<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
|X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1998 or
| | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ________ to ______
Commission file number 000-21813
---------
Texas Equipment Corporation
- -------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Nevada 62-1459870
- -------------------------------------------------------------------------------
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
1305 Hobbs Hwy, Seminole, Texas 79360
- -------------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number: (915) 758-3643
Securities registered under Section 12(b) of the Exchange Act:
Title of each class Name of each exchange on which registered
- ------------------- -----------------------------------------
None None
Securities registered under Section 12(g) of the Exchange Act:
Title of each class
-------------------
Common Stock, $.001 par value
Indicate by check mark whether registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Exchange Act during the past
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
----- -----
The number of shares outstanding of the registrant's Common Stock, as
of August 7, 1998, was 24,674,808.
<PAGE> 2
INDEX
<TABLE>
<CAPTION>
Page
<S> <C>
PART I - FINANCIAL INFORMATION
Item 1. Condensed Financial Statements:
Consolidated Balance Sheets at June 30, 1998 and December 31, 1997 ........................... 4
Consolidated Statement of Operations for the Three Months Ended June 30, 1998 and 1997 ....... 6
Consolidated Statement of Operations for the Six Months Ended June 30, 1998 and 1997 ......... 7
Consolidated Statement of Cash Flows for the Six Months Ended June 30, 1998 and 1997 ......... 8
Item 2. Management's Discussion and Analysis of Financial Conditions and Results of Operations... 12
Item 4. Submission of Matters to a Vote of Security Holders ..................................... 17
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K ........................................................ 18
Signatures ...................................................................................... 19
</TABLE>
2
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CAUTIONARY STATEMENT REGARDING
FUTURE RESULTS AND FORWARD-LOOKING STATEMENTS
The future results of the Company, including results reflected in any
forward-looking statement made by or on behalf of the Company, will be impacted
by a number of important factors. The factors identified below in the section
entitled "Part 1. Item 2. - Management's Discussion And Analysis of Financial
Condition and Results of Operations - Certain Important Factors" are important
factors (but not necessarily all important factors) that could cause the
Company's actual future results to differ materially from those expressed in any
forward-looking statement made by or on behalf of the Company. Words such as
"may," "will," "expect," "believe," "anticipate," "estimate," or "continue" or
comparable terminology is intended to identify forward-looking statements.
Forward-looking statements, by their nature, involve substantial risks or
uncertainties.
3
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PART I - FINANCIAL INFORMATION
ITEM 1. CONDENSED FINANCIAL STATEMENTS.
TEXAS EQUIPMENT CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
ASSETS
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1998 1997
--------------- ---------------
<S> <C> <C>
CURRENT ASSETS
Cash and cash equivalents $ -- $ 104,750
Accounts receivable (less allowance for
Doubtful accounts of $76,000 in 1998 and 1997) 1,935,698 1,965,714
Other receivables 260,198 185,821
Inventories 30,631,319 21,039,882
--------------- ---------------
TOTAL CURRENT ASSETS 32,827,215 23,296,167
PROPERTY AND EQUIPMENT, NET 4,606,078 4,027,731
FINANCE RECEIVABLES 977,489 836,967
RECEIVABLES FROM OFFICER 91,850 92,618
GOODWILL, net of accumulated
amortization of $73,098 in 1998 and $66,743 in 1997 117,600 123,955
OTHER ASSETS 150,649 151,147
--------------- ---------------
$ 38,770,881 $ 28,528,585
=============== ===============
</TABLE>
See Notes to Condensed Financial Statements
4
<PAGE> 5
TEXAS EQUIPMENT CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
LIABILITIES AND STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1998 1997
--------------- ---------------
<S> <C> <C>
CURRENT LIABILITIES
Floor plan payables $ 21,877,571 $ 15,235,375
Accounts payable 1,070,131 810,254
Accrued liabilities 37,985 317,377
Customer deposits 202,439 137,019
Income tax liability 621,114 422,503
Current maturities of
long-term debt 3,190,265 2,807,181
--------------- ---------------
TOTAL CURRENT LIABILITIES 26,999,505 19,729,709
LONG-TERM DEBT, net of
current maturities 3,673,962 1,819,835
DEFERRED TAX LIABILITY 233,074 233,074
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY
Common stock, $.001 par value
authorized 50,000,000; issued
and outstanding: 24,674,808 in 1998
and 24,549,808 in 1997 24,673 24,548
Paid in capital 3,066,745 2,823,320
Retained earnings 4,772,922 3,898,099
--------------- ---------------
TOTAL STOCKHOLDERS' EQUITY 7,864,340 6,745,967
--------------- ---------------
$ 38,770,881 $ 28,528,585
=============== ===============
</TABLE>
See Notes to Condensed Financial Statements
5
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TEXAS EQUIPMENT CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED JUNE 30,
------------------------------------
1998 1997
--------------- ---------------
<S> <C> <C>
REVENUES $ 16,022,216 $ 11,860,401
COST OF SALES 13,569,867 10,120,210
--------------- ---------------
GROSS PROFIT 2,452,349 1,740,191
SELLING,GENERAL AND
ADMINISTRATIVE EXPENSES 1,842,973 1,615,509
--------------- ---------------
INCOME FROM OPERATIONS 609,376 124,682
OTHER INCOME (EXPENSE)
Interest (67,856) 16,021
Non-cash guarantee fee (47,042) --
Other income 3,655 54,950
--------------- ---------------
INCOME FROM CONTINUING
OPERATIONS BEFORE TAXES 498,133 195,653
INCOME TAX EXPENSE 142,063 --
--------------- ---------------
INCOME FROM CONTINUING OPERATIONS 356,070 195,653
DISCONTINUED OPERATIONS
Loss on discontinued operations (less applicable income
tax benefit of $ 60,096) -- (667,735)
--------------- ---------------
NET INCOME $ 356,070 $ (472,082)
=============== ===============
NET INCOME (LOSS) PER SHARE
Basic
- Continuing operations $ 0.014 $ 0.008
- Discontinued operations -- (0.027)
--------------- ---------------
Total $ 0.014 $ (0.019)
=============== ===============
Diluted
- Continuing operations $ 0.014 $ 0.008
- Discontinued operations -- (0.027)
--------------- ---------------
Total $ 0.014 $ (0.019)
=============== ===============
NUMBER OF SHARES USED IN COMPUTATION
Basic 24,674,808 24,704,886
=============== ===============
Diluted 24,715,914 24,704,886
=============== ===============
</TABLE>
See Notes to Condensed Financial Statements
6
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TEXAS EQUIPMENT CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30,
------------------------------------
1998 1997
--------------- ---------------
<S> <C> <C>
REVENUES $ 31,902,042 $ 21,745,487
COST OF SALES 27,041,354 18,616,961
--------------- ---------------
GROSS PROFIT 4,860,688 3,128,526
SELLING,GENERAL AND
ADMINISTRATIVE EXPENSES 3,496,212 2,640,933
--------------- ---------------
INCOME FROM OPERATIONS 1,364,476 487,593
OTHER INCOME (EXPENSE)
Interest (91,064) 16,143
Non-cash guarantee fee (85,543) --
Other income 27,294 67,500
--------------- ---------------
INCOME FROM CONTINUING
OPERATIONS BEFORE TAXES 1,215,163 571,236
INCOME TAX EXPENSE 398,511 127,740
--------------- ---------------
INCOME FROM CONTINUING OPERATIONS 816,652 443,496
DISCONTINUED OPERATIONS
Loss on discontinued operations (less applicable income
tax benefit of $ 77,500) -- (818,397)
--------------- ---------------
NET INCOME $ 816,652 $ (374,901)
=============== ===============
NET INCOME (LOSS) PER SHARE
Basic
- Continuing operations $ 0.033 $ 0.018
- Discontinued operations -- (0.033)
--------------- ---------------
Total $ 0.033 $ (0.015)
=============== ===============
Diluted
- Continuing operations $ 0.033 $ 0.018
- Discontinued operations -- (0.033)
--------------- ---------------
Total $ 0.033 $ (0.015)
=============== ===============
NUMBER OF SHARES USED IN COMPUTATION
Basic 24,630,364 24,704,886
=============== ===============
Diluted 24,656,877 24,704,886
=============== ===============
</TABLE>
See Notes to Condensed Financial Statements
7
<PAGE> 8
TEXAS EQUIPMENT CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30,
----------------------------
1998 1997
----------- -----------
<S> <C> <C>
CASH FLOWS FROM CONTINUING OPERATIONS
Net income $ 816,652 $ 443,496
Adjustment to reconcile net income to net cash
Amortization & depreciation 198,608 164,584
Stock issued in settlement of lawsuit 34,688 --
ESOP earned compensation 58,173 --
Valuation of stock options issued - guaranty fee 85,543 --
CHANGES IN ASSETS AND LIABILITIES:
(Increase) decrease in accounts receivable 30,016 (286,148)
(Increase) decrease in receivables from affiliates (74,377) 10,014
(Increase) decrease in prepaid expenses -- 12,500
(Increase) decrease in inventories (9,591,438) (10,271,210)
Increase (decrease) in floor plan payable 6,642,196 7,744,086
Increase (decrease) in accounts payable 259,877 865,133
Increase (decrease) in accrued liabilities (279,392) 91,074
(Increase) decrease in finance receivable (140,522) 13,385
Increase (decrease) in income tax liability 198,611 --
Increase (decrease) in other liabilities 65,420 (68,986)
----------- -----------
CASH PROVIDED BY (USED IN)
CONTINUING OPERATIONS (1,695,945) (1,282,072)
----------- -----------
CASH PROVIDED BY (USED IN) DISCONTINUED
OPERATIONS -- (818,397)
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of land, buildings and equipment (770,600) (1,837,271)
Proceeds from sale of equipment -- 28,000
(Increase) decrease in other assets 498 --
(Increase) decrease in stockholders' receivables 768 196,237
----------- -----------
NET CASH FLOWS PROVIDED BY
(USED IN) INVESTING ACTIVITIES (769,334) (1,613,034)
----------- -----------
</TABLE>
See Notes to Condensed Financial Statements
8
<PAGE> 9
TEXAS EQUIPMENT CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30,
------------------------------------
1998 1997
--------------- ---------------
<S> <C> <C>
CASH FLOW FROM FINANCING ACTIVITIES
Proceeds from note borrowings $ 5,349,704 $ 2,051,012
Repayments of note borrowings (2,989,175) (623,124)
--------------- ---------------
NET CASH FLOW PROVIDED BY (USED IN)
FINANCING ACTIVITIES 2,360,529 1,427,888
--------------- ---------------
NET INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS (104,750) (2,285,615)
CASH AND CASH EQUIVALENTS AT THE BEGINNING OF THE PERIOD 104,750 2,661,058
--------------- ---------------
CASH AND CASH EQUIVALENTS AT THE END OF THE PERIOD $ -- $ 375,443
=============== ===============
SUPPLEMENTAL DISCLOSURES OF
CASH FLOW INFORMATION
Cash paid during the period for:
Interest expense $ 186,949 $ 145,694
=============== ===============
Income taxes $ 200,000 $ 50,000
=============== ===============
Non-cash items
Conversion feature of note issued $ 123,319 $ --
=============== ===============
</TABLE>
See Notes to Condensed Financial Statements
9
<PAGE> 10
TEXAS EQUIPMENT CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. BASIS OF PREPARATION:
The condensed consolidated financial statements of Texas Equipment
Corporation (the "Company") ("TEC") include wholly-owned subsidiaries Texas
Equipment Co., Inc., ("TECI") and New Mexico Implement Company, Inc. ("NMIC").
Unless the context otherwise indicates, the "Company" refers to TEC, TECI and
NIMC.
The condensed balance sheets as of June 30, 1998 and December 31, 1997
and the condensed statements of operation for the three months and six months
ended June 30, 1998 and 1997 and condensed statements of cash flows for the six
months ended June 30, 1998 and 1997 are unaudited and reflect all adjustments
(consisting only of normal recurring adjustments) which are, in the opinion of
management, necessary for a fair presentation of the financial position and
operating results for the interim periods. The condensed consolidated financial
statements should be read in conjunction with the audited consolidated financial
statements and notes thereto contained in the Company's Annual Report on Form
10-K/A for the fiscal year ended December 31, 1997. The results of operations
for the six months ended June 30, 1998 are not necessarily indicative of the
results to be expected for the full year.
Certain reclassifications have been made in the condensed consolidated
balance sheet and statements of cash flows to 1997 to be in conformity with
1998.
2. DISCONTINUED OPERATIONS.
In the second quarter of 1997, the Company implemented a plan to
discontinue the operations of Marinex Multimedia Corporation ("Marinex"), a New
York corporation, engaged in the business of the creation of digital content
including a CD-ROM magazine and entertainment sites on the Worldwide Web.
Accordingly, all such financial data related to Marinex has been presented as
discontinued operations. At June 30, 1997 the net assets of the discontinued
company were $521,454, which were expensed.
3. INVENTORIES:
All inventories are valued at the lower of cost or market. Cost is
determined using the specific identification method for new and used equipment
and average cost for parts.
Inventories consisted of the following at:
<TABLE>
<CAPTION>
June 30, December 31,
1998 1997
--------------- ---------------
<S> <C> <C>
New equipment $ 16,018,875 $ 12,019,361
Used equipment 9,485,876 4,629,958
Parts and other 5,126,568 4,390,563
--------------- ---------------
Total $ 30,631,319 $ 21,039,882
=============== ===============
</TABLE>
10
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TEXAS EQUIPMENT CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
4. INCOME FROM CONTINUING OPERATIONS PER SHARE
The following is a reconciliation of the numerator and denominator
underlying the income from continuing operations per share calculations:
<TABLE>
<CAPTION>
Six Months ended June 30, 1998
--------------------------------------------
Income Shares Per Share
(Numerator) (Denominator) Amount
----------- ------------- ------
<S> <C> <C> <C>
Income from continuing operations available to common
stockholders' $ 816,652 24,630,364 $ 0.033
========== ==========
Effect of dilutive securities:
Incremental shares of assumed conversions of
options and convertible note 26,513
------------
Diluted income from continuing operations
available to common shareholders' and
assumed conversions $ 816,652 24,656,877 $ 0.033
========== ============ ==========
</TABLE>
<TABLE>
<CAPTION>
Six Months ended June 30, 1997
-------------------------------------------
Income Shares Per Share
(Numerator) (Denominator) Amount
----------- ------------- ------
<S> <C> <C> <C>
Income from continuing operations available to common
stockholders' $ 443,496 24,704,886 $ 0.018
========== ============ ==========
Diluted income from continuing operations
available to common shareholders' and
assumed conversions $ 443,496 24,704,886 $ 0.018
========== ============ ==========
</TABLE>
5. ACQUISITION OF THE TORNILLO, TEXAS JOHN DEERE DEALERSHIP
On June 15, 1998, the Company signed an agreement to purchase the
assets (building, land, equipment and inventory) of Romney Implement Company for
approximately $3,049,000. The Company assumed approximately $1,856,000 of
indebtedness payable to Deere & Company ("Deere"), assumed other Romney
indebtedness of approximately $497,000 and issued a three year 10% Convertible
Note to the principals of Romney Implement Company for approximately $247,000.
Principal and interest are convertible into the Company's common stock over a
three year period with conversion prices at the lesser of $1 or market price in
the first year, the lesser of market price or $1.50 the second year and the
lesser of market price or $2 the third year. If at any time during each of the
three years market price equals or exceed the conversion price, the entire note
will convert into Common Stock.
11
<PAGE> 12
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATION.
RESULTS OF OPERATIONS
Three Months ended June 30, 1998 compared to Three Months ended June 30, 1997
REVENUES
Revenues increased approximately $4,162,000 or 35%, to $16,022,216 for
the second quarter of 1998 from $11,860,401 for the second quarter of 1997. Of
this increase in revenues, "Base-line Stores" (the Company's stores opened or
acquired before 1997) accounted for approximately $476,000 of the increase. This
increase was due primarily to an increase in wholegoods sales at the Company's
Seminole, Texas store. The Company's three John Deere dealerships in the
Northern Panhandle of Texas acquired in January 1997 accounted for $48,000 of
the increase and the July 1997 acquisition of the Artesia, New Mexico dealership
accounted for approximately $3,638,000.
Sales of wholegoods increased approximately $3,134,000, or 33%, to
$12,553,405 for the second quarter of 1998 from $9,419,978 for the second
quarter of 1997. Approximately $2,887,000 of this increase was due primarily to
strong sales at the Company's Artesia, New Mexico store, which was acquired in
July 1997. The Company's Seminole, Texas store accounted for approximately
$343,000 of this increase. Wholegoods sales in the Company's Northern Panhandle
stores were down $96,000.
Parts and service revenue increased approximately $1,028,000, or 42%,
to $3,468,811 for the second quarter of 1998 from $2,440,476 for the second
quarter of 1997. The Artesia, New Mexico store, which was acquired in July 1997,
accounted for approximately $750,000 of this increase. The Northern Panhandle
stores, which were acquired in January 1997, accounted for $145,000 and
Base-line Stores accounted for approximately $133,000 of this increase. These
increases reflect the Company's success in implementing its marketing strategy
for after-market sales of parts and service, which focuses on increasing market
share and giving close attention to the needs of its customers.
GROSS PROFIT
Gross profit increased approximately $712,000, or 41%, to $2,452,349
for the second quarter of 1998 from $1,740,191 for the second quarter of 1997.
Gross profit as a percentage of total revenues increased to 15.3% for the second
quarter of 1998 from 14.7% for the second quarter of 1997. The Company's highest
gross margin is derived from its parts and service revenues. For these periods,
the shift in revenue mix between wholegoods sales (79.4% of total revenues in
the second quarter of 1997 compared to 78.3% of total revenues in the second
quarter of 1998) and parts and service revenues (20.6% of total revenues in the
second quarter of 1997 compared to 21.7% of total revenues in the second quarter
of 1998) was the primary contributor to this increase in margins.
SELLING, GENERAL, AND ADMINISTRATIVE EXPENSE
Selling, general, and administrative expense as a percentage of total
revenues decreased to 11.5% in the second quarter of 1998 from 13.6% in the
second quarter of 1997. This decrease of approximately $251,000 was due to
higher legal and accounting cost in the second quarter of 1997. Total selling,
general,
12
<PAGE> 13
and administrative expense increased approximately $227,000, to $1,842,973 for
the second quarter of 1998 from $1,615,509 for the second quarter of 1997.
Approximately $218,000 of the increase was due to the Artesia, New Mexico store,
which was acquired in July 1997. SG&A at the other stores remained relatively
flat when comparing the two periods.
INTEREST EXPENSE/INCOME
Interest expense increased approximately $89,000 to $151,809 for the
second quarter of 1998 from $62,000, for the second quarter of 1997. The
increase was due primarily to the increased levels of floor plan payables
associated with higher inventory levels, working capital loans and the
acquisition debt associated with the stores acquired in the Texas Panhandle and
Eastern New Mexico in 1997.
Interest income of $83,953 remained relatively flat for the second
quarter of 1998 compared to $77,961 for the first quarter of 1997. Interest
income was earned in connection with the financing of customer purchases. The
amount the Company will earn depends on the interest rates charged by
competitors, lending policies of Deere Credit and Agricredit and prevailing
market conditions. In the second quarter of 1998, interest rates continued to
remain competitive, which resulted in a relatively smaller increase in interest
income compared to the increase in equipment sales.
NON-CASH GUARANTEE FEE
In connection with the personal guarantee by the majority shareholders
of the Company, of approximately $20,908,000 three month average of accounts
payable to Deere & Company and the credit facility with the Company's bank, the
Company issued five-year common stock options to acquire up to 627,230 shares of
the Company's Common Stock at an exercise price of $0.375. This resulted in a
non-cash charge of $47,042 for the three month period.
INCOME FROM CONTINUING OPERATIONS
Income from continuing operations increased approximately $160,000, or
82%, to $356,070 for second quarter of 1998 from $195,653 for the second quarter
of 1997. This increase was primarily the result of the increase in gross profit
of approximately $712,000, which was offset by the increase in operating
expenses and other costs of approximately $363,000, and the increase in the
provision for income taxes of approximately $142,000.
Earnings per share from continuing operations increased to $0.014 (both
basic and diluted) from $0.008 (both basic and diluted) from the second quarter
of 1997 to the second quarter of 1998, primarily as the result of the increase
in net income, for the reasons described above.
NET INCOME
The Company recognized a loss on the discontinuation of its Marinex
business operations of $667,735 in the second quarter of 1997, net of income tax
benefit of $60,096. Accordingly, net income for second quarter of 1997 was a
loss of $472,082 (resulting in loss per share of $0.027 on both a basic and
diluted basis) compared to net income of $373,112 in second quarter of 1998
(resulting in basic earnings per share of $0.015 and diluted earning per share
of $0.015).
13
<PAGE> 14
Six Months ended June 30, 1998 compared to Six Months ended June 30, 1997
REVENUES
Revenues increased approximately $10,157,000, or 47%, to $31,902,042
for the six months ended June 30, 1998 from $21,745,487 for the six months ended
June 30, 1997. Of this increase in revenues, "Base-line Stores" (the Company's
stores opened or acquired before 1997) accounted for approximately $4,154,000 of
the increase. This increase was due primarily to an increase in wholegoods sales
at the Company's Seminole, Texas store. The Company's three John Deere
dealerships in the Northern Panhandle of Texas acquired in January 1997
accounted for $333,000 of the increase and the Artesia, New Mexico dealership,
acquired in July 1997, accounted for approximately $5,670,000.
Sales of wholegoods increased approximately $7,803,000, or 44%, to
$25,449,417 for the six months ended June 30, 1998 from $17,646,306 for the six
months ended June 30, 1997. Approximately $4,440,000 of this increase was due
primarily to strong sales at the Company's Artesia, New Mexico store, which was
acquired in July 1997. The Company's Seminole, Texas store accounted for
approximately $3,731,000 of this increase, which was due to strong tractor sales
in the first quarter of 1998. Wholegoods sales in the Company's Northern
Panhandle stores were down $368,000.
Parts and service revenue increased approximately $2,353,000, or 57%,
to $6,452,625 for the six months ended June 30, 1998 from $4,099,181 for the six
months ended June 30, 1997. The Artesia, New Mexico store, which was acquired in
July 1997, accounted for approximately $1,230,000 of this increase. The Northern
Panhandle stores, which were acquired in January 1997, accounted for $701,000
and Base-line Stores accounted for approximately $422,000 of this increase.
These increases reflect the Company's success in implementing its marketing
strategy for after-market sales of parts and service, which focuses on
increasing market share and giving close attention to the needs of its
customers.
GROSS PROFIT
Gross profit increased approximately $1,732,000, or 55%, to $4,860,688
for the six months ended June 30, 1998 from $3,128,526 for the six months ended
June 30, 1997. Gross profit as a percentage of total revenues increased to 15.2%
for the six months ended June 30, 1998 from 14.4% for the six months ended June
30, 1997. The Company's highest gross margin is derived from its parts and
service revenues. For these periods, the shift in revenue mix between wholegoods
sales (81.1% of total revenues for the six months ended June 30, 1997 compared
to 79.8% of total revenues for the six months ended June 30, 1998) and parts and
service revenues (18.9% of total revenues for the six months ended June 30, 1997
compared to 20.2% of total revenues for the six months ended June 30, 1998) was
the primary contributor to this increase in margins.
SELLING, GENERAL, AND ADMINISTRATIVE EXPENSE
Selling, general, and administrative expense as a percentage of total
revenues decreased to 11% for the six months ended June 30, 1998 from 12.1% for
the six months ended June 30, 1997. This decrease of approximately $248,000 was
due to higher legal and accounting expenses in the second quarter of 1997. Total
selling, general, and administrative expense increased approximately $855,000,
to $3,496,212 for the six months ended June 30, 1998 from $2,640,933 for the
second quarter of 1997. Approximately $396,000 of the increase was due to the
Artesia, New Mexico store, which was acquired in July 1997. Corporate Salaries
and public company expenses increased approximately $200,000. The remaining
increase of
14
<PAGE> 15
$259,000 is primarily due to the increase in salesmen commissions on increased
sales at all other store locations.
INTEREST EXPENSE/INCOME
Interest expense increased approximately $114,000 to $229,412 for the
six months ended June 30, 1998 from $115,511, for the six months ended June 30,
1997. The increase was due primarily to the increased levels of floor plan
payables associated with higher inventory levels, working capital loans and the
acquisition debt associated with the stores acquired in the Texas Panhandle and
Eastern New Mexico in 1997.
Interest income of $138,348 for the six months ended June 30, 1998
remained relatively flat when compared to $131,654 for the six months ended June
30, 1997. Interest income was earned in connection with the financing of
customer purchases. The amount the Company will earn depends on the interest
rates charged by competitors, lending policies of Deere Credit and Agricredit
and prevailing market conditions. Interest rates for the six months ended June
30, 1998 continued to remain competitive, which resulted in a relatively smaller
increase in interest income compared to the increase in equipment sales.
NON-CASH GUARANTEE FEE
In connection with the personal guarantee by the majority shareholders
of the Company, of approximately $18,681,000 the six month average of accounts
payable to Deere & Company and the credit facility with the Company's bank, the
Company issued five-year common stock options to acquire up to 1,120,835 shares
of the Company's Common Stock at an exercise price of $0.375. This resulted in a
non-cash charge of $85,543 for the six month period.
INCOME FROM CONTINUING OPERATIONS
Income from continuing operations increased approximately $373,000, or
84%, to $816,652 for the six months ended June 30, 1998 from $443,496 for the
six months ended June 30, 1997. This increase was primarily the result of the
increase in gross profit of approximately $1,732,000, which was offset by the
increase in operating expenses and other costs of approximately $1,041,000, and
the increase in the provision for income taxes of approximately $271,000.
Earnings per share from continuing operations increased to $0.033,
(both basic and diluted) from $0.018 (both basic and diluted) for the six months
ended June 30, 1997. Primarily as the result of the increase in net income, for
the reasons described above.
NET INCOME
The Company recognized a loss on the discontinuation of its Marinex
business operations of $818,397 for the six months ended June 30, 1997, net of
income tax benefit of $77,500. Accordingly, net income for the six months ended
June 30, 1997 was a loss of $374,901 (resulting in loss per share of $0.015 on
both a basic and diluted basis) compared to net income of $833,694 for the six
months ended June 30, 1998 (resulting in earnings per share of $0.033 on both a
basic and diluted basis).
LIQUIDITY AND CAPITAL RESOURCES
The Company requires cash primarily for financing its inventories of
wholegoods and replacement parts, acquisitions of additional dealerships and
capital expenditures. Historically, the Company has met these liquidity
requirements primarily through cash flow generated from operations, floor plan
financing,
15
<PAGE> 16
and borrowings under credit agreements with Deere, Deere Credit Services, Inc.
("Deere Credit"), Agricredit Acceptance Company ("Agricredit"), and commercial
banks. Floor plan financing from Deere and Deere Credit represents the primary
source of financing for wholegoods inventories, particularly for equipment
supplied by Deere. All lenders receive a security interest in the inventory
financed. Deere and Deere Credit offer floor plan financing to Deere dealers for
extended periods and with varying interest-free periods, depending on the type
of equipment and to encourage the purchase of wholegoods by dealers in advance
of seasonal retail demand. Down payments are not required and interest may not
be charged for a portion of the period for which inventories are financed.
Variable market rates of interest, based on the prime rate, are charged on
balances outstanding following any interest-free periods, which range from six
to twelve months. Deere also provides financing to dealers on used equipment
accepted in trade and approved equipment from other manufacturers. Agricredit
provides financing for new and used equipment using variable market rates of
interest based on the prime rate.
The Company annually reviews the terms of its financing arrangements
with its lenders, including the interest rate. For the six months ended June 30,
1998 the interest rate charged by Deere and Agricredit was prime plus 50 basis
points and prime plus 150 basis points, respectively. As of June 30, 1998, the
Company had floor plan payables outstanding of approximately $21,878,000, of
which approximately $2,400,000 was then interest bearing.
Cash and cash equivalents decreased from $104,750 at December 31, 1997
to $0 at June 30, 1998. During the six months ended June 30, 1998, continuing
operations used net cash of $1,695,945 primarily because of the increase in used
equipment inventory. Investing activities used cash of $770,600 primarily for
capital expenditures in the acquisition of the Tornillo, Texas Deere dealership.
The Company's capital expenditures are expected to increase as it implements its
business plan to acquire additional Deere dealerships in 1998, subject to the
availability of debt or equity financing, of which there can be no assurance.
Failure to obtain debt or equity financing would significantly curtail the
Company's business expansion and development plans. The increase in inventory of
$9,591,438 was funded with floor plan and proceeds from note borrowings.
SEASONALITY
The Company generally experiences a higher volume of wholegoods sales
in the second and fourth quarters of each year. Typically, farmers purchase
agricultural equipment immediately prior to planting or harvesting crops, which
occurs primarily during the Company's second and fourth quarters. As a result,
sales of agricultural equipment generally are lower in the first and third
quarters. If the Company acquires operations in geographical areas other than
where it currently has operations, it may be affected by other seasonal or
equipment buying trends.
CERTAIN IMPORTANT FACTORS
In addition to the matters discussed above, there are several important
factors that could cause the Company's future results to differ materially from
those anticipated by the Company or which are reflected in any forward-looking
statement which may be made by or on behalf of the Company. Some of these
important factors (but not necessarily all such important factors) include the
following:
o The overall success of Deere and the Company's other suppliers;
o The availability and terms of floor plan financing and customer
financing;
16
<PAGE> 17
o The incentive and discount programs provided by Deere and the
Company's other suppliers, and their promotional and marketing
efforts;
o The introduction of new and innovative products by the Company's
suppliers;
o The manufacture and delivery of competitively-priced, high quality
equipment and parts by the Company's suppliers in quantities
sufficient to meet the requirements of the Company's customers on
a timely basis;
o General economic conditions, including agricultural industry
cycles, interest rate fluctuations, economic recessions, customer
business cycles, and customer confidence in the economy;
o The length of the crop growing season and winter and spring
weather conditions in West Texas and Eastern New Mexico, and the
confidence of the Company's agricultural customers in the farm
economy;
o Risks associated with expansion, including the management of
growth; and
o Continued availability of key personnel.
PART II - OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
On August 7, 1998, at the annual meeting of stockholders of the Company
the following matters were brought before the stockholders for vote:
<TABLE>
<CAPTION>
For Against Abstain
--- ------- -------
<S> <C> <C> <C>
o Election of Directors: Paul J. Condit 20,065,110 -- 151,780
John T. Condit 20,065,110 -- 151,780
EA Milo Mattorano 20,065,110 -- 151,780
O.C. Elliott 20,065,110 -- 151,780
Robert T. Maynard 20,065,110 -- 151,780
James D. Arnold 20,065,110 -- 151,780
Mickey L. Ray 20,065,110 -- 151,780
o A 1-for-7 reverse stock split of the
Company's Common Stock, $.001 par
value, though the total number of
authorized share will remain at
50,000,000 20,006,146 169,444 41,300
o The Company's 1998 Stock Option Plan 17,347,706 2,837,384 31,800
</TABLE>
No other matters were submitted to a vote of the Stockholder present.
17
<PAGE> 18
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits
None
(b) Reports on form 8-K
Form 8-K filed June 9, 1998
18
<PAGE> 19
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
Date: August 14, 1998
TEXAS EQUIPMENT CORPORATION
By: /s/ Paul J. Condit
-------------------------------------
Paul J. Condit
President and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed by the following persons on behalf of the Registrant
in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
Chairman of the Board, President, Chief August 14, 1998
/S/ Paul J. Condit Executive Officer and Director (principal
- ----------------------------- executive officer)
Paul J. Condit
/S/ John T. Condit Director and Secretary August 14, 1998
- -----------------------------
John T. Condit
/S/ E.A. Milo Mattorano Vice President, Chief Financial Officer, August 14, 1998
- ----------------------------- and Chief Accounting Officer (principal
E.A. Milo Mattorano financial and accounting officer)
</TABLE>
19
<PAGE> 20
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER EXHIBIT
- -------- -------
<S> <C>
27 Financial Data Schedule
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> JUN-30-1998
<CASH> 0
<SECURITIES> 0
<RECEIVABLES> 2,271,896
<ALLOWANCES> 76,000
<INVENTORY> 30,631,319
<CURRENT-ASSETS> 32,827,215
<PP&E> 5,964,961
<DEPRECIATION> 1,358,883
<TOTAL-ASSETS> 38,770,881
<CURRENT-LIABILITIES> 26,999,505
<BONDS> 2,058,599
0
0
<COMMON> 24,674,808
<OTHER-SE> 7,864,340
<TOTAL-LIABILITY-AND-EQUITY> 38,770,881
<SALES> 31,902,042
<TOTAL-REVENUES> 31,902,042
<CGS> 27,041,354
<TOTAL-COSTS> 27,041,354
<OTHER-EXPENSES> 3,645,525
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 91,064
<INCOME-PRETAX> 1,215,163
<INCOME-TAX> 398,511
<INCOME-CONTINUING> 816,652
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 816,652
<EPS-PRIMARY> .033
<EPS-DILUTED> .033
</TABLE>
