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FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
Quarterly Report Under Section 13 or 15(d)
of the Securities Exchange Act of 1934
For the Quarter Ended January 31, 2005
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 I.D. number)
incorporation or organization)
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
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WESTERN POWER & EQUIPMENT CORP. & SUBSIDIARY
INDEX
Page
PART I. FINANCIAL INFORMATION Number
------
Item 1. Financial Statements
Condensed Consolidated Balance Sheets
January 31, 2005 (Unaudited) and July 31, 2004........... 3
Condensed Consolidated Statements of Operations
Three months ended January 31, 2005 (Unaudited)
and January 31, 2004 (Unaudited)......................... 4
Condensed Consolidated Statements of Operations
Six months ended January 31, 2005 (Unaudited)
and January 31, 2004 (Unaudited)......................... 5
Condensed Consolidated Statements of Cash Flows
Six months ended January 31, 2005 (Unaudited)
and January 31, 2004 (Unaudited)......................... 6-7
Notes to Condensed Consolidated Financial Statements..... 8-14
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations............15-18
Item 3. Quantitative and Qualitative Disclosures about
Market Risk.............................................. 18
Item 4. Controls and Procedures.................................. 18
PART II. OTHER INFORMATION
Item 1. Legal Proceedings........................................ 19
Item 2. Changes in Securities.................................... 19
Item 3. Defaults Upon Senior Securities.......................... 19
Item 4. Submission of Matters to a Vote of Security Holders...... 19
Item 5. Other Information........................................ 19
Item 6. Exhibits and Reports on Form 8-K.........................19-20
SIGNATURES ................................................................ 21
2
ITEM 1. FINANCIAL STATEMENTS
--------------------
WESTERN POWER & EQUIPMENT CORP. & SUBSIDIARY
CONDENSED CONSOLIDATED BALANCE SHEETS
(Dollars in thousands)
January 31, July 31,
2005 2004
------------ ------------
(Unaudited)
ASSETS (PLEDGED)
----------------
Current assets:
Cash and cash equivalents ...................................... $ 9 $ 9
Restricted Cash ................................................ 623 408
Accounts receivable, less allowance for doubtful
accounts of $906 and $938, respectively ..................... 7,551 11,660
Inventories .................................................... 26,422 28,938
Prepaid expenses ............................................... 223 205
------------ ------------
Total current assets ...................................... 34,828 41,220
Fixed assets:
Property, plant and equipment (net) ............................ 3,426 2,620
Rental equipment fleet (net) ................................... 9,717 11,053
------------ ------------
Total fixed assets ........................................ 13,143 13,673
Other assets ....................................................... 169 131
------------ ------------
Total assets ....................................................... $ 48,140 $ 55,024
============ ============
LIABILITIES & STOCKHOLDERS' EQUITY
----------------------------------
Current liabilities:
Borrowings under floor plan financing .......................... $ 10,119 14,561
Short-term borrowings .......................................... 23,690 31,710
Convertible debt ............................................... 50 50
Notes payable .................................................. 2,317 12
Accounts payable and accrued expenses .......................... 7,638 5,461
Accrued payroll and vacation ................................... 654 1,194
Other accrued liabilities ...................................... 931 1,005
Capital lease obligation ....................................... 28 27
------------ ------------
Total current liabilities ................................. 45,427 54,020
Long-term liabilities
Notes Payable .................................................. 543 49
Deferred Lease Income .......................................... 278 0
Capital lease obligation ....................................... 836 853
------------ ------------
Total long-term liabilities ............................... 1,657 902
------------ ------------
Total liabilities .................................................. 47,084 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 ..................................... 17,321 16,933
Deferred compensation .......................................... (72)
Accumulated deficit ............................................ (15,359) (15,997)
Less common stock in treasury, at cost (130,300 shares) ........ (844) (844)
------------ ------------
Total stockholders' equity ................................ 1,056 102
------------ ------------
Total liabilities and stockholders' equity ......................... $ 48,140 $ 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
January 31,
----------------------------
2005 2004
------------ ------------
Net revenue ........................................................ $ 30,341 $ 27,960
Cost of revenues (includes depreciation of $935 and $989,
respectively) .................................................. 27,346 25,147
------------ ------------
Gross profit ....................................................... 2,995 2,813
Selling, general and administrative expenses ....................... 2,448 2,427
------------ ------------
Operating income ................................................... 547 386
Other income (expense):
Interest expense ............................................... (717) (690)
Other income ................................................... 299 78
------------ ------------
Income (loss) before income tax provision .......................... 129 (226)
Income tax provision ............................................... 12 12
------------ ------------
Net income (loss) .................................................. $ 117 $ (238)
============ ============
Basic earnings (loss) per common share ............................. $ .01 $ (0.02)
============ ============
Diluted earnings (loss) per common share ........................... $ .01 $ (0.02)
============ ============
The accompanying notes are an integral part of
these condensed consolidated financial statements.
4
WESTERN POWER & EQUIPMENT CORP. & SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
(Dollars in thousands, except per share amounts)
Six Months Ended
January 31,
----------------------------
2005 2004
------------ ------------
Net revenue ........................................................ $ 57,085 $ 55,693
Cost of revenues (includes depreciation of $2,640 and $2,602,
respectively) .................................................. 50,759 49,311
------------ ------------
Gross profit ....................................................... 6,326 6,382
Selling, general and administrative expenses ....................... 4,673 4,750
------------ ------------
Operating income ................................................... 1,653 1,632
Other income (expense):
Interest expense ............................................... (1,340) (1,412)
Other income ................................................... 347 150
------------ ------------
Income before income tax provision ................................. 660 370
Income tax provision ............................................... 24 24
------------ ------------
Net income ......................................................... $ 636 $ 346
============ ============
Basic earnings per common share .................................... $ 0.06 $ 0.03
============ ============
Diluted earnings per common share .................................. $ 0.05 $ 0.03
============ ============
The accompanying notes are an integral part of
these condensed consolidated financial statements.
5
WESTERN POWER & EQUIPMENT CORP. & SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(Dollars in thousands)
Six Months Ended
January 31,
----------------------------
2005 2004
------------ ------------
Cash flows from operating activities:
Net income ....................................................... $ 636 $ 346
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation ..................................................... 2,639 2,840
Bad Debts ........................................................ 5 174
Amortization of debt discount .................................... 98 --
Gain on sale of fixed assets and rental equipment ................ (1,012) (324)
Stock based compensation ......................................... 24 --
Changes in assets and liabilities:
Accounts receivable .......................................... 4,104 1,190
Restricted Cash .............................................. (215) 122
Inventories .................................................. 2,295 2,382
Prepaid expenses and other assets ............................ (18) (37)
Accounts payable and accrued expenses ........................ 2,177 (794)
Accrued payroll and vacation ................................. (540) (11)
Other accrued liabilities .................................... (74) (35)
Deferred Lease Income ........................................ 278 --
Sale of other assets ......................................... (38) 23
------------ ------------
Net cash provided by operating activities .................... 10,359 5,876
------------ ------------
Cash flows from investing activities:
Purchase of property, plant and equipment ........................ (42) (169)
Purchases of rental equipment .................................... (2,629) (3,789)
Purchase of assets of Arizona Pacific Materials, LLC ............. (500) --
Proceeds on sale of fixed assets ................................. 1,584 --
Proceeds on sale of rental equipment ............................. 3,212 2,582
------------ ------------
Net cash provided (used) by investing activities ................. 1,625 (1,376)
------------ ------------
Cash flows from financing activities:
Principal payments on capital leases ............................. (17) (18)
Payments on floor-plan financing ................................. (4,442) (116)
Payments on short-term borrowings ................................ (8,019) (4,418)
Notes Payable from purchase of Arizona Pacific Materials, LLC .... 500 --
Long term debt borrowings ........................................ -- 66
Long term debt payments .......................................... (6)
Payments on convertible debt ..................................... -- (13)
------------ ------------
Net cash used in financing activities ................................ (11,984) (4,499)
------------ ------------
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 ........................................................ $ 1,283 $ 1,436
Income taxes paid .................................................... -- --
Supplemental schedule of non-cash investing and financing activities:
Notes payable issued for purchase of Arizona Pacific Materials, LLC... $ 2,500 --
6
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 ...................... 292 --
In connection consulting service agreements entered into in November
2004, options were issued in lieu of cash payment .................... 97 --
The accompanying notes are an integral part of
these condensed consolidated financial statements.
7
WESTERN POWER & EQUIPMENT CORP. & SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
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 January 31,
2005 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.
In December, 2004, the Financial Accounting Standards Board ("FASB") issued its
final standard on accounting for share-based payments ("SBP"), FASB Statement
No. 123R (revised 2004), Share-Based Payment. The Statement requires companies
to expense the value of employee stock options and similar awards. Under FAS
123R, SBP awards result in a cost that will be measured at fair value on the
awards' grant date, based on the estimated number of awards that are expected to
vest. Compensation cost for awards that vest would not be reversed if the awards
expire without being exercised. The effective date for public companies is
interim and annual periods beginning after June 15, 2005, and applied to all
outstanding and unvested SBP awards at a company's adoption. Management does not
anticipate that this Statement will have a significant impact on the Company's
consolidated financial statements.
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 January 31, 2005 totaled 4,690,000.
8
Earnings per common share is as follows: Three Months Ended
January 31,
('000's)
-----------------------
2005 2004
BASIC ---------- ----------
Numerator:
Net income (loss) available to common shareholders.... $ 117 $ (238)
========== ==========
Denominator:
Weighted average shares outstanding .................. 10,130 10,130
========== ==========
Basic earnings (loss) per common share ............... $ 0.01 $ (0.02)
========== ==========
DILUTED
Weighted average shares outstanding .................. 10,130 10,130
Stock options ........................................ 1,372 --
---------- ----------
Denominator for diluted earnings per share ........... 11,502 10,130
========== ==========
Diluted earnings (loss) per common share ............. $ 0.01 $ (0.02)
========== ==========
Six Months Ended
January 31,
('000's)
-----------------------
2005 2004
BASIC ---------- ----------
Numerator:
Net income available to common shareholders........... $ 636 $ 346
========== ==========
Denominator:
Weighted average shares outstanding .................. 10,130 10,130
========== ==========
Basic earnings per common share ...................... $ 0.06 $ 0.03
========== ==========
DILUTED
Weighted average shares outstanding .................. 10,130 10,130
Stock options ........................................ 1,654 --
---------- ----------
Denominator for diluted earnings per share ........... 11,784 10,130
========== ==========
Diluted earnings per common share .................... $ 0.05 $ 0.03
========== ==========
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 January 31, 2005
Net income Basic Diluted
('000's) E.P.S. E.P.S.
-------- ------ ------
As Reported ...................... $ 636 .06 .05
Pro Forma ........................ $ 636 .06 .05
9
Period Ended January 31, 2004
Net income Basic Diluted
('000's) E.P.S. E.P.S.
-------- ------ ------
As Reported ...................... $ 346 .03 .03
Pro Forma ........................ $ 346 .03 .03
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 January 31, 2005 and 2004 were:
2005 2004
---- ----
Risk free interest rate ........... 2.50 2.50
Expected dividend yield ........... N/A N/A
Expected life ..................... 2 3
Expected volatility ............... 115.5% 90.5%
During the quarter ended October 31, 2004, the Company issued 2,000,000 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 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. See Note 9.
During the three months ended January 31, 2005, the Company granted 790,000
stock options in connection consulting agreements. The fair value of the options
granted of $97,000 was recorded as a deferred compensation and is being
amortized over the life of the agreements 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 January 31, 2005 was 4,690,000.
5. INVENTORIES
Inventories consist of the following ('000's):
January 31, July 31,
2005 2004
---------- ----------
Equipment (net of reserve allowances
of $3,248 and $3,427, respectively):
New ..................................... $ 15,589 $ 18,773
Used .................................... 3,664 4,294
Mining products ............................ 1,373 --
Parts (net of reserve allowance of $832
and $688, respectively) .................. 5,796 5,871
---------- ----------
$ 26,422 $ 28,938
========== ==========
Mining products is comprised substantially of processed cinder aggregate in a
finished state ready for resale. Inventory costs of the mining products comprise
not only direct costs of production, but also an allocation of overhead charges
including mining and other plant administrative expenses. Inventory of mining
products is valued at the lower of cost or market, with cost generally stated on
a last-in, first-out (LIFO) basis. Mining product reserves for obsolescence or
slow moving inventory are recorded when such conditions are identified. As of
January 31, 2005, the LIFO reserve was $170,000.
10
6. FIXED ASSETS
Fixed assets consist of the following ('000's):
January 31, July 31,
2005 2004
------------ ------------
Operating property, plant and equipment:
Land ................................ $ 876 $ 522
Buildings ........................... 1,153 1,749
Machinery and equipment ............. 3,987 3,136
Office furniture and fixtures ....... 2,085 2,213
Computer hardware and software ...... 1,501 1,539
Vehicles ............................ 1,315 1,275
Leasehold improvements .............. 896 985
------------ ------------
11,813 11,419
Less: accumulated depreciation ...... (8,387) (8,799)
------------ ------------
Property, plant, and equipment (net) ... $ 3,426 $ 2,620
============ ============
Rental equipment fleet ................. $ 14,483 $ 17,545
Less: accumulated depreciation ...... (4,766) (6,492)
------------ ------------
Rental equipment (net) ................. $ 9,717 $ 11,053
============ ============
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 $45,000 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 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 January 31, 2005, the Company continued to be in
technical default of the GE Loan Agreement. 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.
11
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 $ 846,000 and $ 899,000 for the six months ended
January 31, 2005 and 2004, respectively.
During the second quarter of fiscal year 2005, the Company entered into a
sale-leaseback arrangement. Under the arrangement, the Company sold the land and
building at the Anchorage location and leased it back for a period of ten (10)
years. The leaseback has been accounted for as a operating lease. The gain of $
285,500 has been deferred and will be amortized to income in proportion to the
rental expense over the term of the lease.
Assets recorded under capital leases are recorded in fixed assets and are as
follows ('000's):
January 31, July 31,
2005 2004
---------- ----------
Capitalized asset value .................... $ 953 $ 971
Less accumulated amortization .............. (427) (441)
---------- ----------
Net capitalized asset value ................ $ 526 $ 530
========== ==========
Net capitalized asset values are included in Property, Plant and Equipment.
Future minimum lease payments under all noncancelable leases as of January 31,
2005, are as follows ('000's):
Capital Operating
Year ending January 31, leases leases
---------- ----------
2006 ....................................... 112 1,363
2007 ....................................... 132 1,150
2008 ....................................... 132 957
2009 ....................................... 132 586
2010 ....................................... 132 331
Thereafter ................................. 638 1,317
---------- ----------
Total annual lease payments ................ $ 1,278 $ 5,704
Less amount representing interest,
with imputed interest rates
ranging from 6% to 15% .................. 414
----------
Present value of minimum lease payments .... 864
Less current portion ....................... 28
----------
Long-term portion .......................... $ 836
==========
9. PRODUCT INFORMATION
Revenue and gross margin by product categories are summarized as follows
('000's):
Three Months Ended Six Months Ended
January 31, January 31,
Business product category --------------------- ---------------------
Net Revenues 2005 2004 2005 2004
- ------------------------- -------- -------- -------- --------
Equipment Sales ......... $ 23,005 $ 20,812 $ 40,796 $ 39,584
Equipment Rental ........ 619 989 2,086 2,469
Mining Sales ............ 182 -- 275 --
Product Support ......... 6,535 6,159 13,928 13,640
-------- -------- -------- --------
Total ................... $ 30,341 $ 27,960 $ 57,085 $ 55,693
======== ======== ======== ========
12
Three Months Ended Six Months Ended
January 31, January 31
Business product category --------------------- ---------------------
Gross Margins 2005 2004 2005 2004
- ------------------------- -------- -------- -------- --------
Equipment Sales ......... $ 2,136 $ 1,847 $ 3,673 $ 3,556
Equipment Rental ........ 16 35 290 451
Mining Sales ............ (16) -- (23) --
Product Support ......... 859 931 2,386 2,375
-------- -------- -------- --------
Total ................... $ 2,995 $ 2,813 $ 6,326 $ 6,382
======== ======== ======== ========
10. 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 APM and the
seller indemnified Western Power for all of APM's liabilities as of the purchase
date.
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
within nineteen (19) months of the Closing in the amount of the outstanding
principal of $500,000 and accrued interest. The Western Power Note accrues
simple interest at the rate of five percent (5%) per annum from the closing
date.
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 six percent
13
(6%) 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
fair value of these options is $292,625 and is recorded as deferred debt
discount 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.
SIX MONTHS ENDED
--------------------------------------------
JANUARY 31, 2005 JANUARY 31, 2004
---------------- ----------------
Revenues $57,177,924 $56,833,480
Net income $ 205,540 $(1,191.892)
Net income per share - basic $ .02 $ (.12)
Net income per share - diluted $ .02 $ (.12)
11. SEGMENT INFORMATION
Summarized financial information concerning the Company's reportable segments
are shown in the following tables ('000's).
Western Power & Arizona Pacific
Equipment Corp Materials, LLC Total
------------ ------------ ------------
For the Three Months Ended January 31, 2005
- -------------------------------------------
Revenue ..................................... $ 30,200 $ 141 $ 30,341
============ ============ ============
Operating Income (Loss) ..................... $ 830 $ (283) $ 547
============ ============ ============
Net Income (Loss) ........................... $ 401 $ (284) $ 117
============ ============ ============
Capital Expenditures ........................ $ 94 $ 219 $ 313
============ ============ ============
For the Three Months Ended January 31, 2004
- -------------------------------------------
Revenue ..................................... $ 27,960 $ 0 $ 27,960
============ ============ ============
Operating Income ............................ $ 386 $ 0 $ 386
============ ============ ============
Net Income .................................. $ (238) $ 0 $ (238)
============ ============ ============
Capital Expenditures ........................ $ 1,427 $ 0 $ 1,427
============ ============ ============
For the Six Months Ended January 31, 2005
- -----------------------------------------
Revenue ..................................... $ 56,852 $ 233 $ 57,085
============ ============ ============
Operating Income (Loss) ..................... $ 2,078 $ (425) $ 1,653
============ ============ ============
Net Income (Loss) ........................... $ 1,061 $ (425) $ 636
============ ============ ============
Capital Expenditures ........................ $ 2,367 $ 243 $ 2,610
============ ============ ============
Total identifiable assets at January 31, 2005 $ 44,722 $ 3,418 $ 48,140
============ ============ ============
For the Six Months Ended January 31, 2004
- -----------------------------------------
Revenue ..................................... $ 55,693 $ 0 $ 55,693
============ ============ ============
Operating Income ............................ $ 1,632 $ 0 $ 1,632
============ ============ ============
Net Income .................................. $ 346 $ 0 $ 346
============ ============ ============
Capital Expenditures ........................ $ 1,436 $ 0 $ 1,436
============ ============ ============
Total identifiable assets at January 31, 2004 $ 49,471 $ 0 $ 47,471
============ ============ ============
14
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 and Six Months ended January 31, 2005 compared to the Three and Six
- -----------------------------------------------------------------------------
Months ended January 31, 2004.
- ------------------------------
Revenues for the three-month period ended January 31, 2005 increased 8.5% to
$30.3 million compared with $ 28.0 million for the three-month period ended
January 31, 2004. For the three-month period ended January 31, 2005 equipment
sales increased by 10.5%, equipment rental revenues decreased by 37.4% and
product support revenues increased slightly over the comparative three month
period ended January 31, 2004. Revenues were up from the prior year's
comparative period because of increased construction related activity,
especially in the Oregon, Washington and Alaska markets. The Anchorage location
had several large sales to the State of Alaska during December of 2004.
Revenues for the six-month period ended January 31, 2005 increased 2.5% to $57.0
million compared with $ 55.7 million for the six-month period ended January 31,
2004. For the six-month period ended January 31, 2005 equipment sales increased
by 3.1%, equipment rental revenues decreased by 15.5% and product support
revenues increased slightly over the comparative six month period ended January
31, 2004. Revenues were up slightly from the prior year's comparative period
because of improvement in economic conditions, specifically in the second fiscal
quarter in the regions noted above.
The Company's gross profit margin of 9.9% for the three-month period ended
January 31, 2005 was slightly lower than the prior year's comparative period
margin of 10.1%. Gross margin for equipment sales was 9.3% compared to 8.9% for
the prior year's comparative period. Equipment rental gross margin was 2.6%
compared to 3.5% for the prior year's comparative period. Product support gross
margin was 13.1% compared to 15.1% for the prior year's comparative period. The
decrease in overall margins is associated with a change in the sales and rental
mix of products.
The Company's gross profit margin of 11.1% for the six-month period ended
January 31, 2005 was slightly lower than the prior year's comparative period of
11.5%. Gross margin for equipment sales was 9.0% which is the same as the prior
year's comparative period. Equipment rental gross margin was 13.9% compared to
18.3% for the prior year's comparative period. Product support gross margin was
17.1% compared to 17.4% for the prior year's comparative period. The decrease in
overall margins is associated with a change in the sales and rental mix of
products.
For the three-month period ended January 31, 2005, selling, general, and
administrative ("SG&A") expenses as a percentage of sales were 8.1%, slightly
lower than the 8.7% for the prior year's second quarter. The decrease from the
prior year's comparative period reflects the Company's continued effort to
reduce operating expenses and increase revenue levels.
For the six-month period ended January 31, 2005, SG&A expenses as a percentage
of sales were 8.2%, slightly lower than the 8.5% for the prior year's
comparative period. The decrease from the prior year's comparative period
reflects the Company's continued effort to reduce operating expenses and
increase revenue levels.
15
Interest expense for the three months ended January 31, 2005 of $717,000 was up
from $690,000 in the prior year comparative period. This increase from the prior
year's comparative period are the result of a one time charge imposed by GE as
part of the forbearance agreement in the amount of $30,000.
Interest expense for the six months ended January 31, 2005 of $1,340,000 was
down from $1,412,000 in the prior year comparative period. This decrease from
the prior year's comparative period are the result lower average outstanding
balances on the GE facility.
The Company had net income for the quarter ended January 31, 2005 of $117,000
compared with a net loss of $238,000 for the prior year's comparative quarter.
The second quarter net income includes a non-recurring gain on the sale of
certain assets in our Hayward, California store, in the amount of $278,000.
The Company had net income for the six months ended January 31, 2005 of $636,000
compared with a net income of $346,000 for the prior year's comparative period.
Liquidity and Capital Resources
- -------------------------------
The Company's primary needs for liquidity and capital resources are directly
associated with the purchase 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 January 31,
2005, the Company was indebted under manufacturer provided floor planning
arrangements in the aggregate amount of $10,119,000.
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 January 31, 2005, approximately
$23,690,000 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. At January 31, 2005, 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 six months ended January 31, 2005 the Company had positive cash flow
from operating activities during the quarter of $10,359,000. The Company's cash
flow from operating activities consisted primarily of a reduction of accounts
receivable of $4,104,000, depreciation of $2,639,000, gain on sales of fixed
assets and rental equipment of $1,012,000 and a decrease in inventories of
$2,295,000. Purchases of fixed assets during the period were related
16
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
$8,019,000 during the six month period ending January 31, 2005.
The Company's cash and cash equivalents was approximately $9,000 as of January
31, 2005. 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 46% of the Company's net sales for the
three months ended January 31, 2005 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 January 31, 2004. 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 three months ended January 31, 2005. 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.
17
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 January 31, 2005, the Company had
variable rate floor plan payables, notes payable, and short-term debt of
approximately $36.7 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 six months ended January 31, 2005 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.
18
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 January 31, 2005, 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
---------------------------------------------------
On February 25, 2005, the Company held its 2004 Annual meeting of
Stockholders (the "Annual Meeting"). All five of the directors
holding office prior to the date of the Annual Meeting were nominated
for election at the Annual Meeting, and all of such persons were
reelected at the Annual Meeting for another term as director. The
votes recorded for election of each nominee for director were the
following:
Name For Against Abstention
--------------- --------- ------- ----------
C. Dean McLain 9,724,875 20,078 1,085
Robert M. Rubin 9,726,564 18,389 1,085
Michael Metter 9,726,964 17,989 1,085
Steven Moskowitz 9,715,964 28,989 1,085
James Fisher 9,715,964 28,989 1,085
Votes were also cast, and proposals approved, at the Annual Meeting
to increase the Company's authorized share capital to fifty million
(50,000,000) shares of common stock (9,680,712 votes in favor); to
adopt the company's 2005 Stock Option Plan (8,014,137 votes in
favor); and to ratify the appointment of Marcum & Kliegman as the
Company's independent accounts for the ensuing fiscal year (9,741,303
votes in favor).
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. *
19
(b) Reports on Form 8-K
Form 8-K filed on November 9, 2004 regarding the Company's
addition of a new Board member to the Company's Board of
Directors.
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.
20
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
March 15, 2005 By: /s/ Mark J. Wright
-----------------------------
Mark J. Wright
Vice President of Finance and
Chief Financial Officer
21