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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
_____________________
FORM 10-K
_____________________
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED JULY 31, 2004 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) Identification Number)
6407-B N.E. 117TH AVE, VANCOUVER, WA 98662
- ---------------------------------------- ----------
(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
-----------------------------
(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 [_]
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]
Indicate by check mark whether Registrant is an accelerated filer (as
defined in Exchange Act Rule 12b-2). YES [_] NO [X]
As of October 18, 2004: (a) 10,130,000 shares of Common Stock, $.001 par
value, of the registrant (the "Common Stock") were outstanding; (b) 1,592,576
shares of Common Stock were held by non-affiliates ; and (c) the aggregate
market value of the Common Stock held by non-affiliates was $875,917 based on
the closing sale price of $ .55 per share on October 18, 2004.
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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, agricultural, and industrial equipment, parts, and related
products which are manufactured by Case Corporation ("Case") and certain other
manufacturers. The Company believes, based upon the number of locations owned
and operated, that it is one of the largest independent dealers 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 mobile highway signs.
The Company operates out of facilities located in the states of Washington,
Oregon, Nevada, California, and Alaska. 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 had focused on acquiring additional existing
distributorships and rental operations, opening new locations as market
conditions warrant, and increasing sales at its existing locations. In such
connection, it had sought 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. For the past few years,
the Company has concentrated on consolidating or closing certain of its stores
to improve operating efficiency and profitability. See "Business Strategy."
HISTORY AND ACQUISITIONS
The Company commenced business in November 1992 with the acquisition from
Case of seven retail distribution facilities located in Oregon and Washington.
The Company became a subsidiary of American United Global, Inc. ("AUGI"),
simultaneous with such acquisition. AUGI holds 12.1 percent of the outstanding
shares of the Company as of July 31, 2004.
In September 1994 and February 1996, in two different transactions, the
Company acquired from Case four retail construction equipment stores located in
California and Nevada. In addition, in June 1996 and January 1997, the Company
made two additional acquisitions of distributorships of predominantly
non-competing lines of equipment, with locations in California, Oregon,
Washington, and Alaska. From fiscal 1993 through fiscal 1997, the Company also
opened nine new stores in the states served by the existing stores, ending
fiscal year 1997 with 23 stores.
In fiscal 1998, the Company acquired four additional facilities located in
California and Alaska. The previous Alaska facility was discontinued as it was
combined with the new Alaska facility. In fiscal 1998 the Company opened one new
store in Washington. On December 11, 1997, the Company acquired substantially
all of the operating assets used by Case in connection with its business of
servicing and distributing Case agricultural equipment at a facility located in
Yuba City, California.
On April 30, 1998, the Company acquired substantially all of the operating
assets of Yukon Equipment, Inc. (Yukon) in connection with Yukon's business of
servicing and distributing construction, industrial, and agricultural equipment
in Alaska. Yukon has facilities in Anchorage, Fairbanks, and Juneau, Alaska.
In fiscal 1999, the Company closed three of its smaller facilities and
began servicing the territories served by these small stores by larger
facilities in the region.
The Company consolidated four facilities in the first quarter of fiscal
2000 into certain larger stores in each region. One branch office in Washington
was sold during the third quarter of fiscal 2000 while two temporary locations
were
I-2
established in Southern California. The closures were intended to increase
efficiencies and reduce costs. The two branches in California were established
in an effort to assist Case Corporation in a dealership transition for Southern
California. The Company consolidated one branch in Washington during the first
quarter of fiscal 2001 and sold the two branches in Southern California in the
third quarter of fiscal 2001.
During fiscal 2002, the Company closed/sold 3 branches resulting in 15
branches at the end of fiscal 2002. There were no store closures and no new
stores opened in fiscal years 2003 and 2004.
BUSINESS STRATEGY
The Company's strategy is to streamline the Company's operations and close
or consolidate stores and to increase efficiency and profitability. The Company
is concentrating its efforts on reducing costs and increasing sales and margins
so that all of its operations can be profitable. The Company has selectively
pared down its product offerings to reduce inventory carrying costs and to
improve turnover in the remaining product lines that it offers.
The Company's business strategy includes efforts to expand sales at its
existing locations. The Company will continue to seek to improve its product
line and generate incremental sales increases by adding equipment and parts
produced by manufacturers other than Case, where appropriate. The Company will
also seek to increase sales of parts and service--both of which have
considerably higher margins than equipment sales.
The Company's business strategy had previously focused on acquiring
additional existing distributorships and rental operations, opening new
locations, and increasing sales at its existing locations. The Company reduced
its acquisition activity in fiscal years 1999 through 2002 due to market
conditions. When market conditions improve and opportunities arise, the Company
intends to make strategic acquisitions of other authorized Case construction
equipment retail dealers located in established or growing markets, as well as
dealers or distributors of construction, industrial, or agricultural equipment,
and related parts, manufactured by companies other than Case. In addition to
acquisitions, in the future the Company may open new retail outlets or make
strategic acquisitions in related areas, as opportunities and conditions permit.
The strategy in opening additional retail outlets 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.
PRODUCTS
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 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 Oregon, Washington, Nevada, northern California, and Alaska (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
I-3
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
one to six months, depending upon the type of equipment floored, after which
interest commences to accrue monthly at an annual rate 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 six months after the
date of shipment to the Company by Case.
Other Products.
- ---------------
Although the principal products sold, rented, 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 47% and 51% of the Company's net sales for
fiscal year 2004 and fiscal 2003, respectively, resulted from sales, rental, and
servicing of products manufactured by companies other than Case. 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's distribution business is divided into three general
categories of activity: (i) Equipment sales, (ii) Equipment rentals, and (iii)
Product Support.
Equipment Sales.
- ----------------
At each of its distribution outlets, the Company maintains a fleet of
various new and used Equipment for sale. 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.
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 sells 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.
Equipment Rental.
- -----------------
The Company maintains a separate fleet of Equipment that it holds for
rental. Such Equipment is generally held in the rental fleet for 12 to 36 months
and then sold as used Equipment with 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. In October 1998, the
Company opened its first rental-only store, located in the Seattle, Washington
area, under the name Western Power Rents. This store was consolidated with the
Company's Auburn, Washington store in August 2000. Rentals are 5% of revenue in
fiscal year 2004 and fiscal year 2003. See Sales and Marketing below.
Product Support.
- ----------------
The Company operates a service center and yard at each retail distribution
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 80 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 to be purchased by
customers for Equipment sold and serviced by the Company, and independently
marketing such contracts to its customers. The Company services items and types
of Equipment that include those that are neither sold by the Company nor
manufactured by Case.
I-4
The Company purchases parts 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 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 19,000 customers, with most being small
business owners, none of which accounted for more than 3% of its total sales in
the fiscal year ended July 31, 2004.
For fiscal years 2004, 2003, and 2002, the revenue breakdown by source for the
business operated by the Company were approximately as follows:
FY 2004 FY 2003 FY 2002
-----------------------------
Equipment Sales 70% 70% 68%
Equipment Rental 5% 5% 6%
Product Support 25% 25% 26%
-----------------------------
100% 100% 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 accepts orders from
customers for future delivery following manufacture by Case or other
manufacturers, during fiscal 2004 a majority of its sales revenues resulted from
products sold directly out of inventory, or the providing of services upon
customer request.
The Company employed approximately 39 equipment salespersons on July 31,
2004. 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 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.
On July 31, 2004, the Company employed 1 product support salesperson who
sells Company parts and repair services to customers in assigned territories.
The Company has no independent distributors or non-employee sales
representatives.
SUPPLIERS
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 fiscal 2004. 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.
I-5
COMPETITION
The Company competes with distributors of construction, agricultural, and
industrial 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 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, but are not limited to, JCB Corporation--backhoes, Kobelco
Corporation -- excavators, Dresser Industries -- light and medium duty dozers,
Komatsu Corporation -- wheel loaders and crawler dozers, and Bobcat, Inc. --
skid steer loaders.
The Company is currently the only Case dealer for construction equipment in
Alaska, northern Nevada, and in the northern California area (other than
Case-owned distribution outlets), and is one of several Case dealers in Oregon
and Washington. 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 resulting 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 rental and 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, 2004, the Company employed 238 full-time employees. Of that
number, 16 are in corporate administration, 17 are involved in administration at
the branch locations, 57 are employed in equipment sales and rental, and 148 are
employed in product support. At July 31, 2004, approximately 14 of the Company's
service technicians and parts employees at the Sacramento, California operation
were being represented by Operating Engineers Local Union No. 3 of the
International Union of Operating Engineers, AFL-CIO under the terms of a
five-year contract expiring August 31, 2005. At July 31, 2004, approximately 8
of our service technicians and parts employees at the Hayward, California
operation were being represented by Operating Engineers Local Union No. 3 of the
International Union of Operating Engineers, AFL-CIO under the terms of a
five-year contract expiring January 31, 2008. The Company believes that its
relations with its employees are generally satisfactory.
INSURANCE
The Company currently has general, product liability, and umbrella
insurance policies covering the Company with limits, terms, and conditions which
the Company believes to be 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,
I-6
or a claim for which indemnification is not available, could have a material
adverse effect upon the Company's business, results of operations, and financial
condition.
FORWARD-LOOKING STATEMENTS
Information included above 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 entry into new markets; the success of the Company's expansion of its
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; governmental regulations and
environmental matters; risks associated with regional, national, and world
economies. Any forward-looking statements should be considered in light of these
factors.
I-7
ITEM 2. PROPERTIES
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The following table sets forth information as to each of the properties
which the Company owns or leases (all of which are retail sales, rental,
service, storage, and repair facilities except as otherwise noted) at July 31,
2004.
Expiration Annual Size/Square Purchase
Location and Use Lessor Date Rental Feet Options
- ----------------- ------ ---- ------ ---- -------
1745 N.E. Columbia Blvd. Carlton O. Fisher, 12/31/2010 $84,0001 plus Approx. 4 acres; building No
Portland, Oregon 97211 CNJ Enterprises CPI adjustments 17,622 sq. ft.
1665 Silverton Road, N.E. LaNoel Elston Myers 07/31/2009 $37,2001 Approx. 1 acre; building No
Salem, Oregon 97303 Living Trust 14,860 sq. ft.
West 7916 Sunset Hwy. U.S. Bank 09/30/20084 $64,8001 Approx. 5 acres; building No
Spokane, Washington 99204 19,200 sq. ft.
12406 Mukilteo Speedway Phil & Jana Pickering 10/31/2008 $120,9601 Approx. 2.1 acres; building No
Mukilteo, Washington 98275 13,600 sq. ft.
6407-B NE 117th Ave McLain-Rubin Realty 03/31/2006 $69,600 Building 8,627 sq. ft. No
Vancouver, Washington 98662 Company, LLC 3
(Executive Offices)
2702 W. Valley Hwy No. Avalon Island LLC 11/30/2015 $204,0001 Approx. 8 acres; building No
Auburn, Washington 98001 33,000 sq. ft.
500 Prospect Lane Owned N/A N/A Approx. 1.5 acres; building N/A
Moxee, Washington 98936 4,320 sq. ft.
(Subleased to 3rd Party)
1455 Glendale Ave. McLain-Rubin Realty 09/30/2007 $276,0002 Approx. 5 acres; building No
Sparks, Nevada 89431 Company, LLC 3 22,475 sq. ft.
25886 Clawiter Road Clawiter Asso., LLC 11/30/2004 $108,9001 Approx. 2.8 acres; building No
Hayward, California 94545 21,580 sq. ft.
3540 D Regional Parkway Soiland 02/28/2005 $57,6001 plus Approx. 1.25 acres; building No
Santa Rosa, California 95403 annual CPI 5,140 sq. ft.
adjustments
1751 Bell Avenue McLain-Rubin Realty 09/30/2007 $228,0002 Approx. 8 acres; building. No
Sacramento, California 95838 Company, LLC 3 35,940 sq ft.
8271 Commonwealth Avenue M.E. Robinson & 03/31/2005 $93,960 N/A No
Buena Park, CA 90621-2537 Lois Robinson
2535 Ellis Street Hart Enterprises 04/30/2005 $33,600 Approx. 2 acres; building Yes
Redding, California 96001 6,200 sq. ft.
I-8
Expiration Annual Size/Square Purchase
Location and Use Lessor Date Rental Feet Options
- ----------------- ------ ---- ------ ---- -------
1041 S Pershing Ave Raymond Investment 03/14/2006 $49,689 Approx. .5 acres; building Yes
Stockton, CA 95206 Corp 1,794 sq. ft.
723 15th Street Mark Flerchinger Month to $20,400 Approx. 1.2 acres; building Yes
Clarkston, Washington 99403 Month 3,750 sq. ft.
2020 E. Third Avenue Owned N/A N/A Approx. 4 acres; building N/A
Anchorage, Alaska 99501 15,650 sq. ft.
3511 International Street Wingless 11/30/2009 $78,000 Approx. 1.5 acres; building No
Fairbanks, Alaska 99701 Properties 8,500 sq. ft.
1 Net lease with payment of insurance, property taxes, and maintenance costs
paid by the Company.
2 Net lease with payment of insurance, property taxes and maintenance costs,
including structural repairs, paid by the Company.
3 Related party lease.
4 Renewal in process.
- --------------------------------------------------------------------------------
The Company's operating facilities at July 31, 2004 were separated into
eight "hub" outlets and seven "sub-stores". In addition, the Company maintains
its headquarter operations in Vancouver, Washington. The hub stores are the main
distribution centers located in Auburn and Spokane, Washington; Portland,
Oregon; Sparks, Nevada; Hayward, Buena Park, and Sacramento, California; and
Anchorage, Alaska; and the sub-stores are the smaller facilities located in
Mukilteo and Clarkston, Washington; Salem, Oregon; Santa Rosa, Stockton, and
Redding, California; and Fairbanks, Alaska.
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
-----------------
The Company is involved in various legal proceedings which are incidental
to the industry and for which certain matters are covered in whole or in part by
insurance or, otherwise, the Company has recorded accruals for estimated
settlements. Management believes that any liability which may result from these
proceedings will not have a material adverse effect on the Company's business,
results of operations, and financial condition.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
---------------------------------------------------
There were no matters submitted during the fourth quarter of the fiscal
year covered by this report to a vote of security holders, through the
solicitation of proxies or otherwise.
I-9
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
---------------------------------------------------------------------
The Company's stock is traded on the OTC Bulletin Board under the symbol
WPEC. The high and low closing prices for the Company's common stock for the
years ended July 31, 2004 and July 31, 2003 were as follows:
High Low
------ ------
Fiscal 2004
1ST QUARTER - August 1, 2003 through October 31, 2003 $ 0.45 $ 0.15
2ND QUARTER - November 1, 2003 through January 31, 2004 $ 0.43 $ 0.32
3RD QUARTER - February 1, 2004 through April 30, 2004 $ 0.41 $ 0.35
4TH QUARTER - May 1, 2004 through July 31, 2004 $ 0.40 $ 0.26
Fiscal 2003
1ST QUARTER - August 1, 2002 through October 31, 2002 $ 0.26 $ 0.11
2ND QUARTER - November 1, 2002 through January 31, 2003 $ 0.24 $ 0.12
3RD QUARTER - February 1, 2003 through April 30, 2003 $ 0.17 $ 0.10
4TH QUARTER - May 1, 2003 through July 31, 2003 $ 0.20 $ 0.12
The number of shareholders of record of the Company's Common Stock on July
31, 2004 was 495 and the number of beneficial holders of the Company's Common
Stock is estimated by management to be approximately 1,000 holders.
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
development of its business.
Equity Compensation Plan Information
------------------------------------
- ------------------------------ ------------------------------------- ----------------------------- ------------------------------
Plan category Number of Securities to be issued Weighted -average exercise Number of securities remaining
upon exercise of outstanding options, price of outstanding options, available for future issuance
warrants and rights warrants and rights under equity compensation
plans (excluding securities
reflected in column (a))
- ------------------------------ ------------------------------------- ----------------------------- ------------------------------
Equity compensation plans
approved by security holders 1,600,000 $.50 50,000
- ------------------------------ ------------------------------------- ----------------------------- ------------------------------
Equity compensation plans not
approved by security holders -- -- --
- ------------------------------ ------------------------------------- ----------------------------- ------------------------------
II-1
ITEM 6. SELECTED FINANCIAL DATA
-----------------------
The following selected financial data have been derived from the audited
financial statements of the Company. See notes to Consolidated Financial
Statements in Part IV, Item 14(a)(1) for information concerning the effect of
acquisitions completed by the Company during the periods reflected.
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
Fiscal Year Ended July 31,
2004 2003 2002 2001 2000
- -------------------------------------------------------------------------------------------------
Net sales $115,516 $102,396 $107,988 $139,902 $155,637
Gross profit $ 14,170 $ 13,526 $ 7,763 $ 9,820 $ 11,538
(% of sales) 12.3 13.2 7.2 7.0 7.4
Selling, general and
administrative $ 9,594 $ 9,955 $ 10,199 $ 12,840 $ 13,534
(% of sales) 8.3 9.4 9.4 9.2 8.7
(Loss) income before
income taxes $ 1,961 $ 460 $ (9,971) $ (7,537) $ (6,419)
(% of sales) 1.7 .4 (9.2) (5.4) (4.1)
Tax rate (%) 48 10 0.5 4 12
Net (loss) income $ 1,913 $ 412 $(10,019) $ (7,842) $ (7,198)
Net (loss) income per
basic & dilutive common
share $ .19 $ .08 $ (2.50) $ (2.30) $ (2.18)
Shares used in basic &
dilutive earnings per
share calculations 10,130 5,336 4,003 3,403 3,306
Working capital deficit $(12,800) $(17,590) $(24,390) $(20,102) $(15,910)
Long-term debt (including
capital leases and deferred
lease income) $ 902 $ 880 $ 928 $ 3,469 $ 10,796
Stockholders' equity (deficit) $ 102 $ (1,811) $ (3,136) $ 6,751 $ 14,381
Total assets $ 55,024 $ 54,466 $ 60,116 $ 93,092 $122,710
II-2
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. Certain matters discussed herein contain forward-looking
statements that are subject to risks and uncertainties that could cause actual
results to differ materially from those projected, including, but not limited
to, projected sales levels, expense reductions, reduced interest expense, and
increased inventory turnover, one or more of which may not be realized.
GENERAL
The Company acquired its first seven retail distribution stores in November
1992. The Company expanded to 18 stores in four states by the end of fiscal
1996, to 23 stores in five states by the end of fiscal 1997, and to 27 stores in
five states by the end of fiscal 1998. In fiscal 1999, the Company closed 3
stores. At the end of fiscal 2002 and 2003, the Company had 15 stores in
operation.
For the last four years, the Company has concentrated on consolidating or
closing stores to improve operating efficiency and profitability. Store activity
for the last three years is summarized as follows:
- --------------------------------------------------------------------------------------------------
Fiscal No. of Stores at No. of Stores No. of Stores No. of Stores No. of Stores at
Year Beginning of Year Opened Closed/Sold Acquired End of Year
- ------ ------------------- --------------- --------------- --------------- ------------------
2002 18 0 3 0 15
- ------ ------------------- --------------- --------------- --------------- ------------------
2003 15 0 0 0 15
- ------ ------------------- --------------- --------------- --------------- ------------------
2004 15 0 0 0 15
- --------------------------------------------------------------------------------------------------
The Company is evaluating additional store closures or sales. In addition,
in the future the Company may open and acquire additional distribution outlets
for Case products, as well as for products which may be manufactured by other
companies as circumstances permit. The Company's results can be impacted by the
timing of, and costs incurred in connection with, new store openings and
acquisitions as well as the costs of closing existing stores.
RESULTS OF OPERATIONS
FISCAL YEAR 2004, AS COMPARED WITH FISCAL YEAR 2003
The Company reported net revenues for fiscal 2004 of $115,516,000 compared
with net revenues of $102,396,000 for fiscal 2003. Stores opened longer than 12
months showed an overall revenue increase of 12.8 percent from prior year
revenue reflecting a slight recovery in economic conditions. During 2004, there
were no new stores opened or additional store closures.
For fiscal 2004, the Company reported net income of $1,913,000 or $ .19 per
share compared with net income of $412,000 or $ .08 per share in fiscal 2003.
The increase in net income is primarily a result of increased sales and
continued efforts by management to minimize administrative expenses.
Gross margin was 12.3 percent during fiscal 2004 which was slightly lower
than the 13.2 percent gross margin during fiscal 2003. The decrease in 2004, is
due in part to management's continued successful efforts in reducing inventory
levels, particularly of older inventory which were sold at slightly lower prices
than those of the prior year. Also contributing to lower margins in 2004, are
changes in sales mix, which reflect a greater number of new and used equipment
sales transactions which traditionally carry lower margins, thus lowering the
weighted average gross margin percent. Inventory reserves and allowances are
slightly lower in 2004 ($4.2 million) than 2003 ($4.8 million) due to the
Company's ability to sell off such older equipment as described above with very
little application of obsolescence reserves to the sales. The Company continues
to focus its sales efforts on specialty and niche lines.
II-3
Selling, general, and administrative expenses were $ 9,594,000 or 8.3
percent of revenues for fiscal 2004 compared to $9,955,000 or 9.7 percent of
sales for fiscal 2003. The decrease in selling, general, and administrative
expenses resulted in part from the concentrated effort by management to reduce
expenses primarily in the area of payroll and payroll related costs.
Interest expense for fiscal 2004 was $2,767,000, down from $3,363,000 in
fiscal 2003 due to a combination of a decrease in interest rates and lower
inventory levels. The Company has a inventory floor plan and operating line of
credit facility through GE Commercial Distribution Finance ("GE"), fka Deutsche
Financial Services. The agreement provided for a floating interest rate based on
prime with rates between 0.75% under prime to 2.25% over prime depending on the
amount of total debt leverage of the Company. This agreement expired on December
31, 2001. As of 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 was in default and required the Company to pay $45,000 fee to
GE for the forbearance. In addition, under the terms of the Forbearance
Agreement, the Company was required to meet certain financial covenants and meet
certain debt reduction schedules. The Forbearance Agreement expired on December
31, 2002. As of July 31, 2003 and July 31, 2004 the Company remained in
technical default of its loan agreement. As of August 12, 2004, the Company
entered into a Forbearance Agreement with GE, under the terms of which GE
lowered the interest rate to prime plus 1.75% and required the Company to pay
$25,000 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 agreement expires on
December 31, 2004. See LIQUIDITY AND CAPITAL RESOURCES below for a description
of the status of the GE facility. Management has used this facility to allow the
Company to take greater discounts and to lower overall interest expense and to
provide operating capital liquidity.
On September 15, 2004 the Company acquired Arizona Pacific Materials LLC, a
basalt and cinder mining company with operating mines in Phoenix and Flagstaff,
Arizona. The purchase price was $3 million of which $2.5 million is being
carried by the Seller as a note from the Company with interest at 5% and an
installment payment of $2,000,000 plus accrued interest in 13 months from the
date of purchase and the balance of principal and accrued interest due 19 months
from the date of purchase.
FISCAL YEAR 2003, AS COMPARED WITH FISCAL YEAR 2002
The Company reported net revenues for fiscal 2003 of $102,396,000 compared
with net revenues of $107,988,000 for fiscal 2002. Stores opened longer than 12
months showed an overall revenue decrease of 5.2 percent from prior year revenue
reflecting a general softening in economic conditions along with increased
competitive pressures. During 2003, there were no new stores opened or
additional store closures.
For fiscal 2003, the Company reported net income of $412,000 or $ .08 per
share compared with a net loss of $10,019,000 or $2.50 per share in fiscal 2002.
Included in the net loss for fiscal year 2002 were significant non-cash charges
of $3,796,000 for increases of inventory reserves and allowances, a $2,525,000
write-off of all goodwill, a $1,983,000 write-off of disputed vendor financing
discounts (receivables), and a $953,000 write-off of fixed assets.
Gross margin was 13.2 percent during fiscal 2003 which is higher than the
7.2 percent gross margin during fiscal 2002. The increase in 2003, is due in
part to managements successful efforts in reducing inventory levels,
particularly of older inventory which were sold at higher prices than their
marked down values. Also contributing to higher margins in 2003, are favorable
changes in sales mix, which reflect a greater number of sales/service
transactions with higher margins for repairs/servicing, parts and rental
equipment, and the partial recovery of a weakening economy. Inventory reserves
and allowances are lower in 2003 ($4.8 million) than 2002 ($7.8 million) due to
the sell off of such older equipment as described above. The Company continues
to focus its sales efforts on specialty and niche lines.
Selling, general, and administrative expenses were $ 9,955,000 or 9.7
percent of revenues for fiscal 2003 compared to $10,199,000 or 9.4 percent of
sales for fiscal 2002. The decrease in selling, general, and administrative
expenses resulted in part from the concentrated effort by management to reduce
expenses primarily in the area of payroll and payroll related costs.
Interest expense for fiscal 2003 was $3,363,000, down from $4,114,000 in
fiscal 2002 due to a combination of a decrease in interest rates and lower
inventory levels. The Company has a inventory floor plan and operating line of
credit
II-4
facility through GE Commercial Distribution Finance ("GE"), fka Deutsche
Financial Services. The agreement provided for a floating interest rate based on
prime with rates between 0.75% under prime to 2.25% over prime depending on the
amount of total debt leverage of the Company. The agreement expired on December
31, 2001. As of 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 was in default and required the Company to pay $45,000 fee to
GE for the forbearance. In addition, under the terms of the Forbearance
Agreement, the Company was required to meet certain financial covenants and meet
certain debt reduction schedules. The Forbearance Agreement expired on December
31, 2002. As of July 31, 2003 the Company remained in technical default of its
loan agreement. See LIQUIDITY AND CAPITAL RESOURCES below for a description of
the status of the GE facility. Management has used this facility to allow the
Company to take greater discounts and to lower overall interest expense and to
provide operating capital liquidity.
LIQUIDITY AND CAPITAL RESOURCES
The Company's primary needs for liquidity and capital resources are related
to its acquisition of inventory for sale and its rental fleet. The Company's
primary source of internal liquidity has been from its operations. As more fully
described below, 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 as well as the credit
facility with GE more fully described below.
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 upon sale of the
equipment. At July 31, 2004, the Company was indebted under manufacturer
provided floor planning arrangements in the aggregate amount of $ 14,561,000.
The Company has an inventory floor plan and operating line of credit with
GE which expired on December 31, 2001. The line of credit agreement has not been
renewed and the Company is operating under the agreement on a month to month
basis. Amounts are advanced against the Company's assets, including accounts
receivable, parts, new equipment, rental fleet, and used equipment. The
agreement provided for a floating interest rate based on prime with rates
between 0.75% under prime to 2.25% over prime depending on the amount of total
debt leverage of the Company. The Company uses this borrowing facility to lower
flooring related interest expense by using advances under such line to finance
inventory purchases in lieu of financing provided by suppliers, to take
advantage of cash purchase discounts from its suppliers, to provide operating
capital for further growth. Borrowings are collateralized by the Company's
assets, including accounts receivable, parts inventory, new and used equipment
inventory and rental equipment. As of July 31, 2004, approximately $31,710,000
was outstanding under the GE credit facility.
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 was 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 was required to meet certain financial covenants and meet certain debt
reduction schedules. The agreement expired on December 31, 2002. As July 31,
2003 and July 31, 2004, the Company remained in technical default of its loan
agreement. As of August 12, 2004, the Company entered into a Forbearance
Agreement with GE. The agreement expires on December 31, 2004.
During the year ended July 31, 2004, cash and cash equivalents remained
relatively constant. The Company had negative cash flow from operating
activities during the year of $ 1,899,000. The Company's cash flow from
operating activities consisted primarily of an increase in accounts receivable
of $2,293,000, a reduction of accounts payable of $2,752,000, depreciation of
$5,513,000, offset by an increase in inventories of $4,239,000. Purchases of
fixed assets during the period were related mainly to the ongoing replacement of
aged operating assets. The Company paid down its short-term financing by
$2,856,000 and increased its floor plan financing by $3,602,000 during the year.
The Company's cash and cash equivalents was approximately $9,309 as of July
31, 2004. The Company cannot fund current levels of operations without the
continued availability of borrowing from its current lender GE. Under the
existing credit facility, GE is entitled to all cash collections from the
Company's accounts receivable, which are applied as they are received by GE
against the total amount due GE from the Company under the credit facility. To
fund operations,
II-5
the Company must request advances from GE under its credit facility. Since the
Company has essentially no cash flow other than from accounts receivable (which
are remitted to GE), the Company cannot fund operations without borrowing from
GE. If GE decided to stop making borrowing available to the Company, the Company
would immediately be unable to continue its operations.
Although the Company and GE are in negotiations to extend or renew the
credit facility, 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. The Company continues to investigate alternative sources of financing
and/or capital infusion in an effort to meet its operational needs.
Our obligations and the period in which they are scheduled to become due
are set forth in the following table:
Due in Less Due in Due in Due after
Obligation Total Than 1 Year in 1-3 Years in 4-5 Years 5 Years
- ------------------------- ----------- ----------- ----------- ----------- -----------
Long Term Debt $ 71,271 $ 15,838 $ 47,514 $ 7,919 $ --
Capital Lease Obligation 1,466,908 110,908 388,000 264,000 704,000
Employment Contract
Obligations 1,842,387 614,129 1,228,258 -- --
Operating Leases 5,530,659 1,467,787 2,773,032 614,840 675,000
----------- ----------- ----------- ----------- -----------
Total Cash Obligations $ 8,911,225 $ 2,208,662 $ 4,436,804 $ 886,759 $ 1,379,000
=========== =========== =========== =========== ===========
As of July 31, 2004, our obligations included approximately $ 381,000 in various
state sales taxes.
RISK FACTORS
INVENTORY
Controlling inventory is a key ingredient to the success of an equipment
distributor because the equipment industry 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.
INFLATION
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,
agricultural, and industrial 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 construction and
industrial 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.
ECONOMIC CONDITIONS
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, agricultural, and industrial sectors.
An erosion in North American and/or other countries' economies could adversely
affect the Company's business. Market specific factors could also adversely
affect one or more of the Company's target markets and/or products.
SEASONALITY; FLUCTUATIONS IN RESULTS
II-6
Historically, sales of our products have varied substantially from quarter
to quarter due to the seasonality of the construction business. We attempt to
accurately forecast orders for our products and commence purchasing prior to the
receipt of such orders. However, it is highly unlikely that we will consistently
accurately forecast the timing and rate of orders. This aspect of our business
makes our planning inexact and, in turn, affects our shipments, costs,
inventories, operating results and cash flow for any given quarter. In addition,
our quarterly operating results are affected by competitive pricing,
announcements regarding new product developments and cyclical conditions in the
industry. Accordingly, we may experience wide quarterly fluctuations in our
operating performance and profitability, which may adversely affect our stock
price even if our year-to-year performance is more stable, which it also may not
be. In addition, many of our products require significant manufacturing
lead-time, making it difficult to order products on short notice. If we are
unable to satisfy unexpected customer orders, our business and customer
relationships could suffer and result in the loss of future business.
INVENTORY LEAD-TIMES; POTENTIAL WRITE-DOWNS
To be competitive in certain of its markets, particularly markets for
products with long lead time, the Company will be required to build up
inventories of certain products in anticipation of future orders. There can be
no assurance that the Company will not experience problems of obsolete, excess,
or slow-moving inventory if it is not able to properly balance inventories
against the prospect of future orders, and the Company's operations may,
therefore, be adversely affected by inventory write-downs from time to time. In
periods of general economic slowdown or slowdowns in the construction sector we
could be especially affected by such problems.
WRITE-DOWNS OF GOODWILL AND INTANGIBLES
Goodwill and other intangible assets are reviewed for impairment whenever
an event or change in circumstances indicates that the carrying amount may not
be recoverable. If the carrying value of the Company's intangible assets exceeds
the expected undiscounted future cash flows, a loss is recognized to the extent
the carrying amount of assets exceeds their fair values.
COMPETITION
Many of the Company's existing and potential competitors have substantially
greater marketing, financial, and service resources than the Company has. In
addition, some of the Company's competitors have broader product offerings,
placing the Company at a disadvantage to some of its competitors. In addition,
the Company believes that some of its competitors have obtained and maintained
business that loses money - "loss leading" - in order to maintain a competitive
advantage with regard to specific customers or products. If the Company's
competitors were to use such tactics in the future, the Company would be unable
to maintain its market position without incurring a negative impact on its
profitability.
CYCLICALITY OF INDUSTRY
The construction equipment industry is always very competitive. Advances in
technology may reduce the cost for current or potential competitors to gain
market share, particularly for lower priced products. We cannot guarantee that
sales of our products will continue at current volumes or prices in any event,
but especially if our current competitors or new market entrants introduce new
products with better features, better performance, or lower prices or having
other characteristics that are more attractive than our own. Competitive
pressures or other factors also may result in significant price competition that
could have a material adverse effect on our results of operations.
DEPENDENCE UPON THIRD-PARTY MANUFACTURERS
All of our products are supplied by third parties. From time to time, we
experience delays and disruptions in our supply chain. To date, these delays and
disruptions have not materially adversely affected our business, but they could
do so in the future. Wherever possible, we try to assure ourselves of adequate
inventory supply, but we do not always succeed. To the extent that we experience
significant supply or quality control problems with our vendors, these problems
can have a significant adverse effect on our ability to meet future delivery
commitments to our customers.
II-7
Currently, Case Corporation provides approximately 53% of our products.
Case dealer contracts are non-exclusive and terminable by either party upon
minimum notice. There can be no assurances that Case will continue to supply the
Company with products or continue its relationship with the Company. If we are
unable to obtain Case products or to continue our relationship with Case, we
will likely experience reductions in product and service sales and increased
expenses. Our operations will be negatively affected if we experience inadequate
supplies of any key products.
RECENT ACCOUNTING STANDARDS
The following pronouncement have been issued by the FASB.
In January 2003, as revised in December 2003, the FASB issued Interpretation No.
46 ("FIN 46"), "Consolidation of Variable Interest Entities, an Interpretation
of ARB No. 51." FIN 46 requires certain variable interest entities to be
consolidated by the primary beneficiary of the entity if the equity investors in
the entity do not have the characteristics of controlling financial interest or
do not have sufficient equity at risk for the entity to finance its activities
without additional subordinated financial support from other parties. FIN 46 is
effective for all new variable interest entities created or acquired after
January 31, 2003. For variable interest entities created or acquired prior to
February 1, 2003, the provisions of FIN 46 must be applied for the first interim
or annual period beginning after March 15, 2004. The effect of the adoption of
this new accounting pronouncement did not have a significant impact on the
Company's consolidated financial statements for the year ended July 31, 2004.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
The Company's significant accounting policies are described in Note 1 to the
financial statements included in Item 14 of the Annual Report on Form 10-K. Our
financial statements and accompanying notes are prepared in accordance with U.S.
GAAP. Preparing financial statements requires management to make certain
estimates and assumptions that affect the reported amounts of assets,
liabilities, revenue and expenses. These estimates and assumptions are affected
by management's application of accounting policies.
The estimates for inventory obsolescence reserves are developed to provide for
allowances in recognition of decreasing market prices for aged equipment
inventory using inventory aging reports for new and used equipment, combined
with available market prices for comparable equipment, historical and forecasted
sales information. As trends in these variables change, the percentages applied
to the inventory aging categories are updated.
The estimates for impairments of goodwill are derived in accordance with
Statement of Financial Accounting Standards No. 142, "Accounting for Goodwill
and other Intangibles." The Company continually reviews goodwill and other
intangibles to evaluate whether events or changes have occurred that would
suggest an impairment.
Also in accordance with Statement of Financial Accounting Standards No. 144,
"Accounting for the Impairment of Long-Lived Assets to be Disposed Of" estimates
related to the impairment in the value of the long-lived assets are reviewed at
each balance sheet date. The amount of any such impairment is determined by
comparing anticipated undiscounted future cash flows from operating activities
with the associated carrying value. The factors considered by management in
performing this assessment include operating results, trends and prospects, as
well as the effects of obsolescence, demand, competition, and other economic
factors.
Some amount of judgement is required to assess the ultimate realization of
receivables, including assessing the probability of collection and the current
credit worthiness of our clients. Probability of collection is based upon the
assessment of the client's financial condition through review of its current
financial statements and/or credit reports. The estimate of allowance for
doubtful accounts is comprised of two parts, a specific account analysis and a
general reserve. Accounts where specific information indicates a potential loss
may exist are reviewed and a specific reserve against amounts due is recorded.
As additional information becomes available such specific account reserves are
updated. Additionally, a general reserve is applied to the aging categories
based on historical collection and write-off experience. As trends in historical
collection and write-offs change, the percentages applied against the accounts
receivable aging categories are updated.
DIVIDEND POLICY
II-8
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.
FORWARD LOOKING STATEMENTS
Information included within this section relating to growth projections and
future results and events constitutes forward-looking statements. Actual results
in future periods may differ materially from the forward-looking statements
because of 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 entry into new markets; the success of the Company's
expansion of its 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; governmental
regulations and environmental matters; risks associated with regional, national,
and world economies. Any forward-looking statements should be considered in
light of these factors.
II-9
ITEM 7A. 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 July 31, 2004, the Company
had variable rate floor plan payables, notes payable, and long-term debt of
approximately $47.2 million. Holding other variables constant, the pre-tax
earnings and cash flow impact for the next year resulting from a one percentage
point increase in interest rates would be approximately $0.47 million. The
Company's policy is not to enter into derivatives or other financial instruments
for trading or speculative purposes.
II-10
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
-------------------------------------------
The following financial statements and financial schedules are attached to
this Report on Form 10-K following Part IV, Item 14:
Consolidated Statements of Operations for
the years ended July 31, 2004, 2003, and 2002 F-1
Consolidated Balance Sheets as of July 31, 2004 and 2003 F-2
Consolidated Statements of Stockholders' Equity/(Deficit)
for the years ended July 31, 2004, 2003, and 2002 F-3
Consolidated Statements of Cash Flows for
the years ended July 31, 2004, 2003, and 2002 F-4
Notes to Consolidated Financial Statements F-5
Report of Independent Auditors' F-17, F-18, F-19
Financial Statement Schedule:
Report of Independent Registered Public Accounting
Firms - Financial Statement Schedule F-20, F-21, F-22
Schedule II - Valuation and Qualifying Accounts F-23
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
---------------------------------------------------------------
FINANCIAL DISCLOSURE
--------------------
Western Power & Equipment Corp. engaged Marcum & Kliegman LLP as its
new independent registered public accounting firm as of May 1, 2003.
During the two fiscal years and the subsequent interim period prior to
the engagement of Marcum & Kliegman LLP on May 1, 2003, Western Power
& Equipment Corp. did not consult with Marcum & Kliegman LLP regarding
the application of accounting principles to any specific transaction,
whether completed or proposed; on the type of audit opinion that might
be rendered on Western Power & Equipment Corp.'s financial statements;
or on any matter that was either the subject of a disagreement or a
reportable event.
ITEM 9A. CONTROLS AND PROCEDURES
-----------------------
We maintain disclosure controls and procedures that are designed to
ensure that information required to be disclosed in our Exchange Act
reports is recorded, processed, summarized and reported within the
time periods specified in the Securities and Exchange Commission's
rules and forms and that such information is accumulated and
communicated to our management, including our CEO and CFO, as
appropriate, to allow for timely decisions regarding required
disclosure. In designing and evaluating the disclosure controls and
procedures, management recognizes that any controls and procedures, no
matter how well designed and operated, can provide only reasonable
assurance of achieving the desired control objectives, and management
is required to apply its judgment in evaluating the cost-benefit
relationship of possible controls and procedures.
As required by SEC Rule 13a-15(b), we carried out an evaluation, under
the supervision and with the participation of our management,
including our CEO and CFO, of the effectiveness of the design and
operation of our disclosure controls and procedures as of the end of
the period covered by this report. Based on the foregoing, the CEO and
CFO concluded that our disclosure controls and procedures were
effective at the reasonable assurance level.
There has been no change in our internal controls over financial
reporting during the most recent fiscal quarter that has materially
affected, or is reasonably likely to materially affect, our internal
controls over financial reporting.
II-11
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF REGISTRANT
----------------------------------------------
Directors
The following table sets forth the name and age of each of the Company's
directors, as well as the length of time which each director has served.
Name Age Director Since
--------------------------- --- --------------
Robert M. Rubin 63 1992
C. Dean McLain 50 1993
Michael Metter 53 2003
Steven Moskowitz 40 2003
ROBERT M. RUBIN. Mr. Rubin has been the Chief Executive Officer of American
United Global, Inc. ("AUGI"), an approximately 12% stockholder of the Company,
since October 1990, and also served as Chairman of AUGI from October 1990 to
present. Mr. Rubin served as the Chairman of the Board of Directors of the
Company from November 20, 1992 to August 1, 1998. Mr. Rubin is also a director
of Medimerge, Inc. Mr. Rubin was Chairman of the Board 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. ERD Waste Technology filed for Chapter
11 bankruptcy reorganization in the year 2000. Mr. Rubin also served for
approximately five years as an Officer and Director of Style Site Inc., which
filed for bankruptcy in January 2001.
C. DEAN MCLAIN. Mr. McLain has served as President, Chief Executive Officer, and
a director of the Company since March 7, 1993. Mr. McLain was elected Chairman
of the Board of Directors effective August 1, 1998. 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 January
1990 through 1993 Mr. McLain served as Manager of Privatization of Case
Corporation.
MICHAEL METTER. Mr. Metter has served as director since February 11, 2003. Since
April 2001, Mr. Metter has been the President of RME International, Ltd. (RME).
Mr. Metter also currently consults to a broad range of businesses, including IT
communications and media businesses, on mergers, acquisitions, restructuring,
financing and other matters. From October 1998 to February 2001, Mr. Metter was
a principal of Security Capital Trading, Inc., and was a principal at Madison
Capital from September 1997 to October 1998. Prior thereto, Mr. Metter was
President of First Cambridge Securities from October 1994 to August 1997.
Effective with a merger of a division of R.M. Enterprises International, Ltd
into Azurel, Ltd., in October 2002, Mr. Metter became President and COO of
Azurel. He resigned as President in February 2003 and subsequently resigned the
position of COO which he held from February 2003 until June 28, 2003. Mr. Metter
is also President and CEO of BusinessTalkRadio.net (a private company). BTR is a
syndicated radio network based in Greenwich, Connecticut. He has held this
position since June 2002. He is also chairman of Tiburon Capital Group, a
privately held holding corporation.
STEVEN MOSKOWITZ. Mr. Moskowitz has served as director since February 11, 2003.
Since 1997, Mr. Moskowitz has been the Vice-President of Business Development
for H.W. Carter and Sons. Prior thereto, Mr. Moskowitz was Division President of
Evolutions. Mr. Moskowitz is currently a director and secretary for Spongetech.
He previously served as the CEO and a director of Azurel, Ltd from October 2002
through September 2003. Mr. Moskowitz also is currently an independent director
for R.M. Enterprises International, Ltd. He is also Executive Vice President of
Tiburon Capital Group, a privately held holding corporation.
Audit Committee Financial Expert
--------------------------------
The Company's board of directors has determined that at least one audit
committee financial expert is serving on its audit committee. Mr. Metter, is a
financial expert and is independent as that term is used in Item 7(d)(3)(iv) of
Schedule 14A under the Exchange Act.
III-1
Code of Ethics
--------------
The Company has adopted a code of ethics that applies to its chief
executive officer and chief financial officer and other key financial personnel.
The code of ethics can be viewed at the Company's website, www.westernpower.com.
The Company intends to satisfy the disclosure requirements under item 10 of Form
8-K regarding an amendment to, or a waiver from, a provision of its code of
ethics by putting such information on its Internet website.
ITEM 11. EXECUTIVE COMPENSATION
----------------------
The Compensation Committee of the Board of Directors (the "Committee") is
currently composed of two non-employee directors. The Committee reviews the
compensation of the Company's officers and key employees and the granting of
stock options under the Company's stock option plans and makes recommendations
to the Board of Directors for action on these matters. During the fiscal year
ended July 31, 2004, the Company's Board of Directors decided all compensation
matters relating to the Company's executive officers.
The key objectives of the Company's executive compensation policies are to
attract and retain key executives who are important to the long-term success of
the Company and to provide incentives for these executives to achieve high
levels of job performance and enhancement of shareholder value. The Company
seeks to achieve these objectives by paying its executives a competitive level
of base compensation for companies of similar size and industry and by providing
its executives an opportunity for further reward for outstanding performance in
both the short term and the long term. The Company has entered into an
employment agreement with Mr. McLain that covers a multiple year term (see
"Chief Executive Officer Compensation," below). The compensation of Mr. Wright
is based on an employment agreement dated August 1, 2000. Mr. Rubin, previously
compensated under an employment contract (see "Employment, Consulting and
Incentive Compensation Agreements," below), entered into a consulting agreement
with the Company on August 1, 1998 after he ceased to be an executive officer of
the Company on July 31, 1998 and entered into another consulting agreement on
August 1, 2000 when the original consulting agreement expired.
Executive Officer Compensation. The Company's executive officer
compensation program is comprised of three elements: base salary, annual cash
bonus and long-term incentive compensation in the form of stock option grants.
Salary. The Committee and the Board of Directors established base salaries
for the Company's executive officers, including the salary established in Mr.
McLain's employment agreement, after taking into account individual experience,
job responsibility and individual performance during the prior year. These
factors are not assigned a specific weight in establishing individual base
salaries. The Committee also considered the Company's executive officers'
salaries relative to salary information for executives in similar industries and
similarly sized companies.
Cash Bonuses. The purpose of the cash bonus component of the compensation
program is to provide a direct financial incentive in the form of cash bonuses
to executives. Mr. McLain's bonus is derived under the performance formula set
forth in his employment contract described under "Employment and Incentive
Compensation Agreements" below.
Stock Options. Stock options are the primary vehicle for rewarding
long-term achievement of Company goals. The objectives of the program are to
align employee and shareholder long-term interests by creating a strong and
direct link between compensation and increases in share value. Under the
Company's 1995 Employee Stock Option Plan, the Board of Directors or the
Compensation Committee may grant options to purchase Common Stock of the Company
to key employees of the Company. Messrs. McLain and Wright currently participate
in the 1995 Employee Stock Option Plan. The number of options granted to Mr.
McLain are determined under the terms of his employment agreement. The number of
options granted to Mr. Wright are determined by the Compensation Committee on a
discretionary basis. The options generally vest in increments over a period of
years established at the time of grant.
Chief Executive Officer Compensation. In August 2000 the Company entered
into an new employment agreement with its chief executive officer, Mr. McLain,
to ensure the retention of his services and to encourage him to perform at
increasing levels of effectiveness and to use his best efforts to promote the
growth and profitability of the Company. This approach enabled the Board to
concentrate on the negotiation of a particular employment contract with salary,
incentive bonus and stock option components that reflect a longer term view of
the Company's prospects and goals. See "Employment, Consulting and Incentive
Compensation Agreements" for a complete description of the employment agreements
and the compensation and benefits provided thereunder.
III-2
Summary Compensation Table
The following table sets forth the amount of all compensation paid during
each of the last three fiscal years to the Chief Executive Officer and to each
of the Company's other executive officers for services in all capacities to the
Company.
Long-Term
Compensation
Annual Compensation Awards
-------------------------- ---------------------------------------
Other Annual Number of All Other
Name and Principal Position Year Salary Bonus Compensation Options Compensation
- --------------------------- ---- -------- -------- ------------ --------- ------------
Robert M. Rubin 2004 -- -- -- -- $200,000
Consultant; former Chairman(1) 2003 -- -- -- -- $615,413
2002 -- -- -- -- $332,000
C. Dean McLain 2004 $424,805 $189,491 $ 858 -- --
President, CEO, Chairman 2003 $399,633 $ 15,000 -- -- $415,413
of the Board(2) 2002 $393,300 $135,000 $ 967 -- $ 31,199
Mark J. Wright 2004 $190,618 $ 10,000 $ 9,000 -- --
Vice President of Finance 2003 $208,255 $ 75,000 -- -- --
and CFO 2002 $176,481 $ 75,000 $ 9,000 -- $ 7,718
(1) The Company entered into a seven (7) year consulting agreement with Mr.
Rubin effective August 1, 2000 which pays Mr. Rubin a base salary of
$200,000 plus all authorized business expenses in the first year, followed
by a 3% raise in each successive year of the contract. See "Employment,
Consulting and Incentive Compensation Agreements," below. In addition,
pursuant to shareholder approval at the 2002 Annual Meeting of the
Stockholders, 600,000 shares of the Company's common stock were issued to
the Rubin Family Irrevocable Stock Trust in lieu of compensation to Mr.
Rubin. The fair market value of the shares at the date of issuance was
$0.22 per share, resulting in a compensation charge to the Company in the
amount of $132,000. On May 1, 2003 Mr. Rubin agreed to convert the
principal amount of a loan made to the Company in the amount of $73,500
into shares of the Company's common stock. In connection therewith The
Rubin Family Irrevocable Stock Trust received 2,769,419 shares of the
Company's common stock resulting in a compensation charge to the Company in
the amount of $415,413.
(2) Mr. McLain joined the Company in March 1993, when he became its Chief
Executive Officer. On July 31, 1995, Mr. McLain was permitted to and did
purchase from AUGI 6,000 shares of AUGI's common stock at a price of $.01
per share. On August 1, 1995, the closing price for a share of AUGI's
common stock as reported by NASDAQ was $4.875. 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 commenced at $250,000 for
fiscal 1996, and increased to $300,000 for fiscal 2000. His employment
agreement also calls for Incentive Bonuses under certain circumstances.
Effective as of August 1, 2000 Mr. McLain's employment agreement with the
Company was terminated and he entered into a new employment agreement
expiring July 31, 2007. The base salary under this employment agreement
commences at $390,000 and increases yearly based upon the average
percentage increase in salary for all employees of Employer for the current
fiscal year over the previous fiscal year. His employment agreement also
calls for Incentive Bonuses under certain circumstances. See "Employment,
Consulting and Incentive Compensation Agreements" below. Mr. McLain became
Chairman effective August 1, 1998. On May 1, 2003 Mr. McLain agreed to
convert the principal amount of a loan made to the Company in the amount of
$73,500 into shares of the Company's common stock. In connection therewith
Mr. McLain received 2,769,419 shares of the Company's common stock
resulting in a compensation charge to the Company in the amount of
$415,413.
III-3
Option Grants in Last Fiscal Year
The following table provides information regarding individual grants of
stock options to each executive officer in fiscal 2004.
Individual Grants Potential Realizable Value
% of Total Options at Assumed Annual
Granted to Employees Rates of Stock Price
Options in Fiscal Exercise Expiration Appreciation for term
Name Granted Year Price Date 5% 10%
- --------------- ------- -------------------- -------- ---------- ------ -------
C. Dean McLain -- N/A N/A N/A N/A N/A
Robert M. Rubin -- N/A N/A N/A N/A N/A
Mark J. Wright -- 100,000 $ .35 11/14/13 $22,011 $55,781
Option Exercises in Last Fiscal Year and Fiscal Year-End Option Values
The following table provides information concerning the exercise of stock
options during the fiscal 2004 by each executive officer and the fiscal year-end
value of unexercised options held by that officer.
Value of
Number of Unexercised Unexercised In-
Shares Options at the-money options
Acquired on Value Fiscal Year-End at Fiscal Year-End
Name Exercise Realized Exercisable/Unexercisable Exercisable/Unexercisable
- ---------------- ----------- -------- ------------------------- -------------------------
C. Dean McLain -- -- 500,000 N/A
Robert M. Rubin -- -- 500,000 N/A
Mark J. Wright -- -- 200,000 N/A
Employment, Consulting and Incentive Compensation Agreements
Upon completion of the Company's 1995 initial public offering, the Company
entered into an employment agreement with Mr. Rubin, effective as of June 13,
1995, that expired July 31, 1998. Pursuant to this agreement, Mr. Rubin served
as Chairman of the Board of the Company and received an annual base salary of
$150,000 plus bonuses if certain conditions were met. Effective August 1, 1998,
the Company entered into a new two-year agreement with Mr. Rubin. Under the
terms of this agreement, Mr. Rubin no longer served as Chairman, but provided
consulting services to the Company. He received an annual fee of $200,000 plus
all authorized business expenses. The Company then entered into a new seven (7)
year consulting agreement with Mr. Rubin effective August 1, 2000 paying him
$200,000 plus all authorized business expenses in the first year, followed by a
3% raise in each successive year of the contract.
Effective as of August 1, 2000 Mr. McLain entered into an employment
agreement expiring July 31, 2007. The base salary under this employment
agreement commences at $390,000 and increases yearly based upon the average
percentage increase in salary for all employees of Employer for the current
fiscal year over the previous fiscal year. His employment agreement also calls
for Incentive bonuses under certain circumstances. Mr. McLain received a
$197,000
III-4
bonus during the Company's 2004 fiscal year. In addition, Mr. McLain receives
the use of vehicles at Company expense and certain other fringe benefits not
exceeding $50,000 per year.
Compensation Committee Interlocks and Insider Participation
The Compensation Committee consists of Mr. Moskowitz and Mr. Metter. There
are no interlocking relationships, as described by the Securities and Exchange
Commission, between the Compensation Committee members. Mr. McLain, the Chairman
of the Board of Directors since August 1998, as well as its President and CEO,
and Mr. Rubin, the Chairman of the Board of Directors before Mr. McLain, and
currently a director and consultant for the Company, participated in all
discussions and decisions regarding salaries and incentive compensation for all
employees and consultants to the Company, except that they were each excluded
from discussions regarding their own salary.
Directors' Compensation
Each director, not otherwise a full time employee of the Company, is
eligible to receive $1,500 per quarter, together with reimbursement of their
reasonable expenses incurred on the Company's behalf.
ITEM 12. SECUTITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
------------------------------------------------------------------
RELATED STOCKHOLDER MATTERS
---------------------------
Security Ownership of Certain Beneficial Owners
The following table sets forth certain information, as of the date hereof, with
respect to the beneficial ownership of our common stock by each: (i) holder of
more than five percent (5%) of the outstanding shares of our common stock; (ii)
our officers and directors; and (iii) all our officers and directors as a group.
The Company's outstanding voting securities at the close of business on October
25, 2004, consisted of 10,130,000 shares of common stock, $.001 par value (the
"Common Stock"), each of which is entitled to one vote on all matters to be
presented at the Annual Meeting. The Common Stock does not have cumulative
voting rights. Unless otherwise indicated, the address of each of the named
persons is care of Western Power & Equipment Corp., 6407-B North East 117th
Avenue, Vancouver, WA 98662.
Name and Address Shares Percentage
- ---------------- Beneficially Owned(1) Beneficially Owned
--------------------- ------------------
C. Dean McLain(2)(6)(7) 3,857,419 38.1%
Robert M. Rubin(3)(4)(6) 500,000 4.9%
The Rubin Family Irrevocable Stock
Trust(4) 3,369,419 33.3%
Mark J. Wright(5) 200,000 2.0%
Steven Moskowitz(10) 50,000 *
Michel Metter(9) 50,000 *
American United Global, Inc.
11108 NE 106th Place
Kirkland, WA 98033 1,222,586 12.1%
JSC, LLC(7)
38207 NE Gerber Rd.
Yacolt, WA 98675 588,000 5.8%
All officers and directors as a group
(5 persons)(8) 4,657,419 46.0%
* less than one percent
III-5
(1) Unless otherwise indicated, we believe that all persons named in the table
have sole voting and investment power with respect to all shares of the
Company's common stock beneficially owned by them. A person is deemed to be the
beneficial owner of securities which may be acquired by such person within 60
days from the date on which beneficial ownership is to be determined, upon the
exercise of options, warrants or convertible securities. Each beneficial owner's
percentage ownership is determined by assuming that options, warrants and
convertible securities that are held by such person (but not those held by any
other person) and which are exercisable within such 60 day period, have been
exercised.
(2) Includes Mr. McLain's direct beneficial ownership of exercisable options to
acquire 500,000 shares of the Company's common stock. Excludes Mr. McLain's
indirect ownership in the Company through his beneficial ownership of options to
purchase 362,000 shares of AUGI common stock. Mr. McLain's beneficial ownership
of AUGI common stock represents 18.1 percent of AUGI voting stock as of October
27, 2004.
(3) Includes Mr. Rubin's direct beneficial ownership of exercisable options to
acquire 500,000 shares of the Company's common stock. Excludes the shares of the
Company's common stock held by the Rubin Family Irrevocable Stock Trust (the
"Trust"). Excludes Mr. Rubin's indirect ownership in the Company through his
beneficial ownership of 80 shares and options to purchase 33,600 shares of AUGI
common stock. Mr. Rubin's beneficial ownership of AUGI common stock represents
1.7 percent of AUGI voting stock as of October 27, 2004.
(4) Mr. Rubin, a grantor of the Trust, does not have sole or shared voting or
dispositive power over the shares of the Company's common stock held by the
Trust, and disclaims any beneficial ownership of the shares of the Company's
common stock held by the Trust.
(5) Includes options to purchase 200,000 shares of the Company's common stock.
(6) On May 1, 2003, Mr. McLain and the Rubin Family Irrevocable Stock Trust
agreed to convert the principal amount of a loan made to the Company in the
amount of $147,000 into an aggregate of 5,538,838 shares of the Company's common
stock, as a result of which Mr. McLain and the Rubin Family Irrevocable Stock
Trust each received 2,769,419 shares of the Company's common stock.
(7) Includes 588,000 shares beneficially owned by JSC. Through JSC LLC Mr.
McLain has sole or shared voting or dispositive power over the shares of the
Company's common stock beneficially owned by JSC LLC.
(8) Includes the shares of the Company's common stock held by American United
Global, Inc. ("AUGI"), a company of which Mr Rubin is the chief executive
officer and chairman of the board of directors and of which Mr. Mc Lain is a
director.
(9) Excludes Mr. Metter's indirect ownership in the Company through his
ownership of exercisable options to acquire 150,000 shares of AUGI, the
Company's principal stockholder. Mr. Metter's beneficial ownership of AUGI
voting stock represents 7.5 percent of AUGI voting stock as of October 27, 2004.
Includes options to purchase 50,000 shares of the Company's common stock.
(10) Includes options to purchase 50,000 shares of the Company's common stock.
Security Ownership of Management
The following table, which was prepared on the basis of information
furnished by the persons described, shows ownership of the Common Stock as of
October 27, 2004 by the Chief Executive Officer, by each of the other executive
officers, by each of the directors, and by the executive officers and directors
as a group.
III-6
Shares Held By Directors and Named Executive Officers
Set forth in the table below is information concerning the ownership, as of
the close of business on October 27, 2004, of the Common Stock by the Company's
directors and Named Executive Officers and all directors and present executive
officers as a group.
- --------------------------------------------------------------------------------
Amount and Nature of
Name and Address Beneficial Ownership(1) Percent (1)
- --------------------------------------------------------------------------------
C. Dean McLain (2) 3,857,419 38.1%
Mark J. Wright (3) 200,000 2.0%
Robert M. Rubin (4) 500,000 4.9%
- --------------------------------------------------------------------------------
All directors and executive
officers as a group (3 persons) 4,657,419 46.0%
- --------------------------------------------------------------------------------
(1) Unless otherwise indicated, the Company believes that all persons named in
the table have sole voting and investment power with respect to all shares
of Common Stock beneficially owned by them. A person is deemed to be the
beneficial owner of securities which may be acquired by such person within
60 days from the date on which beneficial ownership is to be determined,
upon the exercise of options, warrants or convertible securities. Each
beneficial owner's percentage ownership is determined by assuming that
options, warrants and convertible securities that are held by such person
(but not those held by any other person) and which are exercisable within
such 60 day period, have been exercised.
(2) Excludes Mr. McLain's indirect ownership in the Company through his
beneficial ownership of options to purchase 362,000 shares of AUGI common
stock. Includes Mr. McLain's direct beneficial ownership exercisable
options to acquire 500,000 shares of the Company's common stock and 588,000
shares of the Company's common stock held by the JSC LLC. Mr. McLain's
beneficial ownership of AUGI common stock represents 2.4 percent of AUGI
voting stock as at October 27, 2004.
(3) Includes exercisable stock options to purchase 200,000 shares of common
stock of the Company issued to Mr. Wright for services rendered to the
Company.
(4) Includes Mr. Rubin's direct beneficial ownership of exercisable options to
acquire 500,000 shares of the Company's common stock. Excludes the shares
of the Company's common stock held by the Rubin Family Irrevocable Stock
Trust (the "Trust"). Excludes Mr. Rubin's indirect ownership in the Company
through his beneficial ownership of 80 shares and options to purchase
33,600 shares of AUGI common stock. Mr. Rubin's beneficial ownership of
AUGI common stock represents 1.7 percent of AUGI voting stock as of October
27, 2004.
Shares Held by Certain Other Stockholders
The following table sets forth, as of the close of business on October 27, 2004,
certain information with respect to each person who is known to the Company to
be the beneficial owner of more than five (5%) percent of the Common Stock,
other than the directors set forth in the Directors and Named Executive Officers
Ownership Table above.
III-7
- -----------------------------------------------------------------------------
Amount and Nature of
Name and Address Beneficial Ownership(1) Percent(1)
- -------------------------------------- ------------------------- ----------
American United Global, Inc.
("AUGI")
2489 152nd Avenue NE
Richmond, WA, 98052 (2) 1,222,586 10.3%
- -----------------------------------------------------------------------------
(1) Unless otherwise indicated, the Company believes that all persons named in
the table have sole voting and investment power with respect to all shares
of Common Stock beneficially owned by them. A person is deemed to be the
beneficial owner of securities which may be acquired by such person within
60 days from the date on which beneficial ownership is to be determined,
upon the exercise of options, warrants or convertible securities. Each
beneficial owner's percentage ownership is determined by assuming that
options, warrants and convertible securities that are held by such person
(but not those held by any other person) and which are exercisable within
such 60 day period, have been exercised.
(2) Mr. Rubin has been the Chief Executive Officer of American United Global,
Inc. ("AUGI"), the Company's majority shareholder, since October 1990, and
also served as Chairman of AUGI from October 1990 until January 1996. 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.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
----------------------------------------------
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 $1,500,000 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 March 1, 1996 with the Company paying an initial annual rate of
$168,000. As of October 1, 2000, the Company entered into a renegotiated 7-year
lease with an initial annual rate of $228,000. 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. The new lease qualifies for treatment as an operating lease.
In February 1999, the real property and improvements used in connection with the
Company's Sparks, Nevada operation and upon which such operation is located,
were sold by the Company to McLain-Rubin Realty, L.L.C. (MRR) under the terms of
a real property purchase and sale agreement. MRR is a Delaware limited liability
company the owners of which are Messrs. C. Dean McLain, the President and
Chairman of the Company, and Robert M. Rubin, a director of the Company. The
sale price was $2,210,000 in cash at closing. Subsequent to the closing of the
sale, the Company entered into a 20-year commercial lease agreement with MRR for
the Sparks, Nevada facility at an initial rental rate of $252,000 per year. The
lease is a net lease with payment of insurance, property taxes and maintenance
costs paid by the Company. The sale resulted in a deferred gain which will be
amortized over the life of the lease pursuant to generally accepted accounting
principles. As of October 1, 2000, the Company entered into a renegotiated
7-year lease with an initial annual rate of $276,000. The new lease qualifies
for treatment as an operating lease and the remainder of the deferred gain which
was previously being amortized over the life of the cancelled lease was all
recognized in the first quarter of fiscal year 2001.
On April 1, 2001, the Company entered into a lease with McLain-Rubin Realty
Company II, LLC ("MRR II"), 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, for a 5-year
lease on its Vancouver, Washington corporate office with an annual rate of
$98,000. 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
III-8
maintenance) with respect to the leased real property during the term of the
lease. The lease qualifies for treatment as an operating lease.
On July 30, 2002, pursuant to shareholder approval at the 2002 Annual Meeting of
the Stockholders, 600,000 shares of the Company's common stock were issued to
the Rubin Family Irrevocable Stock Trust in lieu of compensation to Mr. Rubin.
The fair market value of the shares at the date of issuance was $0.22 per share,
resulting in a compensation charge to the Company in the amount of $132,000.
On March 24 2003, Mr. McLain agreed to convert the accrued and unpaid interest
on a loan made to the Company in the amount of $147,000 into shares of the
Company's common stock. In connection therewith Mr. McLain received 588,000
shares of the Company's common stock with a value of $ 82,000.
On May 1, 2003, Mr. McLain and The Rubin Family Irrevocable Stock Trust agreed
to convert the principal amount of a loan made to the Company in the amount of
$147,000 into an aggregate of 5,538,838 shares of the Company's common stock. In
connection therewith The Rubin Family Irrevocable Stock Trust received 2,769,419
shares of the Company's common stock and Mr. McLain received 2,769,419 shares of
the Company's common stock resulting in a compensation charge to the Company of
$831,000.
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES.
---------------------------------------
AUDIT FEES
The aggregate fees billed by Marcum & Kliegman LLP for the audit of our annual
financial statements for the fiscal year ended July 31, 2004 and the reviews of
the financial statements included in our Forms 10-Q for the fiscal year ended
July 31, 2004 were $ 107,525.
The aggregate fees billed by Marcum & Kliegman LLP for the audit of our annual
financial statements for the fiscal year ended July 31, 2003 and the reviews of
the financial information included in our Forms 10-Q for the fiscal year ended
July 31, 2003 were $ 134,232.
AUDIT RELATED FEES
No fees were billed by Marcum & Kliegman LLP for the fiscal years ended July 31,
2004 or July 31, 2003 for services related to the audit or review of our
financial statements that are not included under the caption "Audit Fees".
No fees were billed by Marcum & Kliegman LLP for the fiscal years ended July 31,
2004 or July 31, 2003 for designing, operating, supervising or implementing any
of our financial information systems or any hardware or software systems for our
financial information.
TAX FEES
No fees were billed by Marcum & Kliegman LLP for tax compliance, tax advice and
tax planning in the fiscal year ended July 31, 2004.
No fees were billed by Marcum & Kliegman LLP for tax compliance, tax advice and
tax planning in the fiscal year ended July 31, 2003.
ALL OTHER FEES
No fees were billed by Marcum & Kliegman LLP for any other services rendered by
them during the fiscal years ended July 31, 2004 and July 31, 2003.
Since January 1, 2003, the audit committee has adopted policies and procedures
for pre-approving all non-audit work performed by the auditors. Specifically,
the committee must pre-approve the use of the auditors for all such services.
The audit committee has pre-approved all non-audit work since that time and in
making its determination has considered whether the provision of such services
was compatible with the independence of the auditors.
III-9
Our audit committee believes that the provision by Marcum & Kliegman LLP of
services in addition to audit services in fiscal 2004 and 2003 were compatible
with maintaining their independence.
III-10
PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
---------------------------------------------------------------
(A) 1. FINANCIAL STATEMENTS.
A list of financial statements filed as part of this report is
identified in Part II, item 8.
Report of Independent Auditors' - Financial Statement Schedule
Schedule II - Valuation and Qualifying Accounts
2. EXHIBITS.
EXHIBIT
NUMBER DESCRIPTION
3.1 Certificate of Incorporation of Registrant. (2)
3.2 By-laws of Registrant. (2)
10.1 1995 Employee Stock Option Plan. (3)
10.2 Second Amended and Restated Stock Option Plan for Non-Employee
Directors. (3)
10.3 Case New Dealer Agreement Package. (1)
10.4 Lease Agreement--Hayward, California. (2)
10.5 Lease Agreement--Auburn, Washington. (7)
10.6 Loan Agreement, dated January 17, 1997, between Registrant and
Case Credit Corp. including related promissory notes. (5)
10.7 Security Agreement, dated January 17, 1997, made by Registrant
in favor of Case Credit Corporation to secure payment for and
collateralized by all assets acquired by Registrant from
Sahlberg Equipment, Inc. (5)
10.8 Loan and Security Agreement dated as of June 5, 1997 between
Registrant and Deutsche Financial Services Corporation. (6)
10.9 Asset Purchase Agreement, dated April 30, 1998, between Yukon
Equipment, Inc. and Registrant. (8)
10.10 Employment Agreement dated May 1, 1998 between Maurice
Hollowell and Registrant. (8)
10.11 Employment Agreement dated August 1, 2000 between C. Dean
McLain and Registrant.
10.12 Consulting Agreement dated August 1, 2000 by and between
Registrant and Robert M. Rubin.
10.13 Commercial Lease dated October 1, 2000 between McLain-Rubin
Realty Company III, LLC and Registrant for Yuba City,
California facility.
10.14 Commercial Lease dated October 1, 2000 between McLain-Rubin
Realty Company III, LLC and Registrant for Sacramento,
California facility.
10.15 Commercial Lease, dated as of October 1, 2000 between
McLain-Rubin Realty Company, LLC and Registrant for the
Sparks, Nevada facility.
IV-1
10.16 Commercial Lease, dated as of April 1, 2001 between
McLain-Rubin Realty Company II, LLC and Registrant for the
Vancouver, Washington corporate office.
10.17 Western Power & Equipment Corp.'s Code of Ethics adopted on
November 6, 2003.
21. Subsidiaries of the Company.
23. Consent of Independent Accountants.
31.1 Rule 13a-14(a)/15d-14(a) Certifications
31.2 Rule 13a-14(a)/15d-14(a) Certifications
32.1 Certification by the Chief Executive Officer Relating to
Periodic Report Containing Financial Statements. *
32.2 Certification by the Chief Financial Officer Relating to a
Periodic Report Containing Financial Statements. *
* The Exhibit attached to this Form 10-K shall not be deemed
"filed" for the purposes of Section 18 of the Securities
Exchange Act of 1934 (the "Exchange Act") or otherwise
subject to liability under that section, amended, or the
Exchange Act, except as expressly set forth by specific
reference in such filing.
(1) 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.
(2) 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).
(3) Filed as an Exhibit to the Registrant's Registration Statement on Form S-8,
filed on September 18, 1998 and incorporated herein by reference thereto.
(Registration No. 33-63775).
(4) Filed as an Exhibit to the Quarterly Report on Form 10-Q of the Registrant,
as filed on June 11, 1997 and incorporated herein by reference thereto.
(5) Filed as an Exhibit to the Annual Report on Form 10-K of the Registrant, as
filed on October 28, 1996 and incorporated herein by reference thereto.
(6) Filed as an Exhibit to the Annual Report on Form 10-K of the Registrant, as
filed on October 29, 1998 and incorporated herein by reference thereto.
(7) Filed as an Exhibit to the Quarterly Report on Form 10-Q of the Registrant,
as filed on June 14, 1999 and incorporated herein by reference thereto.
(8) Filed as an Exhibit to Form 8-K of the Registrant, as filed on May 11, 1998
and incorporated herein by reference thereto.
(B) REPORTS ON FORM 8-K.
--------------------
During the quarter ended July 31, 2003, the Company filed a report on Form
8-K on May 8, 2003 pursuant to Item 4 and Item 7. and on May 9, 2003
pursuant to Item 4 and Item 7. Subsequent to the quarter ended July 31,
2003, the Company filed a report on Form 8-K on August 7, 2003 pursuant to
Item 5 and Item 7.
(C) EXHIBITS
--------
See (a)(3) above.
(D) ADDITIONAL FINANCIAL STATEMENT SCHEDULES See (a)(2) above.
----------------------------------------------------------
IV-2
WESTERN POWER & EQUIPMENT CORP.
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
YEAR ENDED JULY 31,
----------------------------------------
2004 2003 2002
---------- ---------- ----------
Net revenues
Product sales $ 104,767 $ 92,461 $ 96,723
Service revenue 5,499 4,978 5,517
Rental revenue 5,250 4,957 5,748
---------- ---------- ----------
Total net revenues 115,516 102,396 107,988
Cost of goods sold
Product sales 92,505 80,256 90,261
Service revenue 4,355 4,289 4,945
Rental revenue 4,486 4,325 5,019
---------- ---------- ----------
Total cost of goods sold 101,346 88,870 100,225
---------- ---------- ----------
Gross profit 14,170 13,526 7,763
Selling, general and administrative expenses 9,594 9,955 10,199
Impairment of goodwill and write-down of
property, plant and equipment -- -- 3,478
---------- ---------- ----------
Income (loss) from operations 4,576 3,571 (5,914)
Other income (expense):
Interest expense (2,767) (3,363) (4,114)
Other income 152 252 57
---------- ---------- ----------
Total other income (expense) (2,615) (3,111) (4,057)
---------- ---------- ----------
Income (loss) before income taxes 1,961 460 (9,971)
Provision for income taxes 48 48 48
---------- ---------- ----------
Net income (loss) $ 1,913 $ 412 $ (10,019)
========== ========== ==========
Income (loss) per common share -
basic & dilutive $ .19 $ .08 $ (2.50)
========== ========== ==========
Weighted Average Outstanding Common Shares
for Basic and Dilutive EPS 10,130 5,336 4,003
========== ========== ==========
See accompanying notes to consolidated financial statements.
F-1
WESTERN POWER & EQUIPMENT CORP.
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS)
JULY 31, JULY 31,
-------------------------
2004 2003
---------- ----------
ASSETS
- ------
Current assets:
Cash and cash equivalents $ 9 $ 8
Restricted cash 408 400
Accounts receivable, less allowance for doubtful accounts
of $938 and $555 11,660 9,779
Inventories 28,938 27,494
Prepaid expenses 205 126
---------- ----------
Total current assets 41,220 37,807
---------- ----------
Fixed assets (net):
Property, plant and equipment 2,620 2,843
Rental equipment fleet 11,053 13,663
---------- ----------
Total fixed assets 13,673 16,506
---------- ----------
Other Assets 131 153
---------- ----------
Total assets $ 55,024 $ 54,466
========== ==========
LIABILITIES & STOCKHOLDERS' DEFICIENCY
- --------------------------------------
Current liabilities:
Borrowings under floor plan financing $ 14,561 $ 10,959
Short-term borrowings - GE line of credit 31,710 34,566
Convertible debt 50 63
Notes payable 12 --
Accounts payable 5,461 8,214
Accrued payroll and vacation 1,194 572
Other accrued liabilities 1,005 984
Capital lease obligations 27 39
---------- ----------
Total current liabilities 54,020 55,397
---------- ----------
Non current liabilities:
Capital lease obligations 853 880
Notes payable 49 --
---------- ----------
Total non current liabilities 902 880
Total liabilities 54,922 56,277
---------- ----------
Commitments and contingencies
Stockholders' equity (deficiency):
Preferred stock-10,000,000 shares authorized; none outstanding -- --
Common stock, $.001 par value - 20,000,000 shares authorized
and 10,130,000 shares and 10,130,000 shares outstanding, as of
July 31, 2004 and 2003 respectively 10 10
Additional paid-in capital 16,933 16,933
Accumulated deficit (15,997) (17,910)
Less common stock in treasury, at cost (130,300 shares) (844) (844)
---------- ----------
Total stockholders' equity (deficiency) 102 (1,811)
---------- ----------
Total liabilities and stockholders' equity (deficiency) $ 55,024 $ 54,466
========== ==========
See accompanying notes to consolidated financial statements.
F-2
WESTERN POWER & EQUIPMENT CORP.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIENCY)
(DOLLARS IN THOUSANDS)
COMMON STOCK TOTAL
------------------------ ADDITIONAL STOCKHOLDERS'
NUMBER PAID-IN ACCUMULATED TREASURY EQUITY
OF SHARES AMOUNT CAPITAL DEFICIT STOCK (DEFICIENCY)
---------- ---------- ---------- ---------- ---------- ----------
Balance at
July 31, 2001 3,403,162 4 15,894 (8,303) (844) 6,751
Issuance of Stock 600,000 1 131 -- -- 132
Net loss -- -- -- (10,019) -- (10,019)
--------------------------------------------------------------------------------
Balance at
July 31, 2002 4,003,162 $ 5 $ 16,025 $ (18,322) $ (844) $ (3,136)
Issuance of Stock-
compensation 5,538,838 4 827 -- -- 831
Issuance of Stock-
in lieu of interest 588,000 1 81 -- -- 82
Net lncome -- -- -- 412 -- 412
--------------------------------------------------------------------------------
Balance at
July 31, 2003 10,130,000 10 16,933 (17,910) (844) (1,811)
Net Income -- -- -- 1,913 -- 1,913
--------------------------------------------------------------------------------
Balance at
July 31, 2004 10,130,000 $ 10 $ 16,933 $ (15,997) $ (844) $ 102
========== ========== ========== ========== ========== ==========
See accompanying notes to consolidated financial statements.
F-3
WESTERN POWER & EQUIPMENT CORP.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
YEAR ENDED JULY 31,
----------------------------------------
2004 2003 2002
---------- ---------- ----------
Cash flows from operating activities:
Net Income (loss) $ 1,913 $ 412 $ (10,019)
Adjustments to reconcile net loss to Net
cash provided by operating activities:
Depreciation 5,513 6,021 7,950
Amortization -- -- 125
Bad debts 412 170 83
Impairment of goodwill and write-down
of property, plant and equipment -- -- 3,478
Write-off of disputed financing receivables -- -- 1,983
Gain on sale of fixed assets (1,010) (421) (606)
Non-cash stock compensation expense -- 831 132
Non-cash stock interest expense -- 82 --
Changes in assets and liabilities
Accounts receivable (2,293) 355 1,925
Restricted cash (7) 140 (298)
Inventories (4,239) (3,335) 14,716
Prepaid expenses (79) (78) 249
Notes receivable current -- 122 (122)
Accounts payable (2,752) 74 (3,692)
Accrued payroll and vacation 622 (87) (1,095)
Other accrued liabilities 21 (1) (723)
Income taxes receivable/payable -- -- (7)
---------- ---------- ----------
Net cash provided by operating activities (1,899) 4,285 14,079
---------- ---------- ----------
Cash flow from investing activities:
Purchase of fixed assets (267) (167) (308)
Purchase of rental equipment (5,401) (2,119) (5,129)
Proceeds on sale of rental equipment 6,723 4,910 5,548
Proceeds on sale of fixed assets 68 156 309
(Purchase) sale of other assets 22 (101) 18
---------- ---------- ----------
Net cash provided by investing activities 1,145 2,679 438
---------- ---------- ----------
Cash flows from financing activities:
Principal payments on capital leases (38) (35) 16
Inventory floor plan financing 3,602 (15) (3,251)
Repayments of short-term financing - GE line of credit (2,856) (6,756) (12,075)
Convertible debt issuance -- -- 100
Payments on convertible debt (13) (155) (64)
Long-term debt borrowings 66 -- --
Long-term debt repayments (6) -- (8)
---------- ---------- ----------
Net cash used in financing activities 755 (6,961) (15,282)
---------- ---------- ----------
Increase (decrease) in cash and cash equivalents 1 3 (765)
Cash and cash equivalents at beginning of year 8 5 770
---------- ---------- ----------
Cash and cash equivalents at end of year $ 9 $ 8 $ 5
========== ========== ==========
See accompanying notes to consolidated financial statements.
F-4
WESTERN POWER & EQUIPMENT CORP.
Notes to Consolidated Financial Statements
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AND OPTIONS DATA)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
The Company is engaged in the sale, rental, and servicing of light,
medium, and heavy construction and industrial, and agricultural
equipment and related parts in Washington, Oregon, California, Nevada,
and Alaska. Case serves as the manufacturer of the single largest
portion of the Company's products.
The consolidated financial statements include the accounts of the
Company and its Oregon subsidiary after elimination of all intercompany
accounts and transactions.
The accompanying 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. As
discussed in note 5 below, the Company has significant borrowings that
require, among other things, compliance with certain financial ratios
on a quarterly basis. As of July 31, 2004 the Company remained in
technical default of its loan agreement but has entered into a
Forbearance Agreement with the financial institution. The Forbearance
Agreement expires on December 31, 2004. Accordingly, the financial
institution may call the outstanding borrowings, which aggregated $31.7
million at July 31, 2004. These matters raise substantial doubt about
the Company's ability to continue as a going concern.
The Company is in discussions with GE regarding further renewal or
extension of the current credit facility. There can be no assurance
that this agreement will be renewed. In addition, the Company is
exploring alternative financing arrangements with other potential
lenders. The Company's continuation as a going concern is dependent, in
part, upon its ability to successfully establish the necessary
financing arrangements to fund the business.
The Company is focusing its efforts on streamlining its operations. The
Company in recent years has selectively reduced the number of stores it
operates and its product offerings to reduce overall expenses and to
improve product turnover.
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, which balances may, at times, exceed
the federally insured limits.
RESTRICTED CASH
In accordance with the borrowing agreement with GE, the Company has a
cash account restricted by GE for the purpose of paying down the line
of credit and accordingly has been recorded as a current asset.
Restricted cash totaled $408 and $400 at July 31, 2004 and 2003,
respectively.
ACCOUNTS RECEIVABLE
Accounts receivable are reported net of an allowance for doubtful
accounts, future returns, and markdowns and allowances. The allowance
was determined by management to be adequate based on a periodic review
of the status of the individual accounts receivable and the volume of
returns.
F-5
INVENTORIES
Inventories (new and used) are stated at cost, which was lower than
market. Cost is determined using the first-in, first-out (FIFO) method
for parts inventories and the specific identification method for
equipment inventories. The Company utilizes recent sales information,
third party valuation guides and recent auction results as well as
judgments of inventory managers within the Company to determine the net
realizable value of inventory. For the year ended July 31, 2004,
inventory reserves and allowances decreased due to the sale of older
equipment inventory.
INTANGIBLE ASSETS
The Company evaluates the recoverability of it's goodwill and other
intangibles in accordance with the Statement of Financial Accounting
Board "SFASB" No. 142, Goodwill and Other Intangible Assets. As of July
31, 2004, the Company has not identified any impairment. As of July 31,
2002 the Company recorded an impairment loss of goodwill in the amount
of $2,525 million.
PROPERTY, PLANT, AND EQUIPMENT
Property, plant, and equipment are stated at cost less accumulated
depreciation. Depreciation and amortization on the property, plant, and
equipment are computed using the straight-line method over the
estimated useful lives of the assets, ranging from 5 to 20 years.
Depreciation on the rental fleet is calculated using the straight-line
method over the estimated useful lives, ranging from 3 to 7 years after
considering salvage values. Expenditures for replacements and major
improvements are capitalized. Expenditures for repairs, maintenance,
and routine replacements are charged to expenses 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.
LONG LIVED ASSETS
In accordance with Statement of Financial Accounting Standards No. 144,
"Accounting for the Impairment of Long-Lived Assets to be Disposed Of"
at each balance sheet date, management assesses whether there has been
permanent impairment in the value of the long-lived assets. The
existence of any such impairment is determined by comparing anticipated
undiscounted future cash flows from operating activities with the
associated carrying value of the assets. The factors considered by
management in performing this assessment include operating results,
trends and prospects, as well as the effects of obsolescence, demand,
competition, and other economic factors. The amount of any such
impairment is determined by comparing the discounted future cash flows
noted above with the associated carrying value of the assets. As of
July 31, 2004 the Company has not identified any impairment.
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. In addition to
outright sales of new and used equipment, certain rentals include
rent-to-purchase option agreements. Under such agreements, customers
are given a period of several months to exercise the option to purchase
the rented equipment and may be allowed to apply a portion of the
rental payments to the purchase price.
ADVERTISING EXPENSE
The Company expenses all advertising costs as incurred. Total
advertising expense for the years ended July 31, 2004, 2003 and 2002
was $82, $87, and $176 respectively.
F-6
OTHER INCOME
Other income principally includes gains and losses on the sale of fixed
assets and finance charges associated with accounts receivable
activities.
INCOME TAXES
The Company recognizes deferred tax assets and liabilities based upon
differences between the financial reporting and tax bases of the assets
and liabilities using the enacted tax rates and laws that are expected
to be in effect when the differences are expected to be recovered. The
Company provides a valuation allowance for deferred tax assets for
which it does not consider realization of such assets to be more likely
than not.
TREASURY STOCK
In April 1998, the Board of Directors authorized the repurchase of up
to 350,000 shares of the Company's common stock in the open market,
subject to normal trading restrictions. Under this program, the Company
purchased a total of 230,300 shares of common stock at a cost of $1.49
million in fiscal year 1998. Currently, the Company uses shares of
treasury stock to issue shares upon exercise of outstanding stock
options and/or for private placements of common stock. As of July 31,
2004 and 2003 the Company held 130,300 shares in treasury stock.
RECLASSIFICATIONS
Certain amounts in the 2003 and 2002 financial statements have been
reclassified to conform with the 2004 presentation. These
reclassifications had no impact on net loss or cash flows as previously
reported.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The recorded amounts of cash and cash equivalents, accounts receivable,
short-term borrowings, accounts payable 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
short and long-term borrowings approximates fair value as the actual
interest rates approximate current competitive rates.
NET INCOME (LOSS) PER COMMON SHARE
Basic net income (loss) per common share has been computed using the
weighted average number of common shares outstanding during the periods
presented.
Diluted net income (loss) per share is computed using the weighted
average number of common shares outstanding during the periods
presented plus any dilutive securities outstanding. There were no
common stock equivalents consisting of options which were required to
be included in the calculation of diluted income (loss) per share for
the periods presented. Outstanding options as of July 31, 2004 totaled
1,600,000.
STOCK BASED COMPENSATION
The company accounts for employee stock transactions in accordance with
APB Opinion No. 25, "Accounting for Stock Issued to Employees." The
Company has adopted the pro-forma disclosure requirements of Statement
of Financial Accounting Standards No. 123, " Accounting For Stock-Based
Compensation."
The FASB issued SFAS No. 148, " Accounting For Stock-Based
Compensation-Transition and Disclosure- an amendment of FASB Statement
No. 123" that provides alternative methods of transition for a
voluntary change to the fair value based method accounting for
stock-based employee compensation. The provisions of this Statement are
effective for fiscal years beginning December 15, 2002.
F-7
During the year ended July 31, 2003, the Company adopted Statement of
Financial Accounting Standard No. 148, " Accounting For Stock-Based
Compensation-Transition and Disclosure." This statement amended
Statement No. 123, Accounting for Stock-Based Compensation." As
permitted under Statement No. 123, the Company continues to apply the
Accounting Principles Board Opinion No. 25, "Accounting for Stock
Issued to Employees." As required under Statement No. 148, the
following table present pro-forma net income and basic and diluted
earnings (loss) per share as if the fair value-based method had been
applied to all awards.
Year Ended July 31, 2004
------------------------ Basic Diluted
Net income E.P.S. E.P.S.
---------- ----- -------
As Reported $ 1,913 .19 .19
Less stock-based employee
compensation cost, net
of tax effect, under
fair value accounting $ (141) (.01) (.01)
---------- ----- -------
Pro Forma $ 1,772 .18 .18
Year Ended July 31, 2003
------------------------ Basic Diluted
Net income E.P.S. E.P.S.
---------- ----- -------
As Reported $ 412 .08 .08
Pro Forma $ 412 .08 .08
Year Ended July 31, 2002
------------------------ Basic Diluted
Net Loss E.P.S. E.P.S.
---------- ----- -------
As Reported $ (10,019) ($2.50) ($2.50)
Pro Forma $ (10,019) ($2.50) ($2.50)
Under APB 25, the Company does not recognize compensation expense upon
the issuance of its stock options because the option terms are fixed
and the exercise price equals the market price of the underlying stock
on the grant date. As required by SFAS, the Company has computed for
pro-forma disclosure purposes the value of options granted using the
Black-Scholes option pricing model. The weighted average assumptions
used for stock option grants for fiscal years 2004, 2003, and 2002
were:
FY04 FY03 FY02
-------- ------- -------
Risk free interest rate 4.22% N/A N/A
Expected dividend yield N/A N/A N/A
Expected life 10 N/A N/A
Expected volatility 98.7% N/A N/A
Adjustments for forfeitures are made as they occur. The options granted
in FY04 were fully vested and exercisable as of year end. The weighted
average fair value per share of the options granted in fiscal years
2004, 2003, and 2002 are $.32, $-0-, and $ -0-, respectively.
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
YEAR ENDED JULY 31,
----------------------------------
2004 2003 2002
-------- ------- -------
Cash paid (received) during the
year for:
Interest $ 2,409 $ 3,363 $ 4,114
Income taxes, net of refunds 15 1 (12)
F-8
USE OF ESTIMATES
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America 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.
RECENT ACCOUNTING PRONOUNCEMENTS
The following pronouncements have been issued by the FASB.
In January 2003, as revised in December 2003, the FASB issued
Interpretation No. 46 ("FIN 46"), "Consolidation of Variable Interest
Entities, an Interpretation of ARB No. 51." FIN 46 requires certain
variable interest entities to be consolidated by the primary
beneficiary of the entity if the equity investors in the entity do not
have the characteristics of controlling financial interest or do not
have sufficient equity at risk for the entity to finance its activities
without additional subordinated financial support from other parties.
FIN 46 is effective for all new variable interest entities created or
acquired after January 31, 2003. For variable interest entities created
or acquired prior to February 1, 2003, the provisions of FIN 46 must be
applied for the first interim or annual period beginning after March
15, 2004. The effect of the adoption of this new accounting
pronouncement did not have a significant impact on the Company's
consolidated financial statements for the year ended July 31, 2004.
2. RELATED PARTY TRANSACTIONS
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. As of October 1, 2000, the Company entered into a
renegotiated 7-year lease with an initial annual rate of $228. 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 February 1999, the real property and improvements used in connection
with the Company's Sparks, Nevada operation and upon which such
operation is located, were sold to McLain-Rubin Realty, L.L.C. (MRR)
under the terms of a real property purchase and sale agreement. MRR is
a Delaware limited liability company the owners of which are Messrs. C.
Dean McLain, the President and Chairman of the Company, and Robert M.
Rubin, a director of the Company. The sale price was $2,210 in cash at
closing. Subsequent to the closing of the sale, the Company entered
into a 20-year commercial lease agreement with MRR for the Sparks,
Nevada facility at an initial rental rate of $252 per year. The lease
is a net lease with payment of insurance, property taxes and
maintenance costs paid by the Company. As of October 1, 2000, the
Company entered into a renegotiated 7-year lease with an initial annual
rate of $276.
On April 1, 2001, the Company entered into a lease with McLain-Rubin
Realty Company II, LLC ("MRR II"), 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, for a 5-year lease on its Vancouver,
Washington corporate office with an annual rate of $98. In addition to
F-9
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.
On May 17, 2002, the shareholders authorized the issuance of 600,000
shares of the Company's common stock to the Rubin Family Irrevocable
Stock Trust with no monetary consideration received by the Company. Mr.
Robert M. Rubin is an elected director of the Company and compensation
expense for the fair market value of the stock on the date of issuance
in the amount of $132 has been recorded in selling, general and
administrative expenses.
On May 1, 2003, Mr. McLain and Mr. Rubin agreed to convert the
principal amount of a loan made to the Company in the amount of $147
into an aggregate of 5,538,838 shares of the Company's common stock. In
connection therewith Mr. Rubin received 2,769,419 shares of the
Company's common stock and Mr. McLain received 2,769,419 shares of the
Company's common stock resulting in a compensation charge to the
Company of $831which has been recorded in selling, general and
administrative expenses.
3. INVENTORIES
Inventories consist of the following:
JULY 31, JULY 31,
2004 2003
------- -------
Equipment (net of reserve allowances
of $3,427 and $4,493 respectively):
New equipment $18,773 $15,460
Used equipment 4,294 5,370
Parts (net of reserve allowance of
$688 and $378 respectively) 5,871 6,664
------- -------
$28,938 $27,494
======= =======
4. FIXED ASSETS
Fixed assets consist of the following:
JULY 31, JULY 31,
2004 2003
------- -------
Property, plant, and equipment:
Land $ 522 $ 522
Buildings 1,749 1,749
Machinery and equipment 3,136 3,092
Office furniture and fixtures 2,213 2,213
Computer hardware and software 1,539 1,525
Vehicles 1,275 1,226
Leasehold improvements 985 967
------- -------
11,419 11,294
Less: accumulated depreciation (8,799) (8,451)
------- -------
Property, plant, and equipment (net) $ 2,620 $ 2,843
======= =======
Rental equipment fleet $17,545 $21,046
Less: accumulated depreciation (6,492) (7,383)
------- -------
Rental equipment (net) $11,053 $13,663
======= =======
Included in depreciation are charges related to certain inventory
rentals under rent-to-purchase option agreements.
As of July 31, 2004 and 2003 fixed assets (net) includes property under
capital leases in the amount of $530 and $535 respectively.
F-10
5. SHORT TERM BORROWINGS
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 one-month to
twelve-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 has an inventory floor plan and operating line of credit
through GE Commercial Distribution Finance ("GE"), fka Deutsche
Financial Services. The credit facility matured December 31, 2001 and
had provided terms with a floating interest rate based on prime with
rates between 0.75% under prime to 2.25% over prime depending on the
amount of total debt leverage of the Company. Amounts may be advanced
to the Company based on its assets, including accounts receivable,
parts inventory, new and used equipment inventory, rental fleet, real
property, and vehicles. Interest payments on the outstanding balance
are due monthly.
As of 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 was in technical default and required the
Company to pay a $45 fee to GE for the forbearance. In addition, under
the terms of the Forbearance Agreement, the Company was required to
meet certain financial covenants and meet certain debt reduction
schedules. The Forbearance Agreement expired December 31, 2002.
As of July 31, 2003 and July 31, 2004, the Company remained in
technical default of its loan agreement. As of August 12, 2004, the
Company entered into a Forbearance Agreement with GE, under the terms
of which GE lowered the interest rate to prime plus 1.75% and required
the Company to pay $25,000 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 will expire on December 31, 2004.
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 RATE 2004 2003
------------- ------- -------
Case Credit Corporation Prime + 2% $14,561 $10,959
(6.75%)
GE Prime + 4.00% 31,710 34,566
------- -------
(8.75%) $46,271 $45,525
======= =======
If and when GE does call the debt, it will become immediately due and
payable in full and the Company would not be able to operate if
alternative financing is not obtained or the Company cannot renegotiate
its line of credit with GE.
In December 2000, the Company completed the sale of $182 principal
amount of 10% convertible promissory notes due December 31, 2001. In
March 2001, the Company completed the sale of an additional $100
principal amount of 10% convertible promissory notes due December 31,
2001. The notes are convertible, at the option of the holders, into
common stock at a minimum conversion price of $1.50 per share. The
Company could at its option, redeem the notes at the principal amount
plus accrued interest any time prior to December 31, 2001. The Company
elected to redeem the notes and is currently paying off the principal
and accrued interest balances thereof. The balance of the unpaid
principal and accrued interest on the convertible notes as of July 31,
2004 is $50.
F-11
6. INCOME TAXES
The current year's federal and state income tax provision consists
substantially of minimum taxes. The principal reasons for the variation
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,
2004 2003 2002
-------- -------- --------
Statutory federal income tax rate 34.0% 34.0% (34.0%)
State income taxes, net of
federal income tax benefit 5.0% 5.0% (5.0%)
Valuation allowance -- -- 39.3%
Utilization of NOLs (28.0%) (27.0%) --
Other (8.2%) (1.8%) 0.2%
-------- -------- --------
2.8% 10.2% 0.5%
======== ======== ========
Temporary differences between the financial statement and tax basis of
assets and liabilities which give rise to a significant portion of
deferred tax assets and deferred tax liabilities were as follows:
YEAR ENDED
---------------------
JULY 31, JULY 31,
2004 2003
-------- --------
Net Current Deferred Tax Assets:
Inventory $ 2,011 $ 2,527
Accounts receivable allowance 366 216
Accrued vacation and bonuses 160 123
Other accruals 83 75
-------- --------
Current Deferred Tax Asset 2,620 2,941
Less-Valuation Allowance (2,620) (2,941)
-------- --------
Net Current Deferred Tax Asset -- --
-------- --------
Net Long-Term Deferred Tax Assets (Liability):
Fixed Assets (820) (1,401)
Goodwill and intangibles 265 470
NOL carryforwards 4,374 4,552
-------- --------
Long-term Deferred Tax Asset (Liability) 3,819 3,621
Less- Valuation Allowance (3,819) (3,621)
-------- --------
Net Long-term Deferred Tax Asset (Liability) $ -- $ --
======== ========
The valuation allowance primarily relates to the federal and state net
operating losses for which utilization in future periods is uncertain.
The ultimate realization of deferred tax assets is dependent upon the
generation of future taxable income during the periods in which those
temporary differences become deductible. The Company considers
projected future taxable income and tax planning strategies in making
this assessment. Based on the historical taxable income and projections
for future taxable income over the periods that the deferred tax assets
are deductible, the Company believes it is more likely than not that
the Company will not realize the benefits of these deductible
differences in the near future and therefore a full valuation allowance
of $6,439 is provided.
As of July 31, 2004 the Company has approximately $11 million of
federal net operating losses available to offset future taxable income,
which if not utilized will expire in 2016 through 2021.
7. STOCKHOLDERS' EQUITY
On March 24 2003, Mr. McLain agreed to convert the accrued and unpaid
interest on a loan made to the Company in the amount of $147,000 into
shares of the Company's common stock. In connection therewith Mr.
McLain received 588,000 shares of the Company's common stock with a
value of $82,000.
F-12
On May 1, 2003, Mr. McLain and Mr. Rubin agreed to convert the
principal amount of a loan made to the Company in the amount of
$147,000 into an aggregate of 5,538,838 shares of the Company's common
stock. In connection therewith Mr. Rubin received 2,769,419 shares of
the Company's common stock and Mr. McLain received 2,769,419 shares of
the Company's common stock resulting in a compensation charge to the
Company of $831,000.
STOCK OPTION PLANS
Under the Company's 1995 Employee Stock Option Plan, 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 1,500,000 shares of the Company's common stock. 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. Outstanding options expire no
later than ten years after the date of grant.
In December 1995, the Board of Directors adopted a stock option plan
for non-employee directors under which each non-employee director is
entitled to receive on August 1 of each year beginning August 1, 1996,
options to purchase 2,500 shares of the Company's common stock at the
fair market value of the stock at the date of grant. In January 1998,
the Company's shareholders approved an amendment to this plan
increasing the number of shares for which options are granted yearly to
non-employee directors from 2,500 to 5,000. Outstanding options expire
no later than ten years after the date of grant.
The following summarizes the stock option transactions under the
Company's stock option plans:
Weighted Average Shares Option Price
Options outstanding July 31, 2001: 1,210,000 .56
Exercised -- --
Surrendered -- --
Granted -- --
--------- ---------
Options outstanding July 31, 2002 1,210,000 0.56
Exercised -- --
Surrendered -- --
Granted -- --
--------- ---------
Options outstanding July 31, 2003 1,210,000 0.56
Exercised -- --
Canceled (50,000) 0.53
Granted 440,000 0.35
--------- ---------
Options outstanding July 31, 2004 1,600,000 0.51
========= =========
The following table sets forth the exercise prices, the number of options
outstanding and exercisable, and the remaining contractual lives of the
Company's stock options at July 31, 2004:
- -------------- ----------- -------- ----------- ----------- --------
WEIGHTED WEIGHTED WEIGHTED
NUMBER OF AVERAGE AVERAGE NUMBER OF AVERAGE
OPTIONS EXERCISE CONTRACTUAL OPTIONS EXERCISE
EXERCISE PRICE OUTSTANDING PRICE LIFE REMAINING EXERCISABLE PRICE
- -------------- ----------- -------- ----------- ----------- --------
$4.375 10,000 $4.375 5.00 10,000 $4.375
- -------------- ----------- -------- ----------- ----------- --------
$0.531 1,150,000 $0.531 8.50 1,150,000 $0.531
- -------------- ----------- -------- ----------- ----------- --------
$0.350 440,000 $0.350 9.50 440,000 $0.350
- -------------- ----------- -------- ----------- ----------- --------
F-13
8. COMMITMENTS AND CONTINGENCIES
LEASES
The Company leases certain facilities under noncancelable lease
agreements. As more fully described in Note 3, the building portion of
some 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 month-to-month to nine years and are accounted for as operating
leases. 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 $ 1,458 and $1,425 for the years ended
July 31, 2004 and 2003, respectively.
Assets recorded under capital leases are recorded in fixed assets and
are as follows:
JULY 31, JULY 31,
2004 2003
------ ------
Capitalized asset value $ 971 $ 971
Less accumulated amortization (441) (384)
------ ------
$ 530 $ 587
====== ======
Net capitalized asset values are included in Property, Plant and
Equipment. Future minimum lease payments under all noncancelable leases
as of July 31, 2004, are as follows:
CAPITAL OPERATING
YEAR ENDING JULY 31, LEASES LEASES
------ ------
2005 111 1,468
2006 124 1,154
2007 132 1,022
2008 132 597
2009 132 411
Thereafter 836 879
------ ------
Total annual lease payments $1,467 $5,531
======
Less amount representing interest, with imputed
interest rates ranging from 6% to 15% 587
------
Present value of minimum lease payments 880
Less current portion 27
------
Long-term portion $ 853
======
NOTES PAYABLE
In November 2003, the Company purchased two vehicles through Ford Motor
Credit at an interest rate of 7.23% maturing 02/28/09. Future minimum
payments under these noncancelable notes payable as of July 31, 2004,
are as follows:
NOTES
YEAR ENDING JULY 31, PAYABLE
-------
2005 16
2006 16
2007 16
2008 16
2009 8
-------
Total annual payments $ 72
Less amount representing interest, with
imputed interest rates of 7.23% 11
-------
Present value of minimum payments 61
Less current portion 12
-------
Long-term portion $ 49
=======
F-14
PURCHASE COMMITMENTS
The Company issues purchase orders to Case Corporation for equipment
purchases. Upon acceptance by Case, these purchases become
noncancelable by the Company. As of July 31, 2004, such purchase
commitments totaled $ 12,000.
LITIGATION
The Company is involved in various legal proceedings which are
incidental to the industry and for which certain matters are covered in
whole or in part by insurance or, otherwise, the Company has recorded
accruals for estimated settlements. Management believes that any
liability which may result from these proceedings will not have a
material adverse effect on the Company's consolidated financial
statements.
9. CONCENTRATION OF CREDIT RISK
Case Corporation provided approximately 53%, 53% and 49% of our
products for the years ending July 31, 2004, 2003 and 2002
respectively. Case dealer contracts are non-exclusive and terminable by
either party upon minimum notice. There can be no assurances that Case
will continue to supply the Company with products or continue its
relationship with the Company. If we are unable to obtain Case products
or to continue our relationship with Case, we will likely experience
reductions in product and service sales and increased expenses. Our
operations will be negatively affected if we experience inadequate
supplies of any key products.
10. 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 YEAR ENDED YEAR ENDED YEAR ENDED
NET REVENUES JULY 31, 2004 JULY 31, 2003 JULY 31, 2002
------------------ ------------- ------------- -------------
Equipment Sales $ 82,011 $ 71,215 $ 73,909
------------------ ------------- ------------- -------------
Equipment Rental 5,250 4,957 5,747
------------------ ------------- ------------- -------------
Product Support 28,255 26,224 28,332
------------------ ------------- ------------- -------------
Totals $ 115,516 $ 102,396 $ 107,988
------------------ ------------- ------------- -------------
------------------ ------------- ------------- -------------
BUSINESS COMPONENT YEAR ENDED YEAR ENDED YEAR ENDED
GROSS MARGINS JULY 31, 2004 JULY 31, 2003 JULY 31, 2002
------------------ ------------- ------------- -------------
Equipment Sales $ 7,767 $ 8,225 $ 2,360
------------------ ------------- ------------- -------------
Equipment Rental 763 668 727
------------------ ------------- ------------- -------------
Product Support 5,640 4,633 4,676
------------------ ------------- ------------- -------------
Totals $ 14,170 $ 13,526 $ 7,763
------------------ ------------- ------------- -------------
Asset information by reportable product line is not reported, since the
Company does not produce such information internally.
11. UNAUDITED QUARTERLY CONSOLIDATED FINANCIAL DATA
QUARTER
----------------------------------------------- TOTAL
FIRST SECOND THIRD FOURTH YEAR
-------- -------- -------- -------- --------
Fiscal 2004:
Net sales $ 27,732 $ 27,960 $ 26,426 $ 33,398 $115,516
Gross Profit 3,569 2,813 2,284 5,504 14,170
Net income (loss) 584 (238) (702) 2,269 1,913
Income (loss) per share - basic 0.06 (0.02) (0.07) .22 .19
Income (loss) per share - diluted 0.06 (0.02) (0.07) .22 .19
F-15
QUARTER
----------------------------------------------- TOTAL
FIRST SECOND THIRD FOURTH YEAR
-------- -------- -------- -------- --------
Fiscal 2003:
Net sales $ 24,094 $ 24,663 $ 24,772 $ 28,867 $102,396
Gross Profit 3,461 3,430 2,784 3,851 13,526
Net income (loss) 279 223 110 (200) 412
Income (loss) per share - basic 0.07 0.06 0.03 (0.02) 0.08
Income (loss) per share - diluted 0.07 0.06 0.03 (0.02) 0.08
12. SUBSEQUENT EVENTS
On September 15, 2004 the Company acquired Arizona Pacific Materials
LLC, a basalt and cinder mining company with operating mines in Phoenix
and Flagstaff, Arizona. The purchase price was $3 million of which
$500,000 was paid upon close. The remaining $2.5 million is being
carried by the Seller as a note from the Company with interest at 5%
and an installment payment of $2,000,000 plus accrued interest in 13
months from the date of purchase and the balance of principal and
accrued interest due 19 months from the date of purchase.
F-16
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and
Stockholders of Western Power & Equipment Corp.
We have audited the accompanying consolidated balance sheets of Western Power &
Equipment Corp. (a Delaware Corporation) as of July 31, 2004 and 2003, and the
related consolidated statements of operations, stockholders' equity (deficiency)
and cash flows for the years then ended. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audit.
We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Western Power &
Equipment Corp. as of July 31, 2004 and 2003, and the consolidated results of
their operations and their cash flows for the years then ended, in conformity
with U.S. generally accepted accounting principles.
The accompanying consolidated financial statements have been prepared assuming
that the Company will continue as a going concern. In the past the Company has
incurred losses from operations and has a working capital deficit as of July 31,
2004 and 2003. Further, as discussed in Note 5 to the consolidated financial
statements, the Company remained in technical default of its loan agreement but
has entered into a Forbearance Agreement with the financial institution. The
Forbearance Agreement will expire December 31, 2004. Accordingly, the financial
institution may call the outstanding borrowings, which aggregated approximately
$31.7 and $34.6 million at July 31, 2004 and 2003 respectively. These matters
raise substantial doubt about the Company's ability to continue as a going
concern. Management's plans in regard to these matters are also described in
Note 1. The consolidated financial statements do not include any adjustment that
might result from the outcome of this uncertainty.
/s/ Marcum & Kliegman LLP
----------------------------
MARCUM & KLIEGMAN LLP
New York, New York
September 24, 2004
F-17
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and
Stockholders of Western Power & Equipment Corp.
We have audited the accompanying consolidated statements of operations,
stockholders' deficiency and cash flows of Western Power & Equipment Corp. (a
Delaware Corporation) for the year ended July 31, 2002. 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 audit.
We conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the results of their operations and their cash
flows, in conformity with U. S. generally accepted accounting principles.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. The Company has incurred losses from
operations and has a working capital deficit for the year ended July 31, 2002.
Further, as discussed in Note 5 to the financial statements, the Company is in
technical default of its loan agreement and has not obtained a waiver or
revisions to the agreement from the financial institution. Accordingly, the
financial institution at any time may call the outstanding borrowings, which
aggregated $41.3 million at July 31, 2002. These matters raise substantial doubt
about the Company's ability to continue as a going concern. Management's plans
in regard to these matters are also described in Note 1. The financial
statements do not include any adjustment that might result from the outcome of
this uncertainty.
/s/ Moss Adams LLP
--------------------
MOSS ADAMS LLP
Beaverton, Oregon
October 15, 2002
F-18
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
FINANCIAL STATEMENT SCHEDULE
To the Board of Directors and
Stockholders of Western Power & Equipment Corp.
Our audit of the consolidated financial statements referred to in our report
dated September 24, 2004 appearing on page F-17 of this Annual Report on Form
10-K also included an audit of the financial statement schedules listed in Item
14(a)(2) of this Form 10-K. In our opinion, this financial statement schedule
presents fairly, in all material respects, the information set forth therein
when read in conjunction with the related consolidated financial statements.
/s/ Marcum & Kliegman LLP
-----------------------------
MARCUM & KLIEGMAN LLP
New York, New York
September 24, 2004
F-19
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNITNG FIRM
FINANCIAL STATEMENT SCHEDULE
To the Board of Directors and
Stockholders of Western Power & Equipment Corp.
Our audit of the consolidated financial statements referred to in our report
dated October 15, 2002 appearing on page F-18 of this Annual Report on Form 10-K
also included an audit of the financial statement schedules listed in Item
14(a)(2) of this Form 10-K. In our opinion, this financial statement schedule
presents fairly, in all material respects, the information set forth therein
when read in conjunction with the related consolidated financial statements.
/s/ Moss Adams LLP
----------------------
MOSS ADAMS LLP
Beaverton, Oregon
October 15, 2002
F-20
SCHEDULE II
WESTERN POWER & EQUIPMENT CORP.
VALUATION AND QUALIFYING ACCOUNTS
For the Fiscal Years Ended July 31, 2004, 2003 and 2002
(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, 2004 $ 555 $ 412 $ --- $ (29) $ 938
Fiscal year ended July 31, 2003 646 170 --- (261) 555
Fiscal year ended July 31, 2002 948 83 --- (385) 646
INVENTORY RESERVE:
Fiscal year ended July 31, 2004 4,871 239 --- (995) 4,115
Fiscal year ended July 31, 2003 8,056 546 --- (3,731) 4,871
Fiscal year ended July 31, 2002 7,771 6,616 --- (6,331) 8.056
F-21
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/ C. DEAN MCLAIN PRESIDENT, CHIEF OCTOBER 29, 2004
- ---------------------- EXECUTIVE OFFICER,
C. DEAN MCLAIN AND CHAIRMAN
/S/ MARK J. WRIGHT VICE PRESIDENT OF FINANCE, OCTOBER 29, 2004
- ---------------------- CHIEF FINANCIAL AND PRINCIPAL
MARK J. WRIGHT ACCOUNTING OFFICER,
TREASURER AND SECRETARY
/S/ ROBERT M. RUBIN DIRECTOR OCTOBER 29, 2004
- ----------------------
ROBERT M. RUBIN
/S/ MICHAEL METTER DIRECTOR OCTOBER 29, 2004
- ----------------------
MICHAEL METTER
/S/ STEVEN MOSKOWITZ DIRECTOR OCTOBER 29, 2004
- ----------------------
STEVEN MOSKOWITZ