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FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
Quarterly Report Under Section 13 or 15(d)
of the Securities Exchange Act of 1934
For the Quarter Ended April 30, 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
PART I. FINANCIAL INFORMATION Page Number
Item 1. Financial Statements
Condensed Consolidated Balance Sheets
April 30, 2005 (Unaudited) and July 31, 2004.................. 3
Condensed Consolidated Statements of Operations
Three months ended April 30, 2005 (Unaudited)
and April 30, 2004 (Unaudited)................................ 4
Condensed Consolidated Statements of Operations
Nine months ended April 30, 2005 (Unaudited)
and April 30, 2004 (Unaudited)................................ 5
Condensed Consolidated Statements of Cash Flows
Nine months ended April 30, 2005 (Unaudited)
and April 30, 2004 (Unaudited)................................ 6-7
Notes to Condensed Consolidated Financial Statements............ 8-15
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations.......... 16-19
Item 3. Quantitative and Qualitative Disclosures about
Market Risk............................................ 19
Item 4. Controls and Procedures................................ 19
PART II. OTHER INFORMATION
Item 1. Legal Proceedings...................................... 20
Item 2. Changes in Securities.................................. 20
Item 3. Defaults Upon Senior Securities........................ 20
Item 4. Submission of Matters to a Vote of Security Holders.... 20
Item 5. Other Information...................................... 20
Item 6. Exhibits and Reports on Form 8-K....................... 20-21
SIGNATURES .............................................................. 22
2
ITEM 1. FINANCIAL STATEMENTS
--------------------
WESTERN POWER & EQUIPMENT CORP. & SUBSIDIARY
CONDENSED CONSOLIDATED BALANCE SHEETS
(Dollars in thousands)
APRIL 30, JULY 31,
2005 2004
------------ ------------
(Unaudited)
ASSETS (PLEDGED)
- ----------------
Current assets:
Cash and cash equivalents .......................................... $ 7 $ 9
Restricted Cash .................................................... 553 408
Accounts receivable, less allowance for doubtful accounts
of $930 and $938, respectively .................................. 9,501 11,660
Inventories ........................................................ 36,032 28,938
Prepaid expenses ................................................... 261 205
------------ ------------
Total current assets .......................................... 46,354 41,220
Fixed assets:
Property, plant and equipment (net) ................................ 3,565 2,620
Rental equipment fleet (net) ....................................... 9,172 11,053
------------ ------------
Total fixed assets ............................................ 12,737 13,673
Other assets ........................................................... 408 131
------------ ------------
Total assets ........................................................... $ 59,499 $ 55,024
============ ============
LIABILITIES & STOCKHOLDERS' EQUITY
- ----------------------------------
Current liabilities:
Borrowings under floor plan financing .............................. $ 16,545 14,561
Short-term borrowings .............................................. 26,155 31,710
Convertible debt ................................................... 50 50
Notes payable ...................................................... 3,033 12
Accounts payable and accrued expenses .............................. 9,250 5,461
Accrued payroll and vacation ....................................... 647 1,194
Other accrued liabilities .......................................... 1,033 1,005
Capital lease obligation ........................................... 36 27
------------ ------------
Total current liabilities ..................................... 56,749 54,020
Long-term liabilities
Notes Payable ...................................................... 692 49
Deferred Lease Income .............................................. 271 0
Capital lease obligation ........................................... 823 853
------------ ------------
Total long-term liabilities ................................... 1,786 902
------------ ------------
Total liabilities ...................................................... 58,535 54,922
------------ ------------
Stockholders' equity:
Preferred stock-10,000,000 shares authorized;
none issued and outstanding ..................................... -- --
Common stock-$.001 par value; 50,000,000 shares authorized;
10,260,300 issued and 10,130,000 outstanding .................... 10 10
Additional paid-in capital ......................................... 17,341 16,933
Deferred compensation .............................................. (48)
Accumulated deficit ................................................ (15,495) (15,997)
Less common stock in treasury, at cost (130,300 shares) ............ (844) (844)
------------ ------------
Total stockholders' equity .................................... 964 102
------------ ------------
Total liabilities and stockholders' equity ............................. $ 59,499 $ 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 APRIL 30,
----------------------------
2005 2004
------------ ------------
Net revenue ................................................................. $ 28,677 $ 26,426
Cost of revenues (includes depreciation of $935 and $989, respectively)...... 25,489 24,142
------------ ------------
Gross profit ................................................................ 3,188 2,284
Selling, general and administrative expenses ................................ 2,670 2,271
------------ ------------
Operating income ............................................................ 518 13
Other income (expense):
Interest expense ........................................................ (696) (645)
Other income ............................................................ 55 (58)
------------ ------------
Income (loss) before income tax provision ................................... (123) (690)
Income tax provision ........................................................ 12 12
------------ ------------
Net income (loss) ........................................................... $ (135) $ (702)
============ ============
Basic earnings (loss) per common share ...................................... $ (.01) $ (0.07)
============ ============
Diluted earnings (loss) per common share .................................... $ (.01) $ (0.07)
============ ============
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)
NINE MONTHS ENDED APRIL 30,
----------------------------
2005 2004
------------ ------------
Net revenue ................................................................. $ 85,762 $ 82,119
Cost of revenues (includes depreciation of $3,264 and $2,602, respectively).. 76,248 73,453
------------ ------------
Gross profit ................................................................ 9,514 8,666
Selling, general and administrative expenses ................................ 7,342 7,021
------------ ------------
Operating income ............................................................ 2,172 1,645
Other income (expense):
Interest expense ........................................................ (2,036) (2,057)
Other income ............................................................ 401 92
------------ ------------
Income before income tax provision .......................................... 537 (320)
Income tax provision ........................................................ 36 36
------------ ------------
Net income .................................................................. $ 501 $ (356)
============ ============
Basic earnings per common share ............................................. $ 0.05 $ (0.04)
============ ============
Diluted earnings per common share ........................................... $ 0.04 $ (0.04)
============ ============
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)
NINE MONTHS ENDED APRIL 31,
----------------------------
2005 2004
------------ ------------
Cash flows from operating activities:
Net income .............................................................. $ 501 $ (356)
Adjustments to reconcile net income to net cash provided by operating
activities:
Depreciation ............................................................ 3,659 3,880
Bad Debts ............................................................... 7 301
Amortization of debt discount ........................................... 171 --
Gain on sale of fixed assets and rental equipment ....................... (1,136) (702)
Stock based compensation ................................................ 68 --
Changes in assets and liabilities:
Accounts receivable ................................................. 2,152 1,693
Restricted Cash ..................................................... (145) (651)
Inventories ......................................................... (7,958) (5,082)
Prepaid expenses and other assets ................................... (332) (3)
Accounts payable and accrued expenses ............................... 3,789 683
Accrued payroll and vacation ........................................ (547) 7
Other accrued liabilities ........................................... 27 94
Deferred Lease Income ............................................... 271 --
------------ ------------
Net cash provided by operating activities ............................... 527 (136)
------------ ------------
Cash flows from investing activities:
Purchase of property, plant and equipment ............................... (744) (222)
Purchases of rental equipment ........................................... (3,142) (4,376)
Purchase of assets of Arizona Pacific Materials, LLC .................... (500) --
Proceeds on sale of fixed assets ........................................ 1,584 8
Proceeds on sale of rental equipment .................................... 4,579 4,757
------------ ------------
Net cash provided (used) by investing activities ........................ 1,777 167
------------ ------------
Cash flows from financing activities:
Principal payments on capital leases .................................... (21) (29)
Borrowings on floor-plan financing ...................................... 1,984 5,563
Payments on short-term borrowings ....................................... (5,555) (5,617)
Notes Payable from purchase of Arizona Pacific Materials, LLC ........... 500 --
Long term debt borrowings ............................................... 795 65
Long term debt payments ................................................. (9) --
Payments on convertible debt ............................................ -- (13)
------------ ------------
Net cash used in financing activities ....................................... (2,306) (31)
------------ ------------
Decrease in cash and cash equivalents ....................................... (2) --
Cash and cash equivalents at beginning of period ............................ 9 8
------------ ------------
Cash and cash equivalents at end of period .................................. $ 7 $ 8
============ ============
Supplemental disclosures:
Interest paid ............................................................... $ 2,158 $ 2,081
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
Options valued at $292 were issued in connection with a $500 note
payable related to the down payment at closing for the purchase of
Arizona Pacific Materials
See Note 9 .................................................................. 292 --
Options issued in lieu of cash payments in connection with consulting
service agreements entered into in November 2004 ............................ 97 --
Options issued in lieu of cash payments in connection consulting
service agreements entered into in February 2005 ............................ 20 --
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 April 30, 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.
At April 30, 2005 the Company continued to be in technical default with the GE
credit facility. In June 2005, the facility was subsequently paid. See Note 13.
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 the
first annual reporting period beginning after June 15, 2005, and will apply 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 April 30, 2005 was 4,890,000.
8
Earnings per common share is as follows:
THREE MONTHS ENDED APRIL 30,
('000's)
-------------------------------
2005 2004
------------ ------------
BASIC
Numerator:
Net income (loss) available to common shareholders... $ (135) $ (702)
============ ============
Denominator:
Weighted average shares outstanding ................. 10,130 10,130
============ ============
Basic earnings (loss) per common share .............. $ (0.01) $ (0.07)
============ ============
DILUTED
Weighted average shares outstanding ................. 10,130 10,130
Stock options ....................................... -- --
------------ ------------
Denominator for diluted earnings per share .......... 10,130 10,130
============ ============
Diluted earnings (loss) per common share ............ $ (0.01) $ (0.07)
============ ============
NINE MONTHS ENDED APRIL 30,
('000's)
-------------------------------
2005 2004
------------ ------------
BASIC
Numerator:
Net income available to common shareholders.......... $ 501 $ (356)
============ ============
Denominator:
Weighted average shares outstanding ................. 10,130 10,130
============ ============
Basic earnings per common share ..................... $ 0.05 $ (0.04)
============ ============
DILUTED
Weighted average shares outstanding ................. 10,130 10,130
Stock options ....................................... 1,042 --
------------ ------------
Denominator for diluted earnings per share .......... 11,172 10,130
============ ============
Diluted earnings per common share ................... $ 0.04 $ (0.04)
============ ============
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.
9
Nine Months Ended April 30, 2005
Net income Basic Diluted
('000's) E.P.S. E.P.S.
---------- ---------- ----------
As Reported .................... $ 501 $ .05 $ .04
Stock Based Employee Compensation
Cost ........................... (185) (.02) (.02)
---------- ---------- ----------
Pro Forma ...................... $ 316 $ .03 $ .02
========== ========== ==========
Nine Months Ended April 30, 2004
Net income Basic Diluted
('000's) E.P.S. E.P.S.
---------- ---------- ----------
As Reported .................... $ (356) $ (.04) $ (.04)
Stock Based Employee Compensation
Cost ........................... (83) (.01) (.01)
---------- ---------- ----------
Pro Forma ...................... $ (439) $ (.05) $ (.05)
========== ========== ==========
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
April 30, 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 .................. 102.5% 90.5%
Fair Value of Stock Options .......... .62 N/A
In October 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.
During the three months ended April 30, 2005, the Company granted 200,000 stock
options in connection consulting agreements. The fair value of the options
granted of $20,000 was recorded as a deferred compensation and was expensed in
the quarter ending April 30, 2005.
10
5. INVENTORIES
Inventories consist of the following ('000's):
April 30, July 31,
2005 2004
---------- ----------
Equipment (net of reserve allowances of
$3,250 and $3,427, respectively):
New ..................................... $ 24,328 $ 18,773
Used .................................... 4,529 4,294
Mining products ............................. 1,497 --
Parts (net of reserve allowance of
$696 and $688, respectively) ................ 5,678 5,871
---------- ----------
.................................................... $ 36,032 $ 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
April 30, 2005, the LIFO reserve was $354,000.
6. FIXED ASSETS
Fixed assets consist of the following ('000's):
April 30, July 31,
2005 2004
Operating property, plant and equipment: ---------- ----------
Land ..................................... $ 876 $ 522
Buildings ................................ 1,153 1,749
Machinery and equipment .................. 4,131 3,136
Office furniture and fixtures ............ 2,072 2,213
Computer hardware and software ........... 1,506 1,539
Vehicles ................................. 1,316 1,275
Leasehold improvements ................... 976 985
---------- ----------
12,030 11,419
Less: accumulated depreciation .............. (8,465) (8,799)
---------- ----------
Property, plant, and equipment (net) ........ $ 3,565 $ 2,620
========== ==========
Rental equipment fleet ...................... $ 13,333 $ 17,545
Less: accumulated depreciation ........... (4,161) (6,492)
---------- ----------
Rental equipment (net) ...................... $ 9,172 $ 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.
11
The Company also 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.
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. On
January 12, 2005, the Company entered into a Forbearance Agreement with GE,
under the terms of which GE raised the interest rate to prime plus 2.75% and
required the Company to pay $80,000 fee to GE for the forbearance. On April 1,
2005, the Company entered into a Forbearance Agreement with GE, under the terms
of which GE changed the interest rate to prime plus 2.25% and required the
Company to pay a $50,000 fee to GE for the forbearance and $5,000 per week until
May 31, 2005 or loan payoff, if sooner.
At April 30, 2005 the Company continued to be in technical default with the GE
credit facility. In June 2005, the facility was subsequently paid. See Note 13.
8. NOTES PAYABLE
Notes payable consists of the following: ('000's)
Balance as of
--------------------------
April 30, July 31,
Description 2005 2004
- ------------------------------------------------------------------ ---------- ----------
Note payable to Basalite Concrete Products, LLC (note 11) dated
September 8, 2004 in the amount of $2,500, with payments of
$2,000 due October 8, 2005 and $500 due March 8, 2006 including
interest accrued at 5% per annum..................................... $ 2,500 $ --
Note payable to related parties (Note 11) dated September 30, 2004
in the amount of $500, recorded at $378 net of discount due
September 30, 2005 including interest accrued at 6% per annum........ 378 --
Note payable to West Coast Bank dated March 15, 2005 in the amount
of $795, due in monthly installments of $ 16 beginning May 15,
2005 including interest at 6.50% per annum secured by specific
equipment in inventory............................................... 795 --
Notes payable to GMAC dated November 15, 2003 in the amount of $66
with payments of $1 per month including interest at 7.2% per annum... 52 61
---------- ----------
Total ....................................................... $ 3,725 $ 61
Less current portion ........................................ (3,033) (12)
---------- ----------
Total Long-Term Notes Payable ............................... $ 692 $ 49
========== ==========
9. 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
12
maintenance and repair costs. Total rent expense under all operating leases
aggregated $ 1,119,000 and $ 899,000 for the nine months ended April 30, 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):
April 30, July 31,
2005 2004
---------- ----------
Capitalized asset value ..................... $ 953 $ 971
Less accumulated amortization ............... (439) (441)
---------- ----------
Net capitalized asset value ................. $ 514 $ 530
========== ==========
Net capitalized asset values are included in Property, Plant and Equipment.
Future minimum lease payments under all noncancelable leases as of April 30,
2005, are as follows ('000's):
Capital Operating
Year ending April 30, leases leases
---------- ----------
2006 ........................................ 118 1,451
2007 ........................................ 132 925
2008 ........................................ 132 584
2009 ........................................ 132 463
2010 ........................................ 132 284
Thereafter .................................. 737 1,174
---------- ----------
Total annual lease payments ................. $ 1,383 $ 4,881
Less amount representing interest, with
imputed an interest rate of 6.5% ......... 524
----------
Present value of minimum lease payments ..... 859
Less current portion ........................ 36
----------
Long-term portion ........................... $ 823
==========
10. PRODUCT INFORMATION
Revenue and gross margin by product categories are summarized as follows
('000's):
Business product category Three Months Ended April 30, Nine Months Ended April 30,
--------------------------- ---------------------------
Net Revenues 2005 2004 2005 2004
---------------------------- ---------- ---------- ---------- ----------
Equipment Sales ............ $ 21,063 $ 17,591 $ 61,860 $ 57,175
Equipment Rental ........... 512 1,634 2,597 4,103
Mining Sales ............... 205 -- 480 --
Product Support ............ 6,897 7,201 20,825 20,841
---------- ---------- ---------- ----------
Total ...................... $ 28,677 $ 26,426 $ 85,762 $ 82,119
========== ========== ========== ==========
13
Business product category Three Months Ended April 30, Nine Months Ended April 30,
--------------------------- ---------------------------
Gross Margins 2005 2004 2005 2004
---------------------------- ---------- ---------- ---------- ----------
Equipment Sales ............ $ 1,787 $ 914 $ 5,461 $ 4,469
Equipment Rental ........... (2) 92 288 544
Mining Sales ............... 117 -- 94 --
Product Support ............ 1,286 1,278 3,671 3,653
---------- ---------- ---------- ----------
Total ...................... $ 3,188 $ 2,284 $ 9,514 $ 8,666
========== ========== ========== ==========
11. 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 Concrete Products, LLC
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
(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
14
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 unamortized deferred debt discount as of April 30, 2005 was $122,000.
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.
NINE MONTHS ENDED
-----------------------------------
April 30, 2005 April 30, 2004
(000's) (000's)
-------------- --------------
Revenues ......................... $ 85,851 $ 83,441
Net income ....................... $ (40) $ (2,509)
Net income per share - basic ..... $ (.03) $ (.24)
Net income per share - diluted ... $ (.03) $ (.24)
12. 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 April 30, 2005
Revenue ................................... $ 28,472 $ 205 $ 28,677
Operating Income (Loss) ................... $ 813 $ (295) $ 518
Net Income (Loss) ......................... $ 162 $ (297) $ (135)
Capital Expenditures ...................... $ 1,027 $ 214 $ 1,241
For the Three Months Ended April 30, 2004
Revenue ................................... $ 26,426 $ 0 $ 26,426
Operating Income .......................... $ 13 $ 0 $ 13
Net Income ................................ $ (702) $ 0 $ (702)
Capital Expenditures ...................... $ 1,206 $ 0 $ 1,206
For the Nine Months Ended April 30, 2005
Revenue ................................... $ 85,282 $ 480 $ 85,762
Operating Income (Loss) ................... $ 2,892 $ (720) $ 2,172
Net Income (Loss) ......................... $ 1,222 $ (721) $ 501
Capital Expenditures ...................... $ 3,395 $ 524 $ 3,919
Total identifiable assets at April 30, 2005 $ 55,821 $ 3,678 $ 59,499
For the Nine Months Ended April 30, 2004
Revenue ................................... $ 82,119 $ 0 $ 82,119
Operating Income .......................... $ 1,645 $ 0 $ 1,645
Net Income ................................ $ (356) $ 0 $ (356)
Capital Expenditures ...................... $ 6,500 $ 0 $ 6,500
Total identifiable assets at April 30, 2004 $ 54,863 $ 0 $ 54,863
15
13. SUBSEQUENT EVENTS
In June 2005 the Company closed a new $32 million senior credit facility with
several institutional lenders. The facility is comprised of $30 million of
convertible debt (convertible into common shares of the Company at $2.00 per
share) payable over the next five years and a $2 million six month convertible
term loan, both at a variable interest rate of LIBOR plus 6%. The lenders were
also granted warrants to purchase approximately 8.5 million common shares of the
Company at $1.75 per share. The lenders also have the option to lend an
additional $7.5 million to the Company under the same terms as the existing five
year convertible debt.
Western used $23.0 million of the loan proceeds to repay and terminate its
credit facility and forbearance agreement with GE Commercial Distribution
Finance Corporation and $2.5 million to pay off the purchase note of Arizona
Pacific Materials (see Note 11). The remainder of the proceeds will be used to
support its near term needs for working capital, general capital expenditures,
including sufficient working capital to initiate the build out of the Phoenix
mining facilities, and other corporate requirements.
16
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 Nine Months ended April 30, 2005 compared to the Three and Nine
- -----------------------------------------------------------------------------
Months ended April 30, 2004.
- ----------------------------
Revenues for the three-month period ended April 30, 2005 increased 8.5% to $28.7
million compared with $ 26.4 million for the three-month period ended April 30,
2004. For the three-month period ended April 30, 2005 equipment sales increased
by 19.7%, equipment rental revenues decreased by 68.6% and product support
revenues decreased 4.2% over the comparative three month period ended April 30,
2004. Revenues were up from the prior year's comparative period because of
increased construction related activity and economic conditions, especially in
the Oregon, Washington and Alaska markets.
Revenues for the nine-month period ended April 30, 2005 increased 4.4% to $85.8
million compared with $ 82.2 million for the nine-month period ended April 30,
2004. For the nine-month period ended April 30, 2005 equipment sales increased
by 8.2%, equipment rental revenues decreased by 36.7% and product support
revenues remained the same as that of the comparative nine month period ended
April 30, 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 11.1% for the three-month period ended
April 30, 2005 was higher than the prior year's comparative period margin of
8.6%. Gross margin for equipment sales was 8.5% compared to 5.2% for the prior
year's comparative period. Equipment rental gross margin was (0.03)% compared to
5.6% for the prior year's comparative period. Product support gross margin was
18.6% compared to 17.7% for the prior year's comparative period. The increase in
overall margins is associated with a change in the sales and rental mix of
products with higher margins from equipment sales having the greatest impact.
Improved economic conditions in the Oregon, Washington and Alaska markets have
created more demand for the purchase of equipment rather than renting.
The Company's gross profit margin of 11.1% for the nine-month period ended April
30, 2005 was slightly higher than the prior year's comparative period of 10.6%.
Gross margin for equipment sales was 8.8% which is higher than the 7.8% of the
prior year's comparative period. Equipment rental gross margin was 11.1%
compared to 13.3% for the prior year's comparative period. Product support gross
margin was 17.6% compared to 17.5% for the prior year's comparative period. The
increase in overall margins is associated with a change in the sales and rental
mix of products.
For the three-month period ended April 30, 2005, selling, general, and
administrative ("SG&A") expenses as a percentage of sales were 9.3%, slightly
higher than the 8.6% for the prior year's third quarter. The increase from the
prior year's comparative period reflects the impact of the operational
transition costs associated with our subsidiary, Arizona Pacific Materials, LLC,
purchased in September 2004.
For the nine-month period ended April 30, 2005, SG&A expenses as a percentage of
sales were 8.6%, slightly lower than the 8.5% for the prior year's comparative
period. The slight increase from the prior year's comparative period
17
reflects the Company's continued effort to reduce operating expenses and
increase revenue levels offset by the impact of the transitional operating
expenses related to our subsidiary, Arizona Pacific Materials, LLC, purchased in
September 2004.
Interest expense for the three months ended April 30, 2005 of $696,000 was up
from $645,000 in the prior year comparative period. This increase from the prior
year's comparative period are the result of charges imposed by GE as part of the
forbearance agreement in the amount of $80,000. This fee was offset by lower
average outstanding balances on the GE facility.
Interest expense for the nine months ended April 30, 2005 of $2,036,000 was down
from $2,057,000 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 a net loss for the quarter ended April 30, 2005 of $135,000
compared with a net loss of $702,000 for the prior year's comparative quarter.
The Company had net income for the nine months ended April 30, 2005 of $501,000
compared with a net loss of $356,000 for the prior year's comparative period.
Liquidity and Capital Resources
- -------------------------------
The Company also 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.
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. On
January 12, 2005, the Company entered into a Forbearance Agreement with GE,
under the terms of which GE raised the interest rate to prime plus 2.75% and
required the Company to pay $80,000 fee to GE for the forbearance. On April 1,
2005, the Company entered into a Forbearance Agreement with GE, under the terms
of which GE changed the interest rate to prime plus 2.25% and required the
Company to pay a $50,000 fee to GE for the forbearance and $5,000 per week until
May 31, 2005 or loan payoff, if sooner.
At April 30, 2005 the Company continued to be in technical default with the GE
credit facility. In June 2005 the Company closed a new $32 million senior credit
facility with several institutional lenders. The facility is comprised of $30
million of convertible debt (convertible into common shares of the Company at
$2.00 per share) payable over the next five years and a $2 million six month
convertible term loan, both at a variable interest rate of LIBOR plus 6%. The
lenders were also granted warrants to purchase approximately 8.5 million common
shares of the Company at $1.75 per share. The lenders also have the option to
lend an additional $7.5 million to the Company under the same terms as the
existing five year convertible debt.
Western used $23.0 million of the loan proceeds to repay and terminate its
credit facility and forbearance agreement with GE Commercial Distribution
Finance Corporation and $2.5 million to pay off the purchase note of Arizona
Pacific Materials (see Note 11). The remainder of the proceeds will be used to
support its near term needs for working capital, general capital expenditures,
including sufficient working capital to initiate the build out of the Phoenix
mining facilities, and other corporate requirements.
During the nine months ended April 30, 2005 the Company had positive cash flow
from operating activities during the year of $527,000. The Company's cash flow
from operating activities consisted primarily of a reduction of accounts
receivable of $2,152,000, depreciation of $3,659,000, gain on sales of fixed
assets and rental equipment of $1,136,000 and a decrease in inventories of
$7,958,000. 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 $5,555,000
during the nine month period ending April 30, 2005.
The Company's cash and cash equivalents was approximately $7,000 as of April 30,
2005. The Company's current level and anticipated available cash flow will be
sufficient to support the Company's operations during the next twelve months.
18
Off-Balance Sheet Arrangements
- ------------------------------
The Company's off balance sheet arrangements are principally lease arrangements
associated with the retail stores and the corporate office.
New Accounting Pronouncements
- -----------------------------
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 the
first annual reporting period beginning after June 15, 2005, and will apply 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.
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 50% of the Company's net sales for the
nine months ended April 30, 2005 resulted from sales, rental, and servicing of
products manufactured by companies other than Case. That compares with a figure
of 50% for the nine month period ended April 30, 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 April 30, 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.
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.
19
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company is exposed to market risk from changes in interest rates. Market
risk is the potential loss arising from adverse changes in market rates and
prices such as interest rates. For fixed rate debt, interest rate changes affect
the fair value of financial instruments but do not impact earnings or cash
flows. Conversely for floating rate debt, interest rate changes generally do not
affect the fair market value but do impact future earnings and cash flows,
assuming other factors are held constant. At April 30, 2005, the Company had
variable rate floor plan payables, notes payable, and short-term debt of
approximately $42.7 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 nine months ended April 30, 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.
20
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
-------------------------------
At April 30, 2005 the Company continued to be in technical default
with the GE credit facility. In June 2005 the Company closed a new
$32 million senior credit facility with several institutional
lenders. The facility is comprised of $30 million of convertible
debt (convertible into common shares of the Company at $2.00 per
share) payable over the next five years and a $2 million six month
convertible term loan, both at a variable interest rate of LIBOR
plus 6%. The lenders were also granted warrants to purchase
approximately 8.5 million common shares of the Company at $1.75 per
share. The lenders also have the option to lend an additional $7.5
million to the Company under the same terms as the existing five
year convertible debt.
Western used $23.0 million of the loan proceeds to repay and
terminate its credit facility and forbearance agreement with GE
Commercial Distribution Finance Corporation and $2.5 million to pay
off the purchase note of Arizona Pacific Materials (see Note 11).
The remainder of the proceeds will be used to support its near term
needs for working capital, general capital expenditures, including
sufficient working capital to initiate the build out of the Phoenix
mining facilities, and other corporate requirements.
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 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.
21
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
June 14, 2005 By: /s/ Mark J. Wright
---------------------------
Mark J. Wright
Vice President of Finance
and Chief Financial Officer
22