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_________________
FORM 10-Q
_________________
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
Quarterly Report Under Section 13 or 15(d)
of the Securities Exchange Act of 1934
For the Quarter Ended October 31, 2005
Commission File Number 0-26230
WESTERN POWER & EQUIPMENT CORP.
- --------------------------------------------------------------------------------
(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 I.D. number)
incorporation or organization)
6407-B N.E. 117th Avenue, Vancouver, WA 98662
- ---------------------------------------- -----------------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone no.: 360-253-2346
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities and Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports); and (2) has been subject to such filing
requirements for the past 90 days. YES [X] NO [_]
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the close of the period covered by this report.
Title of Class Number of shares
Common Stock Outstanding
(par value $.001 per share) 10,180,000
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WESTERN POWER & EQUIPMENT CORP. & SUBSIDIARY
INDEX
PART I. FINANCIAL INFORMATION Page Number
-----------
Item 1. Financial Statements
Condensed Consolidated Balance Sheets
October 31, 2005 (Unaudited) and July 31, 2005............. 3
Condensed Consolidated Statements of Operations
Three months ended October 31, 2005 (Unaudited)
and October 31, 2004 (Unaudited)........................... 4
Condensed Consolidated Statements of Cash Flows
Three months ended October 31, 2005 (Unaudited)
and October 31, 2004 (Unaudited)........................... 5-6
Notes to Condensed Consolidated Financial Statements.......... 7-13
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations........ 14-16
Item 3. Quantitative and Qualitative Disclosures
about Market Risk.................................... 17
Item 4. Controls and Procedures.............................. 17
PART II. OTHER INFORMATION
Item 1. Legal Proceedings.................................... 18
Item 1A. Risk Factors......................................... 18
Item 2. Unregistered Sales of Equity Securities and Use of
Proceeds............................................. 18
Item 3. Defaults Upon Senior Securities...................... 18
Item 4. Submission of Matters to a Vote of Security Holders.. 18
Item 5. Other Information.................................... 18
Item 6. Exhibits ............................................ 18
SIGNATURES ........................................................... 19
2
ITEM 1. FINANCIAL STATEMENTS
--------------------
WESTERN POWER & EQUIPMENT CORP. & SUBSIDIARY
CONDENSED CONSOLIDATED BALANCE SHEETS
(Dollars in thousands)
October 31, July 31,
2005 2005
------------ ------------
(Unaudited)
ASSETS
- ------
Current assets:
Cash and cash equivalents ........................................ $ 1,013 $ 855
Accounts receivable, less allowance for doubtful
accounts of $830 and $906 ...................................... 8,433 10,449
Inventories ...................................................... 49,155 46,333
Deferred tax asset ............................................... 664 664
Prepaid expenses ................................................. 194 564
------------ ------------
Total current assets ........................................ 59,459 58,865
------------ ------------
Fixed assets:
Property, plant and equipment (net) .............................. 3,972 3,889
Rental equipment fleet (net) ..................................... 4,899 6,068
------------ ------------
Total fixed assets .......................................... 8,871 9,957
------------ ------------
Other assets
Security Deposits ................................................ 317 318
Deferred taxes ................................................... 836 836
Deferred debt issuance costs ..................................... 1,524 1,661
------------ ------------
Total other assets .......................................... 2,677 2,815
------------ ------------
Total assets ......................................................... $ 71,007 $ 71,637
============ ============
LIABILITIES & STOCKHOLDERS' EQUITY
- ----------------------------------
Current liabilities:
Borrowings under floor plan financing ............................ $ 25,980 24,558
Bridge loan, net of discount of $23 and $79 ...................... 310 1,254
Convertible debt, net of discount of $836 and $836 ............... 4,719 3,052
Notes payable-related parties, net of discount of $63 and $82..... 437 418
Notes payable .................................................... 207 205
Accounts payable ................................................. 7,003 7,925
Accrued payroll and vacation ..................................... 686 932
Other accrued liabilities ........................................ 1,389 1,313
Capital lease obligation ......................................... 50 43
------------ ------------
Total current liabilities ................................... 40,781 39,700
------------ ------------
Long-term liabilities
Notes Payable .................................................... 615 655
Convertible Debt, net of discount of $2,195 and $2,404 ........... 22,250 23,708
Deferred Lease Income ............................................ 257 264
Capital lease obligation ......................................... 796 810
------------ ------------
Total long-term liabilities ................................. 23,918 25,437
------------ ------------
Total liabilities .................................................... 64,699 65,137
------------ ------------
Stockholders' equity:
Preferred stock-10,000,000 shares authorized;
none issued and outstanding .................................... -- --
Common stock-$.001 par value; 50,000,000 shares authorized;
10,310,300 issued and 10,180,000 outstanding ................... 10 10
Additional paid-in capital ....................................... 20,859 20,859
Deferred compensation ............................................ -- (18)
Accumulated deficit .............................................. (13,717) (13,507)
Less common stock in treasury, at cost (130,300 shares) .......... (844) (844)
------------ ------------
Total stockholders' equity .................................. 6,308 6,500
------------ ------------
Total liabilities and stockholders' equity ........................... $ 71,007 $ 71,637
============ ============
The accompanying notes are an integral part of
these condensed consolidated financial statements.
3
WESTERN POWER & EQUIPMENT CORP. & SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
(Dollars in thousands, except per share amounts)
Three Months Ended
October 31,
----------------------------
2005 2004
------------ ------------
Net revenue ............................................ $ 33,035 $ 26,744
Cost of revenues (includes depreciation of
$989 and $935, respectively) ........................ 28,853 23,413
------------ ------------
Gross profit ........................................... 4,182 3,331
Selling, general and administrative expenses............ 2,938 2,224
------------ ------------
Operating income ....................................... 1,244 1,107
Other income (expense):
Interest expense ................................... (1,312) (623)
Other income (expense) ............................. (125) 47
------------ ------------
Income (loss) before income tax provision .............. (193) 531
Income tax provision ................................... 16 12
------------ ------------
Net income (loss) ...................................... $ (209) $ 519
============ ============
Basic earnings (loss) per common share ................. $ (.02) $ 0.05
============ ============
Diluted earnings (loss) per common share ............... $ (.02) $ 0.04
============ ============
The accompanying notes are an integral part of
these condensed consolidated financial statements.
4
WESTERN POWER & EQUIPMENT CORP. & SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(Dollars in thousands)
Three Months Ended
October 31,
---------------------------
2005 2004
------------ ------------
Cash flows from operating activities:
Net income(loss) ................................................. $ (209) $ 519
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation ..................................................... 2,041 1,622
Bad Debts ........................................................ 3 2
Amortization of debt discount .................................... 283 25
Gain on sale of fixed assets and rental equipment ................ (179) (226)
Amortization of debt issuance costs .............................. 137 --
Stock based compensation ......................................... 18 --
Changes in assets and liabilities:
Accounts receivable .......................................... 2,013 4,105
Restricted Cash .............................................. -- (39)
Inventories .................................................. (4,417) (2,190)
Prepaid expenses and other assets ............................ 371 51
Accounts payable and accrued expenses ........................ (923) 1,560
Accrued payroll and vacation ................................. (245) (388)
Other accrued liabilities .................................... 76 42
Deferred Lease Income ........................................ (7) --
------------ ------------
Net cash provided by operating activities .................. (1,038) 5,083
------------ ------------
Cash flows from investing activities:
Purchase of property, plant and equipment ........................ (223) (43)
Purchases of rental equipment .................................... (22) (543)
Purchase of assets of Arizona Pacific Materials, LLC ............. -- (500)
Proceeds on sale of fixed assets ................................. 2 21
Proceeds on sale of rental equipment ............................. 1,062 1,739
------------ ------------
Net cash provided (used) by investing activities ........... 819 674
------------ ------------
Cash flows from financing activities:
Principal payments on capital leases ............................. (7) (8)
Payments on short-term borrowings ................................ -- (4,987)
Inventory floor plan financing ................................... 1,424 (1,259)
Bridge loan payments ............................................. (1,000) --
Notes Payable from purchase of Arizona Pacific Materials, LLC..... -- 500
Long term debt borrowings ........................................ -- (3)
Long term debt payments .......................................... (40) --
Payments on convertible debt ..................................... -- --
------------ ------------
Net cash used in financing activities ...................... 377 (5,757)
------------ ------------
Increase in cash and cash equivalents ................................ 158 --
Cash and cash equivalents at beginning of period ..................... 855 9
------------ ------------
Cash and cash equivalents at end of period ........................... $ 1,013 $ 9
============ ============
Supplemental disclosures:
Interest paid ........................................................ $ 770 $ 489
Income taxes paid .................................................... -- 4
5
Supplemental schedule of non-cash investing and financing activities:
Notes payable issued for purchase of Arizona Pacific Materials, LLC... -- $ 2,500
Options valued at $292 were issued in connection with a $500 note
payable related to the down payment at closing for the purchase of
Arizona Pacific Materials -- 292
The accompanying notes are an integral part of
these condensed consolidated financial statements.
6
WESTERN POWER & EQUIPMENT CORP. & SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
The accompanying condensed consolidated financial statements include the
accounts of Western Power & Equipment Corp and its wholly owned subsidiary,
Arizona Pacific Materials, LLC, acquired in September 2004. All intercompany
transactions have been eliminated.
The accompanying condensed consolidated financial statements are unaudited and
in the opinion of management contain all the adjustments (consisting of those of
a normal recurring nature) considered necessary to present fairly the condensed
consolidated balance sheet and the condensed consolidated results of operations
and cash flows for the periods presented in conformity with accounting
principles generally accepted in the United States applicable to interim
periods. The results of operations for the quarterly period ended October 31,
2005 are not necessarily indicative of results that may be expected for any
other interim periods or for the full year. This report should be read in
conjunction with the Company's consolidated financial statements included in the
Annual Report on Form 10-K for the fiscal year ended July 31, 2005 filed with
the Securities and Exchange Commission. The accounting policies used in
preparing these unaudited condensed consolidated financial statements are
consistent with those described in the July 31, 2005 consolidated financial
statements.
2. ACCOUNTING POLICIES AND NEW ACCOUNTING PRONOUNCEMENTS
The accounting policies followed by the Company are set forth in Note 1 to the
Company's consolidated financial statements as filed in its Form 10-K for the
year ended July 31, 2005.
Recent Accounting Pronouncements - In October 2004, the FASB ratified the
consensus reached in EITF Issue No. 04-8, "The Effect of Contingently
Convertible Instruments on Diluted Earnings per Share." The EITF reached a
consensus that contingently convertible instruments, such as contingently
convertible debt, contingently convertible preferred stock, and other such
securities should be included in diluted earnings per share (if dilutive)
regardless of whether the market price trigger has been met. The consensus
became effective for reporting periods ending after December 15, 2004. The
adoption of this pronouncement did not have a material impact on the Company's
consolidated financial statements.
In December 2004, the Financial Accounting Standards Board ("FASB") issued its
final standard on accounting for share-based payments ("SBP"), FASB Statement
No. 123R (revised 2004), "Share-Based Payment." This statement requires
companies to expense the value of employee stock options and similar awards.
Under FAS 123R, SBP awards result in a cost that will be measured at fair value
on the awards' grant date, based on the estimated number of awards that are
expected to vest. Compensation cost for awards that vest would not be reversed
if the awards expire without being exercised. The statement's effective date for
a company is the first annual period beginning August 1, 2005, and it applies to
all outstanding and unvested SBP awards at a company's adoption. The Company
adopted this accounting pronouncement during the current fiscal quarter. Upon
adoption there was no impact on the consolidated financial statements. All
outstanding stock options were fully vested as of July 31, 2005.
In May 2005, the FASB issued FASB 154, "Accounting Changes and Error
Corrections." This statement replaces APB Opinion No. 20, Accounting Changes,
and FASB Statement No. 3, Reporting Accounting Changes in Interim Financial
Statements, and changes the requirements for the accounting for and reporting of
a change in accounting principle. The statement applies to all voluntary changes
in accounting principle. It also applies to changes required by an accounting
pronouncement in the unusual instance that the pronouncement does not include
specific transition provisions. When a pronouncement includes specific
transition provisions, those provisions should be followed. This statement is
effective for accounting changes and corrections of errors made in fiscal years
beginning after December 15, 2005. Management does not believe this
pronouncement will have a material impact on the Company's consolidated
financial statements.
In June 2005, the EITF reached consensus on Issue No. 05-6, Determining the
Amortization Period for Leasehold Improvements (EITF 05-6). EITF 05-6 provides
guidance on determining the amortization period for leasehold improvements
acquired in a business combination or acquired subsequent to lease inception.
The guidance in EITF
7
05-6 will be applied prospectively and is effective for periods beginning after
June 29, 2005. The adoption of this pronouncement did not have a material impact
on the Company's consolidated statements.
In September 2005, the FASB ratified the Emerging Issues Task Force's ("EITF")
Issue No. 05-7. "Accounting for Modifications to Conversion Options Embedded in
Debt Instruments and Related Issues", which addresses whether a modification to
a conversion option that changes its fair value affects the recognition of
interest expense for the associated debt instrument after the modification, and
whether a borrower should recognize a beneficial conversion feature, not a debt
extinguishment, if a debt modification increases the intrinsic value of the
debt. Management does not believe this pronouncement will have a material impact
on the Company's consolidated financial statements. In September 2005, the FASB
ratified the following consensus reached in EITF Issue 05-8 ("Income Tax
Consequences of Issuing Convertible Debt with a Beneficial Conversion Feature"):
a) The issuance of convertible debt with a beneficial conversion feature results
in a basis difference in applying FASB Statement of Financial Accounting
Standards SFAS No. 109, Accounting for Income Taxes. Recognition of such a
feature effectively creates a debt instrument and a separate equity instrument
for book purposes, whereas the convertible debt is treated entirely as a debt
instrument for income tax purposes; b) The resulting basis difference should be
deemed a temporary difference because it will result in a taxable amount when
the recorded amount of the liability is recovered or settled; and c) Recognition
of deferred taxes for the temporary difference should be reported as an
adjustment to additional paid-in capital. Both of these issues are effective in
the first interim or annual reporting period commencing after December 15, 2005,
with early application permitted. The effect of applying the consensus should be
accounted for retroactively to all debt instruments containing a beneficial
conversion feature that are subject to EITF Issue 00-27, "Application of Issue
No. 98-5 to Certain Convertible Debt Instruments" (and thus is applicable to
debt instruments converted or extinguished in prior periods but which are still
presented in the financial statements). Management does not believe this
pronouncement will have a material impact on the Company's consolidated
financial statements.
3. EARNINGS OR LOSS PER SHARE
Basic net income or loss per share of common stock is computed based on the
weighted average number of common shares outstanding during the period.
Diluted net income or loss per share of common stock is computed based on the
weighted average number of common shares outstanding during the period plus any
dilutive securities outstanding such as stock options, warrants or convertible
instruments. Total outstanding convertible instruments, options and warrants as
of October 31, 2005 was 28,350,218.
Earnings per common share is as follows:
Three Months Ended
October 31,
('000's)
2005 2004
------ ------
BASIC
Numerator:
Net income (loss) available to common shareholders $ (209) $ 519
======= ========
Denominator:
Weighted average shares outstanding 10,180 10,130
======= ========
Basic earnings (loss) per common share $ (0.02) $ 0.05
======= ========
DILUTED
Weighted average shares outstanding 10,180 10,130
Stock options -- 470
------- --------
Denominator for diluted earnings per share 10,180 10,600
======= ========
Diluted earnings (loss) per common share $ (0.02) $ 0.04
======= ========
8
4. STOCK BASED COMPENSATION
Effective August 1, 2005, the Company adopted FASB Statement of Financial
Accounting Standard ("SFAS") No. 123R "Share Based Payment". This statement is a
revision of SFAS Statement 123, and supersedes APB Opinion No. 25, and its
related implementation guidance. SAFS 123R addresses all forms of share based
payment ("SBP") awards including shares issued under employee stock purchase
plans, stock options, restricted stock and stock appreciation rights. Under SAFS
123R, SBP awards result in a cost that will be measured at fair value on the
award's grant date, based on the estimated number of awards that are expected to
vest that will result in a charge to operations. During the three months ending
October 31, 2005, there were no new options issued and all outstanding options
were fully vested, therefore there was no effect on the condensed consolidated
financial statements upon adoption of this pronouncement.
As required under Statement No. 148, "Accounting For Stock-Based Compensation -
Transition and Disclosure", the following table presents pro-forma net income
and basic and diluted earnings (loss) per share as if the fair value-based
method had been applied to all awards for the periods prior to the adoption of
SFAS No. 123R.
Three Months Ended October 31, 2004
Net income Basic Diluted
('000's) E.P.S. E.P.S.
As Reported $ 519 $ .05 $ .04
Pro Forma $ 519 $ .05 $ .04
As required by SFAS, the Company has computed for pro-forma disclosure purposes
the fair value of options granted using the Black-Scholes option pricing model.
The weighted average assumptions used for stock option grants for periods ended
October 31, 2004 were:
2004
Risk free interest rate 2.50
Expected dividend yield N/A
Expected life 3
Expected volatility 90.5%
Fair Value of Stock Options N/A
5. INVENTORIES
Inventories consist of the following ('000's):
October 31, July 31,
2005 2005
Equipment (net of reserve allowances of
$3,065and $2,937 respectively):
New $37,339 $35,408
Used 4,286 4,545
Mining products 1,177 886
Parts (net of reserve allowance of $905
and $977, respectively) 6,353 5,494
------- -------
$49,155 46,333
======= =======
Mining products is comprised substantially of processed cinder aggregate in a
finished state ready for resale. Inventory costs of the mining products are
comprised of direct costs of production and overhead charges including mining
and other plant administrative expenses. Inventory of mining products is valued
at the lower of cost or market, with cost generally stated on a last-in,
first-out (LIFO) basis. Mining product reserves for obsolescence or slow moving
inventory are recorded when such conditions are identified. As of October 31,
2005, the LIFO reserve was $228,000.
9
6. FIXED ASSETS
Fixed assets consist of the following ('000's):
October 31, July 31,
2005 2005
Operating property, plant and equipment:
Land $ 1,277 $ 1,277
Buildings 1,153 1,152
Machinery and equipment 3,187 3,059
Office furniture and fixtures 2,052 2,055
Computer hardware and software 1,343 1,332
Vehicles 1,406 1,404
Leasehold improvements 1,083 1,010
-------- --------
11,501 11,289
Less: accumulated depreciation (7,529) (7,400)
-------- --------
Property, plant, and equipment (net) $ 3,972 $ 3,889
======== ========
Rental equipment fleet $ 7,646 $ 9,145
Less: accumulated depreciation (2,747) (3,077)
-------- --------
Rental equipment (net) $ 4,899 $ 6,068
======== ========
Depreciation and amortization on the property, plant, and equipment are computed
using the straight-line method over the estimated useful lives of the assets,
ranging from 5 to 20 years. Depreciation on the rental fleet is calculated using
the straight-line method over the estimated useful lives, ranging from 3 to 7
years after considering salvage values.
7. DEBT OBLIGATIONS
Floor Planning
- --------------
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 and interest is at prime + 2%.
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 balance
of borrowings under the floor plan financing as of October 31, 2005 was $25,980.
Convertible Debt
- ----------------
In June 2005, the Company closed a new $30 million convertible debt facility
(convertible into common shares of the Company at $2.00 per share) payable over
the next five years, with a variable interest rate of LIBOR plus 6%. The lenders
were also granted warrants to purchase approximately 8.1 million common shares
of the Company at $1.75 per share. The value of these warrants is $2,920 and is
recorded as debt discount to be amortized over the life of the related debt. The
lenders also have the right to lend an additional $7.5 million to the Company
(within 18 months of the date of the original debt) under the same terms as the
existing five year convertible debt with 1,312,500 warrants to be issued with
this additional debt. The value of these rights is $441 and is also recorded as
debt discount to be amortized over 18 months.
The Company will begin making monthly principal payments in January 2006. The
balance of the unpaid principal on the convertible notes (net of discount) as of
October 31, 2005 is $26,969 (net of discount of $3,031) of which $4,719 (net of
discount of $836) is short term.
10
Bridge Loan
- -----------
In June 2005, the Company closed a new $2 million six month bridge loan, with a
variable interest rate of LIBOR plus 6%. The lenders were granted warrants to
purchase approximately 312,000 common shares of the Company at $1.75 per share.
The value of these warrants is $111 and is recorded as debt discount to be
amortized over the life of the related debt. The balance of the unpaid principal
on the bridge loan as of October 31, 2005 is $ 310 (net of discount of $23) all
of which is short term.
Notes Payable
- -------------
Notes payable consists of the following: (000's)
October 31, July 31,
Description 2005 2005
Note Payable to Investor dated March 30, 2001 due on
Demand and non-interest bearing 50 50
Note payable to West Coast Bank dated March 15, 2005
in the amount of $795, due in monthly installments of
$16 beginning May 15, 2005 including interest at 6.50%
per annum secured by specific equipment in inventory 726 761
Notes payable to GMAC dated November 15, 2003 in the
amount of $66 with payments of $1 per month including
interest at 7.2% per annum 46 49
Total $ 822 $ 860
Less current portion (207) (205)
------- -------
Total Long-Term Notes Payable $ 615 $ 655
======= =======
Future minimum payments under these noncancelable notes payable as of
October 31, 2005, are as follows:
Notes Convertible Bridge
Twelve months ending October 31, Payable Debt Loan Total
- ------------------------------- ------- ----------- ------ ------
2006 $ 207 $5,555 $ 333 $6,095
2007 154 6,666 -- 6,820
2008 179 6,667 -- 6,846
2009 178 6,667 -- 6,845
2010 104 4,445 -- 4,549
Thereafter -- -- -- --
------ ------- ----- -------
Total annual payments 822 30,000 333 31,155
Less debt discount -- 3,031 23 3,054
Present value of minimum payments
(net of discount) 822 26,969 310 28,101
Less current portion (207) (4,719) (310) (5,236)
------ ------- ----- -------
Long-term portion $ 615 $22,250 $ -- $22,865
====== ======= ===== =======
8. COMMITMENTS AND CONTINGENCIES
Leases
- ------
The Company leases certain facilities under noncancelable lease agreements.
Certain of the Company's building leases have been accounted for as capital
leases. Other 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 $ 1,119,000 and $ 899,000 for the
three months ended October 31, 2005 and 2004, respectively.
11
Assets recorded under capital leases are recorded in fixed assets and are as
follows ('000's):
October 31, July 31,
2005 2005
Capitalized asset value $ 953 $ 953
Less accumulated amortization (462) (450)
-------- --------
Net capitalized asset value $ 491 $ 503
======== ========
Future minimum lease payments under all noncancelable leases as of October 31,
2005, are as follows (`000's):
Capital Operating
Twelve months ending October 31, leases leases
2006 130 1,255
2007 132 1,080
2008 132 546
2009 132 476
2010 132 254
Thereafter 670 1,060
-------- --------
Total annual lease payments $ 1,328 $ 4,671
Less amount representing interest
at a rate of 6.5% 482
--------
Present value of minimum lease payments 846
Less current portion 50
--------
Long-term portion $ 796
========
Purchase Commitments
- --------------------
The Company issues purchase orders to Case Corporation for equipment purchases.
Upon acceptance by Case, these purchases become noncancelable by the Company. As
of October 31, 2005, such purchase commitments totaled $10,816,000.
Litigation
- ----------
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. PRODUCT INFORMATION
Revenue and gross margin by product categories are summarized as follows
(`000's):
Business product category Three Months Ended
Net Revenues October 31,
2005 2004
-------------------------------- -------- --------
Equipment Sales $ 24,763 $ 17,792
Equipment Rental 583 1,467
Mining Sales 168 93
Product Support 7,521 7,392
-------- --------
Total $ 33,035 $ 26,744
======== ========
12
Business product category Three Months Ended
Gross Margins (Loss) October 31,
2005 2004
-------------------------------- -------- --------
Equipment Sales $ 2,207 $ 1,538
Equipment Rental 165 273
Mining Sales 178 (6)
Product Support 1,632 1,526
-------- --------
Total $ 4,182 $ 3,331
======== ========
10. SEGMENT INFORMATION
Summarized financial information concerning the Company's reportable segments
are shown in the following tables ('000's).
Western Power & Arizona Pacific
Equipment Corp Materials, LLC Total
For the Three Months Ended
October 31, 2005
Revenue $32,867 $ 168 $33,035
======= ======= =======
Operating Income (Loss) $ 1,613 $ (369) $ 1,244
======= ======= =======
Net Income (Loss) $ 205 $ (414) $ (209)
======= ======= =======
Capital Expenditures $ 62 $ 183 $ 245
======= ======= =======
Total identifiable assets at
October 31, 2005 $66,776 $ 4,231 $71,007
======= ======= =======
For the Three Months Ended
October 31, 2004
Revenue $26,651 $ 93 $26,744
======= ======= =======
Operating Income $ 1,248 $ (141) $ 1,107
======= ======= =======
Net Income $ 638 $ (119) $ 519
======= ======= =======
Capital Expenditures $ 655 $ 69 $ 724
======= ======= =======
Total identifiable assets at
October 31, 2004 $50,564 $ 2,960 $53,524
======= ======= =======
11. CONCENTRATION OF CREDIT RISK
Approximately 56% of the Company's net sales for the three months ended October
31, 2005 resulted from sales, rental, and servicing of products manufactured by
Case. That compares with a figure of 46% for the three month period ended
October 31, 2004.
13
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
LIQUIDITY AND CAPITAL RESOURCES
The following discussion and analysis should be read in conjunction with the
Condensed Consolidated Financial Statements and Notes thereto appearing
elsewhere in this Form 10-Q. Information included herein relating to projected
growth and future results and events constitutes forward-looking statements.
Actual results in future periods may differ materially from the forward-looking
statements due to a number of risks and uncertainties, including but not limited
to fluctuations in the construction, agricultural, and industrial sectors; the
success of the Company's restructuring and cost reduction plans; the success of
the Company's equipment rental business; rental industry conditions and
competitors; competitive pricing; the Company's relationship with its suppliers;
relations with the Company's employees; the Company's ability to manage its
operating costs; the continued availability of financing; the Company's ability
to refinance/restructure its existing debt; governmental regulations and
environmental matters; risks associated with regional, national, and world
economies; and consummation of the merger and asset purchase transactions. Any
forward-looking statements should be considered in light of these factors.
RESULTS OF OPERATIONS
The Three Months ended October 31, 2005 compared to the Three Months ended
- --------------------------------------------------------------------------
October 31, 2004.
- -----------------
Revenues for the three-month period ended October 31, 2005 increased 23.5% to
$33.0 million compared with $ 26.7 million for the three-month period ended
October 31, 2004. For the three-month period ended October 31, 2005 equipment
sales increased by 39.2%, equipment rental revenues decreased by 60.3% and
product support revenues increased 1.7% over the comparative three month period
ended October 31, 2004. Revenues (with the exception of equipment rental) were
up from the prior year's comparative period because of increased construction
related activity and economic conditions, especially in the Oregon, Washington
and Nevada markets.
The Company's gross profit margin of 12.7% for the three-month period ended
October 31, 2005 was slightly higher than the prior year's comparative period
margin of 12.5%. Gross margin for equipment sales was 8.9% compared to 8.6% for
the prior year's comparative period. Equipment rental gross margin was 28.3%
compared to 18.6% for the prior year's comparative period. Product support gross
margin was 21.7% compared to 20.6% for the prior year's comparative period. The
increase in overall margins is associated with a change in the sales and rental
mix of products, with higher margins from equipment sales having the greatest
impact. Improved economic conditions in the Oregon, Washington and Nevada
markets have created more demand for the purchase of equipment rather than
renting.
For the three-month period ended October 31, 2005, selling, general, and
administrative ("SG&A") expenses as a percentage of net revenue were 8.9%,
slightly higher than the 8.3% for the prior year's first quarter. The increase
from the prior year's comparative period reflects the impact of the operational
transition costs associated with our subsidiary, Arizona Pacific Materials, LLC,
purchased in September 2004.
Interest expense for the three months ended October 31, 2005 of $1,312,000 was
up from $623,000 in the prior year comparative period. This increase from the
prior year's comparative period is the result of approximately 3% higher
interest rates related to convertible debt versus the interest rate associated
with the line of credit with GE in existence as of October 31, 2004. In
addition, $285,000 of debt discount (related to warrants issued with the
convertible debt transacted in June 2005) was amortized during the three months
ending October 31, 2005. Only $24,000 of such charges were required during the
three months ending October 31, 2004.
The Company had a net loss for the quarter ended October 31, 2005 of $209,000
compared with net income of $519,000 for the prior year's comparative quarter.
The change is primarily related to additional interest related costs as
discussed above.
Liquidity and Capital Resources
- -------------------------------
The Company's primary needs for liquidity and capital resources are related to
its acquisition of inventory for sale and its rental fleet. The Company's
primary source of internal liquidity has been from its operations. As more fully
described below, the Company's primary sources of external liquidity are
equipment inventory floor plan financing arrangements provided to the Company by
14
the manufacturers of the products the Company sells as well as the credit
facility more fully described below.
Under inventory floor planning arrangements the manufacturers of products sold
by the Company provide interest free credit terms on new equipment purchases for
periods ranging from one to twelve months, after which interest commences to
accrue monthly at rates ranging from zero to two percent over the prime rate of
interest. Principal payments are typically made under these agreements at
scheduled intervals and/or as the equipment is rented, with the balance due at
the earlier of a specified date or upon sale of the equipment. At October 31,
2005, the Company was indebted under manufacturer provided floor plan
arrangements in the aggregate amount of $ 25,980,000.
During the three months ended October 31, 2005 the Company had negative cash
flow from operating activities of $1,038,000. The Company's cash flow from
operating activities consisted primarily of a reduction of accounts receivable
of $2,013,000, depreciation of $2,041,000 and an increase in inventories of
$4,417,000. Purchases of fixed assets during the period were related mainly to
the ongoing replacement of aged operating assets and rental equipment sold
during the period. The Company paid down its short-term financing by $1,000,000
during the three month period ending October 31, 2005.
The Company's cash and cash equivalents was $1,013,000 as of October 31, 2005.
Management believes the Company's current cash level and anticipated available
cash flow is considered sufficient to support the Company's operations during
the next twelve months.
As of October 31, 2005, the Company had outstanding convertible instruments,
options and warrants convertible into 28,350,218 shares of stock which would be
dilutive to earnings per share.
Off-Balance Sheet Arrangements
- ------------------------------
The Company's off balance sheet arrangements are principally lease arrangements
associated with the retail stores and the corporate office.
New Accounting Pronouncements
- -----------------------------
Recent Accounting Pronouncements - In October 2004, the FASB ratified the
consensus reached in EITF Issue No. 04-8, "The Effect of Contingently
Convertible Instruments on Diluted Earnings per Share." The EITF reached a
consensus that contingently convertible instruments, such as contingently
convertible debt, contingently convertible preferred stock, and other such
securities should be included in diluted earnings per share (if dilutive)
regardless of whether the market price trigger has been met. The consensus
became effective for reporting periods ending after December 15, 2004. The
adoption of this pronouncement did not have a material impact on the Company's
consolidated financial statements.
In December 2004, the Financial Accounting Standards Board ("FASB") issued its
final standard on accounting for share-based payments ("SBP"), FASB Statement
No. 123R (revised 2004), "Share-Based Payment." This statement requires
companies to expense the value of employee stock options and similar awards.
Under FAS 123R, SBP awards result in a cost that will be measured at fair value
on the awards' grant date, based on the estimated number of awards that are
expected to vest. Compensation cost for awards that vest would not be reversed
if the awards expire without being exercised. The statement's effective date for
a company is the first annual reporting period beginning August 1, 2005, and it
applies to all outstanding and unvested SBP awards at a company's adoption. The
Company adopted this accounting pronouncement during the current fiscal quarter.
Upon adoption there was no impact on the consolidated financial statements. All
outstanding stock options were fully vested as of July 31, 2005
In May 2005, the FASB issued FASB 154, "Accounting Changes and Error
Corrections." This statement replaces APB Opinion No. 20, Accounting Changes,
and FASB Statement No. 3, Reporting Accounting Changes in Interim Financial
Statements, and changes the requirements for the accounting for and reporting of
a change in accounting principle. The statement applies to all voluntary changes
in accounting principle. It also applies to changes required by an accounting
pronouncement in the unusual instance that the pronouncement does not include
specific transition provisions. When a pronouncement includes specific
transition provisions, those provisions should be followed. This statement is
effective for accounting changes and corrections of errors made in fiscal years
beginning after December 15, 2005. Management does not believe this
pronouncement will have a material impact on the Company's consolidated
financial statements.
In June 2005, the EITF reached consensus on Issue No. 05-6, Determining the
Amortization Period for Leasehold Improvements (EITF 05-6). EITF 05-6 provides
guidance on determining the amortization period for leasehold improvements
acquired in a business combination or acquired subsequent to lease inception.
The guidance in EITF
15
05-6 will be applied prospectively and is effective for periods beginning after
June 29, 2005. The adoption of this pronouncement did not have a material impact
on the Company's consolidated financial position or results of operations.
In September 2005, the FASB ratified the Emerging Issues Task Force's ("EITF")
Issue No. 05-7. "Accounting for Modifications to Conversion Options Embedded in
Debt Instruments and Related Issues", which addresses whether a modification to
a conversion option that changes its fair value affects the recognition of
interest expense for the associated debt instrument after the modification, and
whether a borrower should recognize a beneficial conversion feature, not a debt
extinguishment, if a debt modification increases the intrinsic value of the
debt. Management does not believe this pronouncement will have a material impact
on the Company's consolidated financial statements. In September 2005, the FASB
ratified the following consensus reached in EITF Issue 05-8 ("Income Tax
Consequences of Issuing Convertible Debt with a Beneficial Conversion Feature"):
a) The issuance of convertible debt with a beneficial conversion feature results
in a basis difference in applying FASB Statement of Financial Accounting
Standards SFAS No. 109, Accounting for Income Taxes. Recognition of such a
feature effectively creates a debt instrument and a separate equity instrument
for book purposes, whereas the convertible debt is treated entirely as a debt
instrument for income tax purposes; b) The resulting basis difference should be
deemed a temporary difference because it will result in a taxable amount when
the recorded amount of the liability is recovered or settled; and c) Recognition
of deferred taxes for the temporary difference should be reported as an
adjustment to additional paid-in capital. Both of these issues are effective in
the first interim or annual reporting period commencing after December 15, 2005,
with early application permitted. The effect of applying the consensus should be
accounted for retroactively to all debt instruments containing a beneficial
conversion feature that are subject to EITF Issue 00-27, "Application of Issue
No. 98-5 to Certain Convertible Debt Instruments" (and thus is applicable to
debt instruments converted or extinguished in prior periods but which are still
presented in the financial statements). Management does not believe this
pronouncement will have a material impact on the Company's consolidated
financial statements.
General Economic Conditions
- ---------------------------
Controlling inventory is a key ingredient to the success of an equipment
distributor because the equipment is characterized by long order cycles, high
ticket prices, and the related exposure to "flooring" interest. The Company's
interest expense may increase if inventory is too high or interest rates rise.
The Company manages its inventory through Company-wide information and inventory
sharing systems wherein all locations have access to the Company's entire
inventory. In addition, the Company closely monitors inventory turnover by
product categories and places equipment orders based upon targeted turn ratios.
All of the products and services provided by the Company are either capital
equipment or included in capital equipment, which are used in the construction,
industrial, and agricultural sectors. Accordingly, the Company's sales are
affected by inflation or increased interest rates which tend to hold down new
construction, and consequently adversely affect demand for the equipment sold
and rented by the Company. In addition, although agricultural equipment sales
are less than 2% of the Company's total revenues, factors adversely affecting
the farming and commodity markets also can adversely affect the Company's
agricultural equipment related business.
The Company's business can also be affected by general economic conditions in
its geographic markets as well as general national and global economic
conditions that affect the construction, industrial, and agricultural sectors. A
further erosion in North American and/or other countries' economies could
adversely affect the Company's business.
Although the principal products sold, rented, and serviced by the Company are
manufactured by Case, the Company also sells, rents, and services equipment and
sells related parts (e.g., tires, trailers, and compaction equipment)
manufactured by others. Approximately 44% of the Company's net sales for the
three months ended October 31, 2005 resulted from sales, rental, and servicing
of products manufactured by companies other than Case. That compares with a
figure of 54% for the three month period ended October 31, 2004. Manufacturers
other than Case represented by the Company offer various levels of supplies and
marketing support along with purchase terms which vary from cash upon delivery
to interest-free, 12-month flooring.
The Company purchases its equipment and parts inventory from Case and other
manufacturers. No supplier other than Case accounted for more than 10% of such
inventory purchases during the three months ended October 31, 2005. While
maintaining its commitment to Case to primarily purchase Case Equipment and
parts as an authorized Case dealer, the Company plans to expand the number of
products and increase the aggregate dollar value of those
16
products which the Company purchases from manufacturers other than Case in the
future.
The generally soft economic conditions in the equipment market, particularly in
the northwest, have contributed to a decline in equipment sales in prior years.
A further softening in the industry could severely affect the Company's sales
and profitability. Market specific factors could also adversely affect one or
more of the Company's target markets and/or products.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company is exposed to market risk from changes in interest rates. Market
risk is the potential loss arising from adverse changes in market rates and
prices such as interest rates. For fixed rate debt, interest rate changes affect
the fair value of financial instruments but do not impact earnings or cash
flows. Conversely for floating rate debt, interest rate changes generally do not
affect the fair market value but do impact future earnings and cash flows,
assuming other factors are held constant. At October 31, 2005, the Company had
variable rate floor plan payables, notes payable, convertible debt and
short-term debt of approximately $53.3 million. Holding other variables
constant, the pre-tax earnings and cash flow impact for the next year resulting
from a one percentage point increase in interest rates would be approximately
$0.5 million. The Company's policy is not to enter into derivatives or other
financial instruments for trading or speculative purposes.
ITEM 4. CONTROLS AND PROCEDURES
We maintain disclosure controls and procedures that are designed to ensure that
information required to be disclosed in our Exchange Act reports is recorded,
processed, summarized and reported within the time periods specified in the
Securities and Exchange Commission's rules and forms and that such information
is accumulated and communicated to our management, including our CEO and CFO, as
appropriate, to allow for timely decisions regarding required disclosure. In
designing and evaluating the disclosure controls and procedures, management
recognizes that any controls and procedures, no matter how well designed and
operated, can provide only reasonable assurance of achieving the desired control
objectives, and management is required to apply its judgment in evaluating the
cost-benefit relationship of possible controls and procedures.
As required by SEC Rule 13a-15(e) and 15d-15(e), we carried out an evaluation,
under the supervision and with the participation of our management, including
our CEO and CFO, of the effectiveness of the design and operation of our
disclosure controls and procedures as of the end of the period covered by this
report. Based on the foregoing, the CEO and CFO concluded that our disclosure
controls and procedures were effective at the reasonable assurance level.
There has been no change in our internal controls over financial reporting
during the most recent fiscal quarter that has materially affected, or is
reasonably likely to materially affect, our internal controls over financial
reporting.
Changes in Internal Controls
- ----------------------------
There were no significant changes in our internal controls over financial
reporting that occurred during the three months ended October 31, 2005 that have
materially affected, or are reasonably likely to materially affect, our internal
control over financial reporting.
Limitations on the Effectiveness of Controls
- --------------------------------------------
We believe that a control system, no matter how well designed and operated,
cannot provide absolute assurance that the objectives of the control system are
met, and no evaluation of controls can provide absolute assurance that all
control issues and instances of fraud, if any, within a company have been
detected.
17
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
-----------------
The Company is involved in various legal proceedings
which are incidental to the industry and for which
certain matters are covered in whole or in part by
insurance or, otherwise, the Company has recorded
accruals for estimated settlements. Management
believes that any liability which may result from
these proceedings will not have a material adverse
effect on the Company's business, results of
operations, and financial condition.
ITEM 1A. RISK FACTORS
------------
None.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
-----------------------------------------------------------
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
-------------------------------
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
---------------------------------------------------
None.
ITEM 5. OTHER INFORMATION
-----------------
None.
ITEM 6. EXHIBITS
--------
Exhibit 31 Rule 13a-14(a)/15d-14(a) Certification
Exhibit 32.1 Certification by the Chief Executive Officer
Relating to a Periodic Report Containing
Financial Statements. *
Exhibit 32.2 Certification by the Chief Financial Officer
Relating to a Periodic Report Containing
Financial Statements. *
* The Exhibit attached to this Form 10-Q shall not be deemed
"filed" for purposes of Section 18 of the Securities Exchange
Act of 1934 (the "Exchange Act") or otherwise subject to
liability under that section, nor shall it be deemed
incorporated by reference in any filing under the Securities
Act of 1933, as amended, or the Exchange Act, except as
expressly set forth by specific reference in such filing.
18
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
WESTERN POWER & EQUIPMENT CORP. & SUBSIDIARY
December 15, 2005
By: /s/ Mark J. Wright
--------------------------
Mark J. Wright
Vice President of Finance and
Chief Financial Officer
19