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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
|X| ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the fiscal year ended December 31, 1997 or
TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the transition period from ________ to _______
Commission file number 000-21813
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Texas Equipment Corporation
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(Exact name of registrant as specified in its charter)
Nevada 62-1459870
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(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
1305 Hobbs Hwy, Seminole, Texas 79360
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(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
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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
--- ---
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation 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 this Form 10-K. X
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The aggregate market value of the voting and non-voting common equity
held by non-affiliates of the registrant computed by reference to the average
bid and asked price, as of March 15, 1998, was $3,670,963 (for purposes of
calculating this amount, only directors, officers and beneficial owners of 5% or
more of the Common Stock of the registrant have been deemed affiliates).
The number of shares outstanding of the registrant's Common Stock, as of
March 15, 1998, was: 24,549,808
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PART I
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 "Item 7. - 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.
ITEM 1. BUSINESS.
In September 1996, the Company, a Nevada corporation, issued 16,850,000
shares of its Common Stock in exchange for all of the capital stock of Texas
Equipment Co., Inc., a Texas corporation ("TECI"). Upon the acquisition of TECI,
the Company, formerly Marinex Multimedia Corporation, a Nevada corporation,
changed its name to Texas Equipment Corporation ("TEC"). Unless the context
otherwise indicates, the "Company" refers to TEC and its wholly owned
subsidiary, TECI, and TECI's wholly owned subsidiary, New Mexico Implement
Company, Inc. ("NMIC").
GENERAL
The Company currently operates six retail stores in two states,
specializing in the distribution, sales, service and rental of agricultural
equipment, primarily supplied by Deere & Company and its subsidiaries ("Deere").
The Company's stores are located in West Texas and Eastern New Mexico. The
Company acquired four of its agricultural equipment stores in fiscal 1997. These
acquisitions extended the Company's equipment retail store network into the
northern part of West Texas and Eastern New Mexico, which the Company believes
will provide platforms for future growth. The Company believes that its network
of stores enables it to achieve operating benefits from increasing operational
synergies. The Company's growth strategy is to continue to expand its network
through future acquisitions of similar dealerships, although the Company does
not presently have any agreements, written or oral, with any third party
regarding a potential acquisition or business combination.
Deere, a leading manufacturer and supplier of agricultural equipment in
the United States since 1837 is the primary supplier of the equipment and parts
sold by the Company. Sales of new Deere equipment by the Company accounted for
approximately 68.8% of the Company's new equipment sales in 1997. No other
supplier accounted for more than 14.4% of the Company's new equipment sales in
1997. The Company expects that Deere products will continue to account for the
majority of its agricultural new equipment sales. The Company's stores also
offer complementary equipment from other suppliers, used equipment, new and used
parts, equipment rental, and other related products and services.
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INDUSTRY OVERVIEW
According to industry sources, United States retail sales of new
agricultural equipment in calendar 1997 totaled in excess of $10 billion. Deere
is the leading supplier of agricultural equipment in the United States. Within
the Deere agricultural dealer system, dealers are not assigned exclusive
territories, but are authorized to operate at specific store locations.
Currently, Deere has in excess of 1,200 agricultural dealers in the United
States. The Company believes that increasing needs for capital and more
sophisticated management and marketing information systems of typical Deere
agricultural equipment dealers, owners' concerns about succession (a substantial
number of such dealers have traditionally been family-owned businesses), and
Deere's increasing support for consolidation among its dealers create a business
climate conducive to further consolidation of Deere agricultural dealers. The
Company expects that it will have increasing opportunities to complete strategic
acquisitions of Deere agricultural dealerships as this consolidation trend
develops.
GROWTH STRATEGY
The key elements of the Company's growth strategy are:
Increasing Market Share.
The Company seeks to increase its market share by enhancing customer
service and generating customer loyalty. To accomplish this, the Company offers
a broad range of products, utilizes aggressive marketing programs, trains its
employees to have a strong customer orientation, employs state-of-the-art
service equipment, and maintains a computerized real-time inventory system. Each
agricultural retail equipment store offers a broad array of its respective Deere
equipment lines, and also sells complementary products from other suppliers,
based on the nature of each store's customer base. As the installed base of
equipment expands with the Company's increasing market share, the Company has
the opportunity to generate additional parts and service business. The Company
believes that each customer's experience with the Company's parts and service
departments and other value-added services can positively influence such
customer's overall satisfaction. Parts and service currently have higher profit
margins than equipment sales. The Company serves its customers' financing needs
by developing innovative ways to finance its products.
Pursuing Additional Acquisitions.
Acquisitions are expected to continue to be an important element of the
Company's growth strategy, particularly given the consolidation trends among
agricultural retail equipment dealers. Due to the Company's track record in
completing and integrating acquisitions in 1997, the Company believes that
attractive acquisition candidates will continue to become available to the
Company. The Company believes that its management team has substantial
experience in evaluating potential acquisition candidates and determining
whether a particular group of dealerships can be successfully integrated into
the Company's existing operations, i.e., whether the operations of an
acquisition candidate can be enhanced by utilizing the Company's operating model
and being part of the Company's network of stores. Management believes that it
can operate new facilities effectively and improve the operating results of
acquired dealers as a result of economies of scale, purchasing power, and
merchandising capability. Upon consummation of each acquisition, the Company
integrates the dealership into its agricultural retail equipment operations by
implementing the Company's operating model and seeks to enhance the acquired
dealership's performance within its target market. Integration of an acquisition
generally is completed within the first six to 12 months, although it can take
several years before the benefits of the Company's operating model, store
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network, strategies, and systems are fully realized. The consent of Deere is
required for the acquisition of any Deere dealership.
Implementing the TEC Operating Model.
The Company has developed a proven operating model designed to improve
the performance and profitability of each of its retail equipment stores.
Components of this operating model include (i) pursuing aggressive marketing
programs, (ii) allowing store employees to focus on customers by managing
administrative functions, training, and purchasing at the corporate level, (iii)
providing a full complement of parts and state-of-the-art service functions,
including a computerized real-time inventory system and quick response, on-site
repair service, (iv) motivating store level management in accordance with
corporate goals, and (v) focusing on cost structures at the store level. The
Company centralizes such functions as accounting, purchasing, and employee
recruitment, allowing its store managers and personnel more time to focus on
making sales and providing product support to customers.
Capitalizing On Diversity of Operations.
A major focus of the Company's strategy has been to expand its network of
agricultural retail equipment stores into geographic areas that have a large
base of agricultural activity and that provide the Company with opportunities to
continue to develop its store network. The Company's plan for geographic
diversification into regions outside its initial base in the West Texas
Panhandle will help to diminish the effects of seasonality, as well as local and
regional economic fluctuations. Typically, other retail equipment dealers
operate agricultural dealerships, with a limited number of stores concentrated
in a specific geographic region. For example, based on information published by
Deere, the Company estimates that the majority of United States Deere
agricultural dealers operate a single store compared to the Company's six Deere
agricultural stores.
WHOLEGOODS
The Company is the one of the largest Deere retail agricultural
equipment dealers in the United States in total revenues and accounted for over
one percent of Deere's United States agricultural wholegoods sales in calendar
1997. According to industry usage, "wholegoods" represents agricultural
machinery that can be sold either as an individual item or as part of a series
of machines to perform certain farming operations. As of the end of fiscal 1997,
the Company owned and operated six Deere agricultural equipment stores located
in West Texas and Eastern New Mexico.
The Company is a full-service supplier to farmers, offering a broad
range of farm equipment and related products. The Company's customers primarily
farm cotton and peanuts in the southern Panhandle, corn, soybeans, wheat, sugar
beets, and potatoes in the northern Panhandle, and alfalfa in eastern New
Mexico. As a result of the customer mix and Deere's product offerings, the
Company's core products include combines, tractors, planting equipment, and
tillage equipment. The Company's agricultural equipment stores also carry other
harvesting and crop handling machinery, as well as lawn and grounds care
equipment. The sale of new Deere agricultural equipment is the primary focus of
the Company and accounts for approximately 68.8% of the Company's new equipment
sales. A variety of additional wholegoods lines, which complement the Deere
products, are also offered by the Company according to local market demand. The
agricultural stores also sell used equipment, generally acquired as trade-ins,
accounting for approximately 39.3% of total equipment revenues in 1997.
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The agricultural equipment stores are located in areas with significant
concentrations of farmers and typically serve customers within a 50 to 100 mile
radius. Each store displays a broad array of new and used equipment and has
fully-equipped service bays to provide on-site service and maintenance of
agricultural equipment. The Company believes it has a competitive advantage over
other agricultural dealers given its ability to draw on its network of
agricultural stores for equipment and parts and the economies of scale inherent
in its centralized administrative, purchasing, and inventory management
functions.
PARTS AND SERVICE
The Company's retail agricultural equipment stores offer a broad range
of replacement parts and fully-equipped service and repair facilities for their
respective product lines. Parts and service revenues accounted for approximately
18.2% of total revenues in fiscal 1997. The Company believes that product
support through parts and service will be increasingly important to its ability
to attract and retain customers for its agricultural equipment operations. Each
agricultural equipment store includes an average of six service bays staffed by
highly trained service technicians. Technicians are also available to make
on-site repairs of equipment that cannot be brought in for service. The
Company's service technicians receive training from Deere and certain other
suppliers, as well as additional on-site training conducted by the Company.
INVENTORY AND ASSET MANAGEMENT
The Company maintains substantial inventories of equipment and parts in
order to facilitate sales to customers on a timely basis. The Company also is
required to build its inventory in advance of its second and fourth fiscal
quarters, which historically have higher sales, to ensure that it will have
sufficient inventory available to meet its customer needs and to avoid shortages
or delays. Deere has an inventory warehouse that its dealers may access to
obtain equipment to facilitate inventory management. In addition, to maximize
asset productivity, the Company maintains a complete database on sales and
inventory of parts and equipment, and has a sophisticated, centralized real-time
inventory control system. This system enables each store to access the available
inventory of the Company's other stores before ordering additional parts or
equipment from the supplier. As a result, the Company minimizes its investment
in inventory while still effectively and promptly satisfying its customers'
parts needs. Using this system, the Company also monitors inventory levels and
inventory mix in its network and make adjustments as needed in accordance with
its operating plan.
DEALERSHIP AGREEMENTS
The Company has non-exclusive dealership agreements with Deere for each
of its Deere agricultural equipment stores, each of which authorizes the Company
to act as a dealer in Deere agricultural equipment (the "Agricultural Dealer
Agreements") at a specific authorized store location. The Company is not
required to pay a royalty fee under the Agricultural Dealer Agreements. Rather,
the Company agrees to stock, sell at retail and service Deere equipment in its
defined market area. The Company's areas of responsibility for the sale of Deere
agricultural equipment are in the West Texas Panhandle and Eastern New Mexico.
The Agricultural Dealer Agreements continue until terminated by Deere upon a
violation by the Company of the provisions contained therein and in certain
other circumstances described herein, although Deere may require the execution
on a new Agricultural Dealer Agreement at any time upon 30-days notice. Any
termination or non-renewal of the Dealership Agreements must be done by Deere in
accordance with state legislation designed to protect dealers from arbitrary
termination or non-renewal of franchise agreements. Applicable Texas laws
provide that termination or non-renewal of a dealership agreement may not be
done by a manufacturer without cause. The Company has consistently
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had its Agricultural Dealer Agreements renewed and the Company anticipates
obtaining renewals in the future. However, no assurances can be given that such
renewals will be obtained.
Pursuant to the Agricultural Dealer Agreements, the Company is
required, among other things, to maintain suitable facilities, provide competent
management, actively promote the sale of agricultural equipment in the
designated areas of responsibility, fulfill the warranty obligations of Deere
(with reimbursement at agreed rates therefor), maintain inventory in proportion
to the sales potential in each area of responsibility, provide service and
maintain sufficient parts inventory to service the needs of its customers,
maintain adequate working capital, and maintain stores only in authorized
locations. Deere is obligated to make available to the Company any finance
plans, lease plans, floor plans, parts return programs, sales or incentive
programs or similar plans or programs it offers to other dealers. Deere also
provides the Company with promotional items and marketing materials prepared by
Deere for its agricultural equipment dealers. The Agricultural Dealer Agreements
also entitle the Company to use John Deere trademarks and trade names, with
certain restrictions.
The agricultural equipment stores also offer John Deere lawn and
grounds equipment, for which the Company has entered into non-exclusive Lawn and
Garden Dealer Agreements containing substantially the same terms as the
Agricultural Dealer Agreements.
Under the Agriculture Dealer Agreement with Deere, the Company cannot
engage in discussions to acquire other Deere dealerships without Deere's prior
written consent, which Deere may withhold in its sole discretion. The prior
consent of Deere is required for the opening of any Deere store within the
Company's designated areas of responsibility and for the acquisition of any
other Deere dealership. Deere may immediately cancel the Agricultural Dealer
Agreement by giving notice to the Company at any time after the occurrence of
any of the following: (i) death of Mr. Paul Condit or a major shareholder; (ii)
change of control without the prior written consent of Deere; (iii) closeout or
sale of a substantial part of the Company's business, the commencement of
dissolution or liquidation proceedings with respect to the Company, or a change,
without the prior written approval of Deere, in the location of the dealership's
principal place of business under the agreement; (iv) default by the Company
under any chattel mortgage or other security agreement between Deere and the
Company; and (v) revocation or discontinuance of any guaranty of the Company's
present or future obligations to Deere.
The Company's Deere dealer appointments are not exclusive. Deere could
appoint other dealers in close proximity to the Company's existing stores. In
addition, the dealer agreements can be amended at any time without the Company's
consent, so long as the same amendment is made to the dealer agreements of all
other Deere dealers. Deere also has the right to sell directly to federal,
state, or local governments, as well as national accounts. To the extent Deere
amends the dealer agreements or directly sells substantial amounts of equipment
to government entities and national accounts, the Company's results of
operations and financial condition could be adversely affected.
In addition to Deere, the Company is an authorized dealer at various
stores for suppliers of other equipment. The terms of such arrangements vary,
but most of the dealership agreements contain termination provisions allowing
the supplier to terminate the agreement after a specified notice period (usually
180 days), upon a change of control, and in the event of Mr. Paul Condit's
death.
FLOOR PLAN FINANCING
Having adequate wholegoods and parts inventories at the Company's
agricultural equipment stores is important to meeting its customer needs and is
critical to achieving sales objectives. Accordingly, the
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Company attempts to maintain at each store, or have readily available at other
stores in its network, sufficient inventory to satisfy anticipated customer
needs. Inventory levels fluctuate throughout the year and tend to increase
before the primary agricultural sales seasons during the second and fourth
quarters. The cost of financing its inventory is an important factor affecting
the Company's results of operations.
Deere and Deere Credit offer floor plan financing to Deere dealers for
extended periods, to enable dealers to carry representative inventories of
equipment and to encourage the purchase of goods by dealers in advance of
seasonal retail demand. Deere charges variable market rates of interest at or
over the prime rate on balances outstanding after any interest-free periods and
retains a security interest in the inventories, which it inspects periodically.
The interest-free periods, which Deere changes periodically, are currently six
to twelve months. Deere also provides financing for used equipment accepted in
trade, repossessed equipment, and approved equipment from other suppliers, and
receives a security interest in such equipment.
After the interest-free period, the Company generally shifts its
financing to Deere Credit to obtain a lower interest rate. The rate charged by
Deere Credit is currently a defined prime rate plus 50 basis points, which as of
December 31,1997, resulted in an applicable interest rate of 9%.
For equipment from manufacturers other than Deere, the Company
finances its inventory primarily through its line of credit at Agricredit
Acceptance Company ("Agricredit"). Financing also may be available through floor
plan financing programs provided by the other manufacturers, which may be
financed by such manufacturers themselves or through third party lenders,
depending on which option provides the Company with the most favorable terms.
The interest rate on the Agricredit line of credit is currently a defined prime
rate plus 200 basis points, which as of December 31, 1997 resulted in an
applicable interest rate of 10.5%. In January 1998 Agricredit reduced the rate
by 50 basis points to 10%.
CUSTOMER FINANCING OPTIONS
Financing options for customer purchases support the sales activities
of the Company. Significant financing sources for purchases by the Company's
customers are through programs offered by Deere and Agricredit.
The Company does not grant extended payment terms to its customers.
Deere's credit subsidiaries provide and administer financing for
retail purchases and leases of new and used equipment, primarily through Deere
Credit. Deere Credit retains a security interest in the equipment financed. A
portion of the customer financing provided by Deere is recourse to the Company.
Deere retains a reserve for amounts that the Company may be obligated to pay
Deere, by retaining 1% of the face amount of each contract financed until the
reserve reaches 3 or 4 percent of the total dollar amount of contracts
outstanding. In the event a customer defaults in paying Deere and there is a
deficiency in the amount owed to Deere, the Company has the option of paying the
amount due under its recourse obligations or using a portion of its reserve. The
Company's liability is capped at the amount of the reserve, which, as of
December 31, 1997, was $697,228. The Company has traditionally experienced a
loss rate against such reserves of less than 2% of sales.
Agricredit, through a joint venture with the Company established in
September 1997, also provides financing to the Company's customers. The
financing provided under the joint venture by Agricredit to its customers is
non-recourse to the Company. Prior to September 1997, a portion of the customer
financing provided by Agricredit was recourse to the Company. The Company's
liability is limited to the portion withheld by Agricredit, which was $139,739
at December 31, 1997.
PRODUCT WARRANTIES
The manufacturer generally provides product warranties for new
equipment and parts. The term and scope of these warranties vary greatly by
manufacturer and by product. The Company does not provide
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additional warranties to retail purchasers of new equipment. The manufacturer
(such as Deere) pays the Company for repairs to equipment under warranty. The
Company generally sells used equipment "as is" and without manufacturer's
warranty, although manufacturers sometimes provide limited warranties if the
manufacturer's original warranty is transferable and has not yet expired.
Typically, the Company does not provide additional warranties on used equipment.
COMPETITION
The Company's agricultural retail equipment stores compete with
distributors of equipment from suppliers other than Deere, including Agco
Corporation, Case, Caterpillar, and New Holland N.V., a subsidiary of Fiat. The
Company also competes with other Deere agricultural dealerships. Competing Deere
agricultural stores may be located in close proximity to one of the Company's
stores. Competition among retail equipment dealers is primarily based on price,
value, reputation, quality, and design of the products offered by the dealer,
the customer service and equipment servicing provided by the dealer, and the
accessibility of the stores. The Company believes that its broad product lines,
product support, and superior quality products have enabled it to compete
effectively.
ENVIRONMENTAL AND GOVERNMENTAL REGULATIONS
The Company's operations are subject to numerous federal, state, and
local rules and regulations, including laws and regulations designed to protect
the environment and to regulate the discharge of materials into the environment,
primarily relating to its service operations. Based on current laws and
regulations, the Company believes that it is in compliance with such laws and
regulations and that its policies, practices, and procedures are designed to
prevent unreasonable risk of environmental damage or violation of environmental
laws and regulations and any resulting material financial liability to the
Company. The Company is not aware of any federal, state, or local laws or
regulations that have been enacted or adopted, the compliance with which would
have a material adverse effect on the Company's results of operations or would
require the Company to make any material capital expenditure. No assurance can
be given that future changes in such laws or regulations or changes in the
nature of the Company's operations or the effects of activities of prior
occupants or activities at neighboring facilities will not have an adverse
impact on the Company's operations.
EMPLOYEES
As of December 31, 1997, the Company employed 131 people: 24 in sales; 57
in service; 25 in parts; 16 in set-up; and 9 in corporate administration.
The Company has no contracts or collective bargaining agreements with
labor unions and has never experienced work stoppages. The Company considers its
relations with employees to be satisfactory.
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EXECUTIVE OFFICERS
The following persons are the current executive officers of the
Company:
<TABLE>
<CAPTION>
Name Age Position
---- --- --------
<S> <C> <C>
Paul Condit 64 President, Director, Chief Executive Officer
John T. Condit 33 Secretary, Treasurer, Director
E.A. Milo Mattorano 52 Vice President, Chief Financial Officer
</TABLE>
Paul Condit is President, Chief Executive Officer and a director. He has
a B.S. degree from Oklahoma State University and has been in the farm equipment
business for over 23 years. Mr. Condit owned and operated a predecessor company
and has managed the Company and served the Company in his current capacities
since its inception in 1987.
John Condit serves as a Director and Secretary of the Company and
served the Company in his current capacities since its inception in 1987. He
obtained a BBA degree from Texas Tech University in 1986. Since May 1988 he has
been President of Domicile Property Management, Inc., a real estate acquisition
and management firm, in San Antonio, Texas.
E.A. Milo Mattorano has served as the Company's Chief Financial Officer
and a Vice President since December 15, 1997. Prior to joining the Company, from
January 1995 until December 1997, Mr. Mattorano served as Vice President and
Chief Financial Officer of Lasertechnics, Inc., a manufacturer of laser markers
and plastic card printers. From October 1989 to December 1994, Mr. Mattorano
served as Executive Vice President of Finance of Insilco Corporation, a
conglomerate of manufacturing companies in various industries. Mr. Mattorano is
a CPA and worked in the audit department of Deloitte & Touche for six years from
1974 to 1980. Mr. Mattorano is a graduate of Adams State College with a degree
in Business Administration and Accounting.
ITEM 2. PROPERTIES.
The Company is headquartered in Seminole, Texas at its Deere dealer
store located at 1305 Hobbs Highway, Seminole, Texas 79360.
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The following table sets forth the size of the Company's store
locations:
Total Building Office and Service
<TABLE>
<CAPTION>
Location Acreage Space* Showroom* Parts Storage* Setup*
-------- ------- ------ --------- -------------- ------
<S> <C> <C> <C> <C> <C>
Seminole 13.94 50,000 9,875 14,000 26,125
Plains 6.025 21,000 2,200 8,600 10,800
Pecos 1.32 12,800 1,000 5,500 5,500
Hereford 10.97 26,700 3,900 12,000 10,800
Dimmitt 10.02 35,500 5,400 11,200 18,900
Friona 5.0 18,000 4,100 5,600 8,300
* In square feet
</TABLE>
The Company owns all of its store locations subject to bank mortgages,
which at December 31, 1997 were approximately $3.3 million.
ITEM 3. LEGAL PROCEEDINGS.
During fiscal 1997, a number of interrelated lawsuits were brought by
the Company and its present and former affiliates and professional advisers
against one another arising from events surrounding the September 1996 share
exchange transaction between shareholders of TECI and the Company. As of the
date hereof, all such litigation has been settled.
In March 1997, the Company was sued by Jonathan Braun, Charles Platkin
and Marinex Multimedia Corporation ("Marinex", a New York corporation which was
a wholly-owned subsidiary of the Company) in the United States District Court
for the Southern District Court of New York. Paul Condit, Paul Condit II, John
Condit, Jeffrey Condit, Michael Killman and Charles Barkley were named
co-defendants. Jonathan Braun and Charles Platkin were former directors of the
Company and directors and officers of Marinex. Michael Killman is a principal in
the accounting firm of Killman Murrell & Co., then the independent auditor.
Charles Barkley was counsel to the Company. Paul Condit is the Company's
president, and his sons, Paul Condit II, John Condit, and Jeffrey Condit were
principal shareholders of TECI. The New York action alleged that the defendants
defrauded Marinex, that certain of the defendants negligently made false
representations to Marinex; that Paul Condit II, John Condit and Jeffery Condit
breached a contract with the plaintiffs; and that Charles Barkley and Michael
Killman committed a breach of fiduciary duty, breach of duty of loyalty,
negligence and professional malpractice with respect to the plaintiffs.
In May 1997, the Company and the Condit sons filed a lawsuit against
Mr. Braun, Mr. Platkin and Mr. Killman in state district court in Gaines County,
Texas alleging, among other things, that they were defrauded by the defendants
into entering into the September 1996 business combination. In October 1997, Mr.
Barkley and Killman Murrell & Co. were named by the plaintiffs as an additional
defendant in the
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Texas lawsuit and allegations of professional malpractice, fraud, fraudulent
inducement and aiding and abetting the misconduct of the other defendants were
made in connection therewith. In December 1997, Mr. Barkley filed a lawsuit
against the plaintiffs in the Texas lawsuit in the United States District Court
for the Western District of North Carolina alleging, among other things, that
the defendants in the North Carolina suit had breached their fiduciary duties,
made material misrepresentations in connection with securities transactions and
aided and abetted the misconduct of others, that the Company had breached
contractual obligations to register plaintiff's stock, and that Paul Condit had
slandered and defamed the plaintiff.
In connection with the settlement of the preceding matters, Messrs.
Braun and Platkin transferred an aggregate of 250,000 shares of the Company's
Common Stock to the Company, the Company transferred 125,000 shares of its
Common Stock to Mr. Barkley, the Company paid, or agreed to pay, approximately
$59,000 in disputed fees to Killman Murrell & Co. and the parties to each of the
respective lawsuits executed mutual releases, among other things.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
On, October 31, 1997, at the annual meeting of stockholders of the
Company the following matters were brought before the stockholders for vote:
<TABLE>
<CAPTION>
For Against
--- -------
<S> <C> <C>
O Election of Directors: Mr. Paul J. Condit 18,300,062 12,300
John T. Condit 18,304,862 7,500
</TABLE>
<TABLE>
<CAPTION>
<S> <C> <C> <C>
O Amendment to increase the number of authorized shares For Against Abstain
From 25,000,000 to 50,000,000 --- ------- -------
18,216,742 23,720 26,900
</TABLE>
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
Prior to the date hereof, there has been a limited and sporadic trading
market for the Company's Common Stock, which presently trades on the NASD
Bulletin Board under the symbol "TEXQ." After its initial public offering in
1993, there was very little trading until the first quarter of 1996. According
to information furnished by the National Quotation Bureau, the high and low bid
and high and low asked quotations for each quarter during the 1996 and 1997
fiscal years are as follows:
<TABLE>
<CAPTION>
Bid Asked
----------- -------------
1996 High Low High Low
---- ---- --- ---- ---
<S> <C> <C> <C> <C>
March 31 $ 8.00 7.00 9.00 9.00
June 30 10.25 3.08 11.00 6.25
September 30 7.00 1.00 8.50 2.87
December 31 3.63 1.13 4.00 2.38
1997
March 31 2.25 .56 2.50 .63
June 30 .78 .53 .94 .66
September 30 .75 .28 1.00 .34
December 31 .75 .25 .81 .28
</TABLE>
12
<PAGE> 13
These market quotations represent inter-dealer prices, without retail
markup, mark down or commission and do not necessarily represent actual
transactions. As of March 15, 1998, there were approximately 760 holders of
record of the Company's Common Stock. During the 1996 and 1997 fiscal years the
Company has not paid any dividends or redeemed, repurchased or otherwise retired
any of its Common Stock, except as discussed in "Item 3 -- LEGAL PROCEEDINGS."
The Company presently intends to retain all earnings for the operation and
development of its business and does not anticipate paying cash dividends on its
Common Stock in the foreseeable future.
ITEM 6. SELECTED FINANCIAL DATA.
<TABLE>
<CAPTION>
Years Ended December 31,(1)
1997 1996 1995 1994 1993
---- ---- ---- ---- (Unaudited)
-----------
<S> <C> <C> <C> <C> <C>
Net Sales $ 58,366,746 $28,094,196 $25,031,608 $20,964,570 $24,250,781
Gross Profit 7,825,628 4,092,807 3,383,351 2,917,724 3,147,754
Net Income from
Continuing Operations 815,370 883,155 253,399 58,631 365,035
Net Income Per Share from
Continuing Operations 0.03 0.05 0.02 0.00 0.00
Net Income 274,972 736,351 253,399 58,631 365,035
Net Income Per Share 0.01 0.04 0.02 0.00 0.00
Total Assets 28,528,585 11.612,258 9,624,708 9,047,139 8,400,958
Long-term Debt 1,819,835 1,005,762 1,195,378 1,438,888 978,839
Dividends 0.00 0.00 0.00 0.00 0.00
</TABLE>
(1) Financial data for all periods prior to September 1996 give pro forma
effect to the business combination with TECI at that date and reflect
only the operations of and financial condition of TECI. Such financial
data does not reflect the operations or financial condition of Marinex,
which conducted only limited development stage activities before its
operations were discontinued in 1997.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATION.
The September 1996 acquisition by the Company of TECI has been
accounted for as though TECI acquired the Company through a reverse acquisition.
In September 1997, the operations of Marinex were discontinued, and as a result,
Marinex operations in 1996 and 1997 have been accounted for as "discontinued
operations." The following discussion and financial analysis is of the
continuing operation of the Company and the Company's TECI subsidiary only.
RESULTS OF OPERATIONS
1997 Compared to 1996
REVENUES
Revenues increased approximately $30,273,000, or 108%, from
$28,094,196 for 1996 to $58,366,746 for 1997. Of this increase in revenues,
$26,813,375 was due to the Company's January 1997 acquisition of three John
Deere dealerships in the Texas Panhandle. The July 1997 acquisition of a
dealership in Artesia, New Mexico accounted for $2,452,281 of the increase and
the remaining increase of approximately
13
<PAGE> 14
$947,000, was primarily related to an increase in peanut equipment sales at
the Company's Seminole, Texas dealership.
Sales of wholegoods increased approximately $24,991,000, or 110%, from
$22,669,174 for 1996 to $47,660,654 for 1997. The increase in wholegoods sales
in 1997 was due to the factors discussed in the preceding paragraph. Wholegoods
sales at the acquired stores also increased in the aggregate by more than
$6,000,000 from their aggregate sales for the year prior to their acquisition.
Management believes that this increase was the result of the Company's marketing
strategy, which focuses on increased market share, customer relationship
training of its sales force, and close attention given to each customer in its
selling areas.
Parts and service revenue increased approximately $5,222,000, or 96%,
from $5,425,022 for 1996 to $10,646,695 for 1997. This increase was primarily
due to a $5,318,091 increase related to the acquisitions discussed above.
GROSS PROFIT
Gross profit increased approximately $3,733,000, or 91%, from
$4,092,807 for 1996 to $7,825,628 for 1997. Gross profit as a percentage of
total revenues for 1997 and 1996 were 13.5% and 14.5%, respectively. This
decrease is primarily the result of lower margins on revenues of the acquired
stores, which was expected in the first year of operation following the
acquisition. In addition, the Company's highest gross margins are derived from
its parts and service revenues. For these periods, the modest shift in revenue
mix between wholegoods sales (80.8% of total revenues in 1996 compared to 81.8%
of total revenues in 1997) and parts and service revenues (19.2% of total
revenues in 1996 compared to 18.2% of total revenues in 1997) contributed to
this decrease in margins.
SELLING, GENERAL, AND ADMINISTRATIVE EXPENSE
Selling, general, and administrative expense as a percentage of total
revenues decreased from 10.2% for 1996 to 10% for 1997. This modest decrease is
the result primarily of operating efficiencies realized from operating a greater
number of stores. In addition, in 1997 the Company expensed nonrecurring legal
fees of approximately $323,462 in connection with litigation between the Company
and principals of Marinex, the discontinued company, and the Company's former
legal and accounting firms. This litigation has been settled without any
significant additional cost to the Company. Total selling, general, and
administrative expense increased approximately $2,955,000, from $2,871,729
for 1996 to $5,826,836 for 1997. The increase was primarily due to the
operations acquired during 1997.
INTEREST EXPENSE
Interest expense increased approximately $180,000, or 141%, from
$127,151 for 1996 to $306,897 for 1997. The increase was due primarily to the
increased levels of floor plan payables associated with higher inventory levels
and the acquisition debt associated with the acquisitions in the Texas Panhandle
and Eastern New Mexico.
INTEREST INCOME
Interest income increased approximately $76,000, or 44%, from $175,465
for 1996 to $252,132 for 1997. This 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
14
<PAGE> 15
and Agricredit and prevailing market conditions. In 1997, interest rates were
very competitive which resulted in a relatively smaller increase in interest
income compared to the increase in equipment sales.
NON-CASH GUARANTEE FEE
In 1997 the Company recorded a non-cash charge of $288,211 in connection
with the personal guarantee by four shareholders of the Company of approximately
$15 million of accounts payable to Deere & Company, and of $3.3 million credit
facility at the Company's bank. Guarantee fees related to such arrangements were
paid in the form of five-year options to acquire up to 874,162 shares of Common
Stock with an option price of $.375.
NET INCOME
Net income from continuing operations decreased modestly, approximately
$68,000, or 7.7% ,from $883,115 for 1996 to $815,370 for 1997. This decrease was
primarily the result of the non-cash guarantee charge of $288,211 and the
nonrecurring legal expenses of $323,462, offset by approximately $544,000 in
higher income from continuing operations before these charges. This increase in
income from continuing operations was due primarily to approximately $697,000 in
such income from continuing operations related to the 1997 acquisitions.
Earnings per share from continuing operations (both basic and diluted)
decreased to $.03 from $.05 when comparing 1997 to 1996, primarily as the result
of an increase in weighted average outstanding shares from approximately 19.5
million to 24.7 million, in 1996 and 1997, respectively and a small decrease in
net income.
The Company recognized a loss on the discontinuation of its Marinex
business operations of $540,738 in fiscal 1997, net of income tax benefit of
$278,000, and a loss from discontinued operations of $146,764 in fiscal 1996,
net of income tax benefit of $70,636. Accordingly, net income for fiscal 1997
was $274,972 (resulting in earnings per share of $.01 on both a basic and
diluted basis) compared to net income of $736,351 in fiscal 1996 (resulting in
earnings per share of $.04 on both a basic and diluted basis).
1996 Compared to 1995
REVENUES
Revenues increased to approximately $28,094,196 in 1996 from approximately
$25,031,608 in 1995, an increase of more than 12%. These revenues reflected
sales solely from the Company's three Texas stores during such period and the
improved economic conditions in the area, and increased sales of equipment
related to peanut farming.
GROSS MARGINS
Gross profit increased approximately $709,000, or 21%, from $3,383,351 for
1995 to $4,092,807 for 1996. Gross profit as a percentage of total revenue for
1996 and 1995 was 14.5% and 13.5%, respectively. This increase was primarily due
to the mix of peanut equipment sales compared to sales of other equipment, which
typically sell for higher margins. .
SELLING, GENERAL AND ADMINISTRATIVE EXPENSE
Selling, general and administrative expense decreased from $2,935,899 in
1995 to $2,871,729 in 1996, principally as a result of lower commission
compensation to Mr. Paul Condit, the Company's president. As a percentage of
total revenues, selling, general and administrative expense was 11.7% and 10.2%
in 1995 and 1996, respectively.
15
<PAGE> 16
NET INCOME FROM CONTINUING OPERATIONS
Because of increased gross profit and decreased selling, general and
administrative costs, income from continuing operations and before income tax
increased almost 214% from $416,693 in 1995 to $1,308,148 in 1996. Earnings per
share for the Company increased from $.02 in 1995 to $.04 in 1996.
LIQUIDITY AND CAPITAL RESOURCES
Cash and cash equivalents decreased from $2,661,058 at December 31, 1996
to $104,750 at December 31, 1997. Operating activities used net cash of
$2,473,008 primarily because of the increase in inventory. Investing activities
used cash of $3,008,532 primarily for capital expenditures in connection with
the acquisition of John Deere dealerships in 1997. These acquisitions were
partially financed by an increase in long-term debt of $2,925,232. The Company's
capital expenditures for 1998 are expected to increase as it implements its
business plan to acquire additional John Deere dealerships, subject to the
availability of debt or equity financing, of which there can be no assurance.
The increase from fiscal 1996 year end to fiscal 1997 year end in accounts
receivable of $1,092,899, inventory of $15,659,694 and trade payables of
$13,045,020 is entirely related to the acquisitions made in 1997. TEC cash on
hand acquired in the September 1996 business combination allowed the Company to
acquire the stores in West Texas and Eastern New Mexico for approximately
$6,700,000 in 1997.
EFFECTS OF INFLATION
Inflation has not had a material impact upon operating results and the
Company does not expect it to have such an impact in the future. To date, in
those instances in which the Company has experienced cost increases, it has
been able to increase selling prices to offset such increases in cost. There
can be no assurance, however, that the Company's business will not be affected
by inflation or that it can continue to increase its selling prices to offset
increased costs and remain competitive.
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.
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's management information system software was acquired from Deere.
The Company also pays Deere a monthly maintenance fee for software changes and
upgrades. In formal discussions with Deere the Company has determined that the
modifications designed to address Year 2000 Issues have been completed on
several of the Deere dealer programs as well as Deere's in-house software. The
Company presently believes that Deere will complete the modification to the
remaining dealer programs and its in-house software on a timely basis. However,
if such modifications are not completed on a timely basis, the Company believe
that the impact will not be material, since several modifications and revisions
to its dealer software have already been completed. The cost associated with the
Year 2000 Issue is borne by Deere as part of its computer systems support to its
dealers.
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;
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;
16
<PAGE> 17
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.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
The Company's consolidated balance sheet as of December 31, 1997 and
1996, and the related consolidated statements of operations, stockholders'
equity and cash flows for each of the three years in the period ended December
31, 1997 are included under Item 14 hereof.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
On October 30, 1997, the Company's independent accountant, Killman,
Murrell & Co., resigned. Throughout most of 1997, the Company had been in
litigation with several parties in connection with the September 1996 business
combination with TECI. See "Item 3 - Legal Proceedings."
In a letter to the Securities and Exchange Commission ("Commission")
dated October 30, 1997, Mr. Killman indicated that Killman, Murrell & Co.
resigned as principal accountants and auditors of the Company. In such
resignation letter, Mr. Killman stated, and the Company concurs, that, in
connection with the audits of the two fiscal years ending December 31, 1996, and
the subsequent interim periods through October 30, 1997, there were no
disagreements with the Company on any matters of accounting principles, or
practices, financial statement disclosures, or auditing scope or procedures,
which disagreements, if not resolved, would have caused the accounting firm to
make references in connection
17
<PAGE> 18
with its opinion to the subject matter of the disagreement. Mr. Killman further
stated, and the Company concurs, that the audit report for the years ended
December 31, 1995 and 1996 did not contain any adverse opinion or disclaimer of
opinion, nor was such report qualified or modified as to uncertainty, audit
scope or accounting principles.
Nonetheless, Mr. Killman indicated in the same letter to the Commission
that the firm resigned because "we believe that the current internal control
structure of TEC is not adequate to develop reliable financial statements." The
Company strongly disagrees with this statement and believes that the internal
control structure had not changed in any material respect from the two preceding
fiscal years, for which the financial statements audited by Killman, Murrell &
Co. had never been qualified.
The Company believes the accounting process is critical for a number of
its constituencies as well as management control. These constituencies include
its stockholders and Deere & Company, and the Company's rapid growth requires
heightened attention to all aspects of its accounting system and processes,
including internal control. While the Company believes its systems, including
internal controls, are adequate, the registrant is actively improving its
accounting systems, including its internal controls. It has hired a chief
financial officer and controller in December 1997, and during 1997 the Company
retained an operations consultant to examine the Company's processes, including
its accounting processes.
On November 3, 1997, the registrant engaged the firm of Mazars & Guerard,
LLP as its independent accountants. Mazars & Guerard, LLP previously audited the
Company's discontinued Marinex operations.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
The information called for by this Item is incorporated by reference
from the Company's definitive proxy statement expected to be filed within 120
days after the end of the 1997 fiscal year.
ITEM 11. EXECUTIVE COMPENSATION.
The information called for by this Item is incorporated by reference
from the Company's definitive proxy statement expected to be filed within 120
days after the end of the 1997 fiscal year.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The information called for by this Item is incorporated by reference
from the Company's definitive proxy statement expected to be filed within 120
days after the end of the 1997 fiscal year.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
The information called for by this Item is incorporated by reference
from the Company's definitive proxy statement expected to be filed within 120
days after the end of the 1997 fiscal year.
18
<PAGE> 19
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.
(a) Financial Statements
The following financial statements are included herewith:
<TABLE>
<CAPTION>
Page
----
<S> <C>
Independent Auditors' Report - Mazars & Guerard, LLP F-2
Independent Auditors' Report - Killman Murrell and Company, P.C. F-3
Consolidated Balance Sheets F-4
Consolidated Statements of Operations F-6
Consolidated Statements of Stockholder's Equity F-7
Consolidated Statements of Cash Flows F-8
Notes to Consolidated Financial Statements F-10
</TABLE>
(b) Reports on form 8-K
Form 8-K filed on October 30, 1997 reporting disagreement with prior
accountant. See Item 9 for more complete discussion.
(c) Exhibits
<TABLE>
<CAPTION>
Item No. Item Method of Filing
------- ---- ----------------
<S> <C> <C>
3(a) Articles of Incorporation.................. Incorporated by reference to Exhibit 3(a) to
the Company's 1996 Form 10-K
3(b) By-Laws.................................... Incorporated by reference to Exhibit 3(b) to
the Company's 1996 Form 10-K
10(a) Acquisition Agreement for Texas Incorporated by reference to Exhibit 3(a) to
Equipment Co. Inc.......................... the Company's 1996 Form 10-K
10(j) Contract with John Deere & Company Incorporated by reference to Exhibit 3(j) to
the Company's 1996 Form 10-K
21 List of Subsidiaries (filed herewith)
23 Consent of Accountants (filed herewith)
27 Financial Data Schedule (filed herewith)
</TABLE>
19
<PAGE> 20
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.
Date: March 30, 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>
/s/ PAUL J. CONDIT Chairman of the Board, President, Chief March 30, 1998
---------------------------------- Executive Officer and Director (principal
Paul J. Condit executive officer)
/s/ JOHN T. CONDIT
---------------------------------- Director and Secretary March 30, 1998
John T. Condit
/s/ E.A. MILO MATTORANO
---------------------------------- Vice President, Chief Financial Officer, and March 30, 1998
E.A. Milo Mattorano Chief Accounting Officer (principal financial
and accounting officer)
</TABLE>
20
<PAGE> 21
TEXAS EQUIPMENT CORPORATION AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
THREE YEARS ENDED DECEMBER 31, 1997
<TABLE>
<CAPTION>
INDEX PAGE
----- ----
<S> <C> <C>
INDEPENDENT AUDITORS' REPORT - Mazars & Guerard, LLP F-2
INDEPENDENT AUDITOR'S REPORT - Killman Murrell and Company, P.C. F-3
CONSOLIDATED BALANCE SHEETS F-4
CONSOLIDATED STATEMENTS OF OPERATIONS F-6
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY F-7
CONSOLIDATED STATEMENTS OF CASH FLOWS F-8
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS F-10
</TABLE>
F-1
<PAGE> 22
INDEPENDENT AUDITOR'S REPORT
To the shareholders and Board of Directors
Texas Equipment Corporation and Subsidiaries
We have audited the consolidated balance sheet of Texas Equipment
Corporation and Subsidiaries as of December 31, 1997 and the related
consolidated statements of operations, shareholders' equity, and cash flows for
the year then ended. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the financial position of Texas Equipment
Corporation and Subsidiaries as of December 31, 1997, and the results of its
operations and its cash flows for the year then ended in conformity with
generally accepted accounting principles.
Mazars & Guerard, LLP.
Certified Public Accountants
New York, New York
March 7 , 1998
F-2
<PAGE> 23
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
BOARD OF DIRECTORS AND STOCKHOLDERS
Texas Equipment Corporation
1305 Hobbs Highway
Seminole, Texas 79360
We have audited the accompanying consolidated balance sheets of Texas
Equipment Corporation and Subsidiaries as of December 31, 1996 and 1995, and the
related consolidated statements of operations, stockholders' equity, and cash
flows for each of the two years in the period ended December 31, 1996. These
consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audit.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Texas Equipment
Corporation and Subsidiaries as of December 31, 1996 and 1995, and the results
of its operations and its cash flows for each of the two years in the period
ended December 31, 1996, in conformity with generally accepted accounting
principles.
KILLMAN, MURRELL AND COMPANY, P.C.
Odessa, Texas
February 12, 1997
F-3
<PAGE> 24
TEXAS EQUIPMENT CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
December 31,
---------------------------------------
1997 1996
---- ----
<S> <C> <C>
CURRENT ASSETS
Cash and cash equivalents $ 104,750 $2,661,058
Accounts receivable (less allowance for
doubtful accounts of $ 54,000 and
$ 76,000 respectively) 1,965,714 872,815
Other receivables 185,821 204,649
Inventories 21,039,882 5,380,188
Prepaid expenses -- 12,500
------------ ------------
TOTAL CURRENT ASSETS 23,296,167 9,131,210
PROPERTY AND EQUIPMENT, NET 4,027,731 1,244,442
FINANCE RECEIVABLES 836,967 731,028
RECEIVABLES FROM OFFICER 92,618 215,810
GOODWILL, net of accumulated
amortization of $66,743
and $54,031, respectively 123,955 136,667
OTHER ASSETS 151,147 153,101
------------ ------------
$ 28,528,585 $ 11,612,258
============ ============
</TABLE>
F-4
See notes to consolidated financial statements.
<PAGE> 25
TEXAS EQUIPMENT CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
LIABILITIES AND STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
December 31,
----------------- ----------------
1997 1996
---- ----
<S> <C> <C>
CURRENT LIABILITIES
Floor plan payables $ 15,235,375 $ 2,190,355
Accounts payable 810,254 437,564
Accrued liabilities 317,377 102,271
Notes payable -- 300,000
Customer deposits 137,019 79,500
Income tax liability 422,503 810,800
Current maturities of
long-term debt 2,807,181 396,022
------------- -------------
TOTAL CURRENT LIABILITIES 19,729,709 4,316,512
LONG-TERM DEBT, net of
current maturities 1,819,835 1,005,762
DEFERRED TAX LIABILITY 233,074 107,200
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY
Common stock, $.001 par value
authorized 50,000,000, issued
and outstanding 24,547,808 in 1997
and 24,799,808 in 1996 24,548 24,798
Paid in capital 2,823,320 2,534,859
Retained earnings 3,898,099 3,623,127
------------- -------------
TOTAL STOCKHOLDERS' EQUITY 6,745,967 6,182,784
------------- -------------
$ 28,528,585 $ 11,612,258
============= =============
</TABLE>
F-5
See notes to consolidated financial statements.
<PAGE> 26
TEXAS EQUIPMENT CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Years ended December 31,
-------------------------------------------
1997 1996 1995
----------- ----------- -----------
<S> <C> <C> <C>
REVENUES $58,366,746 $28,094,196 $25,031,608
COST OF SALES 50,541,118 24,001,389 21,648,257
----------- ----------- -----------
GROSS PROFIT 7,825,628 4,092,807 3,383,351
SELLING,GENERAL AND
ADMINISTRATIVE EXPENSES 5,826,836 2,871,729 2,935,899
LITIGATION EXPENSES 323,462 -- --
----------- ----------- -----------
INCOME FROM OPERATIONS 1,675,330 1,221,078 447,452
OTHER INCOME (EXPENSE)
Interest income 252,132 175,465 181,008
Non-cash guarantee fee (288,211) -- --
Interest expense (306,897) (127,151) (243,122)
Other income 55,518 38,756 31,355
----------- ----------- -----------
INCOME FROM CONTINUING
OPERATIONS BEFORE TAXES 1,387,872 1,308,148 416,693
INCOME TAX EXPENSE 572,502 425,033 163,294
----------- ----------- -----------
INCOME FROM CONTINUING OPERATIONS 815,370 883,115 253,399
DISCONTINUED OPERATIONS
Loss on discontinued operations (less applicable income
tax benefit of $278,000 and $ 70,636 respectively) (540,398) (146,764) --
----------- ----------- -----------
NET INCOME $ 274,972 $ 736,351 $ 253,399
=========== =========== ===========
NET INCOME (LOSS) PER SHARE
Basic
- Continuing operations $ .03 $ .05 $ .02
- Discontinued operations (.02) (.01) --
----------- ----------- -----------
Total $ .01 $ .04 $ .02
=========== =========== ===========
Diluted
- Continuing operations $ .03 $ .05 $ .02
- Discontinued operations (.02) (.01) --
----------- ----------- -----------
Total $ .01 $ .04 $ .02
=========== =========== ===========
NUMBER OF SHARED USED IN COMPUTATION
Basic 24,695,641 19,499,936 16,850,000
=========== =========== ===========
Diluted 24,823,766 19,531,186 16,850,000
=========== =========== ===========
</TABLE>
F-6
See notes to consolidated financial statements.
<PAGE> 27
TEXAS EQUIPMENT CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1995, 1996 AND 1997
<TABLE>
<CAPTION>
Total
Stockholders'
Common Stock Paid in Retained -------------
Shares Amount Capital Earnings Equity
---------- ---------- ----------- ------------ -------------
<S> <C> <C> <C> <C> <C>
BALANCE, DECEMBER 31, 1994 16,850,000 $ 16,850 $ 333,045 $ 2,633,377 $ 2,983,272
Stock Bonus Plan Issuance 171,306 171,306
Net income 253,399 253,399
---------- ---------- ----------- ------------ -------------
BALANCE, DECEMBER 31, 1995 16,850,000 16,850 504,351 2,886,776 3,407,977
Sale of common stock, net 7,647,808 7,648 2,030,808 2,038,456
Stock issued to raise equity 300,000 300 (300) --
Net income 736,351 736,351
---------- ---------- ----------- ------------ -------------
BALANCE, DECEMBER 31,1996 24,797,808 24,798 2,534,859 3,623,127 6,182,784
Stock options issued 288,211 288,211
Litigation settlement (250,000) (250) 250 --
Net income 274,972 274,972
---------- ---------- ----------- ------------ -------------
BALANCE, DECEMBER 31, 1997 24,547,808 $ 24,548 $ 2,823,320 $ 3,898,099 $ 6,745,967
========== ========== =========== ============ =============
</TABLE>
F-7
See notes to consolidated financial statements.
<PAGE> 28
TEXAS EQUIPMENT CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Years ended December 31,
------------------------------------------
1997 1996 1995
---------- ---------- ----------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 274,972 $ 736,351 $ 253,399
Adjustment to reconcile net income to net cash
from operating activities
Amortization & depreciation 363,101 163,553 181,080
Loss on disposal of assets -- 3,502 --
Deferred taxes 125,874 (262,300) 1,200
Valuation of stock options issued - guaranty fee 288,211 -- --
CHANGES IN ASSETS AND LIABILITIES:
(Increase) decrease in accounts receivable (1,092,899) (849,636) 57,331
(Increase) decrease in receivables from affiliates 18,828
(Increase) decrease in inventories (15,659,694) 1,059,050 (436,056)
(Increase) decrease in prepaid expenses 12,500 (12,500) 10,300
Increase (decrease) in floor plan payable 13,045,020 (906,446) 835,707
Increase (decrease) in accounts payable 372,690 612 (139,282)
Increase (decrease) in accrued liabilities 215,106 (15,186) 126,467
Increase (decrease) in customer deposits 57,519 79,500 (54,966)
(Increase) in finance receivable (105,939) (37,354) (200,850)
Increase (decrease) in income tax liability (388,297) 460,231 --
---------- ---------- ----------
CASH PROVIDED BY (USED IN)
OPERATING ACTIVITIES (2,473,008) 419,377 634,330
---------- ---------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of land, buildings and equipment (3,133,678) (126,126) (421,224)
Proceeds from sale of equipment -- 46,500 --
(Increase) decrease in other assets 1,954 149,034 (27,564)
(Increase) decrease in stockholders' receivables 123,192 27,454 983
---------- ---------- ----------
NET CASH FLOWS PROVIDED BY
(USED IN) INVESTING ACTIVITIES (3,008,532) 96,862 (447,805)
---------- ---------- ----------
</TABLE>
F-8
See notes to consolidated financial statements.
<PAGE> 29
TEXAS EQUIPMENT CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Years ended December 31,
---------------------------------------------
1997 1996 1995
----------- ----------- -----------
<S> <C> <C> <C>
CASH FLOW FROM FINANCING ACTIVITIES
Proceeds from note borrowings $ 4,171,658 $ 775,149 $ 1,203,569
Repayments from note borrowings (1,246,426) (840,190) ( 1,648,526)
Sale of common stock -- 1,959,829 --
----------- ----------- -----------
NET CASH FLOW PROVIDED BY (USED IN)
FINANCING ACTIVITIES 2,925,232 1,894,788 (444,957)
----------- ----------- -----------
NET INCREASE (DECREASE) IN CASH (2,556,308) 2,411,027 (258,432)
----------- ----------- -----------
CASH AND CASH EQUIVALENTS AT THE
BEGINNING OF THE PERIOD 2,661,058 250,031 508,463
----------- ----------- -----------
CASH AND CASH EQUIVALENTS AT THE END OF
THE PERIOD $ 104,750 $ 2,661,058 $ 250,031
=========== =========== ===========
SUPPLEMENTAL DISCLOSURES OF
CASH FLOW INFORMATION
Cash paid during the period for:
Interest expense $ 360,028 $ 135,260 $ 199,549
=========== =========== ===========
Income taxes $ 134,502 $ 143,918 $ 33,240
=========== =========== ===========
SUPPLEMENTAL SCHEDULE OF
NONCASH ACTIVITIES
Transfer of assets to officer
prior to merger $ (125,722)
===========
Change in officer payable 125,722
===========
Valuation of stock options issued $ 288,211
===========
</TABLE>
F-9
See notes to consolidated financial statements.
<PAGE> 30
TEXAS EQUIPMENT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
THREE YEARS ENDED DECEMBER 31, 1997
NOTE 1: BUSINESS
The consolidated financial statements of Texas Equipment Corporation ("the
Company") ("TEC") ( a Nevada Corporation, formerly Marinex Multimedia
Corporation and Hard Funding, Inc.) include wholly-owned subsidiaries Texas
Equipment Co., Inc., ("TECI"), Marinex Multimedia Corporation ("Marinex") (the
Discontinued Company) and New Mexico Implement Company, Inc. ("NMIC") TEC was
acquired by Marinex with TEC being the successor entity on September 17, 1996.
The acquisition has been accounted for as a reverse acquisition as discussed
hereinafter, unless the context otherwise indicates, the "Company" refers to
TEC, TECI and NMIC .
The Company, is a retailer of agricultural equipment primarily supplied by Deere
& Company ("Deere") and other equipment with its headquarters in Seminole,
Texas. TECI's market area represents the Panhandle portion of Texas and Eastern
New Mexico. In excess of ninety percent (90%) of equipment sales are made to
customers participating in agriculture, therefore, the Company has a
concentration of customers in a geographic area in a single industry and is tied
to a sole supplier Deere for a significant portion of its new equipment
purchases.
During 1997, the Company implemented a plan to discontinue the operations of
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.
NOTE 2: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of the
Company and its wholly-owned subsidiaries. Intercompany items and
transactions have been eliminated in consolidation.
CASH AND EQUIVALENTS
The Company classifies as cash equivalents highly liquid temporary
Investments with an original maturity of three months or less when
purchased.
INVENTORIES
Inventories are stated at the lower of cost or market value. Cost is
determined using the specific identification method for a new and used
agricultural equipment and average cost for parts.
F-10
See notes to consolidated financial statements.
<PAGE> 31
TEXAS EQUIPMENT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
THREE YEARS ENDED DECEMBER 31, 1997
NOTE 2: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONT'D)
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost. Maintenance and repairs are
charged to expense as incurred. Major betterments and improvements
which extend the useful life of the related item are capitalized and
depreciated. Depreciation is provided for over the estimated useful
lives of the individual assets using accelerated and straight-line
methods.
GOODWILL AMORTIZATION
The Company's goodwill is being amortized on a straight-line basis over
a period of fifteen (15) years. The Company assesses the recoverability
of this intangible asset by determining whether amortization of the
goodwill balance over its remaining life can be recovered through
projected undiscounted future cash flows.
FINANCE RECEIVABLES
The Company has entered into retail finance agreements with two credit
corporations whereby the Company customers can finance selected
purchases from the Company and the Company guarantees a portion of the
financed balance. A portion of the financed balance is not remitted to
the Company but is held by the finance companies to insure the payment
of amounts financed. At such time as the amounts are paid to the credit
corporation, the withheld amounts may be remitted to the Company. The
finance receivables are recognized as income when the loans are funded
by the credit corporations. The Company has traditionally experienced
less than two percent loss on credit sales. Therefore, the Company has
elected not to provide a reserve for loss associated with the finance
receivables. The Company receives interest on the finance receivable
held by the finance Company.
FLOOR PLAN PAYABLES
Deere provides various inventory financing arrangements for its
dealers. The terms of these arrangements generally include a
one-to-twelve-month interest-free term followed by a term during which
interest is charged. Payoff of the floor plan generally occurs at the
earlier of sale of the equipment or in accordance with the terms of the
financing arrangements. All amounts owed to Deere are guaranteed by the
majority stockholders of the Company and are collateralized by
inventory.
F-11
See notes to consolidated financial statements.
<PAGE> 32
TEXAS EQUIPMENT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
THREE YEARS ENDED DECEMBER 31, 1997
NOTE 2: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONT'D)
ACCOUNTING FOR INCOME TAXES
The Company accounts for income taxes under Statements of Financial
Accounting Standards No. 109, "Accounting for Income Taxes" ("SFAS No.
109"). SFAS No. 109 requires the recognition of deferred tax assets and
liabilities for both the expected impact of the differences between the
financial statements and tax basis of assets and liabilities, and for
the expected future tax benefit to be derived from tax loss and tax
credit carryforwards.
CONCENTRATION OF CREDIT RISK CONTINGENCIES
The Company places its cash and temporary cash investments with highly
creditworthy financial institutions. At such times investments may be
in excess of FDIC insurance limits. At December 31, 1996, the deposits
exceeding FDIC insurance limits were $2,184,999.
The Company grants credit, generally with collateral, to its customers
which are located in the Company's market area which represents the
panhandle of Texas and Eastern New Mexico. Management believes that its
billing and collection policies are adequate to minimize potential
credit risk.
ACCOUNTING 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 at the date of the financial statements and the reported
amounts of revenues and expenses during the reporting period. Actual
results could differ from those estimates.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amounts reported in the balance sheet for cash,
receivables, and accrued expenses approximate fair value based on the
short-term maturity of these instruments.
EARNING (LOSS) PER SHARE
In February 1997, The Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 128, "Earnings Per
Share" (FAS No. 128), which became effective for both interim and
annual financial statements for periods ending after December 15, 1997.
FAS No. 128 requires a presentation of "Basic" and (where applicable)
"Diluted" earning per share. Generally, Basic earnings per share are
computed on only the weighted average number of common shares actually
outstanding during the period, and the Diluted computation considers
potential shares issuable upon exercise or conversion of other
outstanding instruments where dilution would result. Furthermore, FAS
No. 128 requires the restatements of prior period reported earnings per
share to conform to the new standard. No material change in the
earnings per share was required as part of the implementation of FAS
No. 128.
F-12
See notes to consolidated financial statements.
<PAGE> 33
TEXAS EQUIPMENT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
THREE YEARS ENDED DECEMBER 31, 1997
NOTE 2: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONT'D)
RECLASSIFICATION
Certain reclassifications have been made in the consolidated balance
sheet and statements of cash flows to the years ended December 31, 1996
and 1995 to be in conformity with the year ended December 31, 1997
consolidated balance sheet and statement of cash flows.
RECAPITALIZATION
In September 1996 the Company acquired TECI, and issued 16,850,000
shares of common stock in exchange for all of the capital stock of
TECI. Accordingly since through its Marinex subsidiary, the Company had
no significant operations prior to September 1996 and the TECI
shareholders received 68% of the outstanding shares, the transaction
has been accounted for as a reverse acquisition by TECI. The capital
structure of TEC has been recapitalized to account for the equity
structure subsequent to the acquisition as if TECI had been the issuer
of the common stock for all periods presented. Accordingly the
preferred stock originally issued and outstanding by TEC prior to the
acquisition has not been presented since such preferred stock is now
accounted for as part of the 16,850,000 shares of Common Stock
outstanding.
DEALERSHIP AGREEMENTS
The Company has entered into agreements with Deere which authorize the
Company to act as an authorized dealer of Deere industrial and
agricultural equipment. The dealer agreements continue until terminated
by Deere or the Company in accordance with certain specified
provisions.
The Company is required to meet certain performance criteria and equity
ratios, to maintain suitable facilities, to actively promote the sale
of Deere equipment, to fulfill warranty obligations, and to maintain
stores only in the authorized locations. The Company's principal
stockholder is also required to maintain certain voting control and
ownership interests. The agreement also contain certain provisions that
must be complied with in order to retain the Company's dealership
agreements in the event of certain changes in control, as defined, or
the death of the controlling stockholder.
Deere is obligated to make available the Company floor plan and other
financing programs that it offers to other dealers, provide promotional
and marketing materials, and authorize the Company to use Deere
trademarks and the trade name.
Sales of Deere related new equipment and parts aggregate to 44%, 46%
and 55% of the total sales for the years ended December 31, 1997, 1996
and 1995, respectively.
F-13
See notes to consolidated financial statements.
<PAGE> 34
TEXAS EQUIPMENT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
THREE YEARS ENDED DECEMBER 31, 1997
NOTE 2: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONT'D)
ACCOUNTING OF LONG-LIVED ASSETS
The Company has adopted Statement of Financial Accounting Standards No.
121, "Accounting For The Impairment Of Long-Lived Assets And For
Long-Lived Assets To Be Disposed Of". The Company reviews long-lived
assets, certain identifiable assets and any goodwill related to those
assets for impairment whenever circumstances and situations change such
that there is an indication that the carrying amounts may not be
recoverable. At December 31, 1997, the Company believes that there has
been no impairment of its long-lived assets.
STOCK BASED COMPENSATION
The Company accounts for stock transactions in accordance with APB
Opinion No. 25, "Accounting For Stock Issued To Employees" and has
adopted the disclosure-only option under SFAS No. 123, as of December
31, 1995.
NOTE 3: DISCONTINUED OPERATIONS
In the second quarter of 1997 the Company implemented a plan to discontinue the
operations of Marinex, which included the complete liquidation of Marinex's
assets. As of December 31, 1997 Marinex was liquidated and accordingly there
were no assets or liabilities recorded. A reclassification of $217,400 of
expenses recorded in selling, general and administrative expenses for the year
ended December 31, 1996 was made to discontinued operations, such amount has
been presented net of income tax benefits of $70,636. The discontinued
operations of Marinex for the year ending December 31, 1997 consist primarily of
selling, general and administrative expenses net of the related tax benefit.
NOTE 4: ACQUISITIONS
In January 1997, the Company acquired the assets of three John Deere franchise
stores in two separate purchase agreements. In July 1997, the Company acquired a
fourth John Deere franchise store. The terms of each purchase agreement are
summarized as follows :
a) The building, land, equipment and inventory of one store were
purchased for $923,000. The $923,000 was paid with $754,000 of cash
and the assumption of $169,000 indebtedness to John Deere.
b) The building, land, equipment and inventory of two stores
were purchased for approximately $2,400,000. The $2,400,000 was
paid with $258,000 note to the seller, $945,000 in cash and the
assumption of $1,197,000 indebtedness due to John Deere.
F-14
See notes to consolidated financial statements.
<PAGE> 35
TEXAS EQUIPMENT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
THREE YEARS ENDED DECEMBER 31,1997
NOTE 4: ACQUISITIONS (CONT'D)
c) The building, land, equipment and inventory of the store
acquired in July 1997 was purchased for $387,000. The $387,000 was
paid with $337,000 in cash and a $50,000 note payable to the seller.
The acquisition of the above stores have been accounted for as a purchase and
accordingly, the assets acquired and liabilities assumed have been recorded at
their estimated fair values which approximate book value.
The following schedules combine the unaudited pro-forma results of operations of
the Company for the years ended December 31, 1996 and December 31, 1995 as if
the acquisition had occurred on January 1, 1995 and includes such adjustments
which are directly attributable to the acquisition. It should not be considered
indicative of future results of operations or the results that would have been
obtained had the acquisition actually occurred on January 1, 1995. The results
of two of the smaller stores acquired for the years ended December 31, 1996 and
1995 were not available and accordingly have not been included in the pro-forma
results of operations.
<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
Net sales $ 45,074,346 $ 40,093,270
Net income 1,109,427 402,295
Net income per share $ .06 $ .02
============ ============
Shares used in computation 19,499,936 16,850,000
============ ============
</TABLE>
NOTE 5: INVENTORIES
At December 31, 1997 and 1996, inventories consisted of:
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
New equipment $ 12,019,361 $ 2,243,220
Used equipment 4,629,958 1,390,872
Parts 4,390,563 1,746,096
------------ ------------
$ 21,039,882 $ 5,380,188
============ ============
</TABLE>
Substantially all the inventories are pledged as security for the floor plan
payables to Deere.
F-15
See notes to consolidated financial statements.
<PAGE> 36
TEXAS EQUIPMENT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
THREE YEARS ENDED DECEMBER 31,1997
NOTE 6: PROPERTY AND EQUIPMENT
At December 31, 1997 and 1996, land, building and equipment consisted of:
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
Land and buildings $ 2,936,826 $ 1,143,227
Vehicles 781,128 348,272
Furniture and fixtures 932,025 397,009
Equipment and tools 544,382 222,861
------------- ------------
5,194,361 2,111,369
Less accumulated depreciation (1,166,630) (866,927)
------------- -------------
$ 4,027,731 $ 1,244,442
============= ============
</TABLE>
Depreciation of buildings and equipment is provided principally on the
straight-line method using estimated useful lives from five to forty years.
NOTE 7: FINANCE RECEIVABLES
At December 31, 1997 and 1996, the Company's finance receivables were as
follows:
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
Deere credit $ 697,228 $ 491,022
Agricredit acceptance 139,739 240,006
---------- ----------
$ 836,967 $ 731,028
========== ==========
</TABLE>
The applicable outstanding financed balances for each program were as follows:
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
Deere credit $ 36,446,398 $ 28,039,216
Agricredit acceptance 6,361,318 4,410,478
------------- -------------
$ 42,807,716 $ 32,449,694
============= =============
</TABLE>
F-16
See notes to consolidated financial statements.
<PAGE> 37
TEXAS EQUIPMENT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
THREE YEARS ENDED DECEMBER 31,1997
NOTE 7: FINANCE RECEIVABLES (CONT'D)
In accordance with credit agreements, these finance companies withhold one
percent (1%) of each financed contract accepted from the Company. When the
finance company experiences a loss of contract, the loss is charged against the
Company's finance receivable. The Company's credit risk is limited to the
finance receivables: however, on an annual basis, the finance receivable is
compared to the total outstanding credit balances and if the finance receivable
is greater than the required amount (3% to 4% of outstanding credit balance),
the overage is remitted to the Company. The Company receives interest from the
finance Company on the total finance receivable.
NOTE 8: INCOME TAXES
Significant component of income taxes are as follows for the years ended
December 31, 1997, 1996 and 1995 :
The components of the provision for income taxes are as follows :
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Current $ 267,085 $ 616,697 $ 162,094
Deferred 27,417 (262,300) 1,200
------------- ------------- ------------
Total income tax expenses $ 294,502 $ 354,397 $ 163,294
============= ============= ============
</TABLE>
Income tax expense (benefit) allocated to continuing and discontinued operations
is as follows :
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Continuing operations $ 572,502 $ 425,033 $ 163,294
Discontinued operations (278,000) (70,636) --
------------- ------------ -----------
Total income tax expenses $ 294,502 $ 354,397 $ 163,294
============= ============= ===========
</TABLE>
F-17
See notes to consolidated financial statements.
<PAGE> 38
TEXAS EQUIPMENT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
THREE YEARS ENDED DECEMBER 31,1997
NOTE 8: INCOME TAXES (CONT'D)
A reconciliation of income tax from continuing operations computed at the U.S.
federal statutory tax rate to the Company's effective income tax rate is as
follow :
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Tax at federal statutory rate 34% 34% 34%
State and local tax rate, net of federal benefit 3% 3% 3%
Effect of permanent difference - guaranty fee 7% - -
Temporary timing differences (3%) (4.5%) -
-- ---- --
41% 32.5% 39%
== ==== ==
</TABLE>
NOTE 9: LONG-TERM DEBT
Long term debt consists of the following:
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
Bank loan due October 1, 2002, bearing interest
at 9.5%, payable in monthly installments of
$24,500 collaterized by land and buildings $ 2,071,209 $ --
Equipment financed by Deere or Agricredit due in various amounts
through October 2002, interest at various rates from 4.9% to
12%, collateralized by the
equipment held for sale 1,229,169 463,055
Building, equipment, land and other Financing due in various
amounts through October 2002, interest at various rates from
8.5% to 12%, collateralized by the respective items financed
such as land,
vehicles or insurance policy loan 1,326,638 938,729
------------- -------------
4,627,016 1,401,784
Less current portion 2,807,181 396,022
------------- -------------
$ 1,819,835 $ 1,005,762
============= =============
</TABLE>
F-18
See notes to consolidated financial statements.
<PAGE> 39
TEXAS EQUIPMENT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
THREE YEARS ENDED DECEMBER 31, 1997
NOTE 9: LONG-TERM DEBT (CONT'D)
Aggregate maturities of long-term debt are as follows:
<TABLE>
<S> <C>
December 31, 1998 $2,807,181
1999 455,567
2000 466,002
2001 354,528
2002 543,738
</TABLE>
The Company has unused credit lines available as of December 31, 1997 of
$1,300,000.
Deere, the Company's principal supplier of wholegoods and parts, has
subordinated the debt due to themselves with regard to the collateral of
non-Deere wholegoods and parts for the above bank loan and credit line.
The three majority shareholders of the Company and the President have guaranteed
the indebtedness due to the bank and Deere (floor plan payable). During 1997,
these individuals have received stock options as a fee for such guaranty. The
fee recorded for the year ended December 31, 1997 was $288,216. No guaranty fees
were recorded in the prior years (See Note 10).
NOTE 10: STOCKHOLDERS' EQUITY
The capital structure presented represents the retroactive effect of
recapitalizing the Company as the successor entity of the transaction accounted
for as though it were a reverse acquisition with Marinex on September 17, 1996
with 16,850,000 shares of Common Stock outstanding.
Prior to the acquisition, TECI had a two equity structure comprised of common
stock and no par value, non-voting preferred stock , which was issued pursuant
to a "Stock Bonus Plan". Contributions to the Stock Bonus Plan aggregated
$200,089 and $171,306 in 1994 and 1995, respectively. Such contributions have
been expensed in the year incurred since the plan is a defined contribution
plan. Pursuant to a separate letter agreement by the selling shareholders of
TECI as part of the acquisition by Marinex of TECI, the funding of the Stock
Bonus Plan was performed by allocations from the selling shareholders of TECI
16,850,000 shares of Common Stock.
In February 1996, prior to the transaction with TECI, the Company sold 3,032,246
shares of Common Stock pursuant to two separate Regulation S offerings and
raised $2,967,500, net of expenses and an additional 300,000 shares were issued
to financial consultants relating to the raising of such equity.
Pursuant to the acquisition of TECI by the Company another 4,615,562 shares were
deemed to have been issued to the shareholders of Marinex.
F-19
See notes to consolidated financial statements.
<PAGE> 40
TEXAS EQUIPMENT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
THREE YEARS ENDED DECEMBER 31, 1997
NOTE 10: STOCKHOLDERS' EQUITY (CONT'D)
In July 1997, two shareholders returned a total of 250,000 shares of common
stock pursuant to a settlement agreement discussed hereafter in Note 13.
In December 1997, the Company granted 300,000 stock options to an officer of the
Company exercisable at $.50 per share for a period of five years. The options
vest over four years. These stock options were issued pursuant to an employment
agreement.
In December 1997, the Company granted 874,162 fully vested stock options to the
guarantors of the floor plan payable and bank loans, who are majority
shareholders of the Company, exercisable at $.375 per share for a period of five
years. An expense of $288,211 has been recorded as a guaranty fee for such
options during the year ended December 31, 1997.
NOTE 11: EMPLOYEE BENEFIT PLANS
In March 1994, TECI adopted a flexible health benefit plan (a cafeteria plan)
which covers substantially all full time employees on the 90th day following
commencement of employment. The health benefit plan is a minimum funded plan
with specific and aggregate stop loss insurance provided to limit the overall
exposure to TECI. The specific stop loss is $20,000 per employee. The expense
associated with the health benefit plan aggregated $236,995, $120,341 and
$86,663 for 1997, 1996 and 1995, respectively.
On September 20, 1994, TEC adopted the "TEXAS EQUIPMENT COMPANY, INC. 401 (k)
PLAN" (The "401(k) Plan") which covers all employees that have attained the age
of twenty one (21) years and have one year of service. Contributions by TECI are
discretionary, and TECI has made no contributions to the 401(k) Plan from
inception to December 31, 1997.
NOTE 12: ACCOUNTING FOR EMPLOYEE STOCK OPTIONS
In fiscal 1996, the Company adopted the disclosure provisions of SFAS No. 123,
"Accounting for Stock-Based Compensation". For disclosure purposes, the fair
value of options is estimated on the date of grant using the Black-Scholes
option pricing model with the following weighted average assumptions used for
stock options granted during the years ended December 31, 1997 and 1996; annual
dividends of $0; expected volatility of 50%, risk-free interest rate of 7% and
expected life of five years. The weighted average fair value of stock options
granted during the years ended December 31, 1997 and 1996 was $.01 and $.01,
respectively. If the Company had recognized compensation cost for stock options
in accordance with SFAS No. 123, the Company's proforma net income (loss) and
net income (loss) per share would have been $(56,772) and $(.00) per share for
the fiscal year ended December 31, 1997 and $594,038 and $.03 per share for the
fiscal year ended December 31, 1996. The pro-forma compensation expense per the
Black Scholes formula for the year ended December 31, 1998, 1999, 2000 and 2001
will be $28,463 for each year.
NOTE 13: LITIGATION
In July 1997, the Company settled litigation, which was initiated in March 1997,
with the two controlling shareholders of Marinex prior to the acquisition of
TECI. The settlement required the two shareholders to return a total of 250,000
shares of common stock to the Company, cancel their employment agreements with
the Company and retain ownership of a total 200,000 shares of common stock in
the Company until they have fully liquidated the operations and resolved all
outstanding liabilities of the Marinex operations and present the Company with a
certificate stating the operations have been liquidated. The Company then has a
specified period of time to contest the resolution of all outstanding Marinex
matters in order to prevent the two shareholders from
F-20
See notes to consolidated financial statements.
<PAGE> 41
TEXAS EQUIPMENT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
THREE YEARS ENDED DECEMBER 31, 1997
NOTE 13: LITIGATION (CONT'D)
selling the remaining 200,000 shares of common stock. The 250,000 shares of
common stock returned to the Company have been cancelled and returned to the
treasury.
In February 1998, the Company settled litigation with a business consultant
pursuant to the acquisition agreement between Marinex and TECI, pursuant to
which the consultant, who was originally to be issued 250,000 options for common
stock in the Company for total consideration of $1, the consultant will now
receive 125,000 shares of common stock. Since the options were originally valued
as part of the acquisition of TECI by Marinex, no additional amounts will be
recorded in 1998 upon the actual issuance of such shares. The 125,000 shares
were outstanding for diluted earnings per share since September 13, 1996.
The Company had incurred $323,462 of litigation expenses with regard to the
aforementioned during 1997.
NOTE 14: COMMITMENTS AND CONTINGENCIES
In December 1997, the Company signed an employment agreement with its Chief
Financial Officer providing for a base salary, 300,000 stock options exercisable
at $.50 per share which vest over five years, an incentive bonus plan calculated
from net taxable income and .5% of any new funding raised.
NOTE 15: FOURTH QUARTER (UNAUDITED)
The fourth quarter includes the recording of $288,211 for a guarantee fee from
the valuation of 874,162 stock options exercisable at $ .375 per share for five
years issued to the guarantors of the floor plan payable indebtedness and bank
debt in the amount of approximately $17 million as of December 31, 1997.
NOTE 16: 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>
Year ended December 31, 1997
----------------------------------------
Income Shares Per Share
(Numerator) (Denominator) Amount
----------- ------------- ---------
<S> <C> <C> <C>
Income from continuing operations
available to common stockholders' $815,370 24,695,641 $0.03
-------- -----
Effect of dilutive securities:
Incremental shares of assumed
conversions of options 128,125
----------
Diluted income from continuing
operations available to common
shareholders' and assumed
conversions $815,370 24,823,766 $0.03
-------------------------------------
</TABLE>
<TABLE>
<CAPTION>
Year ended December 31, 1996
----------------------------------------
Income Shares Per Share
(Numerator) (Denominator) Amount
----------- ------------- ---------
<S> <C> <C> <C>
Income from continuing operations
available to common stockholders' $883,115 19,499,936 $0.05
-------- -----
Effect of dilutive securities:
Incremental shares of assumed
conversions of options 31,250
----------
Diluted income from continuing
operations available to common
shareholders' and assumed
conversions $833,155 19,531,186 $0.05
-------------------------------------
</TABLE>
F-21
See notes to consolidated financial statements.
<PAGE> 42
TEXAS EQUIPMENT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
THREE YEARS ENDED DECEMBER 31, 1997
NOTE 16: INCOME FROM CONTINUING OPERATIONS PER SHARE (CONT'D)
<TABLE>
<CAPTION>
Year ended December 31, 1995
----------------------------------------
Income Shares Per Share
(Numerator) (Denominator) Amount
----------- ------------- ---------
<S> <S> <C> <C>
Income from continuing operations
available to common stockholders' $253,339 16,850,000 $0.02
-------------------------------------
Diluted income from continuing
operations available to common
shareholders' and assumed
conversions $253,399 16,850,000 $0.02
-------------------------------------
</TABLE>
F-22
See notes to consolidated financial statements.
<PAGE> 43
EXHIBITS
<TABLE>
<CAPTION>
Exhibit Description
------- -----------
<S> <C>
21.1 Subsidiaries of the Company
23 Consent of Independent Public Accountants
27 Financial Data Schedule
</TABLE>
E-1
<PAGE> 1
EXHIBIT 21
Texas Equipment Corporation's List of Subsidiaries
Names of Subsidiaries State of Incorporation
--------------------- ----------------------
Texas Equipment Co., Inc. Texas
New Mexico Implement Company, Inc. New Mexico
<PAGE> 1
EXHIBIT 23
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation of our report dated February 12, 1997,
which is incorporated in this Annual Report of Texas Equipment Corporation on
Form 10-K.
/s/ KILLMAN, MURRELL & COMPANY, P.C.
Killman, Murrell & Company, P.C.
March 25, 1998
<TABLE> <S> <C>
<ARTICLE> 5
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> DEC-31-1997
<EXCHANGE-RATE> 1
<CASH> 104,750
<SECURITIES> 0
<RECEIVABLES> 2,205,535
<ALLOWANCES> 54,000
<INVENTORY> 21,039,882
<CURRENT-ASSETS> 23,296,167
<PP&E> 4,027,731
<DEPRECIATION> 0
<TOTAL-ASSETS> 28,528,585
<CURRENT-LIABILITIES> 19,729,709
<BONDS> 1,819,835
0
0
<COMMON> 24,548
<OTHER-SE> 6,721,419
<TOTAL-LIABILITY-AND-EQUITY> 28,528,585
<SALES> 58,366,746
<TOTAL-REVENUES> 58,366,746
<CGS> 50,541,118
<TOTAL-COSTS> 50,541,118
<OTHER-EXPENSES> 6,438,509
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 306,897
<INCOME-PRETAX> 1,387,872
<INCOME-TAX> 572,502
<INCOME-CONTINUING> 815,370
<DISCONTINUED> (540,398)
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 274,972
<EPS-PRIMARY> .01
<EPS-DILUTED> .01
</TABLE>
