FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
Quarterly Report Under Section 13 or 15(d)
of the Securities Exchange Act of 1934
For the Quarter Ended October 31, 1998
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 I.D.
incorporation or organization) number)
4601 NE 77th Avenue, Suite 200, 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) 3,303,162
<PAGE>
WESTERN POWER & EQUIPMENT CORP.
INDEX
PART I. FINANCIAL INFORMATION Page Number
Item 1. Financial Statements
Consolidated Balance Sheet
October 31, 1998 (Unaudited) and July 31, 1998................... 1
Consolidated Statement of Operations
Three months ended October 31, 1998 (Unaudited)
and October 31, 1997 (Unaudited)................................. 2
Consolidated Statement of Cash Flows
Three months ended October 31, 1998 (Unaudited)
and October 31, 1997 (Unaudited)................................. 3
Notes to Consolidated Financial Statements......................... 4
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operation..............5 - 8
PART II. OTHER INFORMATION
Item 1. Legal Proceedings......................................... N/A
Item 2. Changes in Securities..................................... N/A
Item 3. Defaults Upon Senior Securities........................... 8
Item 4. Submission of Matters to a Vote of Security
Holders...................................... N/A
Item 5. Other Information......................................... N/A
Item 6. Exhibits and Reports on Form 8-K.......................... 8
<PAGE>
ITEM 1. FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
WESTERN POWER & EQUIPMENT CORP.
CONSOLIDATED BALANCE SHEET
(Dollars in thousands)
October 31, July 31,
1998 1998
---------- ----------
(Unaudited)
<S> <C> <C>
ASSETS
- ------
Current assets:
Cash and cash equivalents.......................................... $ 1,026 $ 2,555
Accounts receivable, less allowance for
doubtful accounts of $662 and $670............................... 18,278 23,626
Inventories........................................................ 65,841 73,491
Prepaid expenses................................................... 177 172
Income taxes receivable............................................ 990 -0-
Deferred income taxes.............................................. 1,298 1,298
---------- ----------
Total current assets........................................... 87,610 101,142
Fixed Assets:
Property, plant and equipment, net................................. 8,881 8,614
Rental equipment fleet, net........................................ 23,023 23,080
Leased equipment fleet, net........................................ 5,447 2,760
Intangibles and other assets, net.................................. 3,075 3,170
---------- ----------
Total fixed assets............................................. 40,426 37,624
Total assets................................................... $ 128,036 $ 138,766
========== ==========
LIABILITIES & STOCKHOLDERS' EQUITY Current liabilities:
- -------------------------------------------------------
Borrowings under floor plan financing.............................. $ 11,853 $ 11,038
Short-term borrowings.............................................. 69,248 76,019
Accounts payable................................................... 11,577 17,574
Accrued payroll and vacation....................................... 796 858
Other accrued liabilities.......................................... 1,570 1,653
Income taxes payable............................................... -0- 255
Covenant not to compete............................................ 10 21
Capital lease obligation........................................... 45 63
---------- ----------
Total current liabilities...................................... 95,099 107,481
Deferred income taxes.................................................. 690 690
Capital lease obligation............................................... 2,836 2,827
Long-term borrowings................................................... 1,169 1,156
Deferred lease income.................................................. 6,392 3,474
---------- ----------
Total long-term liabilities.................................... 11,087 8,147
Total liabilities.............................................. 106,186 115,628
Stockholders' equity:
Preferred stock-10,000,000 shares authorized;
none issued and outstanding...................................... - -
Common stock-$.001 par value; 20,000,000
shares authorized; 3,303,162 issued and
outstanding...................................................... 4 4
Additional paid-in capital......................................... 16,072 16,072
Retained earnings.................................................. 7,265 8,553
Less common stock in treasury,
at cost (230,300 shares)......................................... (1,491) (1,491)
---------- ----------
Total stockholders' equity..................................... 21,850 23,138
Total liabilities and stockholders'
equity....................................................... $ 128,036 $ 138,766
========== ==========
See accompanying notes to financial statements.
</TABLE>
- 1 -
<PAGE>
<TABLE>
<CAPTION>
WESTERN POWER & EQUIPMENT CORP.
CONSOLIDATED STATEMENT OF OPERATIONS
(UNAUDITED)
(Dollars in thousands, except per share amounts)
Three Months Ended
October 31,
1998 1997
---------- ----------
<S> <C> <C>
Net revenue............................................................ $ 40,365 $ 36,958
Cost of goods sold..................................................... 37,890 32,623
---------- ----------
Gross profit........................................................... 2,475 4,335
Selling, general and administrative expenses........................... 3,126 2,812
Operating (loss) income................................................ (651) 1,523
Other income (expense):
Interest expense................................................... (1,768) (764)
Other income....................................................... 251 89
---------- ----------
Income (loss) before taxes............................................. (2,168) 848
Income tax (benefit) provision......................................... (880) 333
---------- ----------
Net (loss) income...................................................... $ (1,288) $ 515
========== ==========
Basic earnings per share............................................... $ (0.39) $ 0.15
========== ==========
Average outstanding common shares
Basic EPS........................................................... 3,303 3,533
========== ==========
Diluted earnings per share............................................. $ (0.39) $ 0.14
========== ==========
Average outstanding common shares
and equivalents for Diluted EPS..................................... 3,303 3,672
========== ==========
See accompanying notes to financial statements.
</TABLE>
- 2 -
<PAGE>
<TABLE>
<CAPTION>
WESTERN POWER & EQUIPMENT CORP.
CONSOLIDATED STATEMENT OF CASH FLOWS
(UNAUDITED)
(Dollars in thousands)
Three Months Ended
October 31,
1998 1997
---------- ----------
<S> <C> <C>
Cash flows from operating activities:
Net (loss) income.................................................. $ (1,288) $ 515
Adjustments to reconcile net (loss) income to
net cash provided by operating activities:
Depreciation................................................... 1,346 310
Amortization................................................... 95 65
Changes in assets and liabilities (excluding
effects of acquisition):
Accounts receivable........................................ 5,349 (1,278)
Inventories................................................ 4,929 551
Inventory floor plan financing............................. 815 (20,369)
Short-term financing................................... (6,770) 24,387
Prepaid expenses........................................... (5) (9)
Deferred income taxes...................................... -0- -0-
Accounts payable........................................... (5,997) (2,300)
Accrued payroll and vacation............................... (63) 7
Other accrued liabilities.................................. (83) (183)
Deferred lease income...................................... 2,918 -0-
Income taxes receivable/payable............................ (1,245) 294
Other assets/liabilities................................... -0- (56)
---------- ----------
Net cash provided by operating activities.......................... 1 1,934
---------- ----------
Cash flows from investing activities:
Purchase of fixed assets........................................... (1,522) (180)
Proceeds on sale of fixed assets................................... -0- -0-
Covenant not to compete............................................ (11) -0-
Purchase of other assets........................................... -0- -0-
---------- ----------
Net cash used in investing activities.............................. (1,533) (180)
---------- ----------
Cash flows from financing activities:
Principal payments on capital leases............................... (9) (28)
Treasury stock repurchases......................................... -0- -0-
Long-term borrowings (repayments).................................. 12 -0-
---------- ----------
Net cash provided by (used in)
financing activities............................................... 3 (28)
---------- ----------
Increase (decrease) in cash and cash equivalents................(1,529) 1,726
Cash and cash equivalents at beginning of
period................................................................ 2,555 1,875
---------- ----------
Cash and cash equivalents at end of period............................. $ 1,026 $ 3,601
========== ==========
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest........................................................... $ 1,768 $ 764
Income taxes....................................................... 365 -0-
Supplemental schedule of noncash investing and financing activities:
In fiscal year 1997, capital lease obligations of $292 and $680 were incurred
when the Company entered into a lease for computer equipment and software and a
20-year lease for the Kent, Washington facility, respectively.
See accompanying notes to financial statements.
</TABLE>
- 3 -
<PAGE>
Western Power & Equipment Corp.
Notes to Consolidated Financial Statements
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, 1998 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, 1998 filed with the Securities and Exchange Commission.
2. Inventories
Inventories consist of the following:
October 31, July 31,
1998 1998
---------- ----------
Equipment:
New equipment $ 46,329 $ 54,883
Used equipment 9,934 10,073
Parts 9,578 8,535
---------- ----------
$ 65,841 $ 73,491
========== ==========
- 4 -
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATION
-----------------------------------------------------------
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 because of a number of
risks and uncertainties, including but not limited to fluctuations in the
construction, agricultural and industrial sectors and general economic cycles;
the success of the Company's entry into new markets through store openings or
acquisitions; the success of the Company's expansion of its equipment rental
business; rental industry conditions and competitors; competitive pricing; the
Company's relationship with Case and other suppliers; relations with the
Company's employees; the Company's ability to manage its operating costs and to
integrate acquired businesses in an effective manner; the continued availability
of financing; governmental regulations and environmental matters; risks
associated with regional, and national and world economies. Any forward-looking
statements should be considered in light of these factors.
General
- -------
The Company acquired its first seven retail distribution stores in November
1992. The Company expanded to 18 stores in four states by the end of fiscal
1996, to 23 stores in five states by the end of fiscal 1997, and to 27 stores in
five states by the end of fiscal 1998. In the first quarter of fiscal 1999, the
Company consolidated its Milton-Freewater, Oregon operation into its Pasco,
Washington operation leaving the Company with 26 operating facilities at October
31, 1998. The Company's growth has been accomplished through a combination of
new store openings, strategic acquisitions, and to a lesser extent, comparable
stores revenue increases.
The Company plans to open and acquire additional distribution outlets for Case
products, as well as for products which may be manufactured by other companies.
The Company's results can be impacted by the timing of, and costs incurred in
connection with, new store openings and acquisitions.
Results of Operations
- ---------------------
The Three Months ended October 31, 1998 compared to the Three Months ended
October 31, 1997.
- --------------------------------------------------------------------------
Revenues for the three month period ended October 31, 1998 increased $3,407,000
or approximately 9% over the three month period ended October 31, 1997, due
entirely to the contribution of stores opened or acquired within the 12 months
ended October 31, 1998. Same store revenues decreased $855,000 or 2.3% for the
three month period ended October 31, 1998, as compared to the prior year period.
The Company's first quarter gross profit margin of 8.7% (before the
non-recurring charge described below) was down from the prior year comparative
period margin of 11.7%. Gross profit margins were down in all departments due to
increased competitive pressures throughout the Company's markets and some
wholesale liquidation of used equipment inventory.
Selling, general, and administrative ("SG&A") expenses, as a percentage of sales
were 7.7%, compared with 7.6% in the year prior period reflecting a slight
increase in expenditures combined with lower than anticipated revenue. Although
the first quarter figure is above management's goal of 7% of sales, management
expects SG&A expenses as a percentage of sales to decrease over the next few
quarters.
Interest expense for the three months ended October 31, 1998 was $1,768,000
compared with $764,000 in the prior year comparative period. This increase is
largely the result of higher levels of inventory (for new locations and rental
fleet) than the prior year period. During the three month period ended October
31, 1998,
- 5 -
<PAGE>
overall inventory was reduced $4,900,000 and management has initiated steps to
further reduce inventory levels over the next several months.
The tax rate for the 1999 fiscal yearis expected to be approximately 41%,
slightly higher than the prior year period due in part to lower depreciation
deductions for its rental fleet.
The Company had a net loss for the quarter ended October 31, 1998 of $1,288,000
compared with net income of $515,000 for the prior year's first quarter.
Earnings per share (basic and diluted) was $(0.39) per share in the first
quarter of fiscal 1999 compared with basic and diluted earnings per share of
$0.15 and 0.14 per share, respectively, in the prior year period.
A major contributing factor to the net loss during the quarter ended October 31,
1998 was a non-recurring charge of $1,061,000 for used equipment inventory
reserves. Based upon market prices of used equipment which are currently
significantly lower than both current book values of the Company's used
equipment inventory and prior periods' market prices, management took this
charge to allow pricing of its used equipment inventory more in line with
current market prices. This is turn should help the Company sell its used
inventory more profitably, reduce inventory levels, and thereby reduce inventory
carrying costs.
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, store
openings, and acquisitions of additional stores. The Company's primary source of
internal liquidity has been its profitable operations. As more fully described
below, the Company's primary sources of external liquidity are equipment
inventory floor plan financing arrangements provided to the Company by the
manufacturers of the products the Company sells, and Deutsche Financial Services
("DFS") and, with respect to acquisitions, secured loans from Case.
Under inventory floor planning arrangements the manufacturers of products sold
by the Company provide interest free credit terms on new equipment purchases for
periods ranging from one to twelve months, after which interest commences to
accrue monthly at rates ranging from zero percent to two percent over the prime
rate of interest. Principal payments are typically made under these agreements
at scheduled intervals and/or as the equipment is rented, with the balance due
at the earlier of a specified date or sale of the equipment. At October 31,
1998, the Company was indebted under manufacturer provided floor planning
arrangements in the aggregate amount of $11,853,000.
In June 1997, the Company obtained a $75 million inventory flooring and
operating line of credit through Deutsche Financial Services ("DFS"). The DFS
credit facility is a three-year, floating rate facility based on prime with
rates between 0.50% under prime to 1.00% over prime depending on the amount of
total borrowing under the facility. Amounts are advanced against the Company's
assets, including accounts receivable, parts, new equipment, rental fleet, and
used equipment. The Company expects to use this borrowing facility to lower
flooring related interest expense by using advances under such line to finance
inventory purchases in lieu of financing provided by suppliers, to take
advantage of cash purchase discounts from its suppliers, to provide operating
capital for further growth, and to refinance some its acquisition related debt
at a lower interest rate. As of October 31, 1998, approximately $69,145,000 was
outstanding under the DFS credit facility. At October 31, 1998, the Company was
in technical default of the leverage covenant in the Deutsche Financial Services
Loan Agreement. The Company obtained a waiver for the period through December
15, 1998. There is no guarantee that Deutsche Financial Services will not call
this debt at any time after December 15, 1998. The Company and DFS have reached
preliminary agreement on increasing this credit facility to $100,000,000.
Finalization of this increase is expected by December 31, 1998. Amounts owing
under the DFS credit facility are secured by inventory purchases financed by
DFS, as well as all proceeds from their sale or rental, including accounts
receivable thereto.
- 6 -
<PAGE>
During the quarter ended October 31, 1998, cash and cash equivalents decreased
by $1,529,000. The Company had essentially break-even cash flow from operating
activities during the first quarter reflecting net income for the year after
adding back depreciation and amortization. Purchases of fixed assets during the
period were related mainly to the purchase of new equipment for the rental
fleet.
The Company's cash and cash equivalents of $1,026,000 as of October 31, 1998 and
available credit facilities are considered sufficient to support current or
higher levels of operations for at least the next twelve months.
Inventory; Effects of Inflation and Interest Rates; General Economic Conditions
Controlling inventory is a key ingredient to the success of an equipment
distributor because the equipment industry is characterized by long order
cycles, high ticket prices, and the related exposure to "flooring" interest. The
Company's interest expense may increase if inventory is too high or interest
rates rise. The Company manages its inventory through company-wide information
and inventory sharing systems wherein all locations have access to the Company's
entire inventory. In addition, the Company closely monitors inventory turnover
by product categories and places equipment orders based upon targeted turn
ratios.
The Company took a non-recurring first quarter charge of $1.1 million for
used equipment inventory reserves to bring the prices of its used inventory more
in line with current market prices, which have significantly declined over the
last several months. This action was taken to position the Company to
substantially increase its sales of used equipment over the remainder of this
fiscal year thereby significantly reducing the Company's used equipment
inventory over the next several quarters and to reduce its inventory carrying
costs. This charge and the wholesale liquidation of some additional inventory at
a loss during the quarter were major contributing factors to the net loss for
the quarter.
All of the products and services provided by the Company are either capital
equipment or included in capital equipment, which are used in the construction,
agricultural, and industrial sectors. Accordingly, the Company's sales are
affected by inflation or increased interest rates which tend to hold down new
construction, and consequently adversely affect demand for the construction and
industrial equipment sold and rented by the Company. In addition, although
agricultural equipment sales are less than 5% 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, agricultural, and industrial sectors.
An erosion in North American and/or other countries' economies could adversely
affect the Company's business. Market specific factors could also adversely
affect one or more of the Company's target markets and/or products.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
At October 31, 1998, the Company was in technical default of the leverage
covenant in the Deutsche Financial Services ("DFS") Loan Agreement. As of
October 31, 1998, the outstanding balance owed to DFS was approximately
$69,145,000. The Company obtained a waiver letter for the period through
December 15, 1998. There is no guarantee that Deutsche Financial Services will
not call this debt at any time after December 15, 1998. See Item 2,
"Management's Discussion and Analysis of Financial Condition and Results of
Operation: Liquidity and Capital Resources."
- 7 -
<PAGE>
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
A. EXHIBITS.
27 Financial Data Schedule
B. REPORTS ON FORM 8-K.
NONE
- 8 -
<PAGE>
SIGNATURE
Pursuant to the requirements of the Securities and Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
WESTERN POWER & EQUIPMENT CORP.
December 15, 1998
By: /s/ MARK J. WRIGHT
-----------------------------------------------
Mark J. Wright
Vice President, Chief Accounting and Chief
Financial Officer
- 9 -
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> JUL-31-1998
<PERIOD-END> OCT-31-1998
<CASH> 1,026
<SECURITIES> 0
<RECEIVABLES> 18,940
<ALLOWANCES> 662
<INVENTORY> 65,841
<CURRENT-ASSETS> 87,610
<PP&E> 46,113
<DEPRECIATION> 5,687
<TOTAL-ASSETS> 128,036
<CURRENT-LIABILITIES> 95,099
<BONDS> 1,169
0
0
<COMMON> 4
<OTHER-SE> 21,846
<TOTAL-LIABILITY-AND-EQUITY> 128,036
<SALES> 40,365
<TOTAL-REVENUES> 40,365
<CGS> 37,890
<TOTAL-COSTS> 41,016
<OTHER-EXPENSES> (251)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,768
<INCOME-PRETAX> (2,168)
<INCOME-TAX> (880)
<INCOME-CONTINUING> (1,288)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,288)
<EPS-PRIMARY> (.39)
<EPS-DILUTED> (.39)
</TABLE>
