================================================================================
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JANUARY 11, 2006
REGISTRATION STATEMENT NO. (333-126854)
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
AMENDMENT NO. 3
TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
--------------------------
WESTERN POWER & EQUIPMENT CORP.
(Exact Name of Registrant as Specified in Its Charter)
Delaware 5084 91-1688446
(State or Other Jurisdiction of (Primary Standard Industrial (I.R.S. Employer
Incorporation or Organization) Classification Code Number) Identification Number)
6407-B N.E. 117TH AVE, VANCOUVER, WA 98662
------------------------------------------
TEL. (360) 253-2346
(Address, Including Zip Code, and Telephone Number, Including Area Code, of
Registrant's Principal Executive Offices)
-----------------------------------------
C. DEAN MCLAIN
CHIEF EXECUTIVE OFFICER
WESTERN POWER & EQUIPMENT CORP.
6407-B N.E. 117TH AVE
VANCOUVER, WA 98662
(360) 253-2346
(Name, Address Including Zip Code, and Telephone
Number, Including Area Code, of Agent For Service)
--------------------------------------------------
COPIES TO:
JAY M. KAPLOWITZ
GERSTEN SAVAGE LLP
600 LEXINGTON AVENUE, 9TH FLOOR
NEW YORK, N.Y. 10022
(212) 752-9700
--------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED RESALE TO THE PUBLIC: From time to
time after the effective date of this Registration Statement.
If any of the securities being registered on this form are to be offered on a
delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. /X/
If this form is filed to register additional securities for an offering pursuant
to Rule 462(b) under the Securities Act, check the following box and list the
Securities Act registration statement number of the earlier effective
registration statement for the same offering. / /
If this form is a post-effective amendment filed pursuant to Rule 462(c) under
the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. / /
If this form is a post-effective amendment filed pursuant to Rule 462(d) under
the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. / /
If delivery of the prospectus is expected to be made pursuant to Rule 434, check
the following box. / /
================================================================================
CALCULATION OF REGISTRATION FEE
- -------------------------------------------- ------------ ------------------------- ------------------------ ----------------
Title of each class of securities being Amount to be Proposed maximum offering Proposed maximum Amount of
registered (1) registered price per share (2) aggregate offering price registration fee
- -------------------------------------------- ------------ ------------------------- ------------------------ ----------------
Shares of Common Stock, $.001 par value (3) 15,000,000 $1.80 $27,000,000 $2,889
- -------------------------------------------- ------------ ------------------------- ------------------------ ----------------
Shares of Common Stock, $.001 par value (4) 9,450,218 $1.80 $17,010,392.40 $1,820.11
- -------------------------------------------- ------------ ------------------------- ------------------------ ----------------
Shares of Common Stock, $.001 par value (5) 3,994,874 $1.80 $7,190,773.20 $769.41
- -------------------------------------------- ------------ ------------------------- ------------------------ ----------------
Shares of Common Stock, $.001 par value (6) 8,248,528 $1.80 $14,847,350.40 $1,588.67
- -------------------------------------------- ------------ ------------------------- ------------------------ ----------------
Shares of Common Stock, $.001 par value (7) 1,222,586 $1.80 $2,200,654.80 235.47$
- -------------------------------------------- ------------ ------------------------- ------------------------ ----------------
Total 37,916,206 $1.80 $68,249,170.80 $7,302.66
- -------------------------------------------- ------------ ------------------------- ------------------------ ----------------
(1) These offered securities may be sold separately or together.
(2) The price is estimated in accordance with Rule 457(c) under the Securities
Act of 1933, as amended, solely for the purpose of calculating the registration
fee and represents the average of the high and the low prices of the Common
Stock on January 3, 2006, as reported on the OTC Bulletin Board.
(3) Consists of shares of common stock issuable upon conversion of debentures
that are being registered for the benefit of certain selling shareholders.
(4) Consists of shares of common stock issuable upon exercise of options and
warrants that are being registered for the benefit of certain selling
shareholders.
(5) Consists of shares of common stock issuable as interest on certain
debentures.
(6) Consists of an additional 30% of the maximum number of shares issuable to
certain selling shareholders.
(7) Consists of shares of common stock that we have agreed to register sold by
American United Global, Inc. to certain purchasers.
(8) We have already paid $7,655.33.
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES
AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL FILE
A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT
SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF THE
SECURITIES ACT OF 1933 OR UNTIL THIS REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A),
MAY DETERMINE.
Information contained herein is subject to completion or amendment. A
registration statement relating to these securities has been filed with the
Securities and Exchange Commission. These securities may not be sold nor may
offers to buy be accepted prior to the time the registration statement becomes
effective. This prospectus shall not constitute an offer to sell or the
solicitation of an offer to buy, nor shall there be any sale of these securities
in any State in which such offer, solicitation or sale would be unlawful prior
to registration or qualification under the securities laws of any such State.
Prospectus
Subject to Completion, Dated January 11, 2006
WESTERN POWER & EQUIPMENT CORP.
37,916,206 SHARES OF COMMON STOCK
This prospectus relates to the resale of up to 37,916,206 shares of common stock
of Western Power & Equipment Corp. All of the shares of common stock are being
offered for resale by the selling stockholders at prices established on the OTC
Bulletin Board during the term of this offering. These prices will fluctuate
based on the demand for the shares of common stock. Our common stock is quoted
on the OTC Bulletin Board under the symbol "WPEC." The last reported sale price
of our common stock on the OTC Bulletin Board on January 3, 2006 was $1.80 per
share.
The 37,916,206 shares of common stock, par value $.001 per share, of Western
Power & Equipment Corp., to which this prospectus relates, include 950,000
shares of common stock issuable upon exercise of options issued to three persons
identified in this prospectus, 1,222,586 shares of unregistered common stock
sold by American United Global, Inc. to certain purchasers identified in this
prospectus and 35,743,620 shares of common stock issuable under the conditions
set forth below.
On June 9, 2005, we announced the closing of a new $32 million senior credit
facility from several institutional investors. This prospectus is filed in
connection with securities issued in this financing and relates to 15,000,000
shares issuable upon conversion of our debentures, 8,500,218 shares of common
stock issuable upon exercise of warrants, 3,994,874 shares issuable as interest
and an additional 8,248,528 registrable under the terms of the transaction
documents relating to the financing. Of such shares:
o 15,000,000 shares are issuable pursuant to conversion of Series A
Debentures in the aggregate dollar amount of $30,000,000;
o 8,188,285 shares issuable upon exercise of the Series A Warrants
issued to the purchasers of the Series A Debentures;
o 311,933 shares issuable upon exercise of the Series B Warrants issued
to the purchasers of the Series B Debentures;
o 3,994,874 shares issuable as interest under the Series A Debentures,
assuming all such debentures are held until maturity; and
o 8,248,528 shares of common stock, representing an additional 30% of
the maximum number of shares issuable to the institutional investors,
that we have agreed to register.
The selling stockholders, and any participating broker-dealers may be deemed to
be "underwriters" within the meaning of the Securities Act of 1933, as amended,
and any commissions or discounts given to any such broker-dealer may be regarded
as underwriting commissions or discounts under the Securities Act of 1933. The
selling stockholders have informed us that they do not have any agreement or
understanding, directly or indirectly, with any person to distribute their
common stock.
PLEASE SEE "RISK FACTORS" BEGINNING ON PAGE 5 TO READ ABOUT FACTORS YOU SHOULD
CONSIDER BEFORE BUYING SHARES OF OUR COMMON STOCK.
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR DETERMINED IF THIS
PROSPECTUS IS TRUTHFUL OR COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
The date of this Prospectus is January__, 2006
[OUTSIDE BACK COVER PAGE OF PROSPECTUS]
Dealer Prospectus Delivery Obligation
Until _________, all dealers that effect transactions in these securities,
whether or not participating in this offering, may be required to deliver a
prospectus. This is in addition to the dealers' obligation to deliver a
prospectus when acting as underwriters and with respect to their unsold
allotments or subscriptions.
ii
TABLE OF CONTENTS
PAGE #
------
Prospectus Summary........................................................ 1
Risk Factors.............................................................. 5
Special Note On Forward Looking Statements................................ 10
Use of Proceeds........................................................... 11
Price Range of Common Stock............................................... 11
Dividend Policy........................................................... 11
Capitalization............................................................ 12
Selected Consolidated Financial Data...................................... 13
Management's Discussion and Analysis of Financial Condition...............
and Results of Operations............................................... 14
Business.................................................................. 21
Management................................................................ 29
Principal Stockholders.................................................... 33
Certain Relationships and Related Transactions............................ 35
Description of Securities................................................. 36
Shares Eligible for Future Sale........................................... 37
Selling Security Holders.................................................. 38
Plan of Distribution...................................................... 41
Legal Matters............................................................. 42
Experts................................................................... 42
Where You Can Find More Information....................................... 43
Index to Consolidated Financial Statements................................ 44
YOU SHOULD RELY ONLY ON THE INFORMATION CONTAINED IN THIS DOCUMENT OR TO
OTHER DOCUMENTS TO WHICH WE REFER YOU. WE HAVE NOT AUTHORIZED ANYONE TO PROVIDE
YOU WITH INFORMATION THAT IS DIFFERENT. THIS DOCUMENT MAY ONLY BE USED WHERE IT
IS LEGAL TO SELL THESE SECURITIES.
iii
PROSPECTUS SUMMARY
THE SUMMARY HIGHLIGHTS SOME OF THE INFORMATION IN THIS PROSPECTUS. IT MAY NOT
CONTAIN ALL OF THE INFORMATION THAT IS IMPORTANT TO YOU. TO UNDERSTAND THIS
OFFERING FULLY, YOU SHOULD READ THE ENTIRE PROSPECTUS CAREFULLY, INCLUDING THE
RISK FACTORS, THE FINANCIAL STATEMENTS AND THE NOTES THERETO. THE FOLLOWING
SUMMARY IS QUALIFIED IN ITS ENTIRETY BY, AND MUST BE READ IN CONJUNCTION WITH,
THE MORE DETAILED INFORMATION AND THE CONSOLIDATED FINANCIAL STATEMENTS,
INCLUDING THE NOTES THERETO, APPEARING ELSEWHERE IN THIS PROSPECTUS. UNLESS THE
CONTEXT OTHERWISE REQUIRES, REFERENCES IN THIS PROSPECTUS TO "WESTERN", THE
"COMPANY", "WE", "US", AND "OUR" REFER TO WESTERN POWER & EQUIPMENT CORP. AND
ITS WHOLLY-OWNED SUBSIDIARY WESTERN POWER & EQUIPMENT CORP., AN OREGON
CORPORATION AND ITS WHOLLY-OWNED SUBSIDIARY ARIZONA PACIFIC MATERIALS, LLC, AN
ARIZONA LIMITED LIABILITY COMPANY, UNLESS OTHERWISE INDICATED.
OUR COMPANY
GENERAL
We are 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 and certain other
manufacturers. We believe, 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 us
include backhoes, excavators, crawler dozers, skid steer loaders, forklifts,
compactors, log loaders, trenchers, street sweepers, sewer vacuums, and mobile
highway signs.
We operate out of facilities located in the states of Washington, Oregon,
Nevada, California, and Alaska. The equipment that we distribute 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.
Our strategy had focused on acquiring additional existing distributorships and
rental operations, opening new locations as market conditions warrant, and
increasing sales at our existing locations. In connection therewith, we 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 four years, we have
concentrated on consolidating or closing certain of our stores to improve
operating efficiency and profitability.
Our company also owns a subsidiary, Arizona Pacific Materials, LLC, which
operates two surface mines producing cinder and basalt aggregate to supply
material for block manufactures, concrete and asphalt suppliers and landscape
contractors, in the Phoenix and Flagstaff, Arizona building/construction
markets.
HISTORY AND ACQUISITIONS
We commenced business in November 1992 with the acquisition from Case of seven
retail distribution facilities located in Oregon and Washington. We became a
subsidiary of American United Global, Inc. ("AUGI"), simultaneous with such
acquisition. Until recently, AUGI held 12.0 percent of the outstanding shares of
our common stock. On September 23, 2005, AUGI sold all its shares of our common
stock to certain purchasers identified in this prospectus.
In September 1994 and February 1996, in two different transactions, we acquired
four retail construction equipment stores located in California and Nevada from
Case. In addition, in June 1996 and January 1997, we 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, we also opened nine new stores in the states
served by the existing stores, ending fiscal year 1997 with 23 stores.
In fiscal 1998, we acquired four additional facilities located in California and
Alaska. The previous Alaska facility was discontinued as it was combined with
the new Alaska facility. In fiscal 1998 we opened one new store in Washington.
On December 11, 1997, we acquired substantially all of the operating assets used
by Case in connection with our business of servicing and distributing Case
agricultural equipment at a facility located in Yuba City, California.
On April 30, 1998, we 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, we closed three of our smaller facilities and began servicing
the territories served by these small stores by larger facilities in the region.
1
We consolidated four facilities in the first quarter of fiscal 2000 into certain
larger stores in each region. One branch office in Washington was sold during
the third quarter of fiscal 2000 while two temporary locations were established
in Southern California. The closures were 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. We
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, we closed/sold 3 branches resulting in 15 branches at the
end of fiscal 2002. There were no store closures and no new stores opened in
fiscal 2003 or 2004.
In September 2004, we purchased Arizona Pacific Materials, LLC, which operates
two surface mines producing cinder aggregate to supply material for block
manufactures, concrete and asphalt suppliers and landscape contractors, in the
Phoenix and Flagstaff, Arizona building/construction markets.
In February 2005 we finalized the sale of our Hayward branch in California.
In December 2005 we closed our Santa Rosa branch in California.
CREDIT FACILITY
On June 9, 2005, we announced the closing of a new $32 million senior credit
facility from several institutional lenders. The facility is comprised of $30
million of convertible debt and a $2 million bridge loan, both at the London
Interbank Offered Rate ("LIBOR") plus 6%.
We entered into a Securities Purchase Agreement (the "Purchase Agreement") with
each of the several lenders, to which we refer as the "Purchasers." Pursuant to
the terms of the Purchase Agreement, we sold $30 million in Variable Rate
Secured Convertible Debentures (the "Series A Debentures") due 60 months from
the date of issuance and $2 million in Variable Rate Secured Debentures (the
"Series B Debentures" and, with the Series A Debentures, the "Debentures") due 6
months from the date of issuance. The Series A Debentures are convertible, at
the option of the Purchasers, into shares of our common stock at a conversion
price of $2.00 per share, subject to adjustment.
Purchasers of the Debentures received Series A Warrants and Series B Warrants to
purchase an aggregate of approximately 8.5 million shares of our common stock at
an exercise price of $1.75 per share, subject to adjustment, for a term of five
years. In addition, the Purchasers may receive Series C Warrants, which allow
each Purchaser of Debentures the right to purchase a number of Series A
Debentures and Series A Warrants in proportion to its initial investment in our
company, contingent on the issuance of an additional $7,500,000 in convertible
debt. The Series C Warrants have a term of exercise equal to the earlier of (i)
the 18 months anniversary of the effective date of this registration statement
and (ii) June 9, 2008. If all Series C Warrants were issued and exercised, we
would issue additional Series A Debentures in the aggregate principal face
amount of $7,500,000, convertible into an aggregate of 3,750,000 shares of our
common stock and issue additional Series A Warrants to purchase 1,312,500 shares
of our common stock.
We have agreed to register all the shares of common stock underlying the Series
A Debentures, the Series A Warrants and the Series B Warrants under the
Securities Act of 1933, as amended, pursuant to the registration rights
agreement entered into with each of the several Purchasers. The Debentures are
secured by all our assets as more fully set forth in the security agreement
entered into with each of the several Purchasers.
We used a significant portion of the loan proceeds to repay and terminate our
credit facility and forbearance agreement with GE Commercial Distribution
Finance Corporation and the remainder of the proceeds will be used to support
our near term needs for working capital, general capital expenditures, including
sufficient working capital to initiate the build out of the Phoenix mining
facilities and other corporate requirements.
Our principal executive offices are located at 6407-B N.E. 117th Avenue,
Vancouver, Washington 98662. Our main telephone number is (360) 253-2346.
Inquiries may also be sent to us at the above address for sales and general
information. We currently maintain a website at www.westernpower.com.
Information contained on our Internet site is not incorporated by reference into
this prospectus and you should not consider information contained on our
Internet site to be part of this prospectus.
2
THE OFFERING
Common stock offered............... Up to 37,916,206 shares of common stock.
Of the 37,916,206 shares of common
stock, 1,222,586 are presently issued
and outstanding, 950,000 shares may be
sold by the selling security holders
upon the exercise of options and
35,743,620 may be sold by the selling
security holders who participated in the
$32 million credit facility that closed
on June 9, 2005.
Common stock outstanding
prior to offering.................. 10,180,000 shares (1)
Common stock outstanding
after the offering................. 46,873,620 shares (2)
Use of proceeds.................... We will not receive any of the proceeds
from the sale of the shares of our
common stock by the selling security
holders. We received approximately
$32,000,000, before deducting offering
expenses from the sale of the Series A
Debentures and the Series B Debentures
of approximately $2 million. We have
used approximately $26,000,000 to pay
off outstanding debt and intend to use
approximately $4,000,000 to further
reduce our debts and for working
capital.
We would receive $14,875,381.50 if all
Series A Warrants and Series B Warrants
presently issued and outstanding were
exercised and an additional $650,500 if
all options to purchase shares of common
stock being registered hereby were
exercised for an aggregate of
$15,525,881.50. We do not presently
anticipate receiving any of the
foregoing proceeds.
OTC Bulletin Board Symbol.......... WPEC
(1) Does not include 13,350,218 shares issuable upon the exercise of currently
outstanding stock options and warrants, 9,450,218 of which are being
registered hereby.
(2) Assumes the issuance of all shares of our common stock being registered
hereby with the exception of the 1,222,586 shares of common stock sold by
AUGI to certain purchasers identified in this prospectus, which are
presently issued and outstanding.
3
SUMMARY CONSOLIDATED FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE DATA)
The summary consolidated financial information set forth below is qualified by
and should be read in conjunction with the consolidated financial statements and
the notes thereto and "Management's Discussion and Analysis of Financial
Condition and Results of Operations" included elsewhere in this Prospectus.
THREE MONTHS ENDED
OCTOBER 31,
(UNAUDITED) YEAR ENDED JULY 31,
2005 2004 2005 2004 2003 2002 2001
-------- -------- --------------------------------------------------------
CONSOLIDATED STATEMENT OF OPERATIONS DATA:
Net sales ................................ $ 33,035 $ 26,744 $117,222 $115,516 $102,396 $107,988 $139,902
Gross profit ............................. 4,182 3,331 14,158 14,170 13,526 7,763 9,820
Selling, general and administrative ...... 2,938 2,224 10,169 9,594 9,955 10,199 12,840
Income (loss) before income taxes ........ (193) 531 1,038 1,961 460 (9,971) (7,537)
Net income (loss) ........................ $ (209) $ 519 $ 2,490 $ 1,913 $ 412 $(10,019) $ (7,842)
Net income (loss per basic common share) . $ (0.02) $ 0.05 $ 0.25 $ 0.19 $ 0.08 $ (2.50) $ (2.30)
Net income (loss per diluted common share) $ (0.02) $ 0.04 $ 0.10 $ 0.19 $ 0.08 $ (2.50) $ (2.30)
Shares used in basic earnings per share
calculations ........................... 10,180 10,130 10,141 10,130 5,336 4,003 3,403
Shares used in diluted earnings per share
calculations ........................... 10,180 10,600 26,269 10,130 5,336 4,003 3,403
AT OCTOBER 31, AT JULY 31,
2005 2004 2005 2004 2003 2002 2001
-------- -------- --------------------------------------------------------
CONSOLIDATED BALANCE SHEET DATA:
Working capital (deficit)................. $ 18,678 $(11,578) $ 19,165 $(12,800) $(17,590) $(24,390) $(20,102)
Total assets.............................. $ 71,007 $ 53,524 $ 71,637 $ 55,024 $ 54,466 $ 59,576 $ 93,102
Long-term debt (including capital
leases and deferred lease income)......... $ 23,918 $ 1,393 $ 25,437 $ 902 $ 880 $ 928 $ 3,469
Stockholders' (deficit) equity............ $ 6,308 $ 913 $ 6,500 $ 102 $ (1,811) $ (3,136) $ 6,751
4
RISK FACTORS
IN ADDITION TO THE OTHER INFORMATION SET FORTH IN THIS PROSPECTUS, PROSPECTIVE
INVESTORS SHOULD CONSIDER CAREFULLY THE FOLLOWING FACTORS.
The accompanying 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 consolidated
financial position and the 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 periods ended October 31, 2005 and 2004 are not
necessarily indicative of results that may be expected for any other interim
periods of for the full year. This report should be read in conjunction with our
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.
The accompanying consolidated financial statements have been prepared on a going
concern basis, which contemplates the realization of assets and the satisfaction
of liabilities in the normal course of business.
We have experienced recurring losses in prior years, which creates substantial
doubt about our ability to continue as a going concern. None of the accompanying
consolidated financial statements, whether audited or unaudited, include any
adjustments that might be necessary should we be unable to continue as a going
concern.
RISKS RELATED TO OUR BUSINESS
WE HAVE A HISTORY OF LOSSES AND CANNOT ASSURE YOU THAT OUR PROFITABILITY WILL
CONTINUE.
For the fiscal years ended July 31, 2005, 2004 and 2003 and the three months
ended October 31, 2005 we had net income (loss) of approximately $2,490,000,
$1,913,000, $412,000 and $(209,000), respectively. During each of the five
fiscal years ended July 31 prior thereto we incurred significant net losses of
approximately $10,019,000 during fiscal 2002, $7,842,000 during fiscal 2001,
$7,198,000 during fiscal 2000 and $1,815,000 during fiscal 1999. As of October
31, 2005, we had an accumulated deficit of $13,717,000. We cannot assure you
that we will be able to maintain profitability, or that we will not incur
significant losses in the future.
WE HAVE ACQUIRED A SUBSIDIARY THAT HAS EXPERIENCED SIGNIFICANT LOSSES IN PRIOR
YEARS.
In September 2004, we purchased Arizona Pacific Materials, LLC (to which we
refer as "APM"), which operates two surface mines producing cinder and basalt
aggregate to supply material for block manufactures, concrete and asphalt
suppliers and landscape contractors, in the Phoenix and Flagstaff, Arizona
building/construction markets. During the fiscal years ending March 31, 2004 and
2003, APM incurred losses of $1,684,830 and $932,768 respectively. During the
fiscal year ending July 31, 2005, APM incurred a loss of $870,030 and for the
quarter ending October 31, 2005 incurred a loss of $414,000. APM will require
significant capital investment to develop its current operations. We cannot
assure you that APM will be able to obtain profitability, or that it will not
incur significant losses in the future.
MOST OF THE PRODUCTS THAT WE SELL ARE SUPPLIED TO US BY THIRD-PARTY
MANUFACTURERS, A MAJORITY OF WHICH ARE FROM CASE CORPORATION, AND WE MAY
EXPERIENCE DELIVERY DELAYS OVER WHICH WE HAVE NO CONTROL.
Most of our products are supplied to us 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 56% 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 us with
products or continue its relationship with us. 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.
WE MAY NOT BE ABLE TO COMPETE SUCCESSFULLY AGAINST CURRENT AND FUTURE
COMPETITORS.
5
Many of our existing and potential competitors have substantially greater
marketing, financial, and service resources than us. In addition, some of our
competitors have broader product offerings, placing us at a disadvantage to some
of our competitors. In addition, we believe that some of our 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 our competitors were to use such tactics in the future, we would be unable to
maintain our market position without incurring a negative impact on our
profitability.
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.
IF WE ARE UNABLE TO SUCCESSFULLY CONTROL OUR INVENTORY OUR RESULTS OF OPERATIONS
COULD BE ADVERSELY AFFECTED.
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. Our
interest expense may increase if inventory is too high or interest rates rise.
To be competitive in certain of our target markets, particularly markets for
products with long lead time, we will be required to build up inventories of
certain products in anticipation of future orders. There can be no assurance
that we will not experience problems of obsolete, excess, or slow-moving
inventory if we are not able to properly balance inventories against the
prospect of future orders, and our 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.
We manage our inventory through company-wide information and inventory sharing
systems whereby all locations have access to our company's entire inventory. In
addition, we closely monitor inventory turnover by product categories and place
equipment orders based upon targeted turn ratios. In the event that we are
unable to successfully manage our inventory our interest expense and inventory
write-downs could increase significantly if inventory is too high, or if our
inventory is too low and we cannot meet the demand of our customers our sales
may be adversely affected.
OUR SALES MAY BE ADVERSELY AFFECTED BY INFLATION AND INCREASED INTEREST RATES.
All of the products we sell and services we provide are either capital equipment
or included in capital equipment, which are used in the construction,
agricultural, and industrial sectors. Accordingly, our sales are affected by
inflation or increased interest rates, which tend to hold down new construction
and consequently adversely affect demand for construction and industrial
equipment sold and rented by us. In addition, although agricultural equipment
sales constitute less than 2% of our total revenues, factors adversely affecting
the farming and commodity markets also can adversely affect our agricultural
equipment related business.
A SLOWDOWN IN THE GENERAL ECONOMY COULD ADVERSELY AFFECT OUR SALES.
Our business can be affected by general economic conditions in our 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 our business.
Market specific factors could also adversely affect one or more of our target
markets and/or products.
THE SEASONALITY OF THE CONSTRUCTION BUSINESS MAY AFFECT SALES OF OUR PRODUCTS
AND MAY RESULT IN THE FLUCTUATION OF OUR QUARTERLY 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,
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.
THE LOSS OF THE SERVICES OF C. DEAN MCLAIN, OUR CHIEF EXECUTIVE OFFICER, COULD
SERIOUSLY HARM OUR BUSINESS.
6
Our future success depends, to a significant extent, on the continued services
of our senior management and our ability to retain and motivate our other key
employees. Specifically, the loss of the services of C. Dean McLain, our chief
executive officer and chairman of our board of directors, would have a material,
adverse effect on our business, results of operations and financial condition.
We do not currently maintain key-man life insurance on any of our senior
management or other key employees.
OUR CHIEF EXECUTIVE OFFICER AND A SIGNIFICANT SHAREHOLDER EACH CONTROL A
SIGNIFICANT PORTION OF OUR COMMON STOCK; THEREFORE YOU MAY HAVE NO EFFECTIVE
VOICE IN OUR MANAGEMENT.
Our Chief Executive Officer, Mr. McLain, beneficially owns approximately 20.7%
of our common stock and The Rubin Family Irrevocable Stock Trust beneficially
owns approximately 38% of our common stock. Accordingly, our Chief Executive
Officer and The Rubin Family Irrevocable Stock Trust will be able to exercise
significant influence over all matters requiring stockholder approval, including
the election of all directors and approval of significant corporate
transactions. If you purchase shares of our common stock, you may have no
effective voice in our management.
RISKS RELATING TO OUR CURRENT FINANCING AGREEMENT
WE HAVE ENTERED INTO A SECURITY AGREEMENT TO SECURE OUR INDEBTEDNESS TO THE
INSTITUTIONAL LENDERS
Virtually all of our assets have been pledged as collateral to secure our
indebtedness to the institutional lenders under the Purchase Agreement and other
definitive financing documents for the financing provided to us. In the event
that we default on payment of our obligations, including but not limited to the
making of required payments of principal and interest, our indebtedness could be
declared immediately due and payable and, in certain cases, our assets could be
foreclosed upon. The aforementioned pledging of the assets and assignments of
insurance to secure outstanding indebtedness makes such assets unavailable to
secure additional debt financing, which most likely will adversely affect our
ability to borrow in the future. In the event that the indebtedness were
foreclosed upon, we would likely have to file for bankruptcy protection, in
which case the value of our shares of common stock would have no value.
IF WE ARE REQUIRED FOR ANY REASON TO REPAY PART OF THE $30,000,000 OF
CONVERTIBLE DEBENTURES WE ISSUED IN JUNE 2005, WE WOULD BE REQUIRED TO DEPLETE
OUR WORKING CAPITAL, IF AVAILABLE, OR RAISE ADDITIONAL FUNDS. OUR FAILURE TO
REPAY THE CONVERTIBLE DEBENTURES AND BRIDGE LOAN, IF REQUIRED, COULD RESULT IN
LEGAL ACTION AGAINST US, WHICH COULD REQUIRE THE SALE OF SUBSTANTIAL ASSETS.
In June 2005, we issued $32,000,000 principal amount of debentures paying
interest at the London Interbank Offered Rate ("LIBOR") plus 6%, of which
$30,000,000 may be converted into shares of our common stock. $2,000,000 owed
under these debentures is due in equal monthly installments plus interest
beginning July 7, 2005 and ending December 7, 2005 and $30,000,000 is due and
payable on June 7, 2010, unless earlier converted into shares of our common
stock. In addition, any event of default as described in the convertible
debentures could require the early repayment of the convertible debentures,
including premia based upon the nature and extent of the default. We cannot
predict whether any amount of the convertible debentures, together with accrued
interest, will be converted into shares of our common stock. As of November 30,
2005, the $2,000,000 has been paid in full. We may be required to pay the
entirety of the $32,000,000, excluding accrued interest in cash. If we are
required to repay the debentures, we would be required to use our limited
working capital and raise additional funds. If we were unable to repay the
debentures when required, the note holders could commence legal action against
us to recover the amounts due which ultimately could require the disposition of
some or all of our assets, all of which serve as security for the repayment of
the debentures. Any such action would require us to curtail or cease operations.
There can be no assurance that we will have the capital or assets necessary to
repay the debentures, principal or interest, at the time they become due.
OUR LEVEL OF DEBT WILL REDUCE OUR NET INCOME AND MAY RESTRICT OUR OPERATIONS
As a result of the $30,000,000 convertible debentures and the $2,000,000 bridge
loan, we will have a higher amount of debt than we had before entering into the
Purchase Agreement. In addition to the negative effect on net income, our high
level of debt could have the following consequences:
o we may have difficulty borrowing money in the future for working
capital, capital expenditures, acquisitions or other purposes;
o we may have difficulty satisfying our debt obligations;
o certain of our indebtedness will be at variable interest rates, which
will make us vulnerable to increases in interest rates;
7
o we may be less flexible in reacting to changes in our business and the
industry in which we operate;
o a significant portion of our cash flow available from operations could
be required to pay principal and interest on our debt, which will
reduce the amount of funds that would otherwise be available to fund
capital expenditures, invest in new technology and pursue other
business opportunities;
o we will be subject to numerous restrictions in the manner in which we
conduct our business in the definitive financing documents, including
restrictions on our ability to pay dividends, make investments, incur
additional debt, sell assets and enter into transactions with
affiliates; and
o we may be placed at a competitive disadvantage compared to our
competitors who have less debt.
WE ARE SUBSTANTIALLY LEVERAGED. THIS COULD AFFECT OUR ABILITY TO FULFILL OUR
OBLIGATIONS UNDER THE DEBENTURES.
Our substantial outstanding debt has important consequences to you, including
the risk that we may not generate sufficient cash flow from operations to pay
principal of and interest on our indebtedness, including the debentures, or to
invest in our businesses. If we are unable to satisfy our obligations with cash
flow from operations and refinancings, we might have to attempt to raise cash to
satisfy our obligations through potential sales of assets or equity. Our ability
to raise funds by selling either assets or equity depends on a number of
factors, including market conditions, restrictions contained in the definitive
financing document, including the Purchase Agreement, and other factors. If we
are unable to refinance indebtedness or raise funds through sales of assets or
equity or otherwise, we may be unable to pay principal of and interest on the
debentures.
THERE ARE A LARGE NUMBER OF SHARES UNDERLYING THE CONVERTIBLE DEBENTURES AND
WARRANTS THAT MAY BE AVAILABLE FOR FUTURE SALE AND THE SALE OF THESE SHARES MAY
DEPRESS THE MARKET PRICE OF OUR COMMON STOCK.
As of the date of this prospectus, we had 10,180,000 shares of common stock
issued and outstanding and convertible Series A Debentures outstanding, pursuant
to a Securities Purchase Agreement dated as of June 8, 2005 entered into with
certain institutional lenders (the "Purchase Agreement"), that may be converted
into 15,000,000 shares of common stock at $2.00 per share. Under the Purchase
Agreement, we also issued the institutional lenders warrants to purchase an
additional 8,500,218 shares of our common stock at $1.75 per share. The Series A
Debentures allow the lenders to receive the interest payable thereon in a
maximum of 3,994,874 shares of our common stock. Pursuant to the Purchase
Agreement, we have an obligation to register an additional 8,248,528 shares of
our common stock. In addition, we are registering 950,000 shares previously
issued to certain parties. All of these additional 36,693,620 shares may be sold
without restriction upon effectiveness of this registration statement. The sale
of a substantial amount of these shares would adversely affect the market price
of our common stock.
The institutional lenders may also be issued Series C Warrants entitling them to
purchase additional Series A Debentures convertible into an additional 3,750,000
shares of our common stock at $2.00 per share and additional Series A Warrants
to purchase 1,312,500 shares of our common stock at $1.75 per share, contingent
on the issuance of an additional $7,500,000 in convertible debt. Neither the
Series C Warrants nor the securities issuable upon exercise of the Series C
Warrants are included in this registration statement.
ANY SIGNIFICANT DOWNWARD PRESSURE ON THE PRICE OF OUR COMMON STOCK COULD
ENCOURAGE SHORT SALES BY THE HOLDERS OF THE SERIES A DEBENTURES OR BY OTHERS.
SUCH SHORT SALES MAY IN TURN PLACE ADDITIONAL DOWNWARD PRESSURE ON THE MARKET
PRICE OF OUR COMMON STOCK.
The Series A Debentures do not contain any restrictions on short selling.
Accordingly, any significant downward pressure on the price of our common stock
as the holders of the Series A Debentures sell shares of our common stock could
encourage short sales by them or others, subject to applicable securities laws.
In turn, sales of a substantial number of shares of our common stock by way of
short sales could further depress the market price of our stock.
In an ordinary or "uncovered" short sale, a selling stockholder causes his or
her executing broker to borrow the shares to be delivered at the completion of
the sale from another broker, subject to an agreement to return them upon
request, thereby avoiding the need to deliver any shares actually owned by the
selling stockholder on the settlement date for the sale. Since the selling
stockholder does not own the shares that are sold, the selling stockholder must
subsequently purchase an equivalent number of shares in the market to complete
or "cover" the transaction. The selling stockholder will realize a profit if the
market price of the shares declines after the time of the short sale, but will
incur a loss if the market price rises and he or she is forced to buy the
replacement shares at a higher price. Accordingly, a declining trend in the
market price of our common stock may stimulate short sales.
8
THE ISSUANCE OF SHARES UPON CONVERSION OF THE CONVERTIBLE DEBENTURES AND
WARRANTS MAY CAUSE IMMEDIATE AND SUBSTANTIAL DILUTION TO OUR EXISTING
STOCKHOLDERS.
The issuance of shares upon conversion of the convertible debentures, including
the conversion of interest earned thereon and the exercise of the warrants may
result in substantial dilution to the interests of other stockholders since the
selling stockholders may ultimately convert and sell the full amount issuable on
conversion. Although the selling stockholders with which we entered into the
Purchase Agreement may not convert their convertible debentures or exercise
their warrants if such conversion or exercise would cause them to own more than
4.99% of our outstanding common stock, this restriction does not prevent the
selling stockholders from converting some of their holdings and subsequently
converting the remainder of their holdings. In this way, the selling
stockholders could sell more than this limit while never holding more than this
limit.
RISKS RELATED TO OUR COMMON STOCK
OUR STOCK MAY BE SUBJECT TO SUBSTANTIAL PRICE AND VOLUME FLUCTUATIONS DUE TO A
NUMBER OF FACTORS, MANY OF WHICH WILL BE BEYOND OUR CONTROL AND MAY PREVENT OUR
STOCKHOLDERS FROM RESELLING OUR COMMON STOCK AT A PROFIT.
The securities markets have experienced significant price and volume
fluctuations in the past. This market volatility, as well as general economic,
market or political conditions, could reduce the market price of our common
stock in spite of our operating performance. In addition, our operating results
could be below the expectations of public market analysts and investors, and in
response the market price of our common stock could decrease significantly.
Investors may be unable to resell their shares of our common stock for a profit.
The decline in the market price of our common stock and market conditions
generally could adversely affect our ability to raise additional capital, to
complete future acquisitions of or investments in other businesses and to
attract and retain qualified technical and sales and marketing personnel.
MANY OF OUR SHARES OF COMMON STOCK WILL IN THE FUTURE BE AVAILABLE FOR RESALE.
ANY SALES OF OUR COMMON STOCK, IF IN SIGNIFICANT AMOUNTS, ARE LIKELY TO DEPRESS
THE MARKET PRICE OF OUR SHARES.
There are presently 2,180,576 freely tradable shares and 1,222,586 shares, being
registered herein, of our common stock previously issued and outstanding, of an
aggregate of 10,180,000 such shares. Assuming all 36,693,620 shares of common
stock issuable to the selling stockholders are sold, we would have 40,096,782
shares that are freely tradable without the requirement of registration under
the Securities Act. Assuming all 36,693,620 shares of common stock issuable to
the selling stockholders are sold, we would have 46,873,620 shares issued and
outstanding. We also have 3,900,000 shares of common stock reserved for issuance
pursuant to exercise of presently vested outstanding options and warrants. If
all such options and warrants were exercised, we would have 50,773,620 shares of
our common stock issued and outstanding. We may in the future register all or a
portion of the presently restricted shares of common stock and the shares
underlying options and warrants.
The 7,999,424 shares of our common stock issued and outstanding that are
currently not freely tradable are "restricted securities" as defined under Rule
144 of the Securities Act. Upon effectiveness of this registration statement,
the 1,222,586 shares of our common stock sold by AUGI to certain purchasers
identified in this prospectus will no longer be restricted securities. The
remaining 6,776,838 shares of our common stock are owned by our officers,
directors and other "affiliates." These persons may only sell their shares,
absent registration, in accordance with the provisions of Rule 144. Restricted
securities may only be publicly sold pursuant to a registration under the
Securities Act, or pursuant to Rule 144 or some other exemption that may be
available from the registration requirements of the Securities Act. Rule 144
entitles each person holding restricted securities for a period of one year to
sell an amount of shares which does not exceed the greater of 1% of the shares
of our common stock outstanding every three months in ordinary brokerage
transactions or, assuming the shares of common stock are then traded on Nasdaq,
the average weekly trading volume during the four calendar weeks prior to said
sale. Any substantial sales pursuant to Rule 144, including the potential sale
of our affiliates' shares of our common stock, may have an adverse effect on the
market price of shares of our common stock, and may hinder our ability to
arrange subsequent equity or debt financing or affect the terms and time of such
financing.
FLUCTUATIONS IN OUR QUARTERLY OPERATING RESULTS MAY CAUSE THE MARKET PRICE OF
OUR COMMON STOCK TO FLUCTUATE.
Our operating results have in the past fluctuated from quarter to quarter and we
expect this trend to continue in the future. 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. As a result,
the market price of our common stock could be volatile. In the past, following
periods of volatility in the market price of stock, many
9
companies have been the object of securities class action litigation. If we were
to be sued in a securities class action, it could result in substantial costs
and a diversion of management's attention and resources which could adversely
affect our results of operations.
WE HAVE THE RIGHT TO ISSUE UP TO 10,000,000 SHARES OF "BLANK CHECK" PREFERRED
STOCK, WHICH MAY ADVERSELY AFFECT THE VOTING POWER OF THE HOLDERS OF OTHER OF
OUR SECURITIES AND MAY DETER HOSTILE TAKEOVERS OR DELAY CHANGES IN MANAGEMENT
CONTROL.
We may issue up to 10,000,000 shares of our preferred stock from time to time in
one or more series, and with such rights, preferences and designations as our
board of directors may determinate from time to time. To date, we have not
issued any shares of preferred stock. Our board of directors, without further
approval of our common stockholders, is authorized to fix the dividend rights
and terms, conversion rights, voting rights, redemption rights, liquidation
preferences and other rights and restrictions relating to any series of our
preferred stock. Issuances of additional shares of preferred stock, while
providing flexibility in connection with possible financings, acquisitions and
other corporate purposes, could, among other things, adversely affect the voting
power of the holders of other of our securities and may, under certain
circumstances, have the effect of deterring hostile takeovers or delaying
changes in management control.
IF OUR COMMON STOCK IS DELISTED FROM THE OTC BULLETIN BOARD, THE MARKET PRICE OF
OUR COMMON STOCK COULD DECREASE SIGNIFICANTLY.
If we are unable to maintain the listing of our common stock on the OTC Bulletin
Board, trading, if any, in our common stock would thereafter be conducted in the
over-the-counter market on the "pink sheets". If our common stock were moved to
the "pink sheets", an investor would find it more difficult to dispose of, or to
obtain quotations as to the price of, our common stock. Additionally, if our
common stock is delisted from the OTC Bulletin Board the market price of our
common stock could decrease significantly.
WE HAVE NOT PAID, AND DO NOT INTEND TO PAY, CASH DIVIDENDS IN THE FORESEEABLE
FUTURE.
We have not paid any cash dividends on our common stock and do not intend to pay
cash dividends in the foreseeable future. We intend to retain future earnings,
if any, for reinvestment in the development and expansion of our business.
Dividend payments in the future may also be limited by financing agreements or
covenants contained in securities that we may issue, such as those contained in
the Purchase Agreement and the related definitive financing documents. Any
future determination to pay cash dividends will be at the discretion of our
board of directors and depend on our financial condition, results of operations,
capital and legal requirements and such other factors as our board of directors
deems relevant.
SPECIAL NOTE ON FORWARD LOOKING STATEMENTS
This prospectus contains certain forward-looking information that involves
substantial risks and uncertainties. When used in this prospectus, the words
"anticipate," "believe," "estimate," "expect" and similar expressions as they
relate to us or our management are intended to identify such forward-looking
statements. Our 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 our entry into new markets; the success of
the expansion of our equipment rental business; rental industry conditions and
competitors; competitive pricing; our relationship with our suppliers; relations
with our employees; our ability to manage our 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.
Historical operating results are not necessarily indicative of the trends in
operating results for any future period.
10
USE OF PROCEEDS
We will not receive any of the proceeds from the sale of the shares of our
common stock by the selling security holders. We received approximately
$30,000,000, before deducting offering expenses from the sale of the Series A
Debentures and the Series B Debentures. We have used approximately $26,000,000
to pay off outstanding debt and intend to use approximately $4,000,000 to
further reduce our debts and for working capital.
We would receive $14,875,381.50 if all Series A Warrants and Series B Warrants
presently issued and outstanding were exercised and an additional $650,500.00 if
all options to purchase shares of common stock being registered hereby were
exercised for an aggregate of $15,525,881.50.
PRICE RANGE OF COMMON STOCK
Our common stock is traded on the OTC Bulletin Board under the symbol "WPEC".
Listed below are the high and low closing prices for our common stock for the
fiscal years ended July 31, 2005 and 2004 and the subsequent period until
January 3, 2006. These quotations reflect inter-dealer prices without retail
mark-up, mark-down or commission and may not represent actual transactions.
FISCAL 2004
HIGH LOW
-----------------------
First Quarter................................. $0.45 $0.15
Second Quarter................................ $0.43 $0.32
Third Quarter................................. $0.41 $0.35
Fourth Quarter................................ $0.40 $0.26
FISCAL 2005
HIGH LOW
-----------------------
First Quarter................................. $0.91 $0.52
Second Quarter................................ $1.95 $1.01
Third Quarter................................. $1.52 $0.96
Fourth Quarter................................ $1.85 $1.20
FISCAL 2006
HIGH LOW
-----------------------
First Quarter................................. $2.00 $1.73
Second Quarter................................ $1.95 $1.55
On January 3, 2006, the closing price of our common stock as reported on the OTC
Bulletin Board was $1.80 per share. As of December 31, 2005 we had 484
shareholders of record of our common stock.
DIVIDEND POLICY
We have never paid or declared a dividend. The payment of cash dividends, if
any, in the future is within the discretion of our Board of Directors and will
depend upon our earnings, capital requirements, financial condition and other
relevant factors. We intend, for the foreseeable future, to retain future
earnings for use in our business.
Equity Compensation Plan Information as of October 31, 2005.
- -------------------------------- ---------------------------------- ----------------------------- -------------------------------
Plan category Number of Securities to be issued Weighted-average exercise Number of securities remaining
upon exercise of outstanding price of outstanding available for future issuance
options, warrants and rights options, warrants and rights under equity compensation plans
(excluding securities reflected
in column (a))
- -------------------------------- ---------------------------------- ----------------------------- -------------------------------
Equity compensation plans
approved by security holders 1,900,000 $0.50 5,100,000
- -------------------------------- ---------------------------------- ----------------------------- -------------------------------
Equity compensation plans not
approved by security holders -0- -0- -0-
- -------------------------------- ---------------------------------- ----------------------------- -------------------------------
11
CAPITALIZATION
The following table sets forth our capitalization as of October 31, 2005. This
table should be read in conjunction with our Consolidated Financial Statements
and the Notes thereto appearing elsewhere in this prospectus.
October 31, 2005
(In thousands)
--------------------------------------------------------- ----------------
Long-term debt
Notes payable............................................ $ 615
Capitalized lease obligations ........................... 796
Convertible Debt......................................... 22,250
Total long-term debt..................................... 23,661
Stockholders' equity:
Common Stock, $0.001 par value per share; 50,000,000
shares authorized; 10,310,300 issued and
10,180,000 outstanding .................................. 10
Preferred Stock - 10,000,000 authorized, 0 issued and
outstanding.............................................. --
Additional paid-in capital............................... 20,859
Accumulated deficit...................................... (13,717)
Less: Common stock in treasury, at cost (130,300 shares). (844)
Total stockholders' equity............................... 6,308
Total capitalization..................................... $29,969
12
SELECTED CONSOLIDATED FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE DATA)
The following selected consolidated financial data of Western Power & Equipment
Corp & Subsidiary should be read in conjunction with the consolidated financial
statements and the notes thereto and "Management's Discussion and Analysis of
Financial Condition and Results of Operations". The consolidated statement of
operations data set forth below with respect to the fiscal years ended July 31,
2003, 2004 and 2005 and the consolidated balance sheet data as of July 31, 2004
and 2005 is derived from and is referenced to the audited consolidated financial
statements of Western Power included elsewhere in this prospectus. The
consolidated statement of income data set forth below with respect to the fiscal
years ended July 31, 2001 and 2002 and the consolidated balance sheet data as of
July 31, 2001, 2002 and 2003 is derived from audited consolidated financial
statements of Western Power not included in this prospectus. The consolidated
statements of income for the three months ended October 31, 2005 and 2004 have
not been audited. The consolidated balance sheet data as of October 31, 2005
have not been audited.
(Amounts in Thousands, except per share data)
THREE MONTHS
ENDED OCTOBER 31,
(UNAUDITED) YEAR ENDED JULY 31,
2005 2004 2005 2004 2003 2002 2001
-------- -------- --------------------------------------------------------
CONSOLIDATED STATEMENT OF OPERATIONS DATA:
Net sales................................. $ 33,035 $ 26,744 $117,222 $115,516 $102,396 $107,988 $139,902
Gross profit.............................. 4,182 3,331 14,158 14,170 13,526 7,763 9,820
Selling, general and administrative....... 2,938 2,224 10,169 9,594 9,955 10,199 12,840
Income (loss) before income taxes......... (193) 531 1,038 1,961 460 (9,971) (7,537)
Net income (loss)......................... $ (209) $ 519 $ 2,490 $ 1,913 $ 412 $(10,019) $ (7,842)
Net income (loss per basic common
share).................................. $ (0.02) $ 0.05 $ 0.25 $ 0.19 $ 0.08 $ (2.50) $ (2.30)
Net income (loss per diluted
common share)........................... $ (0.02) $ 0.04 $ 0.10 $ 0.19 $ 0.08 $ (2.50) $ (2.30)
Shares used in basic earnings per
share calculations...................... 10,180 10,130 10,141 10,130 5,336 4,003 3,403
Shares used in diluted earnings
per share calculations................. 10,180 10,600 26,269 10,130 5,336 4,003 3,403
AT OCTOBER 31, AT JULY 31,
2005 2004 2005 2004 2003 2002 2001
-------- -------- --------------------------------------------------------
CONSOLIDATED BALANCE SHEET DATA:
Working capital (deficit)................. $ 18,678 $(11,578) $ 19,165 $(12,800) $(17,590) $(24,390) $(20,102)
Total assets.............................. $ 71,007 $ 53,524 $ 71,637 $ 55,024 $ 54,466 59,576 $ 93,102
Long-term debt (including capital
leases and deferred lease income)....... $ 23,918 $ 1,393 $ 25,437 $ 902 $ 880 928 $ 3,469
Stockholders' (deficit) equity............ $ 6,308 $ 913 $ 6,500 $ 102 $ (1,811) $ (3,136) $ 6,751
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
Prospectus. 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
We acquired our first seven retail distribution locations in November 1992. We
expanded to 18 locations in four states by the end of fiscal 1996, to 23
locations in five states by the end of fiscal 1997, and to 27 locations in five
states by the end of fiscal 1998. In fiscal 1999, we closed 3 locations. As of
the date of this prospectus, we had 16 locations in operation.
13
For the last four years, we have concentrated on consolidating or closing
locations to improve operating efficiency and profitability. Location activity
for the last four years is summarized as follows:
- ---------------------------------------------------------------------------------------------------------------------
Fiscal Year Number of Locations at Number of Number of Number of Locations Number of Locations
Beginning of Year Locations Opened Locations Acquired Closed/Sold at End of Year
- ---------------------------------------------------------------------------------------------------------------------
2001 21 0 3 0 18
- ----------- ---------------------- ---------------- --------- -------------------- -------------------
2002 18 0 3 0 15
- ----------- ---------------------- ---------------- --------- -------------------- -------------------
2003 15 0 0 0 15
- ----------- ---------------------- ---------------- --------- -------------------- -------------------
2004 15 0 0 0 15
- ----------- ---------------------- ---------------- --------- -------------------- -------------------
2005 15 0 1 2 16
- ----------- ---------------------- ---------------- --------- -------------------- -------------------
2006 16 0 1 0 15
- ---------------------------------------------------------------------------------------------------------------------
In September 2004, we purchased Arizona Pacific Materials, LLC, which operates
two surface mines producing cinder and basalt aggregate to supply material for
block manufactures, concrete and asphalt suppliers and landscape contractors, in
the Phoenix and Flagstaff, Arizona building/construction markets.
During the third quarter of fiscal 2005 we finalized the sale of our Hayward
location in California.
During the second quarter of fiscal 2006 we closed our Santa Rosa location in
California.
We are evaluating additional locations closures or sales. In addition, in the
future we 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. Our results can be impacted by the timing of, and costs
incurred in connection with, new location openings and acquisitions as well as
the costs of closing existing locations.
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.
14
FISCAL YEAR ENDED JULY 31, 2005 COMPARED TO FISCAL YEAR ENDED JULY 31, 2004
We reported net revenues for fiscal 2005 of $117,222,000 compared with net
revenues of $115,516,000 for fiscal 2004. Stores opened longer than 12 months
showed an overall revenue increase of 1.5 percent from prior year revenue
reflecting a continued recovery in economic conditions. During 2005, there were
two locations purchased through the acquisition of Arizona Pacific Materials,
LLC, which accounted for $1,223,000 in sales during 2005, and one store closure.
Gross margin was 12.1 percent during fiscal 2005 which was slightly lower than
the 12.3 percent gross margin during fiscal 2004. The decrease in 2005, is due
to changes in sales mix. Inventory reserves and allowances were $3,914,000 and
$4,115,000 as of July 31, 2005 and 2004, respectively. We continue to focus our
sales efforts on specialty and niche lines.
Selling, general, and administrative expenses were $ 10,169,000 or 8.7 percent
of revenues for fiscal 2005 compared to $9,594,000 or 8.3 percent of sales for
fiscal 2004. The increase in selling, general, and administrative expenses
resulted from first year costs associated with the addition of a new subsidiary,
Arizona Pacific Materials, LLC, and its two locations in Arizona. Selling,
general and administrative costs of the Arizona subsidiary were $1,265,000 for
the year ended July 31, 2005.
Interest expense for fiscal 2005 was $3,146,000, up from $2,767,000 in fiscal
2004 due to a combination of a increase in overall interest rates and higher
inventory levels. We had an inventory floor plan and operating line of credit
facility through GE Commercial Distribution Finance ("GE"), fka Deutsche
Financial Services, which was paid off in June 2005. Management had used this
facility to allow us to take greater discounts and to lower overall interest
expense and to provide operating capital liquidity. In June 2005 we closed a new
$32 million senior credit facility with several institutional lenders. The
facility is comprised of $30 million of convertible debt (convertible into
shares of our common stock at $2.00 per share) payable over the next five years
and a $2 million six month bridge loan, both at a variable interest rate of
LIBOR plus 6%. The lenders were also granted Series A & B Warrants to purchase
approximately 8.5 million shares of our common stock at $1.75 per share. The
value of these warrants is $3,031,000 and is treated as debt discount to be
amortized over the life of the related debt. A portion of the proceeds from the
convertible debt was used to pay off the credit line with GE. The lenders also
have the option to lend an additional $7.5 million to us (within 18 months of
the date of the original debt) under the same terms as the existing five year
convertible debt, with Series C Warrants to be issued in connection with this
debt. If the Series C Warrants are exercised, we would issue additional warrants
to purchase 1,312,500 shares of our common stock at $1.75 per share. The value
of these warrants is $441,000 and is also treated as debt discount to be
amortized over 18 months. Included in interest expense for fiscal 2005 is
$387,000 of amortized debt discount related to the issuance of options and
warrants.
For fiscal 2005, we reported net income of $2,490,000 or $ 0.25 per share
(basic) compared with net income of $1,913,000 or $ 0.19 per share (basic) in
fiscal 2004. The increase in net income is primarily the reduction of a
valuation allowance of our deferred taxes of $1,500,000 offset by losses
incurred by our subsidiary Arizona Pacific Materials, LLC during its first year
as our subsidiary.
On September 15, 2004, we acquired Arizona Pacific Materials LLC, a basalt and
cinder mining company with operating mines in Phoenix and Flagstaff, Arizona.
The purchase price was $3 million of which $2.5 million was being carried by the
seller as a note from us with interest at 5% and an installment payment of
$2,000,000 plus accrued interest in 13 months from the date of purchase and the
balance of principal and accrued interest due 19 months from the date of
purchase. The $2.5 million note to the seller was paid in June 2005 out of the
proceeds from a new $32 million senior credit facility, as discussed above.
FISCAL YEAR ENDED JULY 31, 2004 COMPARED TO FISCAL YEAR ENDED JULY 31, 2003
We reported net revenues for fiscal 2004 of $115,516,000 compared with net
revenues of $102,396,000 for fiscal 2003. Stores opened longer than 12 months
showed an overall revenue increase of 12.8 percent from prior year revenue
reflecting a slight recovery in economic conditions. During 2004, there were no
new stores opened or additional store closures.
For fiscal 2004, we reported net income of $1,913,000 or $0.19 per share
compared with net income of $412,000 or $0.08 per share in fiscal 2003. The
increase in net income is primarily a result of increased sales and continued
efforts by management to minimize administrative expenses.
Gross margin was 12.3 percent during fiscal 2004 which was slightly lower than
the 13.2 percent gross margin during fiscal 2003. The decrease in 2004 was due
in part to management's continued successful efforts in reducing inventory
levels, particularly of older inventory which were sold at slightly lower prices
than those of the prior year. Also contributing to lower margins in 2004, are
changes in sales mix, which reflect a greater number of new and used equipment
sales transactions which traditionally carry lower margins, thus lowering the
weighted average gross margin percent. Inventory reserves and allowances are
slightly lower in 2004 ($4.1 million) than 2003 ($4.8 million) due to our
ability to sell off such older equipment as described above with very little
application of obsolescence reserves to the sales. We continue to focus our
sales efforts on specialty and niche lines.
15
Selling, general, and administrative expenses were $ 9,594,000 or 8.3 percent of
revenues for fiscal 2004 compared to $9,955,000 or 9.7 percent of sales for
fiscal 2003. The decrease in selling, general, and administrative expenses
resulted in part from the concentrated effort by management to reduce expenses
primarily in the area of payroll and payroll related costs.
Interest expense for fiscal 2004 was $2,767,000, down from $3,363,000 in fiscal
2003 due to a combination of a decrease in interest rates and lower inventory
levels. We had an inventory floor plan and operating line of credit facility
through GE Commercial Distribution Finance ("GE"), fka Deutsche Financial
Services. See Liquidity and Capital Resources below for a description of the
status of the GE facility. Management has used this facility to allow us to take
greater discounts and to lower overall interest expense and to provide operating
capital liquidity.
LIQUIDITY AND CAPITAL RESOURCES
Our primary needs for liquidity and capital resources are related to our
acquisition of inventory for sale and our rental fleet. Our primary source of
internal liquidity has been from our operations. As more fully described below,
our primary sources of external liquidity are equipment inventory floor plan
financing arrangements provided to us by the manufacturers of the products we
sell as well as our credit facility with GE more fully described below.
Under inventory floor planning arrangements the manufacturers of products sold
by us 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 October 31,
2005, we were indebted under manufacturer provided floor planning arrangements
in the aggregate amount of $25,980,000.
We had an inventory floor plan and operating line of credit with GE that expired
on December 31, 2001. Amounts were advanced against our assets, including
accounts receivable, parts, new equipment, rental fleet, and used equipment. The
agreement provided for a floating interest rate based on prime with rates
between 0.75% under prime to 2.25% over prime depending on the amount of our
total debt leverage. We used 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 our suppliers, to provide operating capital for further
growth. Borrowings were collateralized by our assets, including accounts
receivable, parts inventory, new and used equipment inventory and rental
equipment.
On June 21, 2002, we entered into a Forbearance Agreement with GE under the
terms of which GE raised the interest rate to prime plus 4% while we were in
default and required us to pay a $45,000 fee to GE for the forbearance. In
addition, under the terms of the Forbearance Agreement, we were required to meet
certain financial covenants and meet certain debt reduction schedules. On August
12, 2004, we entered into a Forbearance Agreement with GE, under the terms of
which GE lowered the interest rate to prime plus 1.75% and required us to pay
$25,000 fee to GE for the forbearance. In addition, under the terms of the
Forbearance Agreement, we were required to meet certain financial covenants and
meet certain debt reduction schedules. On April 1, 2005, we entered into a
Forbearance Agreement with GE, under the terms of which GE changed the interest
rate to prime plus 2.25% and required us to pay a $50,000 fee to GE for the
forbearance and $10,000 per week until May 31, 2005 or loan payoff, if sooner.
In June 2005 we closed a new $32 million senior credit facility with several
institutional lenders. The facility is comprised of $30 million of convertible
debt (convertible into shares of our common stock at $2.00 per share) payable
over the next five years and a $2 million six month bridge loan, both at a
variable interest rate of LIBOR plus 6%. The lenders were also granted Series A
& B Warrants to purchase approximately 8.5 million shares of our common stock at
$1.75 per share. The value of these warrants is $3,031,000 and is treated as
debt discount to be amortized over the life of the related debt. The lenders
also have the option to lend an additional $7.5 million (within 18 months of the
original debt) to us under the same terms as the existing five year convertible
debt, with Series C Warrants in connection with this debt. If the Series C
Warrants are exercised, we would issue additional warrants to purchase 1,312,500
shares of our common stock at $1.75 per share. The value of these warrants is
$441,000 and is also treated as debt discount to be amortized over 18 months.
We used $23.0 million of the loan proceeds to repay and terminate our credit
facility and forbearance agreement with GE Commercial Distribution Finance
Corporation and $2.5 million to pay off the purchase note of Arizona Pacific
Materials. The remainder of the proceeds will be used to support our near term
needs for working capital, general capital expenditures, including sufficient
working capital to initiate the build out of the Phoenix mining facilities and
other corporate requirements.
The Company's cash and cash equivalents was approximately $1,013,000 as of
October 31, 2005. During the three months ended October 31, 2005 the Company had
negative cash flow from operating activities during the year 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
16
a 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 and increased floor plan financing by
$1,424,000 during the three month period ending October 31, 2005.
On July 31, 2005, cash and cash equivalents were $855,000. We had negative cash
flow from operating activities during the year of $2,215,000. Our cash flow from
operating activities consisted primarily of an decrease in accounts receivable
of $1,197,000, an increase of accounts payable of $2,463,000, depreciation of
$5,332,000, offset by an increase in inventories of $19,816,000, an increase in
floor plan financing of $9,997,000 and the provision for deferred income taxes
of 1,500,000. Purchases of fixed assets during the period were related mainly to
the ongoing replacement of aged operating assets. We paid down our short-term
financing by $31,710,000, closed a $30,000,000 convertible debenture and a
$2,000,000 bridge loan and increased our long term borrowings, net of
repayments, by $687,000.
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.
INVENTORY; EFFECTS OF INFLATION AND INTEREST RATES; GENERAL ECONOMIC CONDITIONS
Controlling inventory is a key ingredient to the success of an equipment
distributor because the equipment is characterized by long order cycles,
high-ticket prices, and the related exposure to "flooring" interest. Our
interest expense may increase if inventory is too high or interest rates rise.
We manage our inventory through company-wide information and inventory sharing
systems wherein all locations have access to our entire inventory. In addition,
we closely monitor inventory turnover by product categories and places equipment
orders based upon targeted turn ratios.
All of the products and services we provide are either capital equipment or
included in capital equipment, which are used in the construction, industrial,
and agricultural sectors. Accordingly, our 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 us. In
addition, although agricultural equipment sales are less than 2% of our total
revenues, factors adversely affecting the farming and commodity markets also can
adversely affect our agricultural equipment related business.
Our business can also be affected by general economic conditions in our
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 our business.
Although the principal products sold, rented, and serviced by us are
manufactured by Case, we also sell, rent and service equipment and sell related
parts (e.g., tires, trailers, and compaction equipment) manufactured by others.
Approximately 51% of our net sales for the twelve-months ended July 31, 2005
resulted from sales, rental, and servicing of products manufactured by companies
other than Case. That compares with a figure of 53% for the fiscal year ended
July 31, 2004. 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 us, offer various levels of supplies and marketing support along
with purchase terms which vary from cash upon delivery to interest-free,
12-month flooring.
We purchase our 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 twelve-months ended July 31, 2005 or the three months ended
October 31, 2005. While maintaining our commitment to Case to primarily purchase
Case Equipment and parts as an authorized Case dealer, we plan to expand the
number of products and increase the aggregate dollar value of those products
which we purchase 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 our sales and
profitability. Market specific factors could also adversely affect one or more
of our target markets and/or products. We expect the construction equipment
market in our store locations to remain flat or slightly down over the next 6 to
12 months.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
Our significant accounting policies are described in Note 1 to our financial
statements for the year ended July 31, 2005 and Note 1 of our financial
statements for the three months ended October 31, 2005, which are included in
this prospectus. Our financial statements and accompanying notes are prepared in
accordance with U.S. GAAP. Preparing financial statements requires management to
make certain estimates and assumptions that affect the reported amounts of
assets, liabilities, revenue and expenses. These estimates and assumptions are
affected by management's application of accounting policies.
17
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. 142, "Accounting for Goodwill
and other Intangibles." We continually review goodwill and other intangibles to
evaluate whether events or changes have occurred that would suggest an
impairment.
Also in accordance with Statement of Financial Accounting Standards No. 144,
"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.
Some amount of judgment is required to assess the ultimate realization of
receivables, including assessing the probability of collection and the current
credit worthiness of our clients. Probability of collection is based upon the
assessment of the client's financial condition through review of its current
financial statements and/or credit reports. The 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.
OFF-BALANCE SHEET ARRANGEMENTS
Our off-balance sheet arrangements are principally lease arrangements associated
with the retail stores and the corporate office.
CONTRACTUAL OBLIGATIONS AND COMMERCIAL COMMITMENTS
Our significant contractual obligations as of October 31, 2005 are for debt and
operating leases. Debt by year of maturity and future rental payments under
operating lease agreements are presented below. We have not engaged in
off-balance sheet financing, commodity contract trading or significant related
party transactions.
Contractual Less than More than
Obligations Total 1 Year 1-3 Years 3-5 Years 5 Years
LT Debt $ 822,119 $ 207,076 $ 346,736 $ 268,307 $ --
Related Party Debt 500,000 200,000 200,000 100,000 --
Convertible Debt 30,000,000 5,555,555 13,333,333 11,111,112 --
Capital Lease 846,660 50,338 121,025 146,696 528,601
Employment Contract
Obligations 1,228,258 1,228,258 -- -- --
Operating Lease 4,670,760 1,255,089 1,626,819 728,852 1,060,000
Purchase 25,980,000 25,980,000 -- -- --
Total $64,047,797 $34,476,316 $15,627,913 $12,354,967 $1,588,601
As of October 31, 2005, our obligations included approximately $497,000 in
various state sales taxes.
Our management believes that these commitments will be satisfied with current
operating cash flow.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We are 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
18
but do impact future earnings and cash flows, assuming other factors are held
constant. At October 31, 2005, we had variable rate floor plan payables, notes
payable, 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. Our policy is not to enter into derivatives or other
financial instruments for trading or speculative purposes.
19
BUSINESS
GENERAL
We are 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 and certain other
manufacturers. We believe, 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 us
include backhoes, excavators, crawler dozers, skid steer loaders, forklifts,
compactors, log loaders, trenchers, street sweepers, sewer vacuums, and mobile
highway signs.
We operate out of facilities located in the states of Washington, Oregon,
Nevada, California, and Alaska. The equipment that we distribute 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.
Our strategy had focused on acquiring additional existing distributorships and
rental operations, opening new locations as market conditions warrant, and
increasing sales at our existing locations. In connection therewith, we 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 four years, we have
concentrated on consolidating or closing certain of our stores to improve
operating efficiency and profitability. See "Business Strategy".
Our company also owns a subsidiary, Arizona Pacific Materials, LLC, which
operates two surface mines producing cinder and basalt aggregate to supply
material for block manufactures, concrete and asphalt suppliers and landscape
contractors, in the Phoenix and Flagstaff, Arizona building/construction
markets.
HISTORY
We commenced business in November 1992 with the acquisition from Case of seven
retail distribution facilities located in Oregon and Washington. We became a
subsidiary of American United Global, Inc. ("AUGI"), simultaneous with such
acquisition. Until recently, AUGI held 12.0 percent of the outstanding shares of
our common stock. On September 23, 2005, AUGI sold all its shares of our common
stock to certain purchasers identified in this prospectus.
In September 1994 and February 1996, in two different transactions, we acquired
four retail construction equipment locations located in California and Nevada
from Case. In addition, in June 1996 and January 1997, we 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, we also opened nine new locations in the states
served by the existing locations, ending fiscal year 1997 with 23 locations.
In fiscal 1998, we acquired four additional facilities located in California and
Alaska. The previous Alaska facility was discontinued as it was combined with
the new Alaska facility. In fiscal 1998 we opened one new location in
Washington. On December 11, 1997, we acquired substantially all of the operating
assets used by Case in connection with our business of servicing and
distributing Case agricultural equipment at a facility located in Yuba City,
California.
On April 30, 1998, we 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, we closed three of our smaller facilities and began servicing
the territories served by these small locations by larger facilities in the
region.
We consolidated four facilities in the first quarter of fiscal 2000 into certain
larger locations in each region. One location in Washington was sold during the
third quarter of fiscal 2000 while two temporary locations were established in
Southern California. The closures were intended to increase efficiencies and
reduce costs. The two locations in California were established in an effort to
assist Case Corporation in a dealership transition for Southern California. We
consolidated one location in Washington during the first quarter of fiscal 2001
and sold the two locations in Southern California in the third quarter of fiscal
2001.
During fiscal 2002, we closed/sold 3 locations resulting in 15 locations at the
end of fiscal 2002. There were no location closures and no new locations opened
in fiscal 2003 and 2004.
20
In September 2004, we purchased Arizona Pacific Materials, LLC, which operates
two surface mines producing cinder and basalt aggregate to supply material for
block manufactures, concrete and asphalt suppliers and landscape contractors, in
the Phoenix and Flagstaff, Arizona building/construction markets.
In February 2005 we finalized the sale of our Hayward branch in California.
In December 2005 we closed our Santa Rosa branch in California.
Our principal executive offices are located at 6407-B N.E. 117th Avenue,
Vancouver, Washington 98662. Our main telephone number is (360) 253-2346.
Inquiries may also be sent to us at the above address for sales and general
information. We currently maintain a website at www.westernpower.com.
Information contained on our Internet site is not incorporated by reference into
this prospectus and you should not consider information contained on our
Internet site to be part of this prospectus.
BUSINESS STRATEGY
Our strategy is to streamline our operations and close or consolidate locations
and to increase efficiency and profitability. We are concentrating our efforts
on reducing costs and increasing sales and margins so that all of our operations
can be profitable. We have selectively pared down our product offerings to
reduce inventory carrying costs and to improve turnover in the remaining product
lines that we offer.
Our business strategy includes efforts to expand sales at our existing
locations. We will continue to seek to improve our product line and generate
incremental sales increases by adding equipment and parts produced by
manufacturers other than Case, where appropriate. We will also seek to increase
sales of parts and service, both of which have considerably higher margins than
equipment sales.
Our business strategy had previously focused on acquiring additional existing
distributorships and rental operations, opening new locations, and increasing
sales at our existing locations. We have reduced our acquisition activity in
fiscal years 1999 through 2002 due to market conditions. When market conditions
improve and opportunities arise, we intend 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 we 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 which we sell, rent and service 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, we are an authorized Case
dealer for sales of equipment and related parts and services at locations in
Oregon, Washington, Nevada, northern California, and Alaska. 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 us 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 Case's established history of dealer relationships and industry practice,
we do 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 our agreement to act as dealer, Case supplies us
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
our sales of Case products, and access to Case floor plan financing for
Equipment purchases. Such floor planning arrangement currently provides us with
interest free credit terms on new equipment purchases ranging from one to six
months, depending upon the
21
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 us
or six months after the date of shipment to us by Case.
OTHER PRODUCTS
Although the principal products sold, rented, and serviced by us are
manufactured by Case, we also sell, rent and service equipment and sell related
parts (e.g., tires, trailers, and compaction equipment) manufactured by others.
Approximately 51% and 47% of our net sales for fiscal year 2005 and fiscal 2004,
respectively, resulted from sales, rental, and servicing of products
manufactured by companies other than Case. Manufacturers other than Case
represented by us offer various levels of supplies and marketing support along
with purchase terms which vary from cash upon delivery to interest-free,
12-month flooring.
Our distribution business is divided into three general categories of activity:
(i) equipment sales, (ii) equipment rentals, and (iii) product support.
Our wholly owned subsidiary, Arizona Pacific Materials, LLC, operates two
surface mines producing cinder and basalt aggregate to supply material for block
manufactures, concrete and asphalt suppliers and landscape contractors, in the
Phoenix and Flagstaff, Arizona building/construction markets.
EQUIPMENT SALES
At each of our distribution outlets we maintain a fleet of various new and used
equipment for sale. The equipment purchased for each outlet is selected by our
marketing staff based upon the types of customers in the geographical areas
surrounding each outlet, historical purchases as well as anticipated trends.
We provide 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.
We also sell used equipment that has been reconditioned in our own service
shops. We generally obtain 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, our used equipment is generally sold "as is"
and without a warranty.
EQUIPMENT RENTAL
We maintain a separate fleet of equipment that we hold solely for rental. This
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, we add new equipment to
the rental fleet as needed. The rental charges vary, with different rates for
different types of equipment rented. In October 1998, we opened our first
rental-only location, in the Seattle, Washington area, under the name Western
Power Rents. This location was consolidated with our Auburn, Washington location
in August 2000. Rentals have decreased to 3% of revenue in fiscal year 2005 from
5% of revenue in fiscal year 2004.
PRODUCT SUPPORT
We operate 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 us. We employ approximately 80
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 us. We have expanded this
business by hiring additional personnel and developing extended warranty
contracts to be purchased by customers for equipment sold and serviced by us,
and we are independently marketing such contracts to our customers. We service
items and types of equipment that include those that are neither sold by us nor
manufactured by Case.
We purchase parts for use in our 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. We employ one or more
persons who take orders from customers for parts purchases at each retail
distribution outlet. We provide only the standard manufacturer's warranty on the
parts that we sell, which is generally a 90-day replacement guaranty.
MINING
Through our wholly owned subsidiary, Arizona Pacific Materials, LLC, we operate
two surface mines producing cinder and basalt aggregate to supply material for
block manufacturers, concrete and asphalt suppliers and landscape contractors,
in the Phoenix and Flagstaff, Arizona building/construction markets.
22
SALES AND MARKETING
Our 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. We estimate that
we have approximately 19,000 customers, with most being small business owners,
none of which accounted for more than 3% of our total sales in the fiscal year
ended July 31, 2003.
For fiscal years 2005, 2004, and 2003, the revenue breakdown by source for the
business operated by our company were approximately as follows:
----------------------------- --------- --------- ---------
FY 2005 FY 2004 FY 2003
----------------------------- --------- --------- ---------
Equipment Sales 72% 70% 70%
----------------------------- --------- --------- ---------
Equipment Rental 3% 5% 5%
----------------------------- --------- --------- ---------
Product Support 24% 25% 25%
----------------------------- --------- --------- ---------
Mining 1% 0% 0%
----------------------------- --------- --------- ---------
Total 100% 100% 100%
----------------------------- --------- --------- ---------
We advertise our products in trade publications and appear at trade shows
throughout our territories. We also encourage our salespersons to visit customer
sites and offer equipment demonstrations when requested.
Our sales and marketing activities do not result in any significant backlog of
orders. Although we accept orders from customers for future delivery following
manufacture by Case or other manufacturers, during fiscal 2003 a majority of our
sales revenues resulted from products sold directly out of inventory, or the
providing of services upon customer request.
We employed approximately 35 equipment salespersons on October 31, 2005. All of
our sales personnel are employees of Western Power, and all are under the
general supervision of C. Dean McLain, our president. 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.
As of the date hereof, we employed 1 product support salesperson who sells
Western Power parts and repair services to customers in assigned territories. We
have no independent distributors or non-employee sales representatives.
SUPPLIERS
We purchase our 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 2004 and 2005. While maintaining our commitment to Case
to primarily purchase Case Equipment and parts as an authorized Case dealer, we
plan to expand the number of products and increase the aggregate dollar value of
those products which we purchase from manufacturers other than Case in the
future.
COMPETITION
We compete 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. We believe that we are 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 us.
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 us. 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.
We are 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 we are 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 we operate. In order to maintain and
improve our competitive position, revenues and profit margins, we plan to
increase our sales of products produced by companies other than Case.
23
ENVIRONMENTAL STANDARDS AND GOVERNMENT REGULATION
Our operations are subject to numerous rules and regulations at the federal,
state, and local levels. These regulations are designed to protect the
environment and to regulate the discharge of materials into the environment.
Based upon current laws and regulations, we believe that our policies,
practices, and procedures are properly designed to prevent unreasonable risk of
environmental damage and the resulting financial liability to us. No assurance
can be given that future changes in such laws, regulations, or interpretations
thereof, changes in the nature of our operations, or the effects of former
occupants' past activities at the various sites at which we operate, will not
have an adverse impact on our operations.
We are subject to federal environmental standards because in connection with our
operations we handle and dispose of hazardous materials, and discharge sewer
water in our equipment rental and servicing operations. Our internal staff is
trained to keep appropriate records with respect to our 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
As of January 3, 2006, we employed 241 full-time employees. Of that number, 17
are in corporate administration, 23 are involved in administration at our branch
locations, 58 are employed in equipment sales and rental, 17 are employed in
mining operations and 126 are employed in product support. As of January 3,
2006, approximately 13 of our 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, 2010. We believe
that our relations with our employees are generally satisfactory."
INSURANCE
We currently have general, product liability, and umbrella insurance policies
covering us with limits, terms, and conditions which we believe 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 our business, results of operations, and
financial condition.
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 our entry
into new markets; the success of our expansion of our equipment rental business;
rental industry conditions and competitors; competitive pricing; our
relationship with our suppliers; relations with our employees; our ability to
manage our 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.
24
PROPERTIES
The following table sets forth information as to each of the properties which we
own or lease (all of which are retail sales, rental, service, storage, and
repair facilities except as otherwise noted) at October 31, 2005.
Expiration Annual Size/Square Purchase
Location and Use Lessor Date Rental Feet Options
- ---------------- ------ ---- ------ ---- -------
1745 N.E. Columbia Blvd. Carlton O. Fisher, CNJ 12/31/2010 $84,000(1) Approx. 4 acres; No
Portland, Oregon 97211 Enterprises building 17,622 sq. ft.
1665 Silverton Road, N.E. LaNoel Elston Myers 07/31/2009 $37,200(1) Approx. 1 acre; building No
Salem, Oregon 97303 Living Trust 14,860 sq. ft.
West 7916 Sunset Hwy. U.S. Bank 09/30/2008(4) $64,800(1) Approx. 5 acres; No
Spokane, Washington 99204 building 19,200 sq. ft.
15111 Smokey Point Blvd Woody & Carol Wells 11/30/2009 $57,650(1) Approx. 2.1 acres; No
Marysville, Washington 98271 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 $204,000(1) 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 09/30/2007 $276,000(2) Approx. 5 acres; No
Sparks, Nevada 89431 Company, LLC (3) building 22,475 sq. ft.
3540 D Regional Parkway Soiland Month to Month $63,450(1) Approx. 1.25 acres; No
Santa Rosa, California 95403 building 5,140 sq. ft.
1751 Bell Avenue McLain-Rubin Realty 09/30/2007 $228,000(2) Approx. 8 acres; No
Sacramento, California 95838 Company, LLC (3) building 35,940 sq. ft.
8271 Commonwealth Avenue M.E. Robinson & 03/31/2007 $97,536 N/A No
Buena Park, CA 90621-2537 Lois Robinson
2535 Ellis Street Hart Enterprises 04/30/2006 $33,600 Approx. 2 acres; Yes
Redding, California 96001 building 6,200 sq. ft.
1041 S Pershing Ave Raymond Investment Corp 03/14/2006 $50,758 Approx. .5 acres; Yes
Stockton, CA 95206 building 1,794 sq. ft.
723 15th Street Mark Flerchinger Month to Month $20,400 Approx. 1.2 acres; Yes
Clarkston, Washington 99403 building 3,750 sq. ft.
25
Expiration Annual Size/Square Purchase
Location and Use Lessor Date Rental Feet Options
- ---------------- ------ ---- ------ ---- -------
2020 E. Third Avenue ROM Holdings 11/30/2014 $108,000 Approx. 4 acres; No
Anchorage, Alaska 99501 building 15,650 sq. ft.
3511 International Street Ed Maynard 11/30/2009 $78,000 Approx. 1.5 acres; No
Fairbanks, Alaska 99701 building 8,500 sq. ft.
9390 E Hiller Rd Owned N/A N/A Approx. 74 acres N/A
Phoenix, AZ 85232
State of Arizona (5) 10/20/07 $3,200 Approx. 80 acres No
4999 E Empire Unit A Sister's Cinders 11/30/07 Based upon minerals Approx. 800 acres No
Flagstaff, AZ 86004 sold, minimum
$25,000 per year
1 Net lease with payment of insurance, property taxes, and maintenance costs
paid by us.
2 Net lease with payment of insurance, property taxes and maintenance costs,
including structural repairs, paid by us.
3 Related party lease.
4 Renewal in process.
5 Own the mineral rights while the State of Arizona owns the surface rights.
Our operating facilities at October 31, 2005 were separated into 1) six "hub"
outlets and eight "sub-stores" and 2) one subsidiary with two locations. In
addition, we maintain our headquarter operations in Vancouver, Washington. The
hub stores are the main distribution centers located in Auburn and Spokane,
Washington; Portland, Oregon; Sparks, Nevada; Hayward, Sacramento, California;
and Anchorage, Alaska; and the sub-stores are the smaller facilities located in
Mukilteo and Clarkston, Washington; Salem, Oregon; Santa Rosa, Buena Park,
Stockton, and Redding, California; and Fairbanks, Alaska.
Arizona Pacific Materials, LLC, our wholly owned subsidiary, operates mines in
the Phoenix and Flagstaff, Arizona under royalty agreements which require
payments based upon the number of tons of product processed and sold each month.
The Flagstaff royalty agreement has a minimum payment of $25,000 per year.
All of the leased and owned facilities that we use are believed to be adequate
in all material respects for the needs of our current and anticipated business
operations.
LEGAL PROCEEDINGS
We are involved in various legal proceedings from time to time which are
incidental to the industry and for which certain matters are covered in whole or
in part by insurance or, otherwise, we have recorded accruals for estimated
settlements. Management believes that any liability which may result from these
proceedings will not have a material adverse effect on our business, results of
operations, and financial condition. As of the date of this prospectus, there
are no material ongoing proceedings that we are involved in.
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE
We engaged Moss Adams LLP as our 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, we 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 our financial statements, or on any matter that was either
the subject of a disagreement or a reportable event.
Our Board of Directors, upon recommendation of our Audit Committee, dismissed
our independent accountants, Moss Adams LLP on December 11, 2002. The report of
Moss Adams LLP on our consolidated financial statements as of July 31, 2002 and
for the year then ended contained no adverse opinions or disclaimer of opinion
and were not otherwise qualified or modified as to uncertainty, audit scope, or
accounting principle, except that the report of Moss Adams LLP for the fiscal
year ended July 31, 2002 contained an explanatory paragraph expressing
substantial doubt regarding our ability to continue as a going concern. In
connection with its audit of our consolidated financial statements as of July
31, 2002 we were not in agreement with Moss Adams LLP with respect to the
valuation of inventories and the recognition of impairments related to fixed
assets and goodwill. Those disagreements were resolved
26
by us by recording adjustments in the fourth quarter of fiscal 2002, which
reduced operating earnings by approximately $7.3 million in the quarter. We also
inadvertently filed our annual report on Form 10-K for the year ended July 31,
2002 prior to receiving written consent from Moss Adams LLP. We subsequently
modified our annual report to include all required forms and Moss Adams LLP's
written consent.
We engaged Grassi & Co., CPAs, P.C. as our new independent accountants as of
December 13, 2002. We had previously engaged Moss Adams LLP on December 6, 2001.
During the two fiscal years and the subsequent interim period prior to the
engagement of Grassi & Co., CPAs, P.C. on December 13, 2002, Western Power &
Equipment Corp. did not consult with Grassi & Co., CPAs, P.C. regarding the
application of accounting principles to any specific transaction, either
completed or proposed; or 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.
On May 1, 2003, we dismissed Grassi & Co., CPA's, P.C. as our independent
certified public accountants. Grassi did not issue any reports on our financial
statements during its tenure as our independent certified public accountants.
Grassi was previously engaged as our independent certified public accountants on
December 13, 2002. From December 13, 2002 through and including May 1, 2003,
there were no disagreements with the former accountant on any matter of
accounting principles or practices, financial statement disclosure, or auditing
scope or procedure, which disagreements if not resolved to their satisfaction
would have caused them to make reference in connection with their opinion to the
subject matter of the disagreement.
On May 1, 2003, upon receipt of approval of the audit committee of our Board of
Directors, we engaged Marcum & Kliegman LLP to serve as our independent
certified public accountants. During our two most recent fiscal years, and
during any subsequent period through May 1, 2003, we did not consult with Marcum
& Kliegman LLP on any accounting or auditing issues.
27
MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
Set forth below is certain information regarding the directors and executive
officers of Western Power.
Name Age Title
C. Dean McLain 51 President, Chief Executive Officer and Chairman of
the Board of Directors
Mark J. Wright 49 Chief Financial Officer
Michael Metter 54 Director
Steven Moskowitz 41 Director
James Fisher 69 Director
Directors are elected to one-year terms.
C. DEAN MCLAIN. Mr. McLain has served as our President, Chief Executive Officer,
and a director 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 American United Global, Inc.
(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.
MARK J. WRIGHT. Mr. Wright has served as our Chief Financial Officer since
February 1997. From October 1992 through January 1997, Mr. Wright was employed
in a private law practice. Mr. Wright was employed as the Corporate Treasurer by
Lattice Semiconductor Corporation, a semiconductor company, from 1988 to 1992.
Mr. Wright has been admitted to the Oregon State Bar since 1992 and holds a
Masters of Business Administration degree from the Marriott School of Management
at Brigham Young University.
MICHAEL METTER. Mr. Metter has served as director since February 11, 2003. Since
April 2001, Mr. Metter has been the President of RME International, Ltd. (RME).
Mr. Metter also currently consults to a broad range of businesses, including IT
communications and media businesses, on mergers, acquisitions, restructuring,
financing and other matters. From October 1998 to February 2001, Mr. Metter was
a principal of Security Capital Trading, Inc., and was a principal at Madison
Capital from September 1997 to October 1998. Prior thereto, Mr. Metter was
President of First Cambridge Securities from October 1994 to August 1997.
Effective with a merger of a division of R.M. Enterprises International, Ltd
into Azurel, Ltd., in October 2002, Mr. Metter became President and COO of
Azurel. He resigned as President in February 2003 and subsequently resigned the
position of COO which he held from February 2003 until June 28, 2003. Mr. Metter
is also President and CEO of BusinessTalkRadio.net (a private company). BTR is a
syndicated radio network based in Greenwich, Connecticut. He has held this
position since June 2002. He is also chairman of Tiburon Capital Group, a
privately held holding corporation.
STEVEN MOSKOWITZ. Mr. Moskowitz has served as director since February 11, 2003.
Since 1997, Mr. Moskowitz has been the Vice-President of Business Development
for H.W. Carter and Sons. Prior thereto, Mr. Moskowitz was Division President of
Evolutions. Mr. Moskowitz is currently a director and secretary for Spongetech.
He previously served as the CEO and a director of Azurel, Ltd from October 2002
through September 2003 and President form May 2004 to July 2004. He has been the
CEO of Azurel, Ltd since July 2005. Mr. Moskowitz also is currently an
independent director for R.M. Enterprises International, Ltd. He is also
Executive Vice President of Tiburon Capital Group, a privately held holding
corporation.
JAMES FISHER. Mr. Fisher was elected to the board of directors effective
November 1, 2004. Mr. Fisher has been an insurance agent and broker as well as a
registered representative holding a Series 7 securities license and was an
insurance broker representing CIGA, UNUM, and Metropolitan Life, among others.
He retired in 1994, when he also resigned from the board of directors of Fleet
Bank of New York.
AUDIT COMMITTEE FINANCIAL EXPERT
Our board of directors has determined that at least two audit committee
financial experts are serving on our audit committee. Mr. Metter and Mr. Fisher
are financial experts and are independent as that term is used in Item
7(d)(3)(iv) of Schedule 14A under the Securities Exchange Act of 1934, as
amended (the "Exchange Act").
CODE OF ETHICS
We have adopted a code of ethics that applies to our chief executive officer and
chief financial
28
officer and other key financial personnel. The code of ethics can be viewed at
our website, www.westernpower.com. We intend to satisfy the disclosure
requirements under item 5.05 of Form 8-K regarding an amendment to, or a waiver
from, a provision of our code of ethics by putting such information on our
Internet website.
EXECUTIVE COMPENSATION
The following table sets forth certain information regarding compensation paid
by Western Power during each of the last three fiscal years to our Chief
Executive Officer and to each of our executive officers who were paid in excess
of $100,000 ("Named Officers").
SUMMARY COMPENSATION TABLE
Long-Term Compensation
Annual Compensation Awards
-------------------------- -------------------------------------
Other Annual Number of All Other
Name and Principal Position Year Salary Bonus Compensation Options Compensation
- --------------------------- ------ -------- -------- ------------ ------- ------------
C. Dean McLain 2005 $423,376 $257,950 $ 1,482 -- --
President, CEO, Chairman 2004 $424,805 $189,491 $ -- -- --
of the Board(1) 2003 $399,633 $ 15,000 $ -- -- $415,413
Mark J. Wright 2005 $189,976 $140,705 $ 9,000 -- --
Vice President of Finance 2004 $190,618 $ 10,000 $ 9,000 -- --
and CFO 2003 $208,255 $ 75,000 $ -- -- --
(1) Mr. McLain joined our company in March 1993, when he became our 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 our 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 increased 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 our 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. On May 1, 2003 Mr. McLain agreed to convert the principal amount
of a loan made to our company in the amount of $73,500 into shares of
our common stock. In connection therewith Mr. McLain received
2,769,419 shares of our common stock resulting in a compensation
charge to our company in the amount of $415,413.
EMPLOYMENT, CONSULTING AND INCENTIVE COMPENSATION AGREEMENTS
Upon completion of our 1995 initial public offering, we entered into an
employment agreement with Mr. Rubin, a stockholder of our company, effective as
of June 13, 1995, that expired July 31, 1998. Pursuant to this agreement, Mr.
Rubin served as our Chairman and received an annual base salary of $150,000 plus
bonuses if certain conditions were met. Effective August 1, 1998, we 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 us.
He received an annual fee of $200,000 plus all authorized business expenses. We
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 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 our company 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 $30,000 bonus during
our 2003 fiscal year and a $281,409 bonus for our 2004 fiscal year. In addition,
Mr. McLain receives the use of vehicles at our expense and certain other fringe
benefits not exceeding $50,000 per year.
29
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The Compensation Committee consists of Mr. Moskowitz and Mr. Metter. There are
no interlocking relationships, as described by the Securities and Exchange
Commission, between the Compensation Committee members. Mr. McLain, the Chairman
of our Board of Directors since August 1998, as well as our President and CEO,
and Mr. Rubin, currently a stockholder and consultant to Western Power,
participated in all discussions and decisions regarding salaries and incentive
compensation for all employees and consultants to us, except that they were each
excluded from discussions regarding their own salary.
DIRECTORS' COMPENSATION
Each director, not otherwise a full-time employee of our company, is eligible to
receive $2,000 per quarter, together with reimbursement of their reasonable
expenses incurred on our behalf.
30
STOCK PERFORMANCE GRAPH
The chart below provides an indicator of cumulative total return on our common
stock as compared with the Nasdaq Stock Market Index and the S&P Industrial
Machinery Index during the period from the beginning of fiscal 2000 through the
end of fiscal 2005. The chart shows the value, at the end of each fiscal year,
or $100 invested in our common stock or the indices on August 1, 2000 and
assumes reinvestment of all dividends. The chart depicts the change in the value
of our common stock relative to the noted indices as of the end of each fiscal
year and not for any interim period. Historical stock price performance is not
necessarily indicative of future stock performance.
Western Power & Equipment Corp. & Subsidiary - Stock Performance Chart
Western Power S&P Industrial Nasdaq
Measurement Period Closing Price* WPEC Machinery Index Index
- --------------------------------------------------------------------------------
July 31, 2000........ 5.00 100.00 100.00 100.00
July 31, 2001........ 0.46 9.20 109.41 56.60
July 31, 2002........ 0.22 4.40 110.01 37.29
July 31, 2003........ 0.16 3.20 129.06 39.05
July 31, 2004........ 0.30 6.00 167.29 44.24
July 31, 2005........ 1.80 36.00 181.29 48.31
Amount invested...... 100.00
* all figures are closing prices.
31
PRINCIPAL STOCKHOLDERS
The following table sets forth certain information, as of the date hereof, with
respect to the beneficial ownership of our common stock by each: (i) holder of
more than five percent (5%) of the outstanding shares of our common stock; (ii)
our officers and directors; and (iii) all our officers and directors as a group.
Our outstanding voting securities at the close of business on the date of this
prospectus, consisted of 10,180,000 shares of common stock, $.001 par value (the
"Common Stock"). Unless otherwise indicated, the address of each of the named
persons is care of Western Power & Equipment Corp., 6407-B NE 117th Avenue,
Vancouver, WA 98662.
SHARES BENEFICIALLY PERCENTAGE
NAME AND ADDRESS OWNED (1) BENEFICIALLY OWNED
C. Dean McLain (2)(6)(7) 2,257,419 20.7%
Robert M. Rubin (3)(4) 750,000 6.9%
The Rubin Family Irrevocable
Stock Trust (4)(6) 4,169,419 38.0%
Mark J. Wright (5) 200,000 1.9%
Steven Moskowitz (8) 150,000 1.5%
Michael Metter (9) 150,000 1.5%
James Fisher (10) 100,000 1.0%
JSC, LLC (7)
38207 NE Gerber Rd.
Yacolt, WA 98675 588,000 5.8%
SLM Stock Trust
6400 Rally Road
Amarillo, TX 79119 900,000 8.8%
CPW Stock Trust
800 NW 22nd Ave
Battle Ground, WA 98604 900,000 8.8%
Potomac Capital Management, LLC
Potomac Capital Management, Inc.
Paul J. Solit
153 East 53rd Street, 26th Floor
New York, NY 10022 (11) 702,200 6.9%
All officers and directors as a group
(5 persons) (2)(5)(6)(7)(8)(9)(10) 2,857,419 24.9%
* less than one percent
(1) Unless otherwise indicated, we believe that all persons named in the table
have sole voting and investment power with respect to all shares of our 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) Includes Mr. McLain's ownership of exercisable options to acquire 500,000
shares of our common stock. Includes Mr. McLain's 50% (200,000) beneficial
ownership of exercisable options granted to McLain-Rubin Realty to acquire
400,000 shares of our common stock.
32
(3) Includes Mr. Rubin's ownership of options to acquire 500,000 shares of our
common stock. Includes Mr. Rubin's 50% (200,000) beneficial ownership of options
granted to McLain-Rubin Realty to acquire 400,000 shares of our common stock.
Excludes the shares of our common stock held by the Rubin Family Irrevocable
Stock Trust (the "Trust").
(4) Includes 150,000 shares of common stock issuable upon the exercise of
options. Mr. Rubin, a grantor of the Trust, does not have sole or shared voting
or dispositive power over the shares of our common stock held by the Trust, and
disclaims any beneficial ownership of the shares of our common stock held by the
Trust.
(5) Consists of options to purchase 200,000 shares of our common stock.
(6) On May 1, 2003, Mr. McLain and the Rubin Family Irrevocable Stock Trust
agreed to convert the principal amount of a loan made to Western Power in the
amount of $147,000 into an aggregate of 5,538,838 shares of our common stock, as
a result of which Mr. McLain and the Rubin Family Irrevocable Stock Trust each
received 2,769,419 shares of our common stock. Mr. McLain subsequently
transferred 900,000 of these shares to each of SLM Stock Trust and CPW Stock
Trust, entities in which he has no beneficial interest and over which he
exercises no control.
(7) A trust controlled by Mr. McLain is the sole member of JSC LLC.
(8) Consists of 150,000 shares of common stock issuable upon the exercise of
options.
(9) Consists of 150,000 shares of common stock issuable upon the exercise of
options.
(10) Consists of 100,000 shares of common stock issuable upon the exercise of
options.
(11) Potomac Capital Partners LP, a private investment partnership formed under
the laws of State of Delaware, beneficially owns 307,400 shares of our common
stock. Potomac Capital Management LLC is the General Partner of Potomac Capital
Partners LP. Mr. Paul J. Solit is the Managing Member of Potomac Capital
Management LLC.
Potomac Capital International Ltd., an international business company formed
under the laws of the British Virgin Islands, beneficially owns 187,800 shares
of our common stock. Potomac Capital Management Inc. is the Investment Manager
of Potomac Capital International Ltd. Paul J. Solit is the President and sole
owner of Potomac Capital Management Inc., and a Director of Potomac Capital
International Ltd.
Pleiades Investment Partners-R, LP, a private investment partnership formed
under the laws of the State of Delaware, beneficially owns 207,000 shares of our
common stock. Potomac Capital Management Inc. is the Investment Manager of a
managed account of Pleiades Investment Partners-R, LP. Paul J. Solit is the
President and sole owner of Potomac Capital Management Inc.
According to a Schedule 13G filed September 29, 2005, Potomac Capital Management
LLC, Potomac Capital Management, Inc. and Paul J. Solit have entered into a
joint filing agreement with respect to the shares of our common stock whose
ownership is reported above.
33
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, our
chief executive officer and chairman of our board of directors and Robert M.
Rubin, our former chairman of our board of directors and a significant
stockholder. Simultaneous with its acquisition of the Sacramento Operation real
property and improvements, MRR leased such real property and improvements to us
under the terms of a 20-year commercial lease agreement dated March 1, 1996 with
Western Power paying an initial annual rate of $168,000. As of October 1, 2000,
we entered into a renegotiated 7-year lease with an initial annual rate of
$228,000. In addition to base rent, we are 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 our
Sparks, Nevada operation and upon which such operation is located, were sold by
us to MRR under the terms of a real property purchase and sale agreement. The
sale price was $2,210,000 in cash at closing. Subsequent to the closing of the
sale, we 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 us. 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, we 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, we 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, our chief executive officer and chairman of our board of
directors and Robert M. Rubin, our former chairman of our board of directors and
a significant stockholder, for a 5-year lease on our Vancouver, Washington
corporate office with an annual rate of $98,000. In addition to base rent, we
are 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.
In connection with the purchase of Arizona Pacific Materials, LLC, we issued
notes to MRR and to the Rubin Family Irrevocable Stock Trust for $300,000 of the
$500,000 paid at closing on behalf of our company. Payment on $200,000 these
notes is due December 31, 2005 and the remaining $300,000 is due in three equal
installments of $100,000 payable December 31 of 2006, 2007 and 2008. The notes
accrue simple interest at the rate of five percent (5%) per In addition we
issued 1,200,000 options (associated with the $300,000 notes) on September 9,
2004 with an exercise price of $0.55 per share vesting over the twelve months
beginning October 2004.
In June 2005 we closed a new $32,000,000 senior credit facility with several
institutional lenders. The facility is comprised of $30,000,000 of convertible
debt (convertible into shares of our common stock at $2.00 per share) payable
over the next five years and a $2,000,000 six month convertible bridge loan,
both at the London Interbank Offered Rate ("LIBOR") plus 6%. The lenders were
also granted warrants to purchase approximately 8.5 million shares of our common
stock at $1.75 per share. The lenders also have the option to lend an additional
$7,500,000 to us (within 18 months of the original debt) under the same terms as
the existing five year convertible debt.
On September 23, 2005, AUGI sold its shares of our common stock to various
accredited investors in consideration of gross proceeds in the amount of
$2,286,235. We have agreed to register these 1,222,586 for resale by the
purchasers thereof.
All current transactions between us and our officers, directors and principal
stockholders or any affiliates thereof are, and in the future will be, on terms
no less favorable to us than could be obtained from unaffiliated third parties.
34
DESCRIPTION OF SECURITIES
The following is a description of all material terms and features of our
securities, but does not purport to be complete and is subject in all respects
to applicable Delaware law and to the provisions of our amended articles of
incorporation and bylaws. The applicable prospectus supplement will describe the
specific terms of the securities offered through that prospectus supplement as
well as any of the general terms described below that will not be applicable to
the securities offered.
GENERAL
We are authorized by our Certificate of Incorporation to issue an aggregate of
50,000,000 shares of common stock, $.001 par value per share, and 10,000,000
shares of preferred stock. As of the date of this prospectus there are currently
10,180,000 shares of common stock and no shares of preferred stock outstanding.
All shares of common stock are of the same class and have equal rights and
attributes.
PREFERRED STOCK
We are authorized by our Certificate of Incorporation to issue a maximum of
10,000,000 shares of Preferred Stock, in one or more series and containing such
rights, privileges and limitations, including voting rights, dividend rates,
conversion privileges, redemption rights and terms, redemption prices and
liquidation preferences, as our Board of Directors of may, from time to time,
fix by amendment of the Certificate of Incorporation. As of the date of this
prospectus there are no shares of preferred stock outstanding.
COMMON STOCK
The holders of common stock are entitled to one vote per share on all matters
submitted to a vote of our stockholders. In addition, such holders are entitled
to receive ratably such dividends, if any, as may be declared from time to time
by the Board of Directors out of funds legally available therefor, subject to
the payment of preferential dividends with respect to any shares of preferred
stock that may be outstanding from time to time. In the event of the
dissolution, liquidation or winding up of our company, the holders of common
stock are entitled to share ratably in all assets remaining after payment of all
of our liabilities, subject to the prior distribution rights of the holders of
any preferred stock that may be outstanding at that time. All outstanding shares
of common stock are duly authorized, fully paid and non-assessable.
Holders of common stock do not have any subscription, redemption or conversion
rights, nor do they have any preemptive or other rights to acquire or subscribe
for additional, unissued or treasury shares. Accordingly, if we were to issue
additional shares of common stock current shareholders would have no right to
purchase additional shares and, as a result, their percentage equity interest in
our company would be reduced.
The holders of common stock do not have cumulative voting rights. Accordingly,
all directors will be elected by the affirmative vote of the holders of a
majority of our outstanding common stock. The Board is empowered to fill any
vacancies on the Board created by the resignation, death or removal of
directors.
TRANSFER AGENT
The Transfer Agent for our common stock is Corporate Stock Transfer 3200 Cherry
Creek South Drive, Suite 430 Denver, CO 80209, telephone number (303) 282-4800.
35
SHARES ELIGIBLE FOR FUTURE SALE
As of the date of this prospectus 10,180,000 shares of common stock are
outstanding. We also have outstanding options and warrants to purchase up to a
total of 13,350,218 shares of Common Stock.
Of the 10,180,000 shares of common stock outstanding, 2,180,576 shares are
freely tradable and the remaining 7,999,424 shares of common stock are
"restricted securities" as that term is defined under Rule 144, and may not be
sold unless registered under the Act or exempted there from. All of the shares
sold in this offering will be free trading shares. Upon effectiveness of this
registration statement, which includes 1,222,586 shares of our common stock
presently issued and outstanding, 6,776,838 shares of common stock will be
"restricted securities" as that term is defined under Rule 144.
In general, under the Rule 144, as currently in effect, subject to the
satisfaction of certain other conditions, a person, including an "affiliate" of
Western Power, as that term is defined in Rule 144, (or persons whose shares are
aggregated), who for at least one year has beneficially owned restricted
securities acquired directly or indirectly from our company or an affiliate of
ours in a private transaction is entitled to sell in brokerage transactions
within any three-month period, a number of shares that does not exceed 1% of the
total number of outstanding shares of the same class. A person (or persons whose
shares are aggregated) who is not an affiliate and has not been an affiliate of
our company for at least three months immediately preceding the sale and who has
beneficially owned restricted securities for at least two years is entitled to
sell such shares pursuant to subparagraph (k) of Rule 144 without regard to the
limitation described above. Under Rule 144, an affiliate of our company may sell
shares of common stock that are not "restricted securities" without regard to
the one-year holding period applicable in the case of restricted securities,
subject to the satisfaction of other conditions set forth in Rule 144. The
foregoing summary of Rule 144 is not intended to be a complete description
thereof.
The 7,999,424 shares of our common stock issued and outstanding that are
currently not freely tradable are "restricted securities" as defined under Rule
144 of the Securities Act. Upon effectiveness of this registration statement,
the 1,222,586 shares of our common stock sold by AUGI to certain purchasers
identified in this prospectus will no longer be restricted securities. The
remaining 6,776,838 shares of our common stock are owned by our officers,
directors and other "affiliates." So long as such stock remains in the hands of
affiliates, unless sold pursuant to a registration statement, they will be
subject to all of the conditions of Rule 144, except for the holding period. If
the holders of such stock cease to be affiliates (and, in the case of restricted
stock, the two-year holding period of Rule 144(k) has been met), such shares may
become freely tradable, without regard to most of Rule 144 restrictions,
including the volume limitation.
As of the date of this prospectus, 13,350,218 options and warrants to purchase
shares of our common stock are outstanding. Sales of significant amounts of our
common stock by stockholders in the future, under Rule 144 or otherwise, may
have a depressive effect on the price of our common stock. 9,450,218 shares
underlying such options and warrants are being registered for resale in this
prospectus.
On June 9, 2005, we announced the closing of a new $32 million senior credit
facility from several institutional investors. This prospectus is filed in
connection with securities issued in this financing and relates to 15,000,000
shares issuable upon conversion of our debentures, 9,450,718 shares of common
stock issuable upon exercise of warrants, 3,994,874 shares issuable as interest,
an additional 8,248,528 registrable under the terms of the transaction documents
relating to the financing and 1,222,586 shares of our common stock sold by AUGI
to certain purchasers identified in this prospectus.
36
SELLING SECURITY HOLDERS
We agreed to register for resale an aggregate of 29,667,678 shares of common
stock issuable upon conversion of debentures and exercise of warrants and
options issued to the selling stockholders listed below, excluding 8,248,528
registrable under the terms of the transaction documents relating to the
financing. The selling stockholders may from time to time offer and sell any or
all of their shares that are registered under this prospectus. All expenses
incurred with respect to the registration of the common stock will be borne by
us, but we will not be obligated to pay any underwriting fees, discounts,
commissions or other expenses incurred by the selling stockholders in connection
with the sale of such shares.
The following table sets forth the number of shares of common stock that may be
offered for sale from time to time by the selling stockholders. The following
table sets forth (i) the maximum number of shares of common stock which may be
sold by the selling stockholder under this prospectus and (ii) the number of
shares of common stock which will be owned after the offering by the selling
stockholders. Except as indicated below, none of the selling stockholders has
held any position or office with us, nor are any of the selling stockholders
associates or affiliates of any of our officers or directors. Except as
indicated below, no selling stockholder is the beneficial owner of any
additional shares of common stock or other equity securities issued by us or any
securities convertible into, or exercisable or exchangeable for, our equity
securities.
The selling stockholders may decide to sell all, some, or none of the shares of
common stock listed below. We cannot provide you with any estimate of the number
of shares of common stock that any of the selling stockholders will hold in the
future. For purposes of this table, beneficial ownership is determined in
accordance with the rules of the Commission, and includes voting power and
investment power with respect to such shares.
Based on information received by us from each known holder of securities, except
as disclosed below, no selling stockholder is a registered broker-dealer or an
affiliate of any registered broker-dealer. Other than as disclosed below, no
selling stockholder has been an officer, director or employee of our company or
had a material relationship with us at any time within the past three years.
Shares Shares Maximum Shares
Currently Shares underlying issuable shares Percentage owned
Selling Stockholder issued underlying warrants as interest offered beneficially after
shares debentures or options payments hereby owned offering
Bluegrass Growth Fund LP (1)(2) 275,000 155,838 73,239 504,077 4.7% 0
Bluegrass Growth Fund Ltd. (1)(3) 225,000 127,503 59,923 412,426 3.9% 0
Crestview Capital Master LLC (1)(4) 2,250,000 1,275,033 599,231 4,124,264 28.9% 0
Iroquois Master Fund Ltd (1) (5) 2,000,000 1,133,362 532,650 3,666,012 26.5% 0
Omicron Master Trust (1) (6) 4,250,000 2,408,395 1,131,881 7,790,276 43.4% 0
Smithfield Fiduciary LLC (1) (7) 4,250,000 2,408,395 1,131,881 7,790,276 43.4%
CCA US Fund, L.P. by Crestview Capital
Advisors, LLC, its General Partner (1)(8) 1,750,000 991,692 466,069 3,207,761 23.9% 0
Strategic Growth International, Inc. (9) 200,000 200,000 1.9% 0
S.J. Bayern & Co., Inc. (10) 500,000 500,000 4.7%
Sweeney Family Irrevocable Trust (11) 125,000 125,000 1.2% 0
Hayde Family Irrevocable Trust (12) 125,000 125,000 1.2% 0
Pleiades Investment Partners-R, LP (13)(22) 176,400 176,400 1.7% 30,600
Potomac Capital Partners, LP (14)(22) 262,800 262,800 2.6% 44,600
Potomac Capital International Ltd. (15)(22) 160,800 160,800 1.6% 27,000
Meadowbrook Opportunity Fund LLC (16)(22) 200,000 200,000 1.9% 0
Perritt Emerging Opportunities (17)(22) 200,000 200,000 1.9% 0
Del Ray Management LP (18)(22) 100,000 100,000 * 0
37
Jeffrey Schnipper (22) 34,465 34,465 * 0
William M. Goldstein (22) 21,535 21,535 * 0
George L. Black Jr. Trust (19)(22) 10,000 10,000 * 0
Frank Brenton (22) 7,586 7,586 * 0
Leonard Schutz (22) 7,000 7,000 * 0
Cross River Partners LP (20) (22) 30,000 30,000 * 0
Margaret F. Hudson (22) 4,000 4,000 * 0
Margaret Hudson Trust (21) (22) 4,000 4,000 * 0
Mary H. Kelly (22) 4,000 4,000 *
----------------------------------------------------------------------------------------
Total 1,222,586 15,000,000 9,450,218 3,994,874 29,667,678 76.81% 102,200
========================================================================================
* Less than one percent.
(1) Assumes full conversion of all Series A Debentures at maturity.
Notwithstanding the percentage shown as beneficially owned, no institutional
lender included as a selling shareholder in this table may at any time hold more
than 4.99% shares of our common stock issued and outstanding. Prior to our entry
into the transaction with the institutional lenders as described immediately
below, there was no material relationship with any of such institutional
lenders.
On June 9, 2005, we announced the closing of a new $32 million senior credit
facility from several institutional lenders. The facility is comprised of $30
million of convertible debt and a $2 million bridge loan, both at the London
Interbank Offered Rate ("LIBOR") plus 6%. We entered into a Securities Purchase
Agreement (the "Purchase Agreement") with each of the several lenders, to which
we refer as the "Purchasers." Pursuant to the terms of the Purchase Agreement,
we sold $30 million in Variable Rate Secured Convertible Debentures (the "Series
A Debentures") due 60 months from the date of issuance and $2 million in
Variable Rate Secured Debentures (the "Series B Debentures" and, with the Series
A Debentures, the "Debentures") due 6 months from the date of issuance. The
Series A Debentures are convertible, at the option of the Purchasers, into
shares of our common stock at a conversion price of $2.00 per share, subject to
adjustment. Purchasers of the Debentures received Series A Warrants and Series B
Warrants to purchase an aggregate of approximately 8.5 million shares of our
common stock at an exercise price of $1.75 per share, subject to adjustment, for
a term of five years. In addition, the Purchasers may receive Series C Warrants,
which allow each Purchaser of Debentures the right to purchase a number of
Series A Debentures and Series A Warrants in proportion to its initial
investment in our company, contingent on the issuance of an additional
$7,500,000 in convertible debt. We have agreed to register all the shares of
common stock underlying the Series A Debentures, the Series A Warrants and the
Series B Warrants under the Securities Act of 1933, as amended, pursuant to the
registration rights agreement entered into with each of the several Purchasers.
The Debentures are secured by all our assets as more fully set forth in the
security agreement entered into with each of the several Purchasers.
(2) The name of the natural person who holds voting and investment power over
the securities held by the selling stockholder is Brian Shatz.
(3) The name of the natural person who holds voting and investment power over
the securities held by the selling stockholder is Brian Shatz.
(4) The name of the natural persons who hold voting and investment power over
the securities held by the selling stockholder are Stewart Flink, Robert Hoyt
and Daniel Warsh. Crestview Capital Master LLC acquired its securities in the
ordinary course of business and at the time of acquisition of the securities,
Crestview Capital Master LLC had no agreements, plans, or understandings,
directly or indirectly, with any person to distribute the securities.
(5) The name of the natural person who holds voting and investment power over
the securities held by the selling stockholder is Josh Silverman.
(6) Omicron Capital, L.P., a Delaware limited partnership ("Omicron Capital"),
serves as investment manager to Omicron Master Trust, a trust formed under the
laws of Bermuda ("Omicron"), Omicron Capital, Inc., a Delaware corporation
("OCT"), serves as general partner of Omicron Capital, and Winchester Global
Trust Company Limited ("Winchester") serves as the trustee of Omicron. By reason
of such relationships, Omicron Capital and OCT may be deemed to share
dispositive power over the shares of our common stock owned by Omicron, and
Winchester may be deemed to share voting and dispositive power over the shares
of our common stock owned by Omicron. Omicron Capital, OCT and Winchester
disclaim beneficial ownership of such shares of our common stock. Omicron
Capital has delegated authority from the board of directors of Winchester
regarding the portfolio management decisions with respect to the shares of
common stock owned by Omicron and, as of January 10, 2005, Mr. Olivier H. Morali
and Mr. Bruce T. Bernstein, officers of OCT, have delegated authority from the
board of directors of OCT regarding the portfolio management decisions of
Omicron Capital with respect to the shares of common stock owned by Omicron. By
reason of such delegated authority, Messrs. Morali and Bernstein may be deemed
to share dispositive power over the shares of our common stock owned by Omicron.
Messrs. Morali and Bernstein disclaim beneficial ownership of such shares of our
common stock and neither of such persons has any legal right to maintain such
delegated authority. No other person has sole or shared voting or
38
dispositive power with respect to the shares of our common stock being offered
by Omicron, as those terms are used for purposes under Regulation 13D-G of the
Securities Exchange Act of 1934, as amended. Omicron and Winchester are not
"affiliates" of one another, as that term is used for purposes of the Securities
Exchange Act of 1934, as amended, or of any other person named in this
prospectus as a selling stockholder. No person or "group" (as that term is used
in Section 13(d) of the Securities Exchange Act of 1934, as amended, or the
SEC's Regulation 13D G) controls Omicron and Winchester.
(7) The names of the natural persons who hold voting and investment power over
the securities held by the selling stockholder are Glenn Dubin and Henry Swieca.
(8) The name of the natural person who holds voting and investment power over
the securities held by the selling stockholder is Westin Lovy.
(9) Consists of shares of our common stock underlying options issued for
services rendered to us. The name of the natural person who holds voting and
investment power over the securities held by the selling stockholder is Richard
Cooper.
(10) Consists of shares of our common stock underlying options issued for
services rendered to us. The name of the natural person who holds voting and
investment power over the securities held by the selling stockholder is Steve
Bayern.
(11) Consists of shares of our common stock underlying options issued for
services rendered to us. The name of the natural person who holds voting and
investment power over the securities held by the selling stockholder is Michael
W. Sweeney.
(12) Consists of shares of our common stock underlying options issued for
services rendered to us. The name of the natural person who holds voting and
investment power over the securities held by the selling stockholder is William
Hayde. The Hayde Family Irrevocable Trust acquired its securities in the
ordinary course of business and at the time of acquisition of the securities,
the Hayde Family Irrevocable Trust had no agreements, plans, or understandings,
directly or indirectly, with any person to distribute the securities.
(13) The name of the natural person who holds voting and investment power over
the securities held by the selling stockholder is Paul J Solit. The selling
stockholder is the owner of 30,600 shares of our common stock other than those
being registered hereunder.
(14) The name of the natural person who holds voting and investment power over
the securities held by the selling stockholder is Paul J Solit. The selling
stockholder is the owner of 44,600 shares of our common stock other than those
being registered hereunder.
(15) The name of the natural person who holds voting and investment power over
the securities held by the selling stockholder is Paul J Solit. The selling
stockholder is the owner of 27,000 shares of our common stock other than those
being registered hereunder.
(16) The name of the natural person who holds voting and investment power over
the securities held by the selling stockholder is Michael Ragins.
(17) The names of the natural persons who hold voting and investment power over
the securities held by the selling stockholder are Michael Corbett, Robert Laatz
and Gerald Perritt. Two signatures are required.
(18) The name of the natural person who holds voting and investment power over
the securities held by the selling stockholder is Gregory A. Bied.
(19) The name of the natural person who holds voting and investment power over
the securities held by the selling stockholder is George L. Black Jr.
(20) The name of the natural person who holds voting and investment power over
the securities held by the selling stockholder is Richard Murphy. Cross River
Partners LP acquired its securities in the ordinary course of business and at
the time of acquisition of the securities, Cross River Partners LP had no
agreements, plans, or understandings, directly or indirectly, with any person to
distribute the securities.
(21) The name of the natural person who holds voting and investment power over
the securities held by the selling stockholder is Mary H. Kelley.
(22) The selling stockholder acquired his, her or its shares of our common stock
from American United Global, Inc. We have agreed to register the shares of our
common stock acquired by each such selling stockholder.
39
PLAN OF DISTRIBUTION
Each selling stockholder of our common stock and any of their pledgees,
assignees and successors-in-interest may, from time to time, sell any or all of
their shares of common stock on the OTC Bulletin Board or any other stock
exchange, market or trading facility on which the shares are traded or in
private transactions. These sales may be at fixed or negotiated prices. A
selling stockholder may use any one or more of the following methods when
selling shares:
o ordinary brokerage transactions and transactions in which the
broker-dealer solicits purchasers;
o block trades in which the broker-dealer will attempt to sell the
shares as agent but may position and resell a portion of the block as
principal to facilitate the transaction;
o purchases by a broker-dealer as principal and resale by the
broker-dealer for its account;
o an exchange distribution in accordance with the rules of the
applicable exchange;
o privately negotiated transactions;
o settlement of short sales entered into after the effective date of the
registration statement of which this prospectus is a part;
o broker-dealers may agree with the selling stockholders to sell a
specified number of such shares at a stipulated price per share;
o a combination of any such methods of sale;
o through the writing or settlement of options or other hedging
transactions, whether through an options exchange or otherwise; or
o any other method permitted pursuant to applicable law.
The selling stockholders may also sell shares under Rule 144 under the
Securities Act, if available, rather than under this prospectus. None of the
selling stockholders who presently own shares of our common stock being
registered herein, or securities exercisable or convertible into such shares,
have held such shares for longer than one year.
In general, under the Rule 144, as currently in effect, subject to the
satisfaction of certain other conditions, a person, including an "affiliate" of
Western Power, as that term is defined in Rule 144, (or persons whose shares are
aggregated), who for at least one year has beneficially owned restricted
securities acquired directly or indirectly from our company or an affiliate of
ours in a private transaction is entitled to sell in brokerage transactions
within any three-month period, a number of shares that does not exceed 1% of the
total number of outstanding shares of the same class. A person (or persons whose
shares are aggregated) who is not an affiliate and has not been an affiliate of
our company for at least three months immediately preceding the sale and who has
beneficially owned restricted securities for at least two years is entitled to
sell such shares pursuant to subparagraph (k) of Rule 144 without regard to the
limitation described above. Under Rule 144, an affiliate of our company may sell
shares of common stock that are not "restricted securities" without regard to
the one-year holding period applicable in the case of restricted securities,
subject to the satisfaction of other conditions set forth in Rule 144. The
foregoing summary of Rule 144 is not intended to be a complete description
thereof.
Broker-dealers engaged by the selling stockholders may arrange for other
brokers-dealers to participate in sales. Broker-dealers may receive commissions
or discounts from the selling stockholders (or, if any broker-dealer acts as
agent for the purchaser of shares, from the purchaser) in amounts to be
negotiated, but, except as set forth in a supplement to this prospectus, in the
case of an agency transaction not in excess of a customary brokerage commission
in compliance with NASDR Rule 2440; and in the case of a principal transaction a
markup or markdown in compliance with NASDR IM-2440.
At the time a particular offer of the shares is made, to the extent an
underwriter is used in connection with such sale, we will file a post-effective
amendment to this prospectus that will identify and set forth the aggregate
amount of shares being offered, the identity of the underwriter, the material
terms of any agreement therewith and the terms of the offering.
In connection with the sale of the common stock, the selling stockholders may
enter into hedging transactions with broker-dealers or other financial
institutions, which may in turn engage in short sales of the common stock in the
course of hedging the positions they assume. The selling stockholders may also
sell shares of the common stock short and deliver these securities to close out
their short
40
positions, or loan or pledge the common stock to broker-dealers that in turn may
sell these securities. The selling stockholders may also enter into option or
other transactions with broker-dealers or other financial institutions or the
creation of one or more derivative securities which require the delivery to such
broker-dealer or other financial institution of shares offered by this
prospectus, which shares such broker-dealer or other financial institution may
resell pursuant to this prospectus (as supplemented or amended to reflect such
transaction).
The selling stockholders and any broker dealers or agents that are involved in
selling the shares may be deemed to be "underwriters" within the meaning of the
Securities Act in connection with such sales. In such event, any commissions
received by such broker dealers or agents and any profit on the resale of the
shares purchased by them may be deemed to be underwriting commissions or
discounts under the Securities Act. Each selling stockholder has informed us
that it does not have any written or oral agreement or understanding, directly
or indirectly, with any person to distribute the common stock. In no event shall
any broker-dealer receive fees, commissions and markups which, in the aggregate,
would exceed eight percent (8%).
Of the selling stockholders, none is a broker-dealer and three are affiliates of
a broker-dealer. Crestview Capital Master LLC, The Hayde Family Irrevocable
Trust and Cross River Partners LP each acquired its securities in the ordinary
course of business and at the time of acquisition of the securities, none of
such persons had any agreements, plans, or understandings, directly or
indirectly, with any person to distribute the securities.
We are required to pay certain fees and expenses we incur incident to the
registration of the shares. We have agreed to indemnify the institutional
lenders who are selling stockholders against certain losses, claims, damages and
liabilities, including liabilities under the Securities Act.
Because the selling stockholders may be deemed to be "underwriters" within the
meaning of the Securities Act, they will be subject to the prospectus delivery
requirements of the Securities Act. In addition, any securities covered by this
prospectus which qualify for sale pursuant to Rule 144 under the Securities Act
may be sold under Rule 144 rather than under this prospectus. Each selling
stockholder has advised us that they have not entered into any written or oral
agreements, understandings or arrangements with any underwriter or broker-dealer
regarding the sale of the resale shares. There is no underwriter or coordinating
broker acting in connection with the proposed sale of the resale shares by the
selling stockholders.
Insofar as this prospectus relates to the institutional lenders, we agreed to
keep this prospectus effective until the earlier of (i) the date on which the
shares may be resold by the selling stockholders without registration and
without regard to any volume limitations by reason of Rule 144(e) under the
Securities Act or any other rule of similar effect or (ii) all of the shares
have been sold pursuant to the prospectus or Rule 144 under the Securities Act
or any other rule of similar effect. The resale shares will be sold only through
registered or licensed brokers or dealers if required under applicable state
securities laws. In addition, in certain states, the resale shares may not be
sold unless they have been registered or qualified for sale in the applicable
state or an exemption from the registration or qualification requirement is
available and is complied with.
Under applicable rules and regulations under the Exchange Act, any person
engaged in the distribution of the resale shares may not simultaneously engage
in market making activities with respect to the common stock for a period of two
business days prior to the commencement of the distribution. In addition, the
selling stockholders will be subject to applicable provisions of the Exchange
Act and the rules and regulations thereunder, including Regulation M, which may
limit the timing of purchases and sales of shares of the common stock by the
selling stockholders or any other person. We will make copies of this prospectus
available to the selling stockholders and have informed them of the need to
deliver a copy of this prospectus to each purchaser at or prior to the time of
the sale.
LEGAL MATTERS
Gersten Savage LLP, New York, New York, will pass upon the validity of the
shares of common stock for us in connection with this offering.
EXPERTS
Marcum & Kliegman LLP, an independent registered public accounting firm, have
audited our consolidated financial statements for Western Power & Equipment
Corp. for the years ended July 31, 2005, 2004 and 2003, and for Arizona Pacific
Materials, LLC for the years ended at March 31, 2004 and 2003, as set forth in
their report. We have included our financial statements in the prospectus and
elsewhere in the registration statement in reliance on Marcum & Kliegman LLP's
report, given on their authority as experts in accounting and auditing.
41
WHERE YOU CAN FIND ADDITIONAL INFORMATION
A Registration Statement on Form S-1, including amendments thereto, relating to
the common stock offered hereby has been filed by us with the Commission,
Washington, D.C. This prospectus does not contain all of the information set
forth in the Registration Statement and the exhibits and schedule thereto.
Statements contained in this prospectus as to the contents of any contract or
other document referred to are not necessarily complete and in each instance
reference is made to the copy of such contract or other document filed as an
exhibit to the Registration Statement, each such statement being qualified in
all respects by such reference. For further information with respect to our
company and the common stock offered hereby, reference is made to such
Registration Statement, exhibits and schedules. A copy of the Registration
Statement may be inspected by anyone without charge at the Commission's Public
Reference Room located at 450 Fifth Street, NW, Washington, D.C. 20549, and
copies of all or any part thereof may be obtained from the Public Reference
Branch of the Commission upon the payment of certain fees prescribed by the
Commission. You may obtain information on the operation of the Public Reference
Room by calling the Commission at 1-800-SEC-0330. In addition, the Registration
Statement may be accessed electronically at the Commission's site on the World
Wide Web located at http://www.sec.gov.
We are subject to the informational requirements of the Exchange Act, and in
accordance therewith file reports, proxy statements and other information with
the Commission. Such reports, proxy statements and other information filed may
be inspected without charge and copies may be had at the prescribed fees at the
Commission's addresses set forth above and at the Commission's website.
42
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
WESTERN POWER & EQUIPMENT CORP. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS FOR
THE PERIODS ENDING OCTOBER 31, 2005 AND 2004
Condensed Consolidated Balance Sheets
October 31, 2005 (Unaudited) and July 31, 2005.................F-1
Condensed Consolidated Statements of Operations
Three months ended October 31, 2005 (Unaudited)
and October 31, 2004 (Unaudited)...............................F-2
Condensed Consolidated Statements of Cash Flows
Three months ended October 31, 2005 (Unaudited)
and October 31, 2004 (Unaudited)...............................F-3 - F-4
Notes to Condensed Consolidated Financial Statements.............F-5 - F-10
WESTERN POWER & EQUIPMENT CORP. CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS
ENDED JULY 31, 2005, 2004, AND 2003
Reports of Independent Registered Public Accounting Firms........F11
Consolidated Statements of Operations
Years ended July 31, 2005, 2004 and 2003......................F12
Consolidated Balance Sheets
July 31, 2005 and July 31, 2004...............................F13
Consolidated Statements of Stockholders'
Equity (Deficiency) For the Years ended
July 31, 2005, 2004 and 2003..................................F14
Consolidated Statements of Cash Flows
For the Years ended July 31, 2005, 2004 and 2003..............F15-F16
Notes to Consolidated Financial Statements.......................F17-F28
ARIZONA PACIFIC MATERIALS AUDITED FINANCIAL STATEMENTS FOR THE YEARS ENDED MARCH
31, 2004 AND 2003
Reports of Independent Registered Public Accounting Firms........F29
Balance Sheets...................................................F30-F31
Statements of Operations & Member's Deficiency...................F32
Statements of Cash Flows.........................................F33
Notes to Financial Statements....................................F34-F37
ARIZONA PACIFIC MATERIALS UNAUDITED FINANCIAL STATEMENTS FOR THE FOUR MONTHS
ENDED JULY 31, 2004 AND 2003
Balance Sheets...................................................F38
Statements of Operations & Member's Deficiency...................F39
Statements of Cash Flows.........................................F40
Notes to Financial Statements....................................F41-F42
UNAUDITED PRO FORMA FINANCIAL STATEMENTS FOR THE YEAR ENDED
JULY 31, 2004.........................................................F43-F47
43
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.
F-1
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.
F-2
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
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
F-3
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.
F-4
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 Annual Report for the fiscal year ended July 31,
2005 filed with the Securities and Exchange Commission and included in the
prospectus and elsewhere in the registration statement in reliance on Marcum &
Kliegman LLP's report, given on their authority as experts in accounting and
auditing. 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 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
F-5
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
========== ==========
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
F-6
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
$3,065 and $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.
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
- ----------------
F-7
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.
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:
Twelve months ending October 31, Notes Convertible Bridge
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
========== ========== ========== ==========
F-8
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.
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
========== ==========
F-9
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.
F-10
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and
Stockholders of Western Power & Equipment Corp.
We have audited the accompanying consolidated balance sheets of Western Power &
Equipment Corp. (a Delaware Corporation) as of July 31, 2005 and 2004, and the
related consolidated statements of operations, stockholders' equity (deficiency)
and cash flows for the years ending July 31, 2005, 2004 and 2003. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. The Company is not required to
have, nor are we engaged to perform, an audit of its internal control over
financial reporting. Our audit included consideration of internal control over
financial reporting as a basis for designing audit procedures that are
appropriate in the circumstances, but not for the purposes of expressing an
opinion or the effectiveness of the Company's internal control over financial
reporting. Accordingly, we express no opinion. An audit also 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, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of Western
Power & Equipment Corp. as of July 31, 2005 and 2004, and the consolidated
results of its operations and its cash flows for the years ending July 31, 2005,
2004, and 2003, in conformity with accounting principles generally accepted in
the United States of America.
/s/ Marcum & Kliegman LLP
-------------------------
MARCUM & KLIEGMAN LLP
New York, New York
September 1, 2005
F-11
WESTERN POWER & EQUIPMENT CORP.
CONSOLIDATED STATEMENTS OF OPERATIONS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
Years Ended July 31,
------------------------------------------
2005 2004 2003
---------- ---------- ----------
Net revenues
Product sales $ 107,544 $ 104,767 $ 92,461
Service revenue 5,306 5,499 4,978
Mining revenues 1,223 -- --
Rental revenue 3,149 5,250 4,957
---------- ---------- ----------
Total net revenues 117,222 115,516 102,396
Cost of goods sold
Product sales 94,854 92,505 80,256
Service revenue 4,670 4,355 4,289
Mining revenues 835 -- --
Rental revenue 2,705 4,486 4,325
---------- ---------- ----------
Total cost of goods sold 103,064 101,346 88,870
---------- ---------- ----------
Gross profit 14,158 14,170 13,526
Selling, general and administrative expenses (including
non-cash expenses of $144, $0 and $913 for the years
ended July 31, 2005, 2004 and 2003, respectively) 10,169 9,594 9,955
---------- ---------- ----------
Income from operations 3,989 4,576 3,571
Other income (expense):
Interest expense (3,146) (2,767) (3,363)
Other income 195 152 252
---------- ---------- ----------
Total other income (expense) (2,951) (2,615) (3,111)
---------- ---------- ----------
Income before income taxes 1,038 1,961 460
Provision (benefit) for income taxes (1,452) 48 48
---------- ---------- ----------
Net income $ 2,490 $ 1,913 $ 412
========== ========== ==========
Income per common share - basic $ 0.25 $ 0.19 $ 0.08
========== ========== ==========
Income per common share - diluted $ 0.10 $ 0.19 $ 0.08
========== ========== ==========
Weighted average outstanding common shares
for basic earnings per common share 10,141 10,130 5,336
========== ========== ==========
Weighted average outstanding common shares
for diluted earnings per common share 26,269 10,130 5,336
========== ========== ==========
See accompanying notes to consolidated financial statements.
F-12
WESTERN POWER & EQUIPMENT CORP.
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS)
July 31, July 31,
2005 2004
---------- ----------
ASSETS
Current assets:
Cash and cash equivalents $ 855 $ 9
Restricted cash -- 408
Accounts receivable, less allowance for
doubtful accounts of $906 and $938 10,449 11,660
Inventories (net) 46,333 28,938
Deferred taxes 664
Prepaid expenses 564 205
---------- ----------
Total current assets 58,865 41,220
---------- ----------
Fixed assets (net):
Property, plant and equipment 3,889 2,620
Rental equipment fleet 6,068 11,053
---------- ----------
Total fixed assets 9,957 13,673
---------- ----------
Other Assets
Security deposits 318 131
Deferred taxes 836 --
Deferred debt issuance costs 1,661 --
---------- ----------
Total other assets 2,815 131
---------- ----------
Total assets $ 71,637 $ 55,024
LIABILITIES & STOCKHOLDERS' EQUITY
Current liabilities:
Borrowings under floor plan financing $ 24,558 $ 14,561
Short-term borrowings - GE line of credit -- 31,710
Bridge loan, net of discount of $ 79 1,254 --
Convertible debt, net of discount of $ 836 3,052 --
Notes payable-related parties, net of discount of $82 418 --
Notes payable 205 62
Accounts payable 7,925 5,461
Accrued payroll and vacation 932 1,194
Other accrued liabilities 1,313 1,005
Capital lease obligations 43 27
---------- ----------
Total current liabilities 39,700 54,020
---------- ----------
Non current liabilities:
Capital lease obligations 810 853
Convertible debt, net of discount of $2,404 23,708 --
Deferred lease income 264 --
Notes payable 655 49
---------- ----------
Total non current liabilities 25,437 902
Total liabilities 65,137 54,922
---------- ----------
Commitments and contingencies
Stockholders' equity:
Preferred stock-10,000,000 shares authorized; none outstanding -- --
Common stock, $.001 par value - 50,000,000 shares authorized
and 10,180,000 shares and 10,130,000 shares outstanding, as of
July 31, 2005 and 2004 respectively 10 10
Additional paid-in capital 20,859 16,933
Deferred compensation (18) --
Accumulated deficit (13,507) (15,997)
Less common stock in treasury, at cost (130,300 shares) (844) (844)
---------- ----------
Total stockholders' equity 6,500 102
---------- ----------
Total liabilities and stockholders' equity $ 71,637 $ 55,024
========== ==========
See accompanying notes to consolidated financial statements.
F-13
WESTERN POWER & EQUIPMENT CORP.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIENCY)
(DOLLARS IN THOUSANDS)
Common Stock Total
------------------------- Additional Stockholders'
Number Paid-in Accumulated Treasury Deferred Equity
of Shares Amount Capital Deficit Stock Compensation (Deficiency)
---------- ---------- ---------- ---------- ---------- ---------- ----------
Balance at
July 31, 2002 4,003,162 $ 5 $ 16,025 $ (18,322) $ (844) -- $ (3,136)
Issuance of Stock-
compensation 5,538,838 4 827 -- -- -- 831
Issuance of Stock- 588,000 1 81 -- -- -- 82
in lieu of interest
Net Income -- -- -- 412 -- -- 412
-------------------------------------------------------------------------------------------------------
Balance at
July 31, 2003 10,130,000 10 16,933 (17,910) (844) -- (1,811)
Net Income -- -- -- 1,913 -- -- 1,913
-------------------------------------------------------------------------------------------------------
Balance at
July 31, 2004 10,130,000 $ 10 $ 16,933 $ (15,997) $ (844) -- $ 102
Issuance of Stock-
compensation 50,000 -- 65 -- -- -- 65
Issuance of Options- -- -- 97 -- -- (18) 79
deferred compensation
Issuance of Options- -- -- 292 -- -- -- 292
debt discount
Issuance of Warrants-
debt discount -- -- 3,472 -- -- -- 3,472
Net Income -- -- -- 2,490 -- -- 2,490
-------------------------------------------------------------------------------------------------------
Balance at
July 31, 2005 10,180,000 $ 10 $ 20,859 $ (13,507) $ (844) (18) $ 6,500
========== ========== ========== ========== ========== ========== ==========
See accompanying notes to consolidated financial statements.
F-14
WESTERN POWER & EQUIPMENT CORP.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
Years Ended July 31,
------------------------------------------
2005 2004 2003
---------- ---------- ----------
Cash flows from operating activities:
Net Income $ 2,490 $ 1,913 $ 412
Adjustments to reconcile net income to net cash provided by operating
activities:
Depreciation 5,332 5,513 6,021
Amortization of deferred debt discount 364 -- --
Bad debts 14 412 170
Gain on sale of fixed assets (1,410) (1,010) (421)
Non-cash benefit from deferred taxes (1,500) -- --
Non-cash stock compensation expense 144 -- 831
Non-cash stock interest expense -- -- 82
Changes in assets and liabilities
Accounts receivable 1,197 (2,293) 355
Restricted cash 408 (7) 140
Inventories (19,816) (4,239) (3,335)
Prepaid expenses and other assets (2,207) (79) (78)
Notes receivable current -- -- 122
Accounts payable 2,463 (2,752) 74
Inventory floor plan financing 9,997 3,602 (15)
Accrued payroll and vacation (263) 622 (87)
Other accrued liabilities 308 21 (1)
Deferred lease income 264 -- --
---------- ---------- ----------
Net cash provided by operating activities (2,215) 1,703 4,270
---------- ---------- ----------
Cash flow from investing activities:
Purchase of fixed assets (896) (267) (167)
Purchase of rental equipment (3,193) (5,401) (2,119)
Proceeds on sale of rental equipment 7,596 6,723 4,910
Proceeds on sale of fixed assets 1,708 68 156
Purchase of assets of Arizona Pacific Materials, LLC (500) -- --
(Purchase) sale of other assets -- 22 (101)
---------- ---------- ----------
Net cash provided by investing activities 4,715 1,145 2,679
---------- ---------- ----------
Cash flows from financing activities:
Principal payments on capital leases (27) (38) (35)
Repayments of short-term financing - GE line of credit (31,710) (2,856) (6,756)
Note payable payment - purchase of Arizona Pacific
Materials, LLC (2,500) -- --
Bridge loan borrowing 2,000 -- --
Bridge loan payments (604) -- --
Notes payable borrowing from related parties 500 -- --
Convertible debt issuance 30,000 -- --
Payments on convertible debt -- (13) (155)
Long-term debt borrowings 5,295 66 --
Long-term debt repayments (4,608) (6) --
---------- ---------- ----------
Net cash provided (used) in financing activities (1,654) (2,847) (6,946)
---------- ---------- ----------
Increase in cash and cash equivalents 846 1 3
Cash and cash equivalents at beginning of year 9 8 5
---------- ---------- ----------
Cash and cash equivalents at end of year $ 855 $ 9 $ 8
========== ========== ==========
F-15
Supplemental schedule of non-cash investing and financing
activities:
Notes payable issued for the purchase of Arizona Pacific
Materials, LL20 ...................................................... 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
See Note 12 .......................................................... 292 -- --
Options issued in lieu of cash payments in connection with
consulting service agreements entered into in November 2004.
See Note 7 ........................................................... 97 -- --
Options issued in lieu of cash payments in connection with
consulting service agreements entered into in February 2005.
See Note 7 ........................................................... 20 -- --
Stock issued in lieu of cash payments in connection with
consulting service agreements in May 2005.
See Note 7 ........................................................... 65 -- --
Warrants issued in lieu of cash in connection with a
$32,000 senior credit facility issued in June 2005
See Note 7 ........................................................... 3,472 -- --
See accompanying notes to consolidated financial statements.
F-16
WESTERN POWER & EQUIPMENT CORP.
Notes to Consolidated Financial Statements (DOLLARS IN THOUSANDS, EXCEPT PER
SHARE AND OPTIONS AND WARRANTS 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. In September 2005, the Company purchased the assets of
Arizona Pacific Materials, LLC, with mining operations in the Phoenix and
Flagstaff, Arizona areas.
The consolidated financial statements include the accounts of the Company
and its Oregon and Arizona subsidiaries after elimination of all
intercompany accounts and transactions.
The Company is focusing its efforts on streamlining its operations. The
Company in recent years has selectively reduced the number of stores it
operates and its product offerings to reduce overall expenses and to
improve product turnover.
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 limit.
RESTRICTED CASH
In accordance with the borrowing agreement with GE Commercial Distribution
Financial ("GE"), the Company had a cash account restricted by GE for the
purpose of paying down the line of credit and accordingly has been
recorded as a current asset. The line of credit was repaid in June of 2005
thus eliminating the requirement of restricted cash as of July 31, 2005.
The Restricted cash was $408 at July 31, 2004.
ACCOUNTS RECEIVABLE
Accounts receivable are reported net of an allowance for doubtful
accounts, future returns, and markdowns and allowances. The allowance was
determined by management to be adequate based on a periodic review of the
status of the individual accounts receivable and the volume of returns.
INVENTORIES
Inventories (new and used) are stated at cost, 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. The Company utilizes recent sales information, third party
valuation guides and recent auction results as well as judgments of
inventory managers within the Company to determine the net realizable
value of inventory.
Inventory costs associated with the mining operations of Arizona Pacific
Materials, LLC are determined using the last-in, first-out (LIFO) method.
Mining product reserves for obsolescence or slow moving inventory are
recorded when such conditions are identified. As of July 31, 2005, the
LIFO reserve was $223.
INTANGIBLE ASSETS
The Company evaluates the recoverability of it's goodwill and other
intangibles in accordance with the Statement of Financial Accounting Board
"SFASB" No. 142, Goodwill and Other Intangible Assets. As of July 31,
2005, the Company has not identified any impairment.
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 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. Expenditures for replacements and major improvements are
capitalized. Expenditures for repairs, maintenance, and routine
replacements are charged to expense 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.
LONG LIVED ASSETS
In accordance with Statement of Financial Accounting Standards No. 144,
"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
F-17
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. As of July 31, 2005 the
Company has not identified any impairment.
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. In addition to outright
sales of new and used equipment, certain rentals include rent-to-purchase
option agreements. Under such agreements, customers are given a period of
several months to exercise the option to purchase the rented equipment and
may be allowed to apply a portion of the rental payments to the purchase
price.
ADVERTISING EXPENSE
The Company expenses all advertising costs as incurred. Total advertising
expense for the years ended July 31, 2005, 2004 and 2003 was $108, $82,
and $87 respectively.
OTHER INCOME
Other income principally includes gains and losses on the sale of fixed
assets and finance charges associated with accounts receivable 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, 2005 and 2004 the Company held
130,300 shares of treasury stock.
RECLASSIFICATIONS
Certain amounts in the 2004 and 2003 financial statements have been
reclassified to conform with the 2005 presentation. These
reclassifications had no impact on net income or cash flows as previously
reported.
FAIR VALUE OF 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 PER COMMON SHARE
Basic net income per common share has been computed using the weighted
average number of common shares outstanding during the periods presented.
Diluted net income per share is computed using the weighted average number
of common shares outstanding during the periods presented plus any
dilutive securities outstanding. Outstanding options were 4,850,000,
warrants were 8,500,218 and convertible debenture shares were 15,000,000
as of July 31, 2005.
Earnings per common share is as follows:
Years ended July 31,
(`000's)
2005 2004 2003
-------- -------- --------
Basic
Numerator:
Net income available to common shareholders $ 2,490 $ 1,913 $ 412
Denominator:
Weighted average shares outstanding 10,141 10,130 5,336
Basic earnings per common share $ 0.25 $ 0.19 $ 0.08
F-18
Diluted
Net income available to common shareholders $ 2,490 $ 1,913 $ 412
Interest on convertible debt 243 -- --
-------- -------- --------
Numerator for diluted earnings per share $ 2,733 $ 1,913 $ 412
======== ======== ========
Weighted average shares outstanding 10,141 10,130 5,366
Stock options 1,128 -- --
Convertible debt shares 15,000 -- --
-------- -------- --------
Denominator for diluted earnings per share 26,269 10,130 5,366
======== ======== ========
Diluted earnings (loss) per common share $ 0.10 $ 0.19 $ 0.08
STOCK BASED COMPENSATION
The Company accounts for employee stock transactions in accordance with
APB Opinion No. 25, "Accounting for Stock Issued to Employees." The
Company has adopted the pro-forma disclosure requirements of Statement of
Financial Accounting Standards No. 123, " Accounting For Stock-Based
Compensation."
During the year ended July 31, 2003, the Company adopted Statement of
Financial Accounting Standard No. 148, " Accounting For Stock-Based
Compensation-Transition and Disclosure." This statement amended Statement
No. 123, Accounting for Stock-Based Compensation." As permitted under
Statement No. 123, the Company continues to apply the Accounting
Principles Board Opinion No. 25, "Accounting for Stock Issued to
Employees." As required under Statement No. 148, the following table
present pro-forma net income and basic and diluted earnings (loss) per
share as if the fair value-based method had been applied to all awards.
Years Ended July 31, 2005
-------------------------
Basic Diluted
Net Loss E.P.S. E.P.S.
-------- -------- --------
As Reported $ 2,490 $ 0.25 $ 0.10
Less stock-based employee compensation
cost, net of tax effect, under fair
value accounting (113) (0.02) (0.01)
-------- -------- --------
Pro Forma $ 2,377 $ 0.23 $ 0.09
======== ======== ========
Year Ended July 31, 2004
------------------------
Net Basic Diluted
Income E.P.S. E.P.S.
-------- -------- --------
As Reported $ 1,913 $ 0.19 $ 0.19
Less stock-based employee compensation
cost, net of tax effect, under fair
value accounting $ (141) (0.01) (0.01)
-------- -------- --------
Pro Forma $ 1,772 $ 0.18 $ 0.18
======== ======== ========
Year Ended July 31, 2003
------------------------
Net Basic Diluted
Income E.P.S. E.P.S.
-------- -------- --------
As Reported $ 412 .08 .08
Pro Forma $ 412 .08 .08
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 Statement of Financial Accounting Standards,
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 2005,
2004, and 2003 were:
FY05 FY04 FY03
-------- -------- --------
Risk free interest rate 2.50% 4.22% N/A
Expected dividend yield N/A N/A N/A
Expected life 2 10 N/A
Expected volatility 115.0% 98.7% N/A
F-19
Adjustments for forfeitures are made as they occur. The options and
warrants granted in FY05 were fully vested and exercisable as of year end.
The weighted average fair value per share of the options and warrants
granted in fiscal years 2005, 2004, and 2003 are $ 0.71, $ 0.32, and $
-0-, respectively.
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Years ended July 31,
2005 2004 2003
-------- -------- --------
Cash paid (received) during the year for:
Interest $ 2,980 $ 2,409 $ 3,363
Income taxes, net of refunds 5 15 1
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
The following pronouncements have been issued by the FASB.
In December, 2004, the Financial Accounting Standards Board ("FASB")
issued its final standard on accounting for share-based payments ("SBP"),
FASB Statement No. 123R (revised 2004), Share-Based Payment. The Statement
requires companies to expense the value of employee stock options and
similar awards. Under FAS 123R, SBP awards result in a cost that will be
measured at fair value on the awards' grant date, based on the estimated
number of awards that are expected to vest. Compensation cost for awards
that vest would not be reversed if the awards expire without being
exercised. The effective date of this pronouncement for public companies
is the first annual reporting period beginning after June 15, 2005, and
will apply to all outstanding and unvested SBP awards at a company's
adoption. Management does not anticipate that this Statement will have a
significant impact on the Company's consolidated financial statements.
In May 2005, the Financial Accounting Standard Board ("FASB") issued SFAS
No. 154, "Accounting Changes and Error Corrections - a Replacement of APB
Opinion No. 20 and FASB No. 3." This statement requires retrospective
application of prior periods' financial statements of changes in
accounting principles, unless it is impracticable to determine the period
specific effects, or the cumulative effect of the change. This
pronouncement will be effective December 15, 2005. Currently, the Company
does not have changes in accounting principle, the adoption of SFAS No.
154 will not have an impact on the Company's financial position or results
of operations.
2. RELATED PARTY TRANSACTIONS
The real property and improvements used in connection with the Company's
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 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. 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.
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 Chairman of the Company, and Robert M. Rubin, a director of
the Company. The sale price was $2,210 in cash, which was paid 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. As of October 1, 2000, the Company entered into a renegotiated
7-year lease with an initial annual rate of $276.
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. 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.
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 was 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 recorded in selling, general and administrative
expenses.
F-20
On May 1, 2003, Mr. McLain and Mr. Rubin agreed to convert the principal
amount of a loan made to the Company in the amount of $147 into an
aggregate of 5,538,838 shares of the Company's common stock. In connection
therewith Mr. Rubin received 2,769,419 shares of the Company's common
stock and Mr. McLain received 2,769,419 shares of the Company's common
stock resulting in a compensation charge to the Company of $831which has
been recorded in selling, general and administrative expenses.
On September 8, 2004, McLain-Rubin Realty Company II, LLC ("MRR II"), The
Rubin Family Irrevocable Stock Trust and certain other related parties
loaned the Company $500 for the purchase of Arizona Pacific Materials,
LLC. The interest rate on these notes is 6% with maturity dates between
December 31, 2005 and 2008. These related parties received a total of
2,000,000 options to purchase the Company's stock at a price of $0.55 per
share as part of the loan agreement. The options were valued at $292 and
the cost is being amortized over the life of the loans. As of July 31,
2005 the balance of this loan was $418 (net of discount of $82). No
payments have been made towards these loans as of July 31, 2005.
3. INVENTORIES
Inventories consist of the following:
July 31, July 31,
2005 2004
---------- ----------
Equipment (net of reserve allowances of
$2,937 and $3,427 respectively):
New equipment $ 35,408 $ 18,773
Used equipment 4,545 4,294
Mining 886 --
Parts (net of reserve allowance of $977
and $688 respectively) 5,494 5,871
---------- ----------
$ 46,333 $ 28,938
========== ==========
4. FIXED ASSETS
Fixed assets consist of the following:
July 31, July 31,
2005 2004
---------- ----------
Property, plant, and equipment:
Land $ 1,277 $ 522
Buildings 1,152 1,749
Machinery and equipment 3,059 3,136
Office furniture and fixtures 2,055 2,213
Computer hardware and software 1,332 1,539
Vehicles 1,404 1,275
Leasehold improvements 1,010 985
---------- ----------
11,289 11,419
Less: accumulated depreciation (7,400) (8,799)
---------- ----------
Property, plant, and equipment (net) $ 3,889 $ 2,620
Rental equipment fleet $ 9,145 $ 17,545
Less: accumulated depreciation (3,077) (6,492)
---------- ----------
Rental equipment (net) $ 6,068 $ 11,053
========== ==========
Included in depreciation are charges related to certain inventory rentals
under rent-to-purchase option agreements.
As of July 31, 2005 and 2004 fixed assets (net) includes property under
capital leases in the amount of $503 and $530, respectively.
5. 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.
The Company had an inventory floor plan and operating line of credit
through GE Commercial Distribution Finance ("GE"), fka Deutsche Financial
Services. The credit facility matured December 31, 2001 and had provided
terms with a floating interest rate based on prime with rates between
0.75% under prime to 2.25% over prime depending on the amount of total
debt leverage of the Company. Amounts were advanced to the Company based
on its assets, including accounts receivable, parts inventory, new and
used equipment inventory, rental fleet, real property, and vehicles.
Interest payments on the outstanding balance are due monthly.
F-21
As of June 21, 2002, the Company entered into a Forbearance Agreement with
GE under the terms of which GE raised the interest rate to prime plus 4%
while the Company was in technical default and required the Company to pay
a $45 fee to GE for the forbearance. In addition, under the terms of the
Forbearance Agreement, the Company was required to meet certain financial
covenants and meet certain debt reduction schedules. The Forbearance
Agreement expired December 31, 2002.
As of July 31, 2003 and July 31, 2004, the Company remained in technical
default of its loan agreement. As of August 12, 2004, the Company entered
into a Forbearance Agreement with GE, under the terms of which GE lowered
the interest rate to prime plus 1.75% and required the Company to pay $25
fee to GE for the forbearance. In addition, under the terms of the
Forbearance Agreement, the Company is required to meet certain financial
covenants and meet certain debt reduction schedules. The Forbearance
Agreement expired on December 31, 2004.
In June 2005, the line of credit facility with GE was paid out of proceeds
from a new $32 million senior credit facility with several institutional
lenders.
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,
Interest Rate 2005 2004
Case Credit Corporation Prime + 2% $ 24,558 $ 14,561
(6.75%)
GE Prime + 4.00% -- 31,710
(8.75%)
$ 24,558 $ 46,271
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 December 2005.
The balance of the unpaid principal on the convertible notes (net of
discount) as of July 31, 2005 is $23,708 (net of discount of $2,404) of
which $3,052 (net of discount of $836) is short term.
Western used $23.0 million of the loan proceeds to repay and terminate its
credit facility and forbearance agreement with GE Commercial Distribution
Finance Corporation and $2.5 million to pay off the purchase note of
Arizona Pacific Materials (see Note 12).
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 (net of discount) as of
July 31, 2005 is $1,254 (net of discount of $79) all of which is short
term.
Notes Payable
-------------
Notes payable consists of the following: (000's)
July 31, July 31,
Description 2005 2004
---------- ----------
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 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 49 61
---------- ----------
Total $ 860 $ 111
Less current portion (205) (62)
---------- ----------
Total Long-Term Notes Payable $ 655 $ 49
========== ==========
Future minimum payments under these noncancelable notes payable as of July
31, 2005, are as follows:
Years ending July 31, Notes Convertible Bridge
Payable Debt Loan Total
---------- ---------- ---------- ----------
2006 $ 204 $ 3,889 $ 1,333 $ 5,426
2007 165 6,666 -- 6,831
2008 162 6,667 -- 6,829
2009 179 6,667 -- 6,846
2010 150 6,111 -- 6,261
Thereafter -- -- -- --
---------- ---------- ---------- ----------
Total annual payments 860 30,000 1,333 32,193
Less debt discount -- 3,240 79 3,319
---------- ---------- ---------- ----------
Present value of minimum payments (net of discount) 860 26,760 1,254 28,874
Less current portion 205 3,052 1,254 4,511
---------- ---------- ---------- ----------
Long-term portion $ 655 $ 23,708 $ -- $ 24,363
========== ========== ========== ==========
6. INCOME TAXES
The current year's Federal and State income tax provision consists
substantially of minimum taxes. The principal reasons for the variation
between income taxes at the statutory federal rate and that shown in the
statement of operations were as follows:
Years Ended
July 31, July 31, July 31,
2005 2004 2003
------ ------ ------
Statutory federal income tax rate 34.0% 34.0% 34.0%
State income taxes, net of
federal income tax benefit 5.0% 5.0% 5.0%
Valuation allowance (144.0%) -- --
Utilization of NOLs (26.1%) (28.0%) (27.0%)
Other (8.9%) (8.6%) (1.6%)
------ ------ ------
(140.0%) 2.4% 10.4%
====== ====== ======
Temporary differences between the financial statement and tax basis of
assets and liabilities which give rise to a significant portion of
deferred tax assets and deferred tax liabilities were as follows:
Year Ended
July 31, July 31,
2005 2004
---------- ----------
Net Current Deferred Tax Assets (Liability):
Inventory $ 2,139 $ 2,011
Accounts receivable allowance 354 366
Accrued vacation and bonuses (49) 160
Other accruals 47 83
---------- ----------
Current Deferred Tax Asset 2,491 2,620
Less-Valuation Allowance (1,827) (2,620)
---------- ----------
Net Current Deferred Tax Asset 664 --
Net Long-Term Deferred Tax Assets (Liability):
Fixed Assets 108 (820)
Goodwill and intangibles 591 265
NOL carryforwards 2,435 4,374
---------- ----------
Long-term Deferred Tax Asset (Liability) 3,134 3,819
Less- Valuation Allowance (2,298) (3,819)
---------- ----------
Net Long-term Deferred Tax Asset (Liability) $ 836 $ --
========== ==========
The net change in the valuation allowance for deferred tax assets
decreased by approximately $ 2,314 and $ 123, respectively for the years
ended July 31, 2005 and 2004.
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 realize a portion of the benefits of these deductible
differences in the near
F-23
future and therefore a deferred tax asset of $1,500 ($644 current and $836
non current) was established in 2005 resulting in a valuation allowance of
$4,125.
As of July 31, 2005 the Company has approximately $6.2 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
On March 24 2003, Mr. McLain agreed to convert the accrued and unpaid
interest on a loan made to the Company in the amount of $147 into shares
of the Company's common stock. In connection therewith Mr. McLain received
588,000 shares of the Company's common stock with a value of $82.
On May 1, 2003, Mr. McLain and Mr. Rubin agreed to convert the principal
amount of a loan made to the Company in the amount of $147 into an
aggregate of 5,538,838 shares of the Company's common stock. In connection
therewith Mr. Rubin received 2,769,419 shares of the Company's common
stock and Mr. McLain received 2,769,419 shares of the Company's common
stock resulting in a compensation charge to the Company of $831.
In October 2004, the Company issued 2,000,000 stock options with an
exercise price of $0.55 to related parties as part of a loan made to the
Company for the purchase of Arizona Pacific Materials, LLC. The fair value
of the options of $292 was recorded as a debt discount and is being
amortized over the life of the debt. The unamortized deferred debt
discount as of July 31, 2005 was $82. See Note 12.
In November 2004, the Company granted 750,000 stock options in connection
with certain consulting agreements. The fair value of the options granted
of $97 was recorded as additional paid capital. The associated deferred
compensation is being amortized over the life of the agreements which is
twelve months. As of July 31, 2005 unamortized deferred compensation was
$18.
In February 2005, the Company granted 200,000 stock options in connection
with certain consulting agreements. The fair value of the options granted
of $20 was recorded as compensation expense.
In May 2005, the Company issued 50,000 shares of restricted stock in
connection with certain consulting agreement with Mr. Rubin, a significant
stockholder. The fair value of the stock of $65 was recorded as additional
paid in capital. The associated compensation was expensed in May 2005.
In June 2005, The Company granted 8,500,218 warrants in connection with a
$32,000 senior credit facility consisting of $30,000 of convertible debt
and $2,000 in bridge loans with investors. The fair value of the warrants
granted of $3,472 was recorded as debt discount and is being amortized
over the lives of the convertible debt (5 years) and the bridge loan (6
months). As of July 31, 2005, the unamortized debt discount was $ 3,319.
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. In 2005 the board of directors
established an additional Employee Stock Option Plan with 5,000,000
incentive stock options.
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
employee and director stock option plans:
Option
Shares Price
------ -----
Options outstanding July 31, 2002 1,210,000 0.56
Exercised -- --
Surrendered -- --
Granted -- --
Options outstanding July 31, 2003 1,210,000 0.56
Exercised -- --
Canceled (50,000) 0.53
Granted 440,000 0.35
F-24
Options outstanding July 31, 2004 1,600,000 0.50
Exercised -- --
Canceled -- --
Granted 300,000 1.30
Options outstanding July 31, 2005 1,900,000 0.63
The following table sets forth the exercise prices, the number of options and
warrants outstanding and exercisable, and the remaining contractual lives of all
the Company's stock options at July 31, 2005:
Weighted
Number of Weighted Average Number of Weighted
Options/ Average Contractual Options/ Average
Exercise Warrants Exercise Years Life Warrants Exercise
Price Outstanding Price Remaining Exercisable Price
----- ----------- ----- --------- ----------- -----
$ 4.375 10,000 $ 4.375 .08 10,000 $ 4.375
$ 0.560 1,150,000 $ 0.560 5.50 1,150,000 $ 0.560
$ 0.350 440,000 $ 0.350 8.33 440,000 $ 0.350
$ 0.550 2,000,000 $ 0.550 9.17 1,666,666 $ 0.550
$ 0.550 750,000 $ 0.550 9.25 562,496 $ 0.550
$ 1.300 300,000 $ 1.300 9.75 300,000 $ 1.300
$ 1.19 200,000 $ 1.19 5.00 200,000 $ 1.19
$ 1.750 8,500,218 $ 1.750 4.80 8,500,218 $ 1.750
---------- ----------
Total 13,350,218 12,829,380
========== ==========
During the year ended July 31, 2005, the Company issued 8,500,212
warrants.
8. COMMITMENTS AND CONTINGENCIES
Leases
------
The Company leases certain facilities under noncancelable lease
agreements. As more fully described in Note 3, the building portion of
some of the Company's facility leases qualify under SFAS 13 as "capital
leases" (i.e., an acquisition of an asset and the incurrence of a
liability). The remaining facility lease agreements have terms ranging
from month-to-month to nine years and are accounted for as operating
leases. Certain of the facility lease agreements provide for options to
renew and generally require the Company to pay property taxes, insurance,
and maintenance and repair costs. Total rent expense under all operating
leases aggregated $ 1,364 and $1,458 for the years ended July 31, 2005 and
2004, respectively.
Assets recorded under capital leases are recorded in fixed assets and are
as follows:
July 31, July 31,
2005 2004
---------- ----------
Capitalized asset value $ 953 $ 971
Less accumulated amortization (450) (441)
---------- ----------
$ 503 $ 530
========== ==========
Net capitalized asset values are included in Property, Plant and
Equipment. Future minimum lease payments under all noncancelable leases as
of July 31, 2005, are as follows:
Capital Operating
Year ending July 31, leases leases
---------- ----------
2006 124 1,306
2007 132 1,152
2008 132 643
2009 132 496
2010 132 308
Thereafter 704 1,117
---------- ----------
F-25
Total annual lease payments $ 1,356 $ 5,022
Less amount representing interest, with imputed ==========
interest rates ranging from 6% to 15% 503
----------
Present value of minimum lease payments 853
Less current portion 43
----------
Long-term portion $ 810
==========
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 July 31, 2005, such purchase commitments totaled $
13,488.
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. CONCENTRATION OF CREDIT RISK
Case Corporation provided approximately 49%, 53% and 53% of our products
for the years ending July 31, 2005, 2004 and 2003 respectively. 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.
10. PRODUCT INFORMATION
The Company's operations consist of two business segments. However, the
Company evaluates performance based on revenue and gross margin of three
distinct product categories. Revenue and gross margin by product
categories are summarized as follows:
Business Component Year Ended Year Ended Year Ended
Net Revenues July 31, 2005 July 31, 2004 July 31, 2003
---------- ---------- ----------
Equipment Sales $ 84,634 $ 82,011 $ 71,215
Equipment Rental 3,149 5,250 4,957
Product Support 28,216 28,255 26,224
Mining 1,223 -- --
---------- ---------- ----------
Totals $ 117,222 $ 115,516 $ 102,396
========== ========== ==========
Business Component Year Ended Year Ended Year Ended
Gross Margins July 31, 2005 July 31, 2004 July 31, 2003
---------- ---------- ----------
Equipment Sales $ 7,932 $ 7,767 $ 8,225
Equipment Rental 445 763 668
Product Support 5,393 5,640 4,633
Mining 388 -- --
---------- ---------- ----------
Totals $ 14,158 $ 14,170 $ 13,526
========== ========== ==========
Asset information by reportable product line is not reported, since the
Company does not produce such information internally.
11. UNAUDITED QUARTERLY CONSOLIDATED FINANCIAL DATA
Quarter Total
First Second Third Fourth Year
-------- -------- -------- -------- --------
Fiscal 2005:
Net sales $ 26,744 $ 30,341 $ 28,677 $ 31,460 $117,222
Gross Profit 3,331 2,995 3,188 4,644 14,158
Net income (loss) 519 117 (135) 1,989 2,490
Income (loss) per share - basic 0.05 .01 (0.01) .20 .25
Income (loss) per share - diluted 0.05 .01 (0.01) .08 .10
F-26
Quarter Total
First Second Third Fourth Year
-------- -------- -------- -------- --------
Fiscal 2004:
Net sales $ 27,732 $ 27,960 $ 26,426 $ 33,398 $115,516
Gross Profit 3,569 2,813 2,284 5,504 14,170
Net income (loss) 584 (238) (702) 2,269 1,913
Income (loss) per share - basic 0.06 (0.02) (0.07) .22 .19
Income (loss) per share - diluted 0.06 (0.02) (0.07) .22 .19
Quarter Total
First Second Third Fourth Year
-------- -------- -------- -------- --------
Fiscal 2003:
Net sales $ 24,094 $ 24,663 $ 24,772 $ 28,867 $102,396
Gross Profit 3,461 3,430 2,784 3,851 13,526
Net income (loss) 279 223 110 (200) 412
Income (loss) per share - basic 0.07 0.06 0.03 (0.02) 0.08
Income (loss) per share - diluted 0.07 0.06 0.03 (0.02) 0.08
12. ACQUISITIONS
On September 8, 2004, Western Power & Equipment Corp. ("Western Power"), as the
purchaser, Advanced Mineral Technology of Nevada, Inc., a Nevada Corporation, an
outside consultant ("AMT"), as guarantor and Basalite Concrete Products, LLC, a
Nevada limited liability company ("Basalite"), and Edith Greenburg Irrevocable
Trust (the "Greenburg Trust"), collectively as Seller, entered into the
Agreement for the Purchase of Arizona Pacific Materials, LLC (the "Purchase
Agreement"). Western Power consummated the acquisition of Arizona Pacific
Materials, LLC ("Arizona Pacific") through the purchase, effective as of
September 15, 2004 (the "APM Acquisition"), of all the issued and outstanding
membership interests of Arizona Pacific held by Basalite Concrete Products, LLC
and the Greenburg Trust (collectively, the "Members") as the sole members
thereof for a cash consideration of $500 paid at closing of the APM Acquisition
(the "Closing ") and the issuance at Closing by Western Power of a note in the
principal face amount of $2,500 (the "Western Power Note"), the repayment of
which (Western Power Note) is guaranteed in full by AMT. The Company acquired
APM and the seller indemnified Western Power for all of APM's liabilities as of
the purchase date.
The following table summarizes the allocation of the purchase price:
Purchase Price:
---------------
Cash $ 500
Note payable to members 2,500
----------
Total Purchase Price $ 3,000
==========
Allocation of Purchase Price:
Inventory $ 1,005
Land 1,129
Furniture, fixtures & equipment 866
----------
Total Assets Acquired $ 3,000
==========
The Western Power Note for $2,500 and accrued interest was paid in June 2005.
Western Power issued notes to related parties for the $500 paid at closing, on
behalf of Western Power by these related parties. Per the note agreements
payment on these notes is due September 30, 2005 and accrues simple interest at
the rate of six percent (6%) per annum. Per the terms of the convertible debt
agreement, the payment of these notes was amended to be paid $200 plus accrued
interest in December 2005, $100 plus accrued interest in December 2006, 2007 and
2008. In addition, the Company issued 2,000,000 options (associated with the
$500 notes) on September 9, 2004 with an exercise price of $0.55 per share
vesting over the twelve months beginning October 2004. The estimated fair value
of these options is $292 and is recorded as deferred debt discount and is being
amortized over the period of the related debt. The unamortized deferred debt
discount as of July 31, 2005 was $82.
F-27
The following table of proforma unaudited information gives effect to the
acquisitions of the assets from Arizona Pacific Materials, LLC as if such
acquisition had occurred at the beginning of the periods shown.
YEARS ENDED
July 31, 2005 July 31, 2004
------------ ------------
(000's) (000's)
Revenues $ 117,319 $ 116,972
Net income 2,206 (688)
Net income per share - basic 0.22 (0.07)
Net income per share - diluted 0.08 (0.07)
13. 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 Year Ended July 31, 2005
Revenue $ 115,999 $ 1,223 $ 117,222
Operating Income (Loss) $ 4,867 $ (878) $ 3,989
Net Income (Loss) $ 3,360 $ (870) $ 2,490
Capital Expenditures $ 1,548 $ 2,541 $ 4,089
Total identifiable assets at July 31, 2005 $ 67,387 $ 4,250 $ 71,637
Western Power & Arizona Pacific
Equipment Corp Materials, LLC Total
------------ ------------ ------------
For the Year Ended July 31, 2004
Revenue $ 115,516 $ 0 $ 115,516
Operating Income $ 4,576 $ 0 $ 4,576
Net Income $ 1,913 $ 0 $ 1,913
Capital Expenditures $ 5,668 $ 0 $ 5,668
Total identifiable assets at July 31, 2004 $ 55,024 $ 0 $ 55,024
F-28
REPORT OF INDEPENDENT REGISTERED
PUBLIC ACCOUNTING FIRM
To the Members of Arizona Pacific Materials, LLC
Vancouver, Washington
We have audited the accompanying balance sheets of Arizona Pacific Materials,
LLC (the "Company") as of March 31, 2004 and 2003, and the related statements of
operations, members' deficiency and cash flows for the years ended March 31,
2004 and 2003. 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 in accordance with the standards of the Public Company
Accounting Oversight Board (United States). 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 audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Arizona Pacific Materials, LLC
as of March 31, 2004 and 2003, and the results of its operations and its cash
flows for the years ended March 31, 2004 and 2003 in conformity with U.S.
generally accepted accounting principles.
The accompanying financial statements have been prepared assuming the Company
will continue as a going concern. As discussed in Note 1 to the financial
statements, the Company has had recurring losses from operations, negative cash
flows from operations, and has a working capital deficiency that raises
substantial doubt about its ability to continue as a going concern. Management's
plans in regard to these matters are also discussed in Note 1. The financial
statements do not include any adjustments that might result from the outcome of
this uncertainty.
/s/ Marcum & Kliegman LLP
November 29, 2004
New York, New York
F-29
ARIZONA PACIFIC MATERIALS, LLC
BALANCE SHEETS
MARCH 31, 2004 AND 2003
ASSETS
NOTE 1 - SALE OF BUSINESS
2004 2003
---------- ----------
CURRENT ASSETS
Cash $ 53,468 $ --
Accounts receivable, net of allowance of
$55,909 and $30,514 at March 31, 2004
and 2003, respectively 155,238 396,395
Inventory 1,406,108 1,216,772
Prepaid expenses 4,301 19,486
---------- ----------
TOTAL CURRENT ASSETS 1,619,115 1,632,653
PROPERTY AND EQUIPMENT, NET 1,784,690 1,985,983
OTHER ASSETS
Deposits 200 200
---------- ----------
TOTAL OTHER ASSETS 200 200
---------- ----------
TOTAL ASSETS $3,404,005 $3,618,836
========== ==========
See accompanying notes to financial statements.
F-30
ARIZONA PACIFIC MATERIALS, LLC
BALANCE SHEETS
MARCH 31, 2004 AND 2003
LIABILITIES AND MEMBERS' DEFICIENCY
NOTE 1 - SALE OF BUSINESS
2004 2003
---------- ----------
CURRENT LIABILITIES
Accounts payable - trade 280,431 275,701
Accrued expenses 7,457 12,942
Current portion of note payable 4,287,221 4,284,617
Notes payable to members 1,196,604 318,133
Advances from members 1,314,432 451,948
---------- ----------
TOTAL CURRENT LIABILITIES 7,086,145 5,343,341
LONG-TERM LIABILITIES - LESS CURRENT PORTION 1,310,228 1,583,033
COMMITMENTS AND CONTINGENCIES
MEMBERS' DEFICIENCY (4,992,368) (3,307,538)
---------- ----------
TOTAL LIABILITIES & MEMBERS' DEFICIENCY $3,404,005 $3,618,836
========== ==========
See accompanying notes to financial statements.
F-31
ARIZONA PACIFIC MATERIALS, LLC
STATEMENTS OF OPERATIONS AND MEMBERS' DEFICIENCY
FOR THE YEARS ENDED MARCH 31, 2004 AND 2003
NOTE 1 - SALE OF BUSINESS
2004 2003
------------ ------------
REVENUES $ 1,082,485 $ 1,116,434
COST OF REVENUES 1,976,727 1,337,223
------------ ------------
GROSS PROFIT (894,242) (220,789)
OPERATING EXPENSES
Selling, general, and administrative expenses 456,445 413,701
------------ ------------
TOTAL OPERATING EXPENSES 456,445 413,701
------------ ------------
OPERATING LOSS (1,350,687) (634,490)
OTHER EXPENSE
Interest expense (334,143) (258,900)
Other non operating -- (39,378)
------------ ------------
TOTAL OTHER EXPENSE (334,143) (298,278)
------------ ------------
NET LOSS $ (1,684,830) $ (932,768)
MEMBERS' DEFICIENCY - BEGINNING (3,307,538) (2,374,770)
------------ ------------
MEMBERS' DEFICIENCY - ENDING $ (4,992,368) $ (3,307,538)
============ ============
See accompanying notes to financial statements.
F-32
ARIZONA PACIFIC MATERIALS, LLC
STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED MARCH 31, 2004 AND 2003
NOTE 1 - SALE OF BUSINESS
2004 2003
------------ ------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss $ (1,684,830) $ (932,768)
Adjustments to reconcile net loss to
net cash used in operating activities:
Depreciation 371,966 327,222
Loss on sale of assets -- 42,376
Bad debts 25,395 12,380
(Increase) decrease in:
Accounts receivable 215,760 (74,291)
Prepaid expenses 15,185 (19,486)
Inventory (189,336) (353,622)
Accounts payable - trade 4,730 125,035
Accrued expenses (5,484) (5,854)
------------ ------------
NET CASH USED IN OPERATING ACTIVITIES (1,246,614) (879,008)
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of property, equipment (170,672) (141,415)
Proceeds from sale of fixed assets -- 50,000
------------ ------------
NET CASH USED IN INVESTING ACTIVITIES (170,672) (91,415)
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from bank loans 15,211 2,953,970
Payments of bank loans (285,412) (2,055,863)
Proceeds from loans from members 1,740,955 68,753
------------ ------------
NET CASH PROVIDED BY FINANCING ACTIVITIES 1,470,754 966,860
------------ ------------
NET INCREASE(DECREASE) IN CASH $ 53,468 $ (3,563)
CASH AT BEGINNING OF YEAR -- 3,563
------------ ------------
CASH AT END OF YEAR $ 53,468 $ --
============ ============
See accompanying notes to financial statements.
F-33
ARIZONA PACIFIC MATERIALS, LLC
NOTES TO FINANCIAL STATEMENTS
NOTE 1--NATURE OF BUSINESS AND ORGANIZATION
SALE OF BUSINESS: On September 15, 2004, the Company was acquired by Western
Power & Equipment Corp. See Note 8 for further discussion.
NATURE OF BUSINESS: Arizona Pacific Materials, LLC ("the Company") operates two
surface mines producing cinder aggregate to supply material for block
manufactures, concrete and asphalt suppliers and landscape contractors, in the
Phoenix and Flagstaff, Arizona building/construction markets.
GOING CONCERN: 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 shown in the
accompanying financial statements, the Company has yet to achieve profitability
and has accumulated deficits of $4,992,368 since inception. Additionally, the
Company, for the last year ending March 31, 2004, generated negative cash flow
from operating activities totaling $1,246,614 and had a working capital
deficiency of $5,467,030 as of March 31, 2004. In order to sustain its operating
activities, the Company has been funded through bank financing and advances from
members and other related parties. However, there can be no assurance that the
Company will be successful in raising sufficient capital in order to meet its
future operating needs. The consolidated financial statements do not include any
adjustments that might be necessary should the Company be unable to continue as
a going concern.
NOTE 2--SUMMARY SIGNIFICANT ACCOUNTING POLICIES
REVENUE RECOGNITION: The Company recognizes revenue when product is shipped to
its customers.
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 disclosures and contingent assets and
liabilities at the date of the financial statements and the reported amounts of
revenues and expenses during the reporting period. Actual results could differ
from those estimates.
FAIR VALUE OF FINANCIAL INSTRUMENTS: The carrying values of financial
instruments approximate fair value due to the relatively short period of time
between origination of the instruments and their expected realization, or in the
case of notes payable, because the notes are at interest rates competitive with
those that would be available to the Company in the current market. At March 31,
2004 and 2003, the carrying value of all other financial instruments
approximates their fair values.
LONG-LIVED ASSETS: The Company evaluates long-lived assets for impairment
whenever events or changes in circumstances indicate that the carrying amount of
an asset may not be recoverable. Recoverability of assets to be held and used is
measured by comparison of the carrying amount of an asset to future undiscounted
net cash flows expected to be generated by the asset. If such assets are
considered to be impaired, the impairment to be recognized is measured by the
amount by which the carrying amount of the assets exceeds the fair value of the
assets. As of March 31, 2004 and 2003 there were no such impairments.
ACCOUNTS RECEIVABLE: The Company records an allowance for doubtful accounts
based on specific identification of those accounts that they consider
uncollectible.
INVENTORY: Inventory comprises substantially of processed cinder aggregate in a
finished state ready for resale. Inventory costs comprise not only direct cost
of production, but also an allocation of overhead including mine and other plant
administrative expenses. Depreciation of equipment costs associated with mining
operations are also included in inventory. Inventory is valued at the lower of
cost or market, with cost generally stated on a last-in, first-out (LIFO) basis.
Reserves for obsolescence or slow moving inventory are recorded when such
conditions are identified. As of March 31, 2004 and 2003, the LIFO reserve was
$180,456 and $54,046, respectively.
PROPERTY AND EQUIPMENT: Property and equipment are stated at cost. Depreciation
is computed using the straight-line method over the estimated useful lives of
the assets, generally three to seven years. Leasehold improvements are amortized
over the shorter of the estimated useful life of the improvement or the lease
term.
INCOME TAXES: The Company is treated as a partnership for income tax purposes.
Income or loss from the Company's activities is allocated among the members
based on their respective profit percentages, pursuant to the Company's
operating agreement. No provision has been made for federal and state income
taxes, since such taxes, if any, accrue to the members.
CERTAIN SIGNIFICANT RISKS AND UNCERTAINTIES: Financial instruments which
potentially subject the Company to concentrations of credit risk consist
primarily of cash and accounts receivable. Cash is held with one financial
institution. The Company generates revenue primarily from 8 customers (2004) and
11 (2003) customers which approximate 93% and 92% for the fiscal years 2004 and
2003, respectively.
F-34
ARIZONA PACIFIC MATERIALS, LLC
NOTES TO FINANCIAL STATEMENTS
NOTE 3--PROPERTY & EQUIPMENT, NET
Property and equipment, net includes the following:
2004 2003
------------ ------------
Land $ 536,595 $ 536,595
Equipment 2,408,644 2,254,567
Autos 80,894 64,298
------------ ------------
3,026,133 2,855,460
Less: accumulated depreciation (1,241,443) (869,477)
------------ ------------
Property and equipment, net $ 1,784,690 $ 1,985,983
============ ============
Equipment under capital leases of $ 1,478,819 and $1,578,621 for 2004 and 2003,
respectively, are included above. Depreciation expense totaled $371,965 and
$327,222 for the years ended March 31, 2004 and 2003, respectively.
NOTE 4--ROYALTY AGREEMENTS
The Company is a party to multiple royalty arrangements with land owners for the
extraction of cinder aggregates and basalt from the Phoenix and Flagstaff
locations. These agreements generally require the Company to pay a royalty fee
based upon the number of tons of minerals extracted and sold from land owned by
these land owners. The agreement related to the Flagstaff location has a
pre-determined minimum amount of $40,000 per year. During the year ended March
31, 2004 and 2003, the Company was required to pay $120,355 and $115,188,
respectively, in such royalty fees for both locations.
NOTE 5--NOTES PAYABLE
2004 2003
---------- ----------
Revolving Line of Credit Facility payable to Wells
Fargo Bank, original amount of $4,000,000 in
October 2001 requiring interest only payments based
on annual rate of 1.15% above LIBOR, maturity date
of December 31, 2004. 4,000,000 4,000,000
Note payable to Wells Fargo, original amount of
$15,211 requiring payments of $315 (with interest)
per month starting December 2003 through November
2008. Interest based on annual rate of 8.9%. 14,417 --
Note payable to Bank of America (equipment under
capital lease), original amount $1,961,638 on
November 14, 2002 requiring payments of $30,246
(with interest) per month starting December 2002
extending through October 2009. Interest is based
on an annual rate of approximately 7.6%. 1,583,032 1,867,650
---------- ----------
Total Notes Payable $5,597,449 $5,867,650
Less Current Portion 4,287,221 4,284,617
---------- ----------
Total Long Term Portion $1,310,228 $1,583,033
========== ==========
F-35
ARIZONA PACIFIC MATERIALS, LLC
NOTES TO FINANCIAL STATEMENTS
NOTE 5--NOTES PAYABLE (CONTINUED)
Maturities of long term debt at March 31, 2004 for the next five (5) years are
as follows:
Notes Payable
-------------
2005 $ 4,366,733
2006 366,733
2007 366,733
2008 366,733
2009 365,472
-------------
5,832,404
Less: Interest (234,955)
-------------
$ 5,597,449
=============
Interest expense for fiscal year 2004 and 2003 was $334,143 and $258,900
respectively.
On March 2001, the Company entered into a revolving line of credit with Wells
Fargo Bank. Under the terms of the agreement, the Company was required to meet
certain financial covenants. The agreement expires on December 31, 2004. As July
31, 2004, the Company was in technical default of its loan agreement and there
has been no demands for repayment by the bank. The Wells Fargo revolving line of
credit facility is collateralized by substantially all the assets of the
Company. There can be no assurance that the credit line will not be called or
that Wells Fargo Bank will continue to make borrowings available to the Company.
See Note 8.
The note payable to the Bank of America is collateralized primarily by the
related equipment for which the loan proceeds were used to purchase.
The members have also personally guaranteed the notes payable to Wells Fargo
Bank and Bank of America.
NOTE 6--RELATED PARTY TRANSACTIONS
From time to time, the members of Arizona Pacific Materials, LLC have advanced
funds to the Company to sustain operations. As of the years ended March 31, 2004
and 2003 the balance of these advances was $1,314,432 and $451,948,
respectively. Advances are payable on demand and accrue interest at 6% per
annum. In addition, Pacific Coast Building Materials, LLC, the parent company of
Basalite Concrete Products, LLC, a member, has loaned the Company certain funds
under a note agreement with interest payable at 6.0%. The notes are payable on
demand. The balance of this note as of the years ended March 31, 2004 and 2003
was $ 1,196,604 and $318,133 , respectively. No payments were made for interest
or principal during the two years ended March 31, 2004.
The members have also personally guaranteed the notes payable to Wells Fargo
Bank and Bank of America. See Note 5.
NOTE 7--COMMITMENTS AND CONTINGENCIES
LEASE COMMITMENTS
The Company leases office space on a month to month rental agreement. Total rent
expense for its facilities for the years ended March 31, 2004 and 2003 was $
62,707 and $ 127,075, respectively. The Company also leases the land surface
rights from the State of Arizona for an annual rental of $3,200 expiring
September 18, 2006. The following is a schedule of future minimum non-cancelable
lease payments.
Fiscal years ending March 31,
2005 $ 3,200
2006 3,200
2007 --
2008 --
2009 --
Thereafter --
----------
$ 6,400
==========
F-36
ARIZONA PACIFIC MATERIALS, LLC
NOTES TO FINANCIAL STATEMENTS
LITIGATION
From time to time, the Company may be a defendant in litigation arising in the
normal course of business. Currently there are no material ongoing litigation to
be disclosed.
NOTE 8--ACQUISITIONS
On September 8, 2004, Western Power & Equipment Corp. ("Western Power"), as the
purchaser, Advanced Mineral Technology of Nevada, Inc., a Nevada Corporation, an
outside consultant ("AMT"), as guarantor and Basalite Concrete Products, LLC, a
Nevada limited liability company ("Basalite"), and Edith Greenburg Irrevocable
Trust (the "Greenburg Trust"), collectively as Seller, entered into the
Agreement for the Purchase of Arizona Pacific Materials, LLC (the "Purchase
Agreement"). Western Power consummated the acquisition of Arizona Pacific
Materials, LLC ("Arizona Pacific") through the purchase, effective as of
September 15, 2004 (the "APM Acquisition"), of all the issued and outstanding
membership interests of Arizona Pacific held by Basalite and the Greenburg Trust
(collectively, the "Members") as the sole members thereof for a cash
consideration of $500,000 paid at closing of the APM Acquisition (the "Closing
") and the issuance at Closing by Western Power of a note in the principal face
amount of $2,500,000 (the "Western Power Note"), the repayment of which (Western
Power Note) is guaranteed in full by AMT (the "Guaranty"). The Company acquired
substantially all the assets of APM and did not assume any of the liabilities.
The Western Power Note is to be paid in two installments, the first of which is
due and payable within thirteen (13) months of the Closing in the amount of Two
Million Dollars ($2,000,000) and the second installment is due and payable
within nineteen (19) months of the Closing in the amount of the outstanding
principal of $500,000 and accrued interest. The Western Power Note shall accrue
simple interest at the rate of five percent (5%) per annum which interest shall
commence accumulating from the closing.
NOTE 9--MEMBERS' DEFICIENCY
The Company operates a Limited Liability Company. Based on the LLC Agreement,
the Company shall continue in existence as an LLC into perpetuity unless sooner
dissolved. All members have a right to vote on all matters required to be
submitted to a vote of the members. In addition, the LLC Agreement provides for,
among other things, requirements regarding capital contributions, membership
interests, allocations and distributions, management of the Company, transfer of
ownership, and dissolution or liquidation of the Company.
F-37
ARIZONA PACIFIC MATERIALS, LLC
BALANCE SHEET
JULY 31, 2004 AND 2003
UNAUDITED
NOTE 1 - SALE OF BUSINESS
2004 2003
------------ ------------
ASSETS
CURRENT ASSETS
Cash -- 19,326
Accounts receivable, net of allowance of
$63,332 and 30,514 at July 31, 2004 and 2003
respectively 142,132 370,609
Inventory 1,387,532 1,241,773
Prepaid expenses 11,111 7,007
------------ ------------
TOTAL CURRENT ASSETS 1,540,775 1,638,715
PROPERTY AND EQUIPMENT, NET 1,597,442 1,991,175
OTHER ASSETS
Deposits 200 200
------------ ------------
TOTAL OTHER ASSETS 200 200
------------ ------------
TOTAL ASSETS $ 3,138,417 $ 3,630,090
============ ============
LIABILITIES AND MEMBERS' DEFICIENCY
CURRENT LIABILITIES
Accounts payable - trade 219,219 359,019
Accrued expenses 19,365 27,130
Current portion of note payable 4,287,548 4,284,617
Notes payable to members 1,422,836 554,432
Advances from members 1,536,961 683,632
------------ ------------
TOTAL CURRENT LIABILITIES 7,485,929 5,908,830
LONG-TERM LIABILITIES - LESS CURRENT PORTION 1,214,155 1,488,161
MEMBERS' DEFICIENCY (5,561,667) (3,766,901)
------------ ------------
TOTAL LIABILITIES & MEMBERS' DEFICIENCY $ 3,138,417 $ 3,630,090
============ ============
F-38
ARIZONA PACIFIC MATERIALS, LLC
STATEMENTS OF OPERATIONS & MEMBER'S DEFICIENCY
FOR THE FOUR MONTH PERIOD ENDED JULY 31, 2004 AND 2003
UNAUDITED
NOTE 1 - SALE OF BUSINESS
2004 2003
------------ ------------
REVENUES $ 139,325 $ 451,869
COST OF REVENUES 427,666 557,452
------------ ------------
GROSS PROFIT (288,341) (105,583)
OPERATING EXPENSES
Selling, general, and administrative expenses 115,040 251,355
------------ ------------
TOTAL OPERATING EXPENSES 115,040 251,355
------------ ------------
OPERATING LOSS (403,381) (356,938)
OTHER EXPENSES
Interest expense (130,144) (102,425)
Other non operating (35,774) --
------------ ------------
TOTAL OTHER EXPENSE (165,918) (102,425)
------------ ------------
NET LOSS $ (569,299) $ (459,363)
MEMBER'S DEFICIT - BEGINNING (4,992,368) (3,307,538)
------------ ------------
MEMBER'S DEFICIT - ENDING $ (5,561,667) $ (3,766,901)
============ ============
F-39
ARIZONA PACIFIC MATERIALS, LLC
STATEMENT OF CASH FLOWS
FOR THE FOUR MONTH PERIOD ENDED JULY 31, 2004 AND 2003
UNAUDITED
NOTE 1 - SALE OF BUSINESS
2004 2003
------------ ------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss $ (569,299) $ (459,363)
Adjustments to reconcile net loss to
net cash used in operating activities:
Depreciation 123,974 118,426
Loss on sale of assets 28,274 --
Reserve for bad debts 5,423 --
(Increase) decrease in:
Accounts receivable 7,683 25,869
Prepaid expenses (6,810) 12,394
Inventory 18,575 (25,000)
Accounts payable - trade (61,211) 83,318
Accrued expenses 11,908 14,189
------------ ------------
NET CASH USED IN OPERATING ACTIVITIES (441,483) (230,167)
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of property, equipment -- (123,618)
Proceeds from sale of fixed assets 35,000 --
------------ ------------
NET CASH PROVIDED BY (USED IN)
INVESTING ACTIVITIES 35,000 (123,618)
CASH FLOWS FROM FINANCING ACTIVITIES
Payments of bank loans (95,746) (737,044)
Proceeds from loans from members 448,761 1,110,155
------------ ------------
NET CASH PROVIDED BY FINANCING ACTIVITIES 353,015 373,111
------------ ------------
NET INCREASE(DECREASE) IN CASH $ (53,468) 19,326
CASH AT BEGINNING OF PERIOD 53,468 --
------------ ------------
CASH AT END OF PERIOD $ -- 19,326
============ ============
F-40
ARIZONA PACIFIC MATERIALS, LLC
NOTES TO FINANCIAL STATEMENTS
UNAUDITED
NOTE 1--NATURE OF BUSINESS AND ORGANIZATION
DESCRIPTION OF BUSINESS: Arizona Pacific Materials, LLC ("the Company") operates
two surface mines producing cinder aggregate to supply material for block
manufactures, concrete and asphalt suppliers and landscape contractors, in the
Phoenix and Flagstaff, Arizona building/construction markets. On September 15,
2004, the Western Power & Equipment Corp. purchased the Company.
GOING CONCERN: 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 shown in the
accompanying condensed financial statements, the Company has yet to achieve
profitability and has accumulated deficits of $5,561,667 since inception.
Additionally, the Company, continues to generate negative cash flow from
operating activities and had a working capital deficiency of $5,945,154 as of
July 31, 2004. In order to sustain its operating activities, the Company has
primarily been funded through bank financing and advances from members and a
related party. However, there can be no assurance that the Company can be
successful in raising sufficient capital in order to meet its future operating
needs. The consolidated financial statements do not include any adjustments that
might be necessary should the Company be unable to continue as a going concern.
BASIS OF PRESENTATION The accompanying unaudited financial statements have been
prepared in accordance with generally accepted accounting principles for interim
financial information. Accordingly, they do not include all of the information
and footnotes required by accounting principles generally accepted in the United
States for complete financial statements. In the opinion of management, all
adjustments (consisting of normal recurring accruals) considered necessary for a
fair presentation have been included. Operating results for the four months
ended July 31, 2004 are not necessarily indicative of the results that may be
expected for the fiscal year ended March 31, 2005. For further information,
refer to the Company's annual March 31, 2004 and 2003 financial statements and
footnotes included in this filing on pages 4 to 12.
INVENTORY: Inventory comprises substantially of processed cinder aggregate in a
finished state ready for resale. Inventory costs comprise not only direct cost
of production, but also an allocation of overhead including mine and other plant
administrative expenses. Depreciation of equipment costs associated with mining
operations are also included in inventory. Inventory is valued at the lower of
cost or market, with cost generally stated on a last-in, first-out (LIFO) basis.
Reserves for obsolescence or slow moving inventory are recorded when such
conditions are identified. As of July 31, 2004 and 2003, the LIFO reserve was
$195,462 and $ 60,450 respectively.
NOTE 2--COMMITMENTS AND CONTINGENCIES
LEASE COMMITMENTS
The Company leases office space on a month to month rental agreement. Total rent
expense for its facilities for the four month period ended July 31, 2004 and
2003 was $ 11,414 and $ 62,707, respectively. The Company also leases the land
surface rights from the State of Arizona for an annual rental of $3,200 expiring
September 18, 2006. The following is a schedule of future minimum non-cancelable
lease payments.
Fiscal years,
2005 $ 3,200
2006 3,200
2007 --
2008 --
2009 --
Thereafter --
----------
$ 6,400
==========
LITIGATION
From time to time, the Company may be a defendant in litigation arising in the
normal course of business. Currently there are no material ongoing litigation to
be disclosed.
F-41
ARIZONA PACIFIC MATERIALS, LLC
NOTES TO FINANCIAL STATEMENTS
UNAUDITED
NOTE 3--RELATED PARTY TRANSACTIONS
From time to time, the members of Arizona Pacific Materials, LLC have advanced
funds to the Company to sustain operations. As of July 31, 2004 and 2003 the
balance of these advances was $1,536,961 and $683,632, respectively. Advances
are payable on demand and accrue interest at 6% per annum. In addition, Pacific
Coast Building Materials, LLC, the parent company of Basalite Concrete Products,
LLC, a member, has loaned the Company certain funds under a note agreement with
interest payable at 6.0%. The notes are payable on demand. The balance of this
note as of July 31, 2004 and 2003 was $ 1,422,836 and $554,432 , respectively.
No payments were made for interest or principal during the two years.
The members have also personally guaranteed the notes payable to Wells Fargo
Bank and Bank of America.
F-42
WESTERN POWER & EQUIPMENT CORP AND SUBSIDIARY
PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
JULY 31, 2004
WESTERN POWER & EQUIPMENT CORP AND SUBSIDIARY
WESTERN POWER & EQUIPMENT CORP AND ARIZONA PACIFIC MATERIALS, LLC
PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS
The following unaudited pro forma consolidated balance sheet aggregates the
consolidated balance sheets of Western Power & Equipment Corp (WPE) and
subsidiary, as of July 31, 2004, and the balance sheet of Arizona Pacific
Materials, LLC as of July 31, 2004, and gives effect to the purchase transaction
which occurred on September 15, 2004. The accounting for the transaction is more
fully described in Note 1 to the pro forma financial statements.
The following unaudited pro forma consolidated statement of operations combine
the results of operations of Western Power & Equipment Corp and its subsidiary
for the year ended July 31, 2004, with the results of operations of Arizona
Pacific Materials, LLC (APM), which it acquired effective September 15, 2004.
The statement of operations presents the business activity for both entities for
the twelve months ended July 31, 2004, as if the acquisition of Arizona Pacific
Materials, LLC occurred as of the beginning of the fiscal year.
The unaudited pro forma consolidated financial statements should be read in
conjunction with the separate historical audited financial statements of Arizona
Pacific Materials, LLC, appearing elsewhere herein, and the historical audited
financial statements of Western Power & Equipment Corp, as filed and included in
Form 10-K for the period ended July 31, 2004. These pro forma financial
statements are not necessarily indicative of the consolidated financial
position, had the acquisition occurred on the date indicated above, or the
consolidated results of operations which might have existed for the periods
indicated or the results of operations as they may be in the future. The pro
forma adjustments are based on available financial information and certain
estimates and assumptions set forth in the accompanying notes.
F-43
WESTERN POWER & EQUIPMENT CORP AND SUBSIDIARY
PRO FORMA CONSOLIDATED BALANCE SHEET
(UNAUDITED)
JULY 31, 2004
ASSETS
WPE APM Pro Forma
Consolidated Consolidated Pro Forma Consolidated
07/31/2004(a) 07/31/2004(b) Adjustments 07/31/2004
------------ ------------ ------------ ------------
CURRENT ASSETS
Cash and cash equivalents $ 417,151 $ -- $ -- $ 417,151
Accounts receivable, net 11,659,952 142,132 (142,132)(c) 11,659,952
Inventory 28,937,995 987,532 17,193 (d) 29,942,720
Prepaid expenses 205,099 11,111 (11,111)(e) 205,099
------------ ------------ ------------ ------------
TOTAL CURRENT ASSETS 41,220,197 1,140,775 (136,050) 42,224,922
PROPERTY AND EQUIPMENT, NET 13,673,105 1,997,442 (2,167)(f) 15,668,380
OTHER ASSETS
Other assets 131,108 200 (200)(g) 131,108
------------ ------------ ------------ ------------
TOTAL OTHER ASSETS 131,108 200 (200) 131,108
------------ ------------ ------------ ------------
TOTAL ASSETS $ 55,024,410 $ 3,138,417 $ (138,417) $ 58,024,410
============ ============ ============ ============
LIABILITIES & STOCKHOLDER'S EQUITY (DEFICIENCY)
CURRENT LIABILITIES
Borrowings under floor plan financing $ 14,560,671 $ -- $ -- $ 14,560,671
Short term borrowings - GE line of credit 31,709,750 -- -- 31,709,750
Convertible debt 50,000 -- -- 50,000
Accounts payable 5,461,387 219,219 (219,219)(h) 5,461,387
Accrued liabilities 2,199,575 19,365 (19,365)(i) 2,199,575
Capital leases payable 27,211 -- -- 27,211
Notes payable to members -- 1,422,836 (1,422,836)(j) --
Advances from members -- 1,536,961 (1,536,961)(j) --
Notes payable, current portion 11,839 4,287,548 (4,287,548)(k) 11,839
------------ ------------ ------------ ------------
TOTAL CURRENT LIABILITIES 54,020,433 7,485,929 (7,485,929) 54,020,433
NOTES PAYABLE, LONG TERM PORTION AND OTHER LIABILITIES 901,943 1,214,155 1,785,845 (k) 3,901,943
------------ ------------ ------------ ------------
TOTAL LIABILITIES 54,922,376 8,700,084 (5,700,084) 57,922,376
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY (DEFICIENCY)
Common stock 10,260 -- -- 10,260
Additional paid-in capital 16,932,207 -- -- 16,932,207
Treasury Stock (843,511) -- -- (843,511)
Accumulated deficit (15,996,922) (5,561,667) 5,561,667 (l) (15,996,922)
------------ ------------ ------------ ------------
TOTAL STOCKHOLDERS' EQUITY (DEFICIENCY) 102,034 (5,561,667) 5,561,667 102,034
------------ ------------ ------------ ------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY
(DEFICIENCY) $ 55,024,410 $ 3,138,417 $ (138,417) $ 58,024,410
============ ============ ============ ============
F-44
WESTERN POWER & EQUIPMENT CORP AND SUBSIDIARY
PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
(UNAUDITED)
FOR THE YEAR ENDED JULY 31, 2004
APM
WPE Twelve Months Pro Forma
Consolidated Ended Pro Forma Consolidated
07/31/2004(a) 07/31/2004(b) Adjustments 07/31/2004
------------ ------------ ------------ ------------
REVENUES $115,516,238 $ 769,940 -- $116,286,178
COST OF REVENUES 101,346,512 1,723,805 -- 103,070,317
------------ ------------ ------------ ------------
GROSS PROFIT 14,169,726 (953,865) -- 13,215,861
OPERATING EXPENSES
Selling, general and administrative
expenses 9,594,406 443,266 -- 10,037,672
------------ ------------ ------------ ------------
NET OPERATING INCOME (LOSS) 4,575,320 (1,397,131) -- 3,178,189
OTHER INCOME (EXPENSE)
Other income 152,065 (35,774) -- 116,291
Interest expense, net (2,766,572) (361,861) (80,764)(c) (3,209,197)
------------ ------------ ------------ ------------
TOTAL OTHER INCOME (EXPENSE) (2,614,507) (397,635) (80,764) (3,092,906)
------------ ------------ ------------ ------------
NET INCOME(LOSS) BEFORE TAXES 1,960,813 (1,794,766) (80,764) 85,283
PROVISION FOR INCOME TAXES 48,000 -- -- 48,000
------------ ------------ ------------ ------------
NET INCOME $ 1,912,813 $ (1,794,766) $ (80,764) $ 37,283
============ ============ ============ ============
Net Income per Common Share, Basic and Diluted $ 0.01
============
Weighted Average Shares Outstanding 10,130,000
============
F-45
WESTERN POWER & EQUIPMENT CORP AND SUBSIDIARY
NOTES TO PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 1--ACQUISITION
On September 15, 2004, Western Power & Equipment Corp acquired Arizona Pacific
Materials, LLC, a Phoenix, Arizona-based company that operates two surface mines
producing cinder aggregate to supply material for block manufactures, concrete
and asphalt suppliers and landscape contractors, in the Phoenix and Flagstaff,
Arizona building/construction markets.
Pursuant to the purchase, Western Power & Equipment Corp agreed to pay
$3,000,000, of which $500,000 was paid in cash to the seller upon the closing of
the transaction and a note to the seller was signed for $2,500,000 due in two
installments, $2,000,000 due within thirteen months and $500,000 due within
nineteen months of the date of closing. The following table summarizes the
allocation of the purchase price:
Purchase Price:
---------------
Cash $ 500,000
Note payable to members 2,500,000
----------
Total Purchase Price $3,000,000
==========
Allocation of Purchase Price:
Inventory $1,004,725
Land 1,129,000
Furniture, fixtures & equipment 866,275
----------
Total Assets Acquired $3,000,000
==========
NOTE 2--PRO FORMA ADJUSTMENTS
The pro forma adjustments give effect to the purchase of Arizona Pacific
Materials, LLC (APM), as if all of these transactions had occurred at the
beginning of the period presented.
BALANCE SHEET:
(a) Derived from the audited balance sheet of Western Power & Equipment Corp as
of July 31, 2004.
(b) Derived from the unaudited balance sheet of Arizona Pacific Materials, LLC
as of July 31, 2004.
(c) Adjusted for the elimination of receivables not assumed by Western Power &
Equipment Corp.
(d) Adjusted for valuation of Arizona Pacific Materials, LLC inventory at the
date of purchase.
(e) Adjusted for the elimination of prepaid expenses not acquired by Western
Power & Equipment Corp.
(f) Adjusted for the increased appraisal value for land and an adjustment of
equipment to lower the cost to a derived market value at the date of purchase.
(g) Adjusted for the elimination of deposits not acquired by Western Power &
Equipment Corp.
(h) Adjusted for the elimination of accounts payable not assumed by Western
Power & Equipment Corp.
(i) Adjusted for the elimination of accrued liabilities not assumed by Western
Power & Equipment Corp.
(j) Adjusted for the elimination of payables to members not assumed by Western
Power & Equipment Corp.
F-46
WESTERN POWER & EQUIPMENT CORP AND SUBSIDIARY
NOTES TO PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 2--PRO FORMA ADJUSTMENTS (CONTINUED)
(k) Adjusted for the elimination of long term notes payable of $5,501,703 not
assumed by Western Power & Equipment Corp and the addition of the notes payable
by Western Power & Equipment Corp related to the purchase of Arizona Pacific
Materials, LLC in the amount of $2,500,000 and $500,000 to third parties to
finance the payment due at closing. These notes are payable with interest at 5%
per annum.
(l) Adjusted for the elimination of Arizona Pacific Materials LLC equity
accounts.
STATEMENT OF OPERATIONS:
(a) Derived from the audited statement of operations of Western Power &
Equipment Corp for the twelve months ended of July 31, 2004.
(b) Derived from the unaudited statement of operations of Arizona Pacific
Materials, LLC for the twelve months ended July 31, 2004. The statement of
operations was derived by adding the four (4) months ended July 31, 2004 to
APM's twelve (12) months ended March 31, 2004 (audited financial statements) and
removing the four (4) months ended July 31, 2003.
(c) Adjusted for the elimination of interest expense of $361,861 related to the
debt not assumed by Western Power & Equipment Corp and the addition of interest
expense of $150,000 related to the $3,000,000 in notes related to the
acquisition of Arizona Pacific Materials, LLC and interest expense of $292,625
related to 2,000,000 options issued as part of these notes.
F-47
PART II
INFORMATION NOT REQUIRED IN THE PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The following table sets forth the expenses (other than underwriting discounts
and commissions) in connection with the offering described in this Registration
Statement, all of which, including the shares of common stock issuable upon
conversion of warrants offered by the selling security holders, shall be paid by
us. All of such amounts (except the SEC Registration Fee) are estimated.
SEC Registration Fee........................................... $ 7,655.33
Legal Fees and Expenses........................................ $ 50,000.00
Accounting Fees and Expenses................................... $ 25,000.00
Printing Expenses.............................................. $ 5,000.00
Total.......................................................... $ 87,655.33
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
We have adopted provisions in our articles of incorporation and bylaws that
limit the liability of its directors and provide for indemnification of its
directors and officers to the full extent permitted under the Delaware General
Corporation Law. Under our certificate of incorporation, and as permitted under
the Delaware General Corporation Law, directors are not liable to us or its
stockholders for monetary damages arising from a breach of their fiduciary duty
of care as directors. Such provisions do not, however, relieve liability for
breach of a director's duty of loyalty to us or its stockholders, liability for
acts or omissions not in good faith or involving intentional misconduct or
knowing violations of law, liability for transactions in which the director
derived as improper personal benefit or liability for the payment of a dividend
in violation of Delaware law. Further, the provisions do not relieve a
director's liability for violation of, or otherwise relieve us or our directors
from the necessity of complying with, federal or state securities laws or affect
the availability of equitable remedies such as injunctive relief or rescission.
At present, there is no pending litigation or proceeding involving a director,
officer, employee or agent of us where indemnification will be required or
permitted. We are not aware of any threatened litigation or proceeding that may
result in a claim for indemnification by any director or officer.
Insofar as indemnification for liabilities under the Securities Act may be
permitted to our directors, officers and controlling persons pursuant to the
provisions described above, or otherwise, we have been advised that in the
opinion of Commission such indemnification is against public policy as expressed
in the Securities Act and is, therefore, unenforceable. In the event that a
claim for indemnification against such liabilities (other than the payment by us
of expenses incurred or paid by our director, officer or controlling person in
the successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, we will, unless in the opinion of our counsel the matter as been
settled by controlling precedent, submit to a court of appropriate jurisdiction
the question whether such indemnification by it is against public policy as
expressed in the Securities Act and will be governed by the final adjudication
of such issue.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES.
During the past three years, we sold unregistered securities in the transactions
described below. There were no underwriters involved in the transactions and
there were no underwriting discounts or commissions paid in connection
therewith, except as disclosed below. The issuance of these securities were
considered to be exempt from registration under Section 4(2) of the Securities
Act, as amended, and the regulations promulgated thereunder. The purchasers of
the securities in such transactions represented their intentions to acquire the
securities for investment only and not with a view to or for sale in connection
with any distribution thereof and appropriate legends were affixed to the
certificate for the securities issued in such transaction. The purchaser of the
securities in such transactions had adequate access to information about us.
As of December 31, 2004 under our 1995 Stock Option Plan, we have granted
1,500,000 options to purchase shares of our common stock. In addition, as of
December 31, 2004 under our 1995 Stock Option Plan for Non-Employee Directors,
we have granted 400,000 options to purchase shares of our common stock.
On May 1, 2003, we issued 2,769,419 shares to C. Dean McLain, our Chief
Executive Officer, in connection with the conversion of a debt in the principal
amount of $73,500 owed by us to Mr. McLain.
F-48
On May 1, 2003, we issued 2,769,419 shares to The Rubin Family Irrevocable Stock
Trust, a principal shareholder of Western Power, in connection with the
conversion of a debt in the principal amount of $73,500 owed by us to The Rubin
Family Irrevocable Stock Trust.
On March 24, 2003, we issued 588,000 shares of our common stock to Mr. McLain in
connection with the conversion of $147,000 in accrued and unpaid interest on a
loan made to us by Mr. McLain.
In July 2002, we issued 600,000 shares of our common stock to The Rubin Family
Irrevocable Stock Trust in lieu of compensation to Mr. Rubin.
In September 2004 we granted 2,000,000 options to purchase shares of our common
stock related to notes issued for the down payment for the purchase of Arizona
Pacific Materials, LLC.
In November 2004 we granted 790,000 options to purchase shares of our common
stock for consulting services.
In November 2004 we granted 100,000 options to purchase shares of our common
stock to each of Steven Moskowitz, Michael Metter and James Fisher, members of
the board of directors.
In February 2005 we granted 200,000 options to purchase shares of our common
stock for consulting services.
In June 2005, we issued 50,000 shares of our common stock to Mr. Rubin in lieu
of compensation.
On June 9, 2005, we closed upon a new $32 million senior credit facility from
several institutional lenders. The facility is comprised of $30 million of
convertible debt and a $2 million bridge loan, both at the London Interbank
Offered Rate ("LIBOR") plus 6%. We entered into a Securities Purchase Agreement
(the "Purchase Agreement") with each of the several lenders. Pursuant to the
terms of the Purchase Agreement, we sold $30 million in Variable Rate Secured
Convertible Debentures (the "Series A Debentures") due 60 months from the date
of issuance and $2 million in Variable Rate Secured Debentures (the "Series B
Debentures" and, with the Series A Debentures, the "Debentures") due 6 months
from the date of issuance. The Series A Debentures are convertible, at the
option of the Purchasers, into shares of our common stock at a conversion price
of $2.00 per share, subject to adjustment. Purchasers of the Debentures received
Series A Warrants and Series B Warrants to purchase an aggregate of
approximately 8.5 million shares of our common stock at an exercise price of
$1.75 per share, subject to adjustment, for a term of five years. In addition,
the Purchasers received Series C Warrants which allow each Purchaser of
Debentures the right to purchase a number of Series A Debentures and Series A
Warrants in proportion to its initial investment in our company. The Series C
Warrants have a term of exercise equal to the earlier of (i) the 18 months
anniversary of the effective date of this registration statement and (ii) June
9, 2008.
ITEM 16. EXHIBITS
Exhibit
NUMBER DESCRIPTION
3.1 Certificate of Incorporation of Registrant. (2)
3.2 By-laws of Registrant. (2)
4.1 Form of Securities Purchase Agreement entered into with each of the
several institutional lenders and dated as of June 8, 2005. (9)
4.2 Form of Variable Rate Secured Convertible Debenture entered into with
each of the several institutional lenders and dated as of June 8,
2005. (9)
4.3 Form of Variable Rate Secured Debenture entered into with each of the
several institutional lenders and dated as of June 8, 2005. (9)
4.4 Form of Common Stock Purchase Warrant entered into with each of the
several institutional lenders and dated as of June 8, 2005. (9)
4.5 Form of Series C Warrant entered into with each of the several
institutional lenders and dated as of June 8, 2005. (9)
4.6 Form of Registration Rights Agreement entered into with each of the
several institutional lenders and dated as of June 8, 2005. (9)
F-49
4.7 Form of Security Agreement entered into with each of the several
institutional lenders and dated as of June 8, 2005. (9)
4.8 Option Agreement entered into with The Hayde Family Revocable Trust
dated November 1, 2004. (9)
4.9 Option Agreement entered into with The Sweeney Family Revocable Trust
dated November 1, 2004. (9)
4.10 Option Agreement entered into with Steve Bayern dated November 1,
2004. (9)
4.11 Option Agreement entered into with Strategic Growth International,
Inc. dated February 16, 2005. (9)
4.12 Form of Stock Purchase Agreement dated September 23, 2005 whereby
American United Global, Inc. sold 1,222,586 shares of our common
stock to the purchasers thereof. (10)
5.1 Opinion of Gersten Savage LLP (11)
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. (9)
10.12 Consulting Agreement dated August 1, 2000 by and between Registrant
and Robert M. Rubin. (9)
10.13 Commercial Lease dated October 1, 2000 between McLain-Rubin Realty
Company III, LLC and Registrant for Yuba City, California facility.
(9)
10.14 Commercial Lease dated October 1, 2000 between McLain-Rubin Realty
Company III, LLC and Registrant for Sacramento, California facility.
(9)
10.15 Commercial Lease, dated as of October 1, 2000 between McLain-Rubin
Realty Company, LLC and Registrant for the Sparks, Nevada facility.
(9)
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. (9)
21. Subsidiaries of the Company. (11)
23.1 Consent of Marcum & Kliegman LLP, Independent Registered Public
Accounting Firm (11)
F-50
(1) Filed as an Exhibit to the AUGI 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.
(9) Filed as an exhibit to the Form S-1 filed by the Registrant on July 22,
2005 and incorporated herein by reference thereto.
(10) Filed as an exhibit to the Form S-1 filed by the Registrant on November
30, 2005 and incorporated herein by reference thereto.
(11) Filed herewith.
F-51
ITEM 17. UNDERTAKINGS.
Insofar as indemnification for liabilities arising under the Act may be
permitted to directors, officers and controlling persons of the registrant
pursuant to the foregoing provisions or otherwise, the registrant has been
advised in the opinion of the Commission such indemnification is against public
policy as expressed in the Act and is, therefore, unenforceable. In the event
that a claim for indemnification against such liabilities (other than the
payment by the registrant of expenses incurred or paid by a director, officer or
controlling person of the registrant in the successful defense of any action,
suit or proceeding) is asserted by such director, officer or controlling person
in connection with the securities being registered, the registrant will, unless
in the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in the Act and
will be governed by the final adjudication of such issue.
The undersigned hereby undertakes:
(1) To file, during any period in which offers or sales are being
made, a post-effective amendment to this registration statement:
(i) To include any prospectus required by Section 10(a)(3) of
the Securities Act of 1933;
(ii) To reflect in the prospectus any facts or events arising
after the effective date of the registration statement (or the
most recent post-effective amendment thereof) which,
individually or in the aggregate, represent a fundamental change
in the information set forth in the registration statement.
Notwithstanding the foregoing, any increase or decrease in
volume of securities offered (if the total dollar value of
securities offered would not exceed that which was registered)
and any deviation from the low or high end of the estimated
maximum offering range may be reflected in the form of
prospectus filed with the Commission pursuant to Rule 424(b) if,
in the aggregate, the changes in volume and price represent no
more than 20 percent change in the maximum aggregate offering
price set forth in the "Calculation of Registration Fee" table
in the effective registration statement; and
(iii) To include any material information with respect to the
plan of distribution not previously disclosed in the
registration statement or any material change to such
information in the registration statement.
(2) That, for the purpose of determining any liability under the
Securities Act of 1933, each such post-effective amendment shall be
deemed to be a new registration statement relating to the securities
offered therein, and the offering of such securities at that time
shall be deemed to be the initial BONA FIDE offering thereof.
(3) To remove from registration by means of a post-effective
amendment any of the securities being registered which remain unsold
at the termination of the offering.
(4) That, for purposes of determining any liability under the
Securities Act of 1933, the information omitted from the form of
prospectus filed as part of this registration statement in reliance
upon Rule 430A and contained in a form of prospectus filed by the
registrant pursuant to Rule 424(b)(1) or (4) or 497(h) under the
Securities Act shall be deemed to be part of this registration
statement as of the time it was declared effective.
(5) That, for the purposes of determining any liability under the
Securities Act of 1933, each post-effective amendment that contains a
form of prospectus shall be deemed to be a new registration statement
relating to the securities offered therein, and the offering of such
securities at that time shall be deemed to be the initial BONA FIDE
offering thereof.
F-52
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the registrant has
duly caused this registration statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the city of Vancouver, Washington on
January 11, 2006.
WESTERN POWER & EQUIPMENT CORP.
By: /s/ C. Dean McLain
----------------------------
Name: C. Dean McLain
Title: Chief Executive Officer and
Chairman of the Board of Directors
Pursuant to the requirements of the Securities Act of 1933, this registration
statement has been signed by the following persons in the capacities and on the
dates indicated.
CAPACITY IN
SIGNATURE WHICH SIGNED DATE
- -------------------- ----------------------- ----------------
/s/ C. Dean McLain Chief Executive Officer January 11, 2006
- -------------------- and Chairman of the Board
C. Dean McLain
/s/ Mark J. Wright Chief Financial Officer and January 11, 2006
- -------------------- Principal Accounting Officer
Mark J. Wright
/s/ Michael Metter Director January 11, 2006
- --------------------
Michael Metter
/s/ Steven Moskowitz Director January 11, 2006
- --------------------
Steven Moskowitz
/s/ James Fisher Director January 11, 2006
- --------------------
James Fisher
F-53