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, 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 (I.R.S. Employer
incorporation or organization) 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 November 10, 1999, was 3,607,311(giving effect to a 7-for-1 reverse stock
split effective September 7, 1999).
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INDEX
Page
PART I - FINANCIAL INFORMATION
Item 1. Condensed Financial Statements:
Consolidated Balance Sheets at September 30, 1999 and December 31, 1998 ........................ 4
Consolidated Statement of Operations for the Three Months Ended September 30, 1999 and 1998..... 6
Consolidated Statement of Operations for the Nine Months Ended September 30, 1999 and 1998...... 7
Consolidated Statement of Cash Flows for the Nine Months Ended September 30, 1999 and 1998...... 8
Item 2. Management's Discussion and Analysis of Financial Conditions and Results of Operations..... 14
Item 3. Quantitative and Qualitative Disclosures about Market Risk ................................ 21
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K .......................................................... 21
Signatures ........................................................................................ 22
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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.
NOTE CONCERNING REVERSE STOCK SPLIT
The historical share and per share data included in this Report on Form 10-Q has
been adjusted to give effect to a 7-for-1 reverse stock split effective
September 7, 1999. See Note 5 of the Notes to Financial Statements.
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PART I - FINANCIAL INFORMATION
ITEM 1. CONDENSED FINANCIAL STATEMENTS.
TEXAS EQUIPMENT CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
ASSETS
SEPTEMBER 30, DECEMBER 31,
1999 1998
----------- -----------
CURRENT ASSETS
Cash and cash equivalents $ 480,008 $ 494,132
Accounts receivable (less allowance for
Doubtful accounts of $109,564) 723,502 486,845
Other receivables 1,621,510 594,177
Inventories 32,323,119 39,241,714
Prepaid expense 3,482 --
----------- -----------
TOTAL CURRENT ASSETS 35,151,621 40,816,868
PROPERTY AND EQUIPMENT, NET 5,493,711 5,725,916
FINANCE RECEIVABLES 985,544 987,120
RECEIVABLES FROM OFFICER 150,050 142,290
GOODWILL, net of accumulated
Amortization of $88,992 in 1999
and $79,456 in 1998 101,706 111,242
OTHER ASSETS 65,625 62,181
----------- -----------
$41,948,257 $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
SEPTEMBER 30, DECEMBER 31,
1999 1998
----------- -----------
CURRENT LIABILITIES
Floor plan payables $22,351,498 $30,896,748
Notes payable 1,629,811 1,458,389
Accounts payable 856,034 877,391
Accrued liabilities 503,446 380,778
Income tax liability 273,247 648,544
Current maturities of
long-term debt 339,822 621,451
----------- -----------
TOTAL CURRENT LIABILITIES 25,953,858 34,883,301
LONG-TERM DEBT, net of
current maturities 7,227,250 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
3,607,311 in 1999 and 3,546,401 in 1998 3,607 3,546
Paid in capital 3,362,043 3,209,553
Retained earnings 5,168,425 4,850,734
----------- -----------
TOTAL STOCKHOLDERS' EQUITY 8,534,075 8,063,833
----------- -----------
$41,948,257 $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 SEPTEMBER 30,
--------------------------------
1999 1998
--------------- ---------------
REVENUES $ 17,089,207 $ 17,573,269
COST OF SALES 14,836,587 14,803,695
------------ ------------
GROSS PROFIT 2,252,620 2,769,574
SELLING,GENERAL AND
ADMINISTRATIVE EXPENSES 1,942,919 1,946,273
------------ ------------
INCOME FROM OPERATIONS 309,701 823,301
OTHER INCOME (EXPENSE)
Interest (178,617) (181,759)
Non-cash guarantee fee (15,729) (49,951)
Other income (16,587) (2,248)
------------ ------------
INCOME BEFORE TAXES 98,768 589,343
INCOME TAX EXPENSE 37,684 199,089
------------ ------------
NET INCOME $ 61,084 $ 390,254
NET INCOME PER SHARE
Basic $ 0.02 $ 0.11
Diluted $ 0.02 $ 0.11
NUMBER OF SHARES USED IN COMPUTATION
Basic 3,607,311 3,524,973
Diluted 3,630,800 3,592,295
6
See Notes to Condensed Financial Statements
7
TEXAS EQUIPMENT CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
NINE MONTHS ENDED SEPTEMBER 30,
-------------------------------
1999 1998
------------- --------------
REVENUES $ 49,428,150 $ 49,475,311
COST OF SALES 42,535,535 41,845,049
------------ ------------
GROSS PROFIT 6,892,615 7,630,262
SELLING,GENERAL AND
ADMINISTRATIVE EXPENSES 5,954,154 5,442,485
------------ ------------
INCOME FROM OPERATIONS 938,461 2,187,777
OTHER INCOME (EXPENSE)
Interest (393,591) (272,823)
Non-cash guarantee fee (48,311) (135,494)
Other income (6,342) 25,046
------------ ------------
INCOME FROM OPERATIONS BEFORE TAXES 490,217 1,804,506
INCOME TAX EXPENSE 172,527 597,600
------------ ------------
NET INCOME $ 317,690 $ 1,206,906
NET INCOME PER SHARE
Basic $ 0.09 $ 0.34
Diluted $ 0.09 $ 0.34
NUMBER OF SHARES USED IN COMPUTATION
Basic 3,568,492 3,520,771
Diluted 3,591,981 3,566,561
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See Notes to Condensed Financial Statements
8
TEXAS EQUIPMENT CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
NINE MONTHS ENDED SEPTEMBER 30,
-------------------------------
1999 1998
------------- --------------
CASH FLOW PROVIDE BY (USED IN)
OPERATING ACTIVITIES
Net income $ 317,690 $ 1,206,906
Adjustment to reconcile net income to net cash
Provided by operating activities:
Stock issued in settlement of lawsuit -- 34,688
Amortization & depreciation 401,098 308,898
Guaranty fee - valuation of stock options issued 48,311 135,494
CHANGES IN ASSETS AND LIABILITIES,
net of effects of business acquired:
Accounts receivable (1,263,990) 721,172
Inventories 6,918,595 (17,437,920)
Prepaid expenses (3,482) --
Floor plan payable (8,545,250) 13,401,675
Accounts payable (21,357) 151,886
Accrued liabilities 66,678 (71,374)
Finance receivable 1,576 (228,985)
Income tax liability (375,297) 365,412
Other liabilities 55,990 472,234
Other assets (3,443) 493
------------ ------------
NET CASH USED IN OPERATING ACTIVITIES (2,402,881) (939,421)
------------ ------------
CASH FLOWS PROVIDED BY (USED IN) INVESTING
ACTIVITIES
Purchases of land, buildings and equipment (159,357) (1,368,693)
Stockholders' receivables (7,760) 767
------------ ------------
NET CASH USED IN INVESTING ACTIVITIES (167,117) (1,367,926)
------------ ------------
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See Notes to Condensed Financial Statements
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TEXAS EQUIPMENT CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
NINE MONTHS ENDED SEPTEMBER 30,
-------------------------------
1999 1998
------------- --------------
CASH FLOW PROVIDED BY (USED IN) FINANCING
ACTIVITIES
Proceeds from note borrowings $ 7,980,372 $ 6,478,218
Repayments of note borrowings (5,424,497) (3,195,460)
----------- -----------
NET CASH PROVIDED BY FINANCING
ACTIVITIES 2,555,875 3,282,758
----------- -----------
NET INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS (14,123) 975,411
CASH AND CASH EQUIVALENTS AT THE
BEGINNING OF THE PERIOD 494,132 104,750
----------- -----------
CASH AND CASH EQUIVALENTS AT THE END OF
THE PERIOD $ 480,009 $ 1,080,161
=========== ===========
SUPPLEMENTAL DISCLOSURES OF
CASH FLOW INFORMATION
Cash paid during the period for:
Interest expense $ 645,732 $ 408,388
=========== ===========
Income taxes $ 520,942 $ 200,000
=========== ===========
Common stock issue related to convertible note $ 104,241 $ --
=========== ===========
9
See Notes to Condensed Financial Statements
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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, 1999 and December 31,
1998 and the condensed statements of operation for the three months and nine
months ended September 30, 1999 and 1998 and condensed statements of cash flows
for the nine months ended September 30, 1999 and 1998 are unaudited and reflect
all adjustments (consisting only of normal recurring adjustments) which are, in
the opinion of management, necessary for a fair presentation of the financial
position and operating results for the interim periods. The condensed
consolidated financial statements should be read in conjunction with the audited
consolidated financial statements and notes thereto contained in the Company's
Annual Report on Form 10-K for the fiscal year ended December 31, 1998. The
results of operations for the nine months ended September 30, 1999 are not
necessarily indicative of the results to be expected for the full year.
Certain reclassifications have been made in the condensed consolidated
balance sheet and statements of cash flows for 1998 to be in conformity with
1999.
2. INVENTORIES:
All inventories are valued at the lower of cost or market. Cost is
determined using the specific identification method for new and used equipment
and average cost for parts.
Inventories consisted of the following at:
September 30, December 31,
1999 1998
----------- -----------
New equipment $13,021,053 $19,830,691
Used equipment 14,451,039 15,101,869
Parts and other 4,851,027 4,309,154
----------- -----------
Total $32,323,119 $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.
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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 SEPTEMBER 30, 1999
- ------------------------------------- Product
Wholegoods Support
------------ ------------
Sales and revenues from external customers $ 12,705,593 $ 4,383,614
Depreciation expense 45,420 94,802
Segment operating profit (34,531) 651,237
Segment assets:
Property, plant and equipment 930,993 4,438,844
Inventory 27,472,092 4,851,027
THREE MONTHS ENDED SEPTEMBER 30, 1998
Sales and revenues from external customers 13,720,753 3,852,516
Depreciation expense 12,766 100,938
Segment operating profit 743,337 383,856
Segment assets: (as of December 31, 1998)
Property, plant and equipment 970,343 4,626,763
Inventory 34,932,560 4,309,154
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 profit 746,967 1,198,687
Segment assets:
Property, plant and equipment 930,993 4,438,844
Inventory 27,472,092 4,851,027
NINE MONTHS ENDED SEPTEMBER 30, 1998
Sales and revenues from external customers 39,338,777 10,136,534
Depreciation expense 70,986 223,799
Segment operating profit 1,995,354 1,122,964
Segment assets: (as of December 31, 1998)
Property, plant and equipment 970,343 4,626,463
Inventory 34,932,560 4,309,154
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3. SEGMENT INFORMATION (CONT'D)
OPERATING PROFIT Three Months Ended September 30,
--------------------------------
1999 1998
------------- -------------
Total profit for reportable segments $ 616,706 $ 1,127,193
Unallocated amounts:
Administrative expense (307,005) (303,892)
Other income (16,587) (2,248)
Interest expense (322,513) (221,439)
Interest income 143,896 39,680
Non-cash guarantee fee (15,729) (49,951)
----------- -----------
Total consolidated income before taxes $ 98,768 $ 589,343
=========== ===========
OPERATING PROFIT Nine Months Ended September 30,
-------------------------------
1999 1998
------------- ------------
Total profit for reportable segments $ 1,945,654 $ 3,118,318
Unallocated amounts:
Administrative expense (1,007,193) (930,541)
Other income (6,342) 25,046
Interest expense (690,209) (408,388)
Interest income 296,618 135,565
Non-cash guarantee fee (48,311) (135,494)
----------- -----------
Total consolidated income before taxes $ 490,217 $ 1,804,506
=========== ===========
4. NET INCOME PER SHARE
The following is a reconciliation of the numerator and denominator
underlying the income per share calculations. The number of shares outstanding
have been restated for the September 7, 1999 seven for one reverse stock split:
Nine Months ended September 30, 1999
------------------------------------
Income Shares Per Share
(Numerator) (Denominator) Amount
---------- ------------- ---------
Net income available to common stockholders' $ 317,690 3,568,492 $0.09
Effect of dilutive securities:
Incremental shares of assumed exercise of
options and conversions of convertible note -- 23,489 --
---------- --------- -----
Diluted net income available to common
stockholders' $ 317,690 3,591,981 $0.09
========== ========== =====
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4. NET INCOME PER SHARE (CONT'D)
Nine Months ended September 30, 1998
-------------------------------------
Income Shares Per Share
(Numerator) (Denominator) Amount
---------- ------------- ---------
Net income available to common stockholders' $1,206,906 3,520,771 $0.34
Effect of dilutive securities:
Incremental shares of assumed exercise of
options and convertible note -- 45,790 --
---------- ---------- -----
Diluted net income available to common
stockholders' $1,206,906 3,566,561 $0.34
========== ========== =====
5. REVERSE STOCK SPLIT
September 7, 1999 was the effective date of the Company's 7-for-1
reverse stock split. The Company cannot predict what effect the reverse split
will have on the market price of its common stock. However, a higher price may
diminish the adverse impact that very low prices have upon the efficient
operation of the trading market for the stock. In connection with the reverse
split, the Company is embarking on a program of publicizing the Company's
current business, results of operations and growth strategy to the financial
community. One significant objective of the reverse split and the Company's
related efforts is to better position the Company to qualify for a listing on
the Nasdaq system, although there can be no assurance such result will be
achieved. A Nasdaq listing may make the Company's stock more attractive and
better position the Company to pursue acquisitions consistent with its growth
strategy and to obtain needed equity financing. The historical share and per
share data included in this Report on Form 10-Q has been adjusted to give effect
to a 7-for-1 reverse stock split effective September 7, 1999.
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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's growth in recent years has been due to the acquisition of
agricultural equipment dealers in its operating area and implementation of its
operating model. The increase in sales from acquired stores has offset the
decrease in comparable store revenues (stores with revenues throughout the nine
months in 1998 and 1999). The acquisitions are primarily the result of
consolidation trends among agricultural equipment dealers and the ability of the
Company to leverage its expertise in acquisitions.
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; however, because of the current store locations,
there is an overlap in the growing seasons, which has 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 there will not be a substantial change in seasonality in 1999.
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
acquisition dates.
RESULTS OF OPERATIONS
THREE MONTHS ENDED SEPTEMBER 30, 1999 COMPARED TO THREE MONTHS ENDED SEPTEMBER
30, 1998
REVENUES
Revenues decreased approximately $484,000 or 2.8%, to $17,089,207 for
the third quarter of 1999 from $17,573,269 for the third quarter of 1998. Total
revenue contributed from acquired stores of approximately $1,028,000 was offset
by a decrease in comparable store revenues (stores with revenues throughout the
third quarter of 1998 and 1999) of approximately $1,512,000. The decrease in
comparable store revenue was due primarily to a decrease of approximately
$1,663,000 in wholegoods sales (primarily new tractor, grain combines and to a
lesser extent various other seasonal equipment sales), when compared to new
equipment sales in the third quarter of 1998.
Sales of wholegoods decreased approximately $1,015,000 or 7.4%, to
$12,705,593 for the third quarter of 1999 from $13,720,747 for the third quarter
of 1998. The wholegoods sales contribution of
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approximately $648,000 from acquired stores was offset by a decrease in
comparable stores wholegoods sales of approximately $1,663,000. This decrease in
comparable store wholegoods sales was the result of a decrease of approximately
$3,900,000, or 36.6 % in new equipment sales offset by an increase of
approximately $2,237,000, or 135% in used equipment sales. The decrease in new
equipment sales was primarily the result of the continued effect of weak
commodity prices, which began in 1998 and are expected to continue into 2000.
Parts and service revenue increased approximately $531,000, or 13.8%,
to $4,383,614 for the third quarter of 1999 from $3,852,522 for the third
quarter of 1998. The contribution of parts and service sales from acquired
stores was approximately $380,000. Comparable store parts and service revenues
increased approximately $151,000. The increase in comparable store revenue was
the result of a strong fall harvest season, which is expected to continue into
the fourth quarter.
GROSS PROFIT
Gross profit decreased approximately $517,000, or 18.7%, to $2,252,620
for the third quarter of 1999 from $2,769,574 for the third quarter of 1998.
Gross profit as a percentage of total revenues decreased to 13.2% for the third
quarter of 1999 from 15.8% for the third quarter of 1998. The Company's highest
gross margin is derived from its parts and service revenues. For these periods
the decline in gross profit as a percentage of total revenue was primarily
attributable to a decrease in wholegoods gross margins of 5 percentage points,
to 6.1% in the third quarter of 1999 from 11.1% in the third quarter of 1998,
offset in part by the shift in revenue mix between wholegoods sales (78.1% of
total revenues in the third quarter of 1998 compared to 74.3% of total revenues
in the third quarter of 1999) and parts and service revenues (21.9% of total
revenues in the third quarter of 1998 compared to 25.7% of total revenues in the
third quarter of 1999).
SELLING, GENERAL, AND ADMINISTRATIVE EXPENSE
Selling, general, and administrative (SG&A) expense was relatively flat
at $1,942,919 for the third quarter of 1999 compared to $1,946,273 for the third
quarter of 1998. The stores acquired in July and October of 1998 added
approximately $189,000 of SG&A, which was offset by a decrease in comparable
store SG&A of approximately $196,000. This decrease was the result of cost
reductions implemented in the fourth quarter of 1998. Corporate administration
accounted for the remainder of the increase. SG&A expense as a percentage of
total revenues was 11.4% in the third quarter of 1999 compared to 11.1% in the
third quarter of 1998.
INTEREST EXPENSE/INCOME
Interest expense increased approximately $101,000 to $322,513 for the
third quarter of 1999 from $221,439 for the third quarter of 1998. The increase
was due primarily to increased bank financing to support higher levels of
Company owned inventory and to meet working capital requirements, in addition to
the acquisition debt associated with the stores acquired in 1998.
Interest income increased approximately $104,000 to $143,896 for the
third quarter of 1999 from $39,680 for the third 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. Interest rates continue to remain competitive; however,
because of the increase in used equipment sales, which typically do not have
discounted interest rates, more interest income was earned in 1999 compared to
1998.
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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.
NON-CASH GUARANTEE FEE
In connection with the personal guarantee by the majority shareholders
of the Company of approximately $27,963,000 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
89,882 shares of the Company's Common Stock at an exercise price of $3.50. This
resulted in a non-cash charge of $15,729 for the three-month period.
NET INCOME
Net income decreased approximately $329,000, or 84.3%, to $61,084 for
the third quarter of 1999 from $390,254 for the third quarter of 1998. This
decrease was primarily the result of the decrease in gross profit of
approximately $517,000, which was offset by the decrease in other costs of
$20,000 and the provision for income taxes of approximately $161,000.
Earnings per share decreased to $0.02 (both basic and diluted) from
$0.11 (both basic and diluted) from the third quarter of 1998 to the third
quarter of 1999, primarily as the result of the reasons described above.
NINE MONTHS ENDED SEPTEMBER 30, 1999 COMPARED TO NINE MONTHS ENDED SEPTEMBER 30,
1998
REVENUES
Revenues for the nine months ended September 30, 1999 were $49,428,150
compared to $49,475,311 for the nine months ended September 30, 1998. Revenue
contributed from acquired stores of approximately $8,231,000 was offset by
decreases in comparable store revenues (stores with revenues throughout the nine
months ended September 30, 1998 and 1999) of approximately $8,278,000.
Wholegoods sales decreased approximately $975,000 to $38,364,080 for
the nine months ended September 30, 1999 compared to $39,338,777 for the nine
months ended September 30, 1998. Wholegoods sales from acquired stores
contributed approximately $6,122,000. The decrease in comparable store
wholegoods sales was due primarily to a decrease of approximately $11,029,000,
or 38.1%, in new equipment sales (primarily tractor and harvest equipment, and
to a lesser extent various other equipment sales), partially offset by an
increase in used equipment sales of $3,932,000, or 43.7%. This decrease in new
equipment sales was the result of the continued effect of weak commodity prices,
which began in the fourth quarter of 1998 and are expected to continue into
2000. The increase in used equipment sales is the direct result of lower new
equipment sales.
Parts and service revenue increased approximately $928,000, or 9.2%, to
$11,064,070 for the nine months ended September 30, 1999 from $10,136,534 for
the nine months ended September 30, 1998. The contribution of parts sales and
service revenues from acquired stores of approximately $2,109,000 was offset by
a decrease of approximately $1,182,000 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, which began in 1998 and have continued to remain weak in 1999. As a
result, the Company's customers were forced to delay their field preparation
work until the end of the first quarter, which resulted in lower than expected
parts sales and service revenues during the first three months of 1999. Parts
and service revenues were stronger in the second and third quarters of 1999
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compared to the first quarter of 1999, but the increase was not sufficient to
replace the lost revenue in the first quarter. The Company expects strong parts
and service revenues during the harvest season, which should result in higher
levels of parts sales and service revenues in the fourth quarter of 1999.
GROSS PROFIT
Gross profit decreased approximately $737,000, or 9.6%, to $6,892,615
for the nine months ended September 30, 1999 from $7,630,262 for the nine months
ended September 30, 1998. This decrease is due primarily to the decrease in
gross profit from wholegoods sales.
Gross profit as a percentage of total revenues decreased to 13.9% for
the nine months ended September 30, 1999 from 15.4% for the nine months ended
September 30, 1998. The Company's highest gross margin is derived from its parts
and service revenues. For these periods the decline in gross profit as a
percentage of total revenue was primarily attributable to the decrease in
wholegoods gross margins of 2.7 percentage points, to 7.7% from 10.4%, offset in
part by the shift in revenue mix between wholegoods sales (79.5% of total
revenues in the nine months ended September 30, 1998 compared to 77.6% of total
revenues in the nine months ended September 30, 1999) and parts and service
revenues (20.5% of total revenues in the nine months ended September 30, 1998
compared to 22.4% of total revenues in the nine months ended September 30,
1999).
SELLING, GENERAL, AND ADMINISTRATIVE EXPENSE
Selling, general, and administrative (SG&A) expense increased
approximately $512,000, to $5,954,154 for the nine months ended September 30,
1999 from $5,442,485 for the nine months ended September 30, 1998. The stores
acquired in July and October of 1998 added approximately $1,037,000 of SG&A,
which was offset by a decrease in comparable store SG&A of approximately
$602,000. This decrease was the result of cost reductions implemented in the
fourth quarter of 1998. Corporate administration accounted for the remainder of
the increase of approximately $77,000, which was due to higher salaries and
benefits in the first nine months of 1999 compared to 1998.
SG&A expense as a percentage of total revenues were 12.0% in the nine
months ended September 30, 1999 compared to 11.0% in the nine months ended
September 30, 1998. This increase is primarily due to lower comparable store
revenues without a proportionate decrease in store operating expenses and
corporate administration expenses.
INTEREST EXPENSE/INCOME
Interest expense increased approximately $282,000 to $690,209 for the
nine months ended September 30, 1999 from $408,388, for the nine months ended
September 30, 1998. The increase was due primarily to the increased levels of
bank financing because of higher Company owned inventory levels and working
capital loans, in addition to acquisition debt associated with the store
acquisitions in 1998.
Interest income increased approximately $161,000 to $296,618 for the
nine months ended September 30, 1999 from $135,565 for the nine months ended
September 30, 1998. Interest income was earned in connection with the financing
of customer purchases. The amount the Company will earn depends on the interest
rates charged by competitors, lending policies of Deere Credit and Agricredit
and prevailing market conditions. In the nine months ended September 30, 1999,
interest rates continued to remain competitive; however, because of the increase
in used equipment sales, which typically do not have discounted interest rates,
more interest income was earned in 1999 compared to 1998. In addition, because
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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.
NON-CASH GUARANTEE FEE
In connection with the personal guarantee by the majority shareholders
of the Company of approximately $27,963,000 average of accounts payable on
wholegoods financing and the credit facility with the Company's bank, the
Company issued fully vested five-year common stock options to acquire up to
276,065 shares of the Company's Common Stock at an exercise price of $3.50. This
resulted in a non-cash charge of $48,311 for the nine months ended September 30,
1999.
NET INCOME
Net income decreased approximately $889,000 or 73.7%, to $317,690 for
the nine months ended September 30, 1999 from $1,206,906 for the nine months
ended September 30, 1998. This decrease was primarily the result of the decrease
in gross profit of approximately $738,000, an increase in store operating
expenses of $435,000, an increase in administrative expenses of $77,000, an
increase in interest expense (net of interest income) and other costs of
$64,000, offset by a decrease in the provision for income taxes of approximately
$425,000.
Earnings per share decreased to $0.09 (both basic and diluted) from
$0.34 (both basic and diluted) from the nine months ended September 30, 1998 to
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 defined prime rate.
The Company annually reviews the terms of its financing arrangements and
interest rates with its lenders. As of September 30, 1999 the interest rate
charged by Deere for its floor plan financing and wholesale line of credit was a
defined prime rate plus 150 basis points and defined prime rate plus 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 defined prime rate plus 150 basis points. As of
September 30, 1999, the Company had floor plan payables outstanding of
approximately $22,351,000, of which approximately $8,248,000 was then interest
bearing.
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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 $4,089,600 of
existing debt and provided $840,400 in working capital. In addition to this
loan, the lender will continue to provide the Company with a $1,750,000 line of
credit at a defined prime rate plus 150 basis points, collateralized by trade
accounts receivable and Company owned equipment inventory.
Cash and cash equivalents decreased to $480,009 at September 30, 1999
from $494,132 at December 31, 1998. During the nine months ended September 30,
1999, operations used net cash of $2,402,881 primarily because of the decrease
in floor plan payables of approximately $8,545,250. This decrease was primarily
due to the decrease in equipment inventory of approximately $6,918,595. The
decrease in inventory was primarily due to higher used equipment sales in 1999
and a decrease in new equipment purchases. Investing activities used cash of
$167,117 primarily for capital expenditures. The Company's capital expenditures
are expected to increase as it implements its business plan to acquire
additional Deere dealerships. All acquisitions are subject to the availability
of debt or equity financing and Deere approval, of which there can be no
assurance in either case. Failure to obtain debt or equity financing would
significantly curtail the Company's business expansion and development plans.
SEASONALITY
Typically, farmers purchase agricultural equipment immediately prior to
planting or harvesting crops; however, because of the current store locations,
there is an overlap in the growing seasons, which has the effect of leveling out
quarterly sales and inventory requirements. In 1998, the Company recorded
approximately 24% of its sales in each of the first and second quarters and
approximately 26% in each of the third and fourth quarters. The Company believes
that this seasonality will not be significantly different for 1999. However, if
the Company acquires operations in geographical areas other than where it
currently has operations, it may be affected by other seasonal or equipment
buying trends.
IMPACT OF THE YEAR 2000 ISSUE
The Year 2000 Issue is the result of computer programs being written
using two digits rather than four to define the applicable year. Any of the
Company's computer programs that have date-sensitive software may recognize a
date using "00" as the year 1900 rather than the year 2000. This could result in
a system failure or miscalculations causing disruptions of operations,
including, among other things, a temporary inability to process transactions,
send invoices, or engage in similar normal business activities.
The Company's management information system software was acquired from
Deere. The Company also pays Deere a monthly maintenance fee for software and
hardware changes and upgrades. In formal discussions with Deere, the Company has
determined that the modifications designed to address Year 2000 Issues have been
completed on substantially all of the dealer programs (including related
hardware) as well as Deere's in-house software, and that substantially all of
Deere's systems identified as being mission critical have been tested and
verified as being Year 2000 compliant. Deere has informed the Company in a
communication dated October 11, 1999, that their goal has been to have all
remaining mission critical and non-mission critical systems compliant by October
31, 1999 and that their progress to date suggests this goal remains realistic
and achievable. 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
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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 that are not Year
2000 compliant. The Company has received oral assurances of Year 2000 compliance
from many of the third parties with which it has relationships.
The Company believes that operations will not be significantly
disrupted even if third parties other than Deere with whom we have relationships
are not Year 2000 compliant. The Company believes that all other external
service suppliers, such as manufacturers, suppliers and financial institutions
(other than Deere) do not provide critical services that would affect the
Company's ability to conduct its business. We believe that we will not be
required to make any material expenditure to address the Year 2000 problem as it
relates to our existing systems. However, uncertainty exists concerning the
potential costs and effects associated with any Year 2000 compliance, and we
intend to continue to make efforts to ensure that third parties with whom we
have relationships are Year 2000 compliant. Therefore, we cannot be certain that
unexpected Year 2000 compliance problems of either the Company or our vendors,
customers and service providers would not materially and adversely affect our
business, financial condition or operating results. We will continue to consider
the likelihood of a material business interruption due to the Year 2000 issue,
and if necessary, implement appropriate contingency plans.
Although no assurances can be given as to the Company's compliance,
particularly as it relates to third parties, based upon Deere's progress to
date, the Company does not expect the consequences of any of the Company's or
Deere's unanticipated or unsuccessful modifications to have a material adverse
effect on its financial position or results of operations. However, the failure
to correct a material Year 2000 problem could result in the interruption of
certain normal business activities and operations. The Company's most reasonable
and likely worst case scenario is that the Year 2000 noncompliance of a critical
third party, such as an energy supplier, could cause the supplier to fail to
deliver, with the result that delivery of equipment and product support is
interrupted at each of our stores. The Company believes that such a disruption
in the ability to provide product and services to our customer would not result
in significant loss of sales and profits.
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 March 29, 1999, 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;
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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; technological difficulties, especially
involving the company's suppliers and other third parties, including potential
impact of the year 2000 on processing date-sensitive information, which could
cause the Company to be unable to process customer orders, deliver products or
services, or perform other essential functions; 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 September 30, 1999, approximately 96.5% 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 nine months ended September 30, 1999 average interest rate under these
borrowings, (which average rate was approximately 9.50%) it is estimated that
the Company's interest expense for the nine months ended September 30, 1999
would have increased by approximately $81,000 resulting in a decrease in the
Company's net income and after tax cash flow of approximately $53,000. 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.
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
Form 8-K, Reverse Stock Split, filed September 14, 1999
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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 12, 1999
TEXAS EQUIPMENT CORPORATION
By: /s/ Paul J. Condit
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Paul J. Condit
President and Chief Executive
Officer
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INDEX TO EXHIBITS
EXHIBIT
NUMBER DESCRIPTION
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27 Financial Data Schedule