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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K/A2
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ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended July 31, 2002 Commission File Number 0-26230
WESTERN POWER & EQUIPMENT CORP.
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(Exact name of Registrant as specified in its charter)
DELAWARE 91-1688446
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
6407-B N.E. 117TH AVE, VANCOUVER, WA 98662
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (360) 253-2346
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Securities registered pursuant to Section 12(b) of the Act:
None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $.001 par value
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(Title of Class)
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. YES [X] NO [_]
Indicate by check mark if disclosure of delinquent filers pursuant
to Item 405 of Regulations S-K is not contained herein, and will not be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-K
or any amendment to the Form 10-K. [X]
As of November 22, 2002: (a) 4,003,162 shares of Common Stock, $.001
par value, of the registrant (the "Common Stock") were outstanding; (b)
2,180,578 shares of Common Stock were held by non-affiliates ; and (c) the
aggregate market value of the Common Stock held by non-affiliates was
$501,532.94 based on the closing sale price of $0.23 per share on November 22,
2002.
Portions of the Registrant's Proxy Statement to be filed in
connection with its Annual Meeting of Shareholders are incorporated by reference
in Part III.
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PART I
ITEM 1. BUSINESS
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GENERAL
Western Power & Equipment Corp., a Delaware corporation (the
"Company"), is engaged in the sale, rental, and servicing of light,
medium-sized, and heavy construction, agricultural, and industrial equipment,
parts, and related products which are manufactured by Case Corporation ("Case")
and certain other manufacturers. The Company believes, based upon the number of
locations owned and operated, that it is one of the largest independent dealers
of Case construction equipment in the United States. Products sold, rented, and
serviced by the Company include backhoes, excavators, crawler dozers, skid steer
loaders, forklifts, compactors, log loaders, trenchers, street sweepers, sewer
vacuums, and mobile highway signs.
The Company operates out of facilities located in the states of
Washington, Oregon, Nevada, California, and Alaska. The equipment distributed by
the Company is furnished to contractors, governmental agencies, and other
customers, primarily for use in the construction of residential and commercial
buildings, roads, levees, dams, underground power projects, forestry projects,
municipal construction, and other projects.
The Company's strategy had focused on acquiring additional existing
distributorships and rental operations, opening new locations as market
conditions warrant, and increasing sales at its existing locations. In such
connection, it had sought to operate additional Case or other equipment retail
distributorships, and sell, lease, and service additional lines of construction
equipment and related products not manufactured by Case. For the past three
years, the Company has concentrated on consolidating or closing its stores to
improve operating efficiency and profitability. See "Business Strategy."
HISTORY AND ACQUISITIONS
The Company commenced business in November 1992 with the acquisition
from Case of seven retail distribution facilities located in Oregon and
Washington. The Company became a subsidiary of American United Global, Inc.
("AUGI"), simultaneous with such acquisition. AUGI holds 30.5 percent of the
outstanding shares of the Company as of July 31, 2002.
In September 1994 and February 1996, in two different transactions,
the Company acquired from Case four retail construction equipment stores located
in California and Nevada. In addition, in June 1996 and January 1997, the
Company made two additional acquisitions of distributorships of predominantly
non-competing lines of equipment, with locations in California, Oregon,
Washington, and Alaska. From fiscal 1993 through fiscal 1997, the Company also
opened nine new stores in the states served by the acquired stores, ending
fiscal year 1997 with 23 stores.
In fiscal 1998, the Company acquired four additional facilities
through acquisition, located in California and Alaska. The pre-existing Alaska
facility was discontinued as it was combined with the acquired Alaska facility.
In addition, in fiscal 1998 the Company opened one new store in Washington. On
December 11, 1997, the Company acquired substantially all of the operating
assets used by Case in connection with its business of servicing and
distributing Case agricultural equipment at a facility located in Yuba City,
California.
On April 30, 1998, the Company acquired substantially all of the
operating assets of Yukon Equipment, Inc. (Yukon) in connection with Yukon's
business of servicing and distributing construction, industrial, and
agricultural equipment in Alaska. Yukon has facilities in Anchorage, Fairbanks,
and Juneau, Alaska.
In fiscal 1999, the Company closed three of its smaller facilities
and began servicing the territories served by these small stores by larger
facilities in the region.
The Company consolidated four facilities in the first quarter of
fiscal 2000 into larger stores in each region. One branch office in Washington
was sold during the third quarter while two temporary locations were established
in Southern
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California. The closures are intended to increase efficiencies and reduce costs.
The two branches in California were established in an effort to assist Case
Corporation in a dealership transition for Southern California. The Company
consolidated one branch in Washington during the first quarter of fiscal 2001
and sold the two branches in Southern California in the third quarter of fiscal
2001.
During fiscal 2002, the Company closed/sold 3 branches. There were
15 branches as of the end of fiscal year 2002.
BUSINESS STRATEGY
The Company's strategy is to streamline the Company's structure and
close or consolidate stores and operations to increase efficiency and
profitability. The Company is concentrating its efforts on making all of its
ongoing operations profitable and in capitalizing on its existing operations'
strengths to restore profitability. The Company has selectively pared down its
product offerings to reduce inventory carrying costs and to improve turnover in
the remaining product lines that it offers.
The Company's business strategy includes efforts to expand sales at
its existing locations. The Company will continue to seek to improve its product
line and generate incremental sales increases by adding equipment and parts
produced by manufacturers other than Case, where appropriate. The Company will
also seek to increase sales of parts and service--both of which have
considerably higher margins than equipment sales. This increase will be
accomplished through targeted sales efforts to parts and service customers and
the continued diversification of our parts product lines and the servicing of
equipment produced by manufacturers other than Case, where appropriate. The
Company plans to continue emphasis of its fleet of rental equipment. As the cost
of purchasing equipment escalates, short and long-term rental will become
increasingly attractive to the Company's customers.
The Company's business strategy had previously focused on acquiring
additional existing distributorships and rental operations, opening new
locations, and increasing sales at its existing locations. The Company reduced
its acquisition activity in fiscal years 1999 through 2002 due to market
conditions. When market conditions improve and opportunities arise, the Company
intends to make strategic acquisitions of other authorized Case construction
equipment retail dealers located in established or growing markets, as well as
dealers or distributors of construction, industrial, or agricultural equipment,
and related parts, manufactured by companies other than Case. In addition to
acquisitions, in the future the Company may open new retail outlets as
opportunities and conditions permit. The strategy in opening additional retail
outlets has been to test market areas by placing sales, parts, and service
personnel in the target market. If the results are favorable, a retail outlet is
opened with its own inventory of equipment. This approach reduces both the
business risk and the cost of market development.
PRODUCTS
Case Construction Equipment.
- ----------------------------
The construction equipment (the "Equipment") sold, rented, and
serviced by the Company generally consists of: backhoes (used to dig large, wide
and deep trenches); excavators (used to dig deeply for the construction of
foundations, basements, and other projects); log loaders (used to cut, process
and load logs); crawler dozers (bulldozers used for earth moving, leveling and
shallower digging than excavators); wheel loaders (used for loading trucks and
other carriers with excavated dirt, gravel and rock); roller compactors (used to
compact roads and other surfaces); trenchers (a smaller machine that digs
trenches for sewer lines, electrical power and other utility pipes and wires);
forklifts (used to load and unload pallets of materials); and skid steer loaders
(smaller version of a wheel loader, used to load and transport small quantities
of material--e.g., dirt and rocks-- around a job site). Selling prices for these
units range from $15,000 to $350,000 per piece of Equipment.
Under the terms of standard Case dealer agreements, the Company is
an authorized Case dealer for sales of Equipment and related parts and services
at locations in Oregon, Washington, Nevada, northern California, and Alaska (the
"Territory"). The dealer agreements have no defined term or duration, but are
reviewed on an annual basis by both parties, and can be terminated without cause
at any time either by the Company on 30 days' notice or by Case on 90 days'
notice. Although the dealer agreements do not prevent Case from arbitrarily
exercising its right of termination, based upon
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Case's established history of dealer relationships and industry practice, the
Company does not believe that Case would terminate its dealer agreements without
good cause.
The dealer agreements do not contain requirements for specific
minimum purchases from Case. In consideration for the Company's agreement to act
as dealer, Case supplies to the Company items of Equipment for sale and lease,
parts, cooperative advertising benefits, marketing brochures related to Case
products, access to Case product specialists for field support, the ability to
use the Case name and logo in connection with the Company's sales of Case
products, and access to Case floor plan financing for Equipment purchases. Such
floor planning arrangement currently provides the Company with interest free
credit terms on new equipment purchases ranging from one to six months,
depending upon the type of equipment floored, after which interest commences to
accrue monthly at an annual rate equal to 2% over the prime rate of interest.
The invoice price of each item of Equipment is payable at the earlier of the
time of its sale by the Company or six months after the date of shipment to the
Company by Case.
Other Products.
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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 51% and 50% of the Company's
net sales for fiscal year 2002 and fiscal 2001, respectively, resulted from
sales, rental, and servicing of products manufactured by companies other than
Case. Manufacturers other than Case represented by the Company offer various
levels of supplies and marketing support along with purchase terms which vary
from cash upon delivery to interest-free, 12-month flooring.
The Company's distribution business is divided into three general
categories of activity: (i) Equipment sales, (ii) Equipment rentals, and (iii)
Product Support.
Equipment Sales.
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At each of its distribution outlets, the Company maintains a fleet
of various new and used Equipment for sale. The Equipment purchased for each
outlet is selected by the Company's marketing staff based upon the types of
customers in the geographical areas surrounding each outlet, historical
purchases as well as anticipated trends. Subject to applicable limitations in
the Company's manufacturers' dealer contracts, each distribution outlet has
access to the Company's full inventory of Equipment.
The Company provides only the standard manufacturer's limited
warranty for new Equipment, generally a one-year parts and service repair
warranty. Customers can purchase extended warranty contracts.
The Company sells used Equipment that has been reconditioned in its
own service shops. It generally obtains such used Equipment as "trade-ins" from
customers who purchase new items of Equipment and from Equipment previously
rented and not purchased. Unlike new Equipment, the Company's used Equipment is
generally sold "as is" and without a warranty.
Equipment Rental.
- -----------------
The Company maintains a separate fleet of Equipment that it holds
solely for rental. Such Equipment is generally held in the rental fleet for 12
to 36 months and then sold as used Equipment with appropriate discounts
reflecting prior rental usage. As rental Equipment is taken out of the rental
fleet, the Company adds new Equipment to its rental fleet as needed. The rental
charges vary, with different rates for different types of Equipment rented. In
October 1998, the Company opened its first rental-only store, located in the
Seattle, Washington area, under the name Western Power Rents. This store was
consolidated with the Company's Auburn, Washington store in August 2000. Rentals
have decreased to 6% of revenue in fiscal year 2002 from 15% of revenue in
fiscal year 2001. See Sales and Marketing below.
Product Support.
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The Company operates a service center and yard at each retail
distribution outlet for the repair and storage of Equipment. Both warranty and
non-warranty service work is performed, with the cost of warranty work being
reimbursed by the manufacturer following the receipt of invoices from the
Company. The Company employs approximately 80
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manufacturer-trained service technicians who perform Equipment repair,
preparation for sale, and other servicing activities. Equipment servicing is one
of the higher profit margin businesses operated by the Company. The Company has
expanded this business by hiring additional personnel and developing extended
warranty contracts to be purchased by customers for Equipment sold and serviced
by the Company, and independently marketing such contracts to its customers. The
Company services items and types of Equipment that include those that are
neither sold by the Company nor manufactured by Case.
The Company purchases parts for use in its Equipment service
business, as well as for sale to other customers who are independent servicers
of Case Equipment. Generally, parts purchases are made on standard net 30-day
terms. The Company employs one or more persons who take orders from customers
for parts purchases at each retail distribution outlet. The Company provides
only the standard manufacturer's warranty on the parts that it sells, which is
generally a 90-day replacement guaranty.
SALES AND MARKETING
The Company's customers are typically residential and commercial
building general contractors, road and bridge contractors, sewer and septic
contractors, underground utility contractors, persons engaged in the forestry
industry, equipment rental companies and state and municipal authorities. The
Company estimates that it has approximately 19,000 customers, with most being
small business owners, none of which accounted for more than 3% of its total
sales in the fiscal year ended July 31, 2002.
For fiscal years 2002, 2001, and 2000, the revenue breakdown by source for the
business operated by the Company were approximately as follows:
FY 2002 FY 2001 FY 2000
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Equipment Sales 68% 60% 59%
Equipment Rental 6% 15% 17%
Product Support 26% 25% 24%
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100% 100% 100%
===============================
The Company advertises its products in trade publications and
appears at trade shows throughout its Territory. It also encourages its
salespersons to visit customer sites and offer Equipment demonstrations when
requested.
The Company's sales and marketing activities do not result in any
significant backlog of orders. Although the Company accepts orders from
customers for future delivery following manufacture by Case or other
manufacturers, during fiscal 2002 a majority of its sales revenues resulted from
products sold directly out of inventory, or the providing of services upon
customer request.
The Company employed approximately 42 equipment salespersons on July
31, 2002. All of the Company's sales personnel are employees of the Company, and
all are under the general supervision of C. Dean McLain, the President of the
Company. Each Equipment salesperson is assigned a separate exclusive territory,
the size of which varies based upon the number of potential customers and
anticipated volume of sales, as well as the geographical characteristics of each
area.
On July 31, 2002, the Company employed 3 product support
salespersons who sell the Company's parts and repair services to customers in
assigned territories. The Company has no independent distributors or
non-employee sales representatives.
SUPPLIERS
The Company purchases its equipment and parts inventory from Case
and other manufacturers. No supplier other than Case accounted for more than 10%
of such inventory purchases during fiscal 2002. 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.
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COMPETITION
The Company competes with distributors of construction,
agricultural, and industrial equipment and parts manufactured by companies other
than Case on the basis of price, the product support (including technical
service) that it provides to its customers, brand name recognition for its
products, the accessibility and number of its distribution outlets, and the
overall quality of the products that it sells. The Company's management believes
that it is able to effectively compete with distributors of products produced
and distributed by such other manufacturers primarily on the basis of overall
product quality and the superior product support and other customer services
provided by the Company.
Case's two major competitors in the manufacture of full lines of
construction equipment of comparable sizes and quality are Caterpillar
Corporation and Deere & Company. In addition, other manufacturers produce
specific types of equipment which compete with Case Equipment and other
equipment distributed by the Company. These competitors and their product
specialties include, but are not limited to, JCB Corporation--backhoes, Kobelco
Corporation -- excavators, Dresser Industries -- light and medium duty dozers,
Komatsu Corporation -- wheel loaders and crawler dozers, and Bobcat, Inc. --
skid steer loaders.
The Company is currently the only Case dealer for construction
equipment in Alaska, northern Nevada, and in the northern California area (other
than Case-owned distribution outlets), and is one of several Case dealers in
Oregon and Washington. However, Case has the right to establish other
dealerships in the future in the same territories in which the Company operates.
In order to maintain and improve its competitive position, revenues and profit
margins, the Company plans to increase its sales of products produced by
companies other than Case.
ENVIRONMENTAL STANDARDS AND GOVERNMENT REGULATION
The Company's operations are subject to numerous rules and
regulations at the federal, state, and local levels which are designed to
protect the environment and to regulate the discharge of materials into the
environment. Based upon current laws and regulations, the Company believes that
its policies, practices, and procedures are properly designed to prevent
unreasonable risk of environmental damage and the resulting financial liability
to the Company. No assurance can be given that future changes in such laws,
regulations, or interpretations thereof, changes in the nature of the Company's
operations, or the effects of former occupants' past activities at the various
sites at which the Company operates, will not have an adverse impact on the
Company's operations.
The Company is subject to federal environmental standards because in
connection with its operations it handles and disposes of hazardous materials,
and discharges sewer water in its equipment rental and servicing operations. The
Company's internal staff is trained to keep appropriate records with respect to
its handling of hazardous waste, to establish appropriate on-site storage
locations for hazardous waste, and to select regulated carriers to transport and
dispose of hazardous waste. Local rules and regulations also exist to govern the
discharge of waste water into sewer systems.
EMPLOYEES
At July 31, 2002, the Company employed 242 full-time employees. Of
that number, 15 are in corporate administration, 21 are involved in
administration at the branch locations, 63 are employed in equipment sales and
rental, and 143 are employed in product support. At July 31, 2002, approximately
14 of the Company's service technicians and parts employees at the Sacramento,
California operation were being represented by Operating Engineers Local Union
No. 3 of the International Union of Operating Engineers, AFL-CIO under the terms
of a five-year contract expiring August 31, 2005. The Company believes that its
relations with its employees are generally satisfactory.
INSURANCE
The Company currently has general, product liability, and umbrella
insurance policies covering the Company with limits, terms, and conditions which
the Company believes to be consistent with reasonable business practice,
although there is no assurance that such coverage will prove to be adequate in
the future. An uninsured or partially insured claim, or a claim for which
indemnification is not available, could have a material adverse effect upon the
Company's business, results of operations, and financial condition.
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FORWARD-LOOKING STATEMENTS
Information included above relating to projected growth and future
results and events constitutes forward-looking statements. Actual results in
future periods may differ materially from the forward-looking statements due to
a number of risks and uncertainties, including but not limited to fluctuations
in the construction, agricultural, and industrial sectors; the success of the
Company's entry into new markets; the success of the Company's expansion of its
equipment rental business; rental industry conditions and competitors;
competitive pricing; the Company's relationship with its suppliers; relations
with the Company's employees; the Company's ability to manage its operating
costs; the continued availability of financing; governmental regulations and
environmental matters; risks associated with regional, national, and world
economies. Any forward-looking statements should be considered in light of these
factors.
I-7
ITEM 2. PROPERTIES
The following table sets forth information as to each of the
properties which the Company owns or leases (all of which are retail sales,
rental, service, storage, and repair facilities except as otherwise noted) at
July 31, 2002.
Expiration Annual Size/Square Purchase
Location and Use Lessor Date Rental Feet Options
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1745 N.E. Columbia Blvd. Carlton O. Fisher, CNJ 12/31/2010 $84,0001 plus Approx. 4 acres; No
Portland, Oregon 97211 Enterprises CPI adjustments building 17,622 sq. ft.
1665 Silverton Road, N.E. LaNoel Elston 07/10/2004 $36,0001 Approx. 1 acre; building No
Salem, Oregon 97303 Myers Living Trust 14,860 sq. ft.
West 7916 Sunset Hwy. U.S. Bank 09/30/2003 $69,6001 Approx. 5 acres; No
Spokane, Washington 99204 building 19,200 sq. ft.
12406 Mukilteo Speedway Phil & Jana Pickering 10/31/2008 $120,9601 Approx. 2.1 acres; No
Mukilteo, Washington 98275 building 13,600 sq. ft.
6407-B NE 117th Ave McLain-Rubin Realty 03/31/2006 $98,400 Building 8,627 sq. ft. No
Vancouver, Washington 98662 Company, LLC 3
(Executive Offices)
2702 W. Valley Hwy No. Avalon Island LLC 11/30/2015 $228,0001 Approx. 8 acres; No
Auburn, Washington 98001 building 33,000 sq. ft.
500 Prospect Lane Owned N/A N/A Approx. 1.5 acres; N/A
Moxee, Washington 98936 building 4,320 sq. ft.
(Subleased to 3rd Party)
1455 Glendale Ave. McLain-Rubin Realty 01/31/2007 $276,0002 Approx. 5 acres; No
Sparks, Nevada 89431 Company, LLC 3 building 22,475 sq. ft.
25886 Clawiter Road Fred Kewel II, Agency 11/30/2004 $108,9031 Approx. 2.8 acres; No
Hayward, California 94545 building 21,580 sq. ft.
3540 D Regional Parkway Soiland 02/28/05 $50,2501 plus Approx. 1.25 acres; No
Santa Rosa, California 95403 annual CPI building 5,140 sq. ft.
adjustments
1751 Bell Avenue McLain-Rubin Realty 09/30/2007 $228,0002 Approx. 8 acres; No
Sacramento, California 95838 Company, LLC 3 building 35,940 sq. ft.
8271 Commonwealth Avenue M.E. Robinson & N/A $90,960 N/A No
Buena Park, CA 90621-2537 Lois Robinson
2535 Ellis Street Hart Enterprises Month to $8,400 Approx. 2 acres; Yes
Redding, California 96001 Month building 6,200 sq. ft.
I-8
Expiration Annual Size/Square Purchase
Location and Use Lessor Date Rental Feet Options
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1041 S Pershing Ave Stockton Further 03/14/2006 $48,845 Approx. .5 acres; Yes
Stockton, CA 95206 Processing building 1,794 sq. ft.
723 15th Street Mark Flerchinger 11/02/2002 $20,400 Approx. 1.2 acres; Yes
Clarkston, Washington 99403 building 3,750 sq. ft.
2020 E. Third Avenue Owned N/A N/A Approx. 4 acres; N/A
Anchorage, Alaska 99501 building 15,650 sq. ft.
3511 International Street Airport Rentals 11/30/2009 $74,400 Approx. 1.5 acres; No
Fairbanks, Alaska 99701 building 8,500 sq. ft.
1 Net lease with payment of insurance, property taxes, and maintenance costs
paid by the Company.
2 Net lease with payment of insurance, property taxes and maintenance costs,
including structural repairs, paid by the Company.
3 Related party lease.
- --------------------------------------------------------------------------------
The Company's operating facilities at July 31, 2002 were separated
into eight "hub" outlets and seven "sub-stores". In addition, the Company
maintains its headquarter operations in Vancouver, Washington. The hub stores
are the main distribution centers located in Auburn and Spokane, Washington;
Portland, Oregon; Sparks, Nevada; Hayward, Buena Park, and Sacramento,
California; and Anchorage, Alaska; and the sub-stores are the smaller facilities
located in Mukilteo and Clarkston, Washington; Salem, Oregon; Santa Rosa,
Stockton, and Redding, California; and Fairbanks, Alaska.
The stores in Springfield, OR, Pasco, WA, and Yuba City, CA were
closed during fiscal year 2002 and the operations were combined with the
operations in Salem, OR, Auburn, WA and Sacramento, CA respectively.
All of the leased and owned facilities used by the Company are
believed to be adequate in all material respects for the needs of the Company's
current and anticipated business operations.
ITEM 3. LEGAL PROCEEDINGS
-----------------
The Company is involved in various legal proceedings which are
incidental to the industry and for which certain matters are covered in whole or
in part by insurance or, otherwise, the Company has recorded accruals for
estimated settlements. Management believes that any liability which may result
from these proceedings will not have a material adverse effect on the Company's
business, results of operations, and financial condition.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
---------------------------------------------------
On May 30, 2002, the Company held its 2002 Annual meeting of
Stockholders (the "Annual Meeting"). The directors holding office prior to the
date of the Annual Meeting, Messrs. C. Dean McLain, Robert
I-9
M. Rubin, Seymour Kessler, Allen Perres, and Irwin Pearl were nominated for
election at the Annual Meeting, and all of such persons were reelected at the
Annual Meeting for another one-year term as director. The votes recorded for
election of each nominee for director were the following:
Name For Against Abstention
--- ------- ----------
C. Dean McLain 2,855,987 6,762 94,038
Robert M. Rubin 2,855,090 7,659 94,038
Seymour Kessler 2,855,987 6,762 94,038
Allen Perres 2,855,805 6,944 94,038
Irwin Pearl 2,855,987 6,762 94,038
Votes were also cast, and proposals approved, at the Annual Meeting
for: i) issuance of 600,000 shares of the Company's Common Stock to the Rubin
Family Irrevocable Trust, and ii) ratification of the appointment of Moss Adams
LLP as the Company's independent auditors for the 2002 fiscal year.
ITEM 4A. EXECUTIVE OFFICERS OF THE REGISTRANT (1)
----------------------------------------
Position Held With the
Name Officer Since Age Registrant
---------------- ------------- --- ---------------------------
C. Dean McLain 1993 49 Chairman, President, and
Chief Executive Officer (2)
Mark J. Wright 1997 46 Vice President of Finance,
Chief Financial Officer,
Treasurer, and Secretary
(1) The officers serve for a term of one year and until their
successors are elected.
(2) Elected Chairman in 1998, Chief Executive Officer and President
in 1993.
I-10
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
---------------------------------------------------------------------
The Company's stock is traded on the OTC Bulletin Board under the symbol
WPEC. The high and low closing prices for the Company's common stock for the
years ended July 31, 2002 and July 31, 2001 were as follows:
High Low
Fiscal 2002 ---- ---
-----------
1st Quarter - August 1, 2001 through October 31, 2001 $ 0.56 $ 0.17
2nd Quarter - November 1, 2001 through January 31, 2002 $ 0.31 $ 0.10
3rd Quarter - February 1, 2002 through April 30, 2002 $ 0.35 $ 0.16
4th Quarter - May 1, 2002 through July 31, 2002 $ 0.32 $ 0.22
Fiscal 2001
-----------
1st Quarter - August 1, 2000 through October 31, 2000 $ 6.440 $ 2.000
2nd Quarter - November 1, 2000 through January 31, 2001 $ 4.594 $ 0.281
3rd Quarter - February 1, 2001 through April 30, 2001 $ 2.063 $ 0.550
4th Quarter - May 1, 2001 through July 31, 2001 $ 1.500 $ 0.370
The number of shareholders of record of the Company's Common Stock on
October 1, 2002 was 512 and the number of beneficial holders of the Company's
Common Stock is estimated by management to be approximately 1,200 holders.
The Company has never paid cash dividends on its Common Stock and it does
not anticipate that it will pay cash dividends or alter its dividend policy in
the foreseeable future. The payment of dividends by the Company on its Common
Stock will depend on its earnings and financial condition, and such other
factors as the Board of Directors of the Company may consider relevant. The
Company currently intends to retain its earnings to assist in financing the
development of its business.
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ITEM 6. SELECTED FINANCIAL DATA
-----------------------
The following selected financial data have been derived from the audited
financial statements of the Company. See notes to Consolidated Financial
Statements in Part IV, Item 14(a)(1) for information concerning the effect of
acquisitions completed by the Company during the periods reflected.
(Amounts in thousands, except per share data)
Fiscal Year Ended July 31,
2002 2001 2000 1999 1998
- ---------------------------------------------------------------------------------------------------------
Net sales $ 107,988 $ 139,902 $ 155,637 $ 163,650 $ 163,478
Gross profit $ 7,763 $ 9,820 $ 11,538 $ 14,594 $ 19,176
(% of sales) 7.2 7.0 7.4 8.9 11.7
Selling, general and administrative $ 10,199 $ 12,840 $ 13,534 $ 12,586 $ 12,092
(% of sales) 9.4 9.2 8.7 7.7 7.4
(Loss) income before income taxes (9,971) $ (7,537) $ (6,419) $ (2,916) $ 3,193
(% of sales) (9.2) (5.4) (4.1) (1.8) 2.0
Tax rate (%) 0.8 0.2 12 (38) 42
Net (loss) income $ (10,019) $ (7,842) $ (7,198) $ (1,815) $ 1,839
Net (loss) income per common share $ (2.50) $ (2.30) $ (2.18) $ (0.55) $ 0.53
Shares used in basic earnings
per share calculations 4,003 3,403 3,306 3,303 3,473
Net (loss) income per
diluted common share $ (2.50) $ (2.30) $ (2.18) $ (0.55) $ 0.49
Shares used in diluted earnings
per share calculations 4,003 3,403 3,306 3,303 3,772
Working capital deficit $ (24,390) $ (20,102) $ (15,910) $ (16,117) $ (6,339)
Long-term debt (including capital leases
and deferred lease income) $ 928 $ 3,469 $ 10,796 $ 11,124 $ 7,457
Stockholders' (deficit) equity $ (3,136) $ 6,751 $ 14,381 $ 21,322 $ 23,138
Total assets $ 59,576 $ 93,092 $ 122,710 $ 136,594 $ 138,766
II-2
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
---------------------------------------------------------------
RESULTS OF OPERATIONS
---------------------
The following discussion and analysis should be read in conjunction with
the Consolidated Financial Statements and Notes thereto appearing elsewhere in
this annual report. Certain matters discussed herein contain forward-looking
statements that are subject to risks and uncertainties that could cause actual
results to differ materially from those projected, including, but not limited
to, projected sales levels, expense reductions, reduced interest expense, and
increased inventory turnover, one or more of which may not be realized.
GENERAL
The Company acquired its first seven retail distribution stores in November
1992. The Company expanded to 18 stores in four states by the end of fiscal
1996, to 23 stores in five states by the end of fiscal 1997, and to 27 stores in
five states by the end of fiscal 1998. In fiscal 1999, the Company closed 3
stores. At the end of fiscal 2002, the Company had 15 stores in operation.
For the last three years, the Company has concentrated on consolidating or
closing stores to improve operating efficiency and profitability. Store activity
for the last three years is summarized as follows:
- -------------------------------------------------------------------------------------------------------
Fiscal No. of Stores at No. of Stores No. of Stores No. of Stores No. of Stores at
Year Beginning of Year Opened Closed/Sold Acquired End of Year
- ---------------- ------------------- --------------- --------------- --------------- ------------------
2000 24 2 5 0 21
- ---------------- ------------------- --------------- --------------- --------------- ------------------
2001 21 0 3 0 18
- ---------------- ------------------- --------------- --------------- --------------- ------------------
2002 18 0 3 0 15
- -------------------------------------------------------------------------------------------------------
The Company is evaluating additional store closures or sales. In addition,
in the future the Company may open and acquire additional distribution outlets
for Case products, as well as for products which may be manufactured by other
companies as circumstances permit. The Company's results can be impacted by the
timing of, and costs incurred in connection with, new store openings and
acquisitions as well as the costs of closing existing stores.
RESULTS OF OPERATIONS
FISCAL YEAR 2002, AS COMPARED WITH FISCAL YEAR 2001
The Company reported net revenue for fiscal 2002 of $107,988,000 compared
with net revenue of $139,902,000 for fiscal 2001. Stores opened longer than 12
months showed an overall revenue decrease of 7.7 percent from prior year revenue
reflecting a general softening in economic conditions in the northwest
(resulting in lower sales volume) along with increased competitive pressures
(which negatively affected average sales prices of equipment the Company sold).
The Company consolidated three of its facilities during fiscal 2002 into larger
facilities in the region in order to reduce costs and leverage existing, larger
facilities in the region to cover the territories previously served by the
closed facilities.
The Company had a net loss for fiscal 2002 of $10,019,000 or $2.50 per
share compared with a net loss of $7,842,000 or $2.30 per share in fiscal 2001.
Included in the net loss for fiscal year 2002 are fourth quarter non-cash
charges of $3,796,000 for inventory allowances in light of decreasing market
prices for aged equipment, a $2,525,000 write-off of all goodwill, a $1,983,000
write-off of disputed receivables from vendors, and a $953,000 write-off of
fixed assets. In addition, the Company increased the valuation allowance related
to the deferred tax asset by $4,637,000 due to the uncertainty in the Company's
ability to utilize its net operating loss carryforwards.
Gross margin was 7.2 percent during fiscal 2002 which is higher than the
7.0 percent gross margin during fiscal 2001. Margins increased in fiscal 2002
due mainly to management placing a high priority on improving overall gross
margins. Management continues to place a high priority on improving overall
gross margins by working to increase higher margin service, parts, and rental
revenues, focusing more sales efforts on specialty and niche product lines, and
by obtaining higher prices for new and used equipment.
II-3
Selling, general, and administrative expenses were $ 10,199,000 or 9.4
percent of revenues for fiscal 2002 compared to $12,840,000 or 9.2 percent of
sales for fiscal 2001. The increase in selling, general, and administrative
expenses as a percent of revenues resulted in part from the decrease in revenue
volume and due to the costs of store closures during the year.
Interest expense for fiscal 2002 was $4,114,000, down from $5,982,000 in
fiscal 2001 due to a combination of a decrease in interest rates and lower
inventory levels. The Company has a $50 million inventory flooring and operating
line of credit facility through Deutsche Financial Services ("DFS"). The
agreement was amended in the first quarter of fiscal 2001 with terms maturing
December 31, 2001 and with a floating 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. Management has used this facility to allow the Company
to take advantage of more purchase discounts and to lower overall interest
expense and to provide operating capital liquidity. As of June 21, 2002, the
Company entered into a Forbearance Agreement with DFS, under the terms of which
DFS raised the interest rate to prime plus 4% while the Company is in default
and required the Company to pay $45,000 fee to DFS 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.
See Liquidity and Capital Resources below for a description of the status of the
DFS facility.
FISCAL YEAR 2001, AS COMPARED WITH FISCAL YEAR 2000
The Company reported net revenue for fiscal 2001 of $139,902,000 compared
with net revenue of $155,637,000 for fiscal 2000. Stores opened longer than 12
months showed an overall revenue decrease of 7.4 percent from prior year revenue
reflecting a general softening in economic conditions in the northwest along
with increased competitive pressures. The Company consolidated three of its
facilities during fiscal 2000 into larger facilities in the region in order to
reduce costs and leverage existing, larger facilities in the region to cover the
territories previously served by the closed facilities.
The Company had a net loss for fiscal 2001 of $7,842,000 or $2.30 per share
compared with a net loss of $7,198,000 or $2.18 per share in fiscal 2000. In the
fourth quarter of fiscal 2001, the Company recognized an inventory charge of
approximately $4,106,000 to provide allowances in recognition of decreasing
market prices for aged equipment inventory in the fourth quarter. In fiscal
2000, the Company recognized a fourth quarter inventory charge of approximately
$2,547,000 to provide allowances to recognize decreasing market prices on aged
equipment inventory in the last half of fiscal 2000. In addition, the Company
recorded a valuation allowance of $2,956,000 related to its deferred tax asset.
Gross margin was 7.0 percent during fiscal 2001 which is lower than the 7.4
percent gross margin during fiscal 2000. Margins decreased in fiscal 2001 due
primarily to continued competitive pressures and the fourth quarter equipment
reserve as discussed above. Management continues to place a high priority on
improving overall gross margins by working to increase higher margin service,
parts, and rental revenues, focusing more sales efforts on specialty and niche
product lines, and by obtaining higher prices for new equipment.
Selling, general, and administrative expenses were $12,840,000 or 9.2
percent of revenues for fiscal 2001 compared to $13,534,000 or 8.7 percent of
sales for fiscal 2000. The increase in selling, general, and administrative
expenses as a percent of revenues resulted in part from lower than expected
revenue levels and the costs of closing stores during the year.
Interest expense for fiscal 2001 was $5,982,000, down from $6,069,000 in
fiscal 2000 due in part to a decrease in interest rates and lower inventory
levels. The Company has a $50 million inventory flooring and operating line of
credit facility through DFS. The facility is a floating rate facility at rates
as low as 50 basis points under the prime rate. Prime interest rates have
increased from those in fiscal 1999. Management has used this facility to allow
the Company to take advantage of more purchase discounts and to lower overall
interest expense.
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 fleets, store openings, and
acquisitions of additional stores. 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.
II-4
Under inventory floor planning arrangements the manufacturers of products
sold by the Company provide interest free credit terms on new equipment
purchases for periods ranging from one to twelve months, after which interest
commences to accrue monthly at rates ranging from zero percent to two percent
over the prime rate of interest. Principal payments are typically made under
these agreements at scheduled intervals and/or as the equipment is rented, with
the balance due at the earlier of a specified date or upon sale of the
equipment. At July 31, 2002, the Company was indebted under manufacturer
provided floor planning arrangements in the aggregate amount of $10,974,000.
The Company has a $50 million inventory flooring and operating line of
credit through DFS. Amounts are advanced against the Company's assets, including
accounts receivable, parts, new equipment, rental fleet, and used equipment. The
agreement was amended as of October 31, 2000 with terms maturing December 31,
2001 and with a floating rate based on prime with rates between 0.75% under
prime to 2.25% over prime depending on the amount of total debt leverage of the
Company. This 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 Company expects to use 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. Borrowings are collateralized
by the Company's assets, including accounts receivable, parts inventory, new and
used equipment inventory and rental fleet equipment. As of July 31, 2002,
approximately $41,322,000 was outstanding under the DFS credit facility.
The DFS agreement was amended in the first quarter of fiscal 2001 with
terms maturing December 31, 2001 and with a floating 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. As of June 21, 2002, the Company entered
into a Forbearance Agreement with DFS under the terms of which DFS raised the
interest rate to prime plus 4% while the Company is in default and required the
Company to pay a $45,000 fee to DFS 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 July 31, 2002,
the Company was in technical default of the DFS Loan Agreement. The Company has
requested, but has not obtained a waiver letter for the period July 31, 2002 or
thereafter. Although DFS has not called the debt due to such defaults, there is
no guarantee that DFS will not call this debt at any time after July 31, 2002.
During the year ended July 31, 2002, cash and cash equivalents decreased by
$765,000. The Company had positive cash flow from operating activities during
the year of $ 14,079,000. The Company's cash flow from operating activities
consisted primarily of an inventory reduction of $17,952,000, accounts
receivable reduction of $3,991,000, and depreciation of $7,950,000 offset by a
decrease in accounts payable of $3,990,000. Purchases of fixed assets during the
period were related mainly to the ongoing replacement of aged operating assets.
The Company paid down its short-term financing by $12,075,000 during the year.
The Company's cash and cash equivalents was approximately $5,000 as of July
31, 2002. The Company cannot fund current levels of operations without the
continued availability of borrowing from its current lender DFS. Although the
Company and DFS are in negotiations to extend or renew the credit facility
beyond its expiration on December 31, 2001, there can be no assurance that the
Company will be able to successfully negotiate an acceptable extension or
renewal of the expired DFS credit facility or that DFS will continue to make
borrowing available to the Company.
RISK FACTORS
INVENTORY
Controlling inventory is a key ingredient to the success of an equipment
distributor because the equipment industry is characterized by long order
cycles, high ticket prices, and the related exposure to "flooring" interest. The
Company's interest expense may increase if inventory is too high or interest
rates rise. The Company manages its inventory through company-wide information
and inventory sharing systems wherein all locations have access to the Company's
entire inventory. In addition, the Company closely monitors inventory turnover
by product categories and places equipment orders based upon targeted turn
ratios.
II-5
INFLATION
All of the products and services provided by the Company are either capital
equipment or included in capital equipment, which are used in the construction,
agricultural, and industrial sectors. Accordingly, the Company's sales are
affected by inflation or increased interest rates which tend to hold down new
construction, and consequently adversely affect demand for the construction and
industrial equipment sold and rented by the Company. In addition, although
agricultural equipment sales are less than 2% of the Company's total revenues,
factors adversely affecting the farming and commodity markets also can adversely
affect the Company's agricultural equipment related business.
ECONOMIC CONDITIONS
The Company's business can also be affected by general economic conditions
in its geographic markets as well as general national and global economic
conditions that affect the construction, agricultural, and industrial sectors.
An erosion in North American and/or other countries' economies could adversely
affect the Company's business. Market specific factors could also adversely
affect one or more of the Company's target markets and/or products.
SEASONALITY; FLUCTUATIONS IN RESULTS
Historically, sales of our products have varied substantially from quarter
to quarter due to the seasonality of the construction business. We attempt to
accurately forecast orders for our products and commence purchasing prior to the
receipt of such orders. However, it is highly unlikely that we will consistently
accurately forecast the timing and rate of orders. This aspect of our business
makes our planning inexact and, in turn, affects our shipments, costs,
inventories, operating results and cash flow for any given quarter. In addition,
our quarterly operating results are affected by competitive pricing,
announcements regarding new product developments and cyclical conditions in the
industry. Accordingly, we may experience wide quarterly fluctuations in our
operating performance and profitability, which may adversely affect our stock
price even if our year-to-year performance is more stable, which it also may not
be. In addition, many of our products require significant manufacturing
lead-time, making it difficult to order products on short notice. If we are
unable to satisfy unexpected customer orders, our business and customer
relationships could suffer and result in the loss of future business.
INVENTORY LEAD-TIMES; POTENTIAL WRITE-DOWNS
To be competitive in certain of its markets, particularly markets for
products with long lead time, the Company will be required to build up
inventories of certain products in anticipation of future orders. There can be
no assurance that the Company will not experience problems of obsolete, excess,
or slow-moving inventory if it is not able to properly balance inventories
against the prospect of future orders, and the Company's operations may,
therefore, be adversely affected by inventory write-downs from time to time. In
periods of general economic slowdown or slowdowns in the construction sector we
could be especially affected by such problems.
WRITE-DOWNS OF GOODWILL AND INTANGIBLES
Goodwill and other intangible assets are reviewed for impairment whenever
an event or change in circumstances indicates that the carrying amount may not
be recoverable. If the carrying value of the Company's intangible assets exceeds
the expected undiscounted future cash flows, a loss is recognized to the extent
the carrying amount of assets exceeds their fair values. Based on this review, a
$2,525,000 write-down for impairment loss on goodwill has been recorded during
the fourth quarter of the year ended July 31, 2002.
COMPETITION
Many of the Company's existing and potential competitors have substantially
greater marketing, financial, and service resources than the Company has. In
addition, some of the Company's competitors have broader product offerings,
placing the Company at a disadvantage to some of its competitors. In addition,
the Company believes that some of its competitors have obtained and maintained
business that loses money - "loss leading" - in order to maintain a competitive
advantage with regard to specific customers or products. If the Company's
competitors were to use such tactics in the future, the Company would be unable
to maintain its market position without incurring a negative impact on its
profitability.
II-6
CYCLICALITY OF INDUSTRY
The construction equipment industry is always very competitive. Advances in
technology may reduce the cost for current or potential competitors to gain
market share, particularly for lower priced products. We cannot guarantee that
sales of our products will continue at current volumes or prices in any event,
but especially if our current competitors or new market entrants introduce new
products with better features, better performance, or lower prices or having
other characteristics that are more attractive than our own. Competitive
pressures or other factors also may result in significant price competition that
could have a material adverse effect on our results of operations.
DEPENDENCE UPON THIRD-PARTY MANUFACTURERS
All of our products are supplied by third parties. From time to time, we
experience delays and disruptions in our supply chain. To date, these delays and
disruptions have not materially adversely affected our business, but they could
do so in the future. Wherever possible, we try to assure ourselves of adequate
inventory supply, but we do not always succeed. To the extent that we experience
significant supply or quality control problems with our vendors, these problems
can have a significant adverse effect on our ability to meet future delivery
commitments to our customers.
Currently, Case Corporation provides approximately 51% of our products.
Case dealer contracts are non-exclusive and terminable by either party upon
minimum notice. There can be no assurances that Case will continue to supply the
Company with products or continue its relationship with the Company. If we are
unable to obtain Case products or to continue our relationship with Case, we
will likely experience reductions in product and service sales and increased
expenses. Our operations will be negatively affected if we experience inadequate
supplies of any key products.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
The Company's significant accounting policies are described in Note 1 to the
financial statements included in Item 14 of the Annual Report on Form 10-K.
The estimates for inventory obsolescence reserves are developed to provide for
allowances in recognition of decreasing market prices for aged equipment
inventory using inventory aging reports for new and used equipment, combined
with available market prices for comparable equipment, historical and forecasted
sales information. As trends in these variables change, the percentages applied
to the inventory aging categories are updated.
The estimates for impairments of goodwill are derived in accordance with
Statement of Financial Accounting Standards No. 121, "Accounting for the
Impairment of Long-Lived Assets to be Disposed Of." The Company continually
reviews goodwill to evaluate whether events or changes have occurred that would
suggest an impairment of carrying value based on an estimate of future cash
flows from related operations.
Also in accordance with Statement of Financial Accounting Standards No. 121,
"Accounting for the Impairment of Long-Lived Assets to be Disposed Of" estimates
related to the impairment in the value of the long-lived assets are reviewed at
each balance sheet date. The amount of any such impairment is determined by
comparing anticipated undiscounted future cash flows from operating activities
with the associated carrying value. The factors considered by management in
performing this assessment include operating results, trends and prospects, as
well as the effects of obsolescence, demand, competition, and other economic
factors.
The $646,000 estimate of allowance for doubtful accounts is comprised of two
parts, a specific account analysis and a general reserve. Accounts where
specific information indicates a potential loss may exist are reviewed and a
specific reserve against amounts due is recorded. As additional information
becomes available such specific account reserves are updated. Additionally, a
general reserve is applied to the aging categories based on historical
collection and write-off experience. As trends in historical collection and
write-offs change, the percentages applied against the accounts receivable aging
categories are updated.
II-7
RECENT ACCOUNTING PRONOUNCEMENTS
On June 29, 2001, the Financial Accounting Standards Board (FASB or the
"Board") unanimously voted in favor of issuing two Statements: Statement No. 141
(FAS141), Business Combinations, and Statement No. 142 (FAS 142), Goodwill and
Other Intangible Assets. FAS 141 primarily addresses the accounting for the cost
of an acquired business (i.e., the purchase price allocation), including any
subsequent adjustments to its cost. FAS 141 supercedes APB 16, Business
Combinations. The most significant changes made by FAS 141 are:
- It requires use of the purchase method of accounting for all business
combinations, thereby eliminating use of the pooling-of-interests method.
- It provides new criteria for determining whether intangible assets
acquired in a business combination should be recognized separately from
goodwill.
FAS 141 is effective for all business combinations (as defined in the
Statement) initiated after June 30, 2001 and for all business combinations
accounted for by the purchase method that are completed after June 30, 2001
(that is, the date of acquisition is July 1, 2001, or later).
FAS 142 primarily addresses the accounting for goodwill and intangible
assets subsequent to their acquisition (i.e., the post-acquisition accounting).
FAS 142 supercedes APB 17, Intangible Assets. The most significant changes made
by FAS 142 are:
- Goodwill and indefinite lived intangible assets will no longer be
amortized and will be tested for impairment at least annually.
- Goodwill will be tested at least annually at the reporting unit level.
- The amortization period of intangible assets with finite lives is no
longer limited to forty years
FAS 142 is effective for fiscal years beginning after December 15, 2001 to
all goodwill and other intangible assets recognized in an entity's statement of
financial position at that date, regardless of when those assets were initially
recognized. Early application is permitted for entities with fiscal years
beginning after March 15, 2001 provided that the first interim period financial
statements have not previously been issued. In all cases, the provisions of FAS
142 should be applied at the beginning of a fiscal year. Retroactive application
is not permitted.
On October 3, 2001, the FASB issued Statement of Financial Accounting
Standards No. 144 "Accounting for the Impairment or Disposal of Long-Lived
Assets" ("SFAS 144). SFAS 144 supersedes SFAS 121 "Accounting for the Impairment
of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of." SFAS 144
applies to all long-lived assets (including discontinued operations) and
consequently amends Accounting Principles Board Opinion No. 30 (APB 30),
"Reporting Results of Operations - Reporting the Effects of Disposal of a
Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring
Events and Transaction." SFAS 144 develops one accounting model for long-lived
assets that are to be disposed of by sale. SFAS 144 requires that long-lived
assets that are to be disposed of by sale be measured at the lower of book value
or fair value less cost to sell. Additionally, SFAS 144 expands the scope of
discontinued operations to include all components of an entity with operations
that (1) can be distinguished from the rest of the entity and (2) will be
eliminated from the ongoing operations of the entity in a disposal transaction.
The provisions of this Statement are effective for financial statements issued
for fiscal years beginning after December 15, 2001, and interim periods within
those fiscal years, with early application encouraged.
In April 2002, the FASB issued SFAS No. 145, "Rescission of FASB Statement
No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical
Corrections." SFAS No. 145 generally requires that any gains or losses on
extinguishment of debt in current or prior periods be classified as other income
(expense). The Company expects to adopt the provisions of SFAS No. 145 in its
fiscal year ending July 31, 2003. The Company is currently evaluating the impact
of adopting the provisions of SFAS No. 145 in its financial statements.
In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities." SFAS No. 146 requires companies to
recognize costs associated with exit or disposal activities when they are
incurred rather than at the date of a commitment to an exit or disposal plan.
SFAS 146 will be applied prospectively to any exit or disposal activities
initiated after December 31, 2002. The Company expects there will be no effect
on its financial results relating to the adoption of SFAS No. 146.
II-8
In October 2002, the FASB issued SFAS No. 147, "Acquisitions of Certain
Financial Institutions - an amendment of FASB Statements No. 72 and 144 and FASB
Interpretation No. 9. SFAS 147 is effective for related transactions which occur
on n or after October 1, 2002. It is not anticipated that SFAS 147 will have an
impact on the Company's financial statements.
DIVIDEND POLICY
The Company has never paid cash dividends on its Common Stock and it does
not anticipate that it will pay cash dividends or alter its dividend policy in
the foreseeable future. The payment of dividends by the Company on its Common
Stock will depend on its earnings and financial condition, and such other
factors as the Board of Directors of the Company may consider relevant. The
Company currently intends to retain its earnings to assist in financing the
growth of its business.
FORWARD LOOKING STATEMENTS
Information included within this section relating to growth projections and
future results and events constitutes forward-looking statements. Actual results
in future periods may differ materially from the forward-looking statements
because of a number of risks and uncertainties, including but not limited to
fluctuations in the construction, agricultural, and industrial sectors; the
success of the Company's entry into new markets; the success of the Company's
expansion of its equipment rental business; rental industry conditions, and
competitors; competitive pricing; the Company's relationship with its suppliers;
relations with the Company's employees; the Company's ability to manage its
operating costs; the continued availability of financing; governmental
regulations and environmental matters; risks associated with regional, national,
and world economies. Any forward-looking statements should be considered in
light of these factors.
II-9
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
----------------------------------------------------------
The Company is exposed to market risk from changes in interest rates.
Market risk is the potential loss arising from adverse changes in market rates
and prices such as interest rates. For fixed rate debt, interest rate changes
affect the fair value of financial instruments but do not impact earnings or
cash flows. Conversely for floating rate debt, interest rate changes generally
do not affect the fair market value but do impact future earnings and cash
flows, assuming other factors are held constant. At July 31, 2002, the Company
had variable rate floor plan payables, notes payable, and long-term debt of
approximately $52.5 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 $0.5 million. The
Company's policy is not to enter into derivatives or other financial instruments
for trading or speculative purposes.
II-10
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
-------------------------------------------
The following financial statements and financial schedules are attached to
this Report on Form 10-K following Part IV, Item 14:
Consolidated Statements of Operations for
the years ended July 31, 2002, 2001, and 2000 F-1
Consolidated Balance Sheets as of July 31, 2002 and 2001 F-2
Consolidated Statements of Stockholders' Equity/(Deficit)
for the years ended July 31, 2002, 2001, and 2000 F-3
Consolidated Statements of Cash Flows for
the years ended July 31, 2002, 2001, and 2000 F-4
Notes to Consolidated Financial Statements F-5
Report of Independent Accountants F-17, F-18
Financial Statement Schedule:
Report of Independent Accountants - Financial
Statement Schedule F-19, F-20
Schedule II - Valuation and Qualifying Accounts F-21
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
---------------------------------------------------------------
FINANCIAL DISCLOSURE
--------------------
Western Power & Equipment Corp. engaged Moss Adams LLP as its new independent
accountants as of December 5, 2001. During the two fiscal years and the
subsequent interim period prior to the engagement of Moss Adams LLP on December
5, 2001, Western Power & Equipment Corp. did not consult with Moss Adams LLP
regarding the application of accounting principles to any specific transaction,
whether completed or proposed; on the type of audit opinion that might be
rendered on Western Power & Equipment Corp.'s financial statements; or on any
matter that was either the subject of a disagreement or a reportable event.
Moss Adams LLP did not audit the financial statements contained in the Form 10-K
for the year ended July 31, 2002 filed November 13, 2002 and did not issue an
audit report with respect to the aforementioned financial statements or provide
consent to the incorporation by reference of these financial statements on the
Form S-8 .
II-11
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF REGISTRANT
----------------------------------------------
Directors
The following table sets forth the name and age of each of the Company's
directors, as well as the length of time which each director has served.
Name Age Director Since
------------------- --- --------------
Robert M. Rubin 62 1992
C. Dean McLain 49 1993
Dr. Seymour Kessler 71 2000
Allen Perres 54 2000
Irwin Pearl 59 2001
ROBERT M. RUBIN. Mr. Rubin has been the Chief Executive Officer of American
United Global, Inc. ("AUGI"), an approximately 31% stockholder of the Company,
since October 1990, and also served as Chairman of AUGI from October 1990 to
present. Mr. Rubin served as the Chairman of the Board of Directors of the
Company from November 20, 1992 to August 1, 1998. Mr. Rubin is also a director
of Medimerge, Inc. Mr. Rubin was Chairman of the Board of ERD Waste Technology,
Inc., a diversified waste management public company specializing in the
management and disposal of municipal solid waste, industrial, and commercial
non-hazardous waste and hazardous waste. ERD Waste Technology filed for Chapter
11 bankruptcy reorganization in the year 2000. Mr. Rubin also served for
approximately five years as an Officer and Director of Style Site Inc., which
filed for bankruptcy in January 2001.
C. DEAN MCLAIN. Mr. McLain has served as President, Chief Executive Officer, and
a director of the Company since March 7, 1993. Mr. McLain was elected Chairman
of the Board of Directors effective August 1, 1998. From March 1, 1993 through
June 13, 1995, Mr. McLain served as Executive Vice President of AUGI. Mr. McLain
has served on the Board of Directors of AUGI since March 7, 1994. From January
1990 through 1993 Mr. McLain served as Manager of Privatization of Case
Corporation.
DR. SEYMOUR KESSLER. Dr. Kessler was elected a Director of the Company in 2000.
He has also been a partner at RKP Capital Partners since 1996 and serves as a
Director of Magna Labs. Dr. Kessler served as President & C.E.O. of Princeton
Dental Management Corp. (one of the Nation's first home health care companies).
He has also served as Vice Chairman of the Board of Peterson Bank, Chairman of
the Board of First National Bank of Wheaton and Chairman of the Executive and
Loan Committees for First National Bank in Lincolnshire.
ALLEN PERRES. Mr. Perres was elected a Director of the Company in 2000. He has
also been a managing partner at RKP Capital Partners since 1996 and serves as a
Director of American United Global International. Mr. Perres was a co-founder
and principal of RealCorp., Inc. a commercial real estate investment company.
IRWIN PEARL. Mr. Pearl was appointed as a Director in July 2001. Mr. Pearl has
been the Chief Operating Officer of E-GlobalNet Inc. since 1997. He was
President and a Director of PhaseOut of America from 1993 to 1997. Mr. Pearl was
Executive Vice-President and a Director of Aqua Sciences International from 1985
to 1992.
ITEM 11. EXECUTIVE COMPENSATION
----------------------
The Compensation Committee of the Board of Directors (the "Committee") is
currently composed of two non-employee directors. The Committee reviews the
compensation of the Company's officers and key employees and the granting of
stock options under the Company's stock option plans and makes recommendations
to the Board of Directors for action on these matters. During the fiscal year
ended July 31, 2002, the Company's Board of Directors decided all compensation
matters relating to the Company's executive officers.
The key objectives of the Company's executive compensation policies are to
attract and retain key executives who are important to the long-term success of
the Company and to provide incentives for these executives to achieve high
III-1
levels of job performance and enhancement of shareholder value. The Company
seeks to achieve these objectives by paying its executives a competitive level
of base compensation for companies of similar size and industry and by providing
its executives an opportunity for further reward for outstanding performance in
both the short term and the long term. The Company has entered into an
employment agreement with Mr. McLain that covers a multiple year term (see
"Chief Executive Officer Compensation," below). The compensation of Mr. Wright
is based on an employment agreement dated August 1, 2000. Mr. Rubin, previously
compensated under an employment contract (see "Employment, Consulting and
Incentive Compensation Agreements," below), entered into a consulting agreement
with the Company on August 1, 1998 after he ceased to be an executive officer of
the Company on July 31, 1998 and entered into another consulting agreement on
August 1, 2000 when the original consulting agreement expired.
Executive Officer Compensation. The Company's executive officer
compensation program is comprised of three elements: base salary, annual cash
bonus and long-term incentive compensation in the form of stock option grants.
Salary. The Committee and the Board of Directors established base salaries
for the Company's executive officers, including the salary established in Mr.
McLain's employment agreement, after taking into account individual experience,
job responsibility and individual performance during the prior year. These
factors are not assigned a specific weight in establishing individual base
salaries. The Committee also considered the Company's executive officers'
salaries relative to salary information for executives in similar industries and
similarly sized companies.
Cash Bonuses. The purpose of the cash bonus component of the compensation
program is to provide a direct financial incentive in the form of cash bonuses
to executives. Mr. McLain's bonus is derived under the performance formula set
forth in his employment contract described under "Employment and Incentive
Compensation Agreements" below.
Stock Options. Stock options are the primary vehicle for rewarding
long-term achievement of Company goals. The objectives of the program are to
align employee and shareholder long-term interests by creating a strong and
direct link between compensation and increases in share value. Under the
Company's 1995 Employee Stock Option Plan, the Board of Directors or the
Compensation Committee may grant options to purchase Common Stock of the Company
to key employees of the Company. Messrs. McLain and Wright currently participate
in the 1995 Employee Stock Option Plan. The number of options granted to Mr.
McLain are determined under the terms of his employment agreement. The number of
options granted to Mr. Wright are determined by the Compensation Committee on a
discretionary basis. The options generally vest in increments over a period of
years established at the time of grant.
Chief Executive Officer Compensation. In August 2000 the Company entered
into an new employment agreement with its chief executive officer, Mr. McLain,
to ensure the retention of his services and to encourage him to perform at
increasing levels of effectiveness and to use his best efforts to promote the
growth and profitability of the Company. This approach enabled the Board to
concentrate on the negotiation of a particular employment contract with salary,
incentive bonus and stock option components that reflect a longer term view of
the Company's prospects and goals. See "Employment, Consulting and Incentive
Compensation Agreements" for a complete description of the employment agreements
and the compensation and benefits provided thereunder.
SUMMARY COMPENSATION TABLE
The following table sets forth the amount of all compensation paid during
each of the last three fiscal years to the Chief Executive Officer and to each
of the Company's other executive officers for services in all capacities to the
Company.
Long-Term
Compensation
Annual Compensation Awards
----------------------------- ------------
Other Annual Number of All Other
Name and Principal Position Year Salary Bonus Compensation Options Compensation
- --------------------------- ------ -------- ------- -------------- --------- --------------
Robert M. Rubin 2002 -0- -0- -0- -0- 332,000
Consultant; former Chairman(1) 2001 -0- -0- -0- 500,000 200,000
2000 150,000 -0- -0- -0- -0-
III-2
C. Dean McLain 2002 393,300 135,000 967 -0- 31,199
President, CEO, Chairman 2001 387,474 -0- 1,369 500,000 31,199
of the Board(2) 2000 322,502 -0- 11,668 -0- 31,199
Mark J. Wright 2002 176,481 75,000 9,000 -0- 7,718
Vice President of Finance 2001 173,265 -0- 9,000 100,000 7,718
and CFO 2000 157,674 -0- 5,040 -0- 6,114
(1) The Company entered into a consulting agreement with Mr. Rubin, effective
August 1, 1998 and expiring August 1, 2000, pursuant to which Mr. Rubin was
paid a salary of $150,000 plus all authorized business expenses. The
Company entered into a new seven (7) year consulting agreement with Mr.
Rubin effective August 1, 2000 which pays Mr. Rubin a base salary of
$200,000 plus all authorized business expenses in the first year, followed
by a 3% raise in each successive year of the contract. See "Employment,
Consulting and Incentive Compensation Agreements," below. In addition,
pursuant to shareholder approval at the 2002 Annual Meeting of the
Stockholders, 600,000 shares of the Company's common stock were issued to
the Rubin Family Irrevocable Stock Trust in lieu of compensation to Mr.
Rubin. The fair market value of the shares at the date of issuance was
$0.22 per share, resulting in compensation to the Company in the amount of
$132,000.
(2) Mr. McLain joined the Company in March 1993, when he became its Chief
Executive Officer. On July 31, 1995, Mr. McLain was permitted to and did
purchase from AUGI 6,000 shares of AUGI's common stock at a price of $.01
per share. On August 1, 1995, the closing price for a share of AUGI's
common stock as reported by NASDAQ was $4.875. Effective as of August 1,
1995, Mr. McLain's employment agreement with the Company was terminated and
he entered into an amended employment agreement expiring July 31, 2005. The
base salary under this employment agreement commenced at $250,000 for
fiscal 1996, and rises to $300,000 for fiscal 2000. His employment
agreement also calls for Incentive Bonuses under certain circumstances.
Effective as of August 1, 2000 Mr. McLain's employment agreement with the
Company was terminated and he entered into a new employment agreement
expiring July 31, 2007. The base salary under this employment agreement
commences at $390,000 and increases yearly based upon the average
percentage increase in salary for all employees of Employer for the current
fiscal year over the previous fiscal year. His employment agreement also
calls for Incentive Bonuses under certain circumstances. See "Employment,
Consulting and Incentive Compensation Agreements" below. Mr. McLain became
Chairman effective August 1, 1998.
OPTION GRANTS IN LAST FISCAL YEAR
The following table provides information regarding individual grants of
stock options to each executive officer in fiscal 2002.
Potential Realizable
Individual Grants Value at Assumed Annual
% of Total Options Rates of Stock Price
Options Granted to Employees Exercise Expiration Appreciation for term
Name Granted in Fiscal Year Price Date 5% 10%
- --------------- ------- -------------------- -------- ---------- --------- ---------
C. Dean McLain -0- N/A N/A N/A N/A N/A
Robert M. Rubin -0- N/A N/A N/A N/A N/A
Mark J. Wright -0- N/A N/A N/A N/A N/A
III-3
OPTION EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR-END OPTION VALUES
The following table provides information concerning the exercise of stock
options during the fiscal 2002 by each executive officer and the fiscal year-end
value of unexercised options held by that officer.
Value of
Shares Number of Unexercised Unexercised In-the-money
Acquired on Value Options at Fiscal Year-End options at Fiscal Year-End
Name Exercise Realized Exercisable/Unexercisable Exercisable/Unexercisable
- --------------- ----------- -------- -------------------------- --------------------------
C. Dean McLain 0 0 500,000 N/A
Robert M. Rubin 0 0 500,000 N/A
Mark J. Wright 0 0 100,000 N/A
EMPLOYMENT, CONSULTING AND INCENTIVE COMPENSATION AGREEMENTS
Upon completion of the Company's 1995 initial public offering, the Company
entered into an employment agreement with Mr. Rubin, effective as of June 13,
1995, that expired July 31, 1998. Pursuant to this agreement, Mr. Rubin served
as Chairman of the Board of the Company and received an annual base salary of
$150,000 plus bonuses if certain conditions were met. Effective August 1, 1998,
the Company entered into a new two-year agreement with Mr. Rubin. Under the
terms of this agreement, Mr. Rubin no longer served as Chairman, but provided
consulting services to the Company. He received an annual fee of $200,000 plus
all authorized business expenses. The Company then entered into a new seven (7)
year consulting agreement with Mr. Rubin effective August 1, 2000 paying him
$200,000 plus all authorized business expenses in the first year, followed by a
3% raise in each successive year of the contract.
Effective as of August 1, 2000 Mr. McLain's entered into an employment
agreement expiring July 31, 2007. The base salary under this employment
agreement commences at $390,000 and increases yearly based upon the average
percentage increase in salary for all employees of Employer for the current
fiscal year over the previous fiscal year. His employment agreement also calls
for Incentive bonuses under certain circumstances. Mr. McLain received a
$135,000 bonus during the Company's 2002 fiscal year. In addition, Mr. McLain
receives the use of vehicles at Company expense and certain other fringe
benefits not exceeding $50,000 per year.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The Compensation Committee consists of Dr. Kessler, Mr. Perres and Mr.
Pearl. There are no interlocking relationships, as described by the Securities
and Exchange Commission, between the Compensation Committee members. Mr. McLain,
the Chairman of the Board of Directors since August 1998, as well as its
President and CEO, and Mr. Rubin, the Chairman of the Board of Directors before
Mr. McLain, and currently a director and consultant for the Company,
participated in all discussions and decisions regarding salaries and incentive
compensation for all employees and consultants to the Company, except that they
were each excluded from discussions regarding their own salary.
DIRECTORS' COMPENSATION
Each director, not otherwise a full time employee of the Company, is
eligible to receive $5,000 per quarter, together with reimbursement of their
reasonable expenses incurred on the Company's behalf.
III-4
ITEM 12. PRINCIPAL STOCKHOLDERS
----------------------
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
The Company's outstanding voting securities at the close of business on
November 22, 2002, consisted of 4,003,162 shares of common stock, $.001 par
value (the "Common Stock"), each of which is entitled to one vote on all matters
to be presented at the Annual Meeting. The Common Stock does not have cumulative
voting rights.
The following table sets forth certain information as of November 22, 2002
with respect to the beneficial ownership of the Common Stock by each beneficial
owner of more than 5 percent of all outstanding shares.
Percentage of
Number of Shares of Common Outstanding
Name and Address of Stock of the Company Common
Beneficial Owner Beneficially Owned (1) Stock Owned (1)
- ------------------- -------------------------- ---------------
American United 1,222,586 30.5%
Global, Inc. (AUGI)
2489 152nd Avenue NE
Richmond, WA 98052
C. Dean McClain (2) 529,485 13.2%
Robert M. Rubin (3) 705,197 17.6%
(1) Unless otherwise indicated, the Company believes that all persons named in
the table have sole voting and investment power with respect to all shares
of Common Stock beneficially owned by them. A person is deemed to be the
beneficial owner of securities which may be acquired by such person within
60 days from the date on which beneficial ownership is to be determined,
upon the exercise of options, warrants or convertible securities. Each
beneficial owner's percentage ownership is determined by assuming that
options, warrants and convertible securities that are held by such person
(but not those held by any other person) and which are exercisable within
such 60 day period, have been exercised.
(2) Excludes Mr. McLain's indirect ownership in the Company through his
beneficial ownership of options to purchase 300,000 shares of AUGI common
stock. Includes Mr. McLain's direct beneficial ownership of 29,485 shares
of common stock of the Company and exercisable options to acquire 500,000
shares of Company Common Stock. Mr. McLain's beneficial ownership of AUGI
common stock represents 2.4 percent of AUGI voting stock as of November 22,
2002.
(3) Excludes Mr. Rubin's indirect ownership in the Company through his
ownership of an aggregate of 2,087,798 voting shares of AUGI, the Company's
principal stockholder, including 2,000 shares of AUGI common stock, options
to purchase an additional 840,000 shares of AUGI common stock, and
1,245,798 held by the Rubin Family Irrevocable Stock Trust, to which Mr.
Rubin disclaims beneficial ownership. Excludes the 600,000 shares of Common
Stock issued upon shareholder approval to the Rubin Family Irrevocable
Stock Trust, to which Mr. Rubin disclaims beneficial ownership. Includes
Mr. Rubin's direct beneficial ownership of Company Common Stock through
205,197 shares of Company Common Stock and his ownership of exercisable
options to acquire 500,000 shares of Company Common Stock. Mr. Rubin's
beneficial ownership of AUGI voting stock represents 16.8 percent of AUGI
voting stock as of November 22, 2002.
SECURITY OWNERSHIP OF MANAGEMENT
The following table, which was prepared on the basis of information
furnished by the persons described, shows ownership of the Common Stock as of
July 10, 2002 by the Chief Executive Officer, by each of the other executive
officers, by each of the directors, and by the executive officers and directors
as a group.
III-5
SHARES HELD BY DIRECTORS AND NAMED EXECUTIVE OFFICERS
Set forth in the table below is information concerning the ownership, as of
the close of business on November 12, 2002, of the Common Stock by the Company's
directors and Named Executive Officers and all directors and present executive
officers as a group.
- ------------------------------- ------------------------------- ----------------
Name and Address Amount and Nature of Percent (1)
Beneficial Ownership (1)
- ------------------------------- ------------------------------- ----------------
C. Dean McLain (2) 529,485 13.2%
Mark J. Wright (3) 100,000 2.5%
Robert M. Rubin (4) 705,197 17.6%
Dr. Seymour Kessler(5) 25,000 0.6%
Allen Perres (6) 25,000 0.6%
Irwin Pearl 0 0%
- --------------------------------------------------------------------------------
All directors and executive
officers as a group (5 persons) 1,384,682 34.6%
- --------------------------------------------------------------------------------
(1) Unless otherwise indicated, the Company believes that all persons named in
the table have sole voting and investment power with respect to all shares
of Common Stock beneficially owned by them. A person is deemed to be the
beneficial owner of securities which may be acquired by such person within
60 days from the date on which beneficial ownership is to be determined,
upon the exercise of options, warrants or convertible securities. Each
beneficial owner's percentage ownership is determined by assuming that
options, warrants and convertible securities that are held by such person
(but not those held by any other person) and which are exercisable within
such 60 day period, have been exercised.
(2) Excludes Mr. McLain's indirect ownership in the Company through his
beneficial ownership of options to purchase 300,000 shares of AUGI common
stock. Includes Mr. McLain's direct beneficial ownership of 29,485 shares
of common stock of the Company and exercisable options to acquire 500,000
shares of Company Common Stock. Mr. McLain's beneficial ownership of AUGI
common stock represents 2.4 percent of AUGI voting stock as at November 22,
2002.
(3) Includes exercisable stock options to purchase 100,000 shares of common
stock of the Company issued to Mr. Wright for services rendered to the
Company.
(4) Excludes Mr. Rubin's indirect ownership in the Company through his
ownership of an aggregate of 2,087,798 voting shares of AUGI, the Company's
principal stockholder, including 2,000 shares of AUGI common stock, options
to purchase an additional 840,000 shares of AUGI common stock, and
1,245,798 held by the Rubin Family Irrevocable Stock Trust, to which Mr.
Rubin disclaims beneficial ownership. Excludes the 600,000 shares of Common
Stock issued upon shareholder approval to the Rubin Family Irrevocable
Stock Trust, to which Mr. Rubin disclaims beneficial ownership. Includes
Mr. Rubin's direct beneficial ownership of Company Common Stock through
205,197 shares of Company Common Stock and his ownership of exercisable
options to acquire 500,000 shares of Company Common Stock. Mr. Rubin's
beneficial ownership of AUGI voting stock represents 16.8 percent of AUGI
voting stock as at November 22, 2002.
III-6
(5) Includes stock options to purchase 25,000 shares of common stock of the
Company issued to Dr. Kessler for services rendered to the Company.
(6) Includes stock options to purchase 25,000 shares of common stock of the
Company issued to Mr. Perres for services rendered to the Company.
SHARES HELD BY CERTAIN OTHER STOCKHOLDERS
The following table sets forth, as of the close of business on November 22,
2002, certain information with respect to each person who is known to the
Company to be the beneficial owner of more than five (5%) percent of the Common
Stock, other than the directors set forth in the Directors and Named Executive
Officers Ownership Table above.
- --------------------------------------- -------------------------- -------------
Name and Address Amount and Nature of Percent (1)
Beneficial Ownership (1)
- --------------------------------------- -------------------------- -------------
American United Global, Inc. ("AUGI")
2489 152nd Avenue NE
Richmond, WA, 98052 (2) 1,222,586 30.5%
- --------------------------------------- -------------------------- -------------
(1) Unless otherwise indicated, the Company believes that all persons named in
the table have sole voting and investment power with respect to all shares
of Common Stock beneficially owned by them. A person is deemed to be the
beneficial owner of securities which may be acquired by such person within
60 days from the date on which beneficial ownership is to be determined,
upon the exercise of options, warrants or convertible securities. Each
beneficial owner's percentage ownership is determined by assuming that
options, warrants and convertible securities that are held by such person
(but not those held by any other person) and which are exercisable within
such 60 day period, have been exercised.
(2) Mr. Rubin has been the Chief Executive Officer of American United Global,
Inc. ("AUGI"), the Company's majority shareholder, since October 1990, and
also served as Chairman of AUGI from October 1990 until January 1996. From
March 1, 1993 through June 13, 1995, Mr. McLain served as Executive Vice
President of AUGI. Mr. McLain has served on the Board of Directors of AUGI
since March 7, 1994.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
----------------------------------------------
The real property and improvements used in connection with the Sacramento
Operations, and upon which the Sacramento Operation is located, were sold by
Case for $1,500,000 to the McLain-Rubin Realty Company, LLC ("MRR"), a Delaware
limited liability company the owners of which are Messrs. C. Dean McLain, the
President and a director of the Company, and Robert M. Rubin, the Chairman and a
director of the Company. Simultaneous with its acquisition of the Sacramento
Operation real property and improvements, MRR leased such real property and
improvements to the Company under the terms of a 20-year commercial lease
agreement dated March 1, 1996 with the Company paying an initial annual rate of
$168,000. As of October 1, 2000, the Company entered into a renegotiated 7-year
lease with an initial annual rate of $228,000. In addition to base rent, the
Company is responsible for the payment of all related taxes and other
assessments, utilities, insurance and repairs (both structural and regular
maintenance) with respect to the leased real property during the term of the
lease. The new lease qualifies for treatment as an operating lease.
In February 1999, the real property and improvements used in connection with the
Company's Sparks, Nevada operation and upon which such operation is located,
were sold to McLain-Rubin Realty, L.L.C. (MRR) under the terms of a real
property purchase and sale agreement. MRR is a Delaware limited liability
company the owners of which are Messrs. C. Dean McLain, the President and
III-7
Chairman of the Company, and Robert M. Rubin, a director of the Company. The
sale price was $2,210,000 in cash at closing. Subsequent to the closing of the
sale, the Company entered into a 20-year commercial lease agreement with MRR for
the Sparks, Nevada facility at an initial rental rate of $252,000 per year. The
lease is a net lease with payment of insurance, property taxes and maintenance
costs paid by the Company. The sale resulted in a deferred gain which will be
amortized over the life of the lease pursuant to generally accepted accounting
principles. As of October 1, 2000, the Company entered into a renegotiated
7-year lease with an initial annual rate of $276,000. The new lease qualifies
for treatment as an operating lease and the remainder of the deferred gain which
was previously being amortized over the life of the cancelled lease was all
recognized in the first quarter of fiscal year 2001.
On April 1, 2001, the Company entered into a lease with McLain-Rubin Realty
Company II, LLC ("MRR II"), a Delaware limited liability company, the owners of
which are Messrs. C. Dean McLain, the President and a director of the Company,
and Robert M. Rubin, the Chairman and a director of the Company, for a 5-year
lease on its Vancouver, Washington corporate office with an annual rate of
$98,000. In addition to base rent, the Company is responsible for the payment of
all related taxes and other assessments, utilities, insurance, and repairs (both
structural and regular maintenance) with respect to the leased real property
during the term of the lease. The lease qualifies for treatment as an operating
lease.
On July 30, 2002, pursuant to shareholder approval at the 2002 Annual Meeting of
the Stockholders, 600,000 shares of the Company's common stock were issued to
the Rubin Family Irrevocable Stock Trust in lieu of compensation to Mr. Rubin.
The fair market value of the shares at the date of issuance was $0.22 per share,
resulting in compensation to the Company in the amount of $132,000.
III-8
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) 1. Financial Statements.
Consolidated Statements of Operations for
the years ended July 31, 2002, 2001, and 2000 F-1
Consolidated Balance Sheets as of July 31, 2002 and 2001 F-2
Consolidated Statements of Stockholders' Equity/(Deficit)
for the years ended July 31, 2002, 2001, and 2000 F-3
Consolidated Statements of Cash Flows for
the years ended July 31, 2002, 2001, and 2000 F-4
Notes to Consolidated Financial Statements F-5
Report of Independent Accountants F-17, F-18
2. Financial Statement Schedule.
Report of Independent Accountants - Financial
Statement Schedule F-19, F-20
Schedule II - Valuation and Qualifying Accounts F-21
3. Exhibits.
Exhibit
Number Description
3.1 Certificate of Incorporation of Registrant. (2)
3.2 By-laws of Registrant. (2)
10.1 1995 Employee Stock Option Plan. (3)
10.2 Second Amended and Restated Stock Option Plan for
Non-Employee Directors. (3)
10.3 Case New Dealer Agreement Package. (1)
10.4 Lease Agreement--Hayward, California. (2)
10.5 Lease Agreement--Auburn, Washington. (7)
10.6 Loan Agreement, dated January 17, 1997, between
Registrant and Case Credit Corp. including related
promissory notes. (5)
10.7 Security Agreement, dated January 17, 1997, made by
Registrant in favor of Case Credit Corporation to secure
payment for and collateralized by all assets acquired by
Registrant from Sahlberg Equipment, Inc. (5)
10.8 Loan and Security Agreement dated as of June 5, 1997
between Registrant and Deutsche Financial Services
Corporation. (6)
10.9 Asset Purchase Agreement, dated April 30, 1998, between
Yukon Equipment, Inc. and Registrant. (8)
10.10 Employment Agreement dated May 1, 1998 between Maurice
Hollowell and Registrant. (8)
10.11 Employment Agreement dated August 1, 2000 between C.
Dean McLain and Registrant.
IV-1
10.12 Consulting Agreement dated August 1, 2000 by and between
Registrant and Robert M. Rubin.
10.13 Commercial Lease dated October 1, 2000 between
McLain-Rubin Realty Company III, LLC and Registrant for
Yuba City, California facility.
10.14 Commercial Lease dated October 1, 2000 between
McLain-Rubin Realty Company III, LLC and Registrant for
Sacramento, California facility.
10.15 Commercial Lease, dated as of October 1, 2000 between
McLain-Rubin Realty Company, LLC and Registrant for the
Sparks, Nevada facility.
10.16 Commercial Lease, dated as of April 1, 2001 between
McLain-Rubin Realty Company II, LLC and Registrant for
the Vancouver, Washington corporate office.
21. Subsidiaries of the Company.
23. Consent of Independent Accountants.
(1) Filed as an Exhibit to the American United Global, Inc. Annual
Report on Form 10-K, as filed on October 29, 1993 and incorporated
herein by reference thereto.
(2) Filed as an Exhibit to Amendment No. 1 to the Registrant's
Registration Statement on Form S-1, filed on May 16, 1995 and
incorporated herein by reference thereto. (Registration No.
33-89762).
(3) Filed as an Exhibit to the Registrant's Registration Statement on
Form S-8, filed on September 18, 1998 and incorporated herein by
reference thereto. (Registration No. 33-63775).
(4) Filed as an Exhibit to the Quarterly Report on Form 10-Q of the
Registrant, as filed on June 11, 1997 and incorporated herein by
reference thereto.
(5) Filed as an Exhibit to the Annual Report on Form 10-K of the
Registrant, as filed on October 28, 1996 and incorporated herein by
reference thereto.
(6) Filed as an Exhibit to the Annual Report on Form 10-K of the
Registrant, as filed on October 29, 1998 and incorporated herein by
reference thereto.
(7) Filed as an Exhibit to the Quarterly Report on Form 10-Q of the
Registrant, as filed on June 14, 1999 and incorporated herein by
reference thereto.
(8) Filed as an Exhibit to Form 8-K of the Registrant, as filed on May
11, 1998 and incorporated herein by reference thereto.
(b) Reports on Form 8-K.
--------------------
During the quarter ended January 31, 2002, the Company filed a report
on Form 8-K to report a change in the Company's Certifying Accountant.
(c) Exhibits
--------
See (a)(3) above.
(d) Additional Financial Statement Schedules
----------------------------------------
See (a)(2) above.
IV-2
WESTERN POWER & EQUIPMENT CORP.
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
Year Ended July 31,
---------------------------------------------
2002 2001 2000
--------- --------- ---------
Net revenue $ 107,988 $ 139,902 $ 155,637
Cost of goods sold 100,225 130,082 144,099
--------- --------- ---------
Gross profit 7,763 9,820 11,538
Selling, general and administrative expenses 10,199 12,840 13,534
Impairment of goodwill and write-down of
property, plant and equipment 3,478 -0- -0-
--------- --------- ---------
(5,914) (3,020) (1,996)
Other income (expense):
Interest expense (4,114) (5,982) (6,069)
Other income (expense) 57 1,465 1,646
--------- --------- ---------
Loss before income taxes (9,971) (7,537) (6,419)
Provision for income taxes 48 305 779
--------- --------- ---------
Net loss $ (10,019) $ (7,842) $ (7,198)
========= ========= =========
Basic loss per common share $ (2.50) $ (2.30) $ (2.18)
========= ========= =========
Average Outstanding Common Shares
for Basic EPS 4,003 3,403 3,306
========= ========= =========
Diluted loss per common share $ (2.50) $ (2.30) $ (2.18)
========= ========= =========
Average Outstanding Common Shares
And Equivalents for Diluted EPS 4,003 3,403 3,306
========= ========= =========
See accompanying notes to consolidated financial statements.
F-1
WESTERN POWER & EQUIPMENT CORP.
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands)
July 31, July 31,
2002 2001
-------- --------
ASSETS
- ------
Current assets:
Cash and cash equivalents $ 5 $ 770
Accounts receivable, less allowance for
doubtful accounts of $646 and $948 10,304 14,295
Inventories 26,915 44,867
Prepaid expenses 48 298
Note Receivable Current 122 -0-
Deferred income taxes -0- 2,541
-------- --------
Total current assets 37,394 62,771
-------- --------
Fixed assets (net):
Property, plant and equipment 3,434 5,584
Rental equipment fleet 18,696 22,027
-------- --------
Total fixed assets 22,130 27,611
-------- --------
Intangibles and other assets, net of accumulated
amortization of $2,650 and $808 52 2,720
-------- --------
Total assets $ 59,576 $ 93,102
======== ========
LIABILITIES & STOCKHOLDERS' EQUITY
- ----------------------------------
Current liabilities:
Borrowings under floor plan financing $ 10,974 $ 14,237
Short-term borrowings 41,322 53,384
Convertible Debt 218 182
Accounts payable 7,600 11,591
Accrued payroll and vacation 659 1,754
Other accrued liabilities 985 1,716
Capital lease obligations 26 18
-------- --------
Total current liabilities 61,784 82,882
-------- --------
Deferred income taxes -0- 2,541
Capital lease obligations 928 920
Long-term borrowings -0- 8
-------- --------
Total liabilities 62,712 86,351
-------- --------
Commitments and contingencies
Stockholders' equity:
Preferred stock-10,000,000 shares authorized; none outstanding -0- -0-
Common stock, $.001 par value - Authorized, 20,000,000 shares
Outstanding, 4,003,162 shares and 3,403,162 shares, respectively 5 4
Additional paid-in capital 16,025 15,894
Accumulated deficit (18,322) (8,303)
Less common stock in treasury, at cost (130,300 shares) (844) (844)
-------- --------
Total stockholders' (deficit) equity (3,136) 6,751
-------- --------
Total liabilities and stockholders' equity $ 59,576 $ 93,102
======== ========
See accompanying notes to consolidated financial statements.
F-2
WESTERN POWER & EQUIPMENT CORP.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
(Dollars in thousands)
Common Stock
----------------------- Additional Total
Number Paid-in Accumulated Treasury Stockholders'
of Shares Amount Capital Deficit Stock Equity (Deficit)
--------- --------- --------- --------- --------- ---------
Balance at
July 31, 1999 3,303,162 $ 4 $ 16,072 $ 6,738 $ (1,491) $ 21,323
Issuance of Treasury
Stock 50,000 -- (67) -- 323 256
Net loss -- -- -- (7,198) -- (7,198)
----------------------------------------------------------------------------------
Balance at
July 31, 2000 3,353,162 4 16,005 (460) (1,168) 14,381
Issuance of Treasury
Stock 50,000 -- (111) -- 324 213
Net loss -- -- -- (7,842) -- (7,842)
----------------------------------------------------------------------------------
Balance at
July 31, 2001 3,403,162 4 15,894 (8,303) (844) 6,751
Issuance of Stock 600,000 1 131 -- -- 132
Net loss -- -- -- (10,019) -- (10,019)
----------------------------------------------------------------------------------
Balance at
July 31, 2002 4,003,162 $ 5 $ 16,025 $ (18,322) $ (844) $ (3,136)
========= ========= ========= ========= ========= =========
See accompanying notes to consolidated financial statements.
F-3
WESTERN POWER & EQUIPMENT CORP.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
Year Ended July 31,
------------------------------------------
2002 2001 2000
-------- -------- --------
Cash flows from operating activities:
Net loss $(10,019) $ (7,842) $ (7,198)
Adjustments to reconcile net loss to
net cash provided by operating activities:
Depreciation 7,950 9,835 11,599
Amortization 125 125 113
Impairment of goodwill and write-down of
property, plant and equipment 3,478 -0- -0-
Write-off of disputed financing receivables 1,983 -0- -0-
Gain on sale of fixed assets (606) (2,016) (59)
Non-cash stock compensation expense 132 -0- -0-
Changes in assets and liabilities
Accounts receivable 2,008 3,052 (1,847)
Inventories 14,716 8,545 2,903
Prepaid expenses 249 (88) 23
Deferred income taxes -0- -0- 574
Notes receivable current (122) -0- -0-
Accounts payable (3,990) 861 (1,972)
Accrued payroll and vacation (1,095) 1,003 (74)
Other accrued liabilities (723) 393 (433)
Income taxes receivable/payable (7) 400 (46)
Deferred lease income -0- (1,007) (333)
Other assets/liabilities -0- -0- -0-
-------- -------- --------
Net cash provided by operating activities 14,079 13,261 3,250
-------- -------- --------
Cash flow from investing activities:
Purchase of fixed assets (308) (964) (1,254)
Purchase of rental equipment (5,129) (6,500) (9,531)
Proceeds on sale of rental equipment 5,548 8,512 10,574
Proceeds on sale of fixed assets 309 283 189
Sale (purchase) of leased equipment fleet -0- -0- 289
Purchase of other assets 18 12 (18)
-------- -------- --------
Net cash provided by (used in) investing activities 438 1,343 249
-------- -------- --------
Cash flows from financing activities:
Principal payments on capital leases 16 (2) 32
Treasury stock sales -0- -0- 256
Inventory floor plan financing (3,251) (531) (2,380)
Short-term financing (12,075) (14,287) (3,192)
Convertible debt issuance 100 182 -0-
Payments on convertible debt (64) -0- -0-
Long-term debt repayments (8) (20) (20)
-------- -------- --------
Net cash used in financing activities (15,282) (14,658) (5,304)
-------- -------- --------
(Decrease) increase in cash and cash equivalents (765) (54) (1,805)
Cash and cash equivalents at beginning of year 770 824 2,629
-------- -------- --------
Cash and cash equivalents at end of year $ 5 $ 770 $ 824
======== ======== ========
See accompanying notes to consolidated financial statements.
F-4
Western Power & Equipment Corp.
Notes to Consolidated Financial Statements (Dollars in thousands, except per
share and options data)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
The Company is engaged in the sale, rental, and servicing of light,
medium, and heavy construction and industrial, and agricultural equipment
and related parts in Washington, Oregon, California, Nevada, and Alaska.
Case serves as the manufacturer of the single largest portion of the
Company's products.
The consolidated financial statements include the accounts of the Company
and its Oregon subsidiary after elimination of all intercompany accounts
and transactions.
The accompanying financial statements have been prepared on a going
concern basis, which contemplates the realization of assets and the
satisfaction of liabilities in the normal course of business. As discussed
in note 5 below, the Company has significant borrowings that require,
among other things, compliance with certain financial ratios on a
quarterly basis. As a result of losses incurred during the last year, the
Company was not in compliance with the financial ratio covenants under its
credit facility with Deutsch Financial Services (DFS). The Company
requested, but did not receive a waiver of such non-compliance. There can
be no assurance that the Company will be able to meet the financial ratio
covenants in the future, which could result in DFS calling the debt at any
time and requiring the Company to discontinue operations.
The Company is in discussions with DFS regarding renewal or extension of
the current credit facility. In addition, the Company is exploring
alternative financing arrangements with other potential lenders. The
Company's continuation as a going concern is dependent, in part, upon its
ability to successfully establish the necessary financing arrangements and
to comply with the terms thereof.
Subsequent breaches of any of the terms and conditions of the current DFS
credit facility or any renewal or replacement thereof could result in
acceleration of the Company's indebtedness, in which case the debt would
become immediately due and payable. Based upon the Company's current
projections, it does not believe that it will comply with the existing
financial covenants unless they are modified or waived. If there is no
modification or waiver, the Company may not be able to repay its debt or
borrow sufficient funds to refinance it. Even if new financing is
available, it may not be on terms that are acceptable to the Company.
The Company is concentrating its efforts on making all of its ongoing
operations profitable and in capitalizing on its existing operations'
strengths to restore profitability. The Company has selectively pared down
the number of stores it operates and its product offerings to reduce
overall costs and to improve turnover in the remaining product lines that
it offers.
CASH EQUIVALENTS
For financial reporting purposes, the Company considers all highly liquid
investments purchased with an original maturity of three months or less to
be cash equivalents, which balances may, at times, exceed the federally
insured limits.
RESTRICTED CASH
In accordance with the borrowing agreement with Deutsche Financial
Services (DFS), the Company has a cash account restricted by DFS for the
purpose of paying down the line of credit and accordingly has been
recorded as a current asset. Restricted cash included in the cash balances
totaled $540 and $242 at July 31, 2002 and 2001, respectively.
F-5
INTANGIBLE ASSETS
Goodwill, which represents the excess of purchase price over fair value of
net assets acquired is amortized on a straight-line basis over the
expected period to be benefited. The Company uses estimates of the useful
life of these intangible assets ranging from twenty to forty years. These
lives are based on the factors influencing the acquisition decision and on
industry practice. In accordance with Statement of Financial Accounting
Standards No. 121, "Accounting for the Impairment of Long-Lived Assets to
be Disposed Of" the Company continually reviews goodwill to evaluate
whether events or changes have occurred that would suggest an impairment
of carrying value based on an estimate of future cash flows from related
operations. Based on this review, a $2,525 write-down for impairment loss
on goodwill has been recorded during the fourth quarter of the year ended
July 31, 2002.
PROPERTY, PLANT, AND EQUIPMENT
Property, plant, and equipment are stated at cost less accumulated
depreciation. Depreciation and amortization on the property, plant, and
equipment are computed using the straight-line method over the estimated
useful lives of the assets, ranging from 5 to 40 years. Depreciation on
the rental fleet is calculated using the straight-line method over the
estimated useful lives, considering salvage values. Expenditures for
replacements and major improvements are capitalized. Expenditures for
repairs, maintenance, and routine replacements are charged to expenses as
incurred. The cost of assets retired or otherwise disposed of and the
related accumulated depreciation are eliminated from the accounts; any
resulting gain or loss is included in the results of operations.
In accordance with Statement of Financial Accounting Standards No. 121,
"Accounting for the Impairment of Long-Lived Assets to be Disposed Of" at
each balance sheet date, management assesses whether there has been
permanent impairment in the value of the long-lived assets. The existence
of any such impairment is determined by comparing anticipated undiscounted
future cash flows from operating activities with the associated carrying
value of the assets. The factors considered by management in performing
this assessment include operating results, trends and prospects, as well
as the effects of obsolescence, demand, competition, and other economic
factors. The amount of any such impairment is determined by comparing the
discounted future cash flows noted above with the associated carrying
value of the assets. Based on a review of the Company's property, plant
and equipment, a $953 reduction in the carrying value was recorded during
the fourth quarter of the year ended July 31, 2002, which is, classified
as a write-down of property, plant and equipment in the Consolidated
Statement of Operations.
REVENUE RECOGNITION
Revenue on equipment and parts sales is recognized upon shipment of
products and passage of title. Rental and service revenue is generally
recognized at the time such services are provided.
The Company has entered into sales contracts under which the customer may
require the Company to repurchase equipment at specified dates and
specified prices. The Company records the proceeds from such sales
contracts as deferred lease income. The difference between the sale
contract amount and the repurchase obligation is recognized as revenue
over the period of the repurchase obligation. The remaining repurchase
obligation is recorded as a sale if and when the customer does not
exercise the repurchase option. At July 31, 2002, no repurchase
obligations were in existence.
ADVERTISING EXPENSE
The Company expenses all advertising costs as incurred. Total advertising
expense for the years ended July 31, 2002, 2001 and 2000 was $176, $221,
and $320 respectively.
F-6
OTHER INCOME (EXPENSE)
Other income and expense includes gains and losses on the sale of fixed
assets, amortization of goodwill and miscellaneous income associated with
contract financing activities.
INCOME TAXES
The Company recognizes deferred tax assets and liabilities based upon
differences between the financial reporting and tax bases of the assets
and liabilities using the enacted tax rates and laws that are expected to
be in effect when the differences are expected to be recovered. The
Company provides a valuation allowance for deferred tax assets for which
it does not consider realization of such assets to be more likely than
not.
TREASURY STOCK
In April 1998, the Board of Directors authorized the repurchase of up to
350,000 shares of the Company's common stock in the open market, subject
to normal trading restrictions. Under this program, the Company purchased
a total of 230,300 shares of common stock at a cost of $1.49 million in
fiscal year 1998. Currently, the Company uses shares of treasury stock to
issue shares upon exercise of outstanding stock options and/or for private
placements of common stock. As of July 31, 2002 and 2001 the Company held
130,300 shares in treasury stock.
RECLASSIFICATIONS
Certain amounts in the 2001 financial statements have been reclassified to
conform with the 2002 presentation. These reclassifications had no impact
on net loss or cash flows as previously reported.
FINANCIAL INSTRUMENTS
The recorded amounts of cash and cash equivalents, accounts receivable,
short-term borrowings, accounts payable and accrued liabilities as
presented in the financial statements approximate fair value because of
the short-term nature of these instruments. The recorded amount of short
and long-term borrowings approximates fair value as the actual interest
rates approximate current competitive rates.
NET INCOME (LOSS) PER COMMON SHARE
Basic net income (loss) per common share is computed using the average
number of common shares outstanding during the period. Diluted net income
(loss) per share is computed using the average number of common shares and
common share equivalents outstanding during the period, unless inclusion
of common share equivalents would be anti-dilutive.
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Year ended July 31,
2002 2001 2000
------- ------- -------
Cash paid (received) during the year for:
Interest $ 4,114 $ 5,887 $ 5,922
Income taxes, net of refunds (12) (12) 219
During fiscal year 2001, the Company's obligations under various
guaranteed buyback obligations were terminated resulting in elimination of
leased equipment assets of $4,975 and deferred income of $5,982 from the
prior fiscal year. In fiscal year 2001, in lieu of payment for certain
professional services provided to the Company, the Company issued 50
shares of its common stock for $213 to the provider of such professional
services.
F-7
A capital lease obligation of $1,942 was incurred in February 1999 when
the Company entered into a 20-year lease for the Sparks, Nevada facility.
In the first quarter of fiscal 2001 certain capital leases were converted
to operating leases resulting in a gain of $720.
USE OF ESTIMATES
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America requires
management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and the reported
amounts of revenues and expenses during the fiscal periods presented.
Actual results could differ from those estimates.
RECENT ACCOUNTING PRONOUNCEMENTS
Business Combinations and Goodwill and Other Intangible Assets
During the first quarter of fiscal year-end 2003, the Company is required
to adopt Financial Accounting Standard (FAS) No. 141, "Business
Combinations" and FAS No. 142, "Goodwill and Other Intangible Assets." The
Company has recorded the amortization of goodwill in prior periods. The
impact of the future adoption of FAS 142 will result in the elimination of
goodwill amortization of $31 per quarter and $125 on an annual basis. As
noted above, the Company recorded an impairment loss of $2,525 during the
fourth quarter of 2002 related to goodwill.
On October 3, 2001, the FASB issued Statement of Financial Accounting
Standards No. 144 "Accounting for the Impairment or Disposal of Long-Lived
Assets" ("SFAS 144). SFAS 144 supersedes SFAS 121 "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed
Of." SFAS 144 applies to all long-lived assets (including discontinued
operations) and consequently amends Accounting Principles Board Opinion
No. 30 (APB 30), "Reporting Results of Operations - Reporting the Effects
of Disposal of a Segment of a Business, and Extraordinary, Unusual and
Infrequently Occurring Events and Transaction." SFAS 144 develops one
accounting model for long-lived assets that are to be disposed of by sale.
SFAS 144 requires that long-lived assets that are to be disposed of by
sale be measured at the lower of book value or fair value less cost to
sell. Additionally, SFAS 144 expands the scope of discontinued operations
to include all components of an entity with operations that (1) can be
distinguished from the rest of the entity and (2) will be eliminated from
the ongoing operations of the entity in a disposal transaction. The
provisions of this Statement are effective for financial statements issued
for fiscal years beginning after December 15, 2001, and interim periods
within those fiscal years, with early application encouraged. The Company
is in the process of evaluating the effect of SFAS 144 on its financial
statements.
In April 2002, the FASB issued SFAS No. 145, "Rescission of FASB Statement
No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical
Corrections." SFAS No. 145 generally requires that any gains or losses on
extinguishment of debt in current or prior periods be classified as other
income (expense). The Company expects to adopt the provisions of SFAS No.
145 in its fiscal year ending July 31, 2003. The Company is currently
evaluating the impact of adopting the provisions of SFAS No. 145 in its
financial statements.
In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities." SFAS No. 146 requires
companies to recognize costs associated with exit or disposal activities
when they are incurred rather than at the date of a commitment to an exit
or disposal plan. SFAS 146 will be applied prospectively to any exit or
disposal activities initiated after December 31, 2002. The Company expects
there will be no effect on its financial results relating to the adoption
of SFAS No. 146.
F-8
In October 2002, the FASB issued SFAS No. 147, "Acquisitions of Certain
Financial Institutions - an amendment of FASB Statements No. 72 and 144
and FASB Interpretation No. 9. SFAS 147 is effective for related
transactions which occur on n or after October 1, 2002. It is not
anticipated that SFAS 147 will have an impact on the Company's financial
statements.
2. RELATED PARTY TRANSACTIONS
The real property and improvements used in connection with the Sacramento
Operations, and upon which the Sacramento Operation is located, were sold
by Case for $1,500 to the McLain-Rubin Realty Company, LLC ("MRR"), a
Delaware limited liability company the owners of which are Messrs. C. Dean
McLain, the Chairman, President and Chief Executive Officer the Company,
and Robert M. Rubin, a director of the Company. Simultaneous with its
acquisition of the Sacramento Operation real property and improvements,
MRR leased such real property and improvements to the Company under the
terms of a 20-year commercial lease agreement dated March 1, 1996 with the
Company paying an initial annual rate of $168. As of October 1, 2000, the
Company entered into a renegotiated 7-year lease with an initial annual
rate of $228. In addition to base rent, the Company is responsible for the
payment of all related taxes and other assessments, utilities, insurance
and repairs (both structural and regular maintenance) with respect to the
leased real property during the term of the lease. The new lease qualifies
for treatment as an operating lease.
In February 1999, the real property and improvements used in connection
with the Company's Sparks, Nevada operation and upon which such operation
is located, were sold to McLain-Rubin Realty, L.L.C. (MRR) under the terms
of a real property purchase and sale agreement. MRR is a Delaware limited
liability company the owners of which are Messrs. C. Dean McLain, the
Chairman, President and Chief Executive Officer of the Company, and Robert
M. Rubin, a director of the Company. The sale price was $2,210 in cash at
closing. Subsequent to the closing of the sale, the Company entered into a
20-year commercial lease agreement with MRR for the Sparks, Nevada
facility at an initial rental rate of $252 per year. The lease is a net
lease with payment of insurance, property taxes and maintenance costs paid
by the Company. The sale resulted in a deferred gain which will be
amortized over the life of the lease pursuant to generally accepted
accounting principles. As of October 1, 2000, the Company entered into a
renegotiated 7-year lease with an initial annual rate of $276. The new
lease qualifies for treatment as an operating lease and the remainder of
the deferred gain which was previously being amortized over the life of
the cancelled lease was all recognized in the first quarter of fiscal year
2001.
On April 1, 2001, the Company entered into a lease with McLain-Rubin
Realty Company II, LLC ("MRR II"), a Delaware limited liability company,
the owners of which are Messrs. C. Dean McLain, the Chairman, President,
and Chief Executive Officer of the Company, and Robert M. Rubin, a
director of the Company, for a 5-year lease on its Vancouver, Washington
corporate office with an annual rate of $98. In addition to base rent, the
Company is responsible for the payment of all related taxes and other
assessments, utilities, insurance, and repairs (both structural and
regular maintenance) with respect to the leased real property during the
term of the lease. The lease qualifies for treatment as an operating
lease.
On May 17, 2002, the shareholders authorized the issuance of 600,000
shares of the Company's common stock to the Rubin Family Irrevocable Stock
Trust with no monetary consideration received by the Company. Mr. Robert
M. Rubin is an elected director of the Company and compensation expense
for the fair market value of the stock on the date of issuance in the
amount of $132 has been recognized in selling, general and administrative
expenses.
F-9
3. INVENTORIES
Inventories are stated at market, which was lower than market. Cost is
determined using the first-in, first-out (FIFO) method for parts
inventories and the specific identification method for equipment
inventories. Inventories consist of the following:
July 31, July 31,
2002 2001
------- -------
Equipment (net of reserve allowances of
$7,770 and $7,489 respectively):
New equipment $13,834 $28,163
Used equipment 5,915 7,425
Parts (net of reserve allowance of $286
and $282 respectively) 7,166 9,279
------- -------
$26,915 $44,867
======= =======
4. FIXED ASSETS
Fixed assets consist of the following:
July 31, July 31,
2002 2001
-------- --------
Property, plant, and equipment:
Land $ 522 $ 500
Buildings 1,749 1,717
Machinery and equipment 3,137 3,997
Office furniture and fixtures 2,220 2,377
Computer hardware and software 1,501 1,453
Vehicles 1,406 1,964
Leasehold improvements 960 958
-------- --------
11,495 12,966
Less: accumulated depreciation (8,061) (7,382)
-------- --------
Property, plant, and equipment (net) $ 3,434 $ 5,584
======== ========
Rental equipment fleet $ 25,833 $ 28,889
Less: accumulated depreciation (7,137) (6,862)
-------- --------
Rental equipment (net) $ 18,696 $ 22,027
======== ========
5. 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 a $50,000 inventory flooring and operating line of credit
through Deutsche Financial Services (DFS). The agreement was amended as of
October 31, 2000 with terms maturing December 31, 2001 and with a floating
rate based on prime with rates between 0.75% under prime to 2.25% over
prime depending on the amount of total debt leverage of the Company. This
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. Amounts may be advanced against
the Company's assets, including accounts receivable, parts, new equipment,
rental fleet, used equipment, real property, and vehicles. Interest
payments on the outstanding balance are due monthly.
F-10
As of June 21, 2002, the Company entered into a Forbearance Agreement with
DFS under the terms of which DFS raised the interest rate to prime plus 4%
while the Company is in default and required the Company to pay a $45 fee
to DFS 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 July 31, 2002, the
Company was in technical default of the DFS Loan Agreement. The Company
has requested, but has not obtained a waiver letter for the period July
31, 2002 or thereafter. Although DFS has not called the debt due to such
defaults, there is no guarantee that DFS will not call this debt at any
time after July 31, 2002.
All floor plan debt is classified as current since the inventory to which
it relates is generally sold within twelve months of the invoice date. The
following table summarizes the inventory floor plan financing
arrangements:
July 31,
Maturity ---------------------
Interest Rate Date 2002 2001
------------- ---- ------- -------
Case Credit Corporation Prime + 2% 8 - 48 $10,974 $14,237
(6.75%) months
Deutsche Financial Services Prime + 4.00% 12 - 36 41,322 53,384
(8.75%) months ------- -------
$52,296 $67,621
======= =======
At July 31, 2002 and July 31, 2001, the Company was in technical default
of the Deutsche Financial Services Loan Agreement. There is no guarantee
that Deutsche Financial Services will not call this debt at any time after
July 31, 2002. If DFS does call the debt, it will become immediately due
and payable in full and the Company would not be able to continue
operations. In addition, if the Company is unable to renew the DFS credit
facility after December 31, 2001 or replace it with an equivalent or
better credit facility, there are no assurances that the Company will have
adequate credit facilities to continue its business.
In December 2000, the Company completed the sale of $182 principal amount
of 10% convertible promissory notes due December 31, 2001. In March 2001,
the Company completed the sale of an additional $100 principal amount of
10% convertible promissory notes due December 31, 2001. The notes are
convertible, at the option of the holders, into common stock at a minimum
conversion price of $1.50 per share. The Company could at its option,
redeem the notes at the principal amount plus accrued interest any time
prior to December 31, 2001. The Company elected to redeem the notes and is
currently paying off the principal and accrued interest balances thereof.
The balance of the unpaid principal and accrued interest on the
convertible notes as of July 31, 2002 is $218.
6. INCOME TAXES
The provision for income taxes is comprised of the following:
Year Ended
-------------------------------
July 31, July 31, July 31,
2002 2001 2000
---- ---- ----
Current:
Federal $-0- $278 $180
State 48 27 26
---- ---- ----
48 305 206
---- ---- ----
Deferred:
Federal -0- 0 500
State -0- 0 73
---- ---- ----
-0- 0 573
---- ---- ----
Total provision
for income taxes $ 48 $305 $779
==== ==== ====
F-11
The principal reasons for the variation from the customary relationship
between income taxes at the statutory federal rate and that shown in the
statement of operations were as follows:
Year Ended
------------------------------
July 31, July 31, July 31,
2002 2001 2000
---- ---- ----
Statutory federal income tax rate (34.0%) (34.0%) (34.0%)
State income taxes, net of
federal income tax benefit (5.0%) (4.3%) (2.9%)
Valuation allowance 39.3% 38.3% 46.1%
Other 0.2% 4.0% 2.9%
---- ---- ----
0.5% 4.0% 12.1%
==== ==== ====
Temporary differences and carry forwards which give rise to a significant
portion of deferred tax assets and liabilities were as follows:
Year Ended
--------------------
July 31, July 31,
2002 2001
------- -------
Net Current Deferred Tax Assets:
Inventory $ 2,804 $ 2,734
Accounts receivable 252 373
Accrued vacation and bonuses 75 83
Other accruals 60 75
NOL carryforward -0- 5,997
------- -------
Current Deferred Tax Asset 3,191 9,262
Less-Valuation Allowance (3,191) (6,721)
------- -------
Net Current Deferred Tax Asset -0- 2,541
------- -------
Net Long-Term Deferred Tax Assets (Liability):
Fixed Assets (2,542) (2,385)
Goodwill and intangibles 774 (156)
NOL carryforward 9,935 -0-
------- -------
Long-term Deferred Tax Asset (Liability) 8,167 (2,541)
Less- Valuation Allowance (8,167) -0-
------- -------
Net Long-term Deferred Tax Asset (Liability) $ 0 $(2,541)
======= =======
The valuation allowance primarily relates to the federal and state net
operating losses for which utilization in future periods is uncertain. The
ultimate realization of deferred tax assets is dependent upon the
generation of future taxable income during the periods in which those
temporary differences become deductible. The Company considers projected
future taxable income and tax planning strategies in making this
assessment. Based on the historical taxable income and projections for
future taxable income over the periods that the deferred tax assets are
deductible, the Company believes it is more likely than not that the
Company will not realize the benefits of these deductible differences in
the near future.
As of July 31, 2002 the Company has approximately $29 million of federal
net operating losses available to offset future taxable income, which if
not utilized will expire in 2016 through 2021.
7. STOCKHOLDERS' EQUITY
STOCK OPTION PLANS
Under the Company's 1995 Employee Stock Option Plan, key employees,
officers, directors, and consultants of the Company can receive incentive
stock options and non-qualified stock options to purchase up to an
aggregate of 1,500,000 shares of the Company's common stock. The plan
provides that the exercise price of incentive stock options be at least
equal to 100 percent of the fair market value of the common stock on the
date of grant. With respect to non-qualified stock options, the plan
requires that the exercise price be at least 85 percent of fair value on
the date such option is granted. Outstanding options expire no later than
ten years after the date of grant.
F-12
In December 1995, the Board of Directors adopted a stock option plan for
non-employee directors under which each non-employee director is entitled
to receive on August 1 of each year beginning August 1, 1996, options to
purchase 2,500 shares of the Company's common stock at the fair market
value of the stock at the date of grant. In January 1998, the Company's
shareholders approved an amendment to this plan increasing the number of
shares for which options are granted yearly to non-employee directors from
2,500 to 5,000. Outstanding options expire no later than ten years after
the date of grant.
The following summarizes the stock option transactions under the Company's
stock option plans:
Weighted
Shares Average
(000) Option Price
------ ----
Options outstanding July 31, 1999: 1,513 4.56
Exercised (50) 5.13
Surrendered (1,453) 4.64
Granted -- --
------ ----
Options outstanding July 31, 2000: 10 4.56
Exercised -- --
Surrendered - --
Granted 1,200 0.53
------ ----
Options outstanding July 31, 2001 1,210 0.56
Exercised -- --
Surrendered -- --
Granted -- --
------ ----
Options outstanding July 31, 2002 1,210 0.56
====== ====
As allowed by SFAS 123, "Accounting for Stock-Based Compensation," the
Company has elected to continue to follow Accounting Principles Board
Opinion No. 25, "Accounting for Stock Issued to Employees" (APB 25), in
accounting for its stock option plans. Under APB 25, the Company does not
recognize compensation expense upon the issuance of its stock options
because the option terms are fixed and the exercise price equals the
market price of the underlying stock on the grant date. As required by
SFAS, the Company has computed for pro-forma disclosure purposes the value
of options granted using the Black-Scholes option pricing model. The
weighted average assumptions used for stock option grants for fiscal years
2002, 2001, and 2000 were:
FY02 FY01 FY00
---- ---- ----
Risk free interest rate N/A 4.35% 4.85-5.45%
Expected dividend yield N/A 0% 0%
Expected life N/A 4 years 4 years
Expected volatility N/A 116.21% 93.31
Adjustments for forfeitures are made as they occur. The options granted in
FY01 were fully vested and exercisable as of July 31, 2001. The weighted
average fair value per share of the options granted in fiscal years 2002,
2001, and 2000 are $-0-, $0.53, and $ -0-, respectively.
F-13
The following table sets forth the exercise prices, the number of options
outstanding and exercisable, and the remaining contractual lives of the
Company's stock options at July 31, 2002:
---------- ------------------- ------------------ ------------------ ------------------- ------------------
Weighted Average Weighted Average Weighted Average
Exercise Number of Options Exercise Contractual Number of Options Exercise
Price Outstanding Price Life Remaining Exercisable Price
---------- ------------------- ------------------ ------------------ ------------------- ------------------
$4.375 10,000 $4.375 5.00 10,000 $4.375
---------- ------------------- ------------------ ------------------ ------------------- ------------------
$0.531 1,200,000 $0.531 8.50 1,200,000 $0.531
---------- ------------------- ------------------ ------------------ ------------------- ------------------
If the Company had accounted for the compensation cost of these stock
options issued to employees in accordance with SFAS 123, the Company's net
loss and pro forma net loss and net loss per share and pro forma net loss
per share would have been reported as follows.
Year Ended July 31, 2002
------------------------
Basic Diluted
Net Loss E.P.S. E.P.S.
--------- ----- ------
As Reported $ (10,019) ($2.50) ($2.50)
Pro Forma $ (10,019) ($2.50) ($2.50)
Year Ended July 31, 2001
------------------------
Basic Diluted
Net Loss E.P.S. E.P.S.
-------- ----- ------
As Reported $ (7,842) ($2.30) ($2.30)
Pro Forma $ (8,162) ($2.30) ($2.40)
Year Ended July 31, 2000
------------------------
Basic Diluted
Net Loss E.P.S. E.P.S.
--------- ----- ------
As Reported $ (7,198) ($2.18) ($2.18)
Pro Forma $ (7,206) ($2.18) ($2.18)
The effects of applying SFAS 123 for providing pro forma disclosure for
fiscal years 2002, 2001 and 2000 are not likely to be representative of
the effects on reported net income and earnings per share for future years
since additional option awards may be made each year.
8. COMMITMENTS AND CONTINGENCIES
The Company leases certain facilities under noncancelable lease
agreements. As more fully described in Note 3, the building portion of
some of the Company's facility leases qualify under SFAS 13 as "capital
leases" (i.e., an acquisition of an asset and the incurrence of a
liability). The remaining facility lease agreements have terms ranging
from month-to-month to nine years and are accounted for as operating
leases. Certain of the facility lease agreements provide for options to
renew and generally require the Company to pay property taxes, insurance,
and maintenance and repair costs. Total rent expense under all operating
leases aggregated $1,535, $2,280, and $2,129 for the years ended July 31,
2002, 2001, and 2000, respectively.
F-14
Assets recorded under capital leases are recorded in fixed assets and are
as follows:
July 31, July 31, July 31,
2002 2001 2000
------- ------- -------
Capitalized asset value $ 1,043 $ 937 $ 4,553
Less accumulated amortization (369) (262) (667)
------- ------- -------
$ 674 $ 675 $ 3,886
======= ======= =======
Net capitalized asset values are included in Property, Plant and
Equipment. Future minimum lease payments under all noncancelable leases as
of July 31, 2002, are as follows:
Capital Operating
Year ending July 31, leases leases
------ ------
2003 134 1,534
2004 126 1,356
2005 108 1,090
2006 124 900
2007 132 900
Thereafter 1,100 1,021
------ ------
Total annual lease payments $1,724 $6,801
======
Less amount representing interest, with imputed
interest rates ranging from 6% to 15% 770
------
Present value of minimum lease payments 954
Less current portion 26
------
Long-term portion $ 928
======
The Company issues purchase orders to Case Corporation for equipment
purchases. Upon acceptance by Case, these purchases become noncancelable
by the Company. As of July 31, 2002, such purchase commitments totaled
$4,100,951.
The Company is involved in various legal proceedings which are incidental
to the industry and for which certain matters are covered in whole or in
part by insurance or, otherwise, the Company has recorded accruals for
estimated settlements. Management believes that any liability which may
result from these proceedings will not have a material adverse effect on
the Company's consolidated financial statements.
9. 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:
-------------------- --------------- --------------- ---------------
Business Component Year Ended Year Ended Year Ended
Net Revenues July 31, 2002 July 31, 2001 July 31, 2000
-------------------- --------------- --------------- ---------------
Equipment Sales $ 73,909 $ 84,065 $ 92,513
-------------------- --------------- --------------- ---------------
Equipment Rental 5,747 20,817 26,334
-------------------- --------------- --------------- ---------------
Product Support 28,332 35,020 36,790
-------------------- --------------- --------------- ---------------
Totals $ 107,988 $ 139,902 $ 155,637
-------------------- --------------- --------------- ---------------
-------------------- --------------- --------------- ---------------
Business Component Year Ended Year Ended Year Ended
Gross Margins July 31, 2002 July 31, 2001 July 31, 2000
-------------------- --------------- --------------- ---------------
Equipment Sales $ 2,360 $ (641) $ (66)
-------------------- --------------- --------------- ---------------
Equipment Rental 727 4,566 5,556
-------------------- --------------- --------------- ---------------
Product Support 4,676 5,895 6,048
-------------------- --------------- --------------- ---------------
Totals $ 7,763 $ 9,820 $ 11,538
-------------------- --------------- --------------- ---------------
F-15
There are no inter-segment revenues. Asset information by reportable
segment is not reported, since the Company does not produce such
information internally.
10. UNAUDITED QUARTERLY CONSOLIDATED FINANCIAL DATA
Quarter
---------------------------------------------------- Total
First Second Third Fourth Year
--------- --------- --------- --------- ---------
Fiscal 2002:
Net sales $ 28,499 $ 26,229 $ 25,568 $ 27,692 $ 107,988
Gross Profit 4,117 2,850 2,538 (1,742) 7,763
Net income (loss) 357 (766) (721) (8,889) (10,019)
Basic income (loss) per share 0.10 (0.22) (0.21) (2.17) (2.50)
Diluted income (loss) per share 0.10 (0.22) (0.21) (2.17) (2.50)
Quarter
---------------------------------------------------- Total
First Second Third Fourth Year
--------- --------- --------- --------- ---------
Fiscal 2001:
Net sales $ 37,783 $ 34,299 $ 33,641 $ 34,179 $ 139,902
Gross Profit 4,858 2,957 2,358 (353) 9,820
Net income (loss) 461 1,695 (5,119) (4,879) (7,842)
Basic income (loss) per share 0.14 0.51 (1.53) (1.42) (2.30)
Diluted income (loss) per share 0.14 0.51 (1.53) (1.42) (2.30)
During the fourth quarter of fiscal 2002, the Company recorded four
adjustments which in the aggregate reduced net income by $9.3 million and
gross profit by $3.8 million in the quarter. Refer to Note 1 of the
financial statements for additional disclosure of each individual
adjustment. These adjustments included (1) a $3,796 adjustment to increase
the inventory valuation allowance recorded at the end of the third quarter
of 2002, (2) the impairment of goodwill aggregating $2,525, (3) the
elimination of $1,983 of recorded financing discounts, and (4) the
write-off of property, plant and equipment aggregating $953.
F-16
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and
Stockholders of Western Power & Equipment Corp.
We have audited the accompanying consolidated balance sheet of Western Power &
Equipment Corp. (a Delaware Corporation) as of July 31, 2002, and the related
consolidated statements of operations, stockholders' equity and cash flows for
the year then ended. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audit.
We conducted our audit in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Western Power &
Equipment Corp. as of July 31, 2002, and the results of their operations and
their cash flows for the year then ended, in conformity with accounting
principles generally accepted in the United States of America.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. The Company has incurred losses from
operations and has a working capital deficit for the year ended July 31, 2002.
Further, as discussed in Note 5 to the financial statements, the Company is in
technical default of its loan agreement and has not obtained a waiver or
revisions to the agreement from the financial institution. Accordingly, the
financial institution at any time may call the outstanding borrowings, which
aggregated $41.3 million at July 31, 2002. These matters raise substantial doubt
about the Company's ability to continue as a going concern. Management's plans
in regard to these matters are also described in Note 1. The financial
statements do not include any adjustment that might result from the outcome of
this uncertainty.
/s/ Moss Adams LLP
--------------------------
MOSS ADAMS LLP
Beaverton, Oregon
October 15, 2002
F-17
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and
Stockholders of Western Power & Equipment Corp.
In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of operations, of stockholders' equity and of cash flows
present fairly, in all material respects, the financial position of Western
Power & Equipment Corp. and its subsidiary at July 31, 2001, and the results of
their operations and their cash flows for each of the two years in the period
ended July 31, 2001, in conformity with accounting principles generally accepted
in the United States of America. These financial statements are the
responsibility of the Company's management; our responsibility is to express an
opinion on these financial statements based on our audits. We conducted our
audits of these statements in accordance with auditing standards generally
accepted in the United States of America, which require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements,
assessing the accounting principles used and significant estimates made by
management, and evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for the opinion expressed
above.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. The Company has incurred losses from
operations and has a working capital deficit at July 31, 2001. Further, as
discussed in Note 5 to the financial statements, the Company is in technical
default of its loan agreement and has not obtained a waiver or revisions to the
agreement from the financial institution. Accordingly, the financial institution
at any time may call the outstanding borrowings, which aggregated $53.4 million
at July 31, 2001. Such factors raise substantial doubt about the Company's
ability to continue as a going concern. Management's plans in regard to these
matters are also described in Note 1. The financial statements do not include
any adjustment that might result from the outcome of this uncertainty.
PRICEWATERHOUSECOOPERS LLP
Portland, Oregon
October 6, 2001
F-18
REPORT OF INDEPENDENT ACCOUNTANTS
FINANCIAL STATEMENT SCHEDULE
To the Board of Directors and
Stockholders of Western Power & Equipment Corp.
Our audits of the consolidated financial statements referred to in our report
dated October 15, 2002 appearing on page F-17 of this Annual Report on Form
10-K/A2 also included an audit of the financial statement schedules listed in
Item 14(a)(2) of this Form 10-K/A2. In our opinion, this financial statement
schedule presents fairly, in all material respects, the information set forth
therein when read in conjunction with the related consolidated financial
statements.
MOSS ADAMS LLP
Beaverton, Oregon
October 15, 2002
F-19
Report of Independent Accountants
Financial Statement Schedule
To the Board of Directors and Stockholders of
Western Power & Equipment Corp.
Our audits of the consolidated financial statements as of July 31, 2001 and for
each of the two years in the period ended July 31, 2001 referred to in our
report dated October 6, 2001 appearing on page F-18 of this Annual Report on
Form 10-K/A2 also included an audit of the financial statement schedule for the
year ended July 31, 2001 listed in Item 14(a)(2) of this Form 10-K/A2. In our
opinion, this financial statement schedule for the year ended July 31, 2001
presents fairly, in all material respects, the information set forth therein
when read in conjunction with the related consolidated financial statements.
PRICEWATERHOUSECOOPERS LLP
Portland, Oregon
October 6, 2001
F-20
WESTERN POWER & EQUIPMENT CORP.
VALUATION AND QUALIFYING ACCOUNTS
For the Fiscal Years Ended July 31, 2002 and 2001
(Dollars in Thousands)
Balance at Charged to Charged to Balance at
Beginning Costs and Other End of
Description of Period Expenses Accounts Deductions Period
----------- --------- -------- -------- ---------- ------
Accounts Receivable Reserve:
Fiscal year ended July 31, 2002 $ 948 $ 119 $ -- $ (421) $ 646
Fiscal year ended July 31, 2001 563 544 -- (159) 948
Inventory Reserve:
Fiscal year ended July 31, 2002 7,771 6,616 -- (6,331) 8,056
Fiscal year ended July 31, 2001 5,052 4,106 -- (1,387) 7,771
F-21
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned thereunto duly authorized.
WESTERN POWER & EQUIPMENT CORP.
By:/S/ C. Dean McLain
------------------------------------
C. Dean McLain, President and
Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
Signature Title Date
- --------- ----- ----
/S/ C. Dean McLain President, Chief November 27, 2002
- ------------------------- Executive Officer,
C. Dean McLain and Chairman
/S/ Mark J. Wright Vice President of Finance, November 27, 2002
- ------------------------- Chief Financial and Principal
Mark J. Wright Accounting Officer,
Treasurer and Secretary
/S/ Robert M. Rubin Director November 27, 2002
- -------------------------
Robert M. Rubin
/S/ Dr. Seymour Kessler Director November 27, 2002
- -------------------------
Dr. Seymour Kessler
/S/ Allen Perres Director November 27, 2002
- -------------------------
Allen Perres
I, C. Dean McLain, certify that:
1. I have reviewed this annual report on Form 10-K/A2 of Western Power &
Equipment Corp.;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this annual
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this annual report;
Date: November 27, 2002
/s/ C. Dean McLain
- -------------------------------------
Chief Executive Officer and President
I, Mark J. Wright, certify that:
1. I have reviewed this annual report on Form 10-K/A2 of Western Power &
Equipment Corp.;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this annual
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this annual report;
Date: November 27, 2002
/s/ Mark J. Wright
- -------------------------------------
Chief Financial Officer and Vice President of Finance