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 March 31, 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
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
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 May 10, 1999, was 24,824,808.
2
INDEX
Page
----
PART I - FINANCIAL INFORMATION
Item 1. Condensed Financial Statements:
Consolidated Balance Sheets at March 31, 1999 and December 31, 1998 ........................... 4
Consolidated Statements of Operations for the Three Months Ended March 31, 1999 and 1998 ...... 6
Consolidated Statements of Cash Flows for the Three Months Ended March 31, 1999 and 1998 ...... 7
Item 2. Management's Discussion and Analysis of Financial Conditions and Results of Operations.... 12
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K ......................................................... 18
Signatures........................................................................................ 19
2
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
4
PART I - FINANCIAL INFORMATION
ITEM 1. CONDENSED FINANCIAL STATEMENTS.
TEXAS EQUIPMENT CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
ASSETS
MARCH 31, DECEMBER 31,
1999 1998
----------- -----------
CURRENT ASSETS
Cash and cash equivalents $ 107,150 $ 494,132
Accounts receivable (less allowance for
Doubtful accounts of $109,945) 474,806 486,845
Other receivables 864,917 594,177
Inventories 35,988,658 39,241,714
----------- -----------
TOTAL CURRENT ASSETS 37,435,531 40,816,868
PROPERTY AND EQUIPMENT, NET 5,697,510 5,725,916
FINANCE RECEIVABLES 937,025 987,120
RECEIVABLES FROM OFFICER 143,069 142,290
GOODWILL, net of accumulated
Amortization of $82,635 in 1999 and $79,456 in 1998 108,063 111,242
OTHER ASSETS 97,181 62,181
----------- -----------
$44,418,379 $47,845,617
=========== ===========
4
See Notes to Condensed Financial Statements
5
TEXAS EQUIPMENT CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
LIABILITIES AND STOCKHOLDERS' EQUITY
MARCH 31, DECEMBER 31,
1999 1998
----------- -----------
CURRENT LIABILITIES
Floor plan payables $26,484,331 $30,139,947
Accounts payable 849,219 877,391
Accrued liabilities 340,219 380,778
Income tax liability 718,767 648,544
Current maturities of
long-term debt 2,655,901 2,836,641
----------- -----------
TOTAL CURRENT LIABILITIES 31,048,437 34,883,301
LONG-TERM DEBT, net of
current maturities 4,936,669 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 24,824,808 24,823 24,823
Paid in capital 3,205,032 3,188,276
Retained earnings 4,970,344 4,850,734
----------- -----------
TOTAL STOCKHOLDERS' EQUITY 8,200,199 8,063,833
----------- -----------
$44,418,379 $47,845,617
=========== ===========
5
See Notes to Condensed Financial Statements
6
TEXAS EQUIPMENT CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
THREE MONTHS ENDED MARCH 31,
------------------------------
1999 1998
------------ ------------
REVENUES $ 17,112,323 $ 15,879,826
COST OF SALES 14,771,558 13,471,487
------------ ------------
GROSS PROFIT 2,340,765 2,408,339
SELLING, GENERAL AND
ADMINISTRATIVE EXPENSES 2,048,579 1,653,239
------------ ------------
INCOME FROM OPERATIONS 292,186 755,100
OTHER INCOME (EXPENSE)
Interest (96,971) (23,208)
Non-cash guarantee fee (16,756) (38,501)
Other income 6,256 23,639
------------ ------------
INCOME BEFORE TAXES 184,715 717,030
INCOME TAX EXPENSE 65,105 256,448
------------ ------------
NET INCOME $ 119,610 $ 460,582
============ ============
NET INCOME (LOSS) PER SHARE
Basic $ 0.005 $ 0.019
============ ============
Diluted $ 0.005 $ 0.019
============ ============
NUMBER OF SHARES USED IN COMPUTATION
Basic 24,824,808 24,585,919
Diluted 25,071,446 24,804,459
6
See Notes to Condensed Financial Statements
7
TEXAS EQUIPMENT CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
THREE MONTHS ENDED MARCH 31,
----------------------------
1999 1998
----------- -----------
OPERATING ACTIVITIES
Net income $ 119,610 $ 460,582
Adjustment to reconcile net income to net cash
provided by operating activities:
Amortization & depreciation 137,260 96,155
Guaranty fee - valuation of stock options issued 16,756 38,501
CHANGES IN ASSETS AND LIABILITIES, net of effects of business acquired:
Accounts receivable (258,701) 83,870
Inventories 3,253,056 (2,257,971)
Floor plan payable (3,655,616) (485,582)
Accounts payable (28,172) 343,825
Accrued liabilities (54,289) (317,377)
Finance receivable 50,095 (82,433)
Income tax liability 70,223 56,448
Other liabilities 13,730 55,888
Other assets (34,999) 997
----------- -----------
NET CASH USED IN OPERATING ACTIVITIES (371,047) (2,007,097)
CASH FLOWS PROVIDED BY (USED IN) INVESTING
ACTIVITIES
Purchases of land, buildings and equipment (105,675) (92,277)
Stockholders' receivables (779) 767
----------- -----------
NET CASH USED IN INVESTING ACTIVITIES (106,454) (91,510)
7
See Notes to Condensed Financial Statements
8
TEXAS EQUIPMENT CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
THREE MONTHS ENDED MARCH 31,
----------------------------
1999 1998
----------- -----------
CASH FLOW PROVIDED BY (USED IN) FINANCING
ACTIVITIES
Proceeds from note borrowings $ 1,049,673 $ 3,354,785
Repayments of note borrowings (959,154) (1,279,465)
----------- -----------
NET CASH PROVIDED BY FINANCING
ACTIVITIES 90,519 2,075,320
----------- -----------
NET DECREASE IN CASH AND CASH EQUIVALENTS (386,982) (23,287)
CASH AND CASH EQUIVALENTS AT THE
BEGINNING OF THE PERIOD 494,132 104,750
----------- -----------
CASH AND CASH EQUIVALENTS AT THE END OF THE PERIOD $ 107,150 $ 81,463
=========== ===========
SUPPLEMENTAL DISCLOSURES OF
CASH FLOW INFORMATION
Cash paid during the period for:
Interest expense $ 161,327 $ 77,603
=========== ===========
Income taxes $ -- $ 200,000
=========== ===========
8
See Notes to Condensed Financial Statements
9
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 March 31, 1999 and December 31, 1998
and the condensed statements of operation for the three months ended March 31,
1999 and 1998 and condensed statements of cash flows for the three months ended
March 31, 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 three
months ended March 31, 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:
March 31, 1999 December 31, 1998
-------------- -----------------
New equipment $16,311,692 $19,830,691
Used equipment 14,699,995 15,101,869
Parts and other 4,976,971 4,309,154
----------- -----------
Total $35,988,658 $39,241,714
=========== ===========
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.
9
10
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.
THREE MONTHS ENDED MARCH 31, 1999 Product
--------------------------------- Wholegoods Support
------------ -----------
Sales and revenues from external customers $ 14,283,603 $ 2,828,720
Depreciation expense 37,869 91,866
Segment operating profit 617,359 88,229
Segment assets:
Property, plant and equipment 965,527 4,603,508
Inventory 31,011,687 4,976,971
------------ -----------
THREE MONTHS ENDED MARCH 31, 1999 Product
--------------------------------- Wholegoods Support
------------ -----------
Sales and revenues from external customers $ 12,988,206 $ 2,891,620
Depreciation expense 25,822 63,218
Segment operating profit 697,849 323,322
Segment assets: (as of December 31, 1998)
Property, plant and equipment 970,343 4,626,463
Inventory 34,932,560 4,309,154
------------ -----------
OPERATING PROFIT Three Months Ended
---------------- ----------------------------------
March 31, 1999 March 31, 1998
-------------- --------------
Total profit for reportable segments $ 705,588 $ 1,021,171
Unallocated amounts:
Administrative expense (413,402) (266,071)
Other income 6,256 23,639
Interest expense (179,150) (77,603)
Interest income 82,179 54,395
Non-cash guarantee fee (16,756) (38,501)
--------- -----------
Total consolidated income before taxes 184,715 717,030
--------- -----------
10
11
4. INCOME FROM CONTINUING OPERATIONS PER SHARE
The following is a reconciliation of the numerator and denominator
underlying the income from continuing operations per share calculations:
Three Months ended March 31, 1999
--------------------------------------
Income Shares Per Share
(Numerator) (Denominator) Amount
---------- ------------ ---------
Income from operations available to common
stockholders' $ 119,610 24,824,808 $0.005
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' $ 119,610 25,071,446 $0.005
========== ========== ======
Three Months ended March 31, 1999
--------------------------------------
Income Shares Per Share
(Numerator) (Denominator) Amount
---------- ------------ ---------
Income from operations available to common
stockholders' $ 460,582 24,585,919 $0.019
Effect of dilutive securities:
Incremental shares of assumed exercise of
options -- 218,540 --
---------- ---------- ------
Diluted income from operations available to
common stockholders' $ 460,582 24,804,459 $0.019
========== ========== ======
11
12
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 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 full quarter revenues for
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 Company ("Agricredit"), Equipment Dealers Credit
Company ("EDCO") and Transamerica Distributor
12
13
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 MARCH 31, 1999 COMPARED TO THREE MONTHS ENDED MARCH 31, 1998
REVENUES
Revenues increased approximately $1,233,000 or 7.8%, to $17,112,323 for
the first quarter of 1999 from $15,879,826 for the first quarter of 1998. The
revenue of approximately $3,824,000 contributed from acquired stores was offset
by decreases in comparable store revenues (stores with full quarter revenues for
1998 and 1999) of approximately $2,591,000. The decrease in comparable store
revenue was due primarily to the decrease of approximately $2,521,000, or 29%,
in new equipment sales (primarily new tractor sales) in our Southern Panhandle
and Eastern New Mexico stores when compared to higher than normal new equipment
sales in the first quarter of 1998. This decrease in new equipment sales was the
result of the continued effect of the industry downturn from the fourth quarter
of 1998. The Company expects new equipment sales on a comparable store basis to
continue to be down from 1998 levels by 15% to 20% through the remainder of the
year.
Sales of wholegoods increased approximately $1,295,000, or 10.0%, to
$14,283,603 for the first quarter of 1999 from $12,988,203 for the first quarter
of 1998. The wholegoods sales contribution of approximately $2,914,000 from
acquired stores was offset by a decrease in comparable stores wholegoods sales
of approximately $1,619,000. The decrease in new equipment sales (primarily
tractors) accounted for all of this decrease in comparable store wholegoods
sales.
Parts and service revenue decreased approximately $63,000, or 2.2%, to
$2,828,720 for the first quarter of 1999 from $2,891,623 for the first quarter
of 1998. The parts sales and service revenues contribution of approximately
$909,000 from acquired stores was offset by a decrease of approximately $972,000
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 in 1998. 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 this quarter. The Company expects a strong spring
planting season and winter wheat harvest, which should result in higher levels
of parts sales and service revenues for the second quarter of 1999.
13
14
GROSS PROFIT
Gross profit decreased approximately $68,000, or 2.8%, to $2,340,765
for the first quarter of 1999 from $2,408,339 for the first quarter of 1998.
Gross profit as a percentage of total revenues decreased to 13.7% for the first
quarter of 1999 from 15.2% for the first 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 (81.8% of total revenues in
the first quarter of 1998 compared to 83.5% of total revenues in the first
quarter of 1999) and parts and service revenues (18.2% of total revenues in the
first quarter of 1998 compared to 16.6% of total revenues in the first quarter
of 1999) was the primary reason for the decrease in total margins.
SELLING, GENERAL, AND ADMINISTRATIVE EXPENSE
Selling, general, and administrative (SG&A) expense increased
approximately $395,000, to $2,048,579 for the first quarter of 1999 from
$1,653,239 for the first quarter of 1998. The stores acquired in July and
October of 1998 added $437,000 of SG&A, which was offset by a decrease in
comparable store SG&A of approximately $189,000. This decrease was the result of
cost reduction implemented in the fourth quarter of 1998. Corporate
administration accounted for the remainder of the increase of approximately
$147,000. This increase was due to higher salaries and benefits of approximately
$80,000 and an increase in various other expenses aggregating approximately
$67,000.
SG&A expense as a percentage of total revenues was 12.0% in the first
quarter of 1999 compared to 10.4% in the first quarter of 1998. This increase is
primarily due to lower comparable store revenues without a corresponding
decrease in operating expenses at these stores. The increase in corporate
administration expenses of approximately $147,000 also contributed to this
increase.
INTEREST EXPENSE/INCOME
Interest expense increased approximately $101,000 to $179,150 for the
first quarter of 1999 from $77,603, for the first 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 1997 and 1998.
Interest income increased approximately $28,000 to $82,179 for the
first quarter of 1999 from $54,395 for the first 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 first quarter of 1999, interest rates continued to
remain competitive; however, because of the increase in used equipment sales
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 $29,788,000 in first quarter monthly average of
accounts payable on wholegoods financing and the credit facility with the
Company's bank, the Company issued five-year common stock options to acquire up
to 670,230 shares of the Company's Common Stock at an exercise price of $0.50.
This resulted in a non-cash charge of $16,756 for the three-month period.
14
15
NET INCOME
Net income decreased approximately $341,000, or 74.0%, to $119,610 for
the first quarter of 1999 from $460,528 for the first quarter of 1998. This
decrease was primarily the result of the decrease in gross profit of
approximately $68,000, an increase in operating and administrative expenses of
$395,000, an increase in interest expense (net of interest income) and other
costs of $70,000, offset by a decrease in the provision for income taxes of
approximately $192,000.
Earnings per share decreased to $0.005 (both basic and diluted) from
$0.019 (both basic and diluted) from the first quarter of 1998 to the first
quarter of 1999, primarily as the result of the decrease in net income, for 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 March
31, 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 with no additional points, respectively. In addition, the
Company's wholesale credit lines with Agricredit, EDCO and Transamerica are at
rates that range from a defined prime plus 50 basis points to defined prime plus
150 basis points. As of March 31, 1999, the Company had floor plan payables
outstanding of approximately $26,484,000, of which approximately $5,026,000 was
then interest bearing.
Cash and cash equivalents increased to $107,150 at March 31, 1999 from
$81,463 at March 31, 1998. During the three months ended March 31, 1999,
operations used net cash of $371,047 primarily because of the decrease in floor
plan payables of approximately $3,656,000, which was primarily due to the
decrease in equipment inventory of approximately $3,253,056. The inventory
decrease was primarily due to higher used equipment sales in 1999. Investing
activities used cash of $106,454 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.
15
16
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 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.
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 are Year 2000
compliant. We have not identified any other material systems which 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
16
17
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;
o General economic conditions, including agricultural industry
cycles, interest rate fluctuations, economic recessions, customer
business cycles, and customer confidence in the economy;
o The length of the crop growing season and winter and spring
weather conditions in West Texas and Eastern New Mexico, and the
confidence of the Company's agricultural customers in the farm
economy;
o Risks associated with expansion, including the management of
growth; and
o Continued availability of key personnel.
17
18
PART II - OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits
27 Financial Data Schedule
(b) Reports on form 8-K
None
18
19
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
Date: May 13, 1999
TEXAS EQUIPMENT CORPORATION
By: /s/ Paul J. Condit
-------------------------------------
Paul J. Condit
President and Chief Executive Officer
20
INDEX TO EXHIBITS
Exhibit No. Description
- ----------- -----------
27 Financial Data Schedule