================================================================================
FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
Quarterly Report Under Section 13 or 15(d)
of the Securities Exchange Act of 1934
For the Quarter Ended October 31, 2004
Commission File Number 0-26230
WESTERN POWER & EQUIPMENT CORP. & SUBSIDIARY
--------------------------------------------
(Exact name of registrant as specified in its charter)
DELAWARE 91-1688446
-------- ----------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) I.D. number)
6407-B N.E. 117th Avenue, Vancouver, WA 98662
--------------------------------------- -----
(Address of principal executive offices) (Zip Code)
Registrant's telephone no.: 360-253-2346
------------
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities and Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports); and (2) has been subject to such filing
requirements for the past 90 days.
YES [X] NO [ ]
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the close of the period covered by this report.
Title of Class Number of shares
Common Stock Outstanding
(par value $.001 per share) 10,130,000
================================================================================
WESTERN POWER & EQUIPMENT CORP. & SUBSIDIARY
INDEX
PART I. FINANCIAL INFORMATION Page
Number
Item 1. Financial Statements
Condensed Consolidated Balance Sheets
October 31, 2004 (Unaudited) and July 31, 2004................ 3
Condensed Consolidated Statements of Operations
Three months ended October 31, 2004 (Unaudited)
and October 31, 2003 (Unaudited).............................. 4
Condensed Consolidated Statements of Cash Flows
Three months ended October 31, 2004 (Unaudited)
and October 31, 2003 (Unaudited).............................. 5
Notes to Condensed Consolidated Financial Statements............ 6-11
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations........... 12-15
Item 3. Quantitative and Qualitative Disclosures about
Market Risk............................................. 15
Item 4. Controls and Procedures.................................. 15
PART II. OTHER INFORMATION
Item 1. Legal Proceedings........................................ 16
Item 2. Changes in Securities.................................... 16
Item 3. Defaults Upon Senior Securities.......................... 16
Item 4. Submission of Matters to a Vote of Security
Holders................................................. 16
Item 5. Other Information........................................ 16
Item 6. Exhibits and Reports on Form 8-K......................... 16
SIGNATURES................................................................ 17
2
ITEM 1. FINANCIAL STATEMENTS
WESTERN POWER & EQUIPMENT CORP. & SUBSIDIARY
CONDENSED CONSOLIDATED BALANCE SHEETS
(Dollars in thousands)
October 31, July 31,
2004 2004
-------- --------
(Unaudited)
ASSETS (PLEDGED)
Current assets:
Cash and cash equivalents...................... $ 9 $ 9
Restricted Cash................................ 447 408
Accounts receivable, less allowance for
doubtful accounts of $932 and $938,
respectively................................. 7,553 11,660
Inventories.................................... 31,477 28,938
Prepaid expenses............................... 154 205
-------- --------
Total current assets.................... 39,640 41,220
Fixed assets:
Property, plant and equipment (net)............ 4,567 2,620
Rental equipment fleet (net)................... 9,186 11,053
-------- --------
Total fixed assets...................... 13,753 13,673
Other assets........................................ 131 131
-------- --------
Total assets........................................ $ 53,524 $ 55,024
======== ========
LIABILITIES & STOCKHOLDERS' EQUITY
Current liabilities:
Borrowings under floor plan financing.......... $ 13,302 14,561
Short-term borrowings.......................... 26,722 31,710
Convertible debt............................... 50 50
Accounts payable and accrued expenses.......... 7,023 5,461
Accrued payroll and vacation................... 806 1,194
Other accrued liabilities...................... 1,047 1,005
Notes payable net of deferred debt discount.... 2,243 12
Capital lease obligation....................... 25 27
-------- --------
Total current liabilities.................. 51,218 54,020
Long-term liabilities
Notes Payable.................................. 546 49
Capital lease obligation....................... 847 853
-------- --------
Total long-term liabilities................... 1,393 902
-------- --------
Total liabilities................................... 52,611 54,922
-------- --------
Stockholders' equity:
Preferred stock-10,000,000 shares authorized;
none issued and outstanding.................. -- --
Common stock-$.001 par value; 20,000,000
shares authorized; 10,260,300 issued and
10,130,000 outstanding....................... 10 10
Additional paid-in capital..................... 17,225 16,933
Accumulated deficit............................ (15,478) (15,997)
Less common stock in treasury, at cost
(130,300 shares)............................. (844) (844)
-------- --------
Total stockholders' equity................. 913 102
-------- --------
Total liabilities and stockholders' equity.......... $ 53,524 $ 55,024
======== ========
The accompanying notes are an integral part of
these condensed consolidated financial statements.
3
WESTERN POWER & EQUIPMENT CORP. & SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
(Dollars in thousands, except per share amounts)
Three Months Ended
October 31,
2004 2003
-------- --------
Net revenue....................................... $ 26,744 $ 27,732
Cost of revenues (includes depreciation of
$935 and $ 787 respectively).................. 23,413 24,163
-------- --------
Gross profit...................................... 3,331 3,569
Selling, general and administrative expenses...... 2,224 2,323
-------- --------
Operating income.................................. 1,107 1,246
Other income (expense):
Interest expense............................. (623) (722)
Other income................................. 47 72
-------- --------
Income before income tax provision................ 531 596
Income tax provision.............................. 12 12
-------- --------
Net income........................................ $ 519 $ 584
======== ========
Basic earnings per common share $ 0.05 $ 0.06
======== ========
Diluted earnings per common share $ 0.04 $ 0.06
======== ========
The accompanying notes are an integral part of
these condensed consolidated financial statements.
4
WESTERN POWER & EQUIPMENT CORP. & SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(Dollars in thousands)
Three Months Ended
October 31,
2004 2003
------- -------
Cash flows from operating activities:
Net income......................................... $ 519 $ 584
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation....................................... 1,622 1,676
Bad Debts.......................................... 2 114
Amortization of debt discount...................... 25 --
Gain on sale of fixed assets and
rental equipment............................ (226) (461)
Changes in assets and liabilities:
Accounts receivable............................ 4,105 1,950
Restricted Cash................................ (39) (78)
Inventories.................................... (2,190) 2,368
Prepaid expenses and other assets.............. 51 (15)
Accounts payable and accrued expenses.......... 1,560 (1,033)
Accrued payroll and vacation................... (388) (10)
Other accrued liabilities...................... 42 (26)
Sale of other assets........................... -- 23
------- -------
Net cash provided by operating activities...... 5,083 5,092
------- -------
Cash flows from investing activities:
Purchase of fixed assets........................... (43) (18)
Purchases of rental equipment...................... (543) (979)
Purchase of assets of Arizona Pacific Materials,
LLC................................................ (500) --
Proceeds on sale of fixed assets................... 21 --
Proceeds on sale of rental equipment............... 1,739 1,718
------- -------
Net cash provided by investing activities.......... 674 721
------- -------
Cash flows from financing activities:
Principal payments on capital leases............... (8) (9)
Borrowings (payments) on floor-plan financing...... (1,259) (2,620)
Payments on short-term borrowings.................. (4,987) (3,170)
Notes Payable from purchase of Arizona Pacific
Materials, LLC................................... 500 --
Long term debt payments............................ (3) --
Payments on convertible debt....................... -- (13)
------- -------
Net cash used in financing activities................... (5,757) (5,812)
------- -------
Decrease in cash and cash equivalents................... -- 1
Cash and cash equivalents at beginning of
period................................................. 9 8
------- -------
Cash and cash equivalents at end of period.............. $ 9 $ 9
======= =======
Supplemental disclosures:
Interest paid........................................... $ 489 $ 631
Income taxes paid....................................... 4 --
Supplemental schedule of non-cash investing and financing activities:
Notes payable issued for purchase of Arizona Pacific Materials, LLC in the
amount of $2,500.
In connection with the $500 note payable related to the down payment at closing
for the purchase of Arizona Pacific Materials, LLC, options valued at $292 were
issued. See Note 9.
The accompanying notes are an integral part of
these condensed consolidated financial statements.
5
WESTERN POWER & EQUIPMENT CORP. & SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands)
1. BASIS OF PRESENTATION
The accompanying condensed consolidated financial statements include the
accounts of Western Power & Equipment Corp and its wholly owned subsidiary,
Arizona Pacific Materials, LLC, acquired in September 2004. See Note 9. All
intercompany transactions have been eliminated.
The accompanying condensed consolidated financial statements are unaudited and
in the opinion of management contain all the adjustments (consisting of those of
a normal recurring nature) considered necessary to present fairly the condensed
consolidated balance sheet and the condensed consolidated results of operations
and cash flows for the periods presented in conformity with accounting
principles generally accepted in the United States applicable to interim
periods. The results of operations for the quarterly period ended October 31,
2004 are not necessarily indicative of results that may be expected for any
other interim periods or for the full year. This report should be read in
conjunction with the Company's consolidated financial statements included in the
Annual Report on Form 10-K for the fiscal year ended July 31, 2004 filed with
the Securities and Exchange Commission. The accounting policies used in
preparing these unaudited condensed consolidated financial statements are
consistent with those described in the July 31, 2004 consolidated financial
statements.
The accompanying condensed consolidated financial statements have been prepared
on a going concern basis, which contemplates the realization of assets and the
satisfaction of liabilities in the normal course of business.
The Company is currently in default on its short-term borrowing facility as
discussed in Note 6 of these condensed consolidated financial statements, both
of which create substantial doubt about the Company's ability to continue as a
going concern. The accompanying unaudited condensed consolidated financial
statements do not include any adjustments that might be necessary should the
Company be unable to continue as a going concern.
2. ACCOUNTING POLICIES
The accounting policies followed by the Company are set forth in Note 1 to the
Company's condensed consolidated financial statements as filed in its Form 10-K
for the year ended July 31, 2004.
3. EARNINGS OR LOSS PER SHARE
Basic net income or loss per share of common stock is computed based on the
weighted average number of common shares outstanding during the period.
Diluted net income or loss per share of common stock is computed based on the
weighted average number of common shares outstanding during the period plus any
dilutive securities outstanding such as stock options or convertible
instruments. Total outstanding options as of October 31, 2004 totaled 3,600,000.
6
Earnings per common share is as follows:
Three Months Ended
October 31,
2004 2003
-------- --------
BASIC
Numerator:
Net income available to common
shareholders $ 519 $ 584
======== ========
Denominator:
Weighted average shares
outstanding 10,130 10,130
======== ========
Basic earnings per common share $ 0.05 $ 0.06
======== ========
DILUTED
Weighted average shares
outstanding 10,130 10,130
Stock options 470 --
-------- --------
Denominator for diluted earnings
per share 10,600 10,130
======== ========
Diluted earnings per common
Share $ 0.04 $ 0.06
======== ========
4. 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.
Period Ended October 31, 2004
Basic Diluted
Net income E.P.S. E.P.S.
As Reported $ 519 .05 .04
Pro Forma $ 519 .05 .04
Period Ended October 31, 2003
Basic Diluted
Net income E.P.S. E.P.S.
As Reported $ 584 .06 .06
Pro Forma $ 584 .06 .06
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 fair value of options granted using the Black-Scholes option
pricing model. The weighted average assumptions used for stock option grants for
periods ended October 31, 2004 and 2003 were:
2004 2003
------ ------
Risk free interest rate 2.50 4.22
Expected dividend yield N/A N/A
Expected life 3 10
Expected volatility 90.5% 98.7%
7
During the quarter ended October 31, 2004, the Company issued stock options with
an exercise price of $0.55 to related parties as part of a loan made to the
Company for the purchase of Arizona Pacific Materials, LLC. The options vest
over twelve months beginning October 2004 and are in effect for ten years. See
Note 9.
During the three months ended October 31, 2004, the Company granted 2,000,000
stock options in connection with the issuance of debt. The fair value of the
options of $292,000 was recorded as a debt discount and is being amortized over
the life of the debt which is twelve months. Because the Company's stock options
have characteristics significantly different from those of traded options, and
because changes in the subjective input assumptions can materially affect the
fair value estimate, in management's opinion, the existing models do not
necessarily provide a reliable single measure of the fair value estimate of its
stock options. The total number of stock options outstanding as of October 31,
2004 was 3,600,000.
5. INVENTORIES
Inventories and consist of the following:
October 31, July 31,
2004 2004
------- -------
Equipment (net of reserve allowances of $3,382
and $3,427, respectively):
New $20,223 $18,773
Used 3,850 4,294
Mining products 1,383 --
Parts (net of reserve allowance of $762
and $688, respectively) 6,021 5,871
------- -------
$31,477 $28,938
======= =======
Mining comprises substantially of processed cinder aggregate in a finished state
ready for resale. Inventory costs comprise not only direct cost of production,
but also an allocation of overhead including mine and other plant administrative
expenses. Depreciation of equipment costs associated with mining operations are
also included in inventory. Inventory is valued at the lower of cost or market,
with cost generally stated on a last-in, first-out (LIFO) basis. Reserves for
obsolescence or slow moving inventory are recorded when such conditions are
identified. As of October 31, 2004, the LIFO reserve was $195,000.
6. FIXED ASSETS
Fixed assets consist of the following:
October 30, July 31,
2004 2004
------- -------
Operating property, plant and equipment:
Land $ 1,251 $ 522
Buildings 1,749 1,749
Machinery and equipment 3,958 3,136
Office furniture and fixtures 2,214 2,213
Computer hardware and software 1,365 1,539
Vehicles 1,546 1,275
Leasehold improvements 985 985
------- -------
13,068 11,419
Less: accumulated depreciation (8,501) (8,799)
------- -------
Property, plant, and equipment (net) $ 4,567 $ 2,620
======= =======
Rental equipment fleet $15,110 $17,545
Less: accumulated depreciation (5,924) (6,492)
------- -------
Rental equipment (net) $ 9,186 $11,053
======= =======
8
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.
7. 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. On 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. At October 31, 2004, the Company continued to be in
technical default of the GE Loan Agreement. The Company has requested but did
not receive a waiver from GE. Although GE has not called the debt due to such
defaults, there is no guarantee that GE will not require the Company to repay
the debt at any time.
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.
8. PRODUCT INFORMATION
Revenue and gross margin by product categories are summarized as follows:
Business product category Three Months Ended
Net Revenues October 31,
2004 2003
-------- --------
Equipment Sales $ 17,792 $ 18,772
Equipment Rental 1,467 1,479
Mining Sales 93 --
Product Support 7,392 7,481
-------- --------
Total $ 26,744 $ 27,732
======== ========
9
Business product category Three Months Ended
Gross Margins October 31,
2004 2003
-------- --------
Equipment Sales $ 1,538 $ 1,709
Equipment Rental 273 416
Mining Sales (6) --
Product Support 1,526 1,444
-------- --------
Total $ 3,331 $ 3,569
======== ========
9. ACQUISITIONS
On September 8, 2004, Western Power & Equipment Corp. ("Western Power"), as the
purchaser, Advanced Mineral Technology of Nevada, Inc., a Nevada Corporation, an
outside consultant ("AMT"), as guarantor and Basalite Concrete Products, LLC, a
Nevada limited liability company ("Basalite"), and Edith Greenburg Irrevocable
Trust (the "Greenburg Trust"), collectively as Seller, entered into the
Agreement for the Purchase of Arizona Pacific Materials, LLC (the "Purchase
Agreement"). Western Power consummated the acquisition of Arizona Pacific
Materials, LLC ("Arizona Pacific") through the purchase, effective as of
September 15, 2004 (the "APM Acquisition"), of all the issued and outstanding
membership interests of Arizona Pacific held by Basalite and the Greenburg Trust
(collectively, the "Members") as the sole members thereof for a cash
consideration of $500,000 paid at closing of the APM Acquisition (the "Closing
") and the issuance at Closing by Western Power of a note in the principal face
amount of $2,500,000 (the "Western Power Note"), the repayment of which (Western
Power Note) is guaranteed in full by AMT. The Company acquired substantially all
the assets of APM and did not assume any of the liabilities.
The following table summarizes the allocation of the purchase price:
Purchase Price:
---------------
Cash $ 500,000
Note payable to members 2,500,000
----------
Total Purchase Price $3,000,000
==========
Allocation of Purchase Price:
----------------------------
Inventory $1,404,725
Land 729,000
Furniture, fixtures & equipment 866,275
----------
Total Assets Acquired $3,000,000
==========
The Western Power Note is to be paid in two installments, the first of which is
due and payable within thirteen (13) months of the Closing in the amount of Two
Million Dollars ($2,000,000) and the second installment is due and payable
10
within nineteen (19) months of the Closing in the amount of the outstanding
principal of $500,000 and accrued interest. The Western Power Note shall accrue
simple interest at the rate of five percent (5%) per annum which interest shall
commence accumulating from the closing.
Western Power issued notes to related parties for the $500,000 paid at closing,
on behalf of Western Power by these related parties. Payment on these notes is
due September 30, 2005 and accrues simple interest at the rate of five percent
(5%) per annum. In addition the Company issued 2,000,000 options (associated
with the $500,000 notes) on September 9, 2004 with an exercise price of $0.55
per share vesting over the twelve months beginning October 2004. The estimated
expense for these options is $292,625 and is being amortized over the period of
the related debt.
The following table of proforma unaudited information gives effect to the
acquisitions of the assets from Arizona Pacific Materials, LLC as if such
acquisition had occurred at the beginning of the periods shown.
THREE MONTHS ENDED
OCTOBER 31, 2004 OCTOBER 31, 2003
Revenues $ 26,795,379 $ 29,448,339
Net income $ 311,973 $ 230,701
Net income per phare - basic
and diluted .03 0.02
10. SEGMENT INFORMATION
Summarized financial information concerning the Company's reportable segments
are shown in the following tables.
Western Power & Arizona Pacific
Equipment Corp Materials, LLC Total
For the Three Months Ended October 31,2004
Revenue $26,651 $ 93 $26,744
======= ======= =======
Operating Income (Loss) $ 1,248 $ (141) $ 1,107
======= ======= =======
Net Income (Loss) $ 638 $ (119) $ 519
======= ======= =======
Capital Expenditures $ 655 $ 69 $ 724
======= ======= =======
Total identifiable assets at October 31, 2004 $50,564 $ 2,960 $53,524
======= ======= =======
For the Three Months Ended October 31, 2003
Revenue $27,732 $ 0 $27,732
======= ======= =======
Operating Income $ 1,246 $ 0 $ 1,246
======= ======= =======
Net Income $ 584 $ 0 $ 584
======= ======= =======
Capital Expenditures $ 1,436 $ 0 $ 1,436
======= ======= =======
Total identifiable assets at October 31, 2003 $55,024 $ 0 $55,024
======= ======= =======
11
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
LIQUIDITY AND CAPITAL RESOURCES
The following discussion and analysis should be read in conjunction with the
Condensed Consolidated Financial Statements and Notes thereto appearing
elsewhere in this Form 10-Q. Information included herein relating to projected
growth and future results and events constitutes forward-looking statements.
Actual results in future periods may differ materially from the forward-looking
statements due to a number of risks and uncertainties, including but not limited
to fluctuations in the construction, agricultural, and industrial sectors; the
success of the Company's restructuring and cost reduction plans; the success of
the Company's equipment rental business; rental industry conditions and
competitors; competitive pricing; the Company's relationship with its suppliers;
relations with the Company's employees; the Company's ability to manage its
operating costs; the continued availability of financing; the Company's ability
to refinance/restructure its existing debt; governmental regulations and
environmental matters; risks associated with regional, national, and world
economies; and consummation of the merger and asset purchase transactions. Any
forward-looking statements should be considered in light of these factors.
Results of Operations
- ---------------------
The Three Months ended October 31, 2004 compared to the Three Months ended
October 31, 2003.
Revenues for the three-month period ended October 31, 2004 decreased 3.6% to
$26.7 million compared with $ 27.7 million for the three-month period ended
October 31, 2003. For the three-month period ended October 31, 2004 equipment
sales decreased by 5.2%, equipment rental revenues decreased by .8% and product
support revenues increased slightly over the comparative three month period
ended October 31, 2003. Revenues were down from the prior year's comparative
period as a result of a leveling of the prior year's improved economic
conditions, especially in the Pacific Northwest.
The Company's gross profit margin of 12.5% for the three-month period ended
October 31, 2004 was slightly lower than the prior year's comparative period
margin of 12.9%. Gross margin for equipment sales was 8.6% compared to 9.1% for
the prior year's comparative period. Equipment rental gross margin was 18.6%
compared to 28.1% for the prior year's comparative period. Product support gross
margin was 20.3% compared to 19.3% for the prior year's comparative period. The
decrease in margins is associated with a change in the sales and rental mix of
products.
For the three-month period ended October 31, 2004, selling, general, and
administrative ("SG&A") expenses as a percentage of sales were 8.3%, slightly
lower than the 8.4% for the prior year's first quarter. The decrease from the
prior year's comparative period reflects the Company's continued effort to
reduce operating expenses and increase revenue levels.
Interest expense for the three months ended October 31, 2004 of $623,000 was
down from $722,000 in the prior year comparative period. This decrease from the
prior year's comparative period are the result of lower average interest rates
and a lower balance on the GE facility.
The Company had net income for the quarter ended October 31, 2004 of $519,000
($0.05 per basic share and $0.04 per diluted share) compared with a net income
of $584,000 ($0.06 per basic and diluted share) for the prior year's comparative
quarter.
12
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 October 31,
2004, the Company was indebted under manufacturer provided floor planning
arrangements in the aggregate amount of $ 13,302,000.
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 October 31, 2004, approximately
$26,722,000 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. On 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. On 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. At October 31, 2004, the Company was in technical default
of the GE Loan Agreement. The Company did not request and has not obtained a
waiver. Although GE has not called the debt due to such defaults, there is no
guarantee that GE will not require the Company to repay the debt at any time in
full.
During the three months ended October 31, 2004 the Company had positive cash
flow from operating activities during the quarter of $5,083,000. The Company's
cash flow from operating activities consisted primarily of a reduction of
accounts receivable of $4,105,000, depreciation of $1,622,000, gain on sales of
fixed assets and rental equipment of $226,000 and an increase in inventories of
$2,190,000. Purchases of fixed assets during the period were related mainly to
the ongoing replacement of aged operating assets and rental equipment sold
during the period. The Company paid down its short-term financing by $4,987,000
during the three month period ending October 31,2004.
13
The Company's cash and cash equivalents was approximately $9,000 as of October
31, 2004. The Company's current level and anticipated available cash flow will
not be sufficient to support the Company's operations during the next twelve
months. The Company must have continued availability of borrowing from its
current lender GE or it cannot fund current levels of operations. Under the
existing credit facility with GE, 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.
Since the Company has essentially no cash flow other than from accounts
receivable (which are remitted to GE), the Company cannot fund operations
without continued borrowing from GE. If GE decided to stop making borrowing
available to the Company, the Company would immediately be unable to continue
its operations. The Company currently has no alternative sources of
liquidity/borrowing available to it to meet its operating obligations.
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. However, if
GE decided to stop lending to the Company, the Company would have to discontinue
its operations immediately.
Off-Balance Sheet Arrangements
- ------------------------------
The Company's off balance sheet arrangements are principally lease arrangements
associated with the retail stores and the corporate office.
General Economic Conditions
- ---------------------------
Controlling inventory is a key ingredient to the success of an equipment
distributor because the equipment is characterized by long order cycles, high
ticket prices, and the related exposure to "flooring" interest. The Company's
interest expense may increase if inventory is too high or interest rates rise.
The Company manages its inventory through Company-wide information and inventory
sharing systems wherein all locations have access to the Company's entire
inventory. In addition, the Company closely monitors inventory turnover by
product categories and places equipment orders based upon targeted turn ratios.
All of the products and services provided by the Company are either capital
equipment or included in capital equipment, which are used in the construction,
industrial, and agricultural sectors. Accordingly, the Company's sales are
affected by inflation or increased interest rates which tend to hold down new
construction, and consequently adversely affect demand for the equipment sold
and rented by the Company. In addition, although agricultural equipment sales
are less than 2% of the Company's total revenues, factors adversely affecting
the farming and commodity markets also can adversely affect the Company's
agricultural equipment related business.
The Company's business can also be affected by general economic conditions in
its geographic markets as well as general national and global economic
conditions that affect the construction, industrial, and agricultural sectors. A
further erosion in North American and/or other countries' economies could
adversely affect the Company's business.
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 54% of the Company's net sales for the
14
three months ended October 31, 2004 resulted from sales, rental, and servicing
of products manufactured by companies other than Case. That compares with a
figure of 50% for the period ended October 31, 2003. Manufacturers other than
Case represented by the Company offer various levels of supplies and marketing
support along with purchase terms which vary from cash upon delivery to
interest-free, 12-month flooring.
The Company purchases its equipment and parts inventory from Case and other
manufacturers. No supplier other than Case accounted for more than 10% of such
inventory purchases during the nine months ended October 31, 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.
The generally soft economic conditions in the equipment market, particularly in
the northwest, have contributed to a decline in equipment sales in prior years.
A further softening in the industry could severely affect the Company's sales
and profitability. Market specific factors could also adversely affect one or
more of the Company's target markets and/or products. The Company expects the
construction equipment market in its store locations to remain flat or slightly
down over the next 6 to 12 months.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company is exposed to market risk from changes in interest rates. Market
risk is the potential loss arising from adverse changes in market rates and
prices such as interest rates. For fixed rate debt, interest rate changes affect
the fair value of financial instruments but do not impact earnings or cash
flows. Conversely for floating rate debt, interest rate changes generally do not
affect the fair market value but do impact future earnings and cash flows,
assuming other factors are held constant. At October 31, 2004, the Company had
variable rate floor plan payables, notes payable, and short-term debt of
approximately $42.3 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 $0.4 million. The
Company's policy is not to enter into derivatives or other financial instruments
for trading or speculative purposes.
ITEM 4. CONTROLS AND PROCEDURES
Based on their evaluation as of the date of the end of the period covered by
this Form 10-Q, our management, with the participation of our Chief Executive
Office and Chief Financial Officer, conducted an evaluation of the effectiveness
of the design and operation of our disclosure controls and procedures, as
required by Exchange Act Rule 13a-15. Based on that evaluation, the Chief
Executive Officer and Chief Financial Officer have concluded that our disclosure
controls and procedures were effective to ensure that information required to be
disclosed by us in the reports that we file or submit under the Exchange Act is
recorded, processed, summarized and reported within the time periods specified
by the SEC's rules and forms.
Changes in Internal Controls
- ----------------------------
There were no significant changes in our internal controls over financial
reporting that occurred during the three months ended October 31, 2004 that have
materially affected, or are reasonably likely to materially affect, our internal
control over financial reporting.
Limitations on the Effectiveness of Controls
- --------------------------------------------
We believe that a control system, no matter how well designed and operated,
cannot provide absolute assurance that the objectives of the control system are
met, and no evaluation of controls can provide absolute assurance that all
control issues and instances of fraud, if any, within a company have been
detected.
15
PART II. OTHER INFORMATION
ITEM 1. 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 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
As of October 31, 2004, the Company was in default on its
short-term borrowing facility with GE. The Company has not
received a waiver of such default from GE and although GE has not
called the loan, there is no guarantee that it will not do so in
the future.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
Exhibit 31 Rule 13a-14(a)/15d-14(a) Certification
Exhibit 32.1 Certification by the Chief Executive Officer
Relating to a Periodic Repost Containing Financial
Statements.*
Exhibit 32.2 Certification by the Chief Financial Officer
Relating to a Periodic Report Containing Financial
Statements.*
(b) Reports on Form 8-K
Form 8-K/A filed on November 29, 2004 and Form 8-K Amendment 2
filed on December 8, 2004 regarding the Company's acquisition of
Arizona Pacific Materials, LLC.
* The Exhibit attached to this Form 10-Q shall not be deemed
"filed" for purposes of Section 18 of the Securities Exchange Act
of 1934 (the "Exchange Act") or otherwise subject to liability
under that section, nor shall it be deemed incorporated by
reference in any filing under the Securities Act of 1933, as
amended, or the Exchange Act, except as expressly set forth by
specific reference in such filing.
16
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
WESTERN POWER & EQUIPMENT CORP. & SUBSIDIARY
December 15, 2004
By: /s/ Mark J. Wright
---------------------------
Mark J. Wright
Vice President of Finance and
Chief Financial Officer
17