<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2000 or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
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Commission file number 000-21813
Texas Equipment Corporation
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(Exact name of registrant as specified in its charter)
Nevada 62-1459870
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(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
1305 Hobbs Hwy, Seminole, Texas 79360
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number: (915) 758-3643
Securities registered under Section 12(b) of the Exchange Act:
Title of each class Name of each exchange on which registered
------------------- -----------------------------------------
None None
Securities registered under Section 12(g) of the Exchange Act:
Title of each class
-------------------
Common Stock, $.001 par value
Indicate by check mark whether registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Exchange Act during the past
12 months (or for such shorter period that the registrant was required to file
such reports), and (2) has been subject to such filing requirements for the past
90 days.
Yes X No
--- ---
The number of shares outstanding of the registrant's Common Stock, as of
August 10, 2000 was 3,804,602.
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INDEX
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Page
<S> <C>
PART I - FINANCIAL INFORMATION
Item 1. Condensed Financial Statements (Unaudited):
Consolidated Balance Sheets at June 30, 2000 and December 31, 1999................................ 4
Consolidated Statements of Operations for the Three Months Ended June 30, 2000 and 1999........... 6
Consolidated Statements of Operations for the Six Months Ended June 30, 2000 and 1999............. 7
Consolidated Statements of Cash Flows for the Six Months Ended June 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
Item 4. Submission of Matters to a Vote of Security Holders.......................................... 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 1. 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 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,
2000 1999
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<S> <C> <C>
CURRENT ASSETS
Cash and cash equivalents $ 155,597 $ 307,509
Accounts receivable (less allowance for
doubtful accounts of $109,564) 354,345 561,958
Other receivables 1,552,836 1,127,502
Inventories 26,106,831 27,247,079
-------------- --------------
TOTAL CURRENT ASSETS 28,169,609 29,244,048
PROPERTY AND EQUIPMENT, NET 5,436,144 5,481,180
FINANCE RECEIVABLES (less allowance for
doubtful accounts of $200,000) 604,496 588,564
RECEIVABLES FROM OFFICER 127,153 134,800
GOODWILL, net of accumulated amortization of
$98,527 in 2000 and $92,170 in 1999 92,171 98,528
OTHER ASSETS 404,667 318,972
-------------- --------------
$ 34,834,240 $ 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
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
2000 1999
-------------- --------------
<S> <C> <C>
CURRENT LIABILITIES
Floor plan payables $ 16,872,073 $ 17,625,613
Notes payable 2,416,063 1,749,811
Accounts payable 910,974 1,215,398
Accrued liabilities 332,094 368,763
Current maturities of
long-term debt 359,015 397,639
-------------- --------------
TOTAL CURRENT LIABILITIES 20,890,219 21,357,224
LONG-TERM DEBT, net of
current maturities 6,870,233 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 3,393,382 3,298,647
Retained earnings 3,443,528 3,619,715
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TOTAL STOCKHOLDERS' EQUITY 6,840,714 6,921,969
-------------- --------------
$ 34,834,240 $ 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 JUNE 30,
--------------------------------
2000 1999
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<S> <C> <C>
REVENUES $ 15,452,904 $ 15,226,620
COST OF SALES 13,300,959 12,793,838
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GROSS PROFIT 2,151,945 2,432,782
SELLING, GENERAL AND
ADMINISTRATIVE EXPENSES 2,118,425 2,096,208
-------------- --------------
INCOME FROM OPERATIONS 33,520 336,574
OTHER INCOME (EXPENSE)
Interest expense (269,166) (188,546)
Interest income 72,830 70,543
Non-cash guarantee fee (20,000) (15,826)
Other income 21,453 3,989
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(LOSS) INCOME BEFORE TAXES (161,363) 206,734
INCOME TAX EXPENSE (52,302) 69,739
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NET (LOSS) INCOME $ (109,061) $ 136,995
============== ==============
NET (LOSS) INCOME PER SHARE
Basic $ (0.03) $ 0.04
Diluted $ (0.03) $ 0.04
NUMBER OF SHARES USED IN COMPUTATION
Basic 3,804,602 3,524,972
Diluted 3,804,602 3,530,845
</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,
--------------------------------
2000 1999
-------------- --------------
<S> <C> <C>
REVENUES $ 33,068,455 $ 32,338,943
COST OF SALES 28,457,148 27,450,362
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GROSS PROFIT 4,611,307 4,888,581
SELLING, GENERAL AND
ADMINISTRATIVE EXPENSES 4,545,370 4,259,821
-------------- --------------
INCOME FROM OPERATIONS 65,937 628,760
Other Income (EXPENSE)
Interest expense (524,146) (367,696)
Interest income 132,471 152,722
Non-cash guarantee fee (40,000) (32,582)
Other income 36,466 10,245
-------------- --------------
(LOSS) INCOME BEFORE TAXES (329,272) 391,449
INCOME TAX EXPENSE (109,372) 134,843
-------------- --------------
NET (LOSS) INCOME $ (219,900) $ 256,606
============== ==============
NET (LOSS) INCOME PER SHARE
Basic $ (0.06) $ 0.07
Diluted $ (0.06) $ 0.07
NUMBER OF SHARES USED IN COMPUTATION
Basic 3,804,602 3,548,435
Diluted 3,804,602 3,583,669
</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,
--------------------------------
2000 1999
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<S> <C> <C>
CASH FLOWS (USED IN) PROVIDED BY
OPERATING ACTIVITIES
Net (loss) income $ (219,900) $ 256,606
Adjustment to reconcile net (loss) income to net cash
(used in) operating activities:
Amortization & depreciation 284,618 266,361
Guarantee fee - valuation of stock options issued 40,000 32,582
Interest on convertible note 28,729 30,083
Changes in operating assets and liabilities:
Accounts and other receivable (217,721) (824,614)
Inventories 1,140,248 5,647,116
Floor plan payable (753,540) (6,930,864)
Accounts payable (304,424) (98,844)
Accrued liabilities (36,669) (171,442)
Finance receivable (15,932) 18,590
Income tax liability -- 107,962
Other assets (85,695) (5,554)
-------------- --------------
NET CASH (USED IN) OPERATING ACTIVITIES (140,286) (1,672,018)
-------------- --------------
CASH FLOWS (USED IN) INVESTING ACTIVITIES
Purchases of land, buildings and equipment (294,287) (131,887)
Proceeds from sale of land, buildings and equipment 61,062 --
Stockholder's receivable 7,647 (162)
-------------- --------------
NET CASH (USED IN) INVESTING ACTIVITIES (225,578) (132,049)
-------------- --------------
</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,
-----------------------------
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 1,284,791 2,164,188
Repayments of long-term debt (1,737,091) (1,278,352)
-------------- --------------
NET CASH PROVIDED BY FINANCING
ACTIVITIES 213,952 1,577,259
-------------- --------------
NET (DECREASE) IN CASH AND CASH EQUIVALENTS (151,912) (226,808)
CASH AND CASH EQUIVALENTS AT THE
BEGINNING OF THE PERIOD 307,509 494,132
-------------- --------------
CASH AND CASH EQUIVALENTS AT THE END OF
THE PERIOD $ 155,597 $ 267,324
============== ==============
SUPPLEMENTAL DISCLOSURES OF
CASH FLOW INFORMATION
Cash paid during the period for:
Interest expense $ 495,416 $ 367,696
============== ==============
Common stock issued related to convertible note $ 98,645 $ 104,241
============== ==============
</TABLE>
9
Seen 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, 2000 and December 31, 1999
and the condensed statements of operations for the three months and six months
ended June 30, 2000 and 1999 and condensed statements of cash flows for the six
months ended June 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 six months ended June 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>
June 30, December 31,
2000 1999
-------------- --------------
<S> <C> <C>
New equipment $ 8,674,873 $ 10,349,224
Used equipment 13,063,699 12,377,229
Parts and other 4,368,259 4,520,626
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Total $ 26,106,831 $ 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.
<TABLE>
<CAPTION>
Product
Wholegoods Support
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<S> <C> <C>
THREE MONTHS ENDED JUNE 30, 2000
Sales and revenues from external customers $ 11,790,171 $ 3,662,733
Depreciation expense 41,272 100,464
Segment operating income 18,344 320,105
Segment assets:
Property, plant and equipment 921,238 4,392,331
Inventory 21,738,572 4,368,259
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 income 164,139 459,221
Segment assets:
Property, plant and equipment 948,632 4,522,943
Inventory 28,659,649 4,934,949
</TABLE>
<TABLE>
<CAPTION>
Product
Wholegoods Support
-------------- -------------
<S> <C> <C>
SIX MONTHS ENDED JUNE 30, 2000
Sales and revenues from external customers $ 26,384,222 $ 6,684,233
Depreciation expense 80,008 193,511
Segment operating income 388,017 339,176
Segment assets:
Property, plant and equipment 921,238 4,392,331
Inventory 21,738,572 4,368,259
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 income 781,498 547,450
Segment assets:
Property, plant and equipment 948,632 4,522,943
Inventory 28,659,649 4,934,949
</TABLE>
11
<PAGE> 12
3. SEGMENT INFORMATION (CONT'D)
<TABLE>
<CAPTION>
OPERATING INCOME Three Months Ended March 31,
--------------------------------
2000 1999
-------------- --------------
<S> <C> <C>
Total operating income for reportable segments $ 338,449 $ 623,360
Unallocated amounts:
Administrative expense (304,929) (286,786)
Other income 21,453 3,989
Interest expense (269,166) (188,546)
Interest income 72,830 70,543
Non-cash guarantee fee (20,000) (15,826)
-------------- --------------
Total consolidated (loss) income before taxes $ (161,363) $ 206,734
============== ==============
</TABLE>
<TABLE>
<CAPTION>
OPERATING INCOME Six Months Ended March 31,
--------------------------------
2000 1999
-------------- --------------
<S> <C> <C>
Total operating income for reportable segments $ 727,193 $ 1,328,948
Unallocated amounts:
Administrative expense (661,256) (700,188)
Other income 36,466 10,245
Interest expense (524,146) (367,696)
Interest income 132,471 152,722
Non-cash guarantee fee (40,000) (32,582)
-------------- --------------
Total consolidated (loss) income before taxes $ (329,272) $ 391,449
============== ==============
</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 June 30, 2000. The lender agreed to waive the
non-compliance as of June 30, 2000 and amended the cash flow requirement through
June 30, 2001.
5. NET INCOME PER SHARE
The following summarizes the computation of weighted average shares
outstanding and the net income (loss) from operations per share for the six
months ended June 30:
<TABLE>
<CAPTION>
2000 1999
----------- -----------
<S> <C> <C>
Net (loss) income from continuing operations
available to common shareholders ...................... $ (219,900) $ 256,606
Weighted average number of common shares
outstanding - basic ................................... 3,804,602 3,548,435
Dilutive effect of convertible debt and options ......... -- 35,234
Common and potential common shares outstanding
diluted ............................................... 3,804,602 3,583,669
Basic and dilutive net (loss) income from continuing
operations per share .................................. $ (0.06) $ 0.07
</TABLE>
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.
12
<PAGE> 13
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 JUNE 30, 2000 COMPARED TO THREE MONTHS ENDED JUNE 30, 1999
REVENUES
Revenues increased approximately $226,000 or 1.5%, to $15,452,904 for
the second quarter of 2000 from $15,226,620 for the second quarter of 1999.
Wholegoods sales increased approximately $430,000 or 3.8%, to $11,790,171 for
the second quarter of 2000 from $11,374,884 for the second quarter of 1999. An
increase in new tractor and harvest equipment sales was primarily responsible
for the increase in new equipment sales of approximately $1,043,000, or 16.1%.
This increase in new equipment sales was offset by a decrease in used equipment
sales of approximately 12.8%, or $613,000, which was primarily due to the
increase in new equipment sales. There are several factors, such as interest
rates, yearly payments, manufacturers' promotions and availability, which
influence the customers' decision to purchase new or used equipment. During the
second quarter Deere provided its dealers with aggressive interest rate
promotions and rebates, which increased new equipment sales during the quarter.
Although there has been some improvement in the equipment demand, 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 $189,000, or 4.9%, to
$3,662,733 for the second quarter of 2000 from $3,851,736 for the second quarter
of 1999. A significantly lower wheat harvest in the Northern Panhandle of West
Texas was the main contributor to lower parts and service sales in the second
13
<PAGE> 14
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 $281,000 or 11.5% to $2,151,945 from
$2,432,782 for the second quarter of 2000. Wholegoods gross margins (gross
profit as a percentage of total revenues) decreased from 8.3% to 6.9%. This
decrease in gross margin percentage, offset by the increase in wholegoods sales,
resulted in a decrease in gross profit of $123,000. Price pressures due to low
commodity prices were primarily responsible for lower margins on equipment
sales. Gross profit from parts and service sales decreased by approximately
$158,000. This decrease was due to the decrease in parts and service sales and
to lower gross margins from parts and service sales, which decreased from 38.7%
for the three months ended June 30, 1999 to 36.4% for the three months ended
June 30, 2000. Price pressures due to lower commodity prices and a weak winter
wheat harvest in May and June are responsible for the lower margins and decrease
in sales. 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 74.7% and 76.3% of total revenues and parts and service revenue at
25.3% and 23.7% of total revenue in the second quarter of 1999 and 2000,
respectively.
SELLING, GENERAL, AND ADMINISTRATIVE EXPENSE
Selling, general, and administrative (SG&A) expenses of $2,118,425 for
the second quarter of 2000 were relatively the same as the $2,096,208 for the
second quarter of 1999. SG&A expense as a percentage of total revenues was 13.7%
in the second quarter of 2000 compared to 13.8% in the second quarter of 1999.
INTEREST EXPENSE/INCOME
Interest expense increased approximately $81,000 to $269,166 for the
second quarter of 2000 from $188,546 for the second quarter of 1999. The
increase was due primarily to increased bank financing to support continued high
levels of Company owned inventory and to meet working capital requirements.
Interest income of $72,830 for the second quarter of 2000 was
approximately the same as the $70,543 for the second 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 because of the
continued weakness in equipment demand.
NON-CASH GUARANTEE FEE
In connection with the personal guarantee by the majority shareholders
of the Company of approximately $21,060,000 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
92,696 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 $246,000 to a net loss of ($109,061)
for the second quarter of 2000 from net profit of $136,995 for the second
quarter of 1999. This decrease was primarily the result of
14
<PAGE> 15
the decrease in operating income of approximately $303,000, the increase in
interest expense of $81,000 and the net increase in interest income, other
income and other expense of approximately $16,000, which was offset by the
decrease in the provision for income taxes of approximately $122,000.
The loss per share was ($0.03) (both basic and diluted) for the second
quarter of 2000 compared to earnings per share of $0.04 (both basic and diluted)
for the second quarter of 1999, primarily as the result of the reasons described
above.
SIX MONTHS ENDED JUNE 30, 2000 COMPARED TO SIX MONTHS ENDED JUNE 30, 1999
REVENUES
Revenues increased approximately $730,000 or 2.3%, to $33,068,455 for
the six months ended June 30, 2000 from $32,338,943 for the six months ended
June 30, 1999.
Wholegoods sales increased approximately $726,000 or 2.8%, to $26,384,222 for
the six months ended June 30, 2000 from $25,658,487 for the six months ended
June 30, 1999. An increase in new tractor and harvest equipment sales was
primarily responsible for the increase in new equipment sales of approximately
$2,286,792, or 16.5%. This increase in new equipment sales was offset by a
decrease in used equipment sales of approximately 13.4%, or $1,556,000, which
was primarily due to the increase in new equipment sales. There are several
factors, such as interest rates, yearly payments, manufacturers' promotions and
availability, which influence the customers' decision to purchase new or used
equipment. During the first six months of 2000 Deere provided its dealers with
aggressive interest rate promotions and rebates that increased new equipment
sales during this period. Although there has been some improvement in equipment
demand, 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 remained approximately the same at $6,684,233
for the six months ended June 30, 2000 compared to $6,680,456 for the six months
ended June 30, 1999. Low commodity prices continue to suppress parts and service
revenues.
GROSS PROFIT
Gross profit decreased approximately $277,000 to $4,611,307 for the six
months ended June 30, 2000 from $4,888,581 for the six months ended June 30,
1999. Wholegoods gross margin (gross profit as a percentage of total revenues)
decreased from 8.5% to 8.1%. This decrease in gross margin percentage, offset by
the increase in wholegoods sales, resulted in a decrease in gross profit of
$61,000. Price pressures due to low commodity prices were responsible for lower
margins on equipment sales. Gross profit from parts and service sales decreased
by approximately $216,000. This decrease was due to lower gross margins from
parts and service sales, which decreased from 40.3% for the six months ended
June 30, 1999 to 37.1% for the six months ended June 30, 2000. Price pressures
due to lower commodity prices and a weak winter wheat harvest in May and June
were responsible for the lower margins. The Company expects parts and service
margins to improve during the fall harvest. 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 79.3% and 79.8% of total revenues and parts and
service revenue at 20.7% and 20.2% of total revenue for the six months ended
June 30, 1999 and 2000, respectively.
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SELLING, GENERAL, AND ADMINISTRATIVE EXPENSE
Selling, general, and administrative (SG&A) expense increased
approximately $285,000 to $4,545,370 in the six months ended June 30, 2000 from
$4,259,821 for the six months ended June 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 six months
ended June 30, 2000 compared to 13.2% in the six months ended June 30, 1999.
This increase in percentage was primarily the result of higher operating
expenses as explained above.
INTEREST EXPENSE/INCOME
Interest expense increased approximately $156,000 to $524,146 for the
six months ended June 30, 2000 from $367,696 for the six months ended June 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 $20,000 to $132,471 for the six
months ended June 30, 2000 from $152,722 for the six months ended June 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 six months ended June 30, 2000 compared to the six months
ended June 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 $21,056,000 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
180,486 shares of the Company's Common Stock at an exercise price of $3.50. This
resulted in a non-cash charge of $40,000 for the six-month period.
NET (LOSS) INCOME
Net income decreased approximately $477,000 to a net loss of ($219,900)
for the six months ended June 30, 2000 from net profit of $256,605 for the six
months ended June 30, 1999. This decrease was primarily the result of the
decrease in operating income of approximately $563,000, the increase in interest
expense of $156,000, and a decrease in interest income of $20,000 and a net
decrease in interest income, other income and other expenses of $19,000, which
was offset by the decrease in the provision for income taxes of approximately
$244,000.
The loss per share was ($0.06) (both basic and diluted) for the six
months ended June 30, 2000 compared to earnings per share of $0.07 (both basic
and diluted) for the six months ended June 30, 1999, primarily as the result of
the reasons described above.
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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 June 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 June 30, 2000
the Company had floor plan payables outstanding of approximately $16,872,000, of
which approximately $6,526,000 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.
Cash and cash equivalents decreased to $155,597 at June 30, 2000 from
$307,509 at December 31, 1999. During the six months ended June 30, 2000,
operations used net cash of $140,286 primarily because of the decrease in floor
plan payables of approximately $754,000, an increase in accounts and other
receivables of approximately $218,000 and a decrease in accounts payable of
$304,000, offset by a decrease in inventory of approximately $1,140,000. The
decrease in inventory was primarily due to the decrease in new equipment
purchases. Investing activities used cash of $225,578 primarily for capital
expenditures. The Company's capital expenditures could increase in the future as
it implements its business plan to acquire additional Deere dealerships.
However, 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.
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
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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.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
At June 30, 2000, approximately 91.6% 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 six months ended June
30, 2000 (which average rate was approximately 10.3%), it is estimated that the
Company's interest expense for the six months ended June 30, 2000 would have
increased by approximately $38,000 resulting in an increase in the Company's net
loss and a decrease in after tax cash flow of approximately $25,000. 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.
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ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
On June 27, 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>
o Election of Directors:
Paul J. Condit 3,294,301 3,276 -
John T. Condit 3,294,301 3,276 -
EA Milo Mattorano 3,296,254 1,562 -
James D. Arnold 3,296,254 1,562 -
Mickey L. Ray 3,296,254 1,562 -
</TABLE>
No other matters were submitted to a vote of the stockholders present.
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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). The defendant shareholders made their
principal investments in the Company (then named Marinex Multimedia) in
Regulation S offerings in early 1996 before the Company engaged in the September
1996 business combination with Texas Equipment Co. Inc. Texas Equipment Co. Inc.
was, prior to the business combination, wholly-owned by members of the Condit
family and its John Deere agricultural equipment dealerships have since 1997
represented the Company's only business activities. The defendant shareholders,
in discussions with the Company and the Condits in recent months, have contended
that certain provisions of the September 1996 business combination agreement
require surrender by the Condits of a portion of the shares of the Company they
acquired in the business combination. In addition, they contend that guarantee
fees paid by the Company to the Condits in the form of stock options for the
past several years in consideration of the personal guarantees by the Condits of
the Company's indebtedness to John Deere and the Company's bank are not
warranted. The Company and the Condits have vigorously disputed such
contentions, noting that the defendants' position as to their first claim
ignores a provision in the business combination agreement that expressly negates
any requirement for a return of shares by the Condits and, as to the second
claim, noting that the guarantee fee arrangement represents fair and customary
non-cash consideration for substantial personal guarantees required by the
Company's creditors which confer a substantial benefit upon the Company and,
indirectly, all of its non-guarantor shareholders. As to the first claim, the
auditor provided for by the business combination agreement also provided a
report and analysis supporting the position of the Company and the Condits and
concluding that no return of shares was required. The Company does not expect
the litigation to have a material adverse effect upon its operations or
financial condition.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits
27 Financial Data Schedule
(b) Reports on form 8-K
None
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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 10, 2000
TEXAS EQUIPMENT CORPORATION
By: /s/ Paul J. Condit
-----------------------------
Paul J. Condit
President and Chief Executive
Officer
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Index of Exhibits
-----------------
Exhibit No. Description
----------- -----------------------
27 Financial Data Schedule
