) Parts sales.
NEW EQUIPMENT SALES AND RENTAL.
At each of its distribution outlets, the Company maintains a fleet of
various Equipment for sale or rental for periods ranging from one week to up to
six months (customarily with purchase options at the end of the rental period).
The Equipment purchased for each outlet is selected by the Company's marketing
staff based upon the types of customers in the geographical areas surrounding
each outlet, historical purchases as well as anticipated trends. Each
distribution outlet has access to the Company's full inventory of Equipment.
The Company's new Equipment rental business has historically been an
adjunct to its new Equipment sales. To assist customers, any new Equipment can
be rented generally for periods of up to six months and a portion of customer
rental payments may be applied to the purchase price down payment.
The Company provides only the standard manufacturer's limited warranty for
new Equipment, generally a one-year parts and service repair warranty.
Customers can purchase extended warranty contracts.
The Company maintains a separate fleet of new Equipment that it generally
holds solely for rental. Such Equipment is generally held in the rental fleet
for 12 months and then sold as used Equipment with
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appropriate discounts reflecting prior rental usage. As rental Equipment is
taken out of the rental fleet, the Company adds new Equipment to its rental
fleet as needed. The rental charges vary, with different rates for different
types of Equipment rented.
USED EQUIPMENT SALES AND RENTALS.
The Company sells and rents used Equipment that has been reconditioned in
its own service shops. It generally obtains such used Equipment as "trade-ins"
from customers who purchase new items of Equipment and from Equipment previously
rented and not purchased. Unlike new Equipment, the Company's used Equipment is
generally sold "as is" and without a warranty. Used Equipment is customarily
rented only after available new Equipment has been rented. The rental charge
for such used Equipment is equal to that of rented new Equipment. Used rental
Equipment is first reconditioned by the Company prior to being offered for rent.
EQUIPMENT SERVICING.
The Company operates a service center and yard at each retail outlet for
the repair and storage of Equipment. Both warranty and non-warranty service
work is performed, with the cost of warranty work being reimbursed by the
manufacturer following the receipt of invoices from the Company. The Company
employs approximately 100 manufacturer-trained service technicians who perform
Equipment repair, preparation for sale and other servicing activities.
Equipment servicing is one of the higher profit margin businesses operated by
the Company. The Company has expanded this business by hiring additional
personnel and developing extended warranty contracts for Equipment service
terms, and independently marketing such contracts to its customers. The Company
services items and types of Equipment which include those that are neither sold
by the Company nor manufactured by Case.
PARTS SALES.
The Company purchases a large inventory of parts, principally from Case,
for use in its Equipment service business, as well as for sale to other
customers who are independent servicers of Case Equipment. Generally, parts
purchases are made on standard net 30 day terms.
The Company employs one or more persons who take orders from customers for
parts purchases at each retail distribution outlet. The majority of such orders
are placed in person by walk-in customers. The Company provides only the
standard manufacturer's warranty on the parts that it sells, which is generally
a 90 day replacement guaranty.
SALES AND MARKETING
The Company's customers are typically residential and commercial building
general contractors, road and bridge contractors, sewer and septic contractors,
underground utility contractors, persons engaged in the forestry industry,
equipment rental companies and state and municipal authorities. The Company
estimates that it has approximately 16,000 customers, with most being small
business owners, none of which accounted for more than 5% of its total sales in
the fiscal year ended July 31, 1996.
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For the fiscal year ended July 31, 1996, the revenue breakdown by source
for the business operated by the Company was approximately as follows:
New Equipment Sales 58%
Used Equipment Sales 12%
Rental Revenue 9%
Parts Sales 17%
Service Revenue 4%
----
100%
----
----
The Company advertises its products in trade publications and appears at
trade shows throughout its Territory. It also encourages its salespersons to
visit customer sites and offer Equipment demonstrations when requested.
The Company's sales and marketing activities do not result in any
significant backlog of orders. Although the Company has commenced acceptance of
orders from customers for future delivery following manufacture by Case, during
fiscal 1996 substantially all of its sales revenues resulted from products sold
directly out of inventory, or the providing of services upon customer request.
All of the Company's sales personnel are employees of the Company, and all
are under the general supervision of C. Dean McLain, the President of the
Company. Each Equipment salesperson is assigned a separate exclusive territory,
the size of which varies based upon the number of potential customers and
anticipated volume of sales, as well as the geographical characteristics of each
area. The Company employed 67 Equipment salespersons on July 31, 1996.
On July 31, 1996, the Company employed 5 product support salespersons who
sell the Company's parts and repair services to customers in assigned
territories. The Company has no independent distributors or non-employee sales
representatives.
SUPPLIERS
The Company purchases the majority of its inventory of equipment and parts
from Case. No other supplier accounted for more than 5% of such inventory
purchases during fiscal 1996. While maintaining its commitment to Case to
primarily purchase Case Equipment and parts as an authorized Case dealer, the
Company plans to expand the number of products and increase the aggregate dollar
value of those products which the Company purchases from manufacturers other
than Case in the future.
COMPETITION
The Company competes with distributors of construction equipment and parts
manufactured by companies other than Case on the basis of price, the product
support (including technical service) that it provides to its customers, brand
name recognition for its products, the accessibility and number of its
distribution outlets, and the overall quality of the products that it sells.
The Company's management believes that it is able to effectively compete with
distributors of products produced and distributed by such other manufacturers
primarily on the basis of overall Case product quality, and the superior product
support and other customer services provided by the Company.
Case's two major competitors in the manufacture of full lines of
construction equipment of comparable sizes and quality are Caterpillar
Corporation and Deere & Company. In addition, other manufacturers produce
specific types of equipment which compete with Case Equipment and other
Equipment distributed by the Company. These competitors and their product
specialties include JCB Corporation--backhoes, Kobelco Corporation --
excavators, Dresser Industries -- light and medium duty bulldozers, Komatsu
Corporation -- wheel loaders and crawler dozers, and Bobcat, Inc. -- skid steer
loaders.
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The Company is currently the only Case dealer for construction equipment in
the states of Washington and Nevada and in the Northern California area (other
than Case-owned distribution outlets), and is one of two Case dealers in the
State of Oregon. However, Case has the right to establish other dealerships in
the future in the same territories in which the Company operates. In order to
maintain and improve its competitive position, revenues and profit margins, the
Company plans to increase its sales of products produced by companies other than
Case.
ENVIRONMENTAL STANDARDS AND GOVERNMENT REGULATION
The Company's operations are subject to numerous rules and regulations at
the federal, state and local levels which are designed to protect the
environment and to regulate the discharge of materials into the environment.
Based upon current laws and regulations, the Company believes that its policies,
practices and procedures are properly designed to prevent unreasonable risk of
environmental damage and the resultant financial liability to the Company. No
assurance can be given that future changes in such laws, regulations, or
interpretations thereof, changes in the nature of the Company's operations, or
the effects of former occupants' past activities at the various sites at which
the Company operates, will not have an adverse impact on the Company's
operations.
The Company is subject to federal environmental standards because in
connection with its operations it handles and disposes of hazardous materials,
and discharges sewer water in its equipment servicing operations. The Company's
internal staff is trained to keep appropriate records with respect to its
handling of hazardous waste, to establish appropriate on-site storage locations
for hazardous waste, and to select regulated carriers to transport and dispose
of hazardous waste. Local rules and regulations also exist to govern the
discharge of waste water into sewer systems.
EMPLOYEES
At July 31, 1996, the Company employed 298 full-time employees. Of that
number, 24 are in corporate administration for the Company, 17 are involved in
administration at the branch locations, 77 are employed in Equipment sales and
rental, 63 are employed in parts sales, and 117 are employed in servicing
construction equipment. The Company believes that its relations with its
employees are satisfactory.
INSURANCE
The Company currently has product liability insurance policies covering the
Company with $500,000 limits for each occurrence and $1,000,000 in the aggregate
under the general liability and products liability policies. The Company also
has an umbrella liability insurance policy with an annual aggregate coverage
limit of $10,000,000. The Company believes that its product liability insurance
coverage is reasonable in amount and consists of such terms and conditions as
are generally consistent with reasonable business practice, although there is no
assurance that such coverage will prove to be adequate in the future. An
uninsured or partially insured claim, or a claim for which indemnification is
not available, could have a material adverse effect upon the Company.
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ITEM 2. PROPERTIES
The following table sets forth information as to each of the properties
which the Company owns or leases:
Expiration Size/Square Purchase
Location and Use Lessor Date Annual Rental Feet Options
- ---------------- ------ ---- ------------- ---- -------
1745 N.E. Columbia Blvd. Carlton O. Fisher, 12/31/2000 $54,000(1) plus Approx. 4 Acres; No
Portland, Oregon 97211 Nancy A. Harrison CPI adjustments Building 17,622
(Retail sales, service, storage & Jane G. sq. ft.
and repair facilities) Whitbread
1665 Silverton Road, N.E. LaNoel Elston 7/10/98 $27,480(1) Approx. 1 Acre; No
Salem, Oregon 97303 Myers Living Trust Buildings 14,860
(Retail sales, service, storage sq. ft.
and repair facilities)
1702 North 28th Street McKay Investment 6/14/2001 $69,000(1) Approx. 5 Acres; No
Springfield, Oregon 97477 Company Building 17,024
(Retail sales, service, storage sq. ft.
and repair facilities)
West 7916 Sunset Hwy. Case Corporation 9/30/98 $58,404(1) Approx. 5 Acres; No
Spokane, Washington 99204 Building 19,200
(Retail sales, service, storage sq. ft.
and repair facilities)
3217 Hewitt Avenue Dick Calkins 3/31/97 $40,320(1) Approx. 2.5 No
Everett, Washington 98201 Acres; Building
(Retail sales, service, storage 12,483 sq. ft.
and repair facilities)
1901 Frontier Loop The Landon Group Month to $29,625(1) Approx. 7 Acres; No
Pasco, Washington 99301 Month Building 14,200
(Retail sales, service, storage sq. ft.
and repair facilities)
13184 Wheeler Road, N.E. Maiers Industrial Month to $38,400(1) Approx. 10 No
Building 4 Park Month Acres; Building
Moses Lake, Washington 98837 13,680 sq. ft.
(Retail sales, service, storage
and repair facilities)
63291 Nels Anderson Road B&K Management 10/31/98 $27,600(1) Approx. 3,600 No
Bend, Oregon 97701 Corp. sq. ft.
(Retail sales, service, storage
and repair facilities)
4601 N.E. 77th Avenue Parkway Limited 2/15/99 $93,456 6,100 sq. ft. No
Suite 200 Partnership
Vancouver, Washington 98662
(Executive Offices)
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(1) Net lease with payment of insurance, property taxes and maintenance
costs by Company.
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Expiration Size/Square Purchase
Location and Use Lessor Date Annual Rental Feet Options
- ---------------- ------ ---- ------------- ---- -------
2702 W. Valley Hwy No. Avalon Island LLC 11/30/2015 $204,000(1) Approx. 8 Acres; No
Auburn, Washington 98001 Building 33,000
(Retail sales, service, storage sq. ft.
and repair facilities)
13 West Washington Avenue Bob and Pat 1/14/97 $12,000(1) Approx. 15,600 No
Yakima, Washington 98903 Schneider sq. ft.;
(Retail sales, service, storage Building 4,320
and repair facilities) sq. ft.
2112 Wildwood Way James Ghia 5/31/98 $18,720 Approx. 1 Acre; No
Elko, Nevada 89431 Building 3,000
(Retail sales, service, storage sq. ft.
and repair facilities)
1455 Glendale Ave. Owned N/A N/A Approx. 5 acres; N/A
Sparks, Nevada 89431 Building 22,475
(Retail sales, service, storage sq. ft.
and repair facilities)
25886 Clawiter Road Fred Kewel II, 11/30/99 $96,000(1) Approx. 2.8 No
Hayward, California 94545 Agency acres; Building
(Retail sales, service, storage 21,580 sq. ft.
and repair facility)
3540 D Regional Parkway Soiland 2/28/98 $35,400(1) plus 5,140 sq. ft. No
Santa Rosa, California 95403 CPI adjustments
(Retail sales, service, storage
and repair facility)
1751 Bell Avenue McLain-Rubin 3/1/2016 $168,000(2) Approx. 8 Acres; No
Sacramento, California 95838 Realty Group Buildings 35,941
(Retail sales, service, storage sq. ft.
and repair facility
1041 S. Pershing Avenue Raymond Investment 3/14/2001 $36,000(1) Approx. 2 Acres; No
Stockton, California 95206 Corp. Buildings 5,000
(Retail sales, service, storage sq. ft.
and repair facility)
1126 E. Truslow Avenue D. June Brecht, 6/30/97 $22,524(1) Building 4,800 No
Fullerton, California 92631 Glen Brecht and sq. ft.
(Retail sales, service, storage Marshal Brecht
and repair facility)
- --------------------
(1) Net lease with payment of insurance, property taxes and maintenance
costs by Company.
(2) Net lease with payment of insurance, property taxes, and maintenance
costs, including structural repairs, by Company.
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Expiration Size/Square Purchase
Location and Use Lessor Date Annual Rental Feet Options
- ---------------- ------ ---- ------------- ---- -------
672 Brunken Avenue R. Jay De Serpa, 7/31/98 $28,800(1) 4,000 sq. ft. No
Salinas, CA 93301 Ltd.
(Retail sales, service, storage
and repair facility)
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- ----------------------------------------------------------------------------------------------------------------------------------
The Company's operating facilities are separated into six "hub" outlets and
twelve "sub-stores". The hub stores are the main distribution centers located
in Auburn and Spokane, Washington, Portland, Oregon, Sparks, Nevada, Hayward,
California, and Sacramento, California, and the sub-stores are the smaller
retail facilities located in Everett, Pasco, Moses Lake and Yakima, Washington;
Salem, Springfield and Bend, Oregon; Santa Rosa, Stockton, Fullerton and
Salinas, California; and Elko, Nevada.
All of the leased and owned facilities used by the Company are believed to
be adequate in all material respects for the needs of the Company's current and
anticipated business operations.
ITEM 3. LEGAL PROCEEDINGS
Except for other ordinary, routine proceedings incidental to its business, there
are no pending legal proceedings to which the Company or any of its property is
subject.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
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(1) Net lease with payment of insurance, property taxes and maintenance costs
by Company
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PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
On June 14, 1995, the Company completed an initial public offering of
1,300,000 shares of common stock at $6.50 per share. In addition, on July 28,
1995, the underwriter exercised its overallotment option for an additional
195,000 shares. The net proceeds of the offering were $7,801,000 including
$1,102,000 from the exercise of the overallotment option which was received in
cash subsequent to July 31, 1995. The Company's stock is traded on the NASDAQ
National Market System.
The high and low closing prices for the Company's common stock by fiscal
quarter for the period June 14, 1995 through July 31, 1996 were as follows:
High Low
------ -----
June 14, 1995 through July 31, 1995 $7.375 $5.75
1ST QUARTER - August 1, 1995 through October 31, 1995 $6.625 $4.00
2ND QUARTER - November 1, 1995 through January 31, 1996 $5.00 $3.875
3RD QUARTER - February 1, 1996 through April 30, 1996 $5.675 $4.00
4TH QUARTER - May 1, 1996 through July 31, 1996 $6.25 $4.375
The number of shareholders of record of the Company's Common Stock on
October 21, 1996 was 33, and the number of beneficial holders of the Company's
Common Stock is estimated by management to be over 1,300 holders.
The Company has never paid cash dividends on its Common Stock and it does
not anticipate that it will pay cash dividends or alter its dividend policy in
the foreseeable future. The payment of dividends by the Company on its Common
Stock will depend on its earnings and financial condition, and such other
factors as the Board of Directors of the Company may consider relevant. The
Company currently intends to retain its earnings to assist in financing the
development of its business.
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ITEM 6. SELECTED FINANCIAL DATA
The following selected financial data have been derived from the financial
statements of the Company, which have been audited by Price Waterhouse LLP,
independent accountants. Effective November 1, 1992, the Company completed the
acquisition from Case of certain assets used in connection with seven separate
Case retail construction equipment distributorships located in the states of
Washington and Oregon. The selected financial data of the Company for the ten
months ended October 31, 1992 consist solely of the operations of the seven
retail distribution facilities formerly owned by Case, and have been derived
from the books and records of Case.
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
PREDECESSOR
THE COMPANY COMPANY
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TEN
MONTHS
FISCAL YEARS ENDED ENDED
JULY 31, OCTOBER 31,
----------------------------------------------------------------------
1996 1995 1994 1993** 1992*
---- ---- ---- ------ -----
Net sales $106,555 $86,172 $67,370 $30,386 $39,069
Gross profit $ 12,649 $10,028 $ 8,231 $ 4,053 $ 8,304
(% of sales) 11.9 11.6 12.2 13.3 21.3
Selling, general and administrative $ 7,827 $ 6,078 $ 5,295 $ 3,132 $ 5,793
(% of sales) 7.3 7.1 7.9 10.3 14.8
Income before income taxes $ 3,363 $ 2,602 $ 2,084 $ 700 $ 1,699
(% of sales) 3.2 3.0 3.1 2.3 4.3
Tax rate (%) 38 38 27 24 37
Net income $ 2,079 $ 1,613 $ 1,520 $ 531 $ 1,068
Net income per common share $ .58 $ .74 $ .75 $ .26 -
Shares used in net income per share
calculations 3,585 2,192 2,038 2,038 -
- ----------------------------------------------------------------------------------------------------------------
Working capital $ 15,326 $10,883 $ 3,957 $ 4,643 $ 1,275
Long-term debt $ 2,924 $ 47 $ 99 $ 2,714 $ -
Stockholders' equity $ 21,794 $19,715 $10,051 $ 8,531 $ 3,877
Total assets $ 85,290 $67,192 $46,040 $42,383 $32,634
- ----------------------------------------------------------------------------------------------------------------
* Ten months ended October 31, 1992.
** Nine months ended July 31, 1993.
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following discussion and analysis should be read in conjunction with
the Consolidated Financial Statements and Notes thereto appearing elsewhere in
this annual report.
GENERAL
Effective November 1, 1992, the Company completed the acquisition of seven
stores located in Washington and Oregon which sell and service equipment used in
the construction industry. The Company's strategic plan was, and continues to
be, that of expanding the operations and improving profitability at each of its
existing retail outlets. In furtherance of such strategic plan, subsequent to
1992 the Company opened three additional outlets in Washington and Oregon.
Effective September 10, 1994, the Company also purchased from Case two
additional retail construction equipment distribution outlets located in Sparks,
Nevada and Fremont, California. The Fremont operation was relocated to
neighboring Hayward, California in December 1994. In March and August 1995 the
Company opened distribution outlets in Santa Rosa and Salinas, California,
respectively. In February 1996, the Company announced the opening of a
distribution outlet in Elko, Nevada. Also in February 1996, the Company
completed the acquisition of the Sacramento, California outlet from Case as
further described in Note 2 to the Consolidated Financial Statements. The
opening of a Stockton, California outlet was completed in March 1996. In June
1996 the Company completed the acquisition of GCS, Inc. bringing the total
number of distribution outlets owned and operated by the Company to 18. The
Company plans to open and acquire additional distribution outlets for Case
products, as well as for products which may be manufactured by other companies.
RESULTS OF OPERATIONS
FISCAL YEAR 1996, AS COMPARED WITH FISCAL YEAR 1995
The Company reported net sales for fiscal 1996 of $106,555,000 which is an
increase of 24 percent over net sales of $86,172,000 for fiscal 1995. Same
store revenues increased 13.8 percent over the prior year results reflecting a
continuation of generally good economic conditions, increased market acceptance
of our products, increased housing starts, as well as revenues realized from the
addition of numerous new parts and equipment lines to our product offerings.
Cost of goods sold as a percentage of sales was 88.1 percent during fiscal
1996 which is consistent with the prior year results. Management has placed a
high priority on improving overall gross margins by working to increase higher
margin service and parts revenues and by obtaining higher prices for new
equipment.
Selling, general and administrative expenses were $7,827,000 or 7.3 percent
of sales for fiscal 1996 compared to $6,078,000 or 7.1 percent of sales for
fiscal 1995. The increase in selling, general and administrative expenses as a
percent of sales resulted mainly from administrative costs associated with the
acquisition and integration of the Sacramento Case operations and the GCS
operations.
The $747,000 increase in interest expense for fiscal 1996 is attributable
to an increasing balance of inventory purchased under the Company's various
floor plan lines of credit to stock the new outlets, an increase in inventory
dedicated to rental from approximately $5,000,000 in fiscal 1995 to more than
$12,000,000 in fiscal 1996, as well as changes in floor plan terms by Case.
Effective January 1, 1996, Case changed factory to dealer terms in a program
they have named "Focus 2000". While interest free floor plan terms for Case's
most expensive units--wheel loaders and excavators--remains at six to eight
months, the terms on Case's smaller units were shortened from six months to four
months interest free. For the first time, Case is also granting a 4% cash
discount if the dealer pays for the machine outright rather than utilizing the
interest-free floor planning. The Company was able to take advantage of the
cash discounts for some of its purchases in fiscal 1996, which had an immediate
effect on interest expense. The
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interest free floor planning period was not utilized, however. Nevertheless,
Management believes that the positive impact of the discounted cost as these
units are sold will more than offset the increased interest expense.
FISCAL YEAR 1995, AS COMPARED WITH FISCAL YEAR 1994
The Company reported net sales for fiscal 1995 of $86,172,000 which is an
increase of 28 percent over net sales of $67,370,000 for fiscal 1994. Included
in the fiscal 1995 amount are revenues of approximately $15,000,000 related to
the acquisition of the Sparks, Nevada and Hayward, California stores and the
opening of the Santa Rosa, California store. Same store revenues increased 5.6
percent over the prior year results reflecting a continuation of generally good
economic conditions, increased housing starts, as well as revenues realized from
the addition of numerous new parts and equipment lines to our product offerings.
Cost of goods sold as a percentage of sales was 88.4 percent during fiscal
1995 which is consistent with the prior year results. Management has placed a
high priority on improving overall gross margins by increasing higher margin
service and parts revenues and by obtaining higher prices for new equipment.
Selling, general and administrative expenses were $6,078,000 or 7.1 percent
of sales for fiscal 1995 compared to $5,295,000 or 7.9 percent of sales for
fiscal 1994. The decrease in selling, general and administrative expenses as a
percent of sales reflects the spreading of fixed overhead costs over an
increased revenue base which was partially offset by $108,000 in certain one-
time administrative costs associated with the integration of the Sparks, Nevada
and Hayward, California outlets.
The $296,000 increase in interest expense for fiscal 1995 is attributable
to an increasing balance of inventory purchased under the Company's various
floor plan lines of credit to stock our new outlets, and to increasing interest
rates in general.
FISCAL YEAR 1994, AS COMPARED WITH FISCAL YEAR 1993
The Company reported sales of $67,370,000 for fiscal 1994 which was an
increase of approximately $36,984,000, or 122 percent over net sales of
$30,386,000 for the nine month period ended July 31, 1993. This substantial
increase in revenues resulted from a generally good economy, low interest rates,
an increase in housing starts and three more months of operations than were
included in fiscal 1993 revenues. In addition, the Company made a deliberate
effort to increase its market share, opened three new retail locations, sold
multiple units of Case equipment to local equipment rental companies, filled all
new Case equipment inventory needs throughout the year, and added several new
equipment product lines produced by manufacturers other than Case.
Cost of goods sold was approximately 87.8 percent of net sales during the
1994 fiscal year, which is consistent with the prior fiscal year. Management's
efforts to use its purchasing power to negotiate better prices and terms for
parts, reduce or eliminate customer discounts, and other management initiatives
were offset by lower margins on new equipment sales; resulting from the
Company's stated goal of achieving increased market share.
Selling, general and administrative expenses decreased from 10.3 percent of
net sales in fiscal 1993 to 7.9 percent of net sales in fiscal 1994 as variable
administrative expenses increased at a slower rate than revenues.
Interest expense for fiscal 1994 was $795,000 compared to $295,000 on an
annualized basis for fiscal year 1993. This increase in interest expense
reflects the expiration in fiscal 1994 of the interest-free terms granted by
Case in connection with the acquisition of the seven stores, as well as the
higher inventory levels and floor plan debt required to support the increase in
net sales.
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LIQUIDITY AND CAPITAL RESOURCES
The Company's primary source of internal liquidity has been its profitable
operations since its inception in November 1992. As more fully described below,
the Company's primary sources of external liquidity were contributions to the
Company by its parent, American United Global, Inc. ("AUGI"), and equipment
inventory floor plan financing arrangements provided to the Company by the
manufacturers of the products the Company sells and Seattle-First National Bank
("Seafirst Bank"). In addition, in fiscal 1995, the Company completed an
initial public offering of 1,495,000 shares of common stock at $6.50 per share,
generating net proceeds of $7,801,000. The net proceeds of the offering have
been utilized to repay amounts due to AUGI and to Case, the acquisition and
opening of additional outlets, as well as to reduce floor plan debt.
Under inventory floor planning arrangements the manufacturers of products sold
by the Company provide interest free credit terms on new equipment purchases for
periods ranging from four to twelve months after which interest commences to
accrue monthly at rates ranging from two percent to three percent over the prime
rate of interest. Principal payments are typically made under these agreements
at scheduled intervals and/or as the equipment is rented with the balance due at
the earlier of a specified date or sale of the equipment. At July 31, 1996, the
Company was indebted under manufacturer provided floor planning arrangements in
the aggregate amount of $40,012,000.
In order to take advantage of the 4 percent cash discount offered by Case under
its new Focus 2000 program, to provide financing beyond the term of applicable
manufacturer provided floor plan financing or as alternatives to manufacturer
provided floor plan financing arrangements, the Company has entered into a
separate secured floor planning line of credit with Seafirst Bank. The Seafirst
line of credit was entered into in June 1994 and provides a $17,500,000 line of
credit which can be used to finance new and used equipment or equipment to be
held for rental purposes. On July 31, 1996, approximately $14,352,000 was
outstanding under such line of credit, the principal of which bears interest at
.25 percent over the bank's prime rate and is subject to annual review and
renewal on June 1, 1997.
Amounts owing under these floor plan financing agreements are secured by
inventory purchases financed by these lenders, as well as all proceeds from
their sale or rental, including accounts receivable thereto.
On October 19, 1995, the Company entered into a purchase and sale agreement with
an unrelated party for the Auburn, Washington facility subject to the execution
of a lease. Under the terms of this agreement, which closed on December 1,
1995, the Company sold the property and is leasing it back from the purchaser.
In accordance with Statement of Financial Accounting Standards No 13 (SFAS 13),
the building portion of the lease is being accounted for as a capital lease
while the land portion of the lease qualifies for treatment as an operating
lease. See Note 9 to the accompanying Consolidated Financial Statements for
more information.
Effective February 17, 1996, the Company acquired substantially all of the
operating assets used by Case in connection with its business of servicing and
distributing Case construction equipment at a facility located in Sacramento,
California (the "Sacramento Operation"). The acquisition was consummated for
approximately $630,000 in cash, $3,090,000 in installment notes payable to Case
and the assumption of $3,965,000 in inventory floor plan debt with Case and its
affiliates. The acquisition has been accounted for as a purchase.
The real property and improvements used in connection with the Sacramento
Operation, and upon which the Sacramento Operation is located, were sold by Case
for $1,500,000 to the McLain-Rubin Realty Company, LLC ("MRR"), a Delaware
limited liability company, the owners of which are Messrs. C. Dean McLain, the
President and a director of the Company, and Robert M. Rubin, the Chairman and a
director of the Company. Simultaneous with its acquisition of the Sacramento
Operation real property and improvements, MRR leased such real property and
improvements to the Company under the terms of a 20 year Commercial Lease
Agreement dated as of March 1, 1996. In accordance with SFAS 13, the building
portion of the lease is being accounted for as a capital lease while the land
portion of the lease qualifies for treatment as an operating lease. See Notes 3
and 9 to the accompanying Consolidated Financial Statements for more
information.
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On October 10, 1995, using proceeds from the Company's initial public offering,
the Company retired the $2,175,000 real estate note given to Case for the
purchase of the Sparks, Nevada real estate in September 1994. In March 1996,
the Company consummated an agreement with an institutional lender for a
conventional mortgage on the property in the amount of $1,330,000, secured by
the Sparks, Nevada real estate. The agreement calls for principal and interest
payments over a seven year term using a fifteen year amortization period. The
note cannot be prepaid during the first two years of its term.
On June 11, 1996, the Company acquired the operating assets of GCS, Inc.
("GCS"), a California-based, closely-held distributor of heavy equipment
primarily marketed to municipal and state government agencies responsible for
street and highway maintenance. The Company will operate the GCS business from
an existing location in Fullerton, California and from the Company's existing
facility in Sacramento, California. The purchase price for the GCS assets was
$1,655,000. This transaction is being accounted for as a purchase.
During the year ended July 31, 1996, cash and cash equivalents decreased by
$1,344,000 primarily due to the purchase of GCS for cash in June 1996. The
Company had positive cash flow from operating activities during the year of
$3,074,000 reflecting net income for the year after adding back depreciation and
amortization. The proceeds from the Auburn facility sale leaseback transaction
were sufficient to retire the related note payable to Case. Purchases of fixed
assets during the period were related mainly to the opening of new distribution
outlets.
The Company's cash and cash equivalents of $2,721,000 as of July 31, 1996 and
available credit facilities are considered sufficient to support current or
higher levels of operations for at least the next twelve months. In addition,
the Company is currently in negotiations with several financing institutions to
expand the credit available to the Company.
EFFECTS OF INFLATION AND INTEREST RATES
All of the products and services provided by the Company are either capital
equipment or included in capital equipment, which are used in the construction
industry. Accordingly, the Company's sales are affected by inflation or
increased interest rates which tend to hold down new construction, and
consequently adversely affects demand for the construction equipment sold and
rented by the Company.
DIVIDEND POLICY
The Company has never paid cash dividends on its Common Stock and it does
not anticipate that it will pay cash dividends or alter its dividend policy in
the foreseeable future. The payment of dividends by the Company on its Common
Stock will depend on its earnings and financial condition, and such other
factors as the Board of Directors of the Company may consider relevant. The
Company currently intends to retain its earnings to assist in financing the
growth of its business.
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ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The following financial statements and financial schedule are attached to
this Report on Form 10-K following Part IV, Item 14:
Consolidated Statements of Operations for
the years ended July 31, 1996, 1995, and 1994..........................F-1
Consolidated Balance Sheets as of
July 31, 1996 and 1995.................................................F-2
Consolidated Statements of Stockholders'
Equity for the years ended July 31, 1996, 1995
and 1994..............................................................F-3
Consolidated Statements of Cash Flows for
the years ended July 31, 1996, 1995 and 1994...........................F-4
Notes to Consolidated Financial Statements..............................F-5
Report of Independent Accountants......................................F-15
Financial Statement Schedule:
Report of Independent Accountants - Financial Statement Schedule.......F-16
Schedule II - Valuation and Qualifying Accounts........................F-17
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
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PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF REGISTRANT
The following table sets forth information with respect to directors,
nominees for directors, executive officers and significant employees of the
Company as of October 21, 1995. There are no pending legal proceedings to which
any director or executive officer of the Company is a party adverse to the
Company.
NAME AGE POSITION
---- --- --------
Robert M. Rubin 56 Chairman of the Board of
Directors; Nominee for Director
C. Dean McLain 43 President, Chief Executive
Officer and Director; Nominee
for Director
Thomas D. Berkompas 35 Vice President - Finance, Chief
Financial Officer and Secretary
Harold Chapman, Jr. 35 Director; Nominee for Director
James H. Penland 67 Director; Nominee for Director
Set forth below is a brief background of the executive officers and
directors of the Company, based on information supplied by them.
ROBERT M. RUBIN. Mr. Rubin has served as the Chairman of the Board of
Directors of the Company since November 20, 1992. Between November 20, 1992 and
March 7, 1993, Mr. Rubin served as Chief Executive Officer of the Company. In
addition, between October 1990 and January 1, 1994, Mr. Rubin served as Chairman
and Chief Executive Officer of American United Global, Inc. ("AUGI"). From
January 19, 1996 through the present, Mr. Rubin has again served as Chief
Executive Officer of AUGI. Mr. Rubin was the founder, President, Chief Executive
Officer and a Director of Superior Care, Inc. ("SCI") from its inception in
1976 until May 1986. Mr. Rubin continued as a director of SCI (now known as
Olsten Corporation ("Olsten")) until the latter part of 1987. Olsten, a New York
Stock Exchange listed company, is engaged in providing home care and
institutional staffing services and health care management services. Mr. Rubin
is Chairman of the Board, Chief Executive Officer and a stockholder of ERD Waste
Technology, Inc., a diversified waste management public company specializing in
the management and disposal of municipal solid waste, industrial and commercial
non-hazardous waste and hazardous waste. Mr. Rubin is a former director and
Vice Chairman, and currently a minority stockholder, of American Complex Care,
Incorporated, a public company formerly engaged in providing on-site health care
services, including intra-dermal infusion therapies. In April 1995, American
Complex Care, Incorporated's operating subsidiaries made assignments of their
assets for the benefit of creditors without resort to bankruptcy proceedings.
Mr. Rubin is also Chairman of the Board and a minority stockholder of Universal
Self Care, Inc., a public company engaged in the sale of products used by
diabetics. Mr. Rubin is also a director and a minority stockholder of Response
USA, Inc., a public company engaged in the sale and distribution of personal
emergency response systems; Diplomat Corporation, a public company engaged in
the manufacture and distribution of baby products; Help at Home, Inc., a public
company which provides home health care personnel; Arzan International (1991)
Ltd.; and Kay Kotts Associates, Inc., a public company engaged in providing tax
preparation and assistance service.
C. DEAN MCLAIN. Mr. McLain has served as President, Chief Executive
Officer and a director of the Company since March 7, 1993. From March 1, 1993
through June 13, 1995, Mr. McLain served as Executive Vice President of AUGI.
Mr. McLain has served on the Board of Directors of AUGI since March 7, 1994.
From 1989 to 1993, Mr. McLain served as Manager of privatization of Case
Corporation. From 1985
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to 1989, Mr. McLain served as General Manager of Lake State Equipment, a
distributor of John Deere construction equipment. Mr. McLain was awarded a B.S.
degree in Business and Economics and a Master of Business Administration degree
by West Texas State University.
THOMAS D. BERKOMPAS. Mr. Berkompas joined the Company in June 1993 as Vice
President, Finance and Chief Financial Officer. From July 1983 to June 1993, he
was employed at Price Waterhouse, LLP, where he worked with established and
emerging growth companies and attained the level of Senior Audit Manager. Mr.
Berkompas is a certified public accountant and received his B.A. degree in
Business Economics from Calvin College.
JAMES H. PENLAND. Until his retirement in 1993, Mr. Penland had spent
forty-four years in the construction and agricultural equipment business. He
was associated with International Harvester Corporation for approximately 36
years, and for the eight years prior to his retirement was associated in various
managerial capacities with Case Corporation. He joined the Company's Board of
Directors in March 1995.
HAROLD CHAPMAN, JR. Mr. Chapman joined the Company's Board of Directors in
July 1995. Mr. Chapman is a partner in and general manager of Crown Power and
Equipment Co., a multi-line equipment distributor based in Columbia, Missouri.
Prior to joining Crown Power and Equipment in 1992, Mr. Chapman was in retail
management with Case Corporation for 10 years.
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ITEM 11. EXECUTIVE COMPENSATION
The following table sets forth the amount of all compensation paid by the
Company for services rendered during the fiscal years ended July 31, 1996, 1995
and 1994 for the Company's Chief Executive Officer and to each of the Company's
most highly compensated executive officers whose total salary and bonus
compensation exceeded $100,000.
SUMMARY COMPENSATION TABLE
Long-Term Compensation
- --------------------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------------------
Annual Compensation Awards Payouts
-----------------------------------------------------------------------------
Other All Other
Annual Restricted Compen-
Name and Principal Compen- Stock Options/ LTIP sation
Position Year Salary Bonus sation Awards SARs(#) Payouts
- --------------------------------------------------------------------------------------------------------------------------
Robert M. Rubin 1996 $150,000 $50,000 $ 0 $ 0 150,000 $ 0 $ 0
Chairman and Director(1) 1995 $ 75,000 $25,000 $ 0 $ 0 0 $ 0 $ 0
1994 $ 62,500 $34,800 $ 0 $ 0 0 $ 0 $ 0
C. Dean McLain 1996 $250,000 $84,868 $ 0 $ 0 300,000* $ 0 $ 0
Executive Vice 1995 $170,709 $75,000 $ 0 $ 0 150,000 $ 0 $ 0
President and Director; 1994 $144,835 $30,000 $ 0 $ 0 0 $ 0 $ 0
President and CEO of
Western(2)
- --------------------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------------------
___________________
* Reflects the repricing of options to acquire 150,000 shares and the
original issuance of options to acquire 150,000 shares.
(1) The foregoing annual compensation amounts represent 50% of the $125,000 in
annual cash salary paid to Mr. Rubin by AUGI and its subsidiaries,
including the Company, in fiscal 1994 and 50% of the $150,000 in annual
cash salary paid to Mr. Rubin by AUGI and its subsidiaries, including the
Company, in fiscal 1995, and 50% of the $50,000 and $69,600 annual bonuses
payable to Mr. Rubin under the terms of his employment agreement with AUGI
during fiscal 1995 and 1994, respectively. The Company entered into a
separate employment agreement with Mr. Rubin, effective June 14, 1995 and
expiring July 31, 1998, pursuant to which Mr. Rubin is paid a base salary
of $150,000 plus an annual bonus. See "Compensation Committee Interlocks
and Insider Participation" and "Employment and Incentive Compensation
Agreements" below.
(2) Mr. McLain joined the Company in March 1993, when he became its Chief
Executive Officer. On March 1, 1993, July 31, 1994 and July 31, 1995, Mr.
McLain was permitted to and did purchase from AUGI 8,000, 6,000 and 6,000
shares of AUGI's common stock, respectively, at a price of $.01 per share.
On March 1, 1993, on August 1, 1994 and on August 1, 1995, the closing
prices for a share of AUGI's common stock as reported by NASDAQ was $5.75,
$4.0625 and $4.875, respectively. In addition, $38,095 was paid by AUGI to
Mr. McLain during fiscal 1993 pursuant to the terms of his employment
agreement dated February 12, 1993, as reimbursement for certain expenses
that he incurred in connection with his move to Washington State, and the
sale of his former residence, in order to permit his assuming his
employment duties. Effective as of August 1, 1995, Mr. McLain's employment
agreement with the Company was terminated and he entered into an amended
employment agreement expiring July 31, 2005. The base salary under this
employment agreement commences at $250,000 for fiscal 1996, and rises to
$300,000 for fiscal 2000. His employment agreement also calls for Incentive
Bonuses under certain circumstances. See "Compensation Committee
Interlocks and Insider Participation" and "Employment and Incentive
Compensation Agreements" below.
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COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The Compensation Committee of the Board of Directors (the "Compensation
Committee") was established in March 1995 and currently consists of Harold
Chapman and James Penland. Mr. Penland has been a member of the Compensation
Committee since its inception; Mr. Chapman was made a member of the Compensation
Committee in September 1995. Mr. Rubin, an earlier member of the Compensation
Committee, resigned during fiscal 1996. During the last fiscal year, other than
Messrs. Rubin and McLain, who are officers and directors of the Company, no
officers or employees of the Company participated in compensation decisions
relating to executive officers of the Company. All compensation decisions for
the Company were made by the full Board of Directors. Mr. Rubin's annual
compensation identified in the Summary Compensation Table was provided for under
his employment agreement with AUGI and his subsequent separate employment
agreement with the Company which was entered into effective June 14, 1995 and
which was approved by a vote of the Company's Board of Directors. Mr. McLain's
annual compensation is provided for under his employment contract with the
Company which was entered into as of August 1, 1995, and his amended and
restated employment agreement that was effective August 1, 1995. Both
agreements were approved by the Company's Board of Directors. See "Employment
and Incentive Compensation Agreements" below.
Other than participation in the Company's "Non-Management Directors Stock
Option Plan" (see, "Non-Management Directors Stock Option Plan," below) no
director of the Company receives any directors fees for attendance at Board
meetings, other than Messrs. Penland and Chapman who each receive a fee of $500
per meeting. All directors are entitled to receive reimbursement for actual
expenses of such attendance.
The Company's Audit Committee of the Board of Directors consists of C. Dean
McLain, Harold Chapman and James Penland. No executive officers or directors of
any other publicly held companies serve on the Company's Compensation Committee,
other than Robert M. Rubin, who is a director and member of the compensation
committee of AUGI, and Dean McLain, who is a director of AUGI.
COMPENSATION POLICY AND OTHER COMPENSATION
During the fiscal year ended July 31, 1996, the Company's Board of
Directors decided all compensation matters relating to the Company's executive
officers.
The Board of Directors of the Company has decided that the best way to
attract and retain highly capable employees on a basis that will encourage them
to perform at increasing levels of effectiveness, and to use their best efforts
to promote the growth and profitability of the Company and its subsidiaries, is
to enter into employment agreements with its senior executive officers. Messrs.
Rubin and McLain are each under contract with the Company. This has enabled the
Board to concentrate on the negotiation of particular employment contracts
rather than on the formulation of more general compensation policies for all
management and other personnel. The Company believes that its compensation
levels as to all of its employees are comparable to, if not generally lower
than, industry standards. See "Employment and Incentive Compensation
Agreements".
In setting levels of compensation under such employment contracts, and in
approving management's compensation of all other Company employees, the Board of
Directors has evaluated the Company's overall performance, the contribution of
particular individuals to Company performance and industry compensation
standards.
The Company has adopted a policy of compensating non-employee Directors at
the rate of $500 per meeting (plus reasonable out-of-pocket expenses in a manner
consistent with past practice) for attendance at meetings of the Company's Board
of Directors, as well as with participation in the Company's Non-management
Directors Stock Option Plan. At this time, Harold Chapman, Jr. and James
Penland are the only directors eligible to be compensated pursuant to this
policy.
-III-4-
EMPLOYMENT AND INCENTIVE COMPENSATION AGREEMENTS
Upon completion of the Company's 1995 initial public offering (the
"Offering"), the Company entered into a separate employment agreement with Mr.
Rubin, effective as of June 13, 1995 and expiring July 31, 1998. Pursuant to
such agreement, Mr. Rubin will serve as Chairman of the Board of the Company and
shall receive an annual base salary of $150,000, payable at the rate of $12,500
per month from the effective date of such agreement. In addition to his base
annual salary, Mr. Rubin shall be entitled to receive an annual bonus equal to
$50,000 per annum, payable only in the event that the "consolidated pre-tax
income" of the Company (as defined) shall be in excess of $3,000,000 for the
fiscal year ending July 31, 1996, $3,500,000 for the fiscal year ending July 31,
1997, and $4,000,000 for the fiscal year ending July 31, 1998, respectively.
Under the terms of his employment agreement with the Company, Mr. Rubin is only
obligated to devote a portion of his business and professional time to the
Company (estimated at approximately 20%). The term "consolidated pre-tax
income" is defined as consolidated net income of the Company and any
subsidiaries of the Company subsequently created or acquired, before income
taxes and gains or losses from disposition or purchases of assets or other
extraordinary items. Mr. Rubin received a $50,000 bonus for the Company's 1996
fiscal year under the terms of his employment agreement. In March 1996, Mr.
Rubin received options to acquire 150,000 shares of Common Stock, exercisable at
$4.50 per share and vesting 50% on each of the first and second anniversaries of
the date of grant.
Effective as of August 1, 1995, Mr. McLain's employment agreement with AUGI
was terminated and he entered into an amended employment agreement with the
Company, expiring July 31, 2005. Pursuant to such agreement, Mr. McLain serves
as President and Chief Executive Officer of the Company and will receive an
annual base salary, payable monthly, of $250,000 through the end of fiscal 1996,
$265,000 per annum in fiscal 1997, $280,000 per annum in fiscal 1998, $290,000
per annum in fiscal 1999, and $300,000 per annum in fiscal 2000. For each of
the fiscal years ending 2001, 2002, 2003, 2004 and 2005, inclusive, Mr. McLain's
base salary shall be determined by the Compensation Committee and ratified by
the full Board of Directors. Such base salary in each of the five fiscal years
from 2001 through 2005 shall not be less than the annual base salary in effect
in the immediately preceding fiscal year, plus a cost of living adjustment. In
addition, Mr. McLain will be entitled to receive bonus payments in each of the
five fiscal years ending 1996 through 2000, inclusive, equal to 5% of the
consolidated pre-tax income in excess of $1,750,000 in each such fiscal year
(the "Incentive Bonus"); provided, that the maximum amount of the Incentive
Bonus payable by the Company to Mr. McLain shall not exceed $150,000 in any such
fiscal year, without regard to the amount by which the Company's consolidated
pre-tax income shall exceed $1,750,000 in any of such fiscal years. Mr. McLain
received a $84,868 bonus for the Company's 1996 fiscal year under the terms of
his employment agreement. For each of the fiscal years ending 2001 through
2005, Mr. McLain's Incentive Bonus shall be determined by the Compensation
Committee and ratified by the full Board of Directors. The maximum annual
Incentive Bonus which Mr. McLain shall be entitled to receive during each of the
fiscal years ending 2001 through 2005 shall not be less than $150,000. As used
in Mr. McLain's employment agreement, the term "consolidated pre-tax income" is
defined as consolidated net income of the Company and any subsidiaries of the
Company subsequently created or acquired, before the Incentive Bonus, income
taxes and gains or losses from disposition or purchases of assets or other
extraordinary items.
Under the terms of his amended employment agreement, Mr. McLain received
options to acquire 150,000 shares of Company common stock, exercisable at $6.50
per share, awarded to him under the Company's 1995 Stock Option Plan. Such
exercise price was the closing sale price of the Company's common stock on
August 1, 1995 as reported by NASDAQ. On December 28, 1995, all 300,000 options
previously granted to Mr. McLain under the Plan were repriced, such that all of
his existing options were terminated and he was granted 300,000 new options
under the Plan exercisable at $4.50 per share. All of such options vested in
full in July 1996. See, "Repricing of Stock Options."
Under the terms of his employment agreement, Mr. McLain is also entitled to
receive options to purchase 75,000 additional shares of Company Common Stock
under the Plan with respect to the Company's fiscal year ending July 31, 1998,
at the market price per share of Common Stock on July 31,
-III-5-
1998, in the event that the accumulated consolidated pre-tax income of the
Company for the three consecutive fiscal years ending 1996, 1997 and 1998
shall equal or exceed $9,000,000. Mr. McLain shall also be entitled to
receive options to purchase 50,000 additional shares of Company Common Stock
under the Plan with respect to the Company's fiscal year ending July 31, 2000
in the event that the accumulated consolidated pre-tax income of the Company
for the two consecutive fiscal years ending 1999 and 2000 shall equal or
exceed $7,000,000.
In the event that the Company does not meet the accumulated consolidated
pre-tax income levels described above, Mr. McLain shall still be entitled to
receive options to purchase 125,000 shares under the Plan (minus any options
granted with respect to the fiscal years ending in 1998 and 2000),
exercisable at the market price per share on July 31, 2000, should the
accumulated consolidated pre-tax income of the Company for the five fiscal
years ending 1996 through 2000 equal or exceed $16,000,000. In the event
such additional incentive stock options become available to him, Mr. McLain
may exercise such options beginning August 1, 1996 and ending July 31, 2005.
Mr. McLain's employment agreement also provides for fringe benefits as are
customary for senior executive officers in the industry in which the Company
operates, including medical coverage, excess life insurance benefits, and use
of an automobile supplied by the Company in addition to a $500 per month auto
allowance, the aggregate value of which is estimated at approximately $20,000
per year.
STOCK OPTIONS
OPTION GRANTS IN FISCAL YEAR 1996
The following table identifies individual grants of stock options made during
the last completed fiscal year to the executive officers named in the Summary
Compensation Table:
REALIZABLE VALUE AT
ANNUAL ASSUMED
STOCK RATES OF
APPRECIATION INDIVIDUAL GRANTS PRICE
OPTION TERM FOR
- --------------------------------------------------------------------------------------------------------------------------
(a) (b) (c) (d) (e) (f) (g)
% of
Total
Options/
SARs Exercise
Options Granted of
/SARs to Base
Grante Employees Price
d in FISCAL Expiration
Name (#) YEAR (S/Sh) Date 5% ($) 10%($)
---- ------- ---- ------ ---------- ------ ------
C. Dean McLain 300,000 60% $4.50 12/05 $849,008 $2,151,552
Robert M. Rubin 150,000 30% $4.50 3/06 $424,504 $1,075,776
-III-6-
The following table provides information concerning the exercise of stock
options during the last completed fiscal year by each executive officer named in
the Summary Compensation Table, and the fiscal year-end value of unexercised
options held by each such person.
AGGREGATED OPTION/SAR EXERCISED
IN LAST FISCAL YEAR AND FISCAL
YEAR-END OPTION/SAR VALUES
(a) (b) (c) (d) (e)
Shares Number of Value of
Acquired Unexercised Unexercised In-the-
on Value Options/SARs at Money Options/SARs
Exercise Realized Fiscal Year-End at Fiscal Year-End
Name (#) ($) (#) ($)
---- -------- ------ --------------- ------------------
EXERCISABLE/ EXERCISABLE/
UNEXERCISABLE UNEXERCISABLE
C. Dean McLain (0) (0) 300,000/0 $862,500/0
Robert M. Rubin (0) (0) 0/150,000 0/$431,250
_________________________________________
NON-MANAGEMENT DIRECTORS STOCK OPTION PLAN
On December 28, 1995, the Company adopted a Non-Management Directors Stock
Option Plan for the purpose of compensating all of the Company's outside
directors for their annual service on the Company's Board of Directors (the
"Formula Plan"). Under the terms of the Formula Plan, the Company automatically
grants to each non-management director five-year options to acquire 2,500 shares
of the Company's Common Stock on February 1, 1996 and on each succeeding August
1 upon which the non-management director is a member of the Company's Board of
Directors. Options granted under the Formula Plan are exercisable at the market
price of a share of Company Common Stock on the date of option grant. The
Formula Plan terminates on December 31, 2000, and a maximum of 50,000 shares of
Company Common Stock are available for the granting of options under the plan.
The Formula Plan was adopted by the Board and is subject to stockholder
approval, without which the Formula Plan itself and the options granted
thereunder are not effective. The Company intends to present the Formula Plan
for stockholder approval at the Company's 1996 Annual Stockholders Meeting.
-III-7-
REPRICIING OF STOCK OPTIONS
TEN-YEAR OPTION
REPRICINGS
__________________________________________
LENGTH OF
NUMBER OF MARKET ORIGINAL
SECURITIES PRICE OF EXERCISE OPTION TERM
UNDER-LYING STOCK AT PRICE AT TIME REMAINING AT
OPTIONS/SARs TIME OF OF REPRICING NEW DATE OF
REPRICED OR REPRICING OF OR EXERCISE REPRICING OF
AMENDED AMENDMENT AMENDMENT PRICE AMENDMENT
NAME DATE (#) ($) ($) ($) ($)
(a) (b) (c) (d) (e) (f) (g)
C. Dean 12/28/95 150,000 $4.50 $6.50 $4.50 9.5 years
McLain common
shares
C. Dean 12/28/95 150,000 $4.50 $6.50 $4.50 4.5 years
McLain common
shares
On December 28, 1995, all outstanding options to acquire 350,000 shares of
Company Common Stock granted under the Company's 1995 Stock Option Plan were
priced. Options to acquire 200,000 shares of Common Stock (150,000 options to
Mr. McLain) were originally granted under the Plan in March 1995 at an exercise
price of $8.00 per share, prior to consummation of the Offering. In May 1995,
all of such options were repriced to provide for an exercise price of $6.50 per
share, the anticipated public offering price of the shares to be sold in the
Offering. In December 1995, the full Board of Directors acted to reprice all
outstanding options granted under the Plan, which were exercisable at $6.50 per
share to acquire an aggregate of 350,000 shares of Common Stock. All such
repriced options were granted at an exercise price of $4.50 per share, the fair
market value of a share of the Common Stock on the date of repricing.
The Board of Directors effected the repricing in May 1995 in order to
permit option holders to receive options at the anticipated public offering
price for the shares, which Offering was consummated at $6.50 per share
subsequent to the original granting at $8.00 per share. The Board of Directors
effected the subsequent December 1995 repricing, which lowered the exercise
price of the outstanding options from $6.50 per share to $4.50 per share (the
then current market price for the Common Stock), in order to provide option
holders a true incentive for continuing performance on behalf of the Company.
LIMITATION OF DIRECTORS' AND OFFICERS' LIABILITY AND INDEMNIFICATION
The Company has included in its Certificate of Incorporation and/or By-laws
provisions to (i) eliminate the personal liability of its directors and officers
for monetary damages resulting from breaches of their fiduciary duty (provided
that such provisions do not eliminate liability for breaches of the duty of
loyalty, acts or omissions not in good faith or which involve intentional
misconduct or a knowing violation of law, violations under Section 174 of the
Delaware Law, or for any transaction from which the director and/or officer
derived an improper personal benefit), and (ii) indemnify its directors and
officers to the fullest extent permitted by the Delaware Law, including
circumstances in which indemnification is otherwise discretionary. The Company
believes that these provisions are necessary to attract and retain qualified
persons as directors and officers.
-III-8-
The Company intends to enter into separate but identical indemnity
agreements (the "Indemnity Agreements") with each director and executive officer
of the Company (the "Indemnitees"). The Indemnity Agreements will provide that
the Company will indemnify each Indemnitee against any amounts that he becomes
legally obligated to pay in connection with any claim against him based upon any
act, omission, neglect or breach of duty that he may commit, omit or suffer
while acting in his capacity as a director and/or officer of the Company;
provided, that such claim: (i) is not based upon the Indemnitee's gaining any
personal profit or advantage to which he is not legally entitled; (ii) is not
for an accounting of profits made from the purchase or sale by the Indemnitee of
securities of the Company within the meaning of Section 16(b) of the Securities
Exchange Act of 1934, as amended, or similar provisions of any state law; and
(iii) is not based upon the Indemnitee's knowingly fraudulent, deliberately
dishonest or willful misconduct. The Indemnity Agreements also provide that all
costs and expenses incurred by the Indemnitee in defending or investigating such
claim shall be paid by the Company in advance of the final disposition thereof,
unless the Company, independent legal counsel, the stockholders of the Company
or a court of competent jurisdiction determines that: (x) the Indemnitee did not
act in good faith and in a manner that he reasonably believed to be in or not
opposed to the best interests of the Company; (y) in the case of any criminal
action or proceeding, the Indemnitee had reasonable cause to believe his conduct
was unlawful; or (z) the Indemnitee intentionally breached his duty to the
Company or its stockholders. Each Indemnitee has undertaken to repay the
Company for any costs or expenses so advanced if it shall ultimately be
determined by a court of competent jurisdiction in a final, nonappealable
adjudication that he is not entitled to indemnification under an Indemnity
Agreement.
ITEM 12. PRINCIPAL STOCKHOLDERS
The following table sets forth certain information as of October 21, 1996
with respect to the beneficial ownership of the Common Stock of the Company by
each beneficial owner of more than 5% of the outstanding shares of the Common
Stock of the Company, each director and nominee for director and all officers
and directors of the Company as a group. Unless otherwise indicated, the owners
have sole voting and investment power with respect to their respective shares.
PERCENTAGE
OF
NUMBER OF SHARES OF COMMON OUTSTANDING
NAME AND ADDRESS OF STOCK OF THE COMPANY COMMON
BENEFICIAL OWNER BENEFICALLY OWNED STOCK OWNED
---------------- ----------------- -----------
American United
Global, Inc.
11634 Patton Road
Downey, CA 90241 2,000,000 56.6%
Robert M. Rubin
6060 Kings Gate Circle
Del Ray Beach, FL 33484 430,000(1)(3) 12.2%
C. Dean McLain
4601 N.E. 77th Avenue
Suite 200
Vancouver, WA 98662 513,806(2)(3) 12.2%
James Penland
50 Hillcrest Drive
Weaverville, NC 28787 5,000(4) *
-III-9-
Harold Chapman
4614 Highway 763 North
Columbia, Missouri 65202 5,000(4) *
All directors and
executive officers
as a group (5 persons) 1,003,806(1)(2)(3)(4)(5) 25.8%
_____________________
* Less than 1%
(1) Represents Mr. Rubin's indirect ownership in the Company through his
beneficial ownership of an aggregate of 1,775,798 voting shares of American
United Global, Inc., the Company's principal stockholder ("AUGI"),
including options to purchase an additional 80,000 shares of AUGI common
stock. Mr. Rubin's beneficial ownership of AUGI voting stock represents
21.5% of AUGI voting stock as at October 20, 1996.
(2) Represents Mr. McLain's indirect ownership in the Company through his
beneficial ownership of an aggregate of 20,000 shares of AUGI voting stock
and options to purchase an additional 357,750 shares of AUGI common stock,
as well as direct beneficial ownership of Company Common Stock through his
ownership of exercisable options to acquire 300,000 shares of Company
Common Stock. Mr. McLain's beneficial ownership of AUGI common stock
represents 4.4% of AUGI voting stock as at October 20, 1995.
(3) Does not include options to purchase 150,000 shares of the Company's Common
Stock granted to Mr. McLain in August 1996 which may be exercised at $4.375
per share, 50% commencing on August 1, 1997 and 50% commencing on August 1,
1998, so long as Mr. McLain shall be employed on a full-time basis with the
Company on each occasion such options are exercised. Also does not include
certain incentive stock options which are issuable to Mr. McLain in the
maximum amount of 125,000 shares, based upon the Company achieving certain
pre-tax income levels after the fiscal years ending 1998 (75,000 shares)
and 2000 (50,000 shares). See "MANAGEMENT - Employment and Incentive
Compensation Agreements."
Does not include options to purchase 150,000 shares of the Company's Common
Stock granted to Mr. Rubin on March 5, 1996 which may be exercised at $4.50
per share, 33.3% commencing on March 5, 1997, and 33.3% on each succeeding
March 5 until all are vested. Also does not include options to purchase
50,000 shares granted to Mr. Rubin on August 1, 1996 which may be exercised
at $4.375 per share, 50% commencing on August 1, 1997 and 50% commencing on
August 1, 1998.
(4) Includes options to purchase 5,000 shares of the Company's Common Stock
issued to each of Messrs. Chapman and Penland under the terms of the
Formula Plan for outside directors.
(5) Includes options to purchase 50,000 shares granted to Thomas Berkompas in
December 1995 which may be exercised at $4.50 per share. Does not include
options to purchase 30,000 shares granted to Mr. Berkompas, exercisable at
$4.375 per share, 50% commencing on August 1, 1997 and 50% commencing on
August 1, 1998, so long as Mr. Berkompas shall continue to be employed by
the Company on a full-time basis.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
See "Item 11, Executive Compensation - Compensation Committee Interlocks
and Insider Participation."
To assist AUGI, the Company's principal stockholder, in capitalizing the
Company and to provide it with ongoing working capital, in November 1992 Robert
M. Rubin advanced to AUGI the sum of $1,375,000 as a subordinated loan, which
was funded together with related subordinated loans aggregating $525,000 made to
AUGI by Lawrence E. Kaplan (until August, 1995 a director of the Company and who
became a director of AUGI in March 1993) and his business associates. The
proceeds of such loans, aggregating $1,900,000, were used by AUGI to provide
part of the initial equity capital for the Company at the time of its 1992
acquisition of 7 Case Corporation ("Case") retail stores. Such loans were
evidenced by AUGI notes payable on August 15, 1994 and bearing interest, payable
monthly, at the Citibank, N.A. prime rate, plus 1%. All such loans were fully
subject and subordinated to all bank and other related secured indebtedness of
AUGI and its subsidiaries, including the Company.
On November 19, 1992, in consideration of his personal guaranty of a
portion of a loan to AUGI by its commercial lender and his $1,375,000 loan to
AUGI, the proceeds of both of which financings were used
-III-10-
to capitalize the Company, Mr. Rubin received, for $1,250, an aggregate of
125,000 shares of AUGI Common Stock. Mr. Rubin agreed that, except in
connection with a merger or sale of AUGI as a whole, he will not sell or
otherwise transfer any of the 125,000 shares for a minimum of four years from
their date of issuance. The closing price of AUGI's Common Stock on the NASDAQ
National Market System was $4.94 per share on November 19, 1992.
On consummation of an AUGI public offering of its securities in February
1994, Mr. Rubin exchanged 1,200,000 shares of AUGI Preferred Stock (which he
purchased for $1,200,000) and his $1,375,000 AUGI note due August 15, 1994, for
the AUGI Stockholder Note, evidenced by a 9.56% $2,575,000 AUGI unsecured note,
payable monthly as to interest and due as to principal on November 30, 1995.
Such AUGI Stockholder Note is fully subject and subordinated to all indebtedness
for money borrowed by AUGI and its direct and indirect subsidiaries, including
Company indebtedness to all institutional lenders and to Case. $1,375,000 of
the underlying obligation evidenced by the AUGI Stockholder Note was assumed by
the Company effective as at July 31, 1993. The Company applied $1,375,000 of
the net proceeds of its 1995 initial public offering (the "Offering") to prepay
a like amount of the AUGI Stockholder Note to Mr. Rubin.
Upon completion of AUGI's February 1994 public offering, the $525,000 of
AUGI indebtedness owed to Lawrence E. Kaplan (a member of the AUGI Board of
Directors at that time and a former member of the Company's Board of Directors)
and his business associates was retired. Mr. Kaplan had lent $131,250 of such
$525,000 amount.
Effective February 17, 1996, the Company acquired substantially all of the
operating assets used by Case in connection with its business of servicing and
distributing Case construction equipment at a facility located in Sacramento,
California (the "Sacramento Operation"). The real property and improvements
used in connection with the Sacramento Operation, and upon which the Sacramento
Operation is located, were sold by Case for $1,500 to the McLain-Rubin Realty
Company, LLC ("MRR"), a Delaware limited liability company, the owners of which
are Messrs. C. Dean McLain, the President and a director of the Company, and
Robert M. Rubin, the Chairman and a director of the Company. Simultaneous with
its acquisition of the Sacramento Operation real property and improvements, MRR
leased such real property and improvements to the Company under the terms of a
20 year commercial lease agreement dated March 1, 1996 with the Company paying
an initial annual rate of $168. Under the lease, such annual rate increases to
$192 after five years and is subject to fair market adjustments at the end of
ten years. In addition to base rent, the Company is responsible for the payment
of all related taxes and other assessments, utilities, insurance and repairs
(both structural and regular maintenance) with respect to the leased real
property during the term of the lease.
Upon completion of the Offering, the Company entered into a management
agreement with AUGI expiring July 31, 1996, renewable on a year-to-year basis
thereafter by mutual agreement, pursuant to which AUGI provides the Company
with certain general and administrative services, including tax planning,
administering of the annual audit of the Company's financial statements,
assistance in the preparation of annual reports, and periodic reports
required to be filed by the Company with the Securities and Exchange
Commission under the Securities Exchange Act of 1934, including proxy
statements, Form 10-K Annual Reports, Form 10-Q Interim Financial Reports,
and Form 8-K Reports, maintenance of the Company's continued listing on
NASDAQ or other national exchange, financial public relations and other
miscellaneous administrative services. Under the terms of such management
agreement, the Company pays to AUGI the sum of $10,000 per month, subject to
increase or decrease (as the case may be) on a fiscal quarterly basis,
commencing October 31, 1995, to reflect actual expenses accrued or
anticipated to be paid by AUGI in the next succeeding fiscal quarter. The
agreement was terminated effective January 1, 1996 after the principal
operations of AUGI were sold and the general and administrative services
supplied by AUGI to the Company were discontinued.
-III-11-
COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT.
To the knowledge of the Company, no officers, directors, beneficial
owners of more than 10 percent of any class of equity securities of the
Company registered pursuant to Section 12 of the Securities Exchange Act of
1934, as amended (the "Exchange Act"), or any other person subject to Section
16 of the Exchange Act with respect to the Company, failed to file on a
timely basis reports required by Section 16(a) of the Exchange Act during the
most recent fiscal year, which ended July 31, 1996.
-III-12-
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(A) 1. FINANCIAL STATEMENTS.
Consolidated Statements of Operations for
the years ended July 31, 1996, 1995, and 1994.....................F-1
Consolidated Balance Sheets as of
July 31, 1996 and 1995............................................F-2
Consolidated Statements of Stockholders'
Equity for the years ended July 31, 1996, 1995
and 1994.........................................................F-3
Consolidated Statements of Cash Flows for
the years ended July 31, 1996, 1995 and 1994......................F-4
Notes to Consolidated Financial Statements.........................F-5
Report of Independent Accountants.................................F-15
2. FINANCIAL STATEMENT SCHEDULE.
Report of Independent Accountants - Financial Statement Schedule..F-16
Schedule II - Valuation and Qualifying Accounts...................F-17
(B) REPORTS ON FORM 8-K.
The Company filed a Current Report on Form 8-K on May 6, 1996, with respect
to the acquisition of the Sacramento operation from Case.
(C) EXHIBITS.
EXHIBIT
NUMBER DESCRIPTION
------ -----------
3.1 Certificate of Incorporation of Registrant. (5)
3.2 By-laws of Registrant. (5)
4.1 Specimen Certificate of Common Stock. (5)
4.2 Stock Option Plan. (6)
4.3 Board of Directors' Formula Stock Plan
10.1 Agreement of Purchase and Sale, dated December 4, 1992, by and
between Case and the Registrant. (1)
10.2 Price Calculation--Exhibit A to Asset Purchase Agreement. (1)
10.3 Real Estate Purchase Agreement. (1)
10.4 Sublease Agreement--Portland, Oregon. (1)
10.5 Lease Agreement of Salem, Oregon Property, dated July 1, 1993, by
and between Western Power and LaNoel Elston Myers Living Trust et
al. (2)
-IV-1-
EXHIBIT
NUMBER DESCRIPTION
------ -----------
10.6 Sublease Agreement--Springfield, Oregon. (1)
10.7 Sublease Agreement--Spokane, Washington. (1)
10.8 Sublease Agreement--Pasco, Washington. (1)
10.9 Sublease Agreement--Everett, Washington. (1)
10.10 Amended Congress Loan Agreement; Western Security Agreement with
Congress; AUG Guaranty to Congress; Western Guaranty to Congress;
Robert M. Rubin Guaranty to Congress; Cash Collateral Agreement
with Congress. (1)
10.11 Case New Dealer Agreement Package. (2)
10.12 Lease Agreement of Moses Lake, Washington property, dated June 9,
1993, by and between Western Power and Maiers Industrial Park.
(2)
10.13 Lease Agreement of Bend, Oregon property, dated July 15, 1993, by
and between Western Power and Robert Wilson. (2)
10.14 Employment Agreement, by and between Registrant and C. Dean
McLain. (8)
10.15 Form of Employment Agreement, by and between Registrant and
Robert M. Rubin. (6)
10.16 Letter Agreement Amendment to Credit Agreement with Congress,
dated as of October 1, 1993. (2)
10.17 Financing Agreement with Associates Commercial Corporation. (3)
10.18 Asset Purchase Agreement, dated as of September 22, 1994, by and
between Case and Western (schedules omitted). (4)
10.19 Case Parts Note; Other Assets and Equipment Note; Used Equipment
Note; Accounts Receivable Note; Furniture and Fixtures Note; Shop
Tools Note; Real Estate Note. (4)
10.20 Deed of Trust with Assignment of Rents, dated September 22, 1994,
by and between Western and Case. (4)
10.21 Lease Agreement--Hayward, California. (5)
10.22 Assignment and Assumption Agreement, dated as of September 22,
1994, by and between Case and Western. (4)
10.23 General Security Agreement, dated as of September 22, 1994, by
and between Case and Western. (4)
10.24 Guaranty Agreement of the Company, dated as of September 22,
1994. (4)
-IV-2-
EXHIBIT
NUMBER DESCRIPTION
------ -----------
10.25 Intercreditor Agreement, dated September 22, 1994, by and between
Case, Case Credit Corporation, Congress Financial Corporation and
Western. (4)
10.26 Management Agreement between Registrant and American United
Global, Inc. (6)
10.27 Auburn Facility Real Estate Purchase and Sale Agreement, dated
October 19, 1995, by and between Western and Ford Kiene.
10.28 Lease Agreement--Auburn, Washington.
10.29 Lease Agreement--Sacramento, California. (7)
10.30 Sacramento Acquisition Agreement.
a. Asset Purchase Agreement (7)
b. Used Equipment Note (7)
c. Parts Note (7)
d. Accounts Receivable Note (7)
e. Goodwill Note (7)
f. Real Estate Note from MRR to Case (7)
g. Deed to Secure Debt of MRR to Case (7)
h. Security Agreement (7)
i. C. Dean McLain's Personal Guaranty (7)
10.31 GCS Acquisition Agreement
21. Subsidiaries of the Company.
_____________________
(1) Filed as an Exhibit to the Current Report on Form 8-K of American United
Global, Inc. ("AUGI"), as filed on December 19, 1992 and incorporated
herein by reference thereto.
(2) Filed as an Exhibit to the AUGI Annual Report on Form 10-K, as filed on
October 29, 1993 and incorporated herein by reference thereto.
(3) Filed as an Exhibit to Amendment No.1 to AUGI's Registration Statement on
Form S-1, filed on February 1, 1994 and incorporated herein by reference
thereto. (Registration No. 33-72556)
(4) Filed as an Exhibit to the Current Report on Form 8-K of AUGI, as filed on
September 23, 1994 and incorporated herein by reference thereto.
(5) Filed as an Exhibit to Amendment No. 1 to the Registrant's Registration
Statement on Form S-1, filed on May 16, 1995 and incorporated herein by
reference thereto. (Registration No. 33-89762).
(6) Filed as an Exhibit to the Registrant's Registration Statement on Form S-1,
filed on February 24, 1995 (Registration No. 33-89762).
(7) Filed as an Exhibit to the Current Report on Form 8-K of Western Power &
Equipment ("WPEC"), as filed on March 6, 1996 and incorporated herein by
reference thereto.
(8) Filed as an Exhibit to the Western Power & Equipment Annual Report on Form
10-K, as filed on October 29, 1995 and incorporated herein by reference
thereto.
-IV-3-
(D) ADDITIONAL FINANCIAL STATEMENT SCHEDULES
None.
-IV-4-
WESTERN POWER & EQUIPMENT CORP.
CONSOLIDATED STATEMENTS OF OPERATIONS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
Year Ended July 31,
-------------------------------------
1996 1995 1994
-------- ------- -------
Net sales $106,555 $86,172 $67,370
Cost of goods sold 93,906 76,144 59,139
-------- ------- -------
Gross profit 12,649 10,028 8,231
Selling, general and administrative expenses 7,827 6,078 5,295
-------- ------- -------
4,822 3,950 2,936
Other (income) expense:
Interest expense 1,838 1,091 795
Bridge loan deferred financing costs - 290 -
Other (income) expense (379) (33) 57
-------- ------- -------
Income before income taxes 3,363 2,602 2,084
Provision for income taxes (1,284) (989) (564)
-------- ------- -------
Net income $ 2,079 $ 1,613 $ 1,520
-------- ------- -------
-------- ------- -------
Net income per common share $ 0.58 $ 0.74 $ 0.75
-------- ------- -------
-------- ------- -------
Shares used in net income per share calculations 3,585 2,192 2,038
-------- ------- -------
-------- ------- -------
See accompanying notes to consolidated financial statements.
F-1
WESTERN POWER & EQUIPMENT CORP.
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
July 31,
------------------------
1996 1995
-------- -------
ASSETS
Current assets:
Cash and cash equivalents $ 2,721 $ 4,065
Accounts receivable, less allowance for
doubtful accounts of $519 and $370 6,506 6,008
Receivable from underwriter - 1,102
Inventories 65,689 46,413
Prepaid expenses 43 9
Deferred income taxes 556 417
------- -------
Total current assets 75,515 58,014
Property, plant and equipment, net 7,031 7,062
Intangibles and other assets 2,744 2,116
------- -------
Total assets $85,290 $67,192
------- -------
------- -------
LIABILITIES & STOCKHOLDERS' EQUITY
Current liabilities:
Borrowings under floor plan financing $54,364 $37,989
Short-term borrowings 963 5,105
Accounts payable 2,414 2,150
Accrued payroll and vacation 793 651
Other accrued liabilities 1,384 822
Income taxes payable 37 122
Capital lease obligation 46 51
Payable to parent 188 241
------- -------
Total current liabilities 60,189 47,131
Deferred income taxes 383 299
Capital lease obligation 1,656 47
Long-term borrowings 1,268 -
------- -------
Total liabilities 63,496 47,477
------- -------
Commitments and contingencies
Stockholders' equity:
Preferred stock-10,000,000 shares authorized;
none issued and outstanding - -
Common stock-$.001 par value; 20,000,000
shares authorized; 3,533,462 issued
and outstanding 4 4
Additional paid-in capital 16,047 16,047
Retained earnings 5,743 3,664
------- -------
Total stockholders' equity 21,794 19,715
------- -------
Total liabilities and stockholders'
equity $85,290 $67,192
------- -------
------- -------
See accompanying notes to consolidated financial statements.
F-2
WESTERN POWER & EQUIPMENT CORP.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(DOLLARS IN THOUSANDS)
Common Stock
----------------------- Additional Total
Number Paid-in Retained Stockholders'
of Shares Amount Capital Earnings Equity
--------- ------- ----------- --------- -------------
Balance at
July 31, 1993 2,000,000 $ 2 $ 7,998 $ 531 $ 8,531
Net income - - - 1,520 1,520
--------- ---- -------- -------- --------
Balance at
July 31, 1994 2,000,000 2 7,998 2,051 10,051
Issuance of shares
for bridge loan 38,462 - 250 - 250
Issuance of shares
net of issuance
costs 1,495,000 2 7,799 - 7,801
Net income - - - 1,613 1,613
--------- ---- -------- -------- --------
Balance at
July 31, 1995 3,533,462 4 16,047 3,664 19,715
Net income - - - 2,079 2,079
--------- ---- -------- -------- --------
Balance at
July 31, 1996 3,533,462 $ 4 $ 16,047 $ 5,743 $ 21,794
--------- ---- -------- -------- --------
--------- ---- -------- -------- --------
See accompanying notes to consolidated financial statements.
F-3
WESTERN POWER & EQUIPMENT CORP.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
Year Ended July 31,
---------------------------------
1996 1995 1994
----- ---- ----
Cash flows from operating activities:
Net income $2,079 $1,613 $1,520
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation 820 672 418
Loss on disposal of fixed assets - 4 35
Amortization 71 396 215
Changes in assets and liabilities
(excluding effects of acquisitions):
Accounts receivable (199) (2,420) (94)
Inventories (12,840) (5,181) (5,736)
Inventory floor plan financing 12,411 4,187 1,467
Prepaid expenses (8) 7 162
Deferred income taxes (55) (67) (67)
Accounts payable 264 261 749
Accrued payroll and vacation 142 273 251
Other accrued liabilities 582 223 135
Income taxes payable (85) 122 -
Other assets (108) (101) (46)
-------- -------- --------
Net cash provided by (used in) operating activities 3,074 (11) (991)
-------- -------- --------
Cash flow from investing activities:
Purchase of fixed assets (695) (332) (309)
Proceeds on sale of fixed assets 2,075 6 26
Purchase of distribution outlets (2,325) (449) -
-------- -------- --------
Net cash provided by (used in) investing activities (945) (775) (283)
- - -------- -------- --------
Cash flows from financing activities:
Principal payments on capital lease (62) (52) (20)
Short-term borrowings (5,732) (1,623) 500
Subordinated notes payable to related party - (1,375) (525)
Payable to/receivable from parent (53) 674 2,583
Proceeds from initial public offering - 7,801 -
Receivable from underwriter 1,102 (1,102) -
Long-term borrowings 1,268 - (814)
-------- -------- --------
Net cash provided by (used in) financing activities (3,477) 4,323 1,724
-------- -------- --------
Increase (decrease) in cash and cash equivalents (1,344) 3,537 450
Cash and cash equivalents at beginning of year 4,065 528 78
-------- -------- --------
Cash and cash equivalents at end of year $2,721 $4,065 $ 528
-------- -------- --------
-------- -------- --------
See accompanying notes to consolidated financial statements.
F-4
Western Power & Equipment Corp.
Notes to Consolidated Financial Statements (DOLLARS IN THOUSANDS)
- --------------------------------------------------------------------------------
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
On August 13, 1992, Western Power & Equipment Corp. (the "Company") was
formed and incorporated in the state of Oregon for the purpose of acquiring
the assets and operations of seven factory owned stores of Case Corporation
("Case") in the states of Washington and Oregon (the "Predecessor
Company"). The acquisition was completed effective November 1, 1992.
Simultaneously, American United Global, Inc. ("AUGI") acquired all of the
outstanding shares of the Company. In March 1995, in connection with a
contemplated initial public offering, AUGI formed a new Delaware
Corporation. Upon formation, AUGI contributed to the Delaware Corporation
all outstanding common stock of the Company. The consolidated financial
statements include the accounts of the Delaware Corporation and its Oregon
subsidiary after elimination of all intercompany accounts and transactions.
The Company is engaged in the sale, rental and servicing of light, medium
and heavy construction equipment and related parts in the Pacific
Northwest, northern California and Nevada. Case serves as the manufacturer
of the majority of the Company's products.
CASH EQUIVALENTS
For financial reporting purposes, the Company considers all highly liquid
investments purchased with an original maturity of three months or less to
be cash equivalents.
INVENTORIES
Inventories are stated at the lower of cost or market. Cost is determined
using the first-in, first-out (FIFO) method for parts inventories and the
specific identification method for equipment inventories.
INTANGIBLE ASSETS
The Company's acquisition strategy has been focused on existing businesses
with established market share in a contiguous geographic area. Items with
an indeterminate useful life, such as name recognition, geographical
location and presence represent value to the Company. The Company uses
estimates of the useful life of these intangible assets ranging from twenty
to forty years. This life is based on the factors influencing the
acquisition decision and on industry practice. The Company reviews for
asset impairment on a periodic basis and when events or changes in
circumstances indicate that the carrying amount of the intangible asset may
not be recoverable. Based on this review, no writedown for impairment loss
on intangible assets has been recorded during the three year period ended
July 31, 1996.
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment are stated at cost less accumulated
depreciation. Depreciation and amortization are computed using the
straight-line method over the estimated useful lives of the assets, ranging
from 5 to 30 years. Expenditures for replacements and major improvements
are capitalized. Expenditures for repairs, maintenance and routine
replacements are charged to operating expense as incurred. The cost of
assets retired or otherwise disposed of and the related accumulated
depreciation are eliminated from the accounts; any resulting gain or loss
is included in the results of operations.
F-5
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
REVENUE RECOGNITION
Revenue on equipment and parts sales is recognized upon shipment of
products and passage of title. Rental and service revenue is generally
recognized at the time such services are provided.
ADVERTISING EXPENSE
The Company expenses all advertising costs as incurred. Total advertising
expense for the years ended July 31, 1996, 1995 and 1994 was $263, $274,
and $134 respectively.
INCOME TAXES
Effective August 1, 1993, the Company adopted Statement of Financial
Accounting Standards ("SFAS") No. 109, Accounting for Income Taxes. The
adoption of SFAS No. 109 changed the Company's method of accounting for
income taxes from the deferral method to an asset and liability approach
which requires the recognition of deferred tax liabilities and assets for
the expected future consequences of temporary differences between the
carrying amounts for financial reporting purposes and the tax bases of the
assets and liabilities. The adoption of SFAS No. 109 did not have a
material effect on the results of operations of the Company.
The Company had an informal tax sharing agreement and filed a consolidated
federal income tax return with AUGI for the year ended July 31, 1994 and
the eleven month period ended June 30, 1995. Income taxes as presented in
the accompanying financial statements are provided on a separate company
basis.
FINANCIAL INSTRUMENTS
Effective August 1, 1995 the Company adopted the Statement of Financial
Accounting Standards (SFAS) No. 107, Disclosures about Fair Value of
Financial Instruments. The adoption of SFAS No. 107 had no material effect
on the financial position or results of operations of the Company. The
recorded amounts of cash and cash equivalents, accounts receivable, short-
term borrowings, accounts receivable and accrued liabilities as presented
in the financial statements approximate fair value because of the short-term
nature of these instruments. The recorded amount of long-term debt
approximates fair value as the actual interest rates approximate current
competitive rates.
NET INCOME PER COMMON SHARE
Net income per common share is computed using the weighted average number
of common and dilutive common equivalent shares outstanding during the
period. In accordance with the regulations of the Securities and Exchange
Commission, common stock and common stock equivalents issued within twelve
months of an initial public offering are considered outstanding for all
periods presented prior to the offering using the treasury stock method and
initial public offering price.
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
In September 1994 the Company acquired the assets and operations of two
stores in California and Nevada for approximately $557 in cash (including
$108 of indirect expenses), $4,153 in installment notes payable and the
assumption of $5,019 in inventory floor plan debt.
A capital lease obligation of $170 was incurred during the year ended July
31, 1994 when the Company entered into a lease for computer equipment and
software.
A capital lease obligation of $926 was incurred in December 1995 when the
Company consummated a sale leaseback transaction of the Auburn facility.
F-6
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
In February 1996 the Company acquired the assets and operations of two
stores in California for approximately $630 in cash, $1,590 in installment
notes payable and the assumption of $3,965 in inventory floor plan debt.
In addition, a capital lease obligation of $740 was incurred related to the
lease of the Sacramento facility.
Effective June 11, 1996 the Company acquired the assets and operations of
GCS, Inc. a California-based distributor of heavy equipment primarily
marketed to municipal and state government agencies responsible for highway
maintenance for approximately $1,655 in cash.
Professional fees associated with the Sacramento Case and GCS acquisitions
totalled approximately $40.
Year ended July 31,
1996 1995 1994
------ ------ ------
Cash paid during the year for:
Interest $1,838 $1,091 $ 795
Income taxes 1,284 989 564
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses
during the fiscal periods presented. Actual results could differ from
those estimates.
2. ACQUISITIONS
Effective November 1, 1992, the Company acquired the assets of the
Predecessor Company for $1,940 in cash, approximately $10,749 in
installment notes payable to Case and the assumption of $19,980 in
inventory floor plan debt with Case and its affiliates. The acquisition
was accounted for as a purchase and resulted in the recording of
approximately $1,830 in goodwill which is included in other long-term
assets on the Company's books and is being amortized on the straight-line
basis over 40 years.
In connection with the capitalization of the Company, AUGI issued 160,000
shares of its common stock in consideration for subordinated loans
aggregating $1,900 as well as in consideration for the personal guaranty of
certain acquisition related indebtedness by AUGI's principal shareholder.
The value of the shares, $400, was recorded on the Company's books as
deferred financing costs in other long-term assets with a corresponding
amount in payable to parent. These costs have been amortized on the
straight-line basis over the term of the related loan. In June 1995,
subsequent to the successful completion of the Company's initial public
offering, the remaining balance of the subordinated loans was paid off and
the remaining unamortized balance of deferred financing costs was expensed.
Effective September 10, 1994, the Company acquired the assets and
operations of two additional factory-owned stores of Case in the states of
California and Nevada. The acquisition was consummated for approximately
$557 in cash (including $108 of indirect expenses), $4,153 in installment
notes payable to Case and the assumption of $5,019 in inventory floor plan
debt with Case and its affiliates. The accounts of these two stores have
been included in the Company's accounts from the effective date of the
acquisition. The acquisition was accounted for as a purchase and resulted
in the recording of approximately $300 in goodwill which is included in
other long-term assets on the Company's books and is being amortized on the
straight-line basis over 20 years.
F-7
2. ACQUISITIONS (CONTINUED)
Unaudited pro forma combined results of operations for the year ended July
31, 1994 as if the acquisition of the California and Nevada stores had
occurred as of the beginning of the fiscal year are summarized as follows:
Net sales $ 81,833
Net income $ 1,349
Net income per common share $ 0.66
Effective February 29, 1996, the Company acquired the assets and operations
of two additional factory-owned stores of Case in the state of California.
The acquisition was consummated for approximately $630 in cash, $1,590 in
installment notes payable to Case and the assumption of $3,965 in inventory
floor plan debt with Case and its affiliates. The accounts of these two
stores have been included in the Company's accounts from the effective date
of the acquisition. The acquisition was accounted for as a purchase and
resulted in the recording of approximately $150 in goodwill which is
included in other long-term assets on the Company's books and is being
amortized on the straight-line basis over 20 years.
Unaudited pro forma combined results of operations for the two-year period
ended July 31, 1996 as if the acquisition of the California stores had
occurred as of the beginning of the period are summarized as follows:
1996 1995
-------- --------
Net sales $115,097 $100,226
Net income $ 2,062 $ 1,400
Net income per common share $ 0.58 $ 0.58
In addition, effective June 11, 1996, the Company acquired the assets and
operations of GCS, Inc. ("GCS"), a California-based closely-held
distributor of heavy equipment primarily marketed to municipal and state
government agencies responsible for highway maintenance. The acquisition
was consummated for approximately $1,655 in cash. The acquisition was
accounted for as a purchase and resulted in goodwill of approximately $400
which is included in other long-term assets on the Company's books and is
being amortized on the straight-line basis over 20 years. Pro forma
financial information relating to this acquisition has not been provided
because its effect is immaterial. The accounts of the GCS stores have been
included in the Company's accounts from the effective date of acquisition.
3. RELATED PARTY TRANSACTIONS
Since the acquisition of the Predecessor Company, the Company has depended
on AUGI for substantial support as well as for various services such as
legal, financial and human resources. American United Global allocated the
cost for these services pro rata among its businesses based on operating
revenues. The allocated cost for these services is included in selling,
general and administrative expense and totaled $50, $724, and $600 for the
years ended July 31, 1996, 1995 and 1994 respectively. Management believes
that the method used to allocate these expenses reasonably reflects the
actual costs of services provided and that such expenses on a stand alone
basis would not produce materially different results. As of January 1,
1996, AUGI no longer provided the above mentioned services and therefore
the allocation of these expenses ceased.
F-8
3. RELATED PARTY TRANSACTIONS (CONTINUED)
The real property and improvements used in connection with the Sacramento
Operations, and upon which the Sacramento Operation is located, were sold
by Case for $1,500 to the McLain-Rubin Realty Company, LLC ("MRR"), a
Delaware limited liability company the owners of which are Messrs. C. Dean
McLain, the President and a director of the Company, and Robert M. Rubin,
the Chairman and a director of the Company. Simultaneous with its
acquisition of the Sacramento Operation real property and improvements, MRR
leased such real property and improvements to the Company under the terms
of a 20 year commercial lease agreement dated March 1, 1996 with the
Company paying an initial annual rate of $168. Under the lease, such
annual rate increases to $192 after five years and is subject to fair
market adjustments at the end of ten years. In addition to base rent, the
Company is responsible for the payment of all related taxes and other
assessments, utilities, insurance and repairs (both structural and regular
maintenance) with respect to the leased real property during the term of
the lease. In accordance with SFAS 13, the building portion of the lease
is being accounted for as a capital lease (see Note 9) while the land
portion of the lease qualifies for treatment as an operating lease.
4. INVENTORIES
Inventories consist of the following:
July 31, July 31,
1996 1995
--------- --------
Equipment:
New equipment $ 53,279 $ 36,461
Used equipment 6,090 4,662
Parts 6,320 5,290
--------- --------
$ 65,689 $ 46,413
--------- --------
--------- --------
At July 31, 1996 and 1995 approximately $12,079 and $4,756, respectively,
of equipment was being held for rent and, in accordance with standard
industry practice, is included in new equipment inventory. Such equipment
is generally being charged to cost of goods sold at an amount equal to 80
percent of the rental payments received.
5. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consist of the following:
JULY 31, JULY 31,
1996 1995
-------- -------
Land $ 840 $ 1,903
Buildings 3,001 2,347
Machinery and equipment 2,092 1,574
Office furniture and fixtures 1,742 1,478
Computer hardware and software 496 414
Vehicles 892 596
Leasehold improvements 41 -
-------- --------
9,104 8,312
Less: accumulated depreciation (2,073) 1,250)
-------- --------
$ 7,031 $ 7,062
-------- --------
-------- --------
F-9
6. BORROWINGS
In connection with the acquisition of the Fremont and Sparks stores in
fiscal 1995 and the Sacramento store in fiscal 1996, the Company entered
into various term notes with Case for the purchase of used equipment,
parts, shop tools, furniture and fixtures and accounts receivable. The
terms of these notes range from six to twenty-four months, provide for
interest charges at various rates up to prime plus 2% and are
collateralized by the related equipment, parts and fixed assets. At July
31, 1996 and 1995 a total of $963 and $856, respectively, remained
outstanding on these notes.
On October 10, 1995, using proceeds from the Company's initial public
offering, the Company retired the $2,175 real estate note given to Case for
the purchase of the Sparks, Nevada real estate in September 1994. In March
1996, the Company consummated an agreement with an institutional lender for
a conventional mortgage on the property in the amount of $1,330, secured by
the Sparks, Nevada real estate. The agreement calls for principal and
interest payments over a seven year term using a fifteen year amortization
period. The note cannot be prepaid during the first two years of its term.
In connection with the acquisition of the original seven stores, the
Company entered into a purchase agreement for the Auburn, Washington
facility subject to the completion by Case of certain environmental
remediation. In December 1995, after completion of the remediation, the
Company entered into a sale-leaseback transaction with an unrelated party
regarding the Auburn facility which resulted in no gain or loss to the
Company. The term of the lease is 20 years at an initial annual rate of
$204. In addition to base rent, the Company is responsible for the payment
of all related taxes and other assessments, utilities, insurance and
repairs with respect to the leased real property during the term of the
lease. In accordance with SFAS 13, the building portion of the lease is
being accounted for as a capital lease (see Note 9) while the land portion
of the lease qualifies for treatment as an operating lease.
The Company has inventory floor plan financing arrangements with Case
Credit Corporation, an affiliate of Case, for Case inventory and with other
finance companies affiliated with other equipment manufacturers. The terms
of these agreements generally include a four-month to eight-month interest
free term followed by a term during which interest is charged. Principal
payments are generally due at the earlier of sale of the equipment or
twelve to forty-eight months from the invoice date. The Company also has
an inventory credit facility with Seafirst Bank to provide up to $17,000
for the purchase of new and used equipment held for sale as well as
equipment held for rental. Principal payments under this line are
generally due in periodic installments over terms ranging from twelve to
twenty-four months from the borrowing date. This credit facility is
subject to annual review and expires June 1, 1997. All floor plan debt is
classified as current since the inventory to which it relates is generally
sold within twelve months of the invoice date. The following table
summarizes the inventory floor plan financing arrangements:
July 31,
Interest Maturity ---------------------
Rate Date 1996 1995
---- ---- ---- ----
Case Credit Corporation Prime + 2% 8 - 48 $38,501 $32,215
(10.25%) months
Seafirst Bank Prime + .25% 12 - 24 14,352 3,885
(8.50%) months
Other finance companies Prime + 2% 12 - 48 1,511 1,889
(10.25%) months ------- --------
$54,364 $37,989
------- -------
------- -------
F-10
7. INCOME TAXES
The provision for income taxes is comprised of the following:
` Year Ended
----------------------------------
July 31, July 31, July 31,
1996 1995 1994
-------- -------- --------
Current:
Federal $ 1,242 $ 1,000 $ 592
State 96 56 39
-------- ------- ------
1,338 1,056 631
-------- ------- ------
Deferred:
Federal (50) (64) (65)
State (5) (3) (2)
-------- ------- ------
(55) (67) (67)
-------- ------- ------
Total provision for income taxes $ 1,283 $ 989 $ 564
-------- ------- ------
-------- ------- ------
The principal reasons for the variation from the customary relationship
between income taxes at the statutory federal rate and that shown in the
statement of operations were as follows:
Year Ended
------------------------------
July 31, July 31, July 31,
1996 1995 1994
---- ---- ----
Statutory federal income tax rate $ 1,143 $ 884 $ 709
State income taxes, net of
federal income tax benefit 91 54 31
Purchase accounting adjustments - 5 (180)
Other 49 46 4
------ ----- -----
$ 1,283 $ 989 $ 564
------ ----- -----
------ ----- -----
Temporary differences and carryforwards which give rise to a significant
portion of deferred tax assets and liabilities were as follows:
July 31, July 31,
1996 1995
--------- ----------
Deferred liabilities:
Depreciation and amortization $ (348) $ (281)
Goodwill and intangibles (35) (18)
-------- ---------
(383) (299)
-------- ---------
Deferred assets:
Inventory reserve 223 207
Bad debt reserve 189 133
Accrued vacation and bonuses 91 77
Other accruals 53 -
-------- ---------
556 417
-------- ---------
$ 173 $ 118
-------- ---------
-------- ---------
F-11
8. STOCKHOLDERS' EQUITY
The Company plans to adopt Statement of Financial Accounting Standard No 123
(SFAS 123), Accounting for Stock-Based Compensation in Fiscal 1997. SFAS 123
was issued by the Financial Accounting Standards Board in October 1995 and
allows companies to choose whether to account for stock-based compensation on
a fair market value method or to continue to account for stock-based
compensation under the current intrinsic value method as prescribed by APB
Opinion No 25, Accounting for Stock Issued to Employees. The Company plans
to continue to follow the provisions of APB Opinion No 25 and therefore
management believes that the impact of adoption will not have a significant
effect on the Company's position or results of operations.
INITIAL PUBLIC OFFERING
On June 14, 1995, the Company completed an initial public offering of
1,300,000 shares of common stock at $6.50 per share. In addition, on July
28, 1995, the underwriter exercised its overallotment option for an
additional 195,000 shares. The net proceeds of the offering were $7,801
including $1,102 from the exercise of the overallotment option which was
received in cash subsequent to July 31, 1995. Such balance is included in
current assets at July 31, 1995.
BRIDGE LOAN
In February, 1995 the Company issued promissory notes to certain investors in
exchange for $250 (the "Bridge Notes"). These notes bore interest at 10
percent per annum and were due and payable on the earlier of the closing of a
public offering or July 31, 1995. In connection with the issuance of the
Bridge Notes, the Company issued 38,462 shares of common stock resulting in
deferred debt issuance costs of $290, which included $40 of related costs.
These bridge notes were paid off subsequent to the successful completion of
the Company's initial public offering in June 1995. The deferred debt
issuance costs were amortized over the term of the notes.
STOCK OPTION PLAN
In March 1995, AUGI, as the sole stockholder of the Company, approved the
Company's 1995 Stock Option Plan, as previously adopted by the Board of
Directors (the "Plan"), under which key employees, officers, directors and
consultants of the Company can receive incentive stock options and non-
qualified stock options to purchase up to an aggregate of 300,000 shares of
the Company's common stock. In December 1995, the stockholders amended the
1995 stock option plan to increase the number of shares underlying the plan
from 300,000 to 850,000 shares. The Plan provides that the exercise price of
incentive stock options be at least equal to 100 percent of the fair market
value of the common stock on the date of grant. With respect to non-qualified
stock options, the Plan requires that the exercise price be at least 85
percent of fair value on the date such option is granted. Upon approval of
the Plan, the Company's Board of Directors awarded non-qualified stock options
for an aggregate of 200,000 shares, all of which provide for an exercise price
of $6.50 per share. On December 28, 1995, the exercise price of the options
previously granted was lowered to $4.50 per share, the market price as of that
date. All outstanding options are exercisable commencing August 1, 1996 and
expire on July 31, 2005.
Subsequent to July 31, 1996, the Board of Directors approved the grant of an
additional 347,000 options to employees, directors and consultants of the
Company at an exercise price of $4.375 per share, the market price as of the
date of grant. These options vest ratably over a two-year period commencing
August 1, 1996.
F-12
9. COMMITMENTS AND CONTINGENCIES
The Company leases certain facilities and certain computer equipment and
software under noncancelable lease agreements. As more fully described in
Notes 3 and 6, the building portion of two of the Company's facility leases
qualify under SFAS 13 as "capital leases" (i.e., an acquisition of an asset
and the incurrence of a liability). The remaining facility lease
agreements have terms ranging from one to five years. Certain of the
facility lease agreements provide for options to renew and generally
require the Company to pay property taxes, insurance, and maintenance and
repair costs. Total rent expense under all operating leases aggregated
$924, $733, and $435 for the years ended July 31, 1996, 1995 and 1994,
respectively. The computer equipment lease expires February 1997 and meets
certain specific criteria to be accounted for as a capital lease.
Assets recorded under capital leases are as follows:
JULY 31, JULY 31, JULY 31,
1996 1995 1994
------ -------- --------
Capitalized asset value 1,836 $ 170 $ 170
Less accumulated amortization (134) (54) (20)
------ ------- -------
1,702 $ 116 $ 150
------ ------- -------
------ ------- -------
Future minimum lease payments under all non-cancelable leases as of July
31, 1996, are as follows:
CAPITAL OPERATING
YEAR ENDING JULY 31, LEASES LEASES
-------------------- ------- ---------
1997 $ 217 $ 982
1998 179 914
1999 179 687
2000 179 484
2001 205 310
Thereafter 4,000 2,793
------- -------
Total annual lease payments $ 4,959 $ 6,170
-------
-------
Less amount representing interest 3,257
-------
Present value of minimum lease payments 1,702
Less current portion 46
-------
Long-term portion $ 1,656
-------
-------
10. UNAUDITED QUARTERLY CONSOLIDATED FINANCIAL DATA
QUARTER
-------------------------------------- TOTAL
FIRST SECOND THIRD FOURTH YEAR
----- ------ ----- ------ -----
FISCAL 1996:
Net sales $23,153 $25,772 $26,136 $31,494 $106,555
Gross Profit 2,704 2,728 3,282 3,935 12,649
Net income 523 318 525 713 2,079
Net income per share .15 .09 .15 .20 .58
F-13
10. UNAUDITED QUARTERLY CONSOLIDATED FINANCIAL DATA (CONTINUED)
Fiscal 1995:
Net sales $18,810 $20,315 $20,772 $26,275 $86,172
Gross Profit 2,391 2,129 2,537 2,971 10,028
Net income 475 281 336 521 1,613
Net income per share .23 .14 .16 .19 .74
F-14
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and
Stockholders of Western Power & Equipment Corp.
In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of operations, of stockholders' equity and of cash flows
present fairly, in all material respects, the financial position of Western
Power & Equipment Corp. and its subsidiary at July 31, 1996 and 1995, and the
results of their operations and their cash flows for each of the three years in
the period ended July 31, 1996, in conformity with generally accepted accounting
principles. 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 of these statements in
accordance with generally accepted auditing standards which 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, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for the opinion expressed
above.
PRICE WATERHOUSE LLP
Portland, Oregon
September 6, 1996
F-15
REPORT OF INDEPENDENT ACCOUNTANTS
FINANCIAL STATEMENT SCHEDULE
To the Board of Directors and
Stockholders of Western Power & Equipment Corp.
Our audits of the consolidated financial statements referred to in our report
dated September 6, 1996 appearing on page F-13 of this Annual Report on Form
10-K also included an audit of the Financial Statement Schedule listed in
Item 8 of this Form 10-K. In our opinion, this Financial Statement Schedule
present fairly, in all material respects, the information set forth therein when
read in conjunction with the related consolidated financial statements.
PRICE WATERHOUSE LLP
Portland, Oregon
September 6, 1996
F-16
SCHEDULE II
WESTERN POWER & EQUIPMENT CORP.
VALUATION AND QUALIFYING ACCOUNTS
For the Fiscal Years Ended July 31, 1996, 1995 and 1994
(DOLLARS IN THOUSANDS)
BALANCE AT CHARGED TO CHARGED TO BALANCE AT
BEGINNING COSTS AND OTHER END OF
DESCRIPTION OF PERIOD EXPENSES ACCOUNTS DEDUCTIONS PERIOD
----------- ---------- --------- --------- ---------- -------
ACCOUNTS RECEIVABLE RESERVE:
Fiscal year ended July 31, 1996 $370 $353 $ --- $(204) $519
Fiscal year ended July 31, 1995 233 215 --- (78) 370
Fiscal year ended July 31, 1994 74 165 --- (6) 233
INVENTORY RESERVE:
Fiscal year ended July 31, 1996 449 470 --- (5) 914
Fiscal year ended July 31, 1995 439 50 --- (40) 449
Fiscal year ended July 31, 1994 500 --- --- (61) 439
F-17
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.
WESTERN POWER & EQUIPMENT CORP.
BY: /S/ C. DEAN MCLAIN
---------------------------------------
C. DEAN MCLAIN, PRESIDENT AND
CHIEF EXECUTIVE OFFICER
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.
SIGNATURE TITLE DATE
- --------- ----- ------
/S/ ROBERT M. RUBIN CHAIRMAN AND OCTOBER 28, 1996
- -------------------- DIRECTOR
ROBERT M. RUBIN
/S/ C. DEAN MCLAIN PRESIDENT, CHIEF OCTOBER 28, 1996
- ------------------- EXECUTIVE OFFICER
C. DEAN MCLAIN AND DIRECTOR
/S/ THOMAS D. BERKOMPAS TREASURER, CHIEF OCTOBER 28, 1996
- ----------------------- FINANCIAL AND
THOMAS D. BERKOMPAS ACCOUNTING OFFICER,
AND SECRETARY
/S/JAMES H. PENLAND DIRECTOR OCTOBER 28, 1996
- -----------------------
JAMES H. PENLAND
/S/HAROLD CHAPMAN, JR. DIRECTOR OCTOBER 28, 1996
- -----------------------
HAROLD CHAPMAN, JR.