<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1998 or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ________ to _______
Commission file number 000-21813
Texas Equipment Corporation
- -------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Nevada 62-1459870
- -------------------------------------------------------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
1305 Hobbs Hwy, Seminole, Texas 79360
- -------------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number: (915) 758-3643
Securities registered under Section 12(b) of the Exchange Act:
Title of each class Name of each exchange on which registered
------------------- -----------------------------------------
None None
Securities registered under Section 12(g) of the Exchange Act:
Title of each class
-------------------
Common Stock, $.001 par value
Indicate by check mark whether registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Exchange Act during the past
12 months (or for such shorter period that the registrant was required to file
such reports), and (2) has been subject to such filing requirements for the past
90 days.
Yes [X] No [ ]
The number of shares outstanding of the registrant's Common Stock, as of
November 2, 1998, was 24,824,808.
<PAGE> 2
INDEX
<TABLE>
<CAPTION>
Page
PART I - FINANCIAL INFORMATION
<S> <C>
Item 1. Condensed Financial Statements:
Consolidated Balance Sheets at September 30, 1998 and December 31, 1997............................ 4
Consolidated Statement of Operations for the Three Months Ended September 30, 1998 and 1997........ 6
Consolidated Statement of Operations for the Nine Months Ended September 30, 1998 and 1997......... 7
Consolidated Statement of Cash Flows for the Nine Months Ended September 30, 1998 and 1997......... 8
Item 2. Management's Discussion and Analysis of Financial Conditions and Results of Operations........ 12
Item 4. Submission of Matters to a Vote of Security Holders........................................... 18
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K.............................................................. 18
Signatures................................................................................................. 19
</TABLE>
2
<PAGE> 3
CAUTIONARY STATEMENT REGARDING
FUTURE RESULTS AND FORWARD-LOOKING STATEMENTS
The future results of the Company, including results reflected in any
forward-looking statement made by or on behalf of the Company, will be impacted
by a number of important factors. The factors identified below in the section
entitled "Part 1. Item 2. - Management's Discussion And Analysis of Financial
Condition and Results of Operations - Certain Important Factors" are important
factors (but not necessarily all important factors) that could cause the
Company's actual future results to differ materially from those expressed in any
forward-looking statement made by or on behalf of the Company. Words such as
"may," "will," "expect," "believe," "anticipate," "estimate," or "continue" or
comparable terminology is intended to identify forward-looking statements.
Forward-looking statements, by their nature, involve substantial risks or
uncertainties.
3
<PAGE> 4
PART I - FINANCIAL INFORMATION
ITEM 1. CONDENSED FINANCIAL STATEMENTS.
TEXAS EQUIPMENT CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
ASSETS
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1998 1997
------------- ------------
<S> <C> <C>
CURRENT ASSETS
Cash and cash equivalents $ 1,080,161 $ 104,750
Accounts receivable (less allowance for
Doubtful accounts of $76,000 in 1998 and 1997) 1,038,539 1,965,714
Other receivables 391,824 185,821
Inventories 38,565,055 21,039,882
----------- -----------
TOTAL CURRENT ASSETS 41,075,579 23,296,167
PROPERTY AND EQUIPMENT, NET 5,097,058 4,027,731
FINANCE RECEIVABLES 1,065,952 836,967
RECEIVABLES FROM OFFICER 91,851 92,618
GOODWILL, net of accumulated
Amortization of $76,275 in 1998 and $66,743 in 1997 114,423 123,955
OTHER ASSETS 150,654 151,147
----------- -----------
$47,595,517 $28,528,585
=========== ===========
</TABLE>
4
See Notes to Condensed Financial Statements
<PAGE> 5
TEXAS EQUIPMENT CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
LIABILITIES AND STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1998 1997
----------- -----------
<S> <C> <C>
CURRENT LIABILITIES
Floor plan payables $28,637,050 $15,235,375
Accounts payable 962,140 810,254
Accrued liabilities 246,003 317,377
Customer deposits 609,253 137,019
Income tax liability 787,915 422,503
Current maturities of
long-term debt
2,985,189 2,807,181
----------- -----------
TOTAL CURRENT LIABILITIES 34,227,550 19,729,709
LONG-TERM DEBT, net of
current maturities 4,801,264 1,819,835
DEFERRED TAX LIABILITY 233,074 233,074
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY
Common stock, $.001 par value
authorized 50,000,000; issued
and outstanding: 24,674,808 in 1998
and 24,549,808 in 1997 24,673 24,548
Paid in capital 3,116,696 2,823,320
Retained earnings 5,192,260 3,898,099
----------- -----------
TOTAL STOCKHOLDERS' EQUITY 8,333,629 6,745,967
----------- -----------
$47,595,517 $28,528,585
=========== ===========
</TABLE>
5
See Notes to Condensed Financial Statements
<PAGE> 6
TEXAS EQUIPMENT CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SEPTEMBER 30,
--------------------------------
1998 1997
------------ ------------
<S> <C> <C>
REVENUES $ 17,573,269 $ 17,849,319
COST OF SALES 14,803,695 15,167,109
------------ ------------
GROSS PROFIT 2,769,574 2,682,210
SELLING,GENERAL AND
ADMINISTRATIVE EXPENSES 1,946,273 1,522,288
------------ ------------
INCOME FROM OPERATIONS 823,301 1,159,922
OTHER INCOME (EXPENSE)
Interest (181,759) (17,127)
Non-cash guarantee fee (49,951) --
Other income (2,248) 18,121
------------ ------------
INCOME FROM CONTINUING
OPERATIONS BEFORE TAXES 589,343 1,160,916
INCOME TAX EXPENSE 199,089 555,388
------------ ------------
INCOME FROM CONTINUING OPERATIONS 390,254 605,528
DISCONTINUED OPERATIONS
Loss on discontinued operations (less applicable income
tax benefit) -- --
------------ ------------
NET INCOME $ 390,254 $ 605,528
============ ============
NET INCOME (LOSS) PER SHARE
Basic
- Continuing operations $ 0.016 $ 0.025
- Discontinued operations -- --
------------ ------------
Total $ 0.016 $ 0.025
============ ============
Diluted
- Continuing operations $ 0.016 $ 0.025
- Discontinued operations -- --
------------ ------------
Total $ 0.016 $ 0.025
============ ============
NUMBER OF SHARES USED IN COMPUTATION
Basic 24,674,808 24,704,886
============ ============
Diluted 25,146,063 24,704,886
============ ============
</TABLE>
6
See Notes to Condensed Financial Statements
<PAGE> 7
TEXAS EQUIPMENT CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30,
------------------------------------
1998 1997
-------------- -------------
<S> <C> <C>
REVENUES $ 49,475,311 $ 39,594,806
COST OF SALES 41,845,049 33,784,070
------------ ------------
GROSS PROFIT 7,630,262 5,810,736
SELLING,GENERAL AND
ADMINISTRATIVE EXPENSES 5,442,485 4,163,221
------------ ------------
INCOME FROM OPERATIONS 2,187,777 1,647,515
OTHER INCOME (EXPENSE)
Interest (272,823) (984)
Non-cash guarantee fee (135,494) --
Other income 25,046 85,621
------------ ------------
INCOME FROM CONTINUING
OPERATIONS BEFORE TAXES 1,804,506 1,732,152
INCOME TAX EXPENSE 597,600 605,628
------------ ------------
INCOME FROM CONTINUING OPERATIONS 1,206,906 1,126,524
DISCONTINUED OPERATIONS
Loss on discontinued operations (less applicable income
tax benefit of $ 304,605) -- (591,292)
-- --
NET INCOME $ 1,206,906 $ 535,232
============ ============
NET INCOME (LOSS) PER SHARE
Basic
- Continuing operations $ 0.049 $ 0.046
- Discontinued operations -- (0.024)
------------ ------------
Total $ 0.049 $ 0.022
============ ============
Diluted
- Continuing operations $ 0.049 $ 0.046
- Discontinued operations -- (0.024)
------------ ------------
Total $ 0.049 $ 0.022
============ ============
NUMBER OF SHARES USED IN COMPUTATION
Basic $ 24,645,178 $ 24,704,886
============ ============
Diluted $ 24,965,710 $ 24,704,886
============ ============
</TABLE>
7
See Notes to Condensed Financial Statements
<PAGE> 8
TEXAS EQUIPMENT CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30,
-----------------------------------
1998 1997
------------ -------------
<S> <C> <C>
CASH FLOWS FROM CONTINUING OPERATIONS
Net income $ 1,206,906 $ 1,126,524
Adjustment to reconcile net income to net cash
Amortization & depreciation 308,898 253,028
Stock issued in settlement of lawsuit 34,688 --
ESOP earned compensation 87,254 --
Guaranty fee - valuation of stock options issued 135,494 --
CHANGES IN ASSETS AND LIABILITIES:
(Increase) decrease in accounts receivable 927,175 (1,411,362)
(Increase) decrease in receivables from affiliates (206,003) 10,264
(Increase) decrease in prepaid expenses -- 12,500
(Increase) decrease in inventories (17,525,174) (16,051,763)
Increase (decrease) in floor plan payable 13,401,675 10,837,656
Increase (decrease) in accounts payable 151,886 2,166,230
Increase (decrease) in accrued liabilities (71,374) 815,776
(Increase) decrease in finance receivable (228,985) (69,871)
Increase (decrease) in income tax liability 365,412 (33,925)
Increase (decrease) in other liabilities 472,234 (49,376)
------------ ------------
CASH USED IN CONTINUING OPERATIONS (939,914) (2,394,319)
------------ ------------
CASH USED IN DISCONTINUED OPERATIONS -- (591,292)
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of land, buildings and equipment (1,368,693) (2,545,476)
Proceeds from sale of equipment -- 28,000
(Increase) decrease in other assets 493 (8,197)
(Increase) decrease in stockholders' receivables 767 196,237
------------ ------------
CASH USED IN INVESTING ACTIVITIES (1,367,433) (2,329,436)
------------ ------------
</TABLE>
8
See Notes to Condensed Financial Statements
<PAGE> 9
TEXAS EQUIPMENT CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30,
---------------------------------
1998 1997
------------ ------------
<S> <C> <C>
CASH FLOW FROM FINANCING ACTIVITIES
Proceeds from note borrowings $ 6,478,218 $ 5,368,419
Repayments of note borrowings (3,195,460) (1,988,502)
----------- -----------
CASH PROVIDED BY FINANCING ACTIVITIES 3,282,758 3,379,917
----------- -----------
NET INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS 975,411 (1,935,130)
CASH AND CASH EQUIVALENTS AT THE BEGINNING OF THE PERIOD
104,750 2,661,058
----------- -----------
CASH AND CASH EQUIVALENTS AT THE END OF
THE PERIOD $ 1,080,161 $ 725,928
=========== ===========
SUPPLEMENTAL DISCLOSURES OF
CASH FLOW INFORMATION
Cash paid during the period for:
Interest expense $ 408,388 $ 154,712
=========== ===========
Income taxes $ 200,000 $ 141,686
=========== ===========
Non-cash items
Conversion feature of convertible note $ 123,319 $ --
=========== ===========
</TABLE>
9
See Notes to Condensed Financial Statements
<PAGE> 10
1. BASIS OF PREPARATION:
The condensed consolidated financial statements of Texas Equipment
Corporation (the "Company" or "TEC") include wholly-owned subsidiaries Texas
Equipment Co., Inc., ("TECI") and New Mexico Implement Company, Inc. ("NMIC"),
collectively the Company.
The condensed balance sheets as of September 30, 1998 and December 31,
1997 and the condensed statements of operation for the three months and nine
months ended September 30, 1998 and 1997 and condensed statements of cash flows
for the nine months ended September 30, 1998 and 1997 are unaudited and reflect
all adjustments (consisting only of normal recurring adjustments) which are, in
the opinion of management, necessary for a fair presentation of the financial
position and operating results for the interim periods. The condensed
consolidated financial statements should be read in conjunction with the audited
consolidated financial statements and notes thereto contained in the Company's
Annual Report on Form 10-K/A for the fiscal year ended December 31, 1997. The
results of operations for the nine months ended September 30, 1998 are not
necessarily indicative of the results to be expected for the full year.
Certain reclassifications have been made in the condensed consolidated
balance sheet and statements of cash flows to 1997 to be in conformity with
1998.
2. DISCONTINUED OPERATIONS.
In the third quarter of 1997, the Company implemented a plan to
discontinue the operations of Marinex Multimedia Corporation ("Marinex"), a New
York corporation, engaged in the business of the creation of digital content
including a CD-ROM magazine and entertainment sites on the Worldwide Web.
Accordingly, all such financial data related to Marinex has been presented as
discontinued operations. At September 30, 1997 the net assets of the
discontinued company were $272,120, which were expensed.
3. INVENTORIES:
All inventories are valued at the lower of cost or market. Cost is
determined using the specific identification method for new and used equipment
and average cost for parts.
Inventories consisted of the following at:
<TABLE>
<CAPTION>
September 30, December 31,
1998 1997
----------- -----------
<S> <C> <C>
New equipment $20,815,552 $12,019,361
Used equipment 13,463,900 4,629,958
Parts and other 4,285,603 4,390,563
----------- -----------
Total $38,565,055 $21,039,882
=========== ===========
</TABLE>
10
<PAGE> 11
4. INCOME FROM CONTINUING OPERATIONS PER SHARE
The following is a reconciliation of the numerator and denominator
underlying the income from continuing operations per share calculations:
<TABLE>
<CAPTION>
Nine Months ended September 30, 1998
--------------------------------------------
Income Shares Per Share
(Numerator) (Denominator) Amount
----------- ------------- ------
<S> <C> <C> <C>
Income from continuing operations available to
common stockholders' $1,206,906 24,645,178 $ 0.049
========== ==========
Effect of dilutive securities:
Incremental shares of assumed exercise of
options and conversions of convertible note 320,532
---------
Diluted income from continuing operations
available to common shareholders' $1,206,906 24,965,710 $ 0.049
========== ========== ==========
<CAPTION>
Nine Months ended September 30, 1997
--------------------------------------------
Income Shares Per Share
(Numerator) (Denominator) Amount
----------- ------------- ------
<S> <C> <C> <C>
Income from continuing operations available to common
stockholders' $1,126,524 24,704,886 $ 0.046
========== ========== ==========
Diluted income from continuing operations
available to common shareholders' $ 535,232 24,704,886 $ 0.022
========== ========== ==========
</TABLE>
5. 1998 ACQUISITIONS
Tornillo, Texas John Deere Dealership
On June 15, 1998, the Company signed an agreement to purchase the
assets (building, land, equipment and inventory) of Romney Implement Company,
which operated a Deere dealership in Tornillo, Texas (in the El Paso
metropolitan area), for approximately $3,049,000. The Company assumed
approximately $1,856,000 of indebtedness payable to Deere & Company ("Deere"),
assumed other Romney indebtedness of approximately $497,000 and issued a three
year 10% Convertible Note to the principals of Romney Implement Company for
approximately $247,000. Principal and interest are convertible into the
Company's common stock over a three year period with conversion prices at the
lesser of $1 or market price (as defined) in the first year, the lesser of
market price or $1.50 the second year and the lesser of market price or $2 the
third year. If at any time during each of the three years market price equals or
exceed the conversion price, the entire note will convert into Common Stock.
11
<PAGE> 12
Amarillo, Texas John Deere Dealership
On October 9, 1998, the Company signed an agreement to purchase the
assets (building, land, equipment and inventory) of Texas Tractor Co., which
operated a Deere dealership in the Amarillo, Texas metropolitan area, for
approximately $5,200,000. The Company assumed approximately $5,000,000 of
indebtedness payable to Deere, paid cash of approximately $83,000 and issued
150,000 shares of the Company's common stock.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATION.
RESULTS OF OPERATIONS
THREE MONTHS ENDED SEPTEMBER 30, 1998 COMPARED TO THREE MONTHS ENDED SEPTEMBER
30, 1997
REVENUES
Revenues decreased approximately $276,000 or 1.5%, to $17,573,269 for
the third quarter of 1998 from $17,849,319 for the third quarter of 1997. This
decrease was the result of decreases of approximately $1,012,000 at the
Company's "Base-line Stores" (stores opened or acquired before 1997) and
approximately $2,782,000 at the Company's three John Deere dealerships in the
Northern Panhandle. The Artesia, New Mexico store, which was acquired in July
1997, contributed approximately $1,304,000 in revenue and the Tornillo, Texas
dealership, which was purchased in July 1998 provided approximately $2,214,000
in revenue, which offset the above decreases.
Sales of wholegoods decreased approximately $807,000, or 5%, to
$13,876,665 for the third quarter of 1998 from $14,683,796 for the third quarter
of 1997. The three Northern Panhandle stores had a decrease of approximately
$2,638,000, which was due to increased competition from other John Deere dealers
in the area and, unfavorable market conditions due to the severe drought in
1998. The Base-line Stores had a decrease of approximately $670,000, which was
due to the timing of products that were not sold until October. These
decreases were offset by strong wholegoods sales of approximately $1,076,000 at
the Company's Artesia, New Mexico store, which was purchased in July 1997, in
the third quarter of 1998 compared to the third quarter of 1997 and
approximately $1,425,000 in sales from the Tornillo store, which was acquired in
July 1998. These two stores, because of their location, experienced limited
effect on their wholegoods sales from the severe Texas drought.
Parts and service revenue increased approximately $531,000, or 17%, to
$3,696,604 for the third quarter of 1998 from $3,165,523 for the third quarter
of 1997. An increase in crop production provided an increase in parts and
service sales of approximately $228,000 at the Company's Artesia, New Mexico
store, which was acquired in July 1997, when comparing third quarter of 1998 to
the third quarter of 1997. The Tornillo, Texas store, which was acquired in July
1998, provided additional parts and service revenues of approximately $788,000.
These increases were offset by a $347,000 decrease at the Base-line Stores,
which was the result of a delay in the fall harvest into the fourth quarter and,
a decrease of approximately $138,000
12
<PAGE> 13
at the Northern Panhandle stores, which was due primarily to unfavorable market
conditions due to the severe drought in 1998 and competition from other
John Deere dealers in their market area.
GROSS PROFIT
Gross profit increased approximately $87,000, or 3%, to $2,769,574 for
the third quarter of 1998 from $2,682,210 for the third quarter of 1997. Gross
profit as a percentage of total revenues increased to 15.8% for the third
quarter of 1998 from 15% for the third quarter of 1997. The Company's highest
gross margin is derived from its parts and service revenues. For these periods,
the shift in revenue mix between wholegoods sales (82.3% of total revenues in
the third quarter of 1997 compared to 79% of total revenues in the third quarter
of 1998) and parts and service revenues (17.7% of total revenues in the third
quarter of 1997 compared to 21.1% of total revenues in the third quarter of
1998) was the primary contributor to this increase in margins.
SELLING, GENERAL, AND ADMINISTRATIVE EXPENSE
Selling, general, and administrative (SG&A) expense increased
approximately $424,000, to $1,946,273 for the third quarter of 1998 from
$1,522,288 for the third quarter of 1997. Approximately $224,000 of the increase
was due to the Tornillo, Texas store, which was acquired in July 1998. SG&A at
the other stores increased approximately $150,000, which was due primarily to
the increase in selling expenses. In addition, corporate administration salary,
benefits and public company expenses increased by approximately $200,000, which
was offset by a decrease of approximately $150,000 in one-time legal costs,
incurred in 1997, when comparing the two periods.
SG&A expense as a percentage of total revenues was 11% in the third
quarter of 1998 compared to 9% in the third quarter of 1997. This increase is
due primarily to increases in corporate administration expenses of approximately
$50,000 and an increase in operating expenses at the store level of
approximately $374,000.
INTEREST EXPENSE/INCOME
Interest expense increased approximately $160,000 to $192,342 for the
third quarter of 1998 from $32,252, for the third quarter of 1997. The increase
was due primarily to the increased levels of floor plan payables associated with
higher inventory levels and working capital loans, in addition to acquisition
debt associated with the store acquisitions in 1997 and 1998.
Interest income of $10,583 remained relatively flat for the third
quarter of 1998 compared to $15,125 for the third quarter of 1997. Interest
income was earned in connection with the financing of customer purchases. The
amount the Company will earn depends on the interest rates charged by
competitors, lending policies of Deere Credit and Agricredit and prevailing
market conditions. In the third quarter of 1998, interest rates continued to
remain competitive, which resulted in a small decrease in interest income
compared to the decrease in equipment sales.
13
<PAGE> 14
NON-CASH GUARANTEE FEE
In connection with the personal guarantee by the majority shareholders
of the Company, of approximately $30,141,000 in third quarter monthly average of
accounts payable on wholegoods financing and the credit facility with the
Company's bank, the Company issued five-year common stock options to acquire up
to 925,024 shares of the Company's Common Stock at an exercise price of $0.375.
This resulted in a non-cash charge of $49,951 for the three-month period.
NET INCOME
Income from continuing operations decreased approximately $215,000, or
35%, to $390,254 for the third quarter of 1998 from $605,528 for the third
quarter of 1997. This decrease was primarily the result of the increase in gross
profit of approximately $87,000, which was offset by the increase in operating
and administrative expenses of $423,000, the increase in interest expense and
other costs of $235,000 and the decrease in the provision for income taxes of
approximately $356,000.
Earnings per share decreased to $0.016 (both basic and diluted) from
$0.025 (both basic and diluted) from the third quarter of 1997 to the third
quarter of 1998, primarily as the result of the decrease in net income, for the
reasons described above.
NINE MONTHS ENDED SEPTEMBER 30, 1998 COMPARED TO NINE MONTHS ENDED SEPTEMBER 30,
1997
REVENUES
Revenues increased approximately $9,880,000, or 25%, to $49,475,311 for
the nine months ended September 30, 1998 from $39,594,806 for the nine months
ended September 30, 1997. Of this increase in revenues Base-line Stores (stores
opened or acquired before 1997) increased approximately $2,985,000, the Artesia,
New Mexico dealership, acquired in July 1997, accounted for approximately
$6,974,000 of the increase and the Tornillo, Texas store acquired in July 1998,
accounted for approximately $2,370,000 of the increase. These increases were
offset by a decrease of approximately $2,449,000 at the Company's three John
Deere dealerships in the Northern Panhandle of Texas acquired in January 1997.
Sales of wholegoods increased approximately $6,874,000, or 21%, to
$39,338,785 for the nine months ended September 30, 1998 from $32,464,641 for
the nine months ended September 30, 1997. Approximately $5,516,000 of this
increase was due primarily to strong sales at the Company's Artesia, New Mexico
store, which was acquired in July 1997, approximately $2,944,000 was due to
strong tractor sales in the first quarter of 1998 at the Company's Seminole,
Texas store and the Tornillo, Texas store, purchased in July 1998, accounted for
approximately $1,425,000 of the increase. These increases in wholegoods sales
were offset by a decrease of approximately $3,011,000 in the Company's Northern
Panhandle stores, which was due to increased competition from other John Deere
dealers in their market area and unfavorable market conditions due to the severe
drought in 1998.
Parts and service revenue increased approximately $3,006,000, or 42%,
to $10,136,526 for the nine months ended September 30, 1998 from $7,130,165 for
the nine months ended September 30, 1997. The Artesia, New Mexico store, which
was acquired in July 1997, and the Tornillo, Texas store, which was acquired in
July 1998, accounted for approximately $1,458,000 and $945,000, respectively, of
this increase. The Northern Panhandle stores, which were acquired in January
1997, accounted for $562,000 and Base-line stores accounted for approximately
$41,000 of this increase. These increases were primarily due to strong crop
production in Southern Panhandle stores and the decline in wholegoods sales in
the Northern Panhandle.
14
<PAGE> 15
GROSS PROFIT
Gross profit increased approximately $1,819,000, or 31%, to $7,630,262
for the nine months ended September 30, 1998 from $5,810,736 for the nine months
ended September 30, 1997. Gross profit as a percentage of total revenues
increased to 15.4% for the nine months ended September 30, 1998 from 14.7% for
the nine months ended September 30, 1997. The Company's highest gross margin is
derived from its parts and service revenues. For these periods, the shift in
revenue mix between wholegoods sales (82% of total revenues for the nine months
ended September 30, 1997 compared to 79.5% of total revenues for the nine months
ended September 30, 1998) and parts and service revenues (18% of total revenues
for the nine months ended September 30, 1997 compared to 20% of total revenues
for the nine months ended September 30, 1998) was the primary contributor to
this increase in margins.
SELLING, GENERAL, AND ADMINISTRATIVE EXPENSE
Selling, general, and administrative (SG&A) expense increased
approximately $1,279,000, to $5,442,485 for the nine months ended September 30,
1998 from $4,163,221 for the third quarter of 1997. The Artesia, New Mexico
store, which was acquired in July 1997 and the Tornillo, Texas store, which was
acquired in July 1998, accounted for increases of approximately $370,000 and
$264,000, respectively. The Base-line and Northern Panhandle stores accounted
for approximately $469,000 of the increase which was due to the increases in
selling expenses of approximately $300,000, warranty costs of $96,000 and
repairs and maintenance of $73,000 at these dealerships. Corporate
administration expenses increased $176,000 primarily because of increases in
administrative salaries and public company expenses. SG&A expense as a
percentage of total revenues increased to 11% for the nine months ended
September 30, 1998 from 10.5% for the nine months ended September 30, 1997. This
increase was due to higher operating expenses described above.
INTEREST EXPENSE/INCOME
Interest expense increased approximately $266,000 to $408,388 for the
nine months ended September 30, 1998 from $142,221, for the nine months ended
September 30, 1997. The increase was due primarily to the increased levels of
floor plan payables associated with higher inventory levels, working capital
loans and the acquisition debt associated with the stores acquired in 1997 and
1998.
Interest income of $135,565 for the nine months ended September 30,
1998 remained relatively flat when compared to $141,237 for the nine months
ended September 30, 1997. Interest income was earned in connection with the
financing of customer purchases. The amount the Company will earn depends on the
interest rates charged by competitors, lending policies of Deere Credit and
Agricredit and prevailing market conditions. Interest rates for the nine months
ended September 30, 1998 continued to remain competitive, which resulted in a
relatively smaller increase in interest income compared to the increase in
equipment sales.
NON-CASH GUARANTEE FEE
In connection with the personal guarantee by the majority shareholders
of the Company, of approximately $22,732,000 as the nine month average of
accounts payable on wholegoods financing and the credit facility with the
Company's bank, the Company issued five-year common stock options to acquire up
to 2,045,858 shares of the Company's Common Stock at an exercise price of
$0.375. This resulted in a non-cash charge of $135,494 for the nine-month
period.
15
<PAGE> 16
INCOME FROM CONTINUING OPERATIONS
Income from continuing operations increased approximately $80,000, or
7%, to $1,206,906 for the nine months ended September 30, 1998 from $1,126,524
for the nine months ended September 30, 1997. This increase was primarily the
result of the increase in gross profit of approximately $1,820,000, which was
offset by the increase in operating expenses and other costs of approximately
$1,748,000, and the decrease in the provision for income taxes of approximately
$8,000.
Earnings per share from continuing operations increased to $0.049,
(both basic and diluted) from $0.046 (both basic and diluted) for the nine
months ended September 30, 1997, primarily as the result of the increase in net
income, for the reasons described above.
NET INCOME
The Company recognized a loss on the discontinuation of its Marinex
business operations of $591,292 for the nine months ended September 30, 1997,
net of income tax benefit of $304,605. Accordingly, net income for the nine
months ended September 30, 1997 was $535,232 (resulting in earnings per share of
$0.022 on both a basic and diluted basis) compared to net income of $1,206,906
for the nine months ended September 30, 1998 (resulting in earnings per share of
$0.049 on both a basic and diluted basis).
LIQUIDITY AND CAPITAL RESOURCES
The Company requires cash primarily for financing its inventories of
wholegoods and replacement parts, acquisitions of additional dealerships and
capital expenditures. Historically, the Company has met these liquidity
requirements primarily through cash flow generated from operations, floor plan
financing, and borrowings under credit agreements with Deere, Deere Credit
Services, Inc. ("Deere Credit"), Agricredit Acceptance Company ("Agricredit"),
and commercial banks. Floor plan financing from Deere and Deere Credit
represents the primary source of financing for wholegoods inventories,
particularly for equipment supplied by Deere. All lenders receive a security
interest in the inventory financed. Deere and Deere Credit offer floor plan
financing to Deere dealers for extended periods and with varying interest-free
periods, depending on the type of equipment and to encourage the purchase of
wholegoods by dealers in advance of seasonal retail demand. Down payments are
not required and interest may not be charged for a portion of the period for
which inventories are financed. Variable market rates of interest, based on the
prime rate, are charged on balances outstanding following any interest-free
periods, which range from nine to twelve months. Deere also provides financing
to dealers on used equipment accepted in trade and approved equipment from other
manufacturers. Agricredit provides financing for new and used equipment using
variable market rates of interest based on the prime rate.
The Company annually reviews the terms of its financing arrangements with
its lenders, including the interest rate. For the nine months ended September
30, 1998 the interest rate charged by Deere and Agricredit was prime plus 50
basis points and prime plus 150 basis points, respectively. As of September 30,
1998, the Company had floor plan payables outstanding of approximately
$28,637,000, of which approximately $4,350,000 was then interest bearing.
Cash and cash equivalents increased to $1,080,161 at September 30, 1998
from $725,928 at September 30, 1997. During the nine months ended September 30,
1998, continuing operations used net cash of $939,914 primarily because of the
increase in used equipment inventory. The increase in equipment inventory of
$17,630,000, which was needed to supply the increase in sales during the October
and November harvest season, was funded with floor plan financing and proceeds
from note borrowings. Investing activities used cash of $1,368,693 primarily for
capital expenditures in the acquisition of the Tornillo, Texas Deere dealership.
The Company's capital expenditures are expected to increase as it implements its
business plan to acquire
16
<PAGE> 17
additional Deere dealerships in 1998, subject to the availability of debt or
equity financing, of which there can be no assurance. Failure to obtain debt or
equity financing would significantly curtail the Company's business expansion
and development plans.
SEASONALITY
Typically, farmers purchase agricultural equipment immediately prior to
planting or harvesting crops, which occurs primarily during the Company's third
and fourth quarters. As a result, sales of agricultural equipment, parts and
service generally are lower in the first and second quarters. However, the
Company in 1998 did not experience significant seasonal fluctuations because of
the geographic location of its dealership and the difference in timing of
planting and harvest seasons in these areas. 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.
YEAR 2000 ISSUE
The Company is working with Deere to resolve the potential impact of
the year 2000 on the ability of the dealer's computerized information system to
accurately process information that may be date-sensitive. The Company's
management information system software was acquired from and is supported by
Deere. In formal discussions with Deere the Company has determined that the
modifications designed to address this issue have been completed on several of
the 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 believes that the
impact will not be material, since several modifications and revisions to its
dealer software, that are most affected by this issue, 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;
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.
17
<PAGE> 18
PART II - OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
On August 7, 1998, at the annual meeting of stockholders of the Company
the following matters were brought before the stockholders for vote:
<TABLE>
<CAPTION>
For Against Abstain
--- ------- -------
<S> <C> <C> <C>
o Election of Directors: Paul J. Condit 20,065,110 - 151,780
John T. Condit 20,065,110 - 151,780
EA Milo Mattorano 20,065,110 - 151,780
O.C. Elliott 20,065,110 - 151,780
Robert T. Maynard 20,065,110 - 151,780
James D. Arnold 20,065,110 - 151,780
Mickey L. Ray 20,065,110 - 151,780
o A 1-for-7 reverse stock split of the Company's Common
Stock, $.001 par value, though the total number of
authorized shares will remain at 50,000,000 20,006,146 169,444 41,300
o The Company's 1998 Stock Option Plan 17,347,706 2,837,384 31,800
</TABLE>
No other matters were submitted to a vote of the stockholders present.
Because of unfavorable financial market conditions the Company has
delayed effectuating the reverse stock split until early 1999.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits
10(k) Contract with John Deere Company, dated August 19, 1998
27 Financial Data Schedule
(b) Reports on form 8-K
Form 8-K, Change in auditors, filed September 1, 1998
18
<PAGE> 19
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
Date: November 12, 1998
TEXAS EQUIPMENT CORPORATION
By: /s/ Paul J. Condit
--------------------------------
Paul J. Condit
President and Chief Executive Officer
19
<PAGE> 20
EXHIBITS INDEX
EXHIBIT
NUMBER DESCRIPTION
------ -----------
10(k) Contract with John Deere Company, dated August 19, 1998
27 Financial Data Schedule
<PAGE> 1
EXHIBIT 10(k)
AGREEMENT
This Agreement is made effective this 19 day of August, 1998 by and between
Texas Equipment Co., Inc., hereinafter referred to as "TEC, Inc.", a corporation
duly organized and existing under the laws of the State of Texas and a wholly
owned subsidiary of Texas Equipment Corporation ("TE Corp."), a Nevada
corporation and a reporting company under the Securities Exchange Act; Paul
Condit and his sons (or certain family trusts established by such persons), who
are collectively the principal shareholders of TE Corp. (collectively "Condit")
and John Deere Company - A Division of Deere & Company ("Deere"), a corporation
duly organized and existing under the laws of the State of Delaware.
Whereas TEC, Inc., has acquired the dealership assets of Romney Implement Co.,
and desires to obtain an appointment as a Deere dealer for the area of
responsibility formerly assigned to Romney Implement Co.; and
Whereas the size and geographic diversity of TEC, Inc.'s Deere dealership
operations as presently constituted and its parent corporation's current status
as a publicly traded corporation make them unlike Deere's other North American
dealers; and
Whereas addition of the Romney Implement Co., area of responsibility to TEC,
Inc.'s dealership operations would make TEC, Inc.'s Deere dealership operations
even more unlike any of Deere's other North American dealers; and
Whereas the uniqueness of TEC, Inc.'s circumstances and the additional risks
involved for
<PAGE> 2
Deere warrant the application, to TEC, Inc., of performance requirements beyond
those imposed on other Deere dealers, as well as certain modifications to the
dealer agreements now in effect between TEC, Inc., and Deere; and
Whereas Deere is willing to appoint TEC, Inc., a dealer for the Romney Implement
Co., area of responsibility, and to approve certain future public offerings of
TE Corp., stock for the benefit of TEC, Inc., and its shareholders, both upon
agreement of the parties to the terms hereof; and
Whereas TEC, Inc. and Condit are willing to agree to and be bound by the terms
hereof in order to obtain an appointment as a dealer for the Romney Implement
Co. area of responsibility;
Now Therefore, in consideration of the premises and mutual covenants and
agreements contained herein, the parties hereto agree as follows:
1. Restrictions on Equity:
a. TEC, Inc., on a consolidated basis with TE Corp., will have an
equity to assets ratio of (computed in the manner provided in
this Section 1.a and wherever referenced herein) of 30% or
greater:
(1) no later than December 31, 2000 if a public offering of TE
Corp. stock involving gross proceeds of at least $20 million
does not occur on or before that date;
(2) within 120 days following any public offering of TE Corp.
stock involving gross proceeds of at least $20 million: and
2
<PAGE> 3
(3) immediately following any further expansion of TE Corp.'s
agricultural area of responsibility.
The balance sheet effect of any distribution to shareholders occurring
or to occur in connection with a public offering of TE Corp., stock
shall be included in the calculation of TEC, Inc.'s equity to assets
ratio for the purposes of section l. a (2) above.
b. TEC, Inc., will not pay any dividends, effect any stock repurchase, or
make any other distributions to shareholders if:
(1) TEC, Inc.'s equity to assets ratio is below 30%; or
(2) TEC, Inc.'s equity to assets ratio would fall below 30% as a result
of such dividend, repurchase, or distribution.
c. Unless specifically approved in advance in writing by Deere, TEC, Inc.,
will not make any acquisitions or initiate new business activities if:
(1) TEC, Inc.'s equity to assets ratio is below 30%; or
3
<PAGE> 4
(2) TEC, Inc.'s equity to assets ratio would fall below 30% as a result of
such actions.
d. Any business operation that TEC, Inc., desires to capitalize at less
than a 30% equity to assets ratio will be contained in a corporation
separate from TEC, Inc. TEC, Inc., will remain the Deere dealership
corporation.
e. Provided, however, that the term "affiliated company" for the purposes
hereof shall not include, and TEC, Inc. shall not be restricted in its
dealings with, TE Corp. and subsidiaries of TEC Inc. or of TEC Corp.
whose business is limited to the operation of Deere dealerships and the
sale of goods and performance of services related thereto. TEC, Inc.,
will not guarantee or otherwise be liable for any debt or other
obligation of any affiliated company, provided, however, that this
sentence shall not apply to financing arrangements arising from the
procurement, from TEC, Inc.'s dealerships by a company affiliated with
TEC, Inc., of goods and services offered to the public by TEC, Inc., in
the ordinary course of TEC, Inc.'s business. All inter-company
transactions between TEC, Inc., and affiliated companies will be
conducted on an arms-length basis, on reasonable commercial terms. TEC,
Inc., will maintain its assets, bank accounts, and credit facilities
separately from the assets, bank accounts, and credit facilities of
affiliated companies, and TEC, Inc.'s assets and funds (and records
relating thereto) will not be commingled with those of any affiliated
company.
4
<PAGE> 5
2. Restrictions on Share Ownership:
a. Under Section 2(b) of the Dealer Agreement, it shall be a
basis for cancellation of the Agreement if: (i) Condit
Principal(s) identified in Addendum A in the aggregate
beneficially own less than 35% of the capital stock entitled
to vote on the election of directors of TE Corp., or (ii) if
any "person" (as that term is defined under the Securities
Exchange Act of 1934 as amended) other than Condit
Principal(s) or any person who has not been approved in
writing by Deere, either (x)owns a greater percentage of the
capital stock entitled to vote on the election of directors of
TE Corp. than Condit Principal(s) in the aggregate, or (y) any
person other than one of the Condit Principals or any person
who has not been approved in writing by Deere holds the office
of Chairman of the Board, President or Chief Executive Officer
of TEC, Inc. or TE Corp.
b. TEC, Inc., will advise Deere whenever TEC, Inc., becomes aware
that a shareholder owns or controls 5% or more of the
outstanding shares of any class of stock of TEC, Inc. or TE
Corp.
c. The Condit Principals will not privately sell any TEC, Inc.
or TE Corp. shares to a person or entity not approved by
Deere. However, Condit Principals may:
1) sell any of their shares in TEC, Inc. or TE Corp., in
broker's transactions, to market makers as
contemplated by SEC Rule 144, or in
5
<PAGE> 6
an underwritten public offering or to other Condit
Principals or to family trusts or entities solely
controlled by them; or
d. Neither TEC, Inc. nor TE Corp., will privately sell any TEC,
Inc. or TE Corp., shares to a person or entity not approved by
Deere. However, TEC, Inc. or TE Corp., may (i) sell any of
their shares in an underwritten public offering, or (ii) in
connection with stock options, restricted stock awards, or
similar equity compensation grants for employees or
consultants of TEC, Inc. or TE Corp., or (iii) in connection
with any acquisition of a dealership otherwise approved by
Deere as long as Condit Principals continues to satisfy the
requirements set forth in section 2.a above following the,
sale.
e. Deere will have the right to terminate TEC, Inc.'s dealer
appointments, effective immediately, in the event Condit
Principals cease to comply with either requirement set forth
in section 2.a above, provided, however, that section 4 below
will govern Deere's right of termination on the death of
Condit Principals. Termination under this section 2.e may be
executed, at Deere's sole discretion, on an overall basis or
by individual area of responsibility.
3. Deere Performance Criteria:
a. Deere will have the right to terminate TEC, Inc.'s
agricultural dealer appointments if TEC, Inc.'s equity to
assets ratio, based on TEC, Inc.'s fiscal year-end audit, is
less than 25%. Such termination will require one year advance
6
<PAGE> 7
written notice, and at Deere's sole discretion may be
executed on an overall basis or by individual area of
responsibility. Should Deere give notice of termination under
this section 3.a, TEC, Inc., will have the right to cure its
equity to assets ratio deficiency through the injection of
fresh capital, in the amount deemed necessary by Deere to
raise the year-end percentage to 25%, within 180 days
following TEC, Inc.'s fiscal year end; however, Deere's
approval will be required if TEC, Inc., wishes to cure its
equity to assets ratio deficiency by any other means,
including without limitation reducing its asset levels or
through earnings retained during the cure period.
b. Annually, by a deadline specified, by Deere, TEC, Inc., will
submit and secure Deere's approval of a comprehensive business
plan (for each individual area of responsibility) containing:
(1) specific objectives for market share (whole goods and
parts), Customer Satisfaction Index (CSI), and equity
(as well as any other metric criteria which Deere may
prescribe for dealers generally) for the plan year
which, in each instance, represent at a minimum
meaningful progress toward the metric level specified
by Deere for each criterion;
(2) specific action plans designed to achieve the metric
criteria objectives specified in the plan and, within
a reasonable period of time, the metric levels
specified by Deere; and
7
<PAGE> 8
(3) such other elements or metrics as are set forth in
Deere's then-effective Signature Program, or which
Deere may elect to require in dealer business plans
generally.
c. Failure by TEC, Inc., to submit acceptable business plans or
failure to make meaningful progress toward the objectives in
the plans, as determined by Deere in its sole discretion, will
constitute grounds for termination of TEC, Inc.'s agricultural
dealer appointments for the area of responsibility involved.
Termination pursuant to this provision will require one year
advance written notice and TEC, Inc. may cure such deficiency
within 60 days following such notice by submitting an
acceptable business plan or establishing such meaningful
progress, as determined by Deere in its sole discretion,
otherwise Deere will have no obligation to rescind a notice of
termination given under this section 3.c even if TEC, Inc.,
cures the failure(s) in the area of responsibility involved
during the year after the notice is given and the available
cure period has expired.
d. The termination rights provided for Deere in sections 3.a and
3.c above and elsewhere in this Agreement are in addition to,
and shall in no way affect or limit, the termination rights of
Deere under TEC, Inc.'s agricultural dealer agreements or any
other agreement between TEC, Inc., and Deere. Nothing in
sections 3.a and 3.c above shall preclude immediate
termination, or termination on less than one year advance
notice, of TEC, Inc.'s agricultural dealer appointments in any
situation in which another provision in this Agreement or any
other agreement affords Deere a right to terminate immediately
or on less than one year advance notice.
8
<PAGE> 9
Termination on Death of Condit:
a. Deere will not exercise its right, under section 2(b) of the dealer
agreements in effect between TEC, Inc., and Deere, to terminate TEC,
Inc.'s dealer appointments, effective immediately, upon the death of
Paul Condit if the following conditions are satisfied at the time of
Paul Condit's death:
(1) TEC, Inc., has in place an ownership succession plan that has
been approved in writing by Deere.
(2) TEC, Inc., and Deere have entered into a written agreement
which:
(a) identifies events which, from Paul Condit's death
forward, will constitute changes in the control of
TEC, Inc. (but from an equity ownership basis, the
provision of section 2.a hereof shall apply); and
(b) provides Deere an additional right to terminate TEC,
Inc.'s dealer appointments, effective immediately, if
such an event occurs without the prior written
approval of Deere.
(3) Neither TEC, Inc., nor Condit has breached any obligation under TEC,
Inc.'s dealer agreements, this Agreement, or any other agreement with
Deere, and no grounds for termination of an TEC, Inc., dealer
appointment exist under any agreement between TEC, Inc., and Deere.
9
<PAGE> 10
(4) TEC, Inc., and each of its locations are under the management of
personnel who have demonstrated performance capabilities, are
acceptable to Deere in its sole discretion, and who will continue to
manage TEC, Inc., and its locations after the death of Paul Condit.
(5) Each area of responsibility assigned to TEC, Inc., under its dealer
agreements justifies, in Deere's sole discretion, the continuation of a
Deere dealership assigned only that area. Should Deere determine that a
particular area of responsibility does not justify the continuation of
a dealership, TEC, Inc., shall retain, for a period of three years
following the death of Paul Condit, a right of first refusal to locate
a dealership in the affected area of responsibility if in that period
Deere rescinds its decision, provided, however, that such right of
first refusal shall terminate if TEC, Inc., breaches an agreement with
Deere, or if grounds arise for termination of any of TEC, Inc.'s
dealer-appointments.
(6) Condit Principals are in compliance with the requirements set forth in
section 2.a above.
b. Deere may at its sole discretion evaluate compliance with the
conditions set forth In this section 4 and take action, if
any, on an overall basis or by individual area of
responsibility.
10
<PAGE> 11
5. Arbitration:
a. Any controversy or claim, whether based on contract, tort,
statute, common law, or other legal theory, between TE Corp.,
TEC, Inc., or Condit Principal(s) and Deere, or Deere Credit,
Inc. shall be resolved by binding arbitration pursuant to this
section 5 and the then-current Commercial Rules and
supervision of the American Arbitration Association. The duty
to arbitrate shall extend to any officer, employee,
shareholder, principal, agent, trustee in bankruptcy or
otherwise, affiliate, subsidiary, third-party beneficiary, or
guarantor of a party hereto making or defending any claim
which would otherwise be arbitrable hereunder.
b. The arbitration shall be held in Dallas before a panel of
three arbitrators who are knowledgeable regarding, and have
experience as arbitrators of, commercial disputes. The
decision and award of a majority of the panel shall be final
and binding, and judgment thereon may be entered in any court
having jurisdiction thereof. The panel shall not have the
power to award punitive or exemplary damages, or any damages
excluded by, or in excess of any damage limitations expressed
in, any agreement between the parties to the dispute.
c. Each party to the dispute shall bear its own attorney's fees
associated with the arbitration, and other costs and expenses
of the arbitration shall be borne as provided by the rules of
the American Arbitration Association.
11
<PAGE> 12
d. If court proceedings to stay litigation or compel arbitration
are necessary, the party who unsuccessfully opposes such
proceedings shall pay all associated costs, expenses, and
attorney's fees, which are reasonably incurred by the other
party.
e. Neither a party to the dispute, a witness, or the panel may
disclose the contents or results of any arbitration hereunder
without the prior written consent of all parties to the
dispute, unless and then only to the extent required to
enforce or challenge the award, as required by law (including
without limitation applicable securities laws and regulations)
or as a result of legal process, or as necessary for financial
and tax reports and audits.
f. Deere may seek judicial remedies, such as (but not limited to)
attachment, replevin, and garnishment, deemed necessary by
Deere in its sole discretion for the enforcement of Deere's
rights regarding any security for the indebtedness of TEC,
Inc., and such action by Deere shall not constitute a waiver
of Deere's rights or a breach of Deere's obligations under
this section 5. For the purposes of this section 5.f only,
"Deere" shall include Deere Credit, Inc. in addition to Deere.
g. If any part of this section 5 is held to be unenforceable, its
unenforceability shall not affect the duty to arbitrate
hereunder or any other part of this section 5.
6. General Provisions:
12
<PAGE> 13
a. As used in this Agreement, the term "area of responsibility"
means an individual dealership location.
b. Deere shall have input into the selection and removal of all
TEC, Inc., management personnel down to and including the
managers of TEC, Inc.'s individual locations.
c. TEC, Inc., shall obtain written approval from Deere prior to
discussing (directly or indirectly) with any dealer a possible
purchase of a dealership that would add to TEC, Inc.'s area of
responsibility. Deere shall have the right to reject such a
request or to disapprove additions to TEC, Inc.'s area of
responsibility in its sole discretion.
d. Any grounds for termination of TEC, Inc.'s dealer appointments
under this Agreement, TEC, Inc.'s dealer agreements (as
modified by this Agreement), or any other agreement between
TEC, Inc., and Deere will be sufficient grounds for
termination for the purposes of any applicable law requiring
grounds (or certain grounds) for termination, regardless of
the terminology used in such law to describe the grounds
required thereunder.
e. If any of TEC, Inc.'s dealer appointments are terminated, all
of TEC, Inc.'s indebtedness to Deere in connection with the
terminated appointments which is not due and payable prior to
the effective date of termination shall be due and payable as
of the effective date of termination.
13
<PAGE> 14
f. TEC, Inc., Condit, and Deere will maintain the confidentiality
of one another's confidential information, unless and then
only to the extent disclosure is required by law (including
without limitation applicable securities laws and regulations)
or as a result of legal process. Nothing in this section 6.f
or in section 5.e above shall prohibit the exchange of
information between TEC, Inc. and Condit, or the exchange of
information within the Deere & Company organization.
g. Nothing contained in this Agreement shall be construed as a
waiver or modification of any terms, conditions, or rights
contained in any existing agreement between Deere and TEC,
Inc., or Condit except to the extent such terms, conditions,
or rights are in conflict with this Agreement, in which event
this Agreement shall supersede the existing agreements, but
only to the extent of the conflict.
h. Currently TEC, Inc.'s obligations to Deere are all guaranteed
by a personal guaranty from Paul Condit. Deere would accept a
letter of credit in lieu of the personal guaranty from Paul
Condit if the parties hereto can agree upon an acceptable
form, amount, and issuer of the letter of credit.
i. Each party to this Agreement represents and warrants that it
has taken all action required to authorize it to enter into
this Agreement, and each party further represents that it has
neither relied upon nor been induced by any representation,
statement, or disclosure
14
<PAGE> 15
of the other party, but has relied upon its own knowledge and
judgment in entering into the Agreement.
j. Because of TEC, Inc.'s unique position within Deere's dealer
organizations, each provision hereof shall be given full
effect in accordance with its terms regardless of how or
whether Deere addresses the provision's subject matter with
other Deere dealers.
k. This Agreement cannot be modified, nor any party's rights
hereunder waived, except in writing, and no waiver of any
provision hereof shall preclude enforcement of any other
provision hereof, or subsequent enforcement of the provision
waived. This Agreement cannot be assigned without the prior
written consent of the parties, which consent may be withheld
with or without cause.
1. Re-incorporation of TEC, Inc., in Delaware or another jurisdiction
shall not affect its rights and obligations under this Agreement.
15
<PAGE> 16
JOHN DEERE COMPANY - A DIVISION OF DEERE & COMPANY
BY: /S/ TOM HOLMES
----------------------------------------
TOM HOLMES
Title: Division Finance Manager
TEXAS EQUIPMENT CO., INC.
BY: /S/ PAUL J. CONDIT
----------------------------------------
Title: PRESIDENT & CEO
/S/ Paul J. Condit
- --------------------------------------------
PAUL CONDIT, INDIVIDUALLY
16
<PAGE> 17
ADDENDUM A
The Condit Principals for purposes of this Agreement shall consist of the
following persons:
Paul J. Condit (Sr.)
John T. Condit
Paul J. Condit 11
Jeffrey E. Condit
Condit 1997 Family Trust
17
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
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