UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------------------
FORM 10-K
----------------------------
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended July 31, 1999 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) Identification Number)
4601 NE 77TH AVE, SUITE 200, VANCOUVER, WA 98662
- --------------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (360) 253-2346
Securities registered pursuant to Section 12(b) of the Act:
None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $.001 par value
-----------------------------
(Title of Class)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. YES [X] NO [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulations S-K is not contained herein, and will not be contained, to
the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to the Form 10-K. [X]
As of October 16, 1999: (a) 3,303,162 shares of Common Stock, $.001 par
value, of the registrant (the "Common Stock") were outstanding; (b) 1,303,162
shares of Common Stock were held by non-affiliates ; and (c) the aggregate
market value of the Common Stock held by non-affiliates was $2,158,036 based on
the closing sale price of $1.656 per share on October 15, 1999.
Portions of the Registrant's Proxy Statement to be filed in connection with
its Annual Meeting of Shareholders are incorporated by reference in Part III.
<PAGE>
PART I
ITEM 1. BUSINESS
General
Western Power & Equipment Corp., a Delaware corporation (the "Company"), is
engaged in the sale, rental, and servicing of light, medium-sized, and heavy
construction, agricultural, and industrial equipment, parts, and related
products which are manufactured by Case Corporation ("Case") and certain other
manufacturers. The Company believes, based upon the number of locations owned
and operated, that it is the largest independent dealer of Case construction
equipment in the United States. Products sold, rented, and serviced by the
Company include backhoes, excavators, crawler dozers, skid steer loaders,
forklifts, compactors, log loaders, trenchers, street sweepers, sewer vacuums,
and mobile highway signs.
The Company operates out of facilities located in the states of Washington,
Oregon, Nevada, California, and Alaska. The equipment distributed by the Company
is furnished to contractors, governmental agencies, and other customers,
primarily for use in the construction of residential and commercial buildings,
roads, levees, dams, underground power projects, forestry projects, municipal
construction, and other projects.
The Company's strategy focuses on acquiring additional existing
distributorships and rental operations, opening new locations, and increasing
sales at its existing locations. In such connection, it may seek 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. See "Business Strategy."
History and Acquisitions
The Company commenced business in November 1992 with the acquisition from
Case of seven retail distribution facilities located in Oregon and Washington.
The Company became a subsidiary of American United Global, Inc. ("AUGI"),
simultaneous with such acquisition. AUGI holds 60.6 percent of the outstanding
shares of the Company as of July 31, 1999.
In September 1994 and February 1996, in two different transactions, the
Company acquired from Case four retail construction equipment stores located in
California and Nevada. In addition, in June 1996 and January 1997, the Company
made two additional acquisitions of distributorships of predominantly
non-competing lines of equipment, with locations in California, Oregon,
Washington, and Alaska. From fiscal 1993 through fiscal 1997, the Company also
opened nine new stores in the states served by the acquired stores, ending
fiscal year 1997 with 23 stores.
In fiscal 1998, the Company acquired four additional facilities through
acquisition, located in California and Alaska. The pre-existing Alaska facility
was discontinued as it was combined with the acquired Alaska facility. In
addition, in fiscal 1998 the Company opened one new store in Washington. On
December 11, 1997, the Company acquired substantially all of the operating
assets used by Case in connection with its business of servicing and
distributing Case agricultural equipment at a facility located in Yuba City,
California.
On April 30, 1998, the Company acquired substantially all of the operating
assets of Yukon Equipment, Inc. (Yukon) in connection with Yukon's business of
servicing and distributing construction, industrial, and agricultural equipment
in Alaska. Yukon has facilities in Anchorage, Fairbanks, and Juneau, Alaska.
I-1
<PAGE>
In fiscal 1999, the Company closed three of its smaller facilities and
began servicing the territories served by these small stores by larger
facilities in the region. The Company ended fiscal 1999 with 24 stores. The
company has consolidated an additional four facilities in the first quarter of
fiscal 2000 into larger stores in each region. The closures are intended to
increase efficiencies and reduce costs.
Business Strategy
The Company's business strategy has focused on acquiring additional
existing distributorships and rental operations, opening new locations, and
increasing sales at its existing locations. The Company reduced its acquisition
activity in fiscal 1999 due to market conditions.
When market conditions improve and opportunities arise, the Company intends
to make strategic acquisitions of other authorized Case construction equipment
retail dealers located in established or growing markets, as well as dealers or
distributors of construction, industrial, or agricultural equipment, and related
parts, manufactured by companies other than Case.
In addition to acquisitions, the Company plans to open new retail outlets.
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.
The third prong of the Company's business strategy is to expand sales at
its existing locations in three ways. First, the Company will continue to
broaden its product line by adding equipment and parts produced by manufacturers
other than Case. The Company has already added products to its inventories
produced by such quality manufacturers as Dynapac, Champion, Link-Belt,
Takeuchi, Tymco, Vactor, Kawasaki, Kubota, Daewoo, and Stewart & Stevenson.
Second, the Company will seek to increase sales of parts and service--both of
which have considerably higher margins than equipment sales. This increase will
be accomplished through the continued diversification of our parts product lines
and the servicing of equipment produced by manufacturers other than Case. Third,
the Company plans to further develop its fleet of rental equipment. As the cost
of purchasing equipment escalates, short and long-term rental will become
increasingly attractive to the Company's customers. Management anticipates that
rental of equipment will make up an increasing share of the Company's revenues.
Products
Case Construction Equipment.
- ----------------------------
The construction equipment (the "Equipment") sold, rented, and serviced by
the Company generally consists of: backhoes (used to dig large, wide and deep
trenches); excavators (used to dig deeply for the construction of foundations,
basements, and other projects); log loaders (used to cut, process and load
logs); crawler dozers (bulldozers used for earth moving, leveling and shallower
digging than excavators); wheel loaders (used for loading trucks and other
carriers with excavated dirt, gravel and rock); roller compactors (used to
compact roads and other surfaces); trenchers (a smaller machine that digs
trenches for sewer lines, electrical power and other utility pipes and wires);
forklifts (used to load and unload pallets of materials); and skid steer loaders
(smaller version of a wheel loader, used to load and transport small quantities
of material--e.g., dirt and rocks-- around a job site). Selling prices for these
units range from $15,000 to $350,000 per piece of Equipment.
Under the terms of standard Case dealer agreements, the Company is an
authorized Case dealer for sales of Equipment and related parts and services at
locations in Oregon, Washington, Nevada, northern California, and Alaska (the
"Territory"). The dealer agreements
I-2
<PAGE>
have no defined term or duration, but are reviewed on an annual basis by both
parties, and can be terminated without cause at any time either by the Company
on 30 days' notice or by Case on 90 days' notice. Although the dealer agreements
do not prevent Case from arbitrarily exercising its right of termination, based
upon Case's established history of dealer relationships and industry practice,
the Company does not believe that Case would terminate its dealer agreements
without good cause.
The dealer agreements do not contain requirements for specific minimum
purchases from Case. In consideration for the Company's agreement to act as
dealer, Case supplies to the Company items of Equipment for sale and lease,
parts, cooperative advertising benefits, marketing brochures related to Case
products, access to Case product specialists for field support, the ability to
use the Case name and logo in connection with the Company's sales of Case
products, and access to Case floor plan financing for Equipment purchases. Such
floor planning arrangement currently provides the Company with interest free
credit terms on new equipment purchases ranging from one to six months,
depending upon the type of equipment floored, after which interest commences to
accrue monthly at an annual rate equal to 2% over the prime rate of interest.
The invoice price of each item of Equipment is payable at the earlier of the
time of its sale by the Company or six months after the date of shipment to the
Company by Case.
Other Products.
- ---------------
Although the principal products sold, rented, and serviced by the Company
are manufactured by Case, the Company also sells, rents, and services equipment
and sells related parts (e.g., tires, trailers, and compaction equipment)
manufactured by others. Approximately 42% of the Company's net sales for fiscal
year 1999 resulted from sales, rental, and servicing of products manufactured by
companies other than Case, compared to 35% for fiscal year 1998 as the Company
continued its planned growth in product lines other than Case. Manufacturers
other than Case represented by the Company offer various levels of supplies and
marketing support along with purchase terms which vary from cash upon delivery
to interest-free, 12-month flooring.
The Company's distribution business is divided into three general
categories of activity: (i) Equipment sales, (ii) Equipment rentals, and (iii)
Product Support.
Equipment Sales.
- ----------------
At each of its distribution outlets, the Company maintains a fleet of
various new and used Equipment for sale. The Equipment purchased for each outlet
is selected by the Company's marketing staff based upon the types of customers
in the geographical areas surrounding each outlet, historical purchases as well
as anticipated trends. Subject to applicable limitations in the Company's
manufacturers' dealer contracts, each distribution outlet has access to the
Company's full inventory of Equipment.
The Company provides only the standard manufacturer's limited warranty for
new Equipment, generally a one-year parts and service repair warranty. Customers
can purchase extended warranty contracts.
The Company sells used Equipment that has been reconditioned in its own
service shops. It generally obtains such used Equipment as "trade-ins" from
customers who purchase new items of Equipment and from Equipment previously
rented and not purchased. Unlike new Equipment, the Company's used Equipment is
generally sold "as is" and without a warranty.
I-3
<PAGE>
Equipment Rental.
- -----------------
The Company maintains a separate fleet of Equipment that it holds solely
for rental. Such Equipment is generally held in the rental fleet for 12 to 36
months and then sold as used Equipment with appropriate discounts reflecting
prior rental usage. As rental Equipment is taken out of the rental fleet, the
Company adds new Equipment to its rental fleet as needed. The rental charges
vary, with different rates for different types of Equipment rented. In October
1998, the Company opened its first rental-only store, located in the Seattle,
Washington area, under the name Western Power Rents. This store rents a wide
range of products including Equipment from Case and other manufacturers with
whom the Company has dealer agreements as well as Equipment from companies with
which the Company has had no prior relationship.
Product Support.
- ----------------
The Company operates a service center and yard at each retail distribution
outlet for the repair and storage of Equipment. Both warranty and non-warranty
service work is performed, with the cost of warranty work being reimbursed by
the manufacturer following the receipt of invoices from the Company. The Company
employs approximately 140 manufacturer-trained service technicians who perform
Equipment repair, preparation for sale, and other servicing activities.
Equipment servicing is one of the higher profit margin businesses operated by
the Company. The Company has expanded this business by hiring additional
personnel and developing extended warranty contracts to be purchased by
customers for Equipment sold and serviced by the Company, and independently
marketing such contracts to its customers. The Company services items and types
of Equipment which include those that are neither sold by the Company nor
manufactured by Case.
The Company purchases parts, principally from Case, for use in its
Equipment service business, as well as for sale to other customers who are
independent servicers of Case Equipment. Generally, parts purchases are made on
standard net 30-day terms. The Company employs one or more persons who take
orders from customers for parts purchases at each retail distribution outlet.
The majority of such orders are placed in person by walk-in customers. The
Company provides only the standard manufacturer's warranty on the parts that it
sells, which is generally a 90-day replacement guaranty.
Sales and Marketing
The Company's customers are typically residential and commercial building
general contractors, road and bridge contractors, sewer and septic contractors,
underground utility contractors, persons engaged in the forestry industry,
equipment rental companies and state and municipal authorities. The Company
estimates that it has approximately 19,000 customers, with most being small
business owners, none of which accounted for more than 3% of its total sales in
the fiscal year ended July 31, 1999.
For fiscal years 1999, 1998, and 1997, the revenue breakdown by source for
the business operated by the Company were approximately as follows:
<TABLE>
<CAPTION>
FY 1999 FY 1998 FY 1997
-------------------------------
<S> <C> <C> <C>
Equipment Sales 60% 69% 69%
Equipment Rental 16% 8% 9%
Product Support 24% 23% 22%
-------------------------------
100% 100% 100%
===============================
</TABLE>
The Company advertises its products in trade publications and appears at
trade shows throughout its Territory. It also encourages its salespersons to
visit customer sites and offer Equipment demonstrations when requested.
I-4
<PAGE>
The Company's sales and marketing activities do not result in any
significant backlog of orders. Although the Company accepts orders from
customers for future delivery following manufacture by Case or other
manufacturers, during fiscal 1999 a majority of its sales revenues resulted from
products sold directly out of inventory, or the providing of services upon
customer request.
All of the Company's sales personnel are employees of the Company, and all
are under the general supervision of C. Dean McLain, the President of the
Company. Each Equipment salesperson is assigned a separate exclusive territory,
the size of which varies based upon the number of potential customers and
anticipated volume of sales, as well as the geographical characteristics of each
area. The Company employed approximately 70 Equipment salespersons on July 31,
1999.
On July 31, 1999, the Company employed 7 product support salespersons who
sell the Company's parts and repair services to customers in assigned
territories. The Company has no independent distributors or non-employee sales
representatives.
Suppliers
The Company purchases the majority of its inventory of equipment and parts
from Case. No other supplier accounted for more than 10% of such inventory
purchases during fiscal 1999. While maintaining its commitment to Case to
primarily purchase Case Equipment and parts as an authorized Case dealer, the
Company plans to expand the number of products and increase the aggregate dollar
value of those products which the Company purchases from manufacturers other
than Case in the future.
Competition
The Company competes with distributors of construction, agricultural, and
industrial equipment and parts manufactured by companies other than Case on the
basis of price, the product support (including technical service) that it
provides to its customers, brand name recognition for its products, the
accessibility and number of its distribution outlets, and the overall quality of
the products that it sells. The Company's management believes that it is able to
effectively compete with distributors of products produced and distributed by
such other manufacturers primarily on the basis of overall product quality and
the superior product support and other customer services provided by the
Company.
Case's two major competitors in the manufacture of full lines of
construction equipment of comparable sizes and quality are Caterpillar
Corporation and Deere & Company. In addition, other manufacturers produce
specific types of equipment which compete with Case Equipment and other
Equipment distributed by the Company. These competitors and their product
specialties include, but are not limited to, JCB Corporation--backhoes, Kobelco
Corporation -- excavators, Dresser Industries -- light and medium duty dozers,
Komatsu Corporation --wheel loaders and crawler dozers, and Bobcat, Inc. -- skid
steer loaders.
The Company is currently the only Case dealer for construction equipment in
Washington, Alaska, northern Nevada, and in the northern California area (other
than Case-owned distribution outlets), and is one of two Case dealers in Oregon.
However, Case has the right to establish other dealerships in the future in the
same territories in which the Company operates. In order to maintain and improve
its competitive position, revenues and profit margins, the Company plans to
increase its sales of products produced by companies other than Case.
I-5
<PAGE>
Environmental Standards and Government Regulation
The Company's operations are subject to numerous rules and regulations at
the federal, state, and local levels which are designed to protect the
environment and to regulate the discharge of materials into the environment.
Based upon current laws and regulations, the Company believes that its policies,
practices, and procedures are properly designed to prevent unreasonable risk of
environmental damage and the resultant financial liability to the Company. No
assurance can be given that future changes in such laws, regulations, or
interpretations thereof, changes in the nature of the Company's operations, or
the effects of former occupants' past activities at the various sites at which
the Company operates, will not have an adverse impact on the Company's
operations.
The Company is subject to federal environmental standards because in
connection with its operations it handles and disposes of hazardous materials,
and discharges sewer water in its equipment rental and servicing operations. The
Company's internal staff is trained to keep appropriate records with respect to
its handling of hazardous waste, to establish appropriate on-site storage
locations for hazardous waste, and to select regulated carriers to transport and
dispose of hazardous waste. Local rules and regulations also exist to govern the
discharge of waste water into sewer systems.
Employees
At July 31, 1999, the Company employed 420 full-time employees. Of that
number, 29 are in corporate administration, 27 are involved in administration at
the branch locations, 111 are employed in Equipment sales and rental, and 253
are employed in product support. At July 31, 1999, approximately 19 of the
Company's service technicians and parts employees at the Sacramento, California
operation were being represented by Operating Engineers Local Union No. 3 of the
International Union of Operating Engineers, AFL-CIO under the terms of a
five-year contract expiring August 31, 2001. As of May 1999, approximately 19
service technicians employed at the Auburn, Washington operation had voted to be
represented in collective bargaining by Operating Engineers Local Union Nos. 302
and 612 of the International Union of Operating Engineers, AFL-CIO. The Company
and the local unions' representatives are currently in contract negotiations as
to a contract for these employees. The Company believes that its relations with
its employees are generally satisfactory.
Insurance
The Company currently has general, product liability, and umbrella
insurance policies covering the Company with limits, terms, and conditions which
the Company believes to be consistent with reasonable business practice,
although there is no assurance that such coverage will prove to be adequate in
the future. An uninsured or partially insured claim, or a claim for which
indemnification is not available, could have a material adverse effect upon the
Company.
Forward-Looking Statements
Information included above relating to projected growth and future results
and events constitutes forward-looking statements. Actual results in future
periods may differ materially from the forward-looking statements due to a
number of risks and uncertainties, including but not limited to fluctuations in
the construction, agricultural, and industrial sectors; the success of the
Company's entry into new markets; the success of the Company's expansion of its
equipment rental business; rental industry conditions and competitors;
competitive pricing; the Company's relationship with its suppliers; relations
with the Company's employees; the Company's ability to manage its operating
costs; the continued availability of financing; governmental regulations and
environmental matters; risks associated with regional, national, and world
economies; and implementation and completion of the Company's year 2000
compliance program. Any forward-looking statements should be considered in light
of these factors.
I-6
<PAGE>
ITEM 2. PROPERTIES
The following table sets forth information as to each of the properties
which the Company owns or leases (all of which are retail sales, rental,
service, storage, and repair facilities except as otherwise noted) at July 31,
1999. The Stores located in Salinas, California; Bend, Oregon; Portland, Oregon
(Whitaker location); and Moxee, Washington were closed in the first quarter of
fiscal 2000.
<TABLE>
<CAPTION>
Expiration Annual Size/Square Purchase
Location and Use Lessor Date Rental Feet Options
- ----------------- ------ ---------- ------ ----------- --------
<S> <C> <C> <C> <C> <C>
1745 N.E. Columbia Blvd. Carlton O. 12/31/2000 $ 83,649/1 Approx. 4 acres; No
Portland, Oregon 97211 Fisher, CNJ plus CPI building 17,622
Enterprises adjustments sq. ft.
1665 Silverton Road, N.E. LaNoel Elston 7/10/2001 $ 33,600/1 Approx. 1 acre; No
Salem, Oregon 97303 Myers Living buildings 14,860
Trust sq. ft.
1702 North 28th Street McKay 6/14/2001 $ 69,000/1 Approx. 5 acres; No
Springfield, Oregon 97477 Investment building 17,024
Company sq. ft.
West 7916 Sunset Hwy. U.S. Bank 9/30/2003 $ 69,600/1 Approx. 5 acres; No
Spokane, Washington 99204 building 19,200
sq. ft.
12406 Mukilteo Speedway Phil & Jana 10/31/2008 $114,000/1 Approx. 2.1 No
Mukilteo, Washington 98275 Pickering acres; building
13,600 sq. ft.
1901 Frontier Loop The Landon 4/30/2002 $ 40,500/1 Approx. 7 acres; No
Pasco, Washington 99301 Group building 14,200
sq. ft.
13184 Wheeler Road, NE Maiers Month to $ 38,400/1 Approx. 10 acres; No
Building 4 Industrial Month building 13,680
Moses Lake, Washington 98837 Park sq. ft.
63291 Nels Anderson Road B&K Management 10/31/99 $ 31,800/1 Approx. 1.9 No
Bend, Oregon 97701 Corp. acres; building
3,600 sq. ft.
4601 N.E. 77th Avenue Parkway Limited 1/31/2001 $157,200 Building 8,627 No
Suite 200 Partnership sq. ft.
Vancouver, Washington 98662
(Executive Offices)
2702 W. Valley Hwy No. Avalon Island 11/30/2015 $204,000/1 Approx. 8 acres; No
Auburn, Washington 98001 LLC building 33,000
sq. ft.
500 Prospect Lane Frederick 9/15/2002 $ 26,496/1 Approx. 1.5 Yes
Moxee, Washington 98936 Peterson acres; building
4,320 sq. ft.
1455 Glendale Ave. McLain-Rubin 1/31/2019 $252,000/2 Approx. 5 acres; No
Sparks, Nevada 89431 Realty Company, building 22,475
LLC sq. ft.
I-7
<PAGE>
Expiration Annual Size/Square Purchase
Location and Use Lessor Date Rental Feet Options
- ----------------- ------ ---------- ------ ----------- --------
<S> <C> <C> <C> <C> <C>
25886 Clawiter Road Fred Kewel II, 11/30/99 $110,088/1 Approx. 2.8 No
Hayward, California 94545 Agency acres; building
21,580 sq. ft.
3540 D Regional Parkway Soiland Month-to- $ 43,284/1 plus Approx. 1.25 No
Santa Rosa, California 95403 Month annual CPI acres; building
adjustments 5,140 sq. ft.
1751 Bell Avenue McLain-Rubin 2/2/2016 $168,000/2 Approx. 8 acres; No
Sacramento, California 95838 Realty Group building 35,940
sq. ft.
1041 S. Pershing Avenue Raymond 3/14/2001 $ 44,4001 plus Approx. 2 acres; No
Stockton, California 95206 Investment Corp. annual CPI building 8,000
adjustments sq. ft.
8271 Commonwealth Avenue M.E. Robinson 3/31/2001 $ 81,600/1 Approx. 1 acre; Yes
Buena Park, California 90621 building 11,590
sq. ft.
672 Brunken Avenue R. Jay De Serpa, 7/31/2001 $ 31,644/1 Approx. .8 acre; No
Salinas, California 93301 Ltd. building 4,000
sq. ft.
13691 Whitaker Way D&J Enterprises 5/1/2001 $ 77,700 Approx. 2 acres; No
Portland, Oregon 97230 building 11,760
sq. ft.
2535 Ellis Street Hart Enterprises 2/15/2002 $ 33,600 Approx. 2 acres; Yes
Redding, Oregon 96001 building 6,200
sq. ft.
913 S. Central McLain-Rubin 5/31/2017 $205,2002 plus Approx. 4.4 No
Kent, Washington 98032 Realty II CPI adjustments acres; building
(Rental only facility) 21,400 sq. ft.
723 15th Street Mark Flerchinger 11/02/2002 $ 18,600 Approx. 1.2 Yes
Clarkston, Washington 99403 acres; building
3,750 sq. ft.
3199 E. Onstott Road McLain-Rubin 12/31/2017 $ 54,000/2 Approx. 13 acres; No
Yuba, City, California 95991 Realty III building 23, 900
sq. ft.
2020 E. Third Avenue Owned N/A N/A Approx. 4 acres; N/A
Anchorage, Alaska 99501 building 15,650
sq. ft.
2275 Brandy Lane Excaliber Drill 2/29/2000 $ 30,000 Approx. 0.5 acre; No
Juneau, Alaska 99801 building 1,500
sq, ft.
3510 International Way C & N Partners 12/15/99 $ 46,978 Approx. 2 acres; No
Fairbanks, Alaska 99701 building 4,500
sq. ft.
- --------------
1 Net lease with payment of insurance, property taxes, and maintenance
costs paid by the Company.
2 Net lease with payment of insurance, property taxes and maintenance
costs, including structural repairs, paid by the Company.
</TABLE>
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<PAGE>
The Company's operating facilities at July 31, 1999 were separated into
nine "hub" outlets, fourteen "sub-stores" and one rental only store in Kent,
Washington. The hub stores are the main distribution centers located in Auburn,
Pasco, and Spokane, Washington; Portland and Springfield, Oregon; Sparks,
Nevada; Hayward and Sacramento, California; and Anchorage, Alaska; and the
sub-stores are the smaller facilities located in Mukilteo, Moses Lake,
Clarkston, and Yakima, Washington; Portland, Salem, and Bend, Oregon; Santa
Rosa, Stockton, Buena Park, Redding, Yuba City, and Salinas, California; and
Fairbanks, Alaska.
All of the leased and owned facilities used by the Company are believed to
be adequate in all material respects for the needs of the Company's current and
anticipated business operations.
ITEM 3. LEGAL PROCEEDINGS
Except for routine proceedings incidental to its business, there are no
pending legal proceedings to which the Company or any of its property is
subject.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
ITEM 4A. EXECUTIVE OFFICERS OF THE REGISTRANT (1)
<TABLE>
<CAPTION>
Name Officer Since Age Position Held With the Registrant
---- ------------- --- ---------------------------------
<S> <C> <C> <C>
C. Dean McLain 1993 46 Chairman, President, and
Chief Executive Officer (2)
Mark J. Wright 1997 43 Vice President of Finance, Chief
Financial Officer, Treasurer, and
Secretary
(1) The officers serve for a term of one year and until their successors
are elected.
(2) Elected Chairman in 1998, Chief Executive Officer and President in
1993.
</TABLE>
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<PAGE>
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS
The Company's stock is traded on the NASDAQ National Market System (until
May 20, 1999) and the NASDAQ SmallCap Market (since May 20, 1999) under the
symbol WPEC. The high and low closing prices for the Company's common stock for
the years ended July 31, 1998 and July 31, 1999 were as follows:
<TABLE>
<CAPTION>
High Low
Fiscal 1998
-----------
<S> <C> <C>
1st Quarter - August 1, 1997 through October 31, 1997 $6.375 $4.500
2nd Quarter - November 1, 1997 through January 31, 1998 $6.625 $4.563
3rd Quarter - February 1, 1998 through April 30, 1998 $7.313 $5.375
4th Quarter - May 1, 1998 through July 31, 1998 $6.625 $5.000
Fiscal 1999
-----------
1st Quarter - August 1, 1998 through October 31, 1998 $6.125 $4.000
2nd Quarter - November 1, 1998 through January 31, 1999 $4.625 $2.875
3rd Quarter - February 1, 1999 through April 30, 1999 $3.500 $2.000
4th Quarter - May 1, 1999 through July 31, 1999 $3.375 $2.375
</TABLE>
The number of shareholders of record of the Company's Common Stock on
October 15, 1999 was 38, and the number of beneficial holders of the Company's
Common Stock is estimated by management to be approximately 370 holders.
The Company has never paid cash dividends on its Common Stock and it does
not anticipate that it will pay cash dividends or alter its dividend policy in
the foreseeable future. The payment of dividends by the Company on its Common
Stock will depend on its earnings and financial condition, and such other
factors as the Board of Directors of the Company may consider relevant. The
Company currently intends to retain its earnings to assist in financing the
development of its business.
II-1
<PAGE>
ITEM 6. SELECTED FINANCIAL DATA
The following selected financial data have been derived from the audited
financial statements of the Company. See notes to Consolidated Financial
Statements in Part IV, Item 14(a)(1) for information concerning the effect of
acquisitions completed by the Company during the periods reflected.
(Amounts in thousands, except per share data)
<TABLE>
<CAPTION>
Fiscal Year Ended July 31,
1999 1998 1997 1996 1995
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net sales $ 163,650 $ 163,478 $ 148,130 $ 106,555 $ 86,172
Gross profit $ 14,594 $ 19,176 $ 15,870 $ 12,649 $ 10,028
(% of sales) 8.9 11.7 10.7 11.9 11.6
Selling, general and administrative $ 12,586 $ 12,092 $ 11,194 $ 7,827 $ 6,078
(% of sales) 7.7 7.4 7.6 7.3 7.1
Income (loss) before income taxes (2,916) $ 3,193 $ 1,664 $ 3,363 $ 2,602
(% of sales) (1.8) 2.0 1.1 3.2 3.0
Tax rate (%) 38 42 42 38 38
Net income (loss) $ (1,815) $ 1,839 $ 971 $ 2,079 $ 1,613
Net income (loss) per common share $ (0.55) $ 0.53 $ 0.27 $ 0 .59 $ 0 .74
Shares used in basic earnings
per share calculations 3,303 3,473 3,533 3,533 2,192
Net income (loss) per
diluted common share $ (0.55) $ 0.49 $ 0.27 $ 0.58 $ 0.74
Shares used in diluted earnings
per share calculations 3,303 3,772 3,609 3,579 2,192
Working capital (deficit) $ (16,117) $ (6,339) $ (2,569) $ 15,326 $ 10,883
Long-term debt (including capital leases
and deferred lease income) $ 11,124 $ 7,457 $ 3,767 $ 2,924 $ 47
Stockholders' equity $ 21,322 $ 23,138 $ 22,765 $ 21,794 $ 19,715
Total assets $ 136,594 $ 138,766 $ 107,423 $ 85,290 $ 67,192
</TABLE>
II-2
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The following discussion and analysis should be read in conjunction with
the Consolidated Financial Statements and Notes thereto appearing elsewhere in
this annual report. Certain matters discussed herein contain forward-looking
statements that are subject to risks and uncertainties that could cause actual
results to differ materially from those projected, including, but not limited
to, projected sales levels, expense reductions, reduced interest expense, and
increased inventory turnover, one or more of which may not be realized.
General
The Company'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 acquired its first seven retail
distribution stores in November 1992. The Company expanded to 18 stores in four
states by the end of fiscal 1996, to 23 stores in five states by the end of
fiscal 1997, and to 27 stores in five states by the end of fiscal 1998. In
fiscal 1999, the Company closed its Milton-Freewater, Oregon store, its Elko,
Nevada store, and its Juneau, Alaska store. At the end of fiscal 1999, the
Company had 24 stores in operation.
Store activity for the last three years is summarized as follows:
<TABLE>
<CAPTION>
Fiscal No. of Stores at No. of Stores No. of Stores No. of Stores No. of Stores at
Year Beginning of Year Opened Closed Acquired End of Year
------ ----------------- ------------- ------------- ------------- ----------------
<S> <C> <C> <C> <C> <C>
1997 18 2 0 3 23
1998 23 1 1 4 27
1999 27 0 3 0 24
</TABLE>
Subsequent to the end of fiscal 1999, the Company has consolidated four
additional stores into larger neighboring stores. The four stores consolidated
are Salinas, California; Bend, Oregon; Portland, Oregon; and Moxee, Washington.
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
as circumstances permit. The Company's results can be impacted by the timing of,
and costs incurred in connection with, new store openings and acquisitions as
well as the costs of closing existing stores.
Results of Operations
Fiscal Year 1999, as Compared with Fiscal Year 1998
The Company reported net revenue for fiscal 1999 of $163,650,000 compared
with net revenue of $163,478,000 for fiscal 1998. Stores opened longer than 12
months showed an overall revenue decrease of 2.8 percent from prior year revenue
reflecting a general softening in economic conditions in the northwest,
increased competitive pressures, and some weather related business
interruptions. The Company consolidated three of its facilities during fiscal
1999 into larger facilities in the region in order to reduce costs and leverage
existing, larger facilities in the region to cover the territories previously
served by the closed facilities.
The Company had a net loss for fiscal 1999 of $1,815,000 or $0.55 per share
compared with net income of $1,839,000 or $0.53 per share in fiscal 1998 ($0.49
per share on a diluted basis). In fiscal 1999, the Company recognized a first
quarter pre-tax non-recurring charge of approximately $1,100,000 to provide
allowances to recognize decreasing market prices on used equipment.
Gross margin was 8.9 percent during fiscal 1999 which is lower than the
11.7 percent gross margin during fiscal 1998. Margins decreased in fiscal 1999
due mainly to continued competitive pressures and the first quarter equipment
reserve. Management continues to place a high priority on improving overall
gross margins by working to increase
II-3
<PAGE>
higher margin service, parts, and rental revenues, focusing more sales efforts
on specialty and niche product lines, and by obtaining higher prices for new and
used equipment.
Selling, general, and administrative expenses were $12,586,000 or 7.7
percent of revenues for fiscal 1999 compared to $12,092,000 or 7.4 percent of
sales for fiscal 1998. The increase in selling, general, and administrative
expenses as a percent of revenues resulted in part from lower than expected
revenue levels and full year expenses for stores opened or acquired in fiscal
1998.
Interest expense for fiscal 1999 was $5,454,000, up from $4,687,000 in
fiscal 1998 due in part to an increase in rental equipment levels. In addition,
effective with deliveries after July 1, 1998, Case changed factory to dealer
terms lowering from 3% to 2% the cash payment discount if the dealer pays for
the machine outright rather than utilizing the interest-free floor planning. The
Company was able to take advantage of the cash discounts on a majority of its
Case purchases in fiscal 1998. In June 1997, the Company obtained a $75 million
inventory flooring and operating line of credit facility through Deutsche
Financial Services ("DFS"). The facility is a three-year, floating rate facility
at rates as low as 50 basis points under the prime rate. Management has used
this facility to allow the Company to take advantage of more purchase discounts
and to lower overall interest expense. See Liquidity and Capital Resources below
for a description of the status of the DFS facility.
Fiscal Year 1998, as Compared with Fiscal Year 1997
The Company reported net revenue for fiscal 1998 of $163,478,000 which is
an increase of 10 percent over net revenue of $148,130,000 for fiscal 1997.
Approximately $17.4 million of revenue came from stores opened or acquired in
fiscal 1998. Stores opened prior to fiscal 1998 showed an overall revenue
decrease of 3.9 percent from prior year revenue reflecting a general softening
in economic conditions in the northwest, increased competitive pressures, and
some weather related business interruptions.
Net Income for fiscal 1998 was $1,839,000 or $0.53 per share ($0.49 per
share on a diluted basis) compared with $971,000 or $0.27 per share in fiscal
1997 ($0.27 per share on a diluted basis). In fiscal 1997, the Company
recognized a fourth quarter charge of approximately $440,000 (pre-tax) for
warranty service related expenses that the Company anticipated would not be
reimbursed by Case Corporation. The Company did not experience a similar problem
in fiscal 1998.
Gross margin was 11.7 percent during fiscal 1998 which is higher than the
10.7 percent gross margin during fiscal 1997. Margins increased in fiscal 1998
on new unit sales, rental, and service business. Management continues to place a
high priority on improving overall gross margins by working to increase higher
margin service, parts, and rental revenues, focusing more sales efforts on
specialty and niche product lines, and by obtaining higher prices for new
equipment.
Selling, general, and administrative expenses were $12,092,000 or 7.4
percent of revenues for fiscal 1998 compared to $11,194,000 or 7.6 percent of
sales for fiscal 1997. The decrease in selling, general, and administrative
expenses as a percent of revenues resulted in part from management's cost
control and efficiency improvement efforts as well as a generally higher level
of revenues.
Interest expense for fiscal 1998 was $4,687,000, up from $3,518,000 in
fiscal 1997 due in part to an increase in inventory levels, particularly
inventory dedicated to rentals. In addition, effective with deliveries after
July 1, 1998, Case changed factory to dealer terms lowering from 3% to 2% the
cash payment discount if the dealer pays for the machine outright rather than
utilizing the interest-free floor planning. The Company was able to take
advantage of the cash discounts on a majority of its Case purchases in fiscal
1998. In June 1997, the Company obtained a $75 million inventory flooring and
operating line of credit facility through DFS. The facility is a three-year,
floating rate facility at rates as low as 50 basis points under the prime rate.
Management has used this facility to allow the Company to take advantage of more
purchase discounts and to lower overall interest expense.
Liquidity and Capital Resources
The Company's primary needs for liquidity and capital resources are related
to its inventory for sale and its rental and lease fleets, store openings, and
acquisitions of additional stores. The Company's primary source of internal
liquidity
II-4
<PAGE>
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 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
July 31, 1999, the Company was indebted under manufacturer provided floor
planning arrangements in the aggregate amount of $17,128,000.
In June 1997, the Company obtained a $75 million inventory flooring and
operating line of credit through 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 July
31, 1999, approximately $70,863,000 was outstanding under the DFS credit
facility. At July 31, 1999, the Company was in technical default of the leverage
covenant and the minimum tangible net worth covenant in the DFS Loan Agreement.
The Company has requested but has not obtained a waiver letter for the period
July 31, 1999 or thereafter. Although DFS has not called the debt due to such
defaults, there is no guarantee that DFS will not call this debt at any time
after July 31, 1999. The Company and DFS have reached preliminary agreement on
amending this credit facility to revise certain leverage covenants and provide
financial penalties for violation of such covenants. Finalization of this
amendment is expected by November 30, 1999. 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.
During the year ended July 31, 1999, cash and cash equivalents increased by
$74,000. The Company had positive cash flow from operating activities during the
year of $15,055,000. Purchases of fixed assets during the period were related
mainly to the ongoing replacement of aged operating assets and the purchase of
the Anchorage facility.
The Company's cash and cash equivalents of $2,629,000 as of July 31, 1999
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.
All of the products and services provided by the Company are either capital
equipment or included in capital equipment, which are used in the construction,
agricultural, and industrial sectors. Accordingly, the Company's sales are
affected by inflation or increased interest rates which tend to hold down new
construction, and consequently adversely affect demand for the construction and
industrial equipment sold and rented by the Company. In addition, although
agricultural equipment sales are less than 2% of the Company's total revenues,
factors adversely affecting the farming and commodity markets also can adversely
affect the Company's agricultural equipment related business.
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.
II-5
<PAGE>
Dividend Policy
The Company has never paid cash dividends on its Common Stock and it does
not anticipate that it will pay cash dividends or alter its dividend policy in
the foreseeable future. The payment of dividends by the Company on its Common
Stock will depend on its earnings and financial condition, and such other
factors as the Board of Directors of the Company may consider relevant. The
Company currently intends to retain its earnings to assist in financing the
growth of its business.
Impact of the Year 2000 Issue
The Year 2000 issue is the result of computer programs being written using
two digits rather than four to define the applicable year. Any of the Company's
computer programs that have date sensitive software may recognize a date using
"00" as the year 1900 rather than the year 2000. This could result in a system
failure or miscalculations causing disruptions of operations, including, among
other things, a temporary inability to process transactions, send invoices, or
engage in similar normal business activities.
The company is completing upgrades of its enterprise application to include
Y2K fixes uncovered during the company's internal testing of the vendor's
software. The Company presently believes that with this upgrade to the existing
software, the Year 2000 issue can be mitigated. However, if the upgrade is not
timely completed, or does not work as anticipated, the Year 2000 issue could
have a material impact on the operations of the Company.
The Company has initiated its plan to contact all of its significant
suppliers to determine the extent to which the Company is vulnerable to those
third parties' failure to remediate their own Year 2000 issues. The Company has
received a favorable response from about half of the suppliers contacted to
date. There can be no guarantees that the systems of third parties on which the
Company's systems rely or which influence the business of the Company's
customers will be timely remediated, that any attempted remediation will be
successful, or that such conversions would be compatible with the Company's
systems. The Company has not yet determined the projected costs of the Company's
Year 2000 project and cannot yet determine whether the Company has any exposure
to contingencies related to the Year 2000 issue for the products it has
previously sold.
The Company will utilize both internal and external resources to reprogram,
or replace, and test the Company's software for Year 2000 modifications. The
Company plans to complete its Year 2000 project on or before December 31, 1999.
Funding for the costs of the program are anticipated to come from operating cash
flows.
The Company's current plan to complete the Year 2000 modifications are
based on management's best estimates, which were derived using numerous
assumptions of future events including the continued availability of certain
resources, third party modification plans, and the ability to meet projected
time lines. There can be no guarantee that these estimates will be achieved and
actual results could differ materially from those plans. Specific factors that
might cause such material differences include, but are not limited to, the
availability and cost of personnel trained in this area, the ability to locate
and correct all relevant computer codes, and other uncertainties.
Forward Looking Statement
Information included within this section relating to growth projections and
future results and events constitutes forward-looking statements. Actual results
in future periods may differ materially from the forward-looking statements
because of a number of risks and uncertainties, including but not limited to
fluctuations in the construction, agricultural, and industrial sectors; the
success of the Company's entry into new markets; the success of the Company's
expansion of its equipment rental business; rental industry conditions, and
competitors; competitive pricing; the Company's relationship with its suppliers;
relations with the Company's employees; the Company's ability to manage its
operating costs; the continued availability of financing; governmental
regulations and environmental matters; risks associated with regional, national,
and world economies; and implementation and completion of the Company's year
2000 compliance program. Any forward-looking statements should be considered in
light of these factors.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
None.
II-6
<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The following financial statements and financial schedule are attached to
this Report on Form 10-K following Part IV, Item 14:
Consolidated Statements of Operations for
the years ended July 31, 1999, 1998, and 1997 F-1
Consolidated Balance Sheets as of
July 31, 1999 and 1998 F-2
Consolidated Statements of Stockholders'
Equity for the years ended July 31, 1999, 1998,
and 1997 F-3
Consolidated Statements of Cash Flows for
the years ended July 31, 1999, 1998, and 1997 F-4
Notes to Consolidated Financial Statements F-5
Report of Independent Accountants F-16
Financial Statement Schedule:
Report of Independent Accountants - Financial Statement Schedule F-17
Schedule II - Valuation and Qualifying Accounts F-18
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE
None.
II-7
<PAGE>
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF REGISTRANT
Information with respect to Directors of the Company is incorporated herein
by reference to "Proposal 1: Election of Directors" continuing through "Report
of the Compensation Committee on Executive Compensation" in the Company's Proxy
Statement for the Annual Meeting of Shareholders to be filed pursuant to
Regulation 14A not later than 120 days after the end of the fiscal year covered
by this Form 10-K. The information required by this Item with respect to the
Company's Executive Officers follows Part I, Item 4A of this document.
ITEM 11. EXECUTIVE COMPENSATION
Information with respect to Executive Compensation is incorporated herein
by reference to "Compensation of Executive Officers" in the Company's Proxy
Statement for the Annual Meeting of Shareholders to be filed pursuant to
Regulation 14A not later than 120 days after the end of the fiscal year covered
by this Form 10-K.
ITEM 12. PRINCIPAL STOCKHOLDERS
Information with respect to Security Ownership of Certain Beneficial Owners
and Management is incorporated herein by reference to "Security Ownership of
Certain Beneficial Owners" and "Security Ownership of Directors and Executive
Officers" in the Company's Proxy Statement for the Annual Meeting of
Shareholders to be filed pursuant to Regulation 14A not later than 120 days
after the end of the fiscal year covered by this Form 10-K.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information with respect to Certain Relationships and Related Transactions
is incorporated herein by reference to "Board Compensation, Attendance and
Committees, Certain Transactions" in the Company's Proxy Statement for the
Annual Meeting of Shareholders to be filed pursuant to Regulation 14A not later
than 120 days after the end of the fiscal year covered by this Form 10-K.
III-1
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) 1. Financial Statements.
Consolidated Statements of Operations for
the years ended July 31, 1999, 1998, and 1997 F-1
Consolidated Balance Sheets as of
July 31, 1999 and 1998 F-2
Consolidated Statements of Stockholders'
Equity for the years ended July 31, 1999, 1998,
and 1997 F-3
Consolidated Statements of Cash Flows for
the years ended July 31, 1999, 1998, and 1997 F-4
Notes to Consolidated Financial Statements F-5
Report of Independent Accountants F-16
2. Financial Statement Schedule.
Report of Independent Accountants - Financial
Statement Schedule F-17
Schedule II - Valuation and Qualifying Accounts F-18
3. Exhibits.
Exhibit
Number Description
------- -----------
3.1 Certificate of Incorporation of Registrant. (2)
3.2 By-laws of Registrant. (2)
10.1 1995 Employee Stock Option Plan. (3)
10.2 Second Amended and Restated Stock Option Plan for
Non-Employee Directors. (3)
10.3 Case New Dealer Agreement Package. (1)
10.4 Lease Agreement--Hayward, California. (2)
10.5 Lease Agreement--Auburn, Washington. (7)
10.6 Lease Agreement--Sacramento, California. (4)
10.7 Loan Agreement, dated January 17, 1997, between Registrant
and Case Credit Corp. including related promissory notes.
(5)
10.8 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)
10.9 Loan and Security Agreement dated as of June 5, 1997
between Registrant and Deutsche Financial Services
Corporation. (6)
10.10 Commercial Lease dated June 1, 1997 between McLain-Rubin
Realty Company II, LLC and Registrant for Kent, Washington
facility. (9)
IV-I
<PAGE>
Exhibit
Number Description
------- -----------
10.11 Asset Purchase Agreement, dated December 11, 1997, between
Case Corporation and Registrant and McLain-Rubin Realty
Company III, LLC. (9)
10.12 Commercial Lease dated December 11, 1997 between
McLain-Rubin Realty Company III, LLC and Registrant for
Yuba City, California facility. (9)
10.13 Employment Agreement, by and between Registrant and C. Dean
McLain, dated January 1, 1998. (9)
10.14 Asset Purchase Agreement, dated April 30, 1998, between
Yukon Equipment, Inc. and Registrant. (8)
10.15 Employment Agreement dated May 1, 1998 between Maurice
Hollowell and Registrant. (8)
10.16 Consulting Agreement, by and between Registrant and Robert
M. Rubin. (9)
10.17 Commercial Lease, dated as of February 17,1999 between
McLain-Rubin Realty Company, LLC and Registrant for the
Sparks, Nevada facility. (10)
21. Subsidiaries of the Company.
23. Consent of Independent Public Accountants.
27. Financial Data Schedule.
(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 Current Report on Form 8-K of Registrant,
as filed on March 6, 1996 and incorporated herein by reference
thereto.
(5) Filed as an Exhibit to the Current Report on Form 8-K of Registrant,
as filed on February 3, 1997 and incorporated herein by reference
thereto.
(6) 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.
(7) 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.
(8) Filed as an Exhibit to the Current Report on 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 Annual Report on Form 10-K of the
Registrant, as filed on October 29, 1998 and incorporated herein by
reference thereto.
IV-2
<PAGE>
(10) 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.
(b) Reports on Form 8-K.
none
(c) Exhibits
See (a)(3) above.
(d) Additional Financial Statement Schedules
See (a)(2) above.
IV-3
<PAGE>
<TABLE>
<CAPTION>
WESTERN POWER & EQUIPMENT CORP.
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
Year Ended July 31,
-------------------------------------
1999 1998 1997
--------- --------- ---------
<S> <C> <C> <C>
Net revenue $ 163,650 $ 163,478 $ 148,130
Cost of goods sold 149,056 144,302 132,260
--------- --------- ---------
Gross profit 14,594 19,176 15,870
Selling, general and administrative expenses 12,586 12,092 11,194
--------- --------- ---------
2,008 7,084 4,676
Other income (expense):
Interest expense (5,454) (4,687) (3,518)
Other income 530 796 506
--------- --------- ---------
Income before income taxes (2,916) 3,193 1,664
Provision (benefit) for income taxes (1,101) 1,354 693
--------- --------- ---------
Net income (loss) $ (1,815) $ 1,839 $ 971
========= ========= =========
Basic Earnings (loss) per common share $ (0.55) $ 0.53 $ 0.27
========= ========= =========
Average Outstanding Common Shares
for Basic EPS 3,303 3,473 3,533
========= ========= =========
Diluted Earnings (loss) per common share $ (0.55) $ 0.49 $ 0.27
========= ========= =========
Average Outstanding Common Shares
And Equivalents for Diluted EPS 3,303 3,772 3,609
========= ========= =========
See accompanying notes to consolidated financial statements.
</TABLE>
F-1
<PAGE>
<TABLE>
<CAPTION>
WESTERN POWER & EQUIPMENT CORP.
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands)
July 31, July 31,
1999 1998
--------- ---------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 2,629 $ 2,555
Accounts receivable, less allowance for
doubtful accounts of $724 and $670 15,500 23,626
Inventories 67,068 73,491
Prepaid expenses 233 172
Income taxes receivable 354 -
Deferred income taxes 1,410 1,298
--------- ---------
Total current assets 87,194 101,142
Fixed assets:
Property, plant and equipment, net 9,818 8,614
Rental equipment fleet, net 31,366 23,080
Lease equipment fleet, net 5,264 2,760
--------- ---------
Total fixed assets 46,448 34,454
Intangibles and other assets, net of accumulated
amortization of $570 and $1,262 2,952 3,170
--------- ---------
Total assets $ 136,594 $ 138,766
========= =========
LIABILITIES & STOCKHOLDERS' EQUITY Current liabilities:
Borrowings under floor plan financing $ 17,128 $ 11,038
Short-term borrowings 70,883 76,019
Accounts payable 12,702 17,574
Accrued payroll and vacation 825 858
Other accrued liabilities 1,756 1,653
Income taxes payable - 255
Covenant not to compete - 21
Capital lease obligations 17 63
--------- ---------
Total current liabilities 103,311 107,481
Deferred income taxes 837 690
Capital lease obligations 4,755 2,827
Long-term borrowings 48 1,156
Deferred gain 140 -
Deferred lease income 6,181 3,474
--------- ---------
Total liabilities 115,272 115,628
--------- ---------
Commitments and contingencies
Stockholders' equity:
Preferred stock-10,000,000 shares authorized; none outstanding - -
Common stock, $.001 par value - Authorized, 20,000,000 shares
Outstanding, 3,303,162 shares 4 4
Additional paid-in capital 16,072 16,072
Retained earnings 6,737 8,553
Less common stock in treasury, at cost
(230,300 shares) (1,491) (1,491)
--------- ---------
Total stockholders' equity 21,322 23,138
--------- ---------
Total liabilities and stockholders' equity $ 136,594 $ 138,766
========= =========
See accompanying notes to consolidated financial statements.
</TABLE>
F-2
<PAGE>
<TABLE>
<CAPTION>
WESTERN POWER & EQUIPMENT CORP.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(Dollars in thousands)
Common Stock
------------------------- Additional Total
Number Paid-in Retained Treasury Stockholders'
of Shares Amount Capital Earnings Stock Equity
--------- ----------- ----------- ----------- ----------- --------------
<S> <C> <C> <C> <C> <C> <C>
Balance at
July 31, 1996 3,533,462 4 16,047 5,743 - 21,794
Net income - - - 971 - 971
--------- ----------- ----------- ----------- ----------- --------------
Balance at
July 31, 1997 3,533,462 4 16,047 6,714 - 22,765
Repurchase of shares (280,300) - - - (1,816) (1,816)
Issuance of shares -
Yukon acquisition 50,000 25 - 325 350
Net income - - - 1,839 - 1,839
--------- ----------- ----------- ----------- ----------- --------------
Balance at
July 31, 1998 3,303,162 4 16,072 8,553 (1,491) 23,138
Net loss (1,815) (1,815)
--------- ----------- ----------- ----------- ----------- --------------
Balance at
July 31, 1999 3,303,162 $ 4 $ 16,072 $ 6,737 $ (1,491) $ 21,322
========= =========== =========== =========== =========== ==============
See accompanying notes to consolidated financial statements.
</TABLE>
F-3
<PAGE>
<TABLE>
<CAPTION>
WESTERN POWER & EQUIPMENT CORP.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
Year Ended July 31,
-------------------------------------
1999 1998 1997
--------- --------- ---------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income (loss) $ (1,815) $ 1,839 $ 971
Adjustments to reconcile net income to
net cash provided by (used in) operating activities:
Depreciation 11,554 3,645 1,105
Gain on disposal of fixed assets (45) - (18)
Amortization 225 210 159
Changes in assets and liabilities
(excluding effects of acquisitions):
Accounts receivable 8,126 (13,298) (3,171)
Inventories 1,299 (4,632) (13,039)
Leased equipment, net (2,504) (2,758) -
Inventory floor plan financing 6,090 (47,246) 1,126
Short-term financing (5,136) 67,179 (2,155)
Prepaid expenses (61) (133) 4
Deferred income taxes 35 369 (399)
Accounts payable (4,872) (533) 15,693
Accrued payroll and vacation (33) 122 (57)
Other accrued liabilities 103 (992) 530
Income taxes receivable/payable (609) 769 (551)
Deferred lease income 2,707 3,474 -
Other assets/liabilities (8) 327 193
--------- --------- ---------
Net cash provided by operating activities 15,055 8,342 391
--------- --------- ---------
Cash flow from investing activities:
Purchase of fixed assets (2,711) (942) (602)
Purchase of rental equipment, net (13,315) (4,628) -
Proceeds on sale of fixed assets 2,235 35 53
Covenant not to compete (21) (125) -
Purchase of other assets - (9) -
Purchase of distribution outlets - - (326)
--------- --------- ---------
Net cash used in investing activities (13,812) (5,669) (875)
--------- --------- ---------
Cash flows from financing activities:
Principal payments on capital leases (60) (66) (174)
Payable to/receivable from parent - - (188)
Treasury stock repurchases - (1,816) -
Long-term debt repayments (1,109) (111) -
--------- --------- ---------
Net cash used in financing activities (1,169) (1,993) (362)
--------- --------- ---------
Increase (decrease) in cash and cash equivalents 74 680 (846)
Cash and cash equivalents at beginning of year 2,555 1,875 2,721
--------- --------- ---------
Cash and cash equivalents at end of year $ 2,629 $ 2,555 $ 1,875
========= ========= =========
See accompanying notes to consolidated financial statements.
</TABLE>
F-4
<PAGE>
Western Power & Equipment Corp.
Notes to Consolidated Financial Statements (Dollars in thousands, except per
share and options data)
1. Summary of Significant Accounting Policies
Basis of Presentation
On August 13, 1992, Western Power & Equipment Corp., an Oregon corporation,
was formed and incorporated for the purpose of acquiring the assets and
operations of seven factory owned stores of Case Corporation ("Case") in
the states of Washington and Oregon. The acquisition was completed
effective November 1, 1992. Simultaneously, American United Global, Inc.
("AUGI") acquired all of the outstanding shares of the Oregon corporation.
In March 1995, in connection with a contemplated initial public offering, a
new corporation under the name Western Power & Equipment Corp. was
incorporated in Delaware (the "Company") to hold all the shares of the
Oregon corporation. AUGI contributed to the Company, upon incorporation,
all outstanding common stock of the Oregon corporation. The consolidated
financial statements include the accounts of the Company and its Oregon
subsidiary after elimination of all intercompany accounts and transactions.
The Company is engaged in the sale, rental, and servicing of light, medium,
and heavy construction, industrial, and agricultural equipment and related
parts in Washington, Oregon, California, Nevada, and Alaska. Case serves as
the manufacturer of the majority of the Company's products.
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.
Restricted Cash
In accordance with the borrowing agreement with Deutsche Financial Services
(DFS), the Company has a cash account restricted by DFS for the purpose of
paying down the line of credit. Restricted cash included in the cash
balances totaled $724 and $865 at July 31, 1999 and 1998, respectively.
Inventories
Inventories are stated at the lower of cost or market. Cost is determined
using the first-in, first-out (FIFO) method for parts inventories and the
specific identification method for equipment inventories.
Intangible Assets
The Company's acquisition strategy has been focused on existing businesses
with established market share in a contiguous geographic area. Items with
an indeterminate useful life, such as name recognition, geographical
location and presence represent value to the Company. The Company uses
estimates of the useful life of these intangible assets ranging from twenty
to forty years. These lives are based on the factors influencing the
acquisition decision and on industry practice. The Company reviews for
asset impairment on a periodic basis and whether events or changes in
circumstances indicate that the carrying amount of the intangible asset may
not be recoverable. Based on this review, no write-down for impairment loss
on intangible assets has been recorded during the three-year period ended
July 31, 1999.
F-5
<PAGE>
Property, Plant, and Equipment
Property, plant, and equipment are stated at cost less accumulated
depreciation. Depreciation and amortization are computed using the
straight-line method over the estimated useful lives of the assets, ranging
from 5 to 20 years. Expenditures for replacements and major improvements
are capitalized. Expenditures for repairs, maintenance, and routine
replacements are charged to expenses as incurred. The cost of assets
retired or otherwise disposed of and the related accumulated depreciation
are eliminated from the accounts; any resulting gain or loss is included in
the results of operations.
Revenue Recognition
Revenue on equipment and parts sales is recognized upon shipment of
products and passage of title. Rental and service revenue is generally
recognized at the time such services are provided.
The Company has entered into sales contracts under which the customer may
require the Company to repurchase equipment at specified dates and
specified prices. The Company records the proceeds from such sales
contracts as deferred lease income. The difference between the sale
contract amount and the repurchase obligation is recognized as revenue over
the period of the repurchase obligation. The remaining repurchase
obligation is recorded as a sale if and when the customer does not exercise
the repurchase option. At July 31, 1999, repurchase obligations aggregated
$5,602.
Advertising Expense
The Company expenses all advertising costs as incurred. Total advertising
expense for the years ended July 31, 1999, 1998 and 1997 was $311, $434,
and $501 respectively.
Income Taxes
The Company recognizes deferred tax liabilities and assets for the expected
future consequences of temporary differences between the carrying amounts
for financial reporting purposes and the tax bases of the assets and
liabilities.
Reclassifications
Certain amounts in the 1998 financial statements have been reclassified to
conform with the 1999 presentation.
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 long-term
debt approximates fair value as the actual interest rates approximate
current competitive rates.
Net Income (loss) Per Common Share
During fiscal 1998, the Company adopted Statement of Financial Accounting
Standards (SFAS) No. 128, Earnings Per Share. Under the provisions of SFAS
128, basic net income (loss) per common share is computed using the average
number of common shares outstanding during the period. Diluted net income
(loss) per share is computed using the average number of common shares and
common share equivalents outstanding during the
F-6
<PAGE>
period. SFAS 128 has been retroactively applied to calculate prior years'
earnings per share.
Supplemental disclosures of cash flow information
A capital lease obligation of $292 was incurred during the year ended July
31, 1997 when the Company entered into a lease for computer equipment and
software. A capital lease obligation of $680 was incurred in June 1997 when
the Company entered into a 20-year lease for the Kent, Washington facility.
A capital lease obligation of $397 was incurred in December 1997 when the
Company entered into a 20-year lease for the Yuba City, California
facility. A capital lease obligation of $1,942 was incurred in February
1999 when the Company entered into a 20-year lease for the Sparks, Nevada
facility.
The Company has consummated various acquisitions using, in part, the
assumption of notes payable and the issuance of Company common stock and
notes payable. Such non-cash transactions have been excluded from the
statement of cash flows.
<TABLE>
<CAPTION>
Year ended July 31,
1999 1998 1997
------- ------- -------
<S> <C> <C> <C>
Cash paid (received) during the year for:
Interest $ 5,482 $ 4,377 $ 3,686
Income taxes, net of refunds (834) 1,063 1,621
</TABLE>
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles 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.
2. Acquisitions
On January 17, 1997 the Company acquired the operating assets of Sahlberg
Equipment, Inc.("Sahlberg"), a four-store Northwest distributor of
noncompeting lines of equipment with facilities in Kent, Washington,
Portland, Oregon, Spokane, Washington and Anchorage, Alaska. The purchase
price for the assets of Sahlberg was an aggregate of approximately $5,290,
consisting of $3,844 for equipment inventory, $797 for parts inventories,
$625 for fixed assets, and $24 for work-in-process. The acquisition was
accounted for as a purchase.
On December 11, 1997, the Company acquired substantially all of the
operating assets used by Case in connection with its business of servicing
and distributing Case agricultural equipment at a facility located in Yuba
City, California. The acquisition was consummated for approximately $142 in
cash, $628 in installment notes payable to Case and the assumption of
$1,175 in inventory floor plan debt with Case and its affiliates. The
acquisition was accounted for as a purchase.
On April 30, 1998, the Company acquired substantially all of the operating
assets of Yukon Equipment, Inc. (Yukon) in connection with Yukon's business
of servicing and distributing construction, industrial, and agricultural
equipment in Alaska. Yukon has facilities in Anchorage, Fairbanks, and
Juneau, Alaska. The acquisition was consummated for approximately $4,766 in
cash, the assumption of approximately $2,786 in floor plan debt with Case
and its affiliates, and 50,000 shares of the Company's common stock. The
acquisition was accounted for as a purchase.
F-7
<PAGE>
Unaudited pro forma combined results of operations for the acquisitions
occurring during the two-year period ended July 31, 1998 as if such
acquisitions had occurred as of the beginning of the period are summarized
as follows:
<TABLE>
<CAPTION>
1998 1997
---------- ----------
<S> <C> <C>
Net revenues $ 173,414 $ 175,396
Net income (loss) $ 1,776 $ (60)
Basic earnings (loss) per share $ 0.51 $ (0.02)
Diluted earnings (loss) per share $ 0.47 $ (0.02)
</TABLE>
3. Related Party Transactions
The real property and improvements used in connection with the Sacramento
Operations, and upon which the Sacramento Operation is located, were sold
by Case for $1,500 to the McLain-Rubin Realty Company, LLC ("MRR"), a
Delaware limited liability company the owners of which are Messrs. C. Dean
McLain, the 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. Under the lease, such annual
rate increases to $192 after five years and is subject to fair market
adjustments at the end of ten years. 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
accordance with SFAS 13, the building portion of the lease is being
accounted for as a capital lease (see Note 9) while the land portion of the
lease qualifies for treatment as an operating lease.
On June 1, 1997, the real property and improvements used in connection with
the Sahlberg operation located in Kent, Washington, was purchased by
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. Simultaneous with its acquisition of the
Kent, Washington, real property and improvements, MRR II leased such real
property and improvements to the Company under the terms of a 20-year
commercial lease agreement dated June 1, 1997 with the Company paying an
initial annual rate of $205. Under the lease, such annual rate increases to
$231 after five years and is subject to additional adjustments at the end
of ten and fifteen years. 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
accordance with SFAS 13, the building portion of the lease is being
accounted for as a capital lease (see Note 9) while the land portion of the
lease qualifies for treatment as an operating lease.
On December 11, 1997, the real property and improvements used in connection
with Case's Yuba City, California operation, was purchased by McLain-Rubin
Realty Company III, LLC ("MRR III"), 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 Yuba City,
California real property and improvements, MRR III leased such real
property and improvements to the Company under the terms of a 20-year
commercial lease agreement dated effective December 11, 1997 with the
Company paying an initial annual rate of $54. Under the lease, such annual
rate increases to $59 after five years and is subject to additional
adjustments at the end of ten and fifteen years. In addition to base rent,
the Company is responsible for the
F-8
<PAGE>
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 accordance with SFAS
13, the building portion of the lease is being accounted for as a capital
lease (see Note 9) while the land portion of the lease qualifies for
treatment as an operating lease.
In February, 1999, the real property and improvements used in connection
with the Company's Sparks, Nevada operation and upon which such operation
is located, were sold to McLain-Rubin Realty, L.L.C. (MRR) under the terms
of a real property purchase and sale agreement. MRR is a Delaware limited
liability company the owners of which are Messrs. C. Dean McLain, the
President and Chairman of the Company, and Robert M. Rubin, a director of
the Company. The sale price was $2,210 in cash at closing. Subsequent to
the closing of the sale, the Company entered into a 20-year commercial
lease agreement with MRR for the Sparks, Nevada facility at an initial
rental rate of $252 per year with increases at five, ten, and fifteen years
resulting in a maximum annual rental rate of $374. The present value of the
minimum lease payments at the commencement of the lease back transaction
aggregated $3,052. The lease is a net lease with payment of insurance,
property taxes and maintenance costs paid by the Company. The sale resulted
in a deferred gain which will be amortized over the life of the lease
pursuant to generally accepted accounting principles. In accordance with
SFAS 13, the building portion of the lease is being accounted for as a
capital lease (see Note 9) while the land portion of the lease qualifies
for treatment as an operating lease.
4. Inventories
Inventories consist of the following:
<TABLE>
<CAPTION>
July 31, July 31,
1999 1998
--------- ---------
<S> <C> <C>
Equipment:
New equipment $ 49,325 $ 54,883
Used equipment 7,642 10,073
Parts 10,101 8,535
--------- ---------
$ 67,068 $ 73,491
========= =========
</TABLE>
5. Fixed Assets
Fixed assets consist of the following:
<TABLE>
<CAPTION>
July 31, July 31,
1999 1998
--------- ---------
<S> <C> <C>
Operating property, plant, and equipment:
Land $ 420 $ 840
Buildings 5,126 4,078
Machinery and equipment 3,869 3,236
Office furniture and fixtures 2,291 2,263
Computer hardware and software 1,299 1,045
Vehicles 1,841 1,291
Leasehold improvements 360 202
--------- ---------
15,206 12,955
Less: accumulated depreciation (5,388) (4,341)
--------- ---------
Property, plant, and equipment (net) $ 9,818 $ 8,614
Rental equipment fleet 36,395 23,080
Less: accumulated depreciation (5,029) -
--------- ---------
Rental equipment (net) 31,366 23,080
Leased equipment fleet (net) 5,264 2,760
</TABLE>
F-9
<PAGE>
6. Borrowings
The Company has inventory floor plan financing arrangements with Case
Credit Corporation, an affiliate of Case, for Case inventory and with other
finance companies affiliated with other equipment manufacturers. The terms
of these agreements generally include a one-month to six-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.
In June 1997, the Company obtained a $75,000 inventory flooring and
operating line of credit through 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 may be advanced against the Company's assets,
including accounts receivable, parts, new equipment, rental fleet, and used
equipment. Interest payments on the outstanding balance are due monthly.
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:
<TABLE>
<CAPTION>
July 31,
Maturity ----------------------
Interest Rate Date 1999 1998
------------- -------- --------- ---------
<S> <C> <C> <C> <C>
Case Credit Corporation Prime + 2% 8 - 48 $ 17,128 $ 11,038
(10.00%) months
Deutsche Financial Services Prime - 0.5% 12 - 36 70,863 75,886
(7.50%) months
Other variable 12 - 48 20 133
(8.00%-10.00%) months --------- ---------
$ 88,011 $ 87,057
========= =========
</TABLE>
At July 31, 1999, the Company was in technical default of the leverage
covenant and the minimum tangible net worth covenant in the Deutsche
Financial Services Loan Agreement. The Company asked for but did not obtain
a waiver letter as of July 31, 1999 and thereafter. There is no guarantee
that Deutsche Financial Services will not call this debt at any time after
July 31, 1999. If DFS does call the debt, it will become immediately due
and payable in full. However, the amount due to Deutsche Financial Services
is already included as a current liability.
7. Income Taxes
The provision (benefit) for income taxes is comprised of the following:
<TABLE>
<CAPTION>
Year Ended
---------------------------------------
July 31, July 31, July 31,
1999 1998 1997
--------- --------- ---------
<S> <C> <C> <C>
Current:
Federal $ (978) $ 1,227 $ 974
State (157) 162 119
--------- --------- ---------
(1,135) 1,389 1,093
--------- --------- ---------
Deferred:
Federal 29 (32) (357)
State 5 (3) (43)
--------- --------- ---------
34 (35) (400)
--------- --------- ---------
Total provision (benefit)
for income taxes $ (1,101) $ 1,354 $ 693
========= ========= =========
</TABLE>
F-10
<PAGE>
The principal reasons for the variation from the customary relationship
between income taxes at the statutory federal rate and that shown in the
statement of operations were as follows:
<TABLE>
<CAPTION>
Year Ended
---------------------------------------------
July 31, July 31, July 31,
1999 1998 1997
--------- --------- ---------
<S> <C> <C> <C>
Statutory federal income tax rate (34.0%) 34.0% 34.0%
State income taxes, net of
federal income tax benefit (5.2%) 5.0% 4.5%
Other 1.5% 3.4% 3.1%
--------- --------- ---------
(37.7%) 42.4% 41.6%
========= ========= =========
</TABLE>
Temporary differences and carry forwards which give rise to a significant
portion of deferred tax assets and liabilities were as follows:
<TABLE>
<CAPTION>
Year Ended
-----------------------
July 31, July 31,
1999 1998
--------- ---------
<S> <C> <C>
Deferred assets:
Inventory reserve $ 918 $ 775
Bad debt reserve 283 261
Accrued vacation and bonuses 96 98
Other accruals 113 164
--------- ---------
Current Deferred Tax Asset 1,410 1,298
Deferred liabilities:
Depreciation and amortization (757) (615)
Goodwill and intangibles (80) (75)
--------- ---------
Long-term Deferred Tax Liability (837) (690)
--------- ---------
Net Deferred Tax Asset $ 573 $ 608
========= =========
</TABLE>
8. Stockholders' Equity
Stock Option Plans
Under the Company's 1995 Employee Stock Option Plan, key employees,
officers, directors, and consultants of the Company can receive incentive
stock options and non-qualified stock options to purchase up to an
aggregate of 1,500,000 shares of the Company's common stock. The plan
provides that the exercise price of incentive stock options be at least
equal to 100 percent of the fair market value of the common stock on the
date of grant. With respect to non-qualified stock options, the plan
requires that the exercise price be at least 85 percent of fair value on
the date such option is granted. Outstanding options expire no later than
ten years after the date of grant.
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.
F-11
<PAGE>
During 1995, the Financial Accounting Standards Board issued SFAS 123,
"Accounting for Stock Based Compensation," which defines a fair value
method of accounting for an employee stock option or similar equity
instrument. That pronouncement encourages all entities to adopt that method
of accounting for all compensation costs related to stock options issued to
all employees under these plans, but permits companies to continue using
the intrinsic value method of accounting prescribed by the Accounting
Principles Board Opinion No. 25 ("APB 25"), "Accounting for Stock Issued to
Employees." Entities electing to remain with the accounting in APB 25 must
make pro forma disclosures of net income and earnings per share, as if the
fair value based method of accounting defined in this statement has been
applied.
The Company has elected to account for its stock based compensation under
APB 25; however, as required by SFAS 123, the Company has computed for pro
forma disclosure purposes the value of options granted during fiscal years
1999, 1998, and 1997 using the Black-Scholes option pricing model. The
weighted average assumptions used for stock option grants for fiscal years
1999, 1998, and 1997 were:
<TABLE>
<CAPTION>
FY99 FY98 FY97
----------- ----- -----
<S> <C> <C> <C>
Risk free interest rate 4.85 - 5.45% 5.875% 6.562%
Expected dividend yield 0% 0% 0%
Expected life 4 years 5 years 5 years
Expected volatility 62.56% 56.43% 56.59%
</TABLE>
Adjustments for forfeitures are made as they occur. For the years ended
July 31, 1999, 1998, and 1997, the total value of the options granted, for
which no previous expense has been recognized, was computed as
approximately $72 , $1,425, and $1,532 respectively, which would be
amortized over the vesting period of the options. The weighted average fair
value per share of the options granted in fiscal years 1999, 1998, and 1997
are $5.07, $2.31, and $2.46, respectively.
If the Company had accounted for these stock options issued to employees in
accordance with SFAS 123, the Company's net income (loss) and pro forma net
income (loss) and net income (loss) per share and pro forma net income
(loss) per share would have been reported as follows:
<TABLE>
<CAPTION>
Year Ended July 31, 1999
------------------------
Basic Diluted
Net Loss E.P.S. E.P.S.
-------- ------ --------
<S> <C> <C> <C>
As Reported $ (1,815) ($0.55) ($0.55)
Pro Forma $ (2,174) ($0.66) ($0.66)
Year Ended July 31, 1998
------------------------
Basic Diluted
Net Income E.P.S. E.P.S.
---------- ------ --------
As Reported $ 1,839 $ 0.53 $0.49
Pro Forma $ 583 $ 0.17 $0.15
Year Ended July 31, 1997
------------------------
Basic Diluted
Net Income E.P.S. E.P.S.
---------- ------ --------
As Reported $ 971 $ 0.27 $0.27
Pro Forma $ 600 $ 0.17 $0.17
</TABLE>
F-12
<PAGE>
The effects of applying SFAS 123 for providing pro forma disclosure for
fiscal years 1999, 1998, and 1997 are not likely to be representative of
the effects on reported net income and earnings per share for future years
since options vest over several years and additional awards are made each
year.
The following summarizes the stock option transactions under the Company's
stock option plans:
<TABLE>
<CAPTION>
Shares Weighted Average
(000) Option Price
------ ----------------
<S> <C> <C>
Options outstanding July 31, 1996: 200 $ 4.50
Exercised - -
Surrendered (82) 4.45
Granted 707 4.48
Options outstanding July 31, 1997: 825 4.49
Exercised - -
Surrendered (31) 4.38
Granted 714 4.62
Options outstanding July 31, 1998: 1,508 4.56
Exercised - -
Surrendered (12) 4.53
Granted 17 5.07
Options outstanding July 31, 1999: 1,513 4.56
</TABLE>
The following table sets forth the exercise prices, the number of options
outstanding and exercisable, and the remaining contractual lives of the
Company's stock options at July 31, 1999:
<TABLE>
<CAPTION>
Weighted
Weighted Average Weighted
Number of Average Contractual Number of Average
Exercise Options Exercise Life Options Exercise
Price Outstanding Price Remaining Exercisable Price
-------- ----------- -------- ----------- ----------- --------
<S> <C> <C> <C> <C> <C>
$ 4.375 287,000 $ 4.375 7.00 283,004 $ 4.375
4.500 457,500 4.500 6.00 450,000 4.500
4.563 673,500 4.563 3.33 673,500 4.563
4.656 5,000 4.656 7.00 5,000 4.656
4.875 5,000 4.875 4.00 5,000 4.875
5.125 50,000 5.125 7.50 33,334 5.125
5.500 10,000 5.500 4.00 10,000 5.500
6.250 25,000 6.250 4.00 8,333 6.250
-------- ----------- -------- ----------- ----------- --------
1,513,000 4.562 1,468,171 4.537
</TABLE>
F-13
<PAGE>
9. Commitments and Contingencies
The Company leases certain facilities and certain computer equipment and
software under noncancelable lease agreements. As more fully described in
Note 3, the building portion of five 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. 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
$2,000, $1,883, and $1,474 for the years ended July 31, 1999, 1998, and
1997, respectively. The computer equipment lease expires August 1999 and
meets certain specific criteria to be accounted for as a capital lease.
Assets recorded under capital leases are as follows:
<TABLE>
<CAPTION>
July 31, July 31, July 31,
1999 1998 1997
<S> <C> <C> <C>
Capitalized asset value $ 4,978 $ 3,036 $ 2,830
Less accumulated amortization (550) (315) (271)
-------- -------- --------
$ 4,428 $ 2,721 $ 2,559
</TABLE>
Future minimum lease payments under all noncancelable leases as of July 31,
1999, are as follows:
<TABLE>
<CAPTION>
Capital Operating
Year ending July 31, leases leases
-------- --------
<S> <C> <C>
2000 $ 442 $ 1,720
2001 459 1,374
2002 485 882
2003 510 726
2004 525 572
Thereafter 8,875 6,642
-------- --------
Total annual lease payments $ 11,296 $ 11,916
Less amount representing interest, with imputed
interest rates ranging from 6% to 15% 6,524
--------
Present value of minimum lease payments 4,772
Less current portion 17
--------
Long-term portion $ 4,755
========
</TABLE>
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, 1999, such purchase commitments totaled $5,923.
10. 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:
F-14
<PAGE>
<TABLE>
<CAPTION>
Business Component Year Ended Year Ended Year Ended
Net Revenues July 31, 1999 July 31, 1998 July 31, 1997
------------------ ------------- ------------- -------------
<S> <C> <C> <C>
Equipment Sales $ 98,450 $ 112,061 $ 102,349
Equipment Rental 25,771 13,389 12,464
Product Support 39,429 38,028 33,317
Totals $ 163,650 $ 163,478 $ 148,130
Business Component Year Ended Year Ended Year Ended
Gross Margins July 31, 1999 July 31, 1998 July 31, 1997
------------------ ------------- ------------- -------------
<S> <C> <C> <C>
Equipment Sales $ 2,591 $ 8,334 $ 7,172
Equipment Rental 5,017 3,555 2,046
Product Support 6,986 7,287 6,652
Totals $ 14,594 $ 19,176 $ 15,870
</TABLE>
11. Unaudited Quarterly Consolidated Financial Data
<TABLE>
<CAPTION>
Quarter
----------------------------------------- Total
First Second Third Fourth Year
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Fiscal 1999:
Net sales $ 40,365 $ 41,279 $ 40,371 $ 41,635 $163,650
Gross Profit 2,475 4,492 4,094 3,533 14,594
Net income (loss) (1,288) 331 (62) (796) (1,815)
Basic income (loss) per share (0.39) 0.10 (0.02) (0.24) (0.55)
Diluted income (loss) per share (0.39) 0.10 (0.02) (0.24) (0.55)
Quarter
----------------------------------------- Total
First Second Third Fourth Year
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Fiscal 1998:
Net sales $ 36,959 $ 39,659 $ 40,948 $ 45,912 $163,478
Gross Profit 4,336 4,990 4,391 5,459 19,176
Net income 516 616 101 606 1,839
Basic earnings per share 0.15 0.17 0.03 0.18 0.53
Diluted earnings per share 0.14 0.16 0.02 0.17 0.49
</TABLE>
F-15
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and
Stockholders of Western Power & Equipment Corp.
In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of operations, of stockholders' equity and of cash flows
present fairly, in all material respects, the financial position of Western
Power & Equipment Corp. and its subsidiary at July 31, 1999 and 1998, and the
results of their operations and their cash flows for each of the three years in
the period ended July 31, 1999, in conformity with generally accepted accounting
principles. These financial statements are the responsibility of the Company's
management; our responsibility is to express an opinion on these financial
statements based on our audits. We conducted our audits of these statements in
accordance with generally accepted auditing standards which require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for the opinion expressed
above.
PRICEWATERHOUSECOOPERS LLP
Portland, Oregon
October 22, 1999
F-16
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
FINANCIAL STATEMENT SCHEDULE
To the Board of Directors and
Stockholders of Western Power & Equipment Corp.
Our audits of the consolidated financial statements referred to in our report
dated October 22, 1999 appearing on page F-16 of this Annual Report on Form 10-K
also included an audit of the financial statement schedules listed in Item
14(a)(2) of this Form 10-K. In our opinion, this financial statement schedule
presents fairly, in all material respects, the information set forth therein
when read in conjunction with the related consolidated financial statements.
PRICEWATERHOUSECOOPERS LLP
Portland, Oregon
October 22, 1999
F-17
<PAGE>
SCHEDULE II
<TABLE>
<CAPTION>
WESTERN POWER & EQUIPMENT CORP.
VALUATION AND QUALIFYING ACCOUNTS
For the Fiscal Years Ended July 31, 1999 and 1998
(Dollars in Thousands)
Balance at Charged to Charged to Balance at
Beginning Costs and Other End of
Description of Period Expenses Accounts Deductions Period
----------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Accounts Receivable Reserve:
Fiscal year ended July 31, 1999 $ 670 $ 732 $ --- $ (678) $ 724
Fiscal year ended July 31, 1998 431 596 --- (357) 670
Inventory Reserve:
Fiscal year ended July 31, 1999 2,833 884 --- (1,204) 2,513
Fiscal year ended July 31, 1998 1,597 1,734 --- (498) 2,833
</TABLE>
F-18
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned thereunto duly authorized.
WESTERN POWER & EQUIPMENT CORP.
By: /s/ C. DEAN MCLAIN
-------------------------------------
C. Dean McLain, President and
Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
Signature Title Date
- --------- ----- ----
/s/ C. DEAN MCLAIN President, Chief October 29, 1999
- ----------------------------- Executive Officer,
C. Dean McLain and Chairman
/s/ MARK J. WRIGHT Vice President of Finance, October 29, 1999
- ----------------------------- Chief Financial and
Mark J. Wright Principal Accounting
Officer, Treasurer and
Secretary
/s/ ROBERT M. RUBIN Director October 29, 1999
- -----------------------------
Robert M. Rubin
/s/ HAROLD CHAPMAN, JR. Director October 29, 1999
- -----------------------------
Harold Chapman, Jr.
/s/ MERRILL A. MCPEAK Director October 29, 1999
- -----------------------------
Merrill A. McPeak
F-19
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED FINANCIAL STATEMENTS FOUND ON PAGES 1 THROUGH 3 OF THE COMPANY'S
FORM 10-K FOR THE YEAR, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> JUL-31-1999
<PERIOD-END> JUL-31-1999
<CASH> 2629
<SECURITIES> 0
<RECEIVABLES> 16224
<ALLOWANCES> 724
<INVENTORY> 67068
<CURRENT-ASSETS> 87194
<PP&E> 56865
<DEPRECIATION> 10417
<TOTAL-ASSETS> 136594
<CURRENT-LIABILITIES> 103311
<BONDS> 11961
0
0
<COMMON> 4
<OTHER-SE> 21318
<TOTAL-LIABILITY-AND-EQUITY> 136594
<SALES> 163650
<TOTAL-REVENUES> 163650
<CGS> 149056
<TOTAL-COSTS> 149056
<OTHER-EXPENSES> 12586
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 5454
<INCOME-PRETAX> (2916)
<INCOME-TAX> (1101)
<INCOME-CONTINUING> (1815)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1815)
<EPS-BASIC> (0.55)
<EPS-DILUTED> (0.55)
</TABLE>
EXHIBIT 21
SUBSIDIARIES OF THE COMPANY
1. Western Power & Equipment Corp., an Oregon corporation (100% owned by the
Company).
EXHIBIT 23
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference in the Registration
Statement on Form S-8 of our report dated October 22, 1999 appearing on page
F-16 of Western Power & Equipment Corp.'s Annual Report on Form 10-K for the
year ended July 31, 1999. We also consent to the incorporation by reference of
our report on the Financial Statement Schedule, which appears in Item 14(a)(2)
of such Annual Report on Form 10-K.
PRICEWATERHOUSECOOPERS LLP
Portland, Oregon
October 29, 1999
