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FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
Quarterly Report Under Section 13 or 15(d)
of the Securities Exchange Act of 1934
For the Quarter Ended April 30, 2003
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
incorporation or organization) I.D. number)
6407-B N.E. 117th Avenue, Vancouver, WA 98662
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(Address of principal executive offices) (Zip Code)
Registrant's telephone no.: 360-253-2346
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 and Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports); and (2) has been subject to such filing
requirements for the past 90 days.
YES [X] NO [ ]
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the close of the period covered by this report.
Title of Class Number of shares
Common Stock Outstanding
(par value $.001 per share) 4,591,162
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WESTERN POWER & EQUIPMENT CORP.
INDEX
Page
PART I. FINANCIAL INFORMATION Number
Item 1. Financial Statements
Condensed Consolidated Balance Sheets
April 30, 2003 (Unaudited) and July 31, 2002....................2
Condensed Consolidated Statements of Operations
Three months ended April 30, 2003 (Unaudited)
and April 30, 2002 (Unaudited)..................................3
Condensed Consolidated Statements of Operations
Nine months ended April 30, 2003 (Unaudited)
and April 30, 2002 (Unaudited)..................................4
Condensed Consolidated Statements of Cash Flows
Nine months ended April 30, 2003 (Unaudited)
and April 30, 2002 (Unaudited)..................................5
Notes to Condensed Consolidated Financial Statements............6-9
Item 2. Management's Discussion and Analysis of
Financial Condition and Operating Results.............10-13
Item 3. Quantitative & Qualitative Disclosures about
Market Risk.............................................13
Item 4. Evaluation of Disclosure Controls and Procedures.........13
PART II. OTHER INFORMATION
Item 1. Legal Proceedings.......................................None
Item 2. Changes in Securities...................................None
Item 3. Defaults Upon Senior Securities..........................14
Item 4. Submission of Matters to a Vote of Security Holders.....None
Item 5. Other Information.......................................None
Item 6. Exhibits and Reports on Form 8-K.........................14
SIGNATURES...................................................................15
CERTIFICATIONS.............................................................15-19
EXHIBITS...................................................................20-21
ITEM 1. FINANCIAL STATEMENTS
--------------------
WESTERN POWER & EQUIPMENT CORP.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Dollars in thousands)
April 30, July 31,
2003 2002
-------- --------
(Unaudited)
ASSETS (PLEDGED)
----------------
Current assets:
Cash and cash equivalents ......................... $ 5 $ 5
Accounts receivable, less allowance for doubtful
accounts of $508 and $646, respectively ......... 8,566 10,304
Inventories ....................................... 29,134 26,915
Prepaid expenses .................................. 244 48
-------- --------
Total current assets ....................... 37,949 37,272
Fixed assets:
Property, plant and equipment (net) ............... 2,998 3,434
Rental equipment fleet (net) ...................... 14,100 18,696
-------- --------
Total fixed assets ......................... 17,098 22,130
Other assets ........................................... 53 174
-------- --------
Total assets ........................................... $ 55,100 $ 59,576
======== ========
LIABILITIES & STOCKHOLDERS' DEFICIT
-----------------------------------
Current liabilities:
Borrowings under floor plan financing ............. $ 11,945 $ 10,974
Short-term borrowings ............................. 36,100 41,322
Term debt ......................................... 102 218
Accounts payable and accrued expenses ............. 8,069 8,585
Accrued payroll and vacation ...................... 484 659
Capital lease obligation .......................... 43 26
-------- --------
Total current liabilities ..................... 56,743 61,784
Capital lease obligation ............................... 882 928
-------- --------
Total long-term liabilities ...................... 882 928
-------- --------
Total liabilities ...................................... 57,625 62,712
-------- --------
Stockholders' deficit:
Preferred stock-10,000,000 shares authorized;
none issued and outstanding ..................... -- --
Common stock-$.001 par value; 20,000,000 shares
authorized; 4,591,162 issued and outstanding .... 4 4
Additional paid-in capital ........................ 16,025 16,025
Accumulated deficit ............................... (17,710) (18,322)
Less common stock in treasury, at cost
(130,300 shares) ................................ (844) (844)
-------- --------
Total stockholders' deficit ................... (2,525) (3,136)
-------- --------
Total liabilities and stockholders' deficit ............ $ 55,100 $ 59,576
======== ========
The accompanying notes are an integral part of
these condensed consolidated financial statements.
2
WESTERN POWER & EQUIPMENT CORP.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
(Dollars in thousands, except per share amounts)
Three Months Ended
April 30,
2003 2002
---------- ----------
Net revenue ...................................... $ 24,772 $ 25,568
Cost of revenues (includes depreciation and
amortization of $787 and $807, respectively) .. 21,988 23,030
---------- ----------
Gross profit ..................................... 2,784 2,538
Selling, general and administrative expenses ..... 2,022 2,355
---------- ----------
Operating income ................................. 762 183
Other income (expense):
Interest expense ............................ (746) (935)
Other income (expense) ...................... 106 43
---------- ----------
Income (loss) before income tax provision ........ 122 (709)
Income tax provision ............................. 12 12
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Net income (loss) ................................ $ 110 $ (721)
========== ==========
Average outstanding common shares for
basic and diluted earnings per share ........... 4,214,273 3,403,162
========== ==========
Basic and diluted earnings per common share ...... $ 0.03 $ (0.21)
========== ==========
The accompanying notes are an integral part of
these condensed consolidated financial statements.
3
WESTERN POWER & EQUIPMENT CORP.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
(Dollars in thousands, except per share amounts)
Nine Months Ended
April 30,
2003 2002
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Net revenue ......................................... $ 73,529 $ 80,297
Cost of revenues (includes depreciation and
amortization of $2,535 and $3,122, respectively).. 63,854 70,792
---------- ----------
Gross profit ........................................ 9,675 9,505
Selling, general and administrative expenses ........ 6,686 7,476
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Operating income .................................... 2,989 2,029
Other income (expense):
Interest expense ............................... (2,543) (3,220)
Other income ................................... 203 98
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Income (loss) before income tax provision ........... 649 (1,093)
Income tax provision ................................ 37 36
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Net income (loss) ................................... $ 612 $ (1,129)
========== ==========
Average outstanding common shares for
basic and diluted earnings per share .............. 4,073,273 3,403,162
========== ==========
Basic and diluted earnings per common share ......... $ 0.15 $ (0.33)
========== ==========
The accompanying notes are an integral part of
these condensed consolidated financial statements.
4
WESTERN POWER & EQUIPMENT CORP.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(Dollars in thousands)
Nine Months Ended
April 30,
2003 2002
-------- --------
Cash flows from operating activities:
Net income (loss) ................................ $ 612 $ (1,129)
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation ..................................... 4,638 5,742
Amortization ..................................... -0- 94
Gain on sale of fixed assets and
rental equipment .......................... (177) (643)
Changes in assets and liabilities:
Accounts receivable .......................... 1,737 4,482
Inventories .................................. (4,277) 10,155
Prepaid expenses ............................. (96) 83
Accounts payable ............................. (681) (4,342)
Accrued payroll and vacation ................. (175) (282)
Other accrued liabilities .................... 170 (294)
Income taxes receivable/payable .............. 17 (3)
-------- --------
Net cash provided by operating activities ............. 1,768 13,863
-------- --------
Cash flows from investing activities:
Purchase of fixed assets ......................... (65) (171)
Purchases of rental equipment .................... (1,478) (4,280)
Proceeds on sale of fixed assets ................. 5 321
Proceeds on sale of rental equipment ............. 4,167 3,717
Purchase of other assets ......................... (1) 18
-------- --------
Net cash provided by (used in)investing activities .... 2,628 (395)
-------- --------
Cash flows from financing activities:
Principal payments on capital leases ............. (30) (20)
Proceeds (payments) on
inventory floor-plan financing ................. 979 (5,956)
Payments on short-term financing ................. (5,229) (7,992)
Term debt ........................................ (116) 65
-------- --------
Net cash used in financing activities ................. (4,396) (13,903)
-------- --------
Decrease in cash and cash equivalents ................. 0 (435)
Cash and cash equivalents at beginning of
period ............................................... 5 494
-------- --------
Cash and cash equivalents at end of period ............ $ 5 $ 59
======== ========
The accompanying notes are an integral part of
these condensed consolidated financial statements.
5
Western Power & Equipment Corp.
Notes to Condensed Consolidated Financial Statements
(Dollars in thousands)
April 30, 2003
(unaudited)
1. BASIS OF PRESENTATION
The accompanying condensed consolidated financial statements are unaudited and
in the opinion of management contain all the adjustments (consisting of those of
a normal recurring nature) considered necessary to present fairly the condensed
consolidated financial position and the consolidated results of operations and
cash flows for the periods presented in conformity with accounting principles
generally accepted in the United States applicable to interim periods. This
report should be read in conjunction with the Company's condensed consolidated
financial statements included in the Annual Report on Form 10-K for the fiscal
year ended July 31, 2002 filed with the Securities and Exchange Commission.
The accompanying condensed consolidated financial statements have been prepared
on a going concern basis, which contemplates the realization of assets and the
satisfaction of liabilities in the normal course of business.
The Company has historically generated operating losses and is currently in
default on its short-term borrowing facility as discussed in Note 7 of these
condensed consolidated financial statements, both of which create substantial
doubt about the Company's ability to continue as a going concern. The
accompanying unaudited condensed consolidated financial statements do not
include any adjustments that might be necessary should the Company be unable to
continue as a going concern.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
In November 2002, the Financial Accounting Standards Board ("FASB") issued FASB
Interpretation No. 45 ("FIN 45"), Guarantor's Accounting and Disclosure
Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of
Others. FIN 45 requires that upon issuance of a guarantee, the guarantor must
recognize a liability for the fair value of the obligation it assumes under that
guarantee. FIN 45 also requires additional disclosures by a guarantor in its
interim and annual financial statements about the obligations associated with
guarantees issued. The disclosure requirements are effective for financial
statements of interim or annual periods ending after December 15, 2002. The
recognition and measurement provisions are effective on a prospective basis to
guarantees issued or modified after December 31, 2002.
The FASB issued Statement of Financial Standards ("SFAS") No. 146 ("SFAS 146"),
Accounting for Costs Associated with Exit or disposal Activities." This standard
requires companies to recognize costs associated with exit or disposal
activities when they are incurred rather than at the date of a commitment to an
exit or disposal plan. SFAS No. 146 replaces the existing guidance provided by
EITF Issue No. 94-3, "Liability Recognition for Certain Employee Termination
Benefits and Other Costs to Exit an Activity (including Certain Costs incurred
in a restructuring)." SFAS NO. 146 is to be applied prospectively to exit or
disposal activities initiated after December 31, 2002.
6
In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-Based
Compensation - Transition and Disclosure - an amendment of FASB Statement No.
123." SFAS No. 148 amends SFAS No. 123, "Accounting for Stock-Based
Compensation," to provide alternative methods of transition for a voluntary
change to the fair value based method of accounting for stock-based employee
compensation. In addition, SFAS No. 148 amends the disclosure requirements of
SFAS No. 123 to require prominent disclosures in both annual and interim
financial statements about the method of accounting for stock-based employee
compensation and the effect of the method used on reported results. The
disclosure requirements apply to all companies for fiscal years ending after
December 15, 2002. The interim disclosure provisions are effective for financial
reports containing financial statements for interim periods beginning after
December 15, 2002. During the current quarter, the Company adopted SFAS No. 148.
As permitted under SFAS No. 123, the Company continues to apply the Accounting
Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees." The
adoption of SFAS No. 148 did not have an impact on net income (loss) or proforma
net income (loss), and in applying the fair value method, the Company did not
have stock based compensation for the three and nine month periods ended April
30, 2003 or 2002.
The Company adopted the above pronouncements during the current quarter and
there was no material effect on the Company's consolidated financial statements.
3. RECENT ACCOUNTING PRONOUNCEMENTS
In January 2003, the FASB issued FASB Interpretation No. 46 ("FIN 46"),
Consolidation of Variable Interest Entities. FIN 46 provides guidance on the
identification of entities for which control is achieved through means other
than through voting rights, variable interest entities, and how to determine
when and which business enterprises should consolidate variable interest
entities. This interpretation applies immediately to variable interest entities
created after January 31, 2003. It applies in the first fiscal year or interim
period beginning after June 15, 2003, to variable interest entities in which an
enterprise holds a variable interest that it acquired before February 1, 2003.
The adoption of this interpretation is not expected to have an impact on the
Company's consolidated financial statements.
In April 2003, the FASB issued Statement of Financial Accounting Standard
("SFAS") No. 149, "Amendment of Statement 133 on derivative Instruments and
hedging Activities." The Statement amends and clarifies accounting for
derivative instruments, including certain derivative instruments embedded in
other contracts, and for hedging activities under Statement 133. This Statement
is effective for contracts entered into or modified after June 30, 2003, except
as stated below and for hedging relationships designated after June 30, 2003.
The guidance should be applied prospectively. The provisions of this Statement
that relate to Statement 133 Implementation Issues that have been effective for
fiscal quarters that began prior to June 15, 2003 should continue to be applied
in accordance with their respective effective dates. In addition, certain
provisions relating to forward purchases or sales of when-issued securities or
other securities that do not yet exist, should be applied to existing contracts
as well as new contracts entered into after June 30, 2003. The adoption of SFAS
No. 149 is not expected to have a material impact on the Company's consolidated
financial statement.
In May 2003, the FASB issued Statement of Financial Accounting Standards No. 150
"Accounting or Certain Financial Instruments with Characteristics of both
Liabilities and Equity" ("SFAS No. 150"). SFAS No. 150 established standards
7
for classification and measurement in the statement of financial position of
certain financial instruments with characteristics of both liabilities and
equity. It requires classification of a financials instrument that is within its
scope as a liability (or an asset in some circumstances). SFAS No. 150 is
effective for financial instruments entered into or modified after May 31,
2003,and otherwise is effective at the beginning of the first interim period
beginning after June 15, 2003. The Company has not yet determined the impact of
the adoption of SFAS No. 150 on its financial position or results of operations.
4. EARNINGS (LOSS) PER SHARE
Basic net income (loss) per share of common stock has been computed based on the
weighted average number of common shares outstanding during the periods
presented.
Diluted net income per share of common stock has been computed based on the
weighted average number of common shares outstanding during the periods
presented plus any dilutive securities outstanding. Common stock equivalents
consisting of options were not included in the calculation of diluted loss per
share for the three and nine month periods ended April 30, 2002 because their
inclusion would have been antidilutive. Total outstanding options as of April
30, 2003 totaled 1,210,000.
5. INVENTORIES
Inventories consist of the following:
April 30, July 31,
2003 2002
------- -------
Equipment (net of reserve allowances of $5,187
and $7,770, respectively):
New $16,896 $13,834
Used 5,408 5,915
Parts (net of reserve allowances of $394
and $286, respectively) : 6,830 7,166
------- -------
$29,134 $26,915
======= =======
6. FIXED ASSETS
Fixed assets consist of the following:
April 30, July 31,
2003 2002
------- -------
Operating property, plant and equipment:
Land $ 522 $ 522
Buildings 1,749 1,749
Machinery and equipment 3,092 3,137
Office furniture and fixtures 2,213 2,220
Computer hardware and software 1,519 1,501
Vehicles 1,306 1,406
Leasehold improvements 966 960
------- -------
11,367 11,495
Less: accumulated depreciation
and amortization 8,369 8,061
------- -------
Property, plant, and equipment (net) $ 2,998 $ 3,434
======= =======
Rental equipment fleet $21,265 $25,833
Less: accumulated depreciation 7,165 7,137
------- -------
Rental equipment (net) $14,100 $18,696
======= =======
8
7. SHORT-TERM BORROWINGS
As of October 31, 2000, the Company and GE Commercial Distribution Finance
("GE"), formerly known as Deutsche Financial Services, signed an amendment to
the existing loan and security agreement. The amendment waived all prior
defaults under the agreement, and established revised financial covenants to
be measured at the end of the Company's second and fourth quarters. In
addition, the amendment included periodic mandatory reductions in the credit
limit. The amended GE facility, matured on December 28, 2001, is a floating
rate facility based on prime (4.25% as of April 30, 2003), with rates between
0.75% under prime to 2.25% over prime depending on the amount of total debt
leverage of the Company. On June 21, 2002, the Company entered into a
Forbearance Agreement with GE under terms in which GE extended the due date
until December 31, 2002, raised the interest rate to prime plus 4% while the
Company is in default, and required the Company to pay a $45,000 fee to GE
for the forbearance. In addition, under the terms of the Forbearance
Agreement, the Company is required to meet certain financial covenants and
meet certain debt reduction schedules. The Forbearance Agreement expired on
December 31, 2002. GE is entitled to demand repayment of the entire
outstanding balance at any time.
As of April 30, 2003, the Company was in technical default of the financial
covenants in the GE Forbearance Agreement. The Company has not received a
waiver of such defaults from GE, and although GE has not called the loan,
there is no guarantee that it will not do so in the future. The Company
currently is still in negotiations with GE to extend or renew the credit
facility beyond its current expiration of December 28, 2001, as extended to
December 31, 2002 under the Forbearance Agreement. The Company believes that
it can reach an agreement with GE to further extend or renew the agreement on
reasonably acceptable terms. However, in the event that the Company cannot
reach a reasonably acceptable agreement to extend or renew the current GE
credit facility, GE is entitled to demand repayment of the entire outstanding
balance at any time. In such case, the Company would be unable to repay the
entire GE outstanding balance. There can be no assurance that the Company
will be able to successfully negotiate an acceptable extension or renewal of
the existing GE credit facility or that GE will not call the balance due at
any time.
8. PRODUCT INFORMATION.
The Company's operations consist of one business segment. However, the
Company evaluates performance based on revenue and gross margin of three
distinct product categories. Revenue and gross margin by product categories
are summarized as follows:
Business Component Three Months Ended Nine Months Ended
Net Revenues April 30, April 30,
2003 2002 2003 2002
---------------- ------- ------- ------- -------
Equipment Sales $17,684 $18,123 $50,379 $55,542
Equipment Rental 1,032 924 4,081 3,617
Product Support 6,056 6,521 19,069 21,138
------- ------- ------- -------
Total $24,772 $25,568 $73,529 $80,297
======= ======= ======= =======
9
Business Component Three Months Ended Nine Months Ended
Gross Margins April 30, April 30,
2003 2002 2003 2002
---------------- ------- ------- ------- -------
Equipment Sales $ 1,821 $ 1,700 $ 5,797 $ 5,805
Equipment Rental (50) (172) 537 451
Product Support 1,013 1,010 3,341 3,249
------- ------- ------- -------
Total $ 2,784 $ 2,538 $ 9,675 $ 9,505
======= ======= ======= =======
9. CONTINGENCY
On January 29, 2003, the Company entered into an agreement to sell
substantially all of its business assets in California and Nevada to
CDKnet.com, Inc. (OTCBB:CDKX). Subsequent to this agreement, on May 6, 2003
the parties entered into a new agreement (with the January 29, 2003 agreement
being thereby terminated) pursuant to which the Company agreed to sell all of
the outstanding shares of its wholly owned subsidiary Western Power &
Equipment Corp., an Oregon corporation (Western Sub), to CDKnet.com, Inc. in
exchange for approximately 9,400,000 shares of CDK common stock. Western Sub
is engaged in the business of selling, renting, and servicing light, medium,
and heavy construction equipment and industrial equipment, parts, and related
products manufactured by Case Corporation and several other manufacturers.
The transaction is intended to be a tax-free exchange of shares. The
completion of the transaction remains subject to several conditions including
shareholder approval, the receipt of other required third party approvals,
delivery of audited financial statements of the business to be acquired,
additional due diligence, and compliance with applicable regulatory
requirements. There can be no assurance that the transaction will be
consummated.
10. INCOME TAXES.
The Company has net operating loss carry forwards of approximately $29
million, and as a result, the provision for income taxes for 2003 and 2002
consist of various state and local minimum taxes. As of April 30, 2003, the
Company has a deferred tax asset of approximately $11 million, for which a
full valuation allowance has been provided.
10
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
-----------------------------------------------------------------
LIQUIDITY AND CAPITAL RESOURCES
-------------------------------
The following discussion and analysis should be read in conjunction with the
Condensed Consolidated Financial Statements and Notes thereto appearing
elsewhere in this Form 10-Q. Information included herein relating to projected
growth and future results and events constitutes forward-looking statements.
Actual results in future periods may differ materially from the forward-looking
statements due to a number of risks and uncertainties, including but not limited
to fluctuations in the construction, agricultural, and industrial sectors; the
success of the Company's restructuring and cost reduction plans; the success of
the Company's equipment rental business; rental industry conditions and
competitors; competitive pricing; the Company's relationship with its suppliers;
relations with the Company's employees; the Company's ability to manage its
operating costs; the continued availability of financing; the Company's ability
to refinance/restructure its existing debt; governmental regulations and
environmental matters; risks associated with regional, national, and world
economies; and consummation of the merger and asset purchase transactions. Any
forward-looking statements should be considered in light of these factors.
Results of Operations
- ---------------------
The Three Months and Nine Months ended April 30, 2003 compared to the Three
- ---------------------------------------------------------------------------
Months and Nine Months ended April 30, 2002.
- --------------------------------------------
Revenues for the three-month period ended April 30, 2003 decreased 3% to $24.7
million compared with $25.6 million for the three-month period ended April 30,
2002. Revenues were down from the prior year's third quarter in most departments
and in most store locations due to the generally soft economy.
Revenues for the nine-month period ended April 30, 2003 decreased 8% to $73.5
million compared with $80.3 million for the nine-month period ended April 30,
2002. Revenues were down from the prior year in every department and in most
store locations due to prior year store closures and the generally soft economy.
The Company's gross profit margin of 11.2% for the three-month period ended
April 30, 2003 was up from the prior year comparative period margin of 9.9%. The
Company's gross profit margin of 13.2% for the nine-months ended April 30, 2003
was up from the comparative period margin of 11.8% Margins on equipment sales in
the current quarter were generally higher than compared with the prior year
period due in part to fewer rental-purchase conversions by customers in the
second quarter. This was offset by a slightly lower percentage of revenue
generated from parts and service sales. Historically, the Company experiences
higher gross margins in the first quarter. This higher gross margin is a result
of more high margin rentals as compared to second and third quarters when more
customers purchase their rental equipment as the end of the calendar year
approaches. As discussed above, the Company experienced fewer rental purchase
conversions in the third quarter than customary.
For the three-month period ended April 30, 2003, selling, general, and
administrative ("SG&A") expenses as a percentage of sales were 8.2% down from
9.2% for the prior year's quarter. For the nine-month period ended April 30,
2003, SG&A expenses were 9.1% of sales, down from 9.3% in the comparable period
ended April 30, 2002 even with an overall decrease in revenues for the
comparable periods.
11
Interest expense for the three months ended April 30, 2003 of $746,000 was down
from $935,000 in the prior year comparative period and for the nine months ended
April 30, 2003 interest expense was $2,543,000 compared with $3,220,000 for the
prior year comparative period. This decrease is the result of reduced overall
inventory levels as well as lower average interest rates and a lower balance on
the GE facility.
The Company had net income for the quarter ended April 30, 2003 of $110,000 or
$.02 per share (basic and diluted) compared with a net loss of $721,000 or $0.21
per share (basic and diluted) for the prior year's comparable quarter and a net
income of $612,000 or $0.15 per (basic and diluted) share for the nine months
ended April 30, 2003 as compared to net loss of $1,129,000 or $0.33 per (basic
and diluted) share for the nine months ended April 30, 2002.
Liquidity and Capital Resources
- -------------------------------
The Company's primary needs for liquidity and capital resources are related to
its inventory for sale and its rental and lease fleet inventories. The Company's
primary source of internal liquidity has been its operations. The Company's
primary sources of external liquidity are equipment inventory floor plan
financing arrangements provided to the Company by the manufacturers of the
products the Company sells, the GE Commercial Distribution Finance, formerly
known as Deutsche Financial Services, ("GE") credit facility, and, with respect
to acquisitions, secured loans from Case Corporation (now CNH Global).
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 one to twelve months, after which interest commences to
accrue monthly at rates ranging from zero percent to two 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 April 30, 2003,
the Company was indebted under manufacturer-provided floor planning arrangements
in the aggregate amount of $11,945,000.
The amended GE credit facility matured December 28, 2001 and was a floating rate
facility based on prime with rates between 0.75% under prime to 2.25% over prime
(4.25% as of April 30, 2003) depending on the amount of total debt leverage of
the Company. On June 21, 2002, the Company entered into a Forbearance Agreement
with GE under the terms of which GE raised the interest rate to prime plus 4%
while the Company is in default and required the Company to pay a $45,000 fee to
GE for the forbearance. In addition, under the terms of the Forbearance
Agreement, the Company is required to meet certain financial covenants and meet
certain debt reduction schedules. The Forbearance Agreement expired on December
31, 2002. GE is entitled to demand repayment of the entire outstanding balance
at any time. As of April 30, 2003, the Company was in technical default of the
financial covenants in the GE credit facility. The Company has not received a
waiver of such defaults from GE and although GE has not called the loan, there
is no guarantee that it will not do so in the future.
Borrowings under the GE credit facility are secured by the Company's assets,
including accounts receivable, parts, new equipment, rental fleet, and used
equipment. The Company uses this borrowing facility to provide operating capital
for the Company. As of April 30, 2003, approximately $36,100,000 was outstanding
under the GE credit facility.
12
The Company currently is still in negotiations with GE to extend or renew the
credit facility beyond its current expiration of December 28, 2001. The Company
believes that it can reach agreement with GE to extend or renew the facility on
reasonably acceptable terms. However, in the event that the Company cannot reach
a reasonably acceptable agreement to extend or renew the current GE credit
facility, GE could demand repayment of the entire outstanding balance at any
time. In such case, the Company would be unable to repay the entire GE
outstanding balance. There can be no assurance that the Company will be able to
successfully negotiate an acceptable extension or renewal of the existing GE
credit facility or that GE will not call the balance due at any time.
The accompanying consolidated financial statements have been prepared on a going
concern basis, which contemplates the realization of assets and the satisfaction
of liabilities in the normal course of business.
During the nine months ended April 30, 2003, cash and cash equivalents remained
the same. The Company had positive cash flow from operating activities in the
first nine months reflecting the net income for the period and adding back
depreciation.
The Company's cash and cash equivalents as of April 30, 2003 were $5,000. The
Company cannot fund current levels of operations without the continued
availability of borrowing from its current lender GE. Although the Company and
GE are in negotiations to extend or renew the credit facility beyond its
expiration of December 28, 2001, there can be no assurance that the Company will
be able to successfully negotiate an acceptable extension or renewal of the
expired GE credit facility or that GE will continue to make borrowing available
to the Company.
INVENTORY; EFFECTS OF INFLATION AND INTEREST RATES; GENERAL ECONOMIC CONDITIONS
Controlling inventory is a key ingredient to the success of an equipment
distributor because the equipment is characterized by long order cycles, high
ticket prices, and the related exposure to "flooring" interest. The Company's
interest expense may increase if inventory is too high or interest rates rise.
The Company manages its inventory through Company-wide information and inventory
sharing systems wherein all locations have access to the Company's entire
inventory. In addition, the Company closely monitors inventory turnover by
product categories and places equipment orders based upon targeted turn ratios.
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,
industrial, and agricultural sectors. Accordingly, the Company's sales are
affected by inflation or increased interest rates which tend to hold down new
construction, and consequently adversely affect demand for the equipment sold
and rented by the Company. In addition, although agricultural equipment sales
are less than 2% of the Company's total revenues, factors adversely affecting
the farming and commodity markets also can adversely affect the Company's
agricultural equipment related business.
The Company's business can also be affected by general economic conditions in
its geographic markets as well as general national and global economic
conditions that affect the construction, industrial, and agricultural sectors. A
further erosion in North American and/or other countries' economies could
adversely affect the Company's business.
13
Although the principal products sold, rented, and serviced by the Company are
manufactured by Case Corporation, the Company also sells, rents, and services
equipment and sells related parts (e.g., tires, trailers, and compaction
equipment) manufactured by others. Approximately 41% of the Company's net sales
for the three months ended April 30, 2003 resulted from sales, rental, and
servicing of products manufactured by companies other than Case. That compares
with a figure of 41% for the nine months of the current fiscal year and 51% for
the fiscal year ended July 31, 2002. Manufacturers other than Case represented
by the Company offer various levels of supplies and marketing support along with
purchase terms which vary from cash upon delivery to interest-free, 12-month
flooring.
The Company purchases its equipment and parts inventory from Case and other
manufacturers. No supplier other than Case accounted for more than 10% of such
inventory purchases during the nine months ended April 30, 2003. 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.
The generally soft economic conditions in the equipment market, particularly in
the northwest, have contributed to a decline in equipment sales. A further
softening in the industry could severely affect the Company's sales and
profitability. Market specific factors could also adversely affect one or more
of the Company's target markets and/or products. The Company expects the
construction equipment market in its store locations to remain flat or slightly
down over the next 6 to 12 months.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
----------------------------------------------------------
The Company is exposed to market risk from changes in interest rates.
Market risk is the potential loss arising from adverse changes in market rates
and prices such as interest rates. For fixed rate debt, interest rate changes
affect the fair value of financial instruments but do not impact earnings or
cash flows. Conversely for floating rate debt, interest rate changes generally
do not affect the fair market value but do impact future earnings and cash
flows, assuming other factors are held constant. At April 30, 2003, the Company
had variable rate floor plan payables, notes payable, and short-term debt of
approximately $48.1 million. Holding other variables constant, the pre-tax
earnings and cash flow impact for the next 12 months resulting from a one
percentage point increase in interest rates would be approximately $0.4 million.
The Company's policy is not to enter into derivatives or other financial
instruments for trading or speculative purposes.
ITEM 4. EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES
------------------------------------------------
(a) Evaluation of disclosure controls and procedures. Our Chief Executive
Officer and our Chief Financial Officer, after evaluating the effectiveness of
the Company's "disclosure controls and procedures" (as defined in the Securities
Exchange Act of 1934 Rules 13a-14(c) and 15-d-14(c)) as of a date (the
"Evaluation Date") within 90 days before the filing date of this quarterly
report, have concluded that as of the Evaluation Date, the Company's disclosure
controls and procedures were adequate and designed to ensure that material
information relating to the Company would be made known to them by others within
those entities.
14
(b) Changes in internal controls. There were no significant changes in the
Company's internal controls or to our knowledge, in other factors that could
significantly affect the Company's disclosure controls and procedures subsequent
to the Evaluation Date.
15
PART II. OTHER INFORMATION
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
-------------------------------
As of April 30, 2003, the Company was in technical default of the
financial covenants in the GE Forbearance Agreement. The Company has
not received a waiver of such defaults from GE and although GE has
not called the loan, there is no guarantee that it will not do so in
the future.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
---------------------------------------------------
None.
ITEM 5. OTHER INFORMATION
-----------------
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
--------------------------------
A. EXHIBITS.
99.1 Certification Pursuant to 18 U.S.C. Section 1350 as Adopted
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
99.2 Certification Pursuant to 18 U.S.C. Section 1350 as Adopted
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
B. REPORTS ON FORM 8-K.
The Company filed a current report on Form 8-K on May 8, 2003 and
an amended Form 8-K on May 9, 2003 regarding the Company Changing
its external auditors.
16
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
WESTERN POWER & EQUIPMENT CORP.
June 16, 2003
By: /s/Mark J. Wright
-------------------------------------
Mark J. Wright
Vice President of Finance and
Chief Financial Officer
I, C. Dean McLain, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Western Power &
Equipment Corp.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated subsidiaries,
is made known to us by others within those entities, particularly during the
period in which this quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our evaluation
as of the Evaluation Date;
5. The registrant's other certifying officer and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
17
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal controls; and
6. The registrant's other certifying officer and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: June 16, 2003
/s/ C. Dean McLain
- -----------------------
C. Dean McLain
President and Chief Executive Officer
I, Mark J. Wright, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Western Power &
Equipment Corp.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated subsidiaries,
is made known to us by others within those entities, particularly during the
period in which this quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our evaluation
as of the Evaluation Date;
5. The registrant's other certifying officer and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent function):
18
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal controls; and
6. The registrant's other certifying officer and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: June 16, 2003
/s/ Mark J. Wright
- ---------------------------
Mark J. Wright
Chief Financial Officer
19