Western Power & Equipment 10-Q 2001 Q1 Quarterly report

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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-Q

Quarterly Report Under Section 13 or 15(d)
of the Securities Exchange Act of 1934

For the Quarter Ended October 31, 2000

Commission File Number 0-26230

WESTERN POWER & EQUIPMENT CORP.
(Exact name of registrant as specified in its charter)

Delaware (State or other jurisdiction of incorporation or organization)	91-1688446 (I.R.S. Employer I.D. number)
4601 NE 77th Avenue, Suite 200, Vancouver, WA (Address of principal executive offices)	98662 (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 Outstanding
Common Stock (par value $.001 per share)	3,353,162

WESTERN POWER & EQUIPMENT CORP.

INDEX

			Page Number
PART I.	FINANCIAL INFORMATION
	Item 1.	Financial Statements
		Consolidated Balance Sheet October 31, 2000 (Unaudited) and July 31, 2000	1
		Consolidated Statement of Operations Three months ended October 31, 2000 (Unaudited) and October 31, 1999 (Unaudited)	2
		Consolidated Statement of Cash Flows Three months ended October 31, 2000 (Unaudited) and October 31, 1999 (Unaudited)	3
		Notes to Consolidated Financial Statements	4 - 5
	Item 2.	Management's Discussion and Analysis of Financial Condition and Operating Results	6 - 7
PART II.	OTHER INFORMATION
	Item 1.	Legal Proceedings	N/A
	Item 2.	Changes in Securities	N/A
	Item 3.	Defaults Upon Senior Securities	N/A
	Item 4.	Submission of Matters to a Vote of Security Holders	N/A
	Item 5.	Other Information	8
	Item 6.	Exhibits and Reports on Form 8-K	8

ITEM 1.  FINANCIAL STATEMENTS

WESTERN POWER & EQUIPMENT CORP.

CONSOLIDATED BALANCE SHEET

(Dollars in thousands)

			October 31, 2000			July 31, 2000
			(Unaudited)
ASSETS
Current assets:
	Cash and cash equivalents		$	388		$	824
	Accounts receivable, less allowance for doubtful accounts of $724 and $563			17,596			17,347
	Inventories			56,458			58,297
	Prepaid expenses			146			210
	Income taxes receivable			122			400
	Deferred income taxes			2,273			2,273
		Total current assets		76,983			79,351
Fixed Assets:
	Property, plant and equipment (net)			5,983			9,450
	Rental equipment fleet (net)			25,250			26,076
	Leased equipment fleet (net)			4,921			4,975
		Total fixed assets		36,154			40,501
Intangibles and other assets, net of accumulated amortization of $601 and $683				2,833			2,858
Total assets			$	115,970		$	122,710
LIABILITIES & STOCKHOLDERS' EQUITY
Current liabilities:
	Borrowings under floor plan financing		$	19,830		$	14,768
	Short-term borrowings			60,684			67,671
	Accounts payable			9,385			10,730
	Accrued payroll and vacation			825			751
	Other accrued liabilities			1,238			1,323
	Capital lease obligation			48			17
		Total current liabilities		92,010			95,260
Deferred income taxes				2,273			2,273
Capital lease obligation				900			4,786
Long-term borrowings				28			28
Deferred lease income				5,919			5,982
		Total long-term liabilities		9,120			13,069
Total liabilities				101,130			108,329
Stockholders' equity:
	Preferred stock—10,000,000 shares authorized; none issued and outstanding			—			—
	Common stock—$.001 par value; 20,000,000 shares authorized; 3,353,162 issued and outstanding			4			4
	Additional paid-in capital			16,005			16,005
	Retained earnings			(1	)		(460	)
	Less common stock in treasury, at cost (180,300 shares)			(1,168	)		(1,168	)
		Total stockholders' equity		14,840			14,381
Total liabilities and stockholders' equity			$	115,970		$	122,710

See accompanying notes to financial statements.

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WESTERN POWER & EQUIPMENT CORP.

CONSOLIDATED STATEMENT OF OPERATIONS

(UNAUDITED)

(Dollars in thousands, except per share amounts)

		Three Months Ended October 31,
		2000			1999
Net revenue		$	37,783		$	42,063
Cost of revenues			32,925			37,144
Gross profit			4,858			4,919
Selling, general and administrative expenses			3,280			3,458
Operating Income			1,578			1,461
Other income (expense):
	Interest expense		(1,679	)		(1,492	)
	Other income		856			218
Income before taxes			755			187
Income tax provision			294			62
Net income		$	461		$	125
Basic earnings per common share		$	0.14		$	0.04
Average outstanding common shares for basic earnings per share			3,353			3,303
Average outstanding common shares and equivalents for diluted earnings per share			3,353			3,303
Diluted earnings per share		$	0.14		$	0.04

See accompanying notes to financial statements.

2

WESTERN POWER & EQUIPMENT CORP.

CONSOLIDATED STATEMENT OF CASH FLOWS

(UNAUDITED)

(Dollars in thousands)

				Three Months Ended October 31,
				2000			1999
Cash flows from operating activities:
	Net income			$	461		$	125
	Adjustments to reconcile net income to net cash provided by operating activities:
		Depreciation			3,275			3,500
		Amortization			10			31
		Gain on sale of fixed assets			(522	)		-0	-
		Changes in assets and liabilities:
			Accounts receivable		(249	)		(1,776	)
			Inventories		119			5,407
			Leased equipment, net		53			127
			Inventory floor-plan financing		5,066			(4,151	)
			Short-term financing		(6,992	)		(274	)
			Deferred income tax liability		—			7
			Prepaid expenses		64			87
			Accounts payable		(1,345	)		(2,228	)
			Accrued payroll and vacation		74			38
			Other accrued liabilities		(86	)		82
			Deferred lease income		(63	)		(148	)
			Income taxes receivable/payable		278			53
			Other assets/liabilities		-0	-		-0	-
	Net cash provided by operating activities				143			880
Cash flow from investing activities:
	Purchase of fixed assets				(263	)		(58	)
	Purchase/sales of rental equipment, net				(359	)		(1,498	)
	Proceeds on sale of fixed assets				45			-0	-
	Purchase of intangibles				15			-0	-
	Net cash used in investing activities				(562	)		(1,556	)
Cash flows from financing activities:
	Principal payments on capital leases				(17	)		(14	)
	Long-term borrowings (repayments)				-0	-		(4	)
	Net cash used in financing activities				(17	)		(18	)
Decrease in cash and cash equivalents					(436	)		(694	)
Cash and cash equivalents at beginning of period					824			2,629
Cash and cash equivalents at end of period				$	388		$	1,935

See accompanying notes to financial statements.

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Western Power & Equipment Corp.

Notes to Consolidated Financial Statements

(Dollars in thousands)

1.  Basis of Presentation

    The financial information included in this report has been prepared in conformity with the accounting principles and practices reflected in the financial statements for the preceding year included in the annual report on Form 10-K for the year ended July 31, 2000 filed with the Securities and Exchange Commission. All adjustments are of a normal recurring nature and are, in the opinion of management, necessary for a fair statement of the results for the interim periods. This report should be read in conjunction with the Company's financial statements included in the annual report on Form 10-K for the year ended July 31, 2000 filed with the Securities and Exchange Commission.

2.  Inventories

    Inventories consist of the following:

		October 31, 2000		July 31, 2000
Equipment (net of reserve allowances of 4,027 and 4,770 respectively):
	New equipment	$	39,571	$	40,148
	Used equipment		6,179		7,442
Parts (net of reserve allowance of 560 and 522 respectively)			10,708		10,707
		$	56,458	$	58,297

3.  Fixed Assets

    Fixed Assets consist of the following:

		October 31, 2000			July 31, 2000
Operating property, plant and equipment:
	Land	$	500		$	500
	Buildings		1,575			5,334
	Machinery and equipment		3,993			4,030
	Office furniture and fixtures		2,379			2,360
	Computer hardware and software		1,440			1,869
	Vehicles		1,897			1,428
	Leasehold improvements		664			550
			12,448			16,071
	Less: accumulated depreciation		(6,465	)		(6,621	)
Property, plant, and equipment (net)		$	5,983		$	9,450
Rental equipment fleet		$	32,300		$	32,493
	Less: accumulated depreciation		(7,050	)		(6,417	)
Rental equipment (net)		$	25,250		$	26,076
Leased equipment fleet		$	5,481		$	5,481
Less: accumulated amortization			(560	)		(506	)
Leased equipment fleet (net)		$	4,921		$	4,975

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4.  Short-term Borrowings

    As of October 31,2000, the Company and DFS signed an amendment to the existing loan and security agreement. The amendment waived all prior defaults under the agreement and established revised financial covenants to be measured at the Company's second and fourth quarters. In addition, the amendment included several, periodic mandatory reductions in the credit limit. The amended DFS facility matures December 28, 2001 and is a floating rate facility based on prime with rates between 0.75% under prime to 0.25% over prime depending on the amount of total debt leverage of the Company.

5.  Segment Information.

    In fiscal 1999, the Company adopted Statement of Financial Accounting Standards No. 131 (SFAS 131), "Disclosures about Segments of an Enterprise and Related Information," which requires the reporting of certain financial information by business segment. For the purpose of providing segment information, management believes that all of the Company's operations consist of one segment. However, the Company evaluates performance based on revenue and gross margin of three distinct business components. Revenue and gross margin by component are summarized as follows:

	Three Months Ended October 31,
Business Component Net Revenues	2000		1999
Equipment Sales	$	17,724	$	21,031
Equipment Rental		6,982		7,355
Product Support		13,077		13,677
Totals	$	37,783	$	42,063

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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 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 entry into new markets; the success of the Company's expansion of its equipment rental business; rental industry conditions and competitors; competitive pricing; the Company's relationship with its suppliers; relations with the Company's employees; the Company's ability to manage its operating costs; the continued availability of financing; governmental regulations and environmental matters; risks associated with regional, national, and world economies; and consummation of the merger and asset purchase transactions (see below). Any forward-looking statements should be considered in light of these factors.

Results of Operations

The Three Months ended October 31, 2000 compared to the Three Months ended October 31, 1999.

    Revenues for the three-month period ended October 31, 2000 decreased 10.2% to $37.8 million compared with $42.1 million for the three-month period ended October 31, 1999. Revenues were down from the prior year's first quarter in every department. The decrease in sales was primarily due to the closure of four branches during the fiscal year ending July 31, 2000.

    The Company's gross profit margin of 12.9% for the three-month period ended October 31, 2000 was up from the prior year comparative period margin of 11.7%. The increase in gross profit margins was partly the result of a higher concentration of overall business coming from the relatively higher margin rental, parts and service business.

    For the three-month period ended October 31, 2000, selling, general, and administrative ("SG&A") expenses, as a percentage of sales, were 8.7%, up from 8.2% for the prior year's quarter. Some of the increased SG&A expenses are attributable to costs associated with the consolidation of the Kent facility and the ongoing expenses still being incurred for the vacated locations.

    Interest expense for the three months ended October 31, 2000 of $1,679,000 was up from the $1,492,000 in the prior year comparative period. This increase is the result of higher average interest rates on the Deutsche Financial Services facility.

    The effective tax rate for the three months ended October 31, 2000 was approximately 39.0%, which is higher than the 33.2% effective tax rate for the prior year comparative period. The effective tax rate in the current year more closely approximates statutory levels.

    The Company had net income for the quarter ended October 31, 2000 of $461,000 or $.14 per (basic and diluted) share compared with a net income of $125,000 or $0.04 per (basic and diluted) for the prior year's first quarter. The first quarter of FY01 included a non-recurring pre-tax gain of $589,000 for the conversion of capital leases to operating leases.

Liquidity and Capital Resources

    The Company's primary needs for liquidity and capital resources are related to its inventory for sale and its rental and lease fleet inventories. The Company's primary source of internal liquidity has been its profitable operations. The Company's primary sources of external liquidity are equipment inventory floor plan financing arrangements provided to the Company by the manufacturers of the products the Company sells, the Deutsche Financial Services ("DFS") credit facility, and, with respect to acquisitions, secured loans from Case Corporation (now CNH Global).

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    Under inventory floor planning arrangements the manufacturers of products sold by the Company provide interest-free credit terms on new equipment purchases for periods ranging from one to twelve months, after which interest commences to accrue monthly at rates ranging from zero percent to two percent over the prime rate of interest. Principal payments are typically made under these agreements at scheduled intervals and/or as the equipment is rented, with the balance due at the earlier of a specified date or sale of the equipment. At October 31, 2000, the Company was indebted under manufacturer-provided floor planning arrangements in the aggregate amount of $19,814,000.

    As of October 31, 2000, the Company and DFS signed an amendment to the existing loan and security agreement. The amendment waived all prior defaults under the agreement and established revised financial covenants to be measured at the Company's second and fourth quarters. In addition, the amendment included several, periodic mandatory reductions in the credit limit. The amended DFS credit facility matures December 28, 2001 and is a floating rate facility based on prime with rates between 0.75% under prime to 0.25% over prime depending on the amount of total debt leverage of the Company.

    Borrowings under the DFS credit facility are secured by the Company's assets, including accounts receivable, parts, new equipment, rental fleet, and used equipment. The Company uses this borrowing facility to 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, and to refinance some its acquisition-related debt at a lower interest rate. As of October 31, 2000, approximately $60,684,000 was outstanding under the DFS credit facility.

    During the quarter ended October 31, 2000, cash and cash equivalents decreased by $436,000. The Company had positive cash flow from operating activities in the first quarter reflecting the net income for the quarter and adding depreciation and amortization. Purchases of fixed assets during the period were related mainly to the purchase of vehicles and leasehold improvements to the Portland branch facility.

    The Company's cash and cash equivalents of $388,000 as of October 31, 2000 and available credit facilities are considered sufficient to support current levels of operations for at least the next twelve months.

Inventory; Effects of Inflation and Interest Rates; General Economic Conditions

    Controlling inventory is a key ingredient to the success of an equipment distributor because the equipment is characterized by long order cycles, high ticket prices, and the related exposure to "flooring" interest. The Company's interest expense may increase if inventory is too high or interest rates rise. The Company manages its inventory through company-wide information and inventory sharing systems wherein all locations have access to the Company's entire inventory. In addition, the Company closely monitors inventory turnover by product categories and places equipment orders based upon targeted turn ratios.

    All of the products and services provided by the Company are either capital equipment or included in capital equipment, which are used in the construction, industrial, and agricultural sectors. Accordingly, the Company's sales are affected by inflation or increased interest rates which tend to hold down new construction, and consequently adversely affect demand for the equipment sold and rented by the Company. In addition, although agricultural equipment sales are less than 2% of the Company's total revenues, factors adversely affecting the farming and commodity markets also can adversely affect the Company's agricultural equipment related business.

    The Company's business can also be affected by general economic conditions in its geographic markets as well as general national and global economic conditions that affect the construction, industrial, and agricultural sectors. An erosion in North American and/or other countries' economies could adversely affect the Company's business. Market specific factors could also adversely affect one or more of the Company's target markets and/or products.

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PART II.  OTHER INFORMATION

ITEM 5.  OTHER INFORMATION

    On November 2, 2000, the Company announced the signing of a definitive Merger Agreement between the Company and e-Mobile, Inc. ("EMI") pursuant to which a newly formed holding company will acquire both the Company and EMI. The Company simultaneously announced the signing of an Asset Purchase Agreement pursuant to which the current management of the Company would purchase substantially all of the assets and assume substantially all of the liabilities of the Company. Consummation of these transactions is subject to shareholder approval, regulatory approval, and other contractual obligations.

ITEM 6.  EXHIBITS AND REPORTS ON FORM 8-K

A.	EXHIBITS.
	Exhibit 10.1	Amended and Restated Loan and Security Agreement between the Company and Deutsche Financial Services
	Exhibit 10.2	Asset Purchase Agreement between the Company and Western Power & Equipment, L.L.C. (exhibits excluded)
	Exhibit 10.3	Agreement and Plan of Reorganization and Merger by and among the Company, e-Mobile, Inc., and e-Mobile Holdings, Inc. (exhibits excluded)
	Exhibit 27	Financial Data Schedule
B.	REPORTS ON FORM 8-K.
	None.

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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.
December 15, 2000	By:	/s/ MARK J. WRIGHT   Mark J. Wright Vice President of Finance and Chief Financial Officer

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ITEM 1. FINANCIAL STATEMENTS

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND LIQUIDITY AND CAPITAL RESOURCES
Results of Operations
The Three Months ended October 31, 2000 compared to the Three Months ended October 31, 1999.
Liquidity and Capital Resources

PART II. OTHER INFORMATION

ITEM 5. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K

SIGNATURE