<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2000 or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ________ to _______
Commission file number 000-21813
Texas Equipment Corporation
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(Exact name of registrant as specified in its charter)
<TABLE>
<CAPTION>
Nevada 62-1459870
-------------------------------------------------------------- -----------------------------------
<S> <C>
(State or other jurisdiction of incorporation or organization) (I.R.S. Employer Identification No.)
1305 Hobbs Hwy, Seminole, Texas 79360
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number: (915) 758-3643
Securities registered under Section 12(b) of the Exchange Act:
Title of each class Name of each exchange on which registered
------------------- -----------------------------------------
None None
</TABLE>
Securities registered under Section 12(g) of the Exchange Act:
Title of each class
-------------------
Common Stock, $.001 par value
Indicate by check mark whether registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Exchange Act during the past
12 months (or for such shorter period that the registrant was required to file
such reports), and (2) has been subject to such filing requirements for the
past 90 days.
Yes X No
--- ---
The number of shares outstanding of the registrant's Common Stock, as of
November 10, 2000 was 3,804,602.
<PAGE> 2
INDEX
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Page
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<S> <C>
PART I - FINANCIAL INFORMATION
Item 1. Condensed Financial Statements (Unaudited):
Consolidated Balance Sheets at September 30, 2000 and December 31, 1999...................................... 4
Consolidated Statements of Operations for the Three Months Ended September 30, 2000 and 1999................. 6
Consolidated Statements of Operations for the Nine Months Ended September 30, 2000 and 1999.................. 7
Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2000 and 1999.................. 8
Item 2. Management's Discussion and Analysis of Financial Conditions and Results of Operations.................. 13
Item 3. Quantitative and Qualitative Disclosures about Market Risk.............................................. 19
PART II - OTHER INFORMATION
Item 1. Legal Proceedings....................................................................................... 20
Item 6. Exhibits and Reports on Form 8-K........................................................................ 20
Signatures...................................................................................................... 21
</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 I. Item 2. - Management's Discussion and Analysis of Financial
Condition and Results of Operations - Safe Harbor Statement" 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 are intended to identify forward-looking statements.
Forward-looking statements, by their nature, involve substantial risks or
uncertainties.
3
<PAGE> 4
PART I - FINANCIAL INFORMATION
ITEM 1. CONDENSED FINANCIAL STATEMENTS.
TEXAS EQUIPMENT CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
ASSETS
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
2000 1999
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<S> <C> <C>
Current Assets
Cash and cash equivalents $ 165,913 $ 307,509
Accounts receivable (less allowance for
doubtful accounts of $109,564) 375,414 561,958
Other receivables 2,194,586 1,127,502
Inventories 25,697,333 27,247,079
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TOTAL CURRENT ASSETS 28,433,246 29,244,048
PROPERTY AND EQUIPMENT, NET 5,292,923 5,481,180
FINANCE RECEIVABLES (less allowance for doubtful
accounts of $200,000) 597,364 588,564
RECEIVABLES FROM OFFICER 122,863 134,800
GOODWILL, net of accumulated amortization of
$101,705 in 2000 and $92,170 in 1999 88,993 98,528
OTHER ASSETS 443,494 318,972
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TOTAL ASSETS $34,978,883 $35,866,092
=========== ===========
</TABLE>
4
See Notes to Condensed Financial Statements
<PAGE> 5
TEXAS EQUIPMENT CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
LIABILITIES AND STOCKHOLDERS' EQUITY
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<CAPTION>
SEPTEMBER 30, DECEMBER 31,
2000 1999
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<S> <C> <C>
CURRENT LIABILITIES
Floor plan payables $17,133,846 $17,625,613
Notes payable 2,416,063 1,749,811
Accounts payable 724,800 1,215,398
Accrued liabilities 424,733 368,763
Current maturities of
long-term debt 406,806 397,639
----------- -----------
TOTAL CURRENT LIABILITIES 21,106,248 21,357,224
LONG-TERM DEBT, net of
current maturities 6,955,994 7,353,825
DEFERRED TAX LIABILITY 233,074 233,074
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY
Common stock, $.001 par value; authorized
50,000,000; issued and outstanding
3,804,602 in 2000 and 3,607,311 in 1999 3,804 3,607
Paid in capital 3,457,096 3,298,647
Retained earnings 3,222,667 3,619,715
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TOTAL STOCKHOLDERS' EQUITY 6,683,567 6,921,969
----------- -----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $34,978,883 $35,866,092
=========== ===========
</TABLE>
5
See Notes to Condensed Financial Statements
<PAGE> 6
TEXAS EQUIPMENT CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SEPTEMBER 30,
--------------------------------
2000 1999
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<S> <C> <C>
REVENUES $ 14,943,707 $ 17,089,207
COST OF SALES 12,890,026 14,723,671
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GROSS PROFIT 2,053,681 2,365,536
SELLING, GENERAL AND
ADMINISTRATIVE EXPENSES 2,025,497 2,055,835
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INCOME FROM OPERATIONS 28,184 309,701
OTHER INCOME (EXPENSE)
Interest expense (320,815) (322,513)
Interest income 36,626 143,896
Non-cash guarantee fee (20,000) (15,729)
Other income 3,693 (16,587)
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(LOSS) INCOME BEFORE TAXES (272,312) 98,768
INCOME TAX EXPENSE (BENEFIT) (95,165) 37,684
------------ ------------
NET (LOSS) INCOME $ (177,147) $ 61,084
============ ============
NET (LOSS) INCOME PER SHARE
Basic $ (0.05) $ 0.02
Diluted $ (0.05) $ 0.02
NUMBER OF SHARES USED IN COMPUTATION
Basic 3,804,602 3,607,311
Diluted 3,804,602 3,630,800
</TABLE>
6
See Notes to Condensed Financial Statements
<PAGE> 7
TEXAS EQUIPMENT CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30,
--------------------------------
2000 1999
------------ ------------
<S> <C> <C>
REVENUES $ 48,012,162 $ 49,428,150
COST OF SALES 41,347,174 42,174,033
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GROSS PROFIT 6,664,988 7,254,117
SELLING, GENERAL AND
ADMINISTRATIVE EXPENSES 6,570,867 6,315,656
------------ ------------
INCOME FROM OPERATIONS 94,121 938,461
OTHER INCOME (EXPENSE)
Interest expense (844,961) (690,209)
Interest income 169,097 296,618
Non-cash guarantee fee (60,000) (48,311)
Other income 40,159 (6,342)
------------ ------------
(LOSS) INCOME BEFORE TAXES (601,584) 490,217
INCOME TAX EXPENSE (BENEFIT) (204,537) 172,527
------------ ------------
NET (LOSS) INCOME $ (397,047) $ 317,690
============ ============
NET (LOSS) INCOME PER SHARE
Basic $ (0.11) $ 0.09
Diluted $ (0.11) $ 0.09
NUMBER OF SHARES USED IN COMPUTATION
Basic 3,674,275 3,568,492
Diluted 3,674,275 3,591,981
</TABLE>
7
See Notes to Condensed Financial Statements
<PAGE> 8
TEXAS EQUIPMENT CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
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<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30,
-------------------------------
2000 1999
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<S> <C> <C>
CASH FLOWS (USED IN) PROVIDED BY
OPERATING ACTIVITIES
Net (loss) income $ (397,047) $ 317,690
Adjustment to reconcile net (loss) income to net cash
(used in) operating activities:
Amortization & depreciation 431,866 401,098
Guarantee fee - valuation of stock options issued 60,000 48,311
Interest on convertible note 43,123 31,754
Changes in operating assets and liabilities:
Accounts and other receivable (880,540) (1,639,287)
Inventories 1,549,746 6,918,595
Floor plan payable (491,767) (8,545,250)
Accounts payable (490,598) (21,357)
Accrued liabilities 55,970 (66,678)
Finance receivable (8,800) 1,576
Other assets (124,522) 49,065
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NET CASH (USED IN) OPERATING ACTIVITIES (252,569) (2,371,127)
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CASH FLOWS (USED IN) INVESTING ACTIVITIES
Purchases of land, buildings and equipment (298,156) (159,357)
Proceeds from sale of land, buildings and equipment 64,082 --
Stockholder's receivable 11,937 (7,760)
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NET CASH (USED IN) INVESTING ACTIVITIES (222,137) (167,117)
----------- -----------
</TABLE>
8
See Notes to Condensed Financial Statements
<PAGE> 9
TEXAS EQUIPMENT CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30,
-------------------------------
2000 1999
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<S> <C> <C>
CASH FLOW PROVIDED BY (USED IN) FINANCING
ACTIVITIES
Proceeds from line of credit $ 666,252 $ 691,423
Proceeds from long-term debt 1,968,332 7,257,195
Repayments of long-term debt (2,301,474) (5,424,497)
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NET CASH PROVIDED BY FINANCING
ACTIVITIES 333,110 2,524,121
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NET (DECREASE) IN CASH AND CASH EQUIVALENTS (141,596) (14,123)
CASH AND CASH EQUIVALENTS AT THE
BEGINNING OF THE PERIOD 307,509 494,132
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CASH AND CASH EQUIVALENTS AT THE END OF
THE PERIOD $ 165,913 $ 480,009
=========== ===========
SUPPLEMENTAL DISCLOSURES OF
CASH FLOW INFORMATION
Cash paid during the period for:
Interest expense $ 801,837 $ 645,732
=========== ===========
Common stock issued related to convertible note $ 98,645 $ 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 September 30, 2000 and December 31,
1999 and the condensed statements of operations for the three months and nine
months ended September 30, 2000 and 1999 and condensed statements of cash flows
for the nine months ended September 30, 2000 and 1999 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,
1999. The results of operations for the three months and nine months ended
September 30, 2000 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, statements of operations and statements of cash flows for 1999
to be in conformity with 2000.
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>
September 30, December 31,
2000 1999
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<S> <C> <C>
New equipment $ 9,255,911 $ 10,349,224
Used equipment 12,022,844 12,377,229
Parts and other 4,418,578 4,520,626
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Total $ 25,697,333 $ 27,247,079
============ ============
</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.
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<CAPTION>
THREE MONTHS ENDED SEPTEMBER 30, 2000 Product
Wholegoods Support
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<S> <C> <C>
Sales and revenues from external customers $ 10,942,831 $ 4,000,876
Depreciation expense 41,270 100,463
Segment operating (loss) income (181,063) 482,619
Segment assets:
Property, plant and equipment 896,967 4,276,610
Inventory 21,278,755 4,418,578
THREE MONTHS ENDED SEPTEMBER 30, 1999
Sales and revenues from external customers 12,705,593 4,383,614
Depreciation expense 45,420 94,802
Segment operating (loss) income (34,531) 651,237
Segment assets:
Property, plant and equipment 930,993 4,438,844
Inventory 27,472,092 4,851,027
NINE MONTHS ENDED SEPTEMBER 30, 2000 Product
Wholegoods Support
------------ ------------
Sales and revenues from external customers $ 37,327,053 $ 10,685,109
Depreciation expense 121,278 293,974
Segment operating income 206,955 821,794
Segment assets:
Property, plant and equipment 896,967 4,276,610
Inventory 21,278,755 4,418,578
NINE MONTHS ENDED SEPTEMBER 30, 1999
Sales and revenues from external customers 38,364,080 11,064,070
Depreciation expense 121,159 278,534
Segment operating income 746,967 1,198,687
Segment assets:
Property, plant and equipment 930,993 4,438,844
Inventory 27,472,092 4,851,027
</TABLE>
11
<PAGE> 12
3. SEGMENT INFORMATION (CONT'D)
<TABLE>
<CAPTION>
OPERATING INCOME Three Months Ended September 30,
--------------------------------
2000 1999
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<S> <C> <C>
Total operating income for reportable segments $ 301,556 $ 616,706
Unallocated amounts:
Administrative expense (273,372) (307,005)
Other income 3,693 (16,587)
Interest expense (320,815) (322,513)
Interest income 36,626 143,896
Non-cash guarantee fee (20,000) (15,729)
----------- -----------
Total consolidated (loss) income before taxes $ (272,312) $ 98,768
=========== ===========
OPERATING INCOME Nine Months Ended September 30,
-------------------------------
2000 1999
----------- -----------
Total operating income for reportable segments $ 1,028,749 $ 1,945,654
Unallocated amounts:
Administrative expense (934,628) (1,007,193)
Other income 40,159 (6,342)
Interest expense (844,961) (690,209)
Interest income 169,097 296,618
Non-cash guarantee fee (60,000) (48,311)
----------- -----------
Total consolidated (loss) income before taxes $ (601,584) $ 490,217
=========== ===========
</TABLE>
4. LONG-TERM DEBT
The Company has long-term debt agreements containing various
restrictive covenants which, among other matters, require the Company to
maintain minimum net worth levels and cash flow requirements, as defined, and
place limits on additional indebtedness. The Company did not meet the Cash Flow
Coverage Ratio (as defined) at September 30, 2000. The lender agreed to waive
the non-compliance as of September 30, 2000 and amended the cash flow
requirement through September 30, 2001.
5. NET (LOSS) INCOME PER SHARE
The following summarizes the computation of weighted average shares
outstanding and the net income (loss) per share for the nine months ended
September 30:
<TABLE>
<CAPTION>
2000 1999
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<S> <C> <C>
Net (loss) income available to common shareholders $ (397,047) $ 317,690
Weighted average number of common shares
outstanding - basic ............................... 3,674,275 3,568,492
Dilutive effect of convertible debt and options ...... -- 23,489
Common and potential common shares outstanding
diluted ........................................... 3,674,275 3,591,981
Basic and dilutive net (loss) income per share ....... $ (0.11) $ 0.09
</TABLE>
12
<PAGE> 13
6. IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS
In December of 1999, the Securities and Exchange Commission staff
issued Staff Accounting Bulletin (SAB) No. 101, Revenue Recognition in
Financial Statements. This SAB does not change any of the existing rules on
revenue recognition. Rather, the SAB provides additional guidance for
transactions not addressed by existing rules. The Company is required to review
its revenue recognition policies by the fourth quarter of fiscal year 2000 to
determine that its recognition criteria is in compliance with the SAB
interpretations. Any change in accounting principle required in order to comply
with the SAB may be reported as a cumulative catch-up adjustment at that time.
The Company is currently reviewing its revenue recognition policies and does
not feel that any change in accounting required would have a material impact on
the Company's reported financial position, results of operations or cash flows.
Additionally, the Company is evaluating the effects of FASB
Interpretation 44, Accounting for Certain Transactions Involving Stock Options.
The Company has not yet adopted or completed its assessment of this
interpretation on its current practices.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATION.
As a specialty retailer, the Company distributes, sells, services and
rents 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 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. Because of the differences in gross
margins between wholegoods sales and parts and service revenues, total gross
profit percentages (gross profit as a percentage of total sales) will fluctuate
with the change in the mix of revenues from these product lines.
Typically, farmers purchase agricultural equipment immediately prior
to planting or harvesting crops. Because of the location of the Company's
dealer network, there is an overlap in the growing seasons, which has the
effect of leveling out quarterly sales and inventory requirements. In 1999, the
Company recorded approximately 26% of its sales in each of the first and third
quarters and approximately 24% in each of the second and fourth quarters. The
Company believes that there will not be a substantial change in seasonality in
2000.
RESULTS OF OPERATIONS
THREE MONTHS ENDED SEPTEMBER 30, 2000 COMPARED TO THREE MONTHS ENDED SEPTEMBER
30, 1999
REVENUES
Revenues decreased approximately $2,145,500 or 12.6%, to $14,943,707
for the third quarter of 2000 from $17,089,207 for the third quarter of 1999.
13
<PAGE> 14
Wholegoods sales decreased approximately $1,762,762 or 13.9%, to $10,942,831
for the third quarter of 2000 from $12,705,593 for the third quarter of 1999. A
decrease in new tractor and harvest equipment sales was primarily responsible
for the decrease in new equipment sales of approximately $1,254,000, or 15.8%.
Used equipment sales decreased approximately 10.7%, or $509,000. Weak commodity
prices and severe drought conditions in the Company's market area during the
third quarter was the major contributor to the decreased equipment sales. Weak
commodity prices continue to suppress new and used equipment sales when
compared to the sales levels in 1998. This trend, which began in 1999, is
expected to continue throughout fiscal year 2000.
Parts and service revenue decreased approximately $383,000 or 8.7%, to
$4,000,876 for the third quarter of 2000 from $4,383,614 for the third quarter
of 1999. Drought conditions and a significantly lower corn harvest in the
Northern Panhandle of West Texas were the main contributors to lower parts and
service sales in the third quarter of 2000. In addition, low commodity prices
continue to have a significant effect on parts and service revenues. This
condition is expected to continue through the remainder of 2000.
GROSS PROFIT
Gross profit decreased by $312,000 or 13.2% to $2,053,681 from
$2,365,536 for the third quarter of 2000. Wholegoods gross margins (gross
profit as a percentage of total revenues) decreased from 7.4% to 5.4%. This
decrease in gross margin percentage, as well as the decrease in wholegoods
sales, resulted in a decrease in gross profit of $180,000. Price pressures due
to low commodity prices and the drought in the third quarter of this fiscal
year were primarily responsible for lower margins on equipment sales. Gross
profit from parts and service sales decreased by approximately $131,000. This
decrease was due to the decrease in parts and service sales. Parts and service
gross margins remained approximately the same at 36.3% for the three months
ended September 30, 1999 and 36.4% for the three months ended September 30,
2000. The Company's highest gross margin is derived from its parts and service
revenues. For these periods the revenue mix between wholegoods sales and parts
and service revenues were approximately the same with wholegoods at
approximately 74.3% and 73.2% of total revenues and parts and service revenue
at 25.7% and 26.8% of total revenue in the third quarters of 1999 and 2000,
respectively.
SELLING, GENERAL, AND ADMINISTRATIVE EXPENSE
Selling, general, and administrative (SG&A) expenses of $2,025,497 for
the third quarter of 2000 were relatively the same as the $2,055,835 for the
third quarter of 1999. SG&A expense as a percentage of total revenues was 13.6%
in the third quarter of 2000 compared to 12% in the third quarter of 1999.
INTEREST EXPENSE/INCOME
Interest expense remained approximately the same at $320,815 for the
third quarter of 2000 and $322,513 for the third quarter of 1999.
Interest income decreased to $36,626 for the third quarter of 2000
from $143,896 for the third quarter of 1999. 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 equipment finance companies and prevailing market conditions.
Interest rates continue to remain competitive; however, because of the
continued weakness in equipment demand, the Company and the equipment finance
companies provided greater availability of discounted interest rates in the
three months ended September 30, 2000 compared to the three months ended
September 30, 1999, which lowered the amount of interest income
14
<PAGE> 15
earned by the Company. In addition, because of a change in the Agricredit
customer financing program, the Company received a one time payment of deferred
interest income of $50,000 in the third quarter of 1999.
NON-CASH GUARANTEE FEE
In connection with the personal guarantee by the majority shareholders
of the Company of approximately $21,379,000 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
91,622 shares of the Company's Common Stock at an exercise price of $3.50. This
resulted in a non-cash charge of $20,000 for the three-month period.
NET (LOSS) INCOME
Net income decreased approximately $238,000 to a net loss of
($177,147) for the third quarter of 2000 from net profit of $61,084 for the
third quarter of 1999. This decrease was primarily the result of the decrease
in operating income of approximately $282,000, and the net decrease in interest
income, other income and other expense of approximately $89,000, which was
offset by the decrease in the provision for income taxes of approximately
$133,000.
The loss per share was ($0.05) (both basic and diluted) for the third
quarter of 2000 compared to earnings per share of $0.02 (both basic and
diluted) for the third quarter of 1999, primarily as the result of the reasons
described above.
NINE MONTHS ENDED SEPTEMBER 30, 2000 COMPARED TO NINE MONTHS ENDED SEPTEMBER
30, 1999
REVENUES
Revenues decreased approximately $1,416,000 or 2.9%, to $48,012,162
for the nine months ended September 30, 2000 from $49,428,150 for the nine
months ended September 30, 1999.
Wholegoods sales decreased approximately $1,037,000 or 2.7%, to $37,327,053 for
the nine months ended September 30, 2000 from $38,364,080 for the nine months
ended September 30, 1999. An increase in new tractor and harvest equipment
sales was primarily responsible for the increase in new equipment sales of
approximately $1,027,894 or 4.68%. Used equipment sales decreased approximately
12.6%, or $2,065,000 primarily because of the decrease in used harvest
equipment sales. Weak commodity prices continue to suppress new and used
equipment sales when compared with equipment sales levels in 1998. This trend,
which began in 1999, is expected to continue throughout fiscal year 2000.
Parts and service revenue decreased approximately $379,000 or 3.4%, to
$10,685,109 for the nine months ended September 30, 2000 from $11,064,070 for
the nine months ended September 30, 1999. Low commodity prices continue to
suppress parts and service revenues.
GROSS PROFIT
Gross profit decreased approximately $589,000 to $6,664,988 for the
nine months ended September 30, 2000 from $7,254,117 for the nine months ended
September 30, 1999. Wholegoods gross margin (gross profit as a percentage of
total revenues) decreased from 7.7% to 7.3%. This decrease in gross margin
percentage, resulted in a decrease in gross profit of $242,000. Price pressures
due to low commodity prices
15
<PAGE> 16
were responsible for lower margins on equipment sales. Gross profit from parts
and service sales decreased by approximately $348,000. This decrease was due to
lower gross margins from parts and service sales, which decreased from 38.7%
for the nine months ended September 30, 1999 to 36.9% for the nine months ended
September 30, 2000. Price pressures due to lower commodity prices, a weak
winter wheat harvest in May and June, and a weak corn harvest in August and
September were responsible for the lower margins. The Company's highest gross
margin is derived from its parts and service revenues. The revenue mix between
wholegoods sales and parts and service revenues were approximately the same,
with wholegoods at approximately 77.6% and 77.7% of total revenues and parts
and service revenue at 22.4% and 22.3% of total revenue for the nine months
ended September 30, 1999 and 2000, respectively.
SELLING, GENERAL, AND ADMINISTRATIVE EXPENSE
Selling, general, and administrative (SG&A) expense increased
approximately $255,000 to $6,570,867 in the nine months ended September 30,
2000 from $6,315,656 for the nine months ended September 30, 1999. This
increase was primarily the result of approximately $200,000 of auction expenses
incurred by the Company in connection with a used equipment auction held in
January 2000. The auction was a success in partially decreasing the Company's
excess used equipment inventory. However, used equipment inventory is higher
than normal because of the continued weak demand for equipment because of weak
commodity prices.
SG&A expense as a percentage of total revenues were 13.7% in the nine months
ended September 30, 2000 compared to 12.8% in the nine months ended September
30, 1999. This increase in percentage was primarily the result of higher
operating expenses as explained above and lower sales.
INTEREST EXPENSE/INCOME
Interest expense increased approximately $155,000 to $844,961 for the
nine months ended September 30, 2000 from $690,209 for the nine months ended
September 30, 1999. The increase was due primarily to increased bank financing
to support higher levels of Company owned inventory and to meet working capital
requirements.
Interest income decreased approximately $128,000 to $169,097 for the
nine months ended September 30, 2000 from $296,618 for the nine months ended
September 30, 1999. 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 equipment finance companies
and prevailing market conditions. Interest rates continue to remain
competitive; however, because of the continued weakness in equipment demand,
the Company and the equipment finance companies provided greater availability
of discounted interest rates in the nine months ended September 30, 2000
compared to the nine months ended September 30, 1999, which lowered the amount
of interest income earned by the Company.
NON-CASH GUARANTEE FEE
In connection with the personal guarantee by the majority shareholders
of the Company of approximately $21,379,000 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
274,867 shares of the Company's Common Stock at an exercise price of $3.50.
This resulted in a non-cash charge of $60,000 for the nine-month period.
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NET (LOSS) INCOME
Net income decreased approximately $715,000 to a net loss of
($397,047) for the nine months ended September 30, 2000 from net profit of
$317,690 for the nine months ended September 30, 1999. This decrease was
primarily the result of the decrease in operating income of approximately
$844,000, the increase in interest expense of $155,000, a decrease in interest
income of $128,000 and a net increase in interest income, other income and
other expenses of $35,000, which was offset by the decrease in the provision
for income taxes of approximately $377,000.
The loss per share was ($0.11) (both basic and diluted) for the nine
months ended September 30, 2000 compared to earnings per share of $0.09 (both
basic and diluted) for the nine months ended September 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 Acceptance 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 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 a defined prime rate.
The Company annually reviews the terms of its financing arrangements and
interest rates with its lenders. As of September 30, 2000 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 a defined prime rate plus 75
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 a defined prime rate plus 150 basis points.
As of September 30, 2000 the Company had floor plan payables outstanding of
approximately $17,134,000, of which approximately $7,484,000 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. The proceeds were used to refinance $3,843,740 of
existing debt, provided $840,400 in working capital and $245,860 in loan fees.
In addition to this loan, the lender provides the Company with two lines of
credit for a total of $2,500,000 at a defined prime rate plus 50 basis points,
collateralized by trade accounts receivable, Company owned equipment inventory
and substantially all of the Company's land, buildings, service equipment and
furniture and fixtures. This loan agreement contains various restrictive
covenants which, among other matters, require the Company to maintain minimum
net worth levels and cash flow requirements, as defined, and place limits on
additional indebtedness. The Company did not meet the Cash Flow Coverage Ratio
(as defined) at September 30, 2000. The lender agreed to waive the
non-compliance as of September 30, 2000 and amended the cash flow requirement
through September 30, 2001.
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Cash and cash equivalents decreased to $165,913 at September 30, 2000
from $307,509 at December 31, 1999. During the nine months ended September 30,
2000, operations used net cash of $252,569 primarily because of the decrease in
floor plan payables of approximately $492,000, an increase in accounts and
other receivables of approximately $881,000 and a decrease in accounts payable
of $491,000, offset by a decrease in inventory of approximately $1,550,000. The
decrease in inventory was primarily due to the decrease in new equipment
purchases. Investing activities used cash of $222,137 primarily for capital
expenditures, which is not expected to increase significantly.
SEASONALITY
Typically, farmers purchase agricultural equipment immediately prior
to planting or harvesting crops. Because of the location of the Company's
dealer network, there is an overlap in the growing seasons, which has the
effect of leveling out quarterly sales and inventory requirements. In 1999, the
Company recorded approximately 26% of its sales in each of the first and third
quarters and approximately 24% in each of the second and fourth quarters. The
Company believes that there will not be a substantial change in seasonality in
2000. 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.
SAFE HARBOR STATEMENT
This statement is made under the Private Securities Litigation Reform
Act of 1995. The future results of the Company, including results related to
forward-looking statements in this report, involve a number of risks and
uncertainties. Important factors that will affect future results of the
Company, including factors that could cause actual results to differ materially
from those indicated by forward-looking statements, include, but may not be
limited to, those set forth under the caption "Certain Important Factors" in
Item 7 of the Company's Form 10-K dated April 14, 2000, filed with the
Securities and Exchange Commission. These factors, which are subject to change,
include: general economic conditions worldwide and locally; interest rates;
fuel prices; the many interrelated factors that affect farmers' confidence,
including farm cash income, farmer debt levels, worldwide demand for
agricultural products, world grain stocks, commodity prices, weather, animal
and plant diseases, crop pests, harvest yields, and government farm programs;
legislation relating to agriculture; climatic phenomena such as La Nina and El
Nino; pricing, product initiatives and other actions of competitors in the
agricultural industry, including manufacturers and retailers; the level of new
and used inventories; the Company's relationships with its suppliers;
production difficulties, including capacity and supply constraints experienced
by the Company's suppliers; practices by the Company's suppliers; changes in
governmental regulations; employee relations; dependence upon the Company's
suppliers; termination rights and other provisions which the Company's
suppliers have under dealer and other agreements; risks associated with growth,
expansion and acquisitions; the positions of the Company's suppliers and other
manufacturers with respect to publicly-traded dealers, dealer consolidation and
specific acquisition opportunities; the Company's acquisition strategies and
the integration and successful operation of acquisitions; capital needs and
capital market conditions; operating and financial systems to manage rapidly
growing operations; dependence upon key personnel; accounting standards; and
other risks and uncertainties. The Company's forward-looking statements are
based upon assumptions relating to these factors. These assumptions are
sometimes based upon estimates, data, communications and other information from
suppliers, government agencies and other sources, which are often revised. The
Company makes no commitment to revise forward-looking statements, or to
disclose subsequent facts, events or circumstances that may bear upon
forward-looking statements.
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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
At September 30, 2000, approximately 92.1% of the Company's debt
obligations (including short and long-term equipment and bank financing) had
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 one percentage point increase in
the average interest rate under these borrowings during the nine months ended
September 30, 2000 (which average rate was approximately 10.1%), it is
estimated that the Company's interest expense for the nine months ended
September 30, 2000 would have increased by approximately $56,000 resulting in
an increase in the Company's net loss and a decrease in after tax cash flow of
approximately $37,000. In the event of an adverse change in interest rates,
management would attempt to 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.
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PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
On May 2, 2000 the Company and its Chairman, Paul Condit, as well as certain
other members of the Condit family who are principal shareholders of the
Company, filed a lawsuit in Texas state district court in Gaines County, Texas
against Service Invest AS, a Norwegian shareholder, and certain other
affiliated shareholders seeking a declaratory judgment related to disputes that
have arisen between the parties (Texas Equipment Corporation, Texas Equipment
Co., Inc., Paul Condit et al v. Service Invest AS, et al, Case No. 00-05-14040,
106th State District Court, Gaines County, Texas). There have been no material
developments with respect to this litigation during the Quarter ended September
30, 2000.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits
27 Financial Data Schedule
(b) Reports on form 8-K
Form 8-K, Change in Auditors, filed October 1, 2000
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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: November 10, 2000
TEXAS EQUIPMENT CORPORATION
By: /s/ Paul J. Condit
-------------------------------------
Paul J. Condit
President and Chief Executive Officer
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EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
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<S> <C>
27 Financial Data Schedule
</TABLE>
