<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
<TABLE>
<S> <C>
(Mark One)
|X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1999 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
---------
</TABLE>
<TABLE>
<S> <C>
Texas Equipment Corporation
- -------------------------------------------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Nevada 62-1459870
- -------------------------------------------------------------------------------------------------------------------
(State or other jurisdiction of incorporation or organization) (I.R.S. Employer Identification No.)
1305 Hobbs Hwy, Seminole, Texas 79360
- -------------------------------------------------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number: (915) 758-3643
Securities registered under Section 12(b) of the Exchange Act:
Title of each class Name of each exchange on which registered
------------------- -----------------------------------------
None None
Securities registered under Section 12(g) of the Exchange Act:
Title of each class
-------------------
Common Stock, $.001 par value
</TABLE>
Indicate by check mark whether registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Exchange Act during the past
12 months (or for such shorter period that the registrant was required to file
such reports), and (2) has been subject to such filing requirements for the past
90 days.
Yes X No
--- ---
The number of shares outstanding of the registrant's Common Stock, as of
August 10, 1999, was 25,251,986.
<PAGE> 2
INDEX
<TABLE>
<CAPTION>
Page
<S> <C> <C>
PART I - FINANCIAL INFORMATION
Item 1. Condensed Financial Statements:
Consolidated Balance Sheets at June 30, 1999 and December 31, 1998 ................................. 4
Consolidated Statement of Operations for the Three Months Ended June 30, 1999 and 1998 .............. 6
Consolidated Statement of Operations for the Six Months Ended June 30, 1999 and 1998 ................ 7
Consolidated Statement of Cash Flows for the Six Months Ended June 30, 1999 and 1998................. 8
Item 2. Management's Discussion and Analysis of Financial Conditions and Results of Operations.......... 14
Item 3. Quantitative and Qualitative Disclosures about Market Risk...................................... 22
Item 4. Submission of Matters to a Vote of Security Holders............................................. 22
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K................................................................ 23
Signatures.............................................................................................. 24
</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>
JUNE 30, DECEMBER 31,
1999 1998
----------- ------------
<S> <C> <C>
CURRENT ASSETS
Cash and cash equivalents $ 267,324 $ 494,132
Accounts receivable (less allowance for
Doubtful accounts of $109,564) 615,370 486,845
Other receivables 1,290,266 594,177
Inventories 33,594,598 39,241,714
Prepaid expense 5,804 --
----------- -----------
TOTAL CURRENT ASSETS 35,773,362 40,816,868
PROPERTY AND EQUIPMENT, NET 5,597,799 5,725,916
FINANCE RECEIVABLES 968,530 987,120
RECEIVABLES FROM OFFICER 142,452 142,290
GOODWILL, net of accumulated
Amortization of $85,814 in 1999
and $79,456 in 1998 104,884 111,242
OTHER ASSETS 61,931 62,181
----------- -----------
$42,648,958 $47,845,617
=========== ===========
</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>
JUNE 30, DECEMBER 31,
1999 1998
----------- ------------
<S> <C> <C>
CURRENT LIABILITIES
Floor plan payables $23,965,884 $30,896,748
Notes payable 2,579,812 1,458,389
Accounts payable 778,547 877,391
Accrued liabilities 209,336 380,778
Income tax liability 756,506 648,544
Current maturities of
long-term debt 500,025 621,451
----------- -----------
TOTAL CURRENT LIABILITIES 28,790,110 34,883,301
LONG-TERM DEBT, net of
current maturities 5,168,513 4,665,409
DEFERRED TAX LIABILITY 233,074 233,074
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY
Common stock, $.001 par value authorized
50,000,000; issued and outstanding
25,251,986 in 1999 and 24,824,808 in 1998 25,250 24,823
Paid in capital 3,324,671 3,188,276
Retained earnings 5,107,340 4,850,734
----------- -----------
TOTAL STOCKHOLDERS' EQUITY 8,457,261 8,063,833
----------- -----------
$42,648,958 $47,845,617
=========== ===========
</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 JUNE 30,
-----------------------------------
1999 1998
------------ ------------
<S> <C> <C>
REVENUES $ 15,226,620 $ 16,022,216
COST OF SALES 12,927,390 13,569,867
------------ ------------
GROSS PROFIT 2,299,230 2,452,349
SELLING,GENERAL AND
ADMINISTRATIVE EXPENSES 1,962,656 1,842,973
------------ ------------
INCOME FROM OPERATIONS 336,574 609,376
OTHER INCOME (EXPENSE)
Interest (118,003) (67,856)
Non-cash guarantee fee (15,826) (47,042)
Other income 3,989 3,655
------------ ------------
INCOME BEFORE TAXES 206,734 498,133
INCOME TAX EXPENSE 69,739 142,063
------------ ------------
NET INCOME $ 136,995 $ 356,070
NET INCOME PER SHARE
Basic $ 0.006 $ 0.014
Diluted $ 0.006 $ 0.014
NUMBER OF SHARES USED IN COMPUTATION
Basic 24,853,287 24,674,808
Diluted 25,099,925 24,715,914
</TABLE>
6
See Notes to Condensed Financial Statements
<PAGE> 7
TEXAS EQUIPMENT CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30,
-----------------------------------
1999 1998
------------ ------------
<S> <C> <C>
REVENUES $ 32,338,943 $ 31,902,042
COST OF SALES 27,698,948 27,041,354
------------ ------------
GROSS PROFIT 4,639,995 4,860,688
SELLING,GENERAL AND
ADMINISTRATIVE EXPENSES 4,011,235 3,496,212
------------ ------------
INCOME FROM OPERATIONS 628,760 1,364,476
OTHER INCOME (EXPENSE)
Interest (214,974) (91,064)
Non-cash guarantee fee (32,582) (85,543)
Other income 10,245 27,294
------------ ------------
INCOME FROM OPERATIONS BEFORE TAXES 391,449 1,215,163
INCOME TAX EXPENSE 134,843 398,511
------------ ------------
NET INCOME $ 256,606 $ 816,652
NET INCOME PER SHARE
Basic $ 0.01 $ 0.03
Diluted $ 0.01 $ 0.03
NUMBER OF SHARES USED IN COMPUTATION
Basic 24,839,047 24,630,364
Diluted 25,085,685 24,656,877
</TABLE>
7
See Notes to Condensed Financial Statements
<PAGE> 8
TEXAS EQUIPMENT CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30,
---------------------------------
1999 1998
----------- -----------
<S> <C> <C>
OPERATING ACTIVITIES
Net income $ 256,606 $ 816,652
Adjustment to reconcile net income to net cash
Provided by operating activities:
Stock issued in settlement of lawsuit -- 34,688
Amortization & depreciation 266,361 198,608
Guaranty fee - valuation of stock options issued 32,582 85,543
CHANGES IN ASSETS AND LIABILITIES,
net of effects of business acquired:
Accounts receivable (824,614) (44,361)
Inventories 5,647,116 (9,533,265)
Prepaid expenses (5,804) --
Floor plan payable (6,930,864) 6,642,196
Accounts payable (98,844) 259,877
Accrued liabilities (99,344) (279,392)
Finance receivable 18,590 (140,522)
Income tax liability 107,962 198,611
Other liabilities (72,098) 65,420
Other assets 250 498
----------- -----------
NET CASH USED IN OPERATING ACTIVITIES (1,702,101) (1,695,447)
----------- -----------
CASH FLOWS PROVIDED BY (USED IN) INVESTING
ACTIVITIES
Purchases of land, buildings and equipment (131,887) (770,600)
Stockholders' receivables (162) 768
----------- -----------
NET CASH USED IN INVESTING ACTIVITIES (132,049) (769,832)
----------- -----------
</TABLE>
8
See Notes to Condensed Financial Statements
<PAGE> 9
TEXAS EQUIPMENT CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30,
---------------------------------
1999 1998
----------- -----------
<S> <C> <C>
CASH FLOW PROVIDED BY (USED IN) FINANCING
ACTIVITIES
Proceeds from note borrowings $ 2,885,694 $ 5,349,704
Repayments of note borrowings (1,278,352) (2,989,175)
----------- -----------
NET CASH PROVIDED BY FINANCING
ACTIVITIES 1,607,342 2,360,529
----------- -----------
NET DECREASE IN CASH AND CASH EQUIVALENTS (226,808) (104,750)
CASH AND CASH EQUIVALENTS AT THE
BEGINNING OF THE PERIOD 494,132 104,750
----------- -----------
CASH AND CASH EQUIVALENTS AT THE END OF
THE PERIOD $ 267,324 $ --
=========== ===========
SUPPLEMENTAL DISCLOSURES OF
CASH FLOW INFORMATION
Cash paid during the period for:
Interest expense $ 367,696 $ 186,949
=========== ===========
Income taxes $ -- $ 200,000
=========== ===========
Common stock issue related to convertible note $ 104,241 $ --
=========== ===========
</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"), a Nevada corporation, include wholly-owned
subsidiaries Texas Equipment Co., Inc., ("TECI") and New Mexico Implement
Company, Inc. ("NMIC").
The condensed balance sheets as of June 30, 1999 and December 31, 1998
and the condensed statements of operation for the three months and six months
ended June 30, 1999 and 1998 and condensed statements of cash flows for the six
months ended June 30, 1999 and 1998 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 for the fiscal year ended December 31, 1998. The results of operations for
the six months ended June 30, 1999 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 for 1998 to be in conformity with
1999.
2. INVENTORIES:
All inventories are valued at the lower of cost or market. Cost is
determined using the specific identification method for new and used equipment
and average cost for parts.
Inventories consisted of the following at:
<TABLE>
<CAPTION>
June 30, December 31,
1999 1998
----------- ------------
<S> <C> <C>
New equipment $17,978,314 $19,830,691
Used equipment 10,681,335 15,101,869
Parts and other 4,934,949 4,309,154
----------- -----------
Total $33,594,598 $39,241,714
=========== ===========
</TABLE>
3. SEGMENT INFORMATION
DESCRIPTION OF THE TYPES OF PRODUCTS AND SERVICES FROM WHICH EACH REPORTABLE
SEGMENT DERIVES ITS REVENUES
The Company has two reportable segments: wholegoods and product
support. Distribution of these products and services are made directly to
customers through eight Deere dealerships located in West Texas, Texas Panhandle
and Eastern New Mexico. Wholegoods represents agricultural equipment that can be
sold either as an individual item or as part of a series of machines to perform
certain farming operations. Product support represents replacement parts for
equipment and the service of the agricultural equipment on-site or at the dealer
location.
10
<PAGE> 11
3. SEGMENT INFORMATION (CONT'D)
MEASUREMENT OF SEGMENT PROFIT OR LOSS AND SEGMENT ASSETS
The Company evaluates performance and allocates resources based on
profit or loss from operations before income taxes. The accounting policies of
the reportable segments are the same as those described in the summary of
significant accounting policies. Inter-segment sales and profits are
insignificant.
FACTORS MANAGEMENT USED TO IDENTIFY THE COMPANY'S REPORTABLE SEGMENTS
The Company's reportable segments are business units that offer
different products or services. The reportable segments (although related) are
each managed separately because they each distribute distinct products and
services in the initial and after-market environment.
<TABLE>
<CAPTION>
Product
Wholegoods Support
---------- -----------
<S> <C> <C>
THREE MONTHS ENDED JUNE 30, 1999
--------------------------------
Sales and revenues from external customers $ 11,374,884 $ 3,851,736
Depreciation expense 37,870 91,866
Segment operating profit 164,139 459,221
Segment assets:
Property, plant and equipment 948,632 4,522,943
Inventory 28,659,649 4,934,949
THREE MONTHS ENDED JUNE 30, 1998
--------------------------------
Sales and revenues from external customers 12,629,818 3,392,398
Depreciation expense 32,399 59,642
Segment operating profit 554,168 415,786
Segment assets: (as of December 31, 1998)
Property, plant and equipment 970,343 4,626,763
Inventory 34,932,560 4,309,154
-----------------------------------------------------------------------------------------------------
SIX MONTHS ENDED JUNE 30, 1999
------------------------------
Sales and revenues from external customers 25,658,487 6,680,456
Depreciation expense 75,739 183,732
Segment operating profit 781,498 547,450
Segment assets:
Property, plant and equipment 948,632 4,522,943
Inventory 28,659,649 4,934,949
SIX MONTHS ENDED JUNE 30, 1998
------------------------------
Sales and revenues from external customers 25,618,024 6,284,018
Depreciation expense 58,220 122,861
Segment operating profit 1,252,017 739,108
Segment assets: (as of December 31, 1998)
Property, plant and equipment 970,343 4,626,463
Inventory 34,932,560 4,309,154
-----------------------------------------------------------------------------------------------------
</TABLE>
11
<PAGE> 12
3. SEGMENT INFORMATION (CONT'D)
<TABLE>
<CAPTION>
Three Months Ended
---------------------------------
OPERATING PROFIT June 30, 1999 June 30, 1998
---------------- ------------- -------------
<S> <C> <C>
Total profit for reportable segments $ 623,360 $ 969,954
Unallocated amounts:
Administrative expense (286,786) (360,578)
Other income 3,989 3,655
Interest expense (188,546) (109,346)
Interest income 70,543 41,490
Non-cash guarantee fee (15,826) (47,042)
------------ -----------
Total consolidated income before taxes 206,734 498,133
------------ -----------
<CAPTION>
Six Months Ended
---------------------------------
OPERATING PROFIT June 30, 1999 June 30, 1998
---------------- ------------- -------------
<S> <C> <C>
Total profit for reportable segments $ 1,328,948 $ 1,991,125
Unallocated amounts:
Administrative expense (700,188) (626,649)
Other income 10,245 27,294
Interest expense (367,696) (186,949)
Interest income 152,722 95,885
Non-cash guarantee fee (32,582) (85,543)
------------ -----------
Total consolidated income before taxes 391,449 1,215,163
------------ -----------
</TABLE>
4. NET INCOME PER SHARE
The following is a reconciliation of the numerator and denominator
underlying the income per share calculations:
<TABLE>
<CAPTION>
Six Months ended June 30, 1999
----------------- ------------------ -----------------
Income Shares Per Share
(Numerator) (Denominator) Amount
----------------- ------------------ -----------------
<S> <C> <C> <C>
Income from operations available to common
stockholders' $ 256,606 24,839,047 $ 0.01
Effect of dilutive securities:
Incremental shares of assumed exercise of
options and conversions of convertible note -- 246,638 --
----------------- ------------------ -----------------
Diluted income from operations available to
common stockholders' $ 256,606 25,085,685 $ 0.01
================= ================== =================
</TABLE>
12
<PAGE> 13
4. NET INCOME PER SHARE (CONT'D)
<TABLE>
<CAPTION>
Six Months ended June 30, 1998
------------------------------------------------------
Income Shares Per Share
(Numerator) (Denominator) Amount
----------------- ------------------ -----------------
<S> <C> <C> <C>
Income from operations available to common
Stockholders' $ 816,652 24,630,364 $ 0.03
Effect of dilutive securities:
Incremental shares of assumed exercise of
Options and convertible note -- 26,513 --
----------------- ------------------ -----------------
Diluted income from operations available to
Common stockholders' $ 816,652 24,656,877 $ 0.03
================= ================== =================
</TABLE>
5. SUBSEQUENT EVENTS
On July 2, 1999 the Company received a $4,930,000 long-term loan,
collateralized by substantially all of the Company's land, buildings, equipment
and furniture and fixtures, from a lender. The loan is sponsored by the Rural
Business - Cooperative Service of the United States Department of Agriculture.
The proceeds were used to refinance $4,089,600 of existing debt and provided
$840,400 in working capital. In addition to this loan, the lender will continue
to provide the Company with a $1,750,000 line of credit, collateralized by trade
accounts receivable and Company owned equipment inventory.
On August 3, 1999, the Company sent a notice of a 7 for 1 reverse stock
split to its stockholders of record effective September 7, 1999. The Company
cannot predict what effect the reverse split will have on the market price of
its common stock. However, a higher price may diminish the adverse impact that
very low prices have upon the efficient operation of the trading market for the
stock. In connection with the reverse split, the Company is embarking on a
program of publicizing the Company's current business, results of operations and
growth strategy to the financial community. One significant objective of the
reverse split and the Company's related efforts is to better position the
Company to qualify for a listing on the Nasdaq system, although there can be no
assurance such result will be achieved. A Nasdaq listing may make the Company's
stock more attractive and better position the Company to pursue acquisitions
consistent with its growth strategy and to obtain needed equity financing.
13
<PAGE> 14
ITEM 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATION.
As a specialty retailer, the Company distributes, sells, services,
rents and finances equipment for the agricultural industry. The Company's
primary supplier of new equipment and parts is Deere & Company ("Deere"). The
Company operates the largest network of Deere agricultural equipment dealers in
Texas and is one of the largest in the United States. The Company's stores are
located in the Northern and Southern Panhandle of West Texas and in Eastern New
Mexico.
The Company's growth in recent years has been due to the acquisition of
agricultural equipment dealers in its operating area and implementation of its
operating model. The increase in sales from acquired stores has offset the
decrease in comparable store revenues (stores with revenues in 1998 and 1999).
The acquisitions are primarily the result of consolidation trends among
agricultural equipment dealers and the ability of the Company to leverage its
expertise in acquisitions. In October 1998 the Company acquired the Amarillo
store, which had unaudited total revenues of approximately $14 million for its
twelve months ended September 30, 1998. However, the Company believes that these
sales were higher than are sustainable because of the prior owner's high-volume,
lower-margin strategy which to some extent drew sales from dealerships in the
Northern Panhandle, including certain dealerships operated by the Company.
Accordingly, annual sales contributions from this store on an on-going basis,
operating in conjunction with the Company's network of dealerships in West
Texas, are expected to average approximately $7 million a year.
The Company generates its revenues from sales of new and used equipment
("wholegoods"), sales of parts and service, and the rental of equipment. The
Company's highest gross margins have historically been generated from its parts
and service revenues. One of the Company's operating strategies is to increase
the demand for parts and service by establishing, and then increasing, the base
of wholegoods held by its customers. Due to product warranty time frames and
usage patterns by customers, there generally is a time lag between wholegoods
sales and the generation of significant parts and service revenues from such
sales. As a result of this time lag, increases in parts and service revenues do
not necessarily coincide with increases in wholegoods sales. In addition, due to
differences in gross margins between wholegoods sales and parts and service,
gross margin percentages (gross profit as a percentage of sales) may decline as
the Company builds wholegoods market share.
Typically, farmers purchase agricultural equipment immediately prior to
planting or harvesting crops, which, prior to fiscal 1998, occurred primarily
during the Company's second and fourth quarters. As a result, sales of
agricultural equipment were generally lower in the first and third quarters. In
1998, the Company acquired two additional stores, one in the Northern Panhandle
and the other in Tornillo, Texas. Because of the current store locations, there
was an overlap in the growing seasons in 1998, which had the effect of leveling
out quarterly sales and inventory requirements. In 1998, the Company recorded
approximately 24% of its sales in each of the first and second quarters and
approximately 26% in each of the third and fourth quarters. The Company believes
that this seasonality will not change for 1999. However, 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.
The Company requires cash primarily for financing its inventories of
wholegoods and replacement parts, acquisitions of additional retail locations
and capital expenditures. Historically, the Company has met these liquidity
requirements primarily through cash flow generated from operating activities,
floor plan financing and borrowings under credit agreements with Deere, Deere
Credit, Agricredit Acceptance
14
<PAGE> 15
Company ("Agricredit"), Equipment Dealers Credit Company ("EDCO") and
Transamerica Distributor Financing ("Transamerica") 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 the Company and
other Deere dealers for extended periods and with varying interest-free periods,
depending on the type of equipment, to enable dealers to carry representative
inventories of equipment and to encourage the purchase of goods by dealers in
advance of seasonal retail demand. Down payments are not required and interest
may not be charged for a substantial part of the period for which inventories
are financed. Variable market rates of interest based on the prime rate are
charged on balances outstanding after any interest-free periods, which are
generally four to twelve months. Deere also provides financing to dealers on
used equipment accepted in trade and approved equipment from other suppliers.
The Company's strategic plan of internal growth along with growth
through acquisitions resulted in the Company completing two acquisitions during
fiscal 1998. The results of operations of these acquisitions are included in the
Company's results of operations only for the periods after their applicable
acquisitions dates.
RESULTS OF OPERATIONS
THREE MONTHS ENDED JUNE 30, 1999 COMPARED TO THREE MONTHS ENDED JUNE 30, 1998
REVENUES
Revenues decreased approximately $796,000 or 5.0%, to $15,226,620 for
the second quarter of 1999 from $16,022,216 for the second quarter of 1998.
Total revenue contributed from acquired stores of approximately $3,380,000 was
offset by a decrease in comparable store revenues (stores with revenues
throughout the second quarter of 1998 and 1999) of approximately $4,175,000. The
decrease in comparable store revenue was due primarily to a decrease of
approximately $4,589,000, or 48.8%, in new equipment sales (primarily new
tractor, grain combines and to a lesser extent various other seasonal equipment
sales), when compared to higher than normal new equipment sales in the second
quarter of 1998. This decrease in new equipment sales was the result of the
continued effect of weak commodity prices, which began in 1998 and are expected
to continue into 2000.
Sales of wholegoods decreased approximately $1,255,000 or 10.0%, to
$11,374,884 for the second quarter of 1999 from $12,629,827 for the second
quarter of 1998. The wholegoods sales contribution of approximately $2,559,000
from acquired stores was offset by a decrease in comparable stores wholegoods
sales of approximately $3,814,000. The decrease in new equipment sales accounted
for all of this decrease in comparable store wholegoods sales.
Parts and service revenue increased approximately $459,000, or 13.5%,
to $3,851,736 for the second quarter of 1999 from $3,392,389 for the second
quarter of 1998. Acquired stores contributed approximately $821,000 in parts and
service revenues, which was offset by a decrease in comparable store parts and
service revenues of approximately $361,000. This decrease was directly related
to the drought-related downturn in the agricultural industry and the continued
effect of weak commodity prices, which began in the fourth quarter of 1998. As a
result, the Company's customers were forced to delay their field preparation
work until the second quarter of 1999, which resulted in higher parts and
service revenue in the second quarter. The Company expects a strong harvest
season, which should result in higher levels of parts sales and service revenues
for the third and fourth quarters of 1999.
15
<PAGE> 16
GROSS PROFIT
Gross profit decreased approximately $153,000, or 6.2%, to $2,299,230
for the second quarter of 1999 from $2,452,349 for the second quarter of 1998.
Gross profit as a percentage of total revenues decreased to 15.1% for the second
quarter of 1999 from 15.3% for the second quarter of 1998. 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 (78.8% of total revenues in
the second quarter of 1998 compared to 74.7% of total revenues in the second
quarter of 1999) and parts and service revenues (21.2% of total revenues in the
second quarter of 1998 compared to 25.3% of total revenues in the second quarter
of 1999) increased total gross margins. This increase was offset by the decrease
in wholegoods gross margins of 1.5%, to 8.3% in the second quarter of 1999 from
9.8% in the second quarter of 1998.
SELLING, GENERAL, AND ADMINISTRATIVE EXPENSE
Selling, general, and administrative (SG&A) expense increased
approximately $120,000 to $1,962,656 for the second quarter of 1999 from
$1,842,973 for the second quarter of 1998. The stores acquired in July and
October of 1998 added approximately $410,000 of SG&A, which was offset by a
decrease in comparable store SG&A of approximately $217,000. This decrease was
the result of cost reduction implemented in the fourth quarter of 1998.
Corporate administration accounted for the remainder of the decrease of
approximately $73,000. This decrease was due to higher salaries and benefits of
approximately $40,000 offset by decreases in various other expenses aggregating
approximately $113,000.
SG&A expense as a percentage of total revenues was 12.9% in the second
quarter of 1999 compared to 11.5% in the second quarter of 1998. This increase
is primarily due to lower comparable store revenues without a proportionate
decrease in store operating expenses and corporate administration related
expenses.
INTEREST EXPENSE/INCOME
Interest expense increased approximately $37,000 to $188,546 for the
second quarter of 1999 from $151,809 for the second quarter of 1998. 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 1998.
Interest income decreased approximately $13,000 to $70,543 for the
second quarter of 1999 from $83,953 for the second quarter of 1998. Interest
income was earned in connection with the financing of customer purchases. The
amount the Company will earn depends on the interest rates charged by
competitors, lending policies of Deere Credit and Agricredit and prevailing
market conditions. In the second quarter of 1999, interest rates continued to
remain competitive; however, because of the lower new equipment sales, interest
income was down in the second quarter of 1999 compared to 1998.
NON-CASH GUARANTEE FEE
In connection with the personal guarantee by the majority shareholders
of the Company of approximately $28,962,000 monthly average of accounts payable
on wholegoods financing and the credit facility with the Company's bank, the
Company issued fully vested five-year common stock options to acquire up to
633,051 shares of the Company's Common Stock at an exercise price of $0.50. This
resulted in a non-cash charge of $15,826 for the three-month period.
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<PAGE> 17
NET INCOME
Net income decreased approximately $219,000, or 61.5%, to $136,995 for
the second quarter of 1999 from $356,070 for the second quarter of 1998. This
decrease was primarily the result of the decrease in gross profit of
approximately $153,000, an increase in operating and administrative expenses of
$120,000, an increase in interest expense (net of interest income) and other
costs of $18,000, offset by a decrease in the provision for income taxes of
approximately $72,000.
Earnings per share decreased to $0.006 (both basic and diluted) from
$0.014 (both basic and diluted) from the second quarter of 1998 to the second
quarter of 1999, primarily as the result of the reasons described above.
SIX MONTHS ENDED JUNE 30, 1999 COMPARED TO SIX MONTHS ENDED JUNE 30, 1998
REVENUES
Revenues increased approximately $437,000 or 1.4%, to $32,338,943 for
the six months ended June 30, 1999 from $31,902,042 for the six months ended
June 30, 1998. The revenue of approximately $7,203,000 contributed from acquired
stores was offset by decreases in comparable store revenues (stores with
revenues throughout the six months ended June 30, 1998 and 1999) of
approximately $6,766,000. The decrease in comparable store revenue was due
primarily to a decrease of approximately $7,110,000, or 39%, in new equipment
sales (primarily tractor, grain combines, and to a lesser extent various other
equipment sales) when compared to higher than normal new equipment sales for the
six months ended June 30, 1998. This decrease in new equipment sales was the
result of the continued effect of weak commodity prices, which began in the
fourth quarter of 1998 and are expected to continue into 2000.
Wholegoods sales were $25,658,487 for the six months ended June 30,
1999 compared to $25,618,030 for the six months ended June 30, 1998. Wholegoods
sales from acquired stores contributed approximately $5,474,000. These sales
were offset by a decrease in comparable stores wholegoods sales of approximately
$5,433,000. The decrease in new equipment sales accounted for all of this
decrease in comparable store wholegoods sales.
Parts and service revenue increased approximately $396,000, or 6.3%, to
$6,680,456 for the six months ended June 30, 1999 from $6,284,012 for the six
months ended June 30, 1998. The parts sales and service revenues contribution of
approximately $1,730,000 from acquired stores was offset by a decrease of
approximately $1,333,100 in comparable store parts and service revenues. This
decrease was directly related to the drought-related downturn in the
agricultural industry during 1998 and the effect of weak commodity prices for
crops, which began in 1998 and have continued to remain weak in 1999. As a
result, the Company's customers were forced to delay their field preparation
work until the end of the first quarter, which resulted in lower than expected
parts sales and service revenues during the first three months of 1999. Parts
and service revenues were stronger in the second quarter of 1999 compared to the
first quarter of 1999, but the increase wasn't sufficient to offset the loss of
revenue in the first quarter. The Company expects strong parts and service
revenues during the harvest season, which should result in higher levels of
parts sales and service revenues for the third and fourth quarters of 1999.
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<PAGE> 18
GROSS PROFIT
Gross profit decreased approximately $221,000, or 4.5%, to $4,639,995
for the six months ended June 30, 1999 from $4,860,688 for the six months ended
June 30, 1998. This decrease is due primarily to the decrease in gross profit
associated with the decrease in new equipment sales.
Gross profit as a percentage of total revenues decreased to 14.3% for
the six months ended June 30, 1999 from 15.2% for the six months ended June 30,
1998. 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
(80.3% of total revenues in the six months ended June 30, 1998 compared to 79.3%
of total revenues in the six months ended June 30, 1999) and parts and service
revenues (19.7% of total revenues in the six months ended June 30, 1998 compared
to 20.7% of total revenues in the six months ended June 30, 1999) caused a
slight increase in gross margins that was offset by the decrease in wholegoods
gross margins to 8.5% from 10.1%.
SELLING, GENERAL, AND ADMINISTRATIVE EXPENSE
Selling, general, and administrative (SG&A) expense increased
approximately $515,000, to $4,011,235 for the six months ended June 30, 1999
from $3,496,212 for the six months ended June 30, 1998. The stores acquired in
July and October of 1998 added approximately $847,000 of SG&A, which was offset
by a decrease in comparable store SG&A of approximately $406,000. This decrease
was the result of cost reductions implemented in the fourth quarter of 1998.
Corporate administration accounted for the remainder of the increase of
approximately $74,000, which was due to higher salaries and benefits in the
first six months of 1999 compared to 1998.
SG&A expense as a percentage of total revenues were 12.4% in the six
months ended June 30, 1999 compared to 11.0% in the six months ended June 30,
1998. This increase is primarily due to lower comparable store revenues without
a proportionate decrease in store operating expenses and corporate
administration expenses.
INTEREST EXPENSE/INCOME
Interest expense increased approximately $138,000 to $367,696 for the
six months ended June 30, 1999 from $229,412, for the six months ended June 30,
1998. 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 1998.
Interest income increased approximately $14,000 to $152,722 for the six
months ended June 30, 1999 from $138,348 for the six months ended June 30, 1998.
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 six months ended June 30, 1999, interest
rates continued to remain competitive; however, because of the increase in used
equipment sales, which typically do not have discounted interest rates, more
interest income was earned in 1999 compared to 1998.
NON-CASH GUARANTEE FEE
In connection with the personal guarantee by the majority shareholders
of the Company, of approximately $28,962,000 average of accounts payable on
wholegoods financing and the credit facility with the Company's bank, the
Company issued fully vested five-year common stock options to acquire up
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<PAGE> 19
to 1,303,281 shares of the Company's Common Stock at an exercise price of $0.50.
This resulted in a non-cash charge of $32,582 for the six months ended June
30,1999.
NET INCOME
Net income decreased approximately $560,000 or 68.6%, to $256,606 for
the six months ended June 30, 1999 from $816,652 for the six months ended June
30, 1998. This decrease was primarily the result of the decrease in gross profit
of approximately $221,000, an increase in operating and administrative expenses
of $515,000, an increase in interest expense (net of interest income) and other
costs of $88,000, offset by a decrease in the provision for income taxes of
approximately $264,000.
Earnings per share decreased to $0.01 (both basic and diluted) from
$0.03 (both basic and diluted) from the six months ended June 30, 1998 to the
six months ended June 30, 1999, primarily as the result of the reasons described
above.
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,
Agricredit, EDCO, Transamerica 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 four 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 defined prime
rate.
The Company annually reviews the terms of its financing arrangements with
its lenders, including the interest rate. For the three months ended June 30,
1999, the interest rate charged by Deere for its floor plan financing and
wholesale line of credit was a defined prime rate plus 150 basis points and
defined prime rate plus 50 basis points, respectively. In addition, the
Company's wholesale credit lines with Agricredit, EDCO and Transamerica are at
rates that range from a defined prime rate plus 50 basis points to defined prime
rate plus 150 basis points. As of June 30, 1999, the Company had floor plan
payables outstanding of approximately $23,966,000, of which approximately
$7,221,000 was then interest bearing.
On July 2, 1999 the Company received a $4,930,000 long-term loan at a
defined prime rate plus 150 basis points from a lender. The loan is
collateralized by substantially all of the Company's land, buildings, equipment
and furniture and fixtures, and sponsored by the Rural Business - Cooperative
Service of the United States Department of Agriculture. The proceeds were used
to refinance $4,089,600 of existing debt and provided $840,400 in working
capital. In addition to this loan, the lender will continue to provide the
Company with a $1,750,000 line of credit at a defined prime rate plus 150 basis
points, collateralized by trade accounts receivable and Company owned equipment
inventory.
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<PAGE> 20
Cash and cash equivalents decreased to $267,324 at June 30, 1999 from
$494,132 at December 31, 1998. During the six months ended June 30, 1999,
operations used net cash of $1,702,101 primarily because of the decrease in
floor plan payables of approximately $6,930,864. This decrease was primarily due
to the decrease in equipment inventory of approximately $5,647,116. The decrease
in inventory was primarily due to higher used equipment sales in 1999 and a
decrease in new equipment purchases. Investing activities used cash of $132,049
primarily for capital expenditures. The Company's capital expenditures are
expected to increase as it implements its business plan to acquire additional
Deere dealerships. All acquisitions are subject to the availability of debt or
equity financing and Deere approval, of which there can be no assurance in
either case. 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, prior to fiscal 1998, occurred primarily
during the Company's second and fourth quarters. As a result, sales of
agricultural equipment were generally lower in the first and third quarters. In
1998, the Company acquired two additional stores, one in the Northern Panhandle
and the other in West Texas (near El Paso, Texas). Because of the current store
locations, there was an overlap in the growing seasons in 1998, which had the
effect of leveling out quarterly sales and inventory requirements. In 1998, the
Company recorded approximately 24% of its sales in each of the first and second
quarters and approximately 26% in each of the third and fourth quarters. The
Company believes that this seasonality will not be significantly different for
1999. However, 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 and
hardware 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 dealer programs (including related hardware) as well
as Deere's in-house software, and that over 90 percent of Deere's systems
identified as being mission critical have been tested and verified as being Year
2000 compliant. Deere has informed the Company that their goal has been to have
all remaining mission critical and non-mission critical systems compliant by
October 31, 1999. 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 hardware and software have already been
completed. The cost associated with the Year 2000 Issue as it relates to such
management information system software and hardware is borne by Deere as part of
its computer systems support to its dealers. The existence of embedded
technology is by nature difficult to identify. While the Company believes that
all other significant systems are Year 2000 compliant, the Company plans to
continue testing its operating equipment.
The Company has made a preliminary review of both its information
technology (most of which, as discussed above, is Deere supplied) and its
non-information technology systems to determine whether they
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<PAGE> 21
are Year 2000 compliant. We have not identified any other material systems that
are not Year 2000 compliant. The Company has received oral assurances of Year
2000 compliance from many of the third parties with which it has relationships.
The Company believes that operations will not be significantly
disrupted even if third parties other than Deere with whom we have relationships
are not Year 2000 compliant. The Company believes that all other external
service suppliers, such as manufacturers, suppliers and financial institutions
(other than Deere) do not provide critical services that would affect the
Company's ability to conduct its business. We believe that we will not be
required to make any material expenditure to address the Year 2000 problem as it
relates to our existing systems. However, uncertainty exists concerning the
potential costs and effects associated with any Year 2000 compliance, and we
intend to continue to make efforts to ensure that third parties with whom we
have relationships are Year 2000 compliant. Therefore, we cannot be certain that
unexpected Year 2000 compliance problems of either the Company or our vendors,
customers and service providers would not materially and adversely affect our
business, financial condition or operating results. We will continue to consider
the likelihood of a material business interruption due to the Year 2000 issue,
and if necessary, implement appropriate contingency plans.
Although no assurances can be given as to the Company's compliance,
particularly as it relates to third parties, based upon Deere's progress to
date, the Company does not expect the consequences of any of the Company's or
Deere's unanticipated or unsuccessful modifications to have a material adverse
effect on its financial position or results of operations. However, the failure
to correct a material Year 2000 problem could result in the interruption of
certain normal business activities and operations. The Company's most reasonable
and likely worst case scenario is that the Year 2000 noncompliance of a critical
third party, such as an energy supplier, could cause the supplier to fail to
deliver, with the result that delivery of equipment and product support is
interrupted at each of our stores. The Company believes that such a disruption
in the ability to provide product and services to our customer would not result
in significant loss of sales and profits.
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;
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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 continued availability of key personnel.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
At June 30, 1999, approximately 91% of the Company's debt obligations
(includes short and long-term equipment and bank financing) have variable
interest rates. Accordingly, the Company's net income and after tax cash flow
are affected by changes in interest rates. Assuming the current level of
borrowings at variable rates and assuming a two percentage point increase in the
six months ended June 30, 1999 average interest rate under these borrowings,
(which average rate was approximately 9%) it is estimated that the Company's
interest expense for the six months ended June 30, 1999 would have increased by
approximately $60,000 resulting in a decrease in the Company's net income and
after tax cash flow of approximately $39,000. In the event of an adverse change
in interest rates, management would likely take actions to mitigate its
exposure. Because of the uncertainty of the actions that would be taken and
their possible effects, this analysis assumes no such actions. Further this
analysis does not consider the effects of the change in the level of overall
economic activity that could exist in such an environment.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
On June 14, 1999, 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> <C> <C>
o Election of Directors: Paul J. Condit 22,625,562 6,355 -
John T. Condit 22,625,562 6,355 -
EA Milo Mattorano 22,625,562 6,355 -
Robert T. Maynard 22,625,562 6,355 -
James D. Arnold 22,625,562 6,355 -
Mickey L. Ray 22,625,562 6,355 -
</TABLE>
No other matters were submitted to a vote of the stockholders present.
22
<PAGE> 23
PART II - OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits
10(i) Loan and Security Agreement, dated June 24, 1999
27 Financial Data Schedule
(b) Reports on form 8-K
None
23
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
Date: August 12, 1999
TEXAS EQUIPMENT CORPORATION
By: /s/ Paul J. Condit
-------------------------------------
Paul J. Condit
President and Chief Executive Officer
24
8
<PAGE> 25
EXHIBIT INDEX
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
10(i) Loan and Security Agreement, dated June 24, 1999
27 Financial Data Schedule
<PAGE> 1
EXHIBIT 10(i)
LOAN AND SECURITY AGREEMENT
This Loan and Security Agreement ("Agreement") dated as of June 24,
1999 by and between TEXAS EQUIPMENT CORPORATION ("TE Corp"), TEXAS EQUIPMENT
CO., INC. ("TEC, Inc.") and NEW MEXICO IMPLEMENT COMPANY, INC. ("NMIC")
(collectively, "Borrowers") and BANK UNITED ("Lender").
In consideration of the Loan described below and the mutual covenants
and agreements contained herein, and intending to be legally bound hereby,
Lender and Borrowers agree as follows:
1. DEFINITIONS AND REFERENCE TERMS. In addition to any other terms
defined herein, the following terms shall have the meaning set forth with
respect thereto:
a. Accounting Terms. All accounting terms not specifically
defined or specified herein shall have the meanings attributed to such
terms under generally accepted accounting principles ("GAAP"), as in
effect from time to time, consistently applied, with respect to the
financial statements referenced herein.
b. B&I Guarantee. A loan guarantee by RBS (hereinafter
defined) for business and industry loans.
c. Borrowers. As defined above and including any successors
and assigns of Borrowers.
d. Cash Flow Coverage Ratio. A fraction in which the numerator
is the sum of the consolidated net income of Borrowers (after provision
for federal and state taxes) for the 12-month period preceding the
applicable date plus the consolidated interest, lease and rental
expenses of Borrowers for such 12-month period plus the sum of
consolidated non-cash expenses or allowances for such 12-month period
(including, without limitation, amortization or write-down of
intangible assets, depreciation, depletion, non-cash guaranty fees,
stock options or other non-cash compensation and deferred taxes and
expenses) and the denominator is the sum of the current portion of the
consolidated long-term debt and capital leases of Borrowers as of the
applicable date plus the consolidated interest, lease and rental
expenses for the 12-month period preceding the applicable date.
e. Collateral. The real and/or personal property described as
collateral, secured property and/or mortgaged property in the Loan
Documents and as more particularly described on the attached Schedule
1.e.
f. Dealer Agreements. Dealer Agreement shall mean the
collective reference to the agreements by and between Borrower and the
supplier as defined below to operate John Deere dealerships.
g. Guarantors. Guarantors shall mean the collective reference
to Paul J. Condit, Jeffrey E. Condit, Paul J. Condit II, John T.
Condit.
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<PAGE> 2
h. Lender. As defined above and including any successors and
assigns.
i. Hazardous Materials. Hazardous Materials include all
materials defined as hazardous materials or substances under any local,
state or federal environmental laws, rules or regulations, and
asbestos.
j. Loan. Any loan described in Paragraph 2 hereof and any
subsequent loan which states that it is subject to this Agreement.
k. Loan Documents. Loan Documents means this Agreement and any
and all promissory notes executed by Borrowers in favor of Lender and
all other documents, instruments, guarantees, certificates and
agreements executed and/or delivered by Borrowers, any guarantor or
third party in connection with any Loan.
l. Obligations. All obligations and liabilities of any nature
owed to Lender, whether now or hereafter existing, as set forth in the
Note and this Agreement and arising out of or related to the Loan
Documents or any other financial transactions between Lender and
Borrowers, including all future obligations and advances.
m. Permitted Liens. Permitted Liens means:
(i) Liens disclosed on the attached Schedule 1.n.;
(ii) Liens securing the Obligations in favor of the Lender
pursuant to the Loan Documents;
(iii) Encumbrances consisting of easements, rights-of-way,
zoning restrictions or other restrictions on the use of Real
Property Collateral that do not (individually or in the
aggregate) materially affect the value of the Real Property
Collateral encumbered thereby or materially impair the ability
of the Borrowers to use such Real Property Collateral in their
businesses, and none of which is violated in any material
respect by existing or proposed structures or land use;
(iv) Liens for taxes, assessments or other governmental
charges that are not delinquent or which are being contested
in good faith by appropriate proceedings, which proceedings
have the effect of preventing the forfeiture or sale of the
property subject to such liens, and for which adequate
reserves have been established;
(v) Liens of mechanics, materialmen, warehousemen,
carriers, landlords or other similar statutory liens securing
obligations that are not yet due and are incurred in the
ordinary course of business or which are being contested in
good faith by appropriate proceedings, which proceedings have
the effect of preventing the forfeiture or sale of the
property subject to such liens, and for which adequate
reserves have been established;
(vi) Liens resulting from good faith deposits to secure
payment of workmen's compensation or other social security
programs or to secure the performance of tenders, statutory
obligations, surety and appeal bonds, bids, contracts, (other
than for payment of debt) or leases, all in the ordinary
course of business;
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<PAGE> 3
(vii) Purchase money liens on any property hereafter
acquired or the assumption of any lien on property existing at
the time of such acquisition (and not created in contemplation
of such acquisition), or a lien incurred in connection with
any conditional sale or other title retention agreement of
capital lease obligations; provided that
(a) any property subject to the foregoing is acquired
by the Borrowers in the ordinary course of their respective
businesses and the lien on the property attaches
concurrently or within 90 days after the acquisition
thereof;
(b) the debt secured by any lien so created assumed
or existing shall not exceed the lesser of the cost or
fair market value at the time of acquisition of the
property covered thereby;
(c) each such lien shall attach only to the property
so acquired and the proceeds thereof, and
(d) the debt secured by all such liens when
aggregated with the debt secured by all other purchase
money liens at any time outstanding and whenever incurred
or created shall not exceed the amount permitted in
Paragraph 6.c.;
(viii) Liens upon inventory, arising under Borrowers'
existing or future floor plan financing agreements;
(ix) Any extension, renewal, or replacement of any of the
foregoing provided that the Liens permitted hereunder shall
not be extended or spread to cover any additional indebtedness
or property.
n. RBS. Rural Business - Cooperative Service of USDA
(hereinafter defined).
o. Real Property Collateral. All of those certain tracts or
parcels of land or real estate owned or leased (as tenant) by any of
the Borrowers, which are more particularly described in the attached
Schedule 1.o., together with all easements, rights and appurtenances
thereto, and all buildings and improvements now or hereafter located
thereon, and all fixtures and all additions thereto and substitutions
therefor, whether now or hereafter existing.
p. Supplier. John Deere Company, a division of Deere &
Company.
q. Tangible Net Worth. Tangible Net Worth means the amount by
which Borrowers' consolidated total tangible assets (excluding
intangible assets) exceeds consolidated total liabilities in accordance
with GAAP.
r. USDA. The United States Department of Agriculture.
2. LOAN.
a. Loan. Lender hereby agrees to make a term loan to Borrowers
in the principal amount of Four Million, Nine Hundred Thirty Thousand
and No/100ths ($4,930,000.00) Dollars. A condition of the Loan is the
issuance and continuance of a B&I Guarantee. The obligation to repay
the Loan is evidenced by a promissory note dated of even date (the
3
<PAGE> 4
promissory note together with any and all renewals, extensions or
rearrangements thereof being hereafter collectively referred to as
"Note") having a maturity date, repayment terms and interest rate as
set forth in the Note.
3. COLLATERAL SECURITY
a. Nature of Collateral. The Collateral, together with all of
Borrowers' other property of any kind held by Lender, shall stand as
one general, continuing collateral security interest for all
Obligations and such security interest may be retained by Lender until
all Obligations have been satisfied in full.
b. Real Property Collateral. As security for the timely
satisfaction of all Obligations of Borrowers hereunder, and all other
Obligations of Borrowers to Lender, its successors and assigns,
howsoever created, arising or evidenced, whether direct or indirect,
absolute or contingent, or now or hereafter existing or due to become
due, Borrowers shall grant to Lender a first priority lien on their
respective Real Property Collateral, subject only to permitted liens
and encumbrances pursuant to the terms and conditions set forth in the
respective deeds of trust and security agreements granted to Lender by
Borrowers for each tract of land constituting the Real Property
Collateral.
c. Grant of Security Interest in Collateral. In addition to
all grants, pledges and assignments on the deeds of trust and security
agreements granted to Lender by Borrowers, Borrowers hereby grant,
convey, assign, transfer, and set over to Lender a lien and security
interest in, all of the Collateral, wherever located, now owned or
hereafter arising or acquired by the respective Borrowers, together
with all replacements, accessions and substitutions thereof and all
products and all proceeds (including, without limitation, insurance
proceeds) now or hereafter actually or constructively held or received
by Borrowers or Lender for any purpose.
d. Financing Statements. Borrowers will: (i) execute any
financing statements, assignments and other security documents
(including amendments thereto and continuation statements thereof) as
it relates to the pledge or perfection of the Collateral, in a form
satisfactory to Lender or in such form as Lender may require; (ii) pay
or reimburse the Lender for all costs and taxes of filing or recording
the same in such public offices as Lender may designate; and (iii) take
such other steps as Lender may direct to perfect Lender's security
interest in the Collateral, including, without limitation, making
notations of Lender's lien on the books and records of Borrowers. In
addition to the foregoing, (i) the parties hereto agree that a
photocopy or other reproduction of this Agreement may be sufficient as
a financing statement and may be filed in any appropriate office for
the filing of financing statements; and (ii) to the extent lawful,
Borrowers hereby appoint Lender as the respective Borrower's
attorney-in-fact (without requiring Lender so to act) to execute any
financing statements in the respective Borrower's name and to perform
all other acts and deeds that Lender deems appropriate to perfect and
continue its security interest in, and to preserve and protect, the
Collateral.
e. Cross-Collateralization. The Collateral and any other
collateral which Lender
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may at any time acquire from any other source in connection with the
Obligations of Borrowers to Lender shall constitute cross-collateral
for all Obligations of Borrowers without appointment or designation as
to particular Obligations, and all Obligations, howsoever and
whensoever incurred, shall be secured by all of the Collateral,
howsoever and whensoever acquired, and Lender shall have the right, in
its sole discretion, to determine the order in which Lender's rights in
or remedies against the Collateral are to be proceeded against and the
order of application of proceeds of the Collateral as against
particular Obligations of Borrowers.
f. Additions/Substitutions/Release. Lender may accept
additions to or substitutions for any or all of the Collateral, may
release or deliver any or all of the Collateral, and may release or
compromise with anyone liable on any of the Collateral -- all without
affecting Lender's rights in any of the Collateral retained or the
liability of any maker, endorser, or Guarantor of any of the
Obligations. Borrowers and each Guarantor hereby waive notice of any of
the foregoing actions and waive presentment, protest, notice of
dishonor, demand and any notice of any other formality. In the event of
any addition or substitution of any of the Collateral (which may only
occur with Lender's prior written consent), all rights, duties,
obligations, remedies and security interests provided for, created or
granted shall apply fully to such substitute Collateral.
g. Transfer of Rights. The Lender may, with or without notice,
before or after maturity of the Note, transfer, assign, or register in
the name of its nominee(s) all or any part of its interest in the
Collateral and also exercise any or all rights of collection,
conversion, or exchange and other similar rights, privileges and
options pertaining to the Collateral; but shall have no duty to
exercise any such rights, privileges or options or to sell or otherwise
realize upon any of the Collateral, as herein authorized or to preserve
the same and shall not be responsible for any failure to do so or delay
in so doing.
h. Termination of Security Interests. Upon the satisfaction of
all of the Obligations, Lender shall execute any and all documents,
termination statements or releases reasonably requested by Borrower to
evidence the release or termination of such security interests.
4. REPRESENTATIONS AND WARRANTIES. Borrowers hereby represent and
warrant to Lender as follows:
a. Good Standing. TE Corp is a corporation duly organized,
validly existing and in good standing under the laws of the State of
Nevada, qualified to transact business in the States of Texas and New
Mexico and has the power and authority to own its property and to carry
on its business in each jurisdiction in which said Borrower does
business. TEC, Inc. is a corporation duly organized, validly existing
and in good standing under the laws of the State of Texas, qualified to
transact business in the State of Texas and has the power and authority
to own its property and to carry on its business in each jurisdiction
in which said Borrower does business. NMIC is a corporation duly
organized, validly existing and in good standing under the laws of the
State of New Mexico, qualified to transact business in the State of New
Mexico and has the power and authority to own its property and to carry
on its business in each jurisdiction in which said Borrower does
business.
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b. Citizenship. TE Corp is at least 51 percent owned by
persons who are either citizens of The United States of America or
reside in The United States of America after being legally admitted for
permanent residence.
c. Authority and Compliance. Borrowers have full power and
authority to execute and deliver the Loan Documents and to incur and
perform the obligations provided for therein, all of which have been
duly authorized by all proper and necessary action of the appropriate
governing body of Borrowers. Borrowers possess all permits,
memberships, franchises, contracts, licenses, trademark rights, trade
names, patents, and other authorizations necessary to enable them to
conduct their respective business operations as now conducted, and no
filing with, and no consent, permission, authorization, order or
license of, any individual, entity or government authority is necessary
in connection with the execution, delivery, performance or enforcement
of the Loan Documents.
d. Binding Agreement. This Agreement and the other Loan
Documents executed by Borrowers constitute valid and legally binding
obligations of Borrowers and are enforceable in accordance with their
terms.
e. Default. Borrowers are not in default under any of the Loan
Documents and no event has occurred which by notice, the passage of
time or otherwise would constitute an event of default under any of the
Loan Documents.
f. Litigation. There is no suit or proceeding involving
Borrowers pending or, to the knowledge of Borrowers, threatened before
any court or governmental authority, agency or arbitration authority,
except as disclosed to Lender in writing and acknowledged by Lender
prior to the date of this Agreement.
g. No Conflicting Agreements. There is no charter, articles,
bylaw, stock provision, operating agreement, partnership agreement or
other document pertaining to the organization, power or authority of
Borrowers and no provision of any existing agreement, mortgage, deed of
trust, indenture or contract binding on Borrowers or affecting their
property, which would conflict with or in any way prevent the
execution, delivery or carrying out of the terms of this Agreement
and/or the other Loan Documents.
h. Ownership of Assets. Borrowers have good and marketable
title to their assets, and their assets are free and clear of liens,
except for the Permitted Liens or liens disclosed to Lender in writing
prior to the date of this Agreement.
i. Factual and Financial Information. All factual and
financial information furnished by Borrowers to Lender in connection
with this Agreement and the other Loan Documents is and will be
accurate as of the date stated in such information and is not and will
not be incomplete by the omission of any material fact necessary to
make such information not misleading. The financial statements, dated
December 31, 1998, fairly and accurately present the consolidated
financial condition of Borrowers as of such date and have been prepared
in accordance with GAAP. Since the date of those financial statements,
there
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<PAGE> 7
has been no material adverse change in the financial condition of
Borrowers, and, after due inquiry, there exists not material contingent
liability or obligation assertable against Borrowers.
j. Taxes. All taxes, assessments and withholdings due and
payable by Borrowers have been paid or are being contested in good
faith by appropriate proceedings; Borrowers have filed all tax returns
which it is required to file (subject to permitted extensions); and
Borrowers collectively maintain adequate reserves and accruals in
respect of all such taxes, assessments and withholdings. There are no
unpaid assessments pending against Borrowers for any taxes or
withholdings, and Borrowers knows of no basis therefor.
k. Employment Retirement Income Security Act. The minimum
funding standards of Section 302 of the Employee Retirement Income
Security Act of 1974, as amended ("ERISA"), have been met at all times
with respect to all "plans" of Borrowers to which such standards apply.
Borrowers have not made a "partial withdrawal" or a "complete
withdrawal" from any "multiemployer plan"; and no "reportable event" or
prohibited transaction" has occurred with respect to any such "plan"
(as all of the quoted terms are defined in ERISA).
l. Environmental. The conduct of Borrowers' respective
business operations and the condition of Borrowers' properties does not
and will not violate any federal laws, rules or ordinances for
environmental protection, regulations of the Environmental Protection
Agency, any applicable local or state law, rule, regulation or rule of
common law or any judicial interpretation thereof relating primarily to
the environment or Hazardous Materials or petroleum or petroleum
products.
5. AFFIRMATIVE COVENANTS. Until full payment and performance of all
obligations of Borrowers under the Loan Documents, Borrowers will, unless Lender
consents otherwise in writing (and without limiting any requirement of any other
Loan Document):
a. Use of Proceeds. Use the proceeds of the Loan only for the
purposes set forth in Exhibit A to Rural Business - Cooperative Service
(RBS) Conditional Commitment for B&I Guarantee issued to Lender for the
Loan.
b. B&I Guarantee. Provide Lender with all certifications,
documents or other information Lender is required to obtain from
Borrowers or any third party in support of the B&I Guarantee issued by
RBS.
c. Financial Statements and Other Information. Maintain a
system of accounting satisfactory to Lender and in accordance with GAAP
applied on a consistent basis throughout the period involved, permit
officers or authorized representatives of RBS and Lender to visit and
inspect Borrowers' books of account and other records, on a
confidential basis, at such times and as often as RBS or Lender may
desire, and, pay the reasonable fees and expenses of any accountants or
other agents of RBS and Lender selected by RBS or Lender for the
foregoing purposes. Unless written notice of another location is given
to Lender, Borrowers' books and records will be located at TE Corp's
registered office set forth
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above. All financial statements called for below shall be prepared in
form and content acceptable to Lender and by independent certified
public accountants acceptable to Lender.
In addition, TE Corp, on a confidential basis, will:
i. Deliver to Lender, within 120 days after the close of
each fiscal year, consolidated statements of income and
retained earnings of Borrowers for the just-ended fiscal year
and a consolidated balance sheet of Borrowers as of the end of
such fiscal year, audited and certified by a certified public
accountant acceptable to Lender.
ii. Deliver to Lender quarterly, within 45 days of the end
of each fiscal quarter of Borrowers, then current internally
prepared year-to-date consolidated financial statements of
Borrowers, signed by an officer of TE Corp.
iii. Cause to be delivered to Lender annual tax returns of
Borrowers within 120 days of the end of each fiscal year;
except, however, if Borrowers file an extension for their
annual tax returns, Borrowers will simultaneously give notice
of such extension to Lender and cause the annual tax returns
of Borrowers to be delivered to Lender within 10 days of their
filing with the federal or state tax service in accordance
with the rules and regulations for extensions.
iv. Cause to be delivered to Lender financial statements
and tax returns of each Guarantor within 120 days of the end
of each fiscal year end of each Guarantor; except, however, if
a Guarantor files an extension for its annual tax returns,
such Guarantor will simultaneously give notice of such
extension to Lender and cause the annual tax returns of such
Guarantor to be delivered to Lender within 10 days of their
filing with the federal or state tax service in accordance
with the rules and regulations for extensions.
v. Deliver to Lender a compliance certificate for (and
executed by an authorized representative of) TE Corp
concurrently with and dated as of the date of delivery of each
of the financial statements as required in paragraph i above,
containing (a) a certification that the consolidated financial
statements of even date are true and correct and that the
Borrowers are not in default under the terms of this
Agreement, and (b) computations and conclusions, in such
detail as Lender may reasonably request, with respect to
compliance with this Agreement, and the other Loan Documents,
including computations of all quantitative covenants.
vi. Deliver to Lender promptly such additional financial
information, financial reports and statements, including tax
returns, respecting the business operations and financial
condition of Borrowers or any Guarantor, respectively, from
time to time, as Lender may reasonably request.
d. Insurance. Maintain or cause to be maintained insurance
with responsible insurance companies on such of its properties, in such
amounts and against such risks as is
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<PAGE> 9
customarily maintained by similar businesses operating in the same
vicinity, specifically to include fire and extended coverage insurance
covering all assets, business interruption insurance, workers
compensation insurance (to the extent required by applicable law) and
liability insurance, all to be with such companies and in such amounts
as are satisfactory to Lender as to the insurance related to the
property securing the Loan and providing for at least 30 days prior
notice to Lender of any cancellation thereof as to the insurance
related to the property securing the Loan. Borrowers have provided to
Lender a schedule of insurances currently in force and Lender
acknowledges that such companies and such coverage amounts satisfy the
requirements of this paragraph at the present time, subject to
compliance with the other express provisions of this paragraph related
to notice of cancellation and designation of Lender as mortgagee or
loss payee. All casualty and property damage insurance shall name
Lender as mortgagee or loss payee, as appropriate. Borrowers shall
deliver to Lender from time to time at Lender's request copies of all
such insurance policies and certificates of insurance and schedules
setting forth all insurance then in effect. Additionally, Borrowers
shall deliver to Lender at least 30 days prior to each policy's
termination satisfactory evidence of such insurance policy's renewal or
replacement by a policy satisfactory to Lender.
e. Life Insurance. Maintain life insurance policies on the
life of Paul J. Condit in the amount of $500,000.00, on the life of
Jeffrey E. Condit in the amount of $500,000.00, on the life of Paul J.
Condit II in the amount of $500,000.00, and on the life of John T.
Condit in the amount of $500,000.00. These policies must be
collaterally assigned to Lender and the collateral assignment must
provide that the insurer(s) will provide Lender 30 days written notice
of payment default and a right to cure.
f. Existence and Compliance. Maintain Borrowers' existence,
good standing and qualification to do business, where required; conduct
Borrowers' business in the manner in which it is now conducted subject
only to changes made in the ordinary course of business; and comply
with all laws, regulations and governmental requirements including,
without limitation, RBS regulations and instructions related to the B&I
Guarantee, the Equal Credit Opportunity Act, Title VI of the Civil
Rights Act of 1964 (42 USC 2000d et seq.), 7 CFR Part 15, and
environmental laws applicable to Borrowers or to any of their
respective property, business operations and transactions.
g. Cooperation. Cooperate and adjust for clerical errors on
any of the Loan Documents and execute (i) any additional documents
which may be required in order to make the Loan eligible for purchase
or guaranty by the investor or USDA which has issued its commitment to
purchase or guarantee the Loan or (ii) such documents relating to the
Collateral as Lender may from time to time reasonably request.
h. Dealership. Perform Borrowers' respective obligations under
the Dealer Agreements and maintain Borrowers' qualifications to operate
as a dealer under the Dealer Agreements.
i. Adverse Conditions or Events. Promptly advise Lender in
writing of (i) any condition, event or act which comes to its attention
that would or might materially adversely
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<PAGE> 10
affect Borrowers' financial condition or operations or Lender's rights
under the Loan Documents, (ii) any litigation filed by or against
Borrower which may materially adversely affect Borrowers' financial
condition, (iii) any event that has occurred that would constitute an
event of default under any Loan Documents or the Dealer Agreements and
(iv) any uninsured or partially uninsured loss through fire, theft,
liability or property damage in excess of an aggregate of $100,000.00.
j. Taxes and Other Obligations. Pay all of Borrowers' taxes,
assessments and other obligations, including, without limitation,
taxes, costs or other expenses arising out of this transaction, as the
same become due and payable, except to the extent the same are being
contested in good faith by appropriate proceedings in a diligent
manner.
k. Maintenance. Maintain all of Borrowers' tangible property
in good condition and repair and make all necessary replacements
thereof, and preserve and maintain all licenses, trademarks,
privileges, permits, franchises, certificates and the like necessary
for the operation of its businesses.
l. Environmental. Immediately advise Lender in writing of (i)
any and all enforcement, cleanup, remedial, removal, or other
governmental or regulatory actions instituted, completed or threatened
pursuant to any applicable federal, state, or local laws, ordinances or
regulations relating to any Hazardous Materials or petroleum or
petroleum products affecting Borrowers' business operations; and (ii)
all claims made or threatened by any third party against Borrowers
relating to damages, contribution, cost recovery, compensation, loss or
injury resulting from any Hazardous Materials or petroleum or petroleum
products. Borrowers shall immediately notify Lender of any remedial
action taken by Borrowers. Borrowers will not use or permit any other
party to use any Hazardous Materials at any of Borrowers' places of
business or at any other property owned by Borrowers except such
materials as are incidental to Borrowers' normal course of business,
maintenance and repairs and which are handled in compliance with all
applicable environmental laws. Borrowers agree to permit RBS, Lender,
and their agents, contractors and employees to enter and inspect any of
Borrowers' places of business or any other property of Borrowers at any
reasonable times for the purposes of conducting an environmental
investigation and audit (including taking physical samples) to insure
that Borrowers are complying with this covenant, and Borrowers shall
reimburse Lender on demand for the costs of any such environmental
investigation and audit. Borrowers shall provide Lender, its agents,
contractors, employees and representatives with access to and copies of
any and all data and documents relating to or dealing with any
Hazardous Materials or petroleum or petroleum products used, generated,
manufactured, stored or disposed of by Borrowers' business operations
within five (5) days of the request therefor.
m. Site Inspections. Permit RBS, Lender, and their agents,
contractors and employees to enter and inspect any of Borrowers' places
of business or any other property of Borrowers at any reasonable times
to evaluate the business operations of Borrowers, the Collateral and
Borrowers' compliance with the Loan Documents.
6. NEGATIVE COVENANTS. Until full payment and performance of all
obligations
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of Borrowers under the Loan Documents, Borrowers will, unless Lender consents
otherwise in writing (and without limiting any requirement of any other Loan
Document), be prohibited from the following:
a. Use of Proceeds. Using the proceeds of the Loan except for
the purposes stated in Paragraph 4 above.
b. Transfer of Assets or Control. Selling, leasing, pledging,
encumbering (except purchase money liens on property acquired after the
date of the Note), assigning or otherwise disposing of or transferring
any assets securing the Obligations, except in the normal course of its
business or for obsolete equipment with a book value not to exceed
$50,000.00 in the aggregate in any one fiscal year; or entering into
any merger or consolidation; or permitting any Change of Control (a
Change of Control shall be deemed to have occurred if (i) the
Guarantors and the Condit 1997 Family Trust (collectively, "Condit
Principals") in the aggregate beneficially own less than 35% of the
capital stock entitled to vote on the election of the 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 the Condit
Principals or any person who has not been approved in writing by
Lender) then (x) owns a greater percentage of the capital stock
entitled to vote on the election of directors of TE Corp than the
Condit Principals 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 Lender holds the office of Chairman of the Board, President
or Chief Executive Office of TE Corp or TEC, Inc., or (iii) TEC, Inc.
or NMIC cease to be wholly owned subsidiaries of TE Corp; or changing
key management of the Borrowers; or forming or acquiring any subsidiary
or any other entity or dealership.
c. Asset Acquisitions. Acquiring, without the prior written
consent of Lender and RBS, equipment and/or fixed assets in excess of
$250,000.00 annually (this restriction shall apply to all of the
Borrowers combined and shall not be construed to apply to each of the
Borrowers severally), except, however, this restriction shall not apply
to assets acquired in the normal course of Borrowers' business.
d. Liens. Granting or incurring any contractual or
noncontractual lien on or security interest in its assets, except in
favor of Lender or the Permitted Liens, or failing to promptly pay when
due all lawful claims, whether for labor, materials or otherwise.
e. Extensions of Credit. Making any loan or advance to any
person or entity (except for extensions of credit to farm equipment
purchasers in the ordinary course of business), purchasing or otherwise
acquiring, or permitting any subsidiary to purchase or otherwise
acquire, any capital stock, assets, obligations, or other securities
of, make any capital contributions to, or otherwise invest in or
acquire any interest in any entity, or participating as partner or
joint venturer with any person or entity, except for the purchase of
direct obligations of the United States or any agency thereof with
maturities of less than one (1) year.
f. Repurchasing or Change in Ownership. Repurchasing,
redeeming or retiring any capital stock or membership interest or
partnership interest of Borrowers.
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g. Borrowings. Creating, incurring, assuming or becoming
liable in any manner for any indebtedness (for borrowed money, deferred
payment for purchase price of assets, capital lease obligations, as
surety or guarantor for debt of another, or otherwise), except (i)
indebtedness incurred under this Agreement; (ii) any trade indebtedness
or other payables or liabilities incurred in the ordinary course of
business, in the case of such trade debt, payable within 60 days of its
incurrence or such longer period as may be permitted under floor plan
financing arrangements; (iii) purchase money indebtedness or capital
lease obligations or other financing indebtedness related to the
acquisition of assets within the limits set forth in Paragraph 6.c.;
(iv) existing indebtedness, including the $1,750,000 line of credit
with Lender; or (v) any refinancing or extension of any of the
foregoing indebtedness.
h. Salaries, Bonuses and other Compensation. Paying,
distributing or compensating the officers identified below an annual
amount in excess of the amount paid or distributed to said officer in
the previous year plus five (5%) percent:
i. Paul J. Condit
ii. E. A. Milo Mattorano
Provided, however, that the foregoing restrictions shall not apply to
the award of stock options, restricted stock or other similar
equity-based compensation arrangements.
i. Dividends and Distributions. Paying or declaring any
distributions or dividends on any shares of any class of its capital
stock (other than dividends or distributions payable in the form of
capital stock) or making any distributions to any members or partners.
j. Employment Retirement Income Security Act. Taking or
failing to take, any act if such act or failure to act results in the
imposition of withdrawal liability under Title IV of ERISA.
k. Character of Business. Changing the general character of
the business of Borrowers as conducted at the date hereof, or engage in
any type of business not reasonably related to its business as
presently conducted.
l. Financial Ratios. Permitting at the end of any fiscal
quarter:
i. Tangible Net Worth to be less than $6,500,000.00.
ii. The ratio of the total consolidated liabilities to
Tangible Net Worth (including floor plan liability) to be at
loan closing equal to or less than 5.25 to 1.00; by
December 31, 2000 equal to or less than 4.75 to 1.00; and by
December 31, 2001 and thereafter equal to or less than 4.50
to 1.00;
iii. The ratio of total consolidated liabilities to
Tangible Net Worth (excluding floor plan liability) to be at
loan closing equal to or less than 2.00 to 1.00; and by
December 31, 2000 and thereafter equal to or less than 1.50
to 1.00;
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iv. The ratio of the consolidated current assets to the
consolidated current liabilities to be less than 1.00 to 1.00;
and
v. Cash Flow Coverage Ratio to be at closing equal to or
greater than 1.25 to 1.00; and by December 31, 2000 and
thereafter equal to or greater than 1.50 to 1.00.
7. DEFAULT. Borrowers shall be in default under this Agreement and
under each of the other Loan Documents if:
a. Borrowers or Guarantors shall default in the payment of any
amounts due and owing under the Loan, the Obligations or the Dealer
Agreements; or
b. Borrowers or Guarantors fail to timely and properly
observe, keep or perform any term, covenant, agreement or condition in
any Loan Document or the Dealer Agreements or in any other loan
agreement, promissory note, security agreement, deed of trust, deed to
secure debt, mortgage, assignment or other contract securing or
evidencing payment of any indebtedness of Borrowers or Guarantors to
Lender, including, without limitation, the $1,750,000 line of credit
with Lender and, with respect to any failure to observe any term,
covenant, agreement or condition in this Agreement (other than those
expressly addressed by the other default provisions), Borrowers or
Guarantors fail to cure any such default within 20 days after written
notice of such default is sent to Borrower; or
c. Any representation or warranty contained herein or made by
or furnished on behalf of Borrowers or Guarantors in connection
herewith was false or misleading in any material respect as of the date
made; or
d. Borrowers fail to pay their debts generally as they become
due; or
e. Any of Borrowers or Guarantors make or take any action to
make an assignment for the benefit of creditors, or petition or take
any action to petition any tribunal for the appointment of a custodian,
receiver or trustee for it or a substantial part of its assets, or
commence or take any action to commence any proceeding under any
bankruptcy, reorganization, arrangement, readjustment of debt,
dissolution, liquidation or debtor relief law or statute of any
jurisdiction, whether now or hereafter in effect, including, without
limitation, any chapter of the federal Bankruptcy Code; or, such a
petition, application or proceeding is filed or commenced against any
Borrower or any Guarantor and such petition, application or proceeding
is not dismissed within 45 days or if an order for relief is entered;
or any Borrower or any Guarantor by any act or omission indicates its
approval of or acquiescence in any such petition, application or
proceeding or order for relief or the appointment of a custodian,
receiver or trustee for it or any substantial part of any of its
properties; or any Borrower or any Guarantor suffer to exist any such
custodianship, receivership or trusteeship; or
f. Any Borrower or any Guarantor conceals, removes or permits
to be concealed or removed, any part of its property, with intent to
hinder, delay or defraud its creditors or any of them; or any Borrower
or any Guarantor makes or suffers a transfer of any of its
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<PAGE> 14
property which may be fraudulent under any bankruptcy fraudulent
conveyance or similar law; or any Borrower or any Guarantor makes any
transfer of its property to or for the benefit of a creditor at a time
when other creditors similarly situated have not been paid; or any
Borrower or any Guarantor suffers or permits, while insolvent, any
creditor to obtain a lien upon any of its property through legal
proceedings or distraint which is not vacated within 30 days after the
date hereof.
8. REMEDIES UPON DEFAULT. If an event of default shall occur, Lender
may terminate all obligations of Lender to Borrowers; Lender may declare
immediately due and payable, without presentment, demand, protest or any other
notice of any kind (except to the extent expressly provided for in Paragraph
7.b.), all of which are expressly waived, the Note and any other note of
Borrowers held by Lender, including, without limitation, principal, accrued
interest and costs of collection (including, without limitation, a reasonable
attorneys fee if collected by or through an attorney who is not a salaried
employee of Lender, in bankruptcy or in other judicial proceedings); and Lender
shall have all rights, powers and remedies available under each of the Loan
Documents as well as all rights and remedies available at law or in equity.
9. NOTICES. All notices, requests or demands which any party is
required or may desire to give to any other party under any provision of this
Agreement must be in writing delivered to the other party at the following
address:
Borrowers: Texas Equipment Corporation
Attn: E. A. Milo Mattorano
1305 Hobbs Highway
Seminole, Texas 79360
Lender: Bank United
401 West Texas Street
Midland, Texas 79701
or to such other address as any party may designate by written notice to the
other party. Each such notice, request and demand shall be deemed given or made
as follows:
a. If sent by mail, upon the earlier of the date of receipt or
five (5) days after deposit in the U.S. Mail, first class postage
prepaid;
b. If sent by any other means, upon the first business day
(excluding weekends and federal holidays) after delivery.
10. COSTS, EXPENSES AND ATTORNEYS' FEES. Borrowers shall pay to Lender
immediately upon demand the full amount of all costs and expenses, including
reasonable attorneys' fees (to include outside counsel fees and all allocated
costs of Lender's in-house counsel if permitted by applicable law), incurred by
Lender in connection with (a) negotiation, preparation and enforcement of this
Agreement and each of the Loan Documents, and (b) all other costs and attorneys'
fees incurred by Lender for which Borrowers are obligated to reimburse Lender in
accordance with the terms of the Loan Documents.
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11. INDEMNIFICATION. Borrowers shall indemnify, defend and hold Lender
and its successors and assigns harmless from and against any and all claims,
demands, suits, losses, damages, assessments, fines, penalties, costs or other
expenses (including reasonable attorneys' fees and court costs) whether direct,
indirect, consequential or incidental, at any time asserted by a third party
that Lender may incur or suffer or that may arise out of, result from or relate
to (a) this Agreement or the other Loan Documents or the transactions
contemplated hereby or thereby (other than actions which have been finally
determined by a court of competent jurisdiction to be the direct result of the
gross negligence or willful misconduct of the person otherwise indemnified
hereunder), or (b) arising from or in any way related to any of Borrowers'
business operations, including, without limitation, actual or threatened damage
to the environment, agency costs of investigation, personal injury or death, or
property damage, due to a release or alleged release of Hazardous Materials or
petroleum or petroleum products, arising from Borrowers' business operations,
any other property owned by Borrowers or in the surface or ground water arising
from Borrowers' business operations, or gaseous emissions arising from
Borrowers' business operations or any other condition existing or arising from
Borrowers' business operations resulting from the use or existence of Hazardous
Materials or petroleum or petroleum products, whether such claim proves to be
true or false. Borrowers further agree that their indemnity obligations shall
include, without limitation, liability for damages resulting from the personal
injury or death of an employee of Borrowers, regardless of whether Borrowers
have paid the employee under the workmen' s compensation laws of any state or
other similar federal or state legislation for the protection of employees. The
term "property damage" as used in this paragraph includes, without limitation,
damage to any real or personal property of Borrowers, Lender, and of any third
parties. Borrowers' obligations under this paragraph shall survive the repayment
of the Loan, the Obligations and any deed in lieu of foreclosure or foreclosure
of any deed to secure debt, deed of trust, security agreement or mortgage
securing the Loan and the Obligations.
12. MISCELLANEOUS. Borrowers and Lender further covenant and agree as
follows, without limiting any requirement of any other Loan Document:
a. Cumulative Rights and No Waiver. Each and every right
granted to Lender under any Loan Document, or allowed it by law or
equity shall be cumulative of each other and may be exercised in
addition to any and all other rights of Lender, and no delay by either
party in exercising any right shall operate as a waiver thereof, nor
shall any single or partial exercise by Lender of any right preclude
any other or future exercise thereof or the exercise of any other
right. Borrowers expressly waive any presentment, demand, protest or
other notice of any kind (except to the extent expressly provided for
in Paragraph 7.b.), including, without limitation, notice of intent to
accelerate and notice of acceleration. No notice to or demand on
Borrowers in any case shall, of itself, entitle Borrowers to any other
or future notice or demand in similar or other circumstances.
b. Applicable Law. This Agreement and the rights and
obligations of the parties hereunder shall be governed by and
interpreted in accordance with the laws of the State of Texas and
applicable United States federal law.
c. Integration of Documents\Agreements. The Loan Documents
embody the
15
<PAGE> 16
entire agreement of the parties with regard to the subject matter
hereof. There are no representations, promises, warranties,
understandings or agreements expressed or implied, oral or otherwise,
in relation thereto, except those expressly referred to or set forth
herein or in the Loan Documents. Each of the Borrowers acknowledges
that the execution and delivery of the Loan Documents is its free and
voluntary act and deed, and that said execution and delivery have not
been induced by, nor done in reliance upon, any representations,
promises, warranties, understandings or agreements made by Lender, its
agents, officers, employees or representatives.
d. Amendment; Assignment. No modification, consent, amendment
or waiver of any provision of this Agreement, nor consent to any
departure by Borrowers therefrom, shall be effective unless the same
shall be in writing and signed by an officer of Lender, and then shall
be effective only in the specified instance and for the purpose for
which given. This Agreement is binding upon Borrowers, their successors
and assigns, and inures to the benefit of Lender, its successors and
assigns; however, no assignment or other transfer of Borrowers' rights
or obligations hereunder shall be made or be effective without Lender's
prior written consent, nor shall it relieve Borrowers of any
obligations hereunder. There is no third party beneficiary of this
Agreement.
e. Documents. All documents, certificates and other items
required under this Agreement to be executed and/or delivered to Lender
shall be in form and content satisfactory to Lender and its counsel.
f. Partial Invalidity. The unenforceability or invalidity of
any provision of this Agreement shall not affect the enforceability or
validity of any other provision herein and the invalidity or
unenforceability of any provision of any Loan Document as to any person
or circumstance shall not affect the enforceability or validity of such
provision as it may apply to other persons or circumstances.
g. Survivability. All covenants, agreements, representations
and warranties made herein or in the other Loan Documents shall survive
the making of the Loan and shall continue in full force and effect so
long as the Loan or any of the Obligations are outstanding or the
obligation of the Lender to make any advances under the Loan shall not
have expired.
h. Updated Appraisals and Maintenance of Collateral. Lender
may, at its option, at Borrowers' expense, obtain an appraisal of the
Collateral prepared in accordance with applicable Lender regulatory
agency regulations and the written instructions of Lender by a third
party appraiser engaged directly by Lender. The cost of each appraiser
shall be payable by Borrowers to Lender on demand. If such appraisal
shows the market value of the Collateral has declined, Borrowers agree
that upon the demand of Lender they will immediately either pledge
additional collateral in form and substance acceptable to Lender or
make such payments as may be necessary to reduce the principal balance
outstanding under the Loan, so that in either case, the principal
amount outstanding under the Loan shall not exceed 100% of the market
value of the Collateral and any additional collateral.
i. Time of the Essence. The parties hereto agree that time is
of the essence to this Agreement.
16
<PAGE> 17
13. NO ORAL AGREEMENT. THIS WRITTEN AGREEMENT AND THE OTHER LOAN
DOCUMENTS REPRESENT THE FINAL AGREEMENT BETWEEN THE PARTIES AND MAY NOT BE
CONTRADICTED BY EVIDENCE OF PRIOR, CONTEMPORANEOUS OR SUBSEQUENT ORAL AGREEMENTS
OF THE PARTIES.
The parties hereto have caused this Agreement to be duly executed under
seal by their duly authorized representatives as of the date first above
written.
BORROWERS: LENDER:
TEXAS EQUIPMENT CORPORATION BANK UNITED
By: /s/ Paul J. Condit By: /s/ C. Jeff Hansard
-------------------- ---------------------
Name: Paul J. Condit Name: C. Jeff Hansard
Title: President Title: Senior Vice President
TEXAS EQUIPMENT CO., INC.
By: /s/ Paul J. Condit
--------------------
Name: Paul J. Condit
Title: President
NEW MEXICO IMPLEMENT
COMPANY, INC.
By: /s/ Paul J. Condit
--------------------
Name: Paul J. Condit
Title: President
17
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