10-Q 1 form10-q_11311.txt WESTERN POWER & EQUIPMENT CORP. ================================================================================ FORM 10-Q SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 Quarterly Report Under Section 13 or 15(d) of the Securities Exchange Act of 1934 For the Quarter Ended April 30, 2002 Commission File Number 0-26230 WESTERN POWER & EQUIPMENT CORP. ------------------------------- (Exact name of registrant as specified in its charter) DELAWARE 91-1688446 -------- ---------- (State or other jurisdiction of (I.R.S. Employer incorporation or organization) I.D. number) 6407-B N.E. 117th Avenue, Vancouver, WA 98662 --------------------------------------- ----- (Address of principal executive offices) (Zip Code) Registrant's telephone no.: 360-253-2346 ------------ Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities and Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports); and (2) has been subject to such filing requirements for the past 90 days. YES X NO ----- ----- Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the close of the period covered by this report. Title of Class Number of shares Common Stock Outstanding (par value $.001 per share) 3,403,162 ================================================================================ WESTERN POWER & EQUIPMENT CORP. INDEX PART I. FINANCIAL INFORMATION Page Number Item 1. Financial Statements Consolidated Balance Sheet April 30, 2002 (Unaudited) and July 31, 2001.............. 1 Consolidated Statement of Operations Three months ended April 30, 2002 (Unaudited) and April 30, 2001 (Unaudited)............................ 2 Consolidated Statement of Operations Nine months ended April 30, 2002 (Unaudited) And April 30, 2001 (Unaudited)........................... 3 Consolidated Statement of Cash Flows Nine months ended April 30, 2002 (Unaudited) and April 30, 2001 (Unaudited)............................ 4 Notes to Consolidated Financial Statements.................. 5 - 7 Item 2. Management's Discussion and Analysis of Financial Condition and Operating Results......... 8 - 10 PART II. OTHER INFORMATION Item 1. Legal Proceedings................................... N/A Item 2. Changes in Securities............................... N/A Item 3. Defaults Upon Senior Securities..................... N/A Item 4. Submission of Matters to a Vote of Security Holders.................................... 11 Item 5. Other Information................................... N/A Item 6. Exhibits and Reports on Form 8-K.................... N/A ITEM 1. FINANCIAL STATEMENTS -------------------- WESTERN POWER & EQUIPMENT CORP. CONSOLIDATED BALANCE SHEET (Dollars in thousands)
April 30, July 31, 2002 2001 -------- -------- (Unaudited) ASSETS Current assets: Cash and cash equivalents .......................... $ 59 $ 770 Accounts receivable, less allowance for doubtful accounts of $683 and $948 ............... 8,385 14,295 Inventories ........................................ 32,091 44,867 Prepaid expenses ................................... 214 298 Deferred income taxes .............................. 2,541 2,541 -------- -------- Total current assets .......................... 43,290 62,771 Fixed Assets: Property, plant and equipment (net) ................ 4,529 5,584 Rental equipment fleet (net) ....................... 21,015 22,027 -------- -------- Total fixed assets ............................ 25,544 27,611 Intangibles and other assets, net of accumulated amortization of $902 and $808 .................... 2,608 2,720 -------- -------- Total assets ........................................... $ 71,442 $ 93,102 ======== ======== LIABILITIES & STOCKHOLDERS' EQUITY Current liabilities: Borrowings under floor plan financing .............. $ 8,262 $ 14,237 Short-term borrowings .............................. 45,412 53,384 Convertible debt ................................... 247 182 Accounts payable ................................... 6,832 11,591 Accrued payroll and vacation ....................... 497 1,754 Other accrued liabilities .......................... 1,103 1,716 Capital lease obligation ........................... 13 18 -------- -------- Total current liabilities ...................... 62,366 82,882 Deferred income taxes .................................. 2,541 2,541 Capital lease obligation ............................... 905 920 Long-term borrowings ................................... 8 8 -------- -------- Total long-term liabilities ...................... 3,454 3,469 -------- -------- Total liabilities ...................................... 65,820 86,351 -------- -------- Stockholders' equity: Preferred stock-10,000,000 shares authorized; none issued and outstanding ...................... -- -- Common stock-$.001 par value; 20,000,000 shares authorized; 3,403,162 issued and outstanding ..... 4 4 Additional paid-in capital ......................... 15,894 15,894 Retained earnings .................................. (9,432) (8,303) Less common stock in treasury, at cost (130,300 shares) ................................. (844) (844) -------- -------- Total stockholders' equity ..................... 5,622 6,751 -------- -------- Total liabilities and stockholders' equity ............. $ 71,442 $ 93,102 ======== ========
See accompanying notes to financial statements. 1 WESTERN POWER & EQUIPMENT CORP. CONSOLIDATED STATEMENT OF OPERATIONS (UNAUDITED) (Dollars in thousands, except per share amounts)
Three Months Ended April 30, 2002 2001 -------- -------- Net revenue .......................................... $ 25,568 $ 33,641 Cost of revenues ..................................... 23,030 31,283 -------- -------- Gross profit ......................................... 2,538 2,358 Selling, general and administrative expenses ......... 2,355 3,117 -------- -------- Operating Income ..................................... 183 (759) Other income (expense): Interest expense ................................. (935) (1,425) Other income (expense) ........................... 43 108 -------- -------- Loss before taxes .................................... (709) (2,076) Income tax provision ................................. 12 3,043 -------- -------- Net Loss ............................................. $ (721) $ (5,119) ======== ======== Basic loss per common share .......................... $ (0.21) $ (1.53) ======== ======== Average outstanding common shares for basic earnings per share ........................... 3,403 3,371 ======== ======== Average outstanding common shares and equivalents for diluted earnings per share ..................... 3,403 3,371 ======== ======== Diluted loss per share ............................... $ (0.21) $ (1.53) ======== ========
See accompanying notes to financial statements. 2 WESTERN POWER & EQUIPMENT CORP. CONSOLIDATED STATEMENT OF OPERATIONS (UNAUDITED) (Dollars in thousands, except per share amounts)
Nine Months Ended April 30, 2002 2001 -------- --------- Net revenue ........................................... $ 80,297 $ 105,723 Cost of revenues ...................................... 70,792 95,550 -------- --------- Gross profit .......................................... 9,505 10,173 Selling, general and administrative expenses .......... 7,476 9,473 -------- --------- Operating Income ...................................... 2,029 700 Other income (expense): Interest expense .................................. (3,220) (4,654) Other income ...................................... 97 1,283 -------- --------- Loss before taxes ..................................... (1,093) (2,671) Income tax provision .................................. 36 292 -------- --------- Net Loss .............................................. $ (1,129) $ (2,963) ======== ========= Basic earnings per common share ....................... $ (0.33) $ (0.88) ======== ========= Average outstanding common shares for basic earnings per share ............................ 3,403 3,358 ======== ========= Average outstanding common shares and equivalents for diluted earnings per share ...................... 3,403 3,358 ======== ========= Diluted loss per share ................................ $ (0.33) $ (0.88) ======== =========
See accompanying notes to financial statements. 3 WESTERN POWER & EQUIPMENT CORP. CONSOLIDATED STATEMENT OF CASH FLOWS (UNAUDITED) (Dollars in thousands)
Nine Months Ended April 30, 2002 2001 -------- -------- Cash flows from operating activities: Net income ......................................... $ (1,129) $ (2,963) Adjustments to reconcile net income to net cash provided by operating activities: Depreciation ................................... 5,742 7,220 Amortization ................................... 94 93 Gain on sale of fixed assets ................... (643) (772) Compensation Related to Stock Option ........... 113 Stock in lieu of Services Rendered ............... 100 Changes in assets and liabilities: Accounts receivable ........................ 4,482 6,131 Inventories ................................ 10,155 5,701 Leased equipment, net ...................... -0- 4,423 Prepaid expenses ........................... 83 (72) Accounts payable ........................... (4,342) (1,559) Accrued payroll and vacation ............... (282) 36 Other accrued liabilities .................. (172) (288) Deferred lease income ...................... -0- (5,009) Income taxes receivable/payable ............ (3) 400 Other assets/liabilities ................... (122) -0- -------- -------- Net cash provided by operating activities .......... 13,863 13,554 -------- -------- Cash flow from investing activities: Purchase of fixed assets ........................... (171) (852) Purchase/sales of rental equipment, net ............ (4,280) 305 Proceeds on sale of fixed assets ................... 321 260 Proceeds on sale of rental equipment ............... 3,717 -0- Purchase of intangibles ............................ 18 (5) -------- -------- Net cash used in investing activities .............. (395) (292) -------- -------- Cash flows from financing activities: Principal payments on capital leases ............... (20) 3 Inventory floor-plan financing ..................... (5,956) (115) Short-term financing ............................... (7,992) (13,908) Convertible Debt ................................... 65 182 -------- -------- Net cash used in financing activities .............. (13,903) (13,838) -------- -------- Decrease in cash and cash equivalents .................. (435) (576) Cash and cash equivalents at beginning of period ................................................ 494 824 -------- -------- Cash and cash equivalents at end of period ............. $ 59 $ 248
See accompanying notes to financial statements. 4 Western Power & Equipment Corp. Notes to Consolidated Financial Statements (Dollars in thousands) 1. BASIS OF PRESENTATION The financial information included in this report has been prepared in conformity with the accounting principles and practices reflected in the financial statements for the preceding year included in the annual report on Form 10-K for the year ended July 31, 2001 filed with the Securities and Exchange Commission. All adjustments are of a normal recurring nature and are, in the opinion of management, necessary for a fair statement of the results for the interim periods. This report should be read in conjunction with the Company's financial statements included in the annual report on Form 10-K for the year ended July 31, 2001 filed with the Securities and Exchange Commission. 2. INVENTORIES Inventories consist of the following: April 30, July 31, 2002 2001 ------- ------- Equipment (net of reserve allowances of $4,794 and $7,489 respectively): New equipment $18,057 $28,163 Used equipment 6,416 7,425 Parts (net of reserve allowance of $198 and $282 respectively) 7,618 9,279 ------- ------- $32,091 $44,867 ======= ======= 3. FIXED ASSETS Fixed Assets consist of the following: April 30, July 31, 2002 2001 -------- -------- Operating property, plant and equipment: Land $ 500 $ 500 Buildings 1,733 1,717 Machinery and equipment 3,744 3,997 Office furniture and fixtures 2,232 2,377 Computer hardware and software 1,454 1,453 Vehicles 1,433 1,964 Leasehold improvements 960 958 -------- -------- 12,056 12,966 Less: accumulated depreciation (7,527) (7,382) -------- -------- Property, plant, and equipment (net) $ 4,529 $ 5,584 ======== ======== Rental equipment fleet $ 28,245 $ 28,889 Less: accumulated depreciation (7,230) (6,862) -------- -------- Rental equipment (net) $ 21,015 $ 22,027 ======== ======== 5 4. SHORT-TERM BORROWINGS As of October 31, 2000, the Company and Deutsche Financial Services (DFS) signed an amendment to the existing loan and security agreement. The amendment waived all prior defaults under the agreement and established revised financial covenants to be measured at the Company's second and fourth quarters. In addition, the amendment included several, periodic mandatory reductions in the credit limit. The amended DFS facility is a floating rate facility based on prime with rates between 0.75% under prime to 2.25% over prime depending on the amount of total debt leverage of the Company. As of April 30, 2002, the DFS credit facility had expired without extension or renewal and the Company was in technical default of the financial covenants in the DFS credit facility at the time of such expiration. The Company has not received an extension or renewal of the credit facility or a waiver of the defaults from DFS and although DFS has not called the loan, there is no guarantee that it will not do so at anytime in the future. The Company currently is in negotiations with DFS to extend or renew the credit facility beyond its expiration on December 28, 2001. The Company believes that it can reach agreement with DFS to extend or renew the agreement on reasonably acceptable terms prior to July 31, 2002. However, in the event that the Company cannot reach a reasonably acceptable agreement to extend or renew the expired DFS credit facility, DFS could demand repayment of the entire outstanding balance at anytime. In such case, the Company would be unable to repay the entire DFS outstanding balance. There can be no assurance that the Company will be able to successfully negotiate an acceptable extension or renewal of the expired DFS credit facility or that DFS will not call the balance due at anytime. 6 5. SEGMENT INFORMATION. In fiscal 1999, the Company adopted Statement of Financial Accounting Standards No. 131 (SFAS 131), "Disclosures about Segments of an Enterprise and Related Information," which requires the reporting of certain financial information by business segment. For the purpose of providing segment information, management believes that all of the Company's operations consist of one segment. However, the Company evaluates performance based on revenue and gross margin of three distinct business components. Revenue and gross margin by component are summarized as follows: Business Component Three Months Ended Nine Months Ended Net Revenues April 30, April 30, 2002 2001 2002 2001 ------------------ ------- ------- ------- -------- Equipment Sales $18,123 $22,328 $55,542 $ 63,353 Equipment Rental 924 3,263 3,617 15,651 Product Support 6,521 8,050 21,138 26,719 ------- ------- ------- -------- Totals $25,568 $33,641 $80,297 $105,723 ======= ======= ======= ======== Business Component Three Months Ended Nine Months Ended Gross Margins April 30, April 30, 2002 2001 2002 2001 ------------------ ------- ------- ------- -------- Equipment Sales $ 1,700 $ 1,073 $ 5,805 $ 2,147 Equipment Rental (172) 363 451 3,393 Product Support 1,010 922 3,249 4,633 ------- ------- ------- -------- Total $ 2,538 $ 2,358 $ 9,505 $ 10,173 ======= ======= ======= ======== 7 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND ----------------------------------------------------------------- LIQUIDITY AND CAPITAL RESOURCES ------------------------------- The following discussion and analysis should be read in conjunction with the Financial Statements and Notes thereto appearing elsewhere in this Form 10-Q. Information included herein relating to projected growth and future results and events constitutes forward-looking statements. Actual results in future periods may differ materially from the forward-looking statements due to a number of risks and uncertainties, including but not limited to fluctuations in the construction, agricultural, and industrial sectors; the success of the Company's restructuring and cost reduction plans; the success of the Company's equipment rental business; rental industry conditions and competitors; competitive pricing; the Company's relationship with its suppliers; relations with the Company's employees; the Company's ability to manage its operating costs; the continued availability of financing; governmental regulations and environmental matters; risks associated with regional, national, and world economies; and consummation of the merger and asset purchase transactions (see below). Any forward-looking statements should be considered in light of these factors. Results of Operations --------------------- The Three Months and the Nine Months ended April 30, 2002 compared to the Three --------------------------------------------------------- --------------------- Months and Nine Months ended April 30, 2001. -------------------------------------------- Revenues for the three-month period ended April 30, 2002 decreased 24.0% to $25.6 million compared with $33.6 million for the three-month period ended April 30, 2001. Revenues were down from the prior year's third quarter in every department and in most store locations. The return of normal weather to the Pacific Northwest compared with a mild quarter in 2001 contributed in part to the revenue decrease, along with a generally sluggish economy in many areas. Revenues for the nine-month period ended April 30, 2002 decreased 24% to $80.3 million compared with $105.7 million for the nine-month period ended April 30, 2001. Revenues were down from the prior year in every department and in most store locations for the same reasons stated above. In addition the closing of two stores in the first quarter and one store in the third quarter contributed to the revenue decrease. The Company's gross profit margin of 9.9% for the three-month period ended April 30, 2002 was up from the prior year comparative period margin of 7.0%. The Company's gross profit margin of 11.8% for the nine-months ended April 30, 2002 was up from the comparative period margin of 9.6%. The increase in gross profit margins was mainly the result of higher gross margins on equipment sales. For the three-month period ended April 30, 2002, selling, general, and administrative ("SG&A") expenses, as a percentage of sales, were 9.2%, down from 9.3% for the prior year's quarter. For the nine-month period ended April 30, 2002, SG&A expenses were 9.3% of sales, up from 9.0% in the comparative period ended April 30, 2001. Some of the increased SG&A expenses are attributable to costs associated with the closing of three stores during the nine months ended April 30, 2002 and some ongoing expenses still being incurred for the vacated locations. Interest expense for the three months ended April 30, 2002 of $935,000 was down from the $1,425,000 in the prior year comparative period and for the nine months ended April 30, 2002 interest expense was $3,220,000 compared with $4,654,000 for the prior year comparative period. This decrease is the result 8 of reduced overall inventory levels as well as lower average interest rates on the DFS facility. The Company had a net loss for the three months ended April 30, 2002 of $721,000 or $0.21 per (basic and diluted) share compared with a net loss of $5,119,000 or $1.53 per (basic and diluted) for the prior year's comparable quarter and a net loss of $1,129,000 or $0.33 per(basic and diluted)share for the nine months ended April 30, 2002 as compared to net loss of $2,963,000 or $0.88 per (basic and diluted) share for the nine months ended April 30, 2001. The first quarter of FY01 included a non-recurring pre-tax gain of $589,000 for the conversion of capital leases to operating leases and a tax charge of $3,043,000 in the third quarter of 2001. Liquidity and Capital Resources ------------------------------- The Company's primary needs for liquidity and capital resources are related to its inventory for sale and its rental and lease fleet inventories. The Company's primary source of internal liquidity has been its operations. The Company's primary sources of external liquidity are equipment inventory floor plan financing arrangements provided to the Company by the manufacturers of the products the Company sells, the Deutsche Financial Services ("DFS") credit facility, and, with respect to acquisitions, secured loans from Case Corporation (now CNH Global). Under inventory floor planning arrangements the manufacturers of products sold by the Company provide interest-free credit terms on new equipment purchases for periods ranging from one to twelve months, after which interest commences to accrue monthly at rates ranging from zero percent to two percent over the prime rate of interest. Principal payments are typically made under these agreements at scheduled intervals and/or as the equipment is rented, with the balance due at the earlier of a specified date or sale of the equipment. At April 30, 2002, the Company was indebted under manufacturer-provided floor planning arrangements in the aggregate amount of $14,633,000. As of October 31, 2000, the Company and Deutsche Financial Services (DFS) signed an amendment to the existing loan and security agreement. The amendment waived all prior defaults under the agreement and established revised financial covenants to be measured at the Company's second and fourth quarters. In addition, the amendment included several, periodic mandatory reductions in the credit limit. The amended DFS facility is a floating rate facility based on prime with rates between 0.75% under prime to 2.25% over prime depending on the amount of total debt leverage of the Company. As of April 30, 2002, the DFS credit facility had expired without extension or renewal and the Company was in technical default of the financial covenants in the DFS credit facility at the time of such expiration. The Company has not received an extension or renewal of the credit facility or a waiver of the defaults from DFS and although DFS has not called the loan, there is no guarantee that it will not do so at anytime in the future. Borrowings under the DFS credit facility are secured by the Company's assets, including accounts receivable, parts, new equipment, rental fleet, and used equipment. The Company uses this borrowing facility to lower flooring-related interest expense by using advances under such line to finance inventory purchases in lieu of financing provided by suppliers, to take advantage of cash purchase discounts from its suppliers, to provide operating capital for further growth, and to refinance some its acquisition-related debt at a lower interest rate. As of April 30, 2002, approximately $45,412,000 was outstanding under the DFS credit facility. The Company currently is in negotiations with DFS to extend or renew the credit facility beyond its current expiration of December 28, 2001. The 9 Company believes that it can reach agreement with DFS to extend or renew the agreement on reasonably acceptable terms. However, in the event that the Company cannot reach a reasonably acceptable agreement to extend or renew the current DFS credit facility, DFS could demand repayment of the entire outstanding balance at anytime after December 28, 2001. In such case, the Company would be unable to repay the entire DFS outstanding balance. There can be no assurance that the Company will be able to successfully negotiate an acceptable extension or renewal of the existing DFS credit facility or that DFS will not call the balance due at anytime after December 28, 2001. During the nine month period ended April 30, 2002, cash and cash equivalents decreased by $435,000. The Company had positive cash flow from operating activities in the first nine months after adding depreciation and amortization back to the net loss. The Company's cash and cash equivalents was approximately $59,000 as of April 30, 2002. The Company cannot fund current levels of operations without the continued availability of borrowing from its current lender DFS. Although the Company and DFS are in negotiations to extend or renew the credit facility beyond its expiration on December 28, 2001, there can be no assurance that the Company will be able to successfully negotiate an acceptable extension or renewal of the expired DFS credit facility or that DFS will continue to make borrowing available to the Company. INVENTORY; EFFECTS OF INFLATION AND INTEREST RATES; GENERAL ECONOMIC CONDITIONS Controlling inventory is a key ingredient to the success of an equipment distributor because the equipment is characterized by long order cycles, high ticket prices, and the related exposure to "flooring" interest. The Company's interest expense may increase if inventory is too high or interest rates rise. The Company manages its inventory through company-wide information and inventory sharing systems wherein all locations have access to the Company's entire inventory. In addition, the Company closely monitors inventory turnover by product categories and places equipment orders based upon targeted turn ratios. All of the products and services provided by the Company are either capital equipment or included in capital equipment, which are used in the construction, industrial, and agricultural sectors. Accordingly, the Company's sales are affected by inflation or increased interest rates which tend to hold down new construction, and consequently adversely affect demand for the equipment sold and rented by the Company. In addition, although agricultural equipment sales are less than 2% of the Company's total revenues, factors adversely affecting the farming and commodity markets also can adversely affect the Company's agricultural equipment related business. The Company's business can also be affected by general economic conditions in its geographic markets as well as general national and global economic conditions that affect the construction, industrial, and agricultural sectors. An erosion in North American and/or other countries' economies could adversely affect the Company's business. Market specific factors could also adversely affect one or more of the Company's target markets and/or products. The Company expects the construction equipment market in its store locations to remain flat or slightly down over the next 6 to 12 months. A larger drop in the construction equipment market could have a material adverse impact upon the Company's operating results. 10 PART II. OTHER INFORMATION ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS --------------------------------------------------- On May 30, 2002, the Company held its 2001 Annual meeting of Stockholders (the "Annual Meeting"). All five of the directors holding office prior to the date of the Annual Meeting were nominated for election at the Annual Meeting, and all of such persons were reelected at the Annual Meeting for another term as director. The votes recorded for election of each nominee for director were the following: Name For Against Abstention ---- --------- ------- ---------- C. Dean McLain 2,855,987 6,762 94,038 Robert M. Rubin 2,855,090 7,659 94,038 Seymour Kessler 2,855,987 6,762 94,038 Allen Perres 2,855,805 6,944 94,038 Irwin Pearl 2,855,987 6,762 94,038 Votes were also cast, and proposals approved, at the Annual Meeting to issue 600,000 shares of common stock of the Company to the Robert Rubin Family Stock Trust (1,304,384 votes in favor); and to issue options to purchase 25,000 shares of common stock of the Company to each of Dr. Seymour Kessler and Allen Perres pursuant to the 1995 Stock Option Plan, as amended (2,780,381 votes in favor). ITEM 5. OTHER INFORMATION ----------------- None. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K -------------------------------- A. EXHIBITS. None. B. REPORTS ON FORM 8-K. None. 11 SIGNATURE Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. WESTERN POWER & EQUIPMENT CORP. June 13, 2002 By: /s/Mark J. Wright ------------------------------------ Mark J. Wright Vice President of Finance and Chief Financial Officer 12