<PAGE>
Filed Pursuant to Rule 424(b)(4)
File No. 333-13267
4,200,000 SHARES
[LOGO]
CLASS A COMMON STOCK
($.01 par value)
--------------
All of the shares of Class A Common Stock, $.01 par value ("Class A Common
Stock"), offered hereby (the "Offering") are being issued and sold by RDO
Equipment Co. (the "Company"). Prior to this Offering, there has been no public
market for the Class A Common Stock. For information relating to the factors
considered in determining the initial offering price to the public, see
"Underwriting." The shares of Class A Common Stock have been approved for
listing on the New York Stock Exchange ("NYSE") under the symbol "RDO."
The Company's authorized Common Stock consists of Class A Common Stock and Class
B Common Stock, par value $.01 per share ("Class B Common Stock"). The economic
rights of each class of Common Stock are the same, but the voting rights differ.
Each share of Class A Common Stock is entitled to one vote per share and each
share of Class B Common Stock is entitled to four votes per share. The Class A
Common Stock is freely transferable, but the Class B Common Stock is
transferable only to certain transferees. Each share of Class B Common Stock is
convertible into one share of Class A Common Stock. Upon con-summation of this
Offering, the principal stockholder of the Company will own 100% of the
outstanding Class B Common Stock, which will represent approximately 59.4% of
the Common Stock of the Company (56.6% if the Underwriters' over-allotment
option is exercised in full) and approximately 85.4% of the combined voting
power of all classes of voting stock of the Company (83.9% if the Underwriters'
over-allotment option is exercised in full). See "Principal Stockholders" and
"Description of Capital Stock."
FOR A DISCUSSION OF CERTAIN FACTORS THAT SHOULD BE CONSIDERED IN CONNECTION WITH
AN INVESTMENT IN THE CLASS A COMMON STOCK, SEE "RISK FACTORS" ON PAGE 9 HEREIN.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
<TABLE>
<CAPTION>
Underwriting
Price to Discounts and Proceeds to
Public Commissions Company(1)
-------------- -------------- --------------
<S> <C> <C> <C>
Per Share................................... $15.50 $1.085 $14.415
Total(2).................................... $65,100,000 $4,557,000 $60,543,000
</TABLE>
(1) Before deduction of expenses payable by the Company estimated at $1,000,000.
(2) The Company has granted the Underwriters an option, exercisable for 30 days
from the date of this Prospectus, to purchase a maximum of 630,000
additional shares to cover over-allotments of shares. If the option is
exercised in full, the total Price to the Public will be $74,865,000,
Underwriting Discounts and Commissions will be $5,240,550, and Proceeds to
Company will be $69,624,450.
The Shares are offered by the several Underwriters when, as and if issued by the
Company, delivered to and accepted by the Underwriters and subject to their
right to reject orders in whole or in part. It is expected that the Shares will
be ready for delivery on or about January 29, 1997, against payment in
immediately available funds.
CREDIT SUISSE FIRST BOSTON DAIN BOSWORTH
INCORPORATED
Prospectus dated January 23, 1997.
<PAGE>
[Outside gatefold: Photos depicting various types of industrial and agricultural
equipment]
[Inside gatefold: two maps, one depicting industrial store locations and Deere
areas of responsibility and the other depicting agricultural store locations,
and two inset photos depicting Company service technicians repairing industrial
and agricultural equipment]
------------------------
INFORMATION CONTAINED IN THIS PROSPECTUS CONTAINS "FORWARD-LOOKING
STATEMENTS" WHICH CAN BE IDENTIFIED BY THE USE OF FORWARD-LOOKING TERMINOLOGY
SUCH AS "MAY," "WILL," "EXPECT," "ANTICIPATE," "ESTIMATE," OR "CONTINUE" OR THE
NEGATIVE THEREOF OR OTHER VARIATIONS THEREON OR COMPARABLE TERMINOLOGY. THE
STATEMENTS IN "RISK FACTORS" BEGINNING ON PAGE 9 OF THIS PROSPECTUS CONSTITUTE
CAUTIONARY STATEMENTS IDENTIFYING IMPORTANT FACTORS, INCLUDING CERTAIN RISKS AND
UNCERTAINTIES, WITH RESPECT TO SUCH FORWARD-LOOKING STATEMENTS THAT COULD CAUSE
ACTUAL RESULTS TO DIFFER MATERIALLY FROM THOSE REFLECTED IN SUCH FORWARD-LOOKING
STATEMENTS.
IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT
TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE CLASS A COMMON
STOCK OF THE COMPANY AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE
OPEN MARKET. SUCH TRANSACTIONS MAY BE EFFECTED ON THE NYSE OR OTHERWISE. SUCH
STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME.
DURING THIS OFFERING, CERTAIN PERSONS AFFILIATED WITH PERSONS PARTICIPATING
IN THE DISTRIBUTION MAY ENGAGE IN TRANSACTIONS FOR THEIR OWN ACCOUNTS OR FOR THE
ACCOUNTS OF OTHERS IN THE CLASS A COMMON STOCK PURSUANT TO EXEMPTIONS FROM RULES
10b-6 AND 10b-7 UNDER THE SECURITIES EXCHANGE ACT OF 1934.
2
<PAGE>
PROSPECTUS SUMMARY
THE FOLLOWING SUMMARY IS QUALIFIED IN ITS ENTIRETY BY THE MORE DETAILED
INFORMATION AND COMBINED FINANCIAL STATEMENTS AND NOTES THERETO APPEARING
ELSEWHERE IN THIS PROSPECTUS. EXCEPT AS OTHERWISE NOTED OR CONTAINED IN THE
COMBINED FINANCIAL STATEMENTS AND NOTES THERETO INCLUDED HEREIN, ALL INFORMATION
IN THIS PROSPECTUS (I) ASSUMES NO EXERCISE OF THE UNDERWRITERS' OVER-ALLOTMENT
OPTION GRANTED BY THE COMPANY, AND (II) REFLECTS CHANGES TO THE COMPANY'S
CAPITAL STRUCTURE EFFECTED PRIOR TO THE CONSUMMATION OF THIS OFFERING, INCLUDING
THE 44.5-FOR-ONE STOCK SPLIT AND SHARE EXCHANGE IN CONNECTION WITH THE
REINCORPORATION OF THE COMPANY IN DELAWARE, EFFECTIVE IN JANUARY 1997. IN
ADDITION, (I) REFERENCES TO THE COMPANY ON A PRO FORMA BASIS REFLECT ADJUSTMENTS
TO GIVE EFFECT TO THE COMPANY'S RECENT ACQUISITIONS OF INDUSTRIAL OPERATIONS IN
CENTRAL TEXAS AND AGRICULTURAL OPERATIONS IN WASHINGTON, AS IF SUCH ACQUISITIONS
HAD OCCURRED ON FEBRUARY 1, 1995 WITH RESPECT TO STATEMENTS OF OPERATIONS DATA,
AND (II) REFERENCES TO THE COMPANY INCLUDE ITS WHOLLY-OWNED SUBSIDIARIES. SEE
"REINCORPORATION" AND "BUSINESS--GROWTH STRATEGY." THE CLASS A COMMON STOCK AND
THE CLASS B COMMON STOCK ARE SOMETIMES COLLECTIVELY REFERRED TO AS THE "COMMON
STOCK."
THE COMPANY
RDO Equipment Co. (the "Company") owns and operates the largest networks of
John Deere industrial stores and agricultural stores in the United States.
Through its 32 stores, the Company sells, services, and rents industrial and
agricultural equipment, primarily supplied by Deere & Company and its
subsidiaries ("Deere" or "John Deere"). The Company's revenues have grown at a
compound annual rate of 33% over the past five fiscal years, from $71.2 million
in fiscal 1992 to $223.6 million in fiscal 1996.
INDUSTRIAL EQUIPMENT INDUSTRY. Management estimates that United States
retail sales of new industrial equipment in its target product market in
calendar 1995 totaled approximately $5.7 billion. Deere is one of the leading
suppliers of industrial equipment in the United States for light to medium
applications and offers a broad array of products. Currently, Deere has
approximately 110 industrial dealers which operate approximately 355 stores in
the United States. Each dealer within the Deere industrial system is assigned
specific geographic areas of responsibility within which it has the right to
sell new Deere products. Over the last five years, while the number of Deere
industrial stores has remained constant, the number of Deere industrial dealers
has declined by more than 30%. This dealer consolidation is being driven, in
part, by an increasing need for capital, owners' concerns about succession, and
Deere's support for consolidation of its dealers. The Company expects to benefit
from this consolidation trend by continuing its strategic acquisition of Deere
industrial dealerships.
AGRICULTURAL EQUIPMENT INDUSTRY. Management estimates that United States
retail sales of new agricultural equipment in its target product market in
calendar 1995 totaled approximately $10.1 billion. Deere is the leading supplier
of agricultural equipment in the United States. Currently, Deere has
approximately 1,275 agricultural dealers which operate approximately 1,545
stores in the United States. Deere agricultural dealers are not assigned
exclusive territories, but have authorized store locations. The Company believes
that Deere agricultural dealerships also face an increasing need for capital,
owners' concerns about succession, and Deere's support for consolidation and, as
a result, that a consolidation of Deere agricultural dealerships will occur. The
Company expects that it will have increasing opportunities to complete strategic
acquisitions of Deere agricultural dealerships as this consolidation trend
develops.
GROWTH STRATEGY. The Company's growth strategy is to continue to expand and
improve its operations through a combination of (i) increasing market share
within its existing Deere areas of responsibility, (ii) capitalizing on the
consolidation trends among Deere dealers by acquiring additional dealerships,
(iii) improving the operating performance of its store networks by implementing
its operating model, and (iv) continuing the business and geographic
diversification of its operations. Over the last five years, the Company has
acquired 13 stores from seven dealers, including five stores acquired in
calendar 1996. The acquisitions completed in calendar 1996 establish new
industrial operations in Texas and new agricultural
3
<PAGE>
operations in Washington, which the Company believes will provide platforms for
further growth. Approximately $34.4 million of the net proceeds of this Offering
is expected to be used to finance future acquisitions, new stores, and internal
growth. In addition to its acquisitions, the Company also has opened four stores
in the last five years.
INDUSTRIAL DIVISION
The Company operates the largest network of Deere industrial stores,
representing approximately 6% of Deere's United States industrial equipment
sales in calendar 1995. The Industrial Division operates 21 stores located
primarily in areas with significant construction activity within the Company's
designated Deere areas of responsibility, including Dallas-Fort Worth, southern
Los Angeles, Minneapolis-St. Paul, Phoenix, and San Diego. Customers of the
Company's industrial stores include contractors, for both residential and
commercial construction, utility companies, and federal, state, and local
government agencies. Revenues of the Industrial Division increased from $30.5
million in fiscal 1992 to $139.0 million in fiscal 1996, representing a compound
annual growth rate of 46%. The growth in the Industrial Division's revenues are
due to same store sales increases and the acquisition of 11 stores over the last
five years. The increases in same store sales are attributable to the continued
implementation of the Company's operating model, particularly at acquired
stores, as well as a favorable construction environment. Industrial acquisitions
have been made in Arizona, California, and Texas due to the favorable
construction economies and year-round construction seasons in these locations,
as well as the Company's strategy to diversify geographically.
The Company's industrial stores offer a full range of new and used Deere
equipment, replacement parts, and fully-equipped service and repair facilities.
In addition, the Company sells industrial equipment supplied by other
manufacturers which is complementary to the Deere lines, as well as used
industrial equipment taken as trade-ins. The Company believes that product
support, through its parts and service programs, has been and will be
increasingly important to the profitability of its industrial equipment
operations and its ability to attract and retain customers. In the Southwest
region, the Industrial Division has established a rental fleet of industrial
equipment, which the Company intends to continue to expand. See
"Business--Recent and Contemplated Acquisitions."
AGRICULTURAL DIVISION
The Company operates the largest network of Deere agricultural stores,
representing approximately 1% of Deere's U.S. agricultural equipment sales in
calendar 1995. The Agricultural Division operates 11 stores located in
Minnesota, North Dakota, South Dakota, and Washington. Revenues of the
Agricultural Division increased from $40.7 million in fiscal 1992 to $84.6
million in fiscal 1996, representing a compound annual growth rate of 20%. The
growth in the Agricultural Division's revenues is almost entirely due to same
store sales increases. The increase in same store sales is attributable to the
continued implementation of the Company's operating model, as well as a
favorable agricultural economy.
As full-service suppliers to farmers, the Company's agricultural stores
offer a broad range of farm equipment and related products, with sales of new
Deere equipment the primary focus. The Company also sells agricultural equipment
supplied by other manufacturers which is complementary to the Deere lines, as
well as used agricultural equipment taken as trade-ins. In addition, the
agricultural stores offer lawn and grounds care equipment, primarily supplied by
Deere. As part of its strategy to provide a full complement of product support
services to its agricultural customers, the Company offers a broad range of
replacement parts and fully-equipped service and repair facilities at each
store.
4
<PAGE>
GROWTH STRATEGY
In order to capitalize on industry consolidation trends, expand its market
leadership position, and further develop its industrial and agricultural
equipment operations, the Company has developed its growth strategy, the key
elements of which are:
- INCREASING MARKET SHARE. The Company seeks to increase its market share
by enhancing customer service and generating customer loyalty. With a
larger installed base of equipment, the Company has the opportunity to
generate additional parts and service business, which currently accounts
for approximately 26% of the Company's total revenues and which has higher
profit margins than wholegoods sales.
- PURSUING ADDITIONAL ACQUISITIONS. Acquisitions have been and will
continue to be an important element of the Company's growth strategy,
particularly given the consolidation trends among industrial and
agricultural equipment dealers. Over the past five years, the Company has
acquired 11 industrial stores and two agricultural stores from seven
dealers. Due to its leadership position in the industry and its track
record in completing and integrating acquisitions, the Company believes
that attractive acquisition candidates will continue to become available
to the Company. Approximately $34.4 million of the net proceeds of this
Offering is expected to be used to finance future acquisitions, new
stores, and internal growth. Completion of any prospective acquisition of
a Deere dealership, or the opening of a new Deere store, requires Deere's
consent. See "Risk Factors-- Risks Associated with Expansion" and
"Business--Recent and Contemplated Acquisitions."
- IMPLEMENTING THE RDO OPERATING MODEL. The Company has developed a proven
operating model designed to improve the performance and profitability of
each of its stores. Components of this operating model include (i)
pursuing aggressive marketing programs, (ii) allowing store employees to
focus on customers by managing administrative functions, training, and
purchasing at the corporate level, (iii) providing a full complement of
parts and state-of-the-art service functions, including a computerized
real-time inventory system and quick response, on-site repair service,
(iv) motivating store level management in accordance with corporate goals,
and (v) focusing on cost structures at the store level.
- CAPITALIZING ON DIVERSITY OF OPERATIONS. A major focus of the Company's
strategy is to expand its networks of industrial and agricultural stores
into geographic areas that have a large base of construction or
agricultural activity and that provide the Company with opportunities to
continue to develop its store networks. The Company believes that its
business diversification into both industrial and agricultural store
operations has significantly increased its customer base, while also
mitigating the effects of industry-specific economic cycles. Similarly,
the Company's geographic diversification into regions outside the Midwest
helps to diminish the effects of seasonality, as well as local and
regional economic fluctuations. Typically, other Deere dealers operate
only industrial or agricultural dealerships, with a limited number of
stores concentrated in a specific geographic region.
RECENT ACQUISITIONS
The Company recently acquired three industrial stores and two agricultural
stores, thereby extending the Company's store networks into Texas and
Washington, which the Company believes will provide platforms for future growth.
The Company recently completed the purchase of a Deere industrial dealership in
Central Texas, with three stores located in the Dallas-Fort Worth and Waco,
Texas metropolitan areas with a Deere area of responsibility covering the 35
surrounding counties (the "Central Texas Acquisition"). The Company also
recently completed the acquisition of a Deere agricultural dealership, with two
stores located in Pasco and Sunnyside, Washington (the "Washington
Acquisition"). Completion of any prospective acquisition of a Deere dealership
requires Deere's consent. See "Risk Factors--Risks Associated with Expansion"
and "Business--Recent and Contemplated Acquisitions."
5
<PAGE>
The Company was incorporated in North Dakota on March 13, 1968 and was
reincorporated in Delaware in January 1997. The Company's executive offices are
located at 2829 South University Drive, Fargo, North Dakota 58109. The Company's
phone number is (701) 237-7363.
THE OFFERING
<TABLE>
<S> <C> <C>
Class A Common Stock
offered...................... 4,200,000 shares of Class A Common Stock
Common Stock to be outstanding
after this Offering
Class A Common Stock........ 5,091,508 shares(1)
Class B Common Stock........ 7,458,492 shares
---------
Total..................... 12,550,000 shares
---------
---------
Use of Proceeds............... The net proceeds from this Offering will be used (i) to
repay indebtedness incurred to finance recent acquisitions
in the aggregate amount of approximately $10.1 million,
(ii) to make an S corporation distribution in the amount of
approximately $15.0 million to the Company's existing
stockholders in connection with termination of the
Company's S corporation status, and (iii) to finance future
acquisitions, new stores, internal growth, and working
capital needs. See "Use of Proceeds," "S Corporation
Distributions," and "Certain Relationships and Related
Transactions."
Voting Rights................. The Class A Common Stock and Class B Common Stock vote
together as a single class on all matters, except as
otherwise required by law, with each share of Class A
Common Stock entitling its holder to one vote and each
share of Class B Common Stock entitling its holder to four
votes. All of the outstanding Class B Common Stock is held
by Ronald D. Offutt, the Company's Chairman, Chief
Executive Officer, and principal stockholder. Under certain
circumstances, Class B Common Stock automatically converts
into Class A Common Stock. See "Description of Capital
Stock-- Common Stock."
NYSE symbol................... RDO
</TABLE>
- ------------------------
(1) Excludes 1,250,000 shares of Class A Common Stock reserved for issuance
pursuant to the Company's stock incentive plan of which approximately
600,000 shares will be subject to options to be granted prior to
consummation of this Offering at an exercise price equal to the initial
public offering price. See "Management--1996 Stock Incentive Plan."
6
<PAGE>
SUMMARY COMBINED AND PRO FORMA FINANCIAL AND OPERATING DATA
(in thousands, except store and per share data)
<TABLE>
<CAPTION>
FISCAL YEAR ENDED JANUARY 31,
---------------------------------------------------------------------------------
ACTUAL
------------------------------------------------------------------- PRO FORMA
1992 1993 1994 1995 1996 1996 (1)(2)
----------- ----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Revenues..................................... $ 71,226 $ 105,378 $ 144,112 $ 183,910 $ 223,557 $ 265,478
Cost of sales................................ 56,422 83,548 116,369 148,111 180,839 212,824
----------- ----------- ----------- ----------- ----------- -----------
Gross profit................................. 14,804 21,830 27,743 35,799 42,718 52,654
Selling, general, and administrative
expense..................................... 11,929 16,737 20,577 24,893 31,655 38,858
----------- ----------- ----------- ----------- ----------- -----------
Operating income............................. 2,875 5,093 7,166 10,906 11,063 13,796
Interest expense............................. (1,299) (1,284) (1,670) (1,895) (3,817) (1,584)
Interest income.............................. 173 376 336 802 823 1,031
----------- ----------- ----------- ----------- ----------- -----------
Net income................................... $ 1,749 $ 4,185 $ 5,832 $ 9,813 $ 8,069 $ 13,243
----------- ----------- ----------- ----------- ----------- -----------
----------- ----------- ----------- ----------- ----------- -----------
PRO FORMA INCOME STATEMENT DATA: (UNAUDITED)
Income before taxes.......................... $ 1,749 $ 4,185 $ 5,832 $ 9,813 $ 8,069 $ 13,243
Provision for income taxes(3)................ 700 1,674 2,332 3,925 3,228 5,297
----------- ----------- ----------- ----------- ----------- -----------
Net income................................... $ 1,049 $ 2,511 $ 3,500 $ 5,888 $ 4,841 $ 7,946
----------- ----------- ----------- ----------- ----------- -----------
----------- ----------- ----------- ----------- ----------- -----------
Net income per share ............................................................................... $ .51 $ .63
----------- -----------
----------- -----------
Weighted average shares outstanding ................................................................ 9,429 12,570
----------- -----------
----------- -----------
SELECTED OPERATING DATA:
Comparable store net sales increase.......... -- 12% 32% 25% 11% --
Stores open at beginning of period........... 15 17 21 22 22 22
Stores opened.............................. 1 0 0 0 2 2
Stores acquired............................ 1 4 1 0 2 7
----------- ----------- ----------- ----------- ----------- -----------
Stores open at end of period................. 17 21 22 22 26 31
----------- ----------- ----------- ----------- ----------- -----------
----------- ----------- ----------- ----------- ----------- -----------
Capital expenditures......................... $ 561 $ 681 $ 627 $ 1,208 $ 9,993 $ 10,131
Depreciation................................. 504 584 668 690 1,326 1,653
<CAPTION>
NINE MONTHS ENDED OCTOBER 31,
---------------------------------------
ACTUAL
------------------------- PRO FORMA
1995 1996 1996 (1)(2)
----------- ----------- -----------
<S> <C> <C> <C>
INCOME STATEMENT DATA:
Revenues..................................... $ 176,825 $ 229,260 $ 257,823
Cost of sales................................ 143,718 186,451 208,581
----------- ----------- -----------
Gross profit................................. 33,107 42,809 49,242
Selling, general, and administrative
expense..................................... 23,600 29,492 33,908
----------- ----------- -----------
Operating income............................. 9,507 13,317 15,334
Interest expense............................. (2,435) (4,116) (2,247)
Interest income.............................. 586 633 816
----------- ----------- -----------
Net income................................... $ 7,658 $ 9,834 $ 13,903
----------- ----------- -----------
----------- ----------- -----------
PRO FORMA INCOME STATEMENT DATA: (UNAUDITED)
Income before taxes.......................... $ 7,658 $ 9,834 $ 13,903
Provision for income taxes(3)................ 3,063 3,934 5,561
----------- ----------- -----------
Net income................................... $ 4,595 $ 5,900 $ 8,342
----------- ----------- -----------
----------- ----------- -----------
Net income per share ........................ $ .63 $ .66
----------- -----------
----------- -----------
Weighted average shares outstanding ......... 9,414 12,555
----------- -----------
----------- -----------
SELECTED OPERATING DATA:
Comparable store net sales increase.......... 13% 23% --
Stores open at beginning of period........... 22 26 26
Stores opened.............................. 1 1 1
Stores acquired............................ 2 5 5
----------- ----------- -----------
Stores open at end of period................. 25 32 32
----------- ----------- -----------
----------- ----------- -----------
Capital expenditures......................... $ 9,674 $ 3,182 $ 3,328
Depreciation................................. 614 1,930 2,155
</TABLE>
<TABLE>
<CAPTION>
AS OF OCTOBER 31, 1996
---------------------------------------------
PRO FORMA
ACTUAL PRO FORMA (4) AS ADJUSTED (2)(4)
--------- -------------- ------------------
<S> <C> <C> <C>
BALANCE SHEET DATA:
Working capital................................... $ 20,778 $ 5,778 $ 65,278
Inventories....................................... 125,766 125,766 125,766
Total assets...................................... 176,712 177,562 177,562
Floor plan payables(5)............................ 100,612 100,612 66,212
Total debt........................................ 26,758 26,758 16,658
Stockholders' equity.............................. 34,284 20,134 79,634
</TABLE>
(SEE FOOTNOTES ON FOLLOWING PAGE)
7
<PAGE>
NOTES TO SUMMARY COMBINED AND PRO FORMA FINANCIAL AND OPERATING DATA
(1) Reflects adjustment to give effect to the Central Texas and the Washington
Acquisitions as if such acquisitions had occurred February 1, 1995. The pro
forma information is not necessarily indicative of the results that actually
would have been achieved had such transactions been consummated as of
February 1, 1995, or that may be achieved in the future. See "Selected
Combined and Pro Forma Financial and Operating Data" and Pro Forma Unaudited
Financial Statements and the Notes thereto.
(2) Adjusted to give effect to the sale of 4,200,000 shares of Class A Common
Stock offered hereby and the application of the net proceeds therefrom. See
"Use of Proceeds," "S Corporation Distributions," "Capitalization," Pro
Forma Unaudited Financial Statements and the Notes thereto, and the Combined
Financial Statements and the Notes thereto.
(3) For all periods presented, the Company was an S corporation and was not
generally subject to corporate income taxes. The pro forma income tax
provision has been computed as if the Company were subject to corporate
income taxes for all periods presented based on the tax laws in effect
during the respective periods. See "S Corporation Distributions" and the
Combined Financial Statements and the Notes thereto.
(4) Adjusted to give effect to (i) the deferred tax asset of approximately
$850,000 resulting from the termination of the Company's status as an S
corporation, and (ii) the $15.0 million S corporation distribution to
existing stockholders which will be paid out of the net proceeds of this
Offering.
(5) Includes interest bearing and non-interest bearing liabilities incurred in
connection with inventory financing. See Note 5 to the Combined Financial
Statements.
8
<PAGE>
RISK FACTORS
IN ADDITION TO THE OTHER INFORMATION IN THIS PROSPECTUS, PROSPECTIVE
INVESTORS SHOULD CONSIDER CAREFULLY THE FOLLOWING RISK FACTORS BEFORE PURCHASING
THE SHARES OF CLASS A COMMON STOCK OFFERED HEREBY.
DEPENDENCE UPON JOHN DEERE
The Company is an authorized dealer of John Deere industrial and
agricultural equipment and parts in its designated areas of responsibility and
at its store locations, and the Company's acquisition strategy contemplates the
acquisition of additional Deere areas of responsibility and store locations.
During fiscal 1996, approximately 72% of the Company's new equipment sales
represented sales of new equipment supplied by Deere and a majority of the
Company's sales from parts and service also were directly related to Deere
equipment. The Company depends on Deere for floor plan financing to finance a
substantial portion of its inventory. As of October 31, 1996, Deere and its
subsidiaries were financing approximately $89.1 million of the Company's
inventory of Deere equipment. See "Business--Floor Plan Financing." In addition,
Deere provides a significant percentage of the financing used by the Company's
customers to purchase Deere equipment from the Company. See "Business--Customer
Financing Options." Deere also provides incentive programs and discount programs
from time to time which enable the Company to price its products more
competitively. In addition, Deere conducts promotional and marketing activities
on national, regional, and local levels. Due to the Company's dependence on
Deere, the Company believes that its success depends, in significant part, on
(i) the overall success of Deere, (ii) the availability and terms of floor plan
financing and customer financing from Deere, (iii) the incentive and discount
programs provided by Deere and its promotional and marketing efforts for its
industrial and agricultural products, (iv) the goodwill associated with John
Deere trademarks, (v) the introduction of new and innovative products by Deere,
(vi) the manufacture and delivery of competitively-priced, high quality
equipment and parts by Deere in quantities sufficient to meet the requirements
of the Company's customers on a timely basis, and (vii) the quality,
consistency, and management of the overall Deere dealership system. If Deere
does not provide, maintain, or improve any of the foregoing, there could be a
material adverse effect on the Company's results of operations. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and "Business--Dealership Agreements."
DEERE TERMINATION RIGHTS
Under a master agreement with Deere (the "Deere Agreement"), Deere has the
right to terminate the Company's dealer appointments immediately if Ronald D.
Offutt, the Company's Chairman, Chief Executive Officer, and principal
stockholder, ceases to (i) own or control in excess of 50% of the outstanding
voting power, or whatever greater percentage is required to control corporate
actions that require a stockholder vote, and (ii) own at least 35% of the
outstanding Common Stock. Upon consummation of this Offering, Mr. Offutt will
own or control approximately 85.4% (83.9% if the Underwriters' over-allotment
option is exercised in full) of the outstanding voting power of the Company and
will own approximately 59.4% (56.6% if the Underwriters' over-allotment option
is exercised in full) of the Common Stock. Deere also has a right to terminate
the Company's dealer appointments in the event of Mr. Offutt's death; however,
Deere cannot exercise this right to terminate if, at that time, (i) there is in
place an ownership succession plan approved by Deere, (ii) the Company and Deere
have identified events which would thereafter constitute changes of control of
the Company entitling Deere to terminate the dealer appointments, (iii) the
Company and each of its stores are under continuing management acceptable to
Deere, (iv) there is no existing breach and no grounds for termination exist
with respect to any of the Company's agreements with Deere, including the
ownership requirements, and (v) Deere in its sole discretion has determined that
each of the Company's areas of responsibility and store locations justifies the
continuation of the Deere appointment for such area or location. As of the date
of this Prospectus, all of these conditions would be met.
In addition, Deere is entitled to terminate the Company's dealer
appointments on one year's notice if the equity-to-assets ratio of the Company's
Deere dealer operations is below 25% as calculated by Deere based on the
Company's fiscal year end audit, provided that the Company has not cured such
deficiency
9
<PAGE>
within 180 days of such fiscal year end. Certain business operations and assets
of the Company held in wholly-owned subsidiaries, such as its real estate and
its irrigation and equipment rental businesses, are excluded from this
calculation. In addition, without regard to any subsequent attempts to cure,
upon one year's notice Deere may terminate dealer appointments for which the
Company fails to meet certain performance criteria and market share objectives
for each of its agricultural stores, including developing and achieving
Deere-approved business plans. The Company's industrial operations also must
maintain overall and core product market share and product support standards at
a level greater than the level corresponding to the 50th percentile of all of
Deere's United States industrial dealers and may be terminated upon one year's
prior written notice without regard to any subsequent attempts to cure. Acquired
operations that are performing below these levels at the time the acquisition is
completed have a three-year grace period to meet these standards. Deere has
advised the Company that, after excluding acquisitions that fall into such grace
period, the Company's operations currently meet all of these performance
criteria. In addition, Deere can terminate the Company's agricultural dealer
appointments for cause or if Deere determines that there is not sufficient
market potential to support a dealership in a particular location upon prior
written notice to the Company of 180 days. The Company's dealer appointments
terminate immediately upon the commencement of the dissolution or liquidation of
the Company or a sale of a substantial part of the business, change in the
location of a dealership without Deere's prior written consent, the withdrawal
of a major stockholder or a substantial reduction in interest of a major
stockholder, or a default under any security agreement with Deere. The
appointments also may be terminated upon the revocation or discontinuance of any
guaranty of Ronald D. Offutt or the Company to Deere, unless replaced by a
letter of credit acceptable to Deere. See "Business--Personal Guaranty."
In the event of Mr. Offutt's death, Deere thereafter will have the right to
terminate the Company's dealer appointments upon the occurrence of a "change of
control." A "change of control" is defined for these purposes as (i) the sale,
lease, exchange, or other transfer of substantially all of the Company's assets,
(ii) a merger, consolidation, reorganization, or similar transaction in which
the Company's stockholders do not own more than 50% of the voting power of the
surviving entity (provided that if they own more than 50% but less than 80% of
the voting power, the merger must be approved by a majority of the directors who
were directors at the time of Mr. Offutt's death or subsequent directors whose
election has been approved by existing directors ("Continuity Directors")),
(iii) a vote by the stockholders to approve a transaction set forth in (i) or
(ii), (iv) the acquisition by a person other than Mr. Offutt or his heirs of 50%
or more of the voting power of the Company (20% if such acquisition has not been
approved by a majority of the Continuity Directors), (v) a change in the
corporate executive officers without Deere's approval, or (vi) if Continuity
Directors cease to constitute a majority of the Company's Board of Directors.
Termination of certain or all of the Company's Deere dealer appointments
would have a material adverse effect on the results of operations and financial
condition of the Company. The Company is presently unaware of any intention by
Deere to terminate any of its dealer appointments. See "Business-- Dealership
Agreements."
DEERE DEALERSHIP AGREEMENTS--OTHER PROVISIONS
The Company operates its Deere industrial and agricultural stores pursuant
to the Deere Agreement and pursuant to Deere's customary industrial or
agricultural dealership agreements for each of the Company's industrial areas of
responsibility and agricultural store locations. These agreements impose a
number of restrictions and obligations on the Company with respect to its
operations, including a prohibition on carrying industrial products which are
competitive with Deere products, and an obligation to maintain suitable
facilities, provide competent management, actively promote the sale of Deere
equipment in the Company's designated areas of responsibility, fulfill the
warranty obligations of Deere, provide service and maintain sufficient parts
inventory to service the needs of its customers, maintain inventory in
proportion to the sales potential in each of the Company's designated areas of
responsibility, maintain adequate working capital, and maintain stores only in
authorized locations. The Deere Agreement also provides that the Company cannot
engage in discussions to acquire other Deere dealerships without Deere's prior
written consent, which Deere may withhold in its sole discretion. In addition,
Deere
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has the right to have input into the selection of the Company's management
personnel, including store managers, and to have input with respect to the
selection of nominees to the Company's Board of Directors and the removal of
directors. The prior consent of Deere is required for the opening of any store
within the Company's designated areas of responsibility and for the acquisition
of any other Deere dealership. There can be no assurance that any such consent
will be given by Deere. See "Business-- Dealership Agreements." In addition, the
Company is prohibited from making acquisitions, initiating new business
activity, paying dividends, repurchasing its capital stock, or making any other
distributions to stockholders if the Company's equity to assets ratio is below
30%, as calculated by Deere under the Deere Agreement, or if such ratio would
fall below 30% as a result of such action. The Company believes its
equity-to-assets ratio as so calculated at the time of consummation of this
Offering and at the end of fiscal 1997 will be at least 30%.
The Company's Deere dealer appointments are not exclusive. Deere could
appoint other dealers in close proximity to the Company's existing stores. The
areas of responsibility assigned to the Company's industrial dealerships can be
reduced by Deere upon 120 days' prior written notice. In addition, the dealer
agreements can be amended at any time without the Company's consent, so long as
the same amendment is made to the dealer agreements of all other Deere dealers.
Deere also has the right to sell directly to federal, state, and local
governments, as well as national accounts. To the extent Deere appoints other
dealers in the Company's markets, reduces the areas of responsibility relating
to the Company's industrial stores, amends the dealer agreements, or sells
substantial amounts of equipment directly to government entities and national
accounts, the Company's results of operations and financial condition could be
adversely affected.
EFFECTS OF DOWNTURN IN GENERAL ECONOMIC CONDITIONS; CYCLICALITY, SEASONALITY,
AND WEATHER
The Company's business, and particularly the sale of new equipment, is
dependent on a number of factors relating to general economic conditions,
including agricultural industry cycles, construction spending, federal, state,
and local government spending on highways and other construction projects, new
housing starts, interest rate fluctuations, economic recessions, customer
business cycles, and customer confidence in the economy. Accordingly, the
Company's financial condition and results of operations may be materially and
adversely affected by any general downward economic pressures, or adverse
cyclical trends. The ability to finance affordable purchases, of which the
interest rate charged is a significant component, is an important part of a
customer's decision to purchase equipment. Interest rate increases may make
equipment purchases less affordable for customers and, as a result, the
Company's revenues and profitability may decrease. To the extent the Company
cannot pass on to its customers the increased costs of its own inventory
financing resulting from increased interest rates, its net income also may
decrease. As a result of all of the foregoing, the Company's results of
operations have in the past and in the future are expected to continue to
fluctuate from quarter to quarter and year to year.
The Company generally experiences lower levels of equipment sales during the
period from November through April, impacting the first and fourth quarters of
each fiscal year, due to the crop growing season and winter weather conditions
in the Midwest. Typically, farmers purchase agricultural equipment immediately
prior to planting or harvesting crops, which occurs during the Company's second
and third fiscal quarters. As a result, sales of agricultural equipment
generally are lower in the first and fourth fiscal quarters. Winter weather in
the Midwest also limits construction to some degree and, therefore, also
typically results in lower sales of industrial equipment in the first and fourth
fiscal quarters. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations."
The Company's results of operations have been and are expected to be
affected by weather. Severe weather can adversely impact agricultural and
construction activity, resulting in decreased demand for the Company's products
and services and lost revenues. For example, the winter of 1995/1996 was
extremely cold, with numerous record low temperatures set in both December 1995
and January 1996. As a result, customers in the Midwest did not buy wholegoods
and equipment was not able to be moved for normal servicing. To the extent
severe weather occurs, the Company's results of operations and financial
condition
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could be adversely affected. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations."
RISKS ASSOCIATED WITH EXPANSION
The Company believes a significant portion of its future growth will depend
on its ability to acquire additional dealerships, and the Company intends to use
up to approximately $34.4 million of the net proceeds of this Offering to
finance future acquisitions, new stores, and internal growth. In pursuing its
acquisition strategy, the Company will face risks commonly encountered with
growth through acquisitions. These risks include incurring significantly higher
than anticipated capital expenditures and operating expenses, failing to
assimilate the operations and personnel of acquired dealerships, disrupting the
Company's ongoing business, dissipating the Company's management resources,
failing to maintain uniform standards, controls, and policies, and impairing
relationships with employees and customers as a result of changes in management.
Realization of the full benefit of the Company's strategies, operating model,
and systems as to an acquired dealership may take several years. There can be no
assurance that the Company will be successful in overcoming these risks or any
other problems encountered with acquisitions, including the Company's recent and
future acquisitions. To the extent the Company does not successfully avoid or
overcome the risks or problems related to acquisitions, the Company's results of
operations and financial condition could be adversely affected. Future
acquisitions also will have a significant impact on the Company's financial
position and capital needs, and could cause substantial fluctuations in the
Company's quarterly and yearly results of operations. Acquisitions could include
significant goodwill and intangible assets, resulting in substantial
amortization charges to the Company that would reduce stated earnings. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and "Business--Growth Strategy--Pursuing Additional Acquisitions."
Deere's consent is required for the acquisition of any Deere dealership or
the opening of a new store, and, consequently, any prospective acquisition or
new store opening will require Deere's consent. Deere typically evaluates
management, performance, and capitalization of a prospective acquiror or
existing Deere dealer, as the case may be, in determining whether to consent to
the sale of a Deere dealership or approve the opening of a new store. While the
Company believes that its management, operational history, acquisition history,
and capitalization allow it to compete effectively for the acquisition of
additional areas of responsibility and stores and to grow by opening new stores,
there can be no assurance that Deere will allow ownership concentration of Deere
dealerships beyond a certain level. Although the Company believes that Deere
wants fewer, better capitalized dealers to achieve higher sales and better
customer service, there can be no assurance that Deere will approve any or all
future acquisitions or the opening of new stores proposed by the Company. See
"Business--Dealership Agreements."
MANAGEMENT OF GROWTH
The Company has grown significantly in recent years and is expected to
continue to grow through acquisitions, opening new stores, and internal growth.
Management has expended, and expects to continue to expend, significant time and
effort in evaluating, completing, and integrating acquisitions, opening new
stores, and supporting internal growth. There can be no assurance that the
Company's systems, procedures, and controls will be adequate to support the
Company's operations as they expand. Any future growth also will impose
significant added responsibilities on members of senior management, including
the need to identify, recruit, and integrate new senior level managers and
executives. There can be no assurance that such additional management will be
identified and retained by the Company. If the Company is unable to manage its
growth efficiently and effectively, or is unable to attract and retain
additional qualified management, there could be a material adverse effect on the
Company's financial condition and results of operations.
AVAILABILITY OF ACQUISITION CANDIDATES; NEED FOR ADDITIONAL CAPITAL
The Company's ability to continue to grow through the acquisition of
additional Deere areas of responsibility and store locations or other businesses
will be dependent upon (i) the availability of suitable
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acquisition candidates at an acceptable cost, (ii) receiving Deere approval of
acquisitions as required or appropriate, (iii) the Company's ability to compete
effectively for available acquisition candidates, and (iv) the availability of
capital to complete the acquisitions. Expansion of the Company through new store
openings and internal growth also will require significant capital expenditures.
The Company intends to use up to $34.4 million of the net proceeds of this
Offering to finance acquisitions, new stores, and internal growth. If additional
financing for those purposes is necessary, the Company intends to finance growth
with cash generated from operations, through the incurrence or assumption of
indebtedness, and through issuances of Class A Common Stock, Preferred Stock,
other forms of equity, or debt securities. Using cash to finance acquisitions,
new stores, and internal growth could substantially limit the Company's
financial flexibility, using debt could result in financial covenants that limit
the Company's operating and financial flexibility, and using equity may result
in significant dilution of the interest in the Company of the stockholders at
that time. The use of cash, debt, or equity to finance acquisitions, new stores,
and internal growth also could be limited by provisions in the Deere Agreement,
which gives Deere the right to terminate the Company's dealer appointments if
Mr. Offutt ceases to (i) own or control in excess of 50% of the outstanding
voting power, or whatever greater percentage is required to control corporate
actions requiring a stockholder vote, and (ii) own at least 35% of the
outstanding Common Stock, and which requires that the Company meet the required
equity-to-asset ratio upon completion of each acquisition. The Deere Agreement
also provides that the Company cannot engage in discussions to acquire other
Deere dealerships without Deere's prior written consent, which Deere may
withhold in its sole discretion. There can be no assurance that Deere will
consent to any future acquisition. See "Business--Dealership Agreements." In
addition, there can be no assurance that the Company will be able to obtain
additional capital on acceptable terms. If the Company is unable to obtain
additional capital on acceptable terms, the Company's acquisition activities,
new store openings, and internal growth may be limited. See "Management's
Discussion and Analysis of Financial Condition and Results of
Operation--Liquidity and Capital Resources." To the extent the Company is
limited in its ability to make acquisitions, open new stores, or to grow
internally for any reason, the Company's growth, financial condition, and
results of operations could be adversely affected.
SUBSTANTIAL INVENTORY FINANCING REQUIREMENTS
The sale of industrial and agricultural equipment requires substantial
inventories of equipment and parts to be maintained at each store in order to
facilitate sales to customers on a timely basis. The Company generally purchases
its inventories of Deere equipment with the assistance of floor plan financing
programs through Deere. Inventories of products from other suppliers generally
are financed through a line of credit with Ag Capital Company ("Ag Capital"), a
cooperative lending institution which is controlled by Ronald D. Offutt, the
Company's Chairman, Chief Executive Officer, and principal stockholder, or
through floor financing programs offered by such suppliers. As the Company
grows, whether through acquisitions, opening new stores, or internal growth, its
inventory requirements will increase and, as a result, the Company's financing
requirements also will increase. In the event that the Company's available
financing sources are not sufficient to satisfy its future requirements, the
Company would be required to obtain additional financing from other sources.
While the Company believes that it could obtain additional financing or
alternative financing if required, there can be no assurance that such financing
could be obtained on commercially reasonable terms. To the extent such
additional financing cannot be obtained on commercially reasonable terms, the
Company's growth and results of operations could be adversely affected. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Liquidity and Capital Resources," "Business--Floor Plan Financing,"
and "Certain Relationships and Related Transactions."
COMPETITION
The Company anticipates that both its industrial and agricultural operations
will continue to face strong, and perhaps increasing, competition. The Company's
industrial stores compete with distributors of industrial equipment from
suppliers other than Deere such as Case Corporation ("Case"), Caterpillar Inc.
("Caterpillar"), and Komatsu Corporation ("Komatsu"). The Company's agricultural
stores compete with
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distributors of agricultural equipment from suppliers such as Agco Corporation
("Agco"), Case, and New Holland, N.V., a subsidiary of Fiat ("New Holland").
Some of these competitors may be larger and have substantially greater capital
resources than the Company. The Company's stores also compete to a degree with
other Deere dealerships. Competition among distributors of equipment can be
intense and is primarily based on the price, value, reputation, quality, and
design of the products offered by the dealer, the customer service and equipment
servicing provided by the dealer, and the accessibility of stores. Although the
Company believes that it is competitive in all of these categories, there can be
no assurance that the Company will remain competitive in general or in any
particular area in which the Company has operations. To the extent Deere's
competitors provide their distributors with more innovative and/or higher
quality products, better pricing, or more favorable customer financing, or have
more effective marketing efforts, the Company's ability to compete and financial
condition and results of operations could be adversely affected. In addition, to
the extent Deere's products are not as competitive or in demand as those of
suppliers not used by the Company, the Company's results of operations could be
adversely affected. With respect to industrial equipment rental operations,
there are a number of significant competitors, including Deere, which
participates in a rental joint venture with operations in Arizona and
California. See "Business--Competition."
DEPENDENCE UPON KEY PERSONNEL
The Company believes its success depends, in large part, upon the continued
services of Ronald D. Offutt, Chairman and Chief Executive Officer, Paul T.
Horn, President and Chief Operating Officer, and Allan F. Knoll, Chief Financial
Officer. The loss of any of these individuals could materially and adversely
affect the Company. The Company does not maintain key person life insurance on
any of these individuals. Since October 1, 1996, Mr. Horn has devoted his
full-time to the Company. Messrs. Offutt and Knoll will continue to spend
approximately 25% of their time on Company-related activities, with the balance
of their time spent on activities for R. D. Offutt Company ("Offutt Co.") and
other entities wholly or substantially owned, controlled, and/or managed by Mr.
Offutt (collectively, the "Offutt Entities"). Messrs. Horn and Knoll also are
stockholders and serve as officers and directors of Offutt Co. and many of the
Offutt Entities. See "Management" and "Certain Relationships and Related
Transactions."
CERTAIN TRANSACTIONS WITH AFFILIATES AND POTENTIAL CONFLICTS OF INTEREST
The Company has engaged in, and expects to continue to engage in, business
transactions with various Offutt Entities, including, among others, sales of
agricultural equipment and parts, leasing of real estate, corporate support
services, floor plan financing, and customer financing. The Company had sales of
equipment and related parts and services to the Offutt Entities in the aggregate
amounts of $1.9 million, $3.5 million, $5.5 million, and $4.9 million in fiscal
1994, 1995, 1996, and the nine months ended October 31, 1996, respectively. Ag
Capital and another Offutt Entity provide the Company with financing for a
portion of its working capital needs, primarily inventory financing for
non-Deere equipment. Interest on such financings typically is at the prime rate
as it varies from time to time. Interest paid to Offutt Entities for inventory
financing totalled $771,000, $627,000, $849,000, and $829,000 in fiscal 1994,
1995, 1996, and the nine months ended October 31, 1996, respectively. The total
amount outstanding under these inventory financing arrangements at October 31,
1996 was $9.4 million. In addition, the amount of customer financing provided by
Offutt Entities as of January 31, 1994, 1995, and 1996, and as of October 31,
1996 was $12.2 million, $24.3 million, $32.8 million, and $43.8 million,
respectively. The Offutt Entities will continue to purchase equipment, parts,
and services from the Company and provide financing to the Company and its
customers following this Offering. The Company receives certain corporate
support services from various Offutt Entities, including office space for its
executive offices, use of conference and meeting facilities, use of an aircraft
for Company business, administration of the Company's 401(k) plan and other
employee benefits, and certain real estate management services. The Company has
historically paid for such services based on its pro rata usage compared to the
usage of other Offutt Entities or at a fixed charge. Charges for such services
totalled $48,000, $56,000, $77,000, and $94,000, in fiscal 1994, 1995, 1996, and
the nine months ended October 31, 1996, respectively. Upon consummation of this
Offering, all such services will be provided to the Company pursuant to a
three-year
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Corporate Services Agreement and the cost of such services to the Company will
be on the same basis as in prior years. The Company believes that all of these
transactions were made on terms no less favorable to the Company than could have
been obtained from unaffiliated third parties. All future transactions between
the Company and any of the Offutt Entities or the Company's officers, directors,
principal stockholder, or their affiliates will be approved both by a majority
of all members of the Company's Board of Directors and by a majority of the
independent and disinterested outside directors, and will continue to be on
terms believed to be no less favorable to the Company than could be obtained
from unaffiliated third parties. Messrs. Offutt, Horn, and Knoll also are
stockholders and serve as officers and directors of various Offutt Entities,
which may present a conflict of interest when the Company enters into
transactions with an Offutt Entity. See "Certain Relationships and Related
Transactions."
CONTROL BY RONALD D. OFFUTT
The Company's outstanding voting capital stock consists of Class A Common
Stock and Class B Common Stock. Holders of Class A Common Stock are entitled to
one vote per share and holders of Class B Common Stock are entitled to four
votes per share. Upon consummation of this Offering, Ronald D. Offutt, the
Company's Chairman, Chief Executive Officer, and principal stockholder, will own
100% of the outstanding Class B Common Stock representing approximately 85.4% of
the outstanding voting power of the Common Stock (approximately 83.9% if the
Underwriters' over-allotment option is exercised in full). Under the Deere
Agreement, Deere has the right to terminate the Company's dealer appointments if
Mr. Offutt ceases to (i) own or control in excess of 50% of the outstanding
voting power, or whatever greater percentage is required to control corporate
actions that require a stockholder vote, and (ii) own at least 35% of the
outstanding Common Stock. As a result of such voting control, Mr. Offutt will
have the power to control the Company, including the election of all of the
directors of the Company, the determination of matters requiring stockholder
approval, and other matters pertaining to corporate governance. Such voting
concentration may have the effect of discouraging, delaying, or preventing a
change of control, including transactions in which the holders of Class A Common
Stock might otherwise receive a premium for their shares over the then-current
market price. Mr. Offutt will also have sufficient voting power to take
stockholder action by written consent, without a stockholder meeting. See
"Principal Stockholders" and "Description of Capital Stock."
PRODUCT LIABILITY RISK
Products sold or serviced by the Company may expose it to potential
liabilities for personal injury or property damage claims relating to the use of
such products. Although product liability claims historically have not had a
material adverse effect upon the Company, there can be no assurance that the
Company will not be subject to or incur any liability for such claims in the
future. While the Company maintains third-party product liability insurance
which it believes to be adequate, there can be no assurance that the Company
will not experience claims in excess of its insurance coverage, or claims which
are ultimately not covered by insurance or for which manufacturers do not
provide indemnity. There also can be no assurance that such insurance will
continue to be available on economically reasonable terms. An uninsured or
partially insured claim for which indemnification is not provided could have a
material adverse effect on the financial condition of the Company. Furthermore,
if any significant claims are made against the Company or against Deere or any
of the Company's other suppliers, the Company's business may be adversely
affected by any resulting negative publicity. See "Business--Product Liability
and Legal Proceedings."
GOVERNMENT REGULATION
The Company is subject to numerous federal, state, and local rules and
regulations, including regulations promulgated by the Environmental Protection
Agency and similar state agencies with respect to storing, shipping, disposing,
discharging, and manufacturing hazardous materials and hazardous and
non-hazardous waste. These activities are associated with the repair and
maintenance of equipment at the Company's facilities. Currently, none of the
Company's stores or operations exceeds small quantity generation status.
Although the Company believes that its operations are in material compliance
with current laws and regulations, including environmental laws and regulations,
there can be no assurance that
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current regulatory requirements will not change, that unforeseen environmental
incidents will not occur, or that past contamination or non-compliance with
environmental laws will not be discovered on properties on which the Company is
or has been located. See "Business--Environmental Standards and Government
Regulations."
S CORPORATION STATUS; USE OF PROCEEDS
Beginning November 1, 1989 and continuing until January 20, 1997, the
Company elected to be treated as an S corporation under the Internal Revenue
Code of 1986, as amended (the "Internal Revenue Code"). As a result, during that
period the Company's stockholders were directly subject to tax on the income of
the Company for federal, state, and certain local income tax purposes. The
Company will use approximately $15.0 million of the net proceeds of this
Offering to make a distribution to its existing stockholders of substantially
all of the previously undistributed accumulated net income of the Company as of
January 31, 1996 with respect to which such stockholders have previously paid
taxes. The Company has terminated its S election and hereafter will be taxed as
a C corporation and similar distributions will not be made to the purchasers of
Class A Common Stock in this Offering. Additionally, while the Company believes
that it has met the S corporation requirements and, as of the date of this
Prospectus, the Internal Revenue Service (the "IRS") has not challenged the
Company's S corporation status, if, for any reason, the Company were
subsequently determined by the IRS not to have met S corporation requirements,
the Company could be liable to pay federal corporate taxes on its income at the
effective federal corporate tax rate for all or a part of the period from
November 1, 1989 through the termination of the S election, plus interest and
possibly penalties. See "S Corporation Distributions" and "Certain Relationships
and Related Transactions."
ANTI-TAKEOVER MEASURES; POSSIBLE ISSUANCES OF PREFERRED STOCK
Under the Deere Agreement, Deere has the right to terminate the Company's
dealer appointments if Mr. Offutt ceases to (i) own or control in excess of 50%
of the outstanding voting power, or whatever greater percentage is required to
control corporate actions that require a stockholder vote, and (ii) own at least
35% of the outstanding Common Stock. Further, in the event of Ronald D. Offutt's
death, Deere also will have the power to terminate the Company's dealer
appointments upon the occurrence of a "change of control." See "--Deere
Termination Rights." These restrictions may effectively prevent a third party
from acquiring a substantial portion or a majority of the Company's outstanding
capital stock without Deere's consent. In addition, pursuant to the Company's
Certificate of Incorporation, the Board of Directors is authorized to issue up
to 500,000 shares of Preferred Stock and fix the rights, preferences,
privileges, and restrictions, including voting rights, of such shares without
any further vote or action by the stockholders. See "Description of Capital
Stock--Preferred Stock." The rights of the holders of Class A Common Stock will
be subject to, and may be adversely affected by, the rights of the holders of
any Preferred Stock that may be issued in the future. The issuance of any shares
of Preferred Stock may result in significant dilution of the interest in the
Company of the holders of Common Stock at that time. While the Company has no
present intention to issue shares of Preferred Stock, any such issuance could
make it more difficult for a third party to acquire a majority of the
outstanding voting power of the Company. Stockholders also do not have the right
of cumulative voting for the election of directors. The ownership interest and
voting control by Mr. Offutt, the requirements in the Deere Agreement, the
ability of the Board of Directors to issue shares of Preferred Stock without
further vote or action by the stockholders, and other provisions in the
Company's Certificate of Incorporation may discourage, delay, or prevent a
change of control of the Company without further action by the stockholders,
and, consequently, also could adversely affect the market price of the Class A
Common Stock. The Company also is subject to the anti-takeover provisions of
Section 203 of the Delaware General Corporation Law (the "DGCL"), which could
have the effect of delaying or preventing a change of control of the Company.
See "Description of Capital Stock."
SHARES ELIGIBLE FOR FUTURE SALE
Sales of shares of Class A Common Stock (including shares issued upon the
exercise of stock options) in the public market after consummation of this
Offering, or the perception that such sales could occur, could materially and
adversely affect the market price of the Class A Common Stock. Such sales also
might
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make it more difficult for the Company to sell equity securities or
equity-related securities in the future at a time and price that the Company
would deem appropriate. Upon the consummation of this Offering, the Company will
have 12,550,000 shares of Class A Common Stock outstanding, or issuable upon
conversion of the 7,458,492 outstanding shares of Class B Common Stock, of which
the shares offered hereby will be tradeable without restriction unless they are
purchased by an affiliate of the Company. Shares of Common Stock outstanding
prior to consummation of this Offering will be "restricted securities" within
the meaning of the Securities Act of 1933, as amended (the "Securities Act").
These "restricted securities" and any shares purchased by affiliates of the
Company in this Offering may be sold only if they are registered under the
Securities Act or pursuant to an applicable exemption from the registration
requirements of the Securities Act, including Rule 144. The Company, its
directors, its executive officers, and the holders of approximately 8,350,000
shares of Common Stock have agreed not to sell, otherwise dispose of, or pledge
such shares for 180 days after the date of this Prospectus without the prior
written consent of Credit Suisse First Boston Corporation. After expiration of
the lock-up agreements, in addition to the shares sold in this Offering, an
additional 7,924,716 shares of Class A Common Stock will be available for sale
in the public market, including 7,033,208 shares of Class A Common Stock into
which shares of Class B Common Stock are convertible on a one-for-one basis,
subject in certain cases to volume and manner of sale limitations. The remaining
425,284 shares of Common Stock held by existing stockholders will become
eligible for public resale at various times over a period of less than two years
following the consummation of this Offering, subject to volume and manner of
sale limitations pursuant to Rule 144. In addition, the Company intends to file
a registration statement under the Securities Act to register an aggregate of
1,250,000 shares of Class A Common Stock reserved for issuance under the
Company's 1996 Stock Incentive Plan (the "Incentive Plan"). The Company intends
to grant options to purchase approximately 600,000 shares of Class A Common
Stock prior to consummation of this Offering at an exercise price equal to the
initial public offering price. The issuance of shares pursuant to the Incentive
Plan or otherwise could result in the dilution of the voting power of the shares
of Class A Common Stock purchased in this Offering and could have a dilutive
effect on earnings per share. See "Management--1996 Stock Incentive Plan,"
"Description of Capital Stock," "Shares Eligible for Future Sale," and
"Underwriting."
NO PRIOR MARKET; POSSIBLE VOLATILITY OF STOCK PRICE
Prior to this Offering, no public market for the Common Stock existed.
Although the Class A Common Stock has been approved for listing on the NYSE,
there can be no assurance that an active trading market will develop or be
sustained following this Offering. The initial public offering price of the
Class A Common Stock offered hereby will be determined through negotiations
between the Company and the representatives of the Underwriters. See
"Underwriting." The market price for the Class A Common Stock may be volatile
and subject to fluctuations resulting from news announcements concerning the
Company, quarterly operating results, the markets for industrial or agricultural
equipment, announcements by Deere or other suppliers of equipment to the Company
or by competitive manufacturers, analyst recommendations, general securities
market conditions, and other factors. The stock market in general, and the
market for shares of small capitalization stocks in particular, have experienced
significant price and volume fluctuations that often have been unrelated to the
operating performance of particular companies. These market fluctuations may
adversely affect the market price of the Class A Common Stock and the negotiated
initial public offering price may not be indicative of future market prices of
the Class A Common Stock.
DILUTION
Purchasers of shares of the Class A Common Stock offered hereby will
experience immediate and substantial dilution of the net tangible book value of
the Class A Common Stock in the amount of $9.67 per share from the initial
public offering price. The net tangible book value per share of the Class A
Common Stock represents the amount of the Company's tangible assets less
liabilities divided by the number of shares of Common Stock outstanding. See
"Dilution."
17
<PAGE>
USE OF PROCEEDS
The net proceeds to the Company from the sale of the 4,200,000 shares of
Class A Common Stock offered hereby (after deducting underwriting discounts and
commissions and estimated offering expenses) are estimated to be approximately
$59.5 million ($68.6 million if the Underwriters' over-allotment option is
exercised in full).
The Company plans to use a portion of the net proceeds of this Offering to
pay the purchase price and repay indebtedness incurred in connection with
recently completed acquisitions, in the aggregate amount of approximately $10.1
million, including (i) a promissory note in the amount of $8.4 million, payable
by the Company to Ag Capital, which bears interest at the prime rate (8.25% as
of December 31, 1996) and matures on February 28, 1997, incurred in connection
with the Central Texas Acquisition, and (ii) a promissory note in the amount of
$1.7 million, payable by the Company to Ag Capital, which bears interest at the
prime rate and matures February 28, 1997, incurred in connection with the
Washington Acquisition. See "Certain Relationships and Related Transactions."
The Company also plans to use a portion of the net proceeds of this Offering to
pay an aggregate distribution of approximately $15.0 million to the existing
stockholders of the Company of substantially all of the previously
undistributed, accumulated net income of the Company as of January 31, 1996. See
"S Corporation Distributions."
The Company plans to use the balance of the net proceeds of approximately
$34.4 million ($43.5 million if the Underwriters' over-allotment option is
exercised in full) to finance future acquisitions, new stores, and internal
growth and for other general corporate purposes, including working capital. The
Company intends to continue to evaluate acquisition opportunities as they arise
and expects that future acquisitions primarily will consist of existing Deere
agricultural and industrial dealers. The Company also may consider acquisitions
of complementary businesses, such as equipment rental operations. The Company
has entered into a letter of intent to acquire certain assets of an industrial
equipment rental company with five locations in Arizona. If this contemplated
acquisition is completed, the Company would expect to use approximately $2.4
million of the net proceeds of this Offering and assume certain liabilities. See
"Business--Recent and Contemplated Acquisitions." This contemplated acquisition
is subject to a number of conditions, including the negotiation and execution of
a definitive agreement and the completion of due diligence. There can be no
assurance that such conditions will be fulfilled or that the contemplated
acquisition will be consumated.
The Company currently is not a party to any other agreement or understanding
with respect to other possible acquisitions.
Pending such uses, the net proceeds of this Offering will be used to reduce
borrowings under the Company's lines of credit, including its floor plan
financing with Deere or indebtedness to Ag Capital, each of which bears interest
at the prime rate (8.25% as of December 31, 1996).
S CORPORATION DISTRIBUTIONS
The Company elected to be taxed as an S corporation from November 1, 1989
until January 20, 1997. Consequently, the stockholders of the Company paid the
federal and state income taxes on the Company's taxable income directly for all
periods during which the Company was an S corporation. Prior to fiscal 1997, a
portion of the net income of the Company was distributed to the stockholders,
primarily to enable them to pay the tax liability incurred by them in connection
with the Company's taxable income. Distributions declared to date in fiscal 1997
approximate the net income of the Company until the S corporation termination.
Dividends declared and paid for the fiscal years ended January 31, 1994, 1995,
1996, and during the nine-month period ended October 31, 1996 aggregated
approximately $2.3 million, $3.8 million, $4.3 million, and $7.5 million,
respectively, and dividends declared but unpaid as of October 31, 1996 were $2.2
million. This amount, plus net income before taxes for the fourth quarter of
fiscal 1997, which is estimated to be approximately $900,000, is expected to be
distributed to the existing stockholders prior to the consummation of this
Offering. Purchasers of Class A Common Stock in this Offering will not receive
any of these distributions.
18
<PAGE>
Simultaneously with the consummation of this Offering, the Company will pay
to its existing stockholders from the net proceeds of this Offering an
additional aggregate distribution of approximately $15.0 million, which
represents a distribution to such stockholders of substantially all of the
previously undistributed, accumulated net income of the Company as of January
31, 1996 with respect to which such stockholders have previously paid taxes.
This distribution will allow the existing stockholders of the Company to receive
this accumulated net income without having to pay additional taxes on such
amounts. Purchasers of Class A Common Stock in this Offering will not receive
any of these distributions. The Company will enter into a tax agreement with its
existing stockholders prior to the consummation of this Offering which will
provide that, to the extent undistributed taxable income of the Company, as
subsequently established in connection with the filing of the Company's tax
return for the Company's last S corporation tax year, is less than these
distributions, such stockholders will make a payment equal to such difference to
the Company, and if such undistributed taxable income is greater than these
distributions, the Company will make an additional distribution equal to such
difference to such stockholders. This agreement will also provide that the
Company will indemnify its existing stockholders against additional income taxes
resulting from adjustments made (as a result of a final determination made by a
competent tax authority) to the taxable income reported by the Company as an S
corporation for periods prior to termination of the S corporation status, but
only to the extent those adjustments provide a tax benefit to the Company.
Because the Company has used a fiscal year rather than a calendar year for
its taxable year during its existence as an S corporation, the Company has made
required payments to the IRS under Section 444 of the Internal Revenue Code. As
of October 31, 1996, the payments held on deposit totalled approximately
$570,000, which amount will be refunded to the Company.
The Company has elected to allocate its taxable income on the basis of
closing its books effective the end of business on the day before the
termination of its S corporation status. Upon termination of its S corporation
status, the Company became subject to income taxation and, in connection
therewith, the Company will record an asset of approximately $850,000 for
deferred income taxes on its balance sheet. See Note 8 to the Combined Financial
Statements.
REINCORPORATION
The Company, originally incorporated in North Dakota in 1968, was
reincorporated in Delaware effective in January 1997. Concurrently with and as
part of the reincorporation, the Company also completed a 44.5-for-one stock
split and share exchange so that each existing stockholder other than Mr. Offutt
received 44.5 shares (a total of 891,508 shares) of Class A Common Stock, and
Mr. Offutt received 44.5 shares (a total of 7,458,492 shares) of Class B Common
Stock of the new Delaware corporation for each share of the North Dakota
corporation.
DIVIDEND POLICY
Following the consummation of this Offering, the Company's Board of
Directors intends to retain the earnings of the Company, if any, to support the
Company's operations and to finance expansion, and it does not intend to pay
cash dividends on the Common Stock in the foreseeable future. Any future
determination as to the payment of dividends will be at the discretion of the
Board of Directors and will depend on the Company's financial condition, results
of operations, capital requirements, dividend restrictions under its agreements
with Deere or with any credit provider, and such other factors as the Board of
Directors may deem relevant. No dividends may be declared or paid on any share
of either class of Common Stock, unless such dividend, at the same rate per
share, is simultaneously declared or paid on each share of the other class of
Common Stock.
Under the Deere Agreement, the Company is prohibited from paying any
dividends, effecting any capital stock repurchase, or making any other
distributions to stockholders if the Company's equity-to-assets ratio is below
30%, as calculated by Deere under the Deere Agreement, or would be below such
19
<PAGE>
percentage as a result of such dividend, repurchase, or distribution. For
purposes of making this calculation, certain business operations and assets of
the Company held in wholly-owned subsidiaries, such as its real estate and its
irrigation and rental businesses, are excluded.
Because the Company was an S corporation until January 20, 1997, a portion
of the net income of the Company has been distributed from time to time to its
existing stockholders as a dividend primarily to cover the taxes payable by such
stockholders with respect to the Company's taxable income. In addition,
dividends declared but unpaid as of October 31, 1996 were $2.2 million. This
amount, plus net income before taxes for the fourth quarter of fiscal 1997,
which is estimated to be approximately $900,000, will be distributed to the
existing stockholders prior to consummation of this Offering. An additional
distribution of approximately $15.0 million will be paid to the existing
stockholders from the net proceeds of this Offering simultaneously with the
consummation of this Offering, representing substantially all of the previously
undistributed, accumulated net income of the Company as of January 31, 1996 with
respect to which stockholders have already paid taxes. Purchasers of shares of
Class A Common Stock in this Offering will not receive any of these
distributions. See "S Corporation Distributions."
DILUTION
The pro forma net tangible book value of the Common Stock as of October 31,
1996 was $13.6 million or $1.63 per share, after giving pro forma effect to the
Central Texas and the Washington Acquisitions, the 44.5-for-one stock split in
connection with the reincorporation of the Company, and the $15.0 million S
corporation distribution to the existing stockholders. See Pro Forma Unaudited
Financial Statements and the Notes thereto.
Net tangible book value dilution per share represents the difference between
the amount per share paid by purchasers of shares of Class A Common Stock in
this Offering and the pro forma net tangible book value per share of the Common
Stock (both Class A and Class B) immediately after consummation of this
Offering. After giving effect to the sale of 4,200,000 shares of Class A Common
Stock in this Offering and the application of the estimated net proceeds
therefrom, the pro forma net tangible book value of the Company as of October
31, 1996 would have been $73.1 million, or $5.83 per share. See "Use of
Proceeds" and "S Corporation Distributions." This represents an immediate
increase in net tangible book value of $4.20 per share to existing stockholders
of the Company and an immediate dilution in net tangible book value of $9.67 per
share to purchasers of Class A Common Stock in this Offering, as illustrated in
the following table:
<TABLE>
<S> <C> <C>
Initial public offering price per share of Class A Common
Stock....................................................... $ 15.50
Pro forma net tangible book value per share before this
Offering................................................. $ 1.63
Increase per share attributable to new investors........... 4.20
---------
Pro forma net tangible book value per share after this
Offering.................................................... 5.83
---------
Dilution per share to new investors(1)....................... $ 9.67
---------
---------
</TABLE>
- ------------------------
(1) Excludes 1,250,000 shares of Class A Common Stock reserved for issuance
under the Incentive Plan, of which approximately 600,000 shares will be
subject to options to be granted prior to consummation of this Offering at
an exercise price equal to the initial public offering price. See
"Management--1996 Stock Incentive Plan."
20
<PAGE>
The following table summarizes, on a pro forma basis as of October 31, 1996,
the difference between the existing stockholders and the purchasers of shares of
Class A Common Stock in this Offering with respect to the number of shares of
Common Stock purchased from the Company, the total consideration paid therefor
to the Company, and the average price per share paid by the existing
stockholders and by purchasers of shares of Class A Common Stock in this
Offering:
<TABLE>
<CAPTION>
TOTAL
SHARES PURCHASED CONSIDERATION
------------------------- -------------------------- AVERAGE PRICE
NUMBER PERCENT AMOUNT PERCENT PER SHARE
------------ ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C>
Existing stockholders(1)....... 8,350,000 66.5% $ 16,300,000 20.0% $ 1.95
New investors.................. 4,200,000 33.5 65,100,000 80.0 15.50
------------ ----- ------------- -----
Total(2)................... 12,550,000 100.0% $ 81,400,000 100.0%
------------ ----- ------------- -----
------------ ----- ------------- -----
</TABLE>
- ------------------------
(1) Includes both Class A and Class B Common Stock purchased by existing
stockholders. See "Principal Stockholders" for information on ownership by
the existing stockholders, directors, and executive officers.
(2) Excludes 1,250,000 shares of Class A Common Stock reserved for issuance
under the Incentive Plan, of which approximately 600,000 shares will be
subject to options to be granted prior to consummation of this Offering at
an exercise price equal to the initial public offering price. See
"Management--1996 Stock Incentive Plan."
21
<PAGE>
CAPITALIZATION
The following table sets forth the actual and pro forma capitalization of
the Company as of October 31, 1996, and as adjusted to give effect to the sale
of shares of Class A Common Stock offered hereby and the application of the net
proceeds therefrom as described under "Use of Proceeds," which includes an S
corporation distribution to the existing stockholders. See "S Corporation
Distributions." The capitalization table excludes $100.6 million ($66.2 million
on a pro forma as adjusted basis) of floor plan payables, a portion of which is
interest bearing. Such payables are used to finance the Company's inventory
purchases. See Note 5 to the Combined Financial Statements.
<TABLE>
<CAPTION>
PRO FORMA
ACTUAL PRO FORMA(2) AS ADJUSTED
----------- ------------- -------------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C>
Notes payable and long-term debt(1):
Banks and others.......................................... $ 11,020 $ 11,020 $ 11,020
Affiliates................................................ 15,738(3) 15,738 5,638
----------- ------------- -------------
Total debt.............................................. 26,758 26,758 16,658
----------- ------------- -------------
Less short-term notes and current maturities of long-term
debt....................................................... (15,928) (15,928) (5,828)
----------- ------------- -------------
Net long-term debt...................................... 10,830 10,830 10,830
----------- ------------- -------------
Stockholders' equity:
Preferred stock, no par value, 500,000 shares authorized;
none outstanding........................................ -- -- --
Class A Common Stock, $.01 par value, 20,000,000 shares
authorized; 891,508 shares issued and outstanding,
actual and pro forma; 5,091,508 shares issued and
outstanding, as adjusted................................ 9 9 51
Class B Common Stock, $.01 par value, 7,500,000 shares
authorized; 7,458,492 shares issued and outstanding,
actual, pro forma, and as adjusted...................... 75 75 75
Additional paid-in capital................................ 16,216 16,216 75,674
Retained earnings......................................... 17,984 3,834 3,834
----------- ------------- -------------
Total stockholders' equity............................ 34,284 20,134 79,634
----------- ------------- -------------
Total capitalization.................................. $ 45,114 $ 30,964 $ 90,464
----------- ------------- -------------
----------- ------------- -------------
</TABLE>
- ------------------------
(1) See Note 6 to the Combined Financial Statements for information regarding
outstanding notes payable and long-term debt.
(2) Adjusted to give effect to (i) the deferred tax asset of approximately
$850,000 resulting from the termination of the Company's status as an S
corporation, and (ii) the $15.0 million S corporation distribution to
existing stockholders which will be paid out of the net proceeds of this
Offering.
(3) Includes $10.1 million of notes issued to Ag Capital in connection with the
consummation of the Central Texas and Washington Acquisitions, which notes
will be repaid from the net proceeds of this Offering.
22
<PAGE>
SELECTED COMBINED AND PRO FORMA FINANCIAL AND OPERATING DATA
The following Selected Combined and Pro Forma Financial and Operating Data
relating to the Company have been taken or derived from the Combined Financial
Statements and other records of the Company. The selected financial data for the
fiscal year ended January 31, 1996 have been derived from combined financial
statements which have been audited by Arthur Andersen LLP, independent public
accountants. The selected financial data for each of the four years in the
period ended January 31, 1995 have been derived from combined financial
statements which have been audited by Eide Helmeke PLLP, independent public
accountants. The selected financial data for the nine months ended October 31,
1995 and 1996 have been derived from unaudited interim financial statements, for
those periods, which have been prepared on the same basis as the audited
financial statements and, in the opinion of management, include all adjustments
which are necessary for a fair statement of the results of the interim periods,
and all such adjustments are of a normal recurring nature. The financial and
operating data presented below may not be comparable between periods in all
material respects or indicative of the Company's future financial position or
results of operations due primarily to acquisitions which occurred during the
periods presented, or subsequent thereto, including the Central Texas and the
Washington Acquisitions. The selected financial and operating data for the nine
months ended October 31, 1996 are not necessarily indicative of the results to
be expected for the fiscal year ending January 31, 1997. The pro forma financial
statements are provided for informational purposes only and should not be
construed to be indicative of the Company's results of operations had the
acquisitions been consummated on the dates assumed and do not project the
Company's results of operations for any future period. The Selected Combined and
Pro Forma Financial and Operating Data should be read in conjunction with the
Company's Combined Financial Statements and the Notes thereto and Pro Forma
Unaudited Financial Statements and the Notes thereto and other financial
information included elsewhere in this Prospectus. See "Management's Discussion
and Analysis of Financial Condition and Results of Operations."
23
<PAGE>
SELECTED COMBINED AND PRO FORMA FINANCIAL AND OPERATING DATA
<TABLE>
<CAPTION>
FISCAL YEAR ENDED JANUARY 31,
---------------------------------------------------------------------------------
ACTUAL
------------------------------------------------------------------- PRO FORMA
1992 1993 1994 1995 1996 1996(1)(2)
----------- ----------- ----------- ----------- ----------- -----------
(IN THOUSANDS, EXCEPT STORE AND PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Revenues:
Wholegoods sales........................... $ 49,097 $ 73,516 $ 106,600 $ 135,704 $ 164,054 $ 192,760
Parts and service.......................... 22,129 31,862 37,512 48,206 58,998 72,213
Rental..................................... -- -- -- -- 505 505
----------- ----------- ----------- ----------- ----------- -----------
Total revenues........................... 71,226 105,378 144,112 183,910 223,557 265,478
Cost of sales................................ 56,422 83,548 116,369 148,111 180,839 212,824
----------- ----------- ----------- ----------- ----------- -----------
Gross profit................................. 14,804 21,830 27,743 35,799 42,718 52,654
Selling, general, and administrative
expense..................................... 11,929 16,737 20,577 24,893 31,655 38,858
----------- ----------- ----------- ----------- ----------- -----------
Operating income............................. 2,875 5,093 7,166 10,906 11,063 13,796
Interest expense............................. (1,299) (1,284) (1,670) (1,895) (3,817) (1,584)
Interest income.............................. 173 376 336 802 823 1,031
----------- ----------- ----------- ----------- ----------- -----------
Net income................................... $ 1,749 $ 4,185 $ 5,832 $ 9,813 $ 8,069 $ 13,243
----------- ----------- ----------- ----------- ----------- -----------
----------- ----------- ----------- ----------- ----------- -----------
PRO FORMA INCOME STATEMENT DATA: (UNAUDITED)
Income before taxes.......................... $ 1,749 $ 4,185 $ 5,832 $ 9,813 $ 8,069 $ 13,243
Provision for income taxes(3)................ 700 1,674 2,332 3,925 3,228 5,297
----------- ----------- ----------- ----------- ----------- -----------
Net income................................... $ 1,049 $ 2,511 $ 3,500 $ 5,888 $ 4,841 $ 7,946
----------- ----------- ----------- ----------- ----------- -----------
----------- ----------- ----------- ----------- ----------- -----------
Net income per share................................................................................
$ .51 $ .63
----------- -----------
----------- -----------
Weighted average shares outstanding................................................................. 9,429 12,570
----------- -----------
----------- -----------
SELECTED OPERATING DATA:
Comparable store net sale increase........... -- 12% 32% 25% 11% --
Stores open at beginning of period........... 15 17 21 22 22 22
Stores opened.............................. 1 0 0 0 2 2
Stores acquired............................ 1 4 1 0 2 7
----------- ----------- ----------- ----------- ----------- -----------
Stores open at end of period................. 17 21 22 22 26 31
----------- ----------- ----------- ----------- ----------- -----------
----------- ----------- ----------- ----------- ----------- -----------
Capital expenditures......................... $ 561 $ 681 $ 627 $ 1,208 $ 9,993 $ 10,131
Depreciation................................. 504 584 668 690 1,326 1,653
<CAPTION>
NINE MONTHS ENDED OCTOBER 31,
---------------------------------------
ACTUAL
------------------------- PRO FORMA
1995 1996 1996(1)(2)
----------- ----------- -----------
<S> <C> <C> <C>
INCOME STATEMENT DATA:
Revenues:
Wholegoods sales........................... $ 131,211 $ 170,036 $ 191,044
Parts and service.......................... 45,614 57,322 64,877
Rental..................................... -- 1,902 1,902
----------- ----------- -----------
Total revenues........................... 176,825 229,260 257,823
Cost of sales................................ 143,718 186,451 208,581
----------- ----------- -----------
Gross profit................................. 33,107 42,809 49,242
Selling, general, and administrative
expense..................................... 23,600 29,492 33,908
----------- ----------- -----------
Operating income............................. 9,507 13,317 15,334
Interest expense............................. (2,435) (4,116) (2,247)
Interest income.............................. 586 633 816
----------- ----------- -----------
Net income................................... $ 7,658 $ 9,834 $ 13,903
----------- ----------- -----------
----------- ----------- -----------
PRO FORMA INCOME STATEMENT DATA: (UNAUDITED)
Income before taxes.......................... $ 7,658 $ 9,834 $ 13,903
Provision for income taxes(3)................ 3,063 3,934 5,561
----------- ----------- -----------
Net income................................... $ 4,595 $ 5,900 $ 8,342
----------- ----------- -----------
----------- ----------- -----------
Net income per share.........................
$ .63 $ .66
----------- -----------
----------- -----------
Weighted average shares outstanding.......... 9,414 12,555
----------- -----------
----------- -----------
SELECTED OPERATING DATA:
Comparable store net sale increase........... 13% 23% --
Stores open at beginning of period........... 22 26 26
Stores opened.............................. 1 1 1
Stores acquired............................ 2 5 5
----------- ----------- -----------
Stores open at end of period................. 25 32 32
----------- ----------- -----------
----------- ----------- -----------
Capital expenditures......................... $ 9,674 $ 3,182 $ 3,328
Depreciation................................. 614 1,930 2,155
</TABLE>
<TABLE>
<CAPTION>
AS OF OCTOBER 31, 1996
----------------------------------------
AS OF JANUARY 31, PRO FORMA
----------------------------------------------------- AS
1992 1993 1994 1995 1996 ACTUAL PRO FORMA(4) ADJUSTED(2)(4)
--------- --------- --------- --------- --------- --------- ------------- --------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Working capital......... $ 9,846 $ 15,284 $ 22,019 $ 26,700 $ 26,596 $ 20,778 $ 5,778 $ 65,278
Inventories............. 40,175 55,582 64,768 77,204 115,616 125,766 125,766 125,766
Total assets............ 46,129 68,660 83,341 98,315 148,093 176,712 177,562 177,562
Floor plan
payables(5)............ 28,067 45,149 46,644 53,581 91,614 100,612 100,612 66,212
Total debt.............. 6,283 6,698 2,946 3,277 10,638 26,758 26,758 16,658
Stockholders' equity.... 7,006 11,105 24,503 30,467 34,284 34,284 20,134 79,634
</TABLE>
(SEE FOOTNOTES ON FOLLOWING PAGE)
24
<PAGE>
NOTES TO SELECTED COMBINED AND PRO FORMA FINANCIAL AND OPERATING DATA
(1) Reflects adjustment to give effect to the Central Texas and the Washington
Acquisitions as if such acquisitions had occurred February 1, 1995. The pro
forma information is not necessarily indicative of the results that actually
would have been achieved had such transactions been consummated as of
February 1, 1995 or that may be achieved in the future. See Pro Forma
Unaudited Financial Statements and the Notes thereto.
(2) Adjusted to give effect to the sale of 4,200,000 shares of Class A Common
Stock offered hereby and the application of the net proceeds therefrom. See
"Use of Proceeds," "S Corporation Distributions," "Capitalization," Pro
Forma Unaudited Financial Statements and the Notes thereto, and Combined
Financial Statements and the Notes thereto.
(3) For all periods presented, the Company was an S corporation and generally
was not subject to corporate income taxes. The pro forma income tax
provision has been computed as if the Company were subject to corporate
income taxes for all periods presented based on the tax laws in effect
during the respective periods. See "S Corporation Distributions" and
Combined Financial Statements and the Notes thereto.
(4) Adjusted to give effect to (i) the deferred tax asset of approximately
$850,000 resulting from the termination of the Company's status as an S
corporation, and (ii) the $15.0 million S corporation distribution to
existing stockholders which will be paid out of the net proceeds of this
Offering.
(5) Includes interest bearing and non-interest bearing liabilities incurred in
connection with inventory financing. See Note 5 to the Combined Financial
Statements.
25
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
GENERAL
The Company owns and operates industrial and agricultural equipment stores
located in Arizona, California, Minnesota, North Dakota, South Dakota, Texas,
and Washington. The Company sells, services, and rents industrial and
agricultural equipment to customers primarily operating in the construction and
agricultural industries, as well as to units of state, local, and federal
government and utility companies. The Company's major supplier of new equipment
and parts is Deere.
A significant portion of the Company's growth in recent years has been due
to the acquisition of several industrial and agricultural dealerships. The
results of operations of the following acquisitions have been included with the
Company's results of operations only for the periods specified:
- In February 1995, the Company purchased the assets and assumed certain
liabilities of a Deere industrial dealership in Southern California which
consisted of two full-service industrial stores located in San Diego and
Riverside, California with a Deere area of responsibility contiguous with
the Company's area of responsibility in Arizona, resulting in operating
efficiencies. The results of operations of the acquired business are
included in the Company's results of operations beginning in February
1995.
- Effective July 1, 1996, the Company completed the Central Texas
Acquisition, and acquired certain assets and assumed certain liabilities
of a Deere industrial dealership which consisted of three full-service
Deere industrial stores located in the Dallas-Fort Worth and Waco, Texas
metropolitan areas with a related Deere area of responsibility. The
purchase price was approximately $8.4 million, which was financed through
a note payable to Ag Capital, with an interest rate at the prime rate
(which was 8.25% as of December 31, 1996) due February 28, 1997, which
note will be repaid out of the net proceeds of this Offering. See "Certain
Relationships and Related Transactions." The acquisition was accounted for
under the purchase method of accounting and the results of operations of
the Central Texas stores are included in the Company's results of
operations beginning July 1, 1996.
- Effective October 1, 1996, the Company completed the Washington
Acquisition, and acquired certain assets and assumed certain liabilities
of a Deere agricultural dealership which consisted of two Deere
agricultural stores in Pasco and Sunnyside, Washington. The purchase price
for the net assets was approximately $2.7 million, and was financed in
part by a $1.0 million note payable to the seller, with the remainder
financed by a note payable to Ag Capital with an interest rate at the
prime rate (which was 8.25% as of December 31, 1996) due February 28,
1997, which note will be repaid out of the net proceeds of this Offering.
See "Certain Relationships and Related Transactions." This acquisition was
accounted for under the purchase method of accounting and the results of
operations of the Washington stores are included in the Company's results
of operations beginning October 1, 1996.
For pro forma financial information regarding the potential effects of these
acquisitions, see the Pro Forma Unaudited Financial Statements and the Notes
thereto included elsewhere in this Prospectus.
The Company generates its revenues from sales of new and used equipment
(wholegoods), sales of parts and service, and the rental of equipment. In
addition to sales of new and used equipment, wholegoods sales include equipment
purchased under rent-to-purchase agreements. Generally under such agreements,
the customer is given a period of up to six months to exercise the option to
purchase the rented equipment and is allowed to apply a portion of the rental
payments to the purchase price. This equipment is included in the Company's
inventory until the option is exercised and the equipment is purchased. Rental
includes only rental income derived from the Company's dedicated rental fleet
and does not include rental payments made on rent-to-purchase equipment.
26
<PAGE>
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 revenues, gross margin percentages may decline as the Company builds
wholegoods market share.
The Company generally experiences lower levels of equipment sales during the
period from November through April, impacting the first and fourth fiscal
quarters, due to the crop growing season and winter weather conditions in the
Midwest. Typically, farmers purchase agricultural equipment immediately prior to
planting or harvesting crops, which occurs during the Company's second and third
fiscal quarters. As a result, sales of agricultural equipment generally are
lower in the Company's first and fourth fiscal quarters. Winter weather in the
Midwest also limits construction activity and, therefore, also typically results
in lower sales of industrial equipment in the first and fourth fiscal quarters.
The Company requires cash primarily for financing its inventory 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 operating activities,
floor plan financing, and borrowings under credit agreements with Deere, Deere
Credit Services, Inc. ("Deere Credit"), Ag Capital, 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, 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 currently six to eight
months for agricultural equipment and one to five months for industrial
equipment. Deere also provides financing to dealers on used equipment accepted
in trade and approved equipment from other suppliers. See "Business--Floor Plan
Financing" and "Certain Relationships and Related Transactions."
The Company believes that it has benefitted from generally favorable
economic conditions during recent years, including, with respect to its
Agricultural Division, favorable grain prices which have resulted in a strong
farming economy and, with respect to its Industrial Division, favorable
construction markets. Price increases by suppliers of the Company's products
have not historically had a significant impact on the Company's results of
operations.
Beginning November 1, 1989, the Company was an S corporation and not subject
to tax on its net income. The Company's S election was terminated on January 20,
1997. The pro forma provision for taxes and net income reflect the impact of the
tax provision as if the Company were subject to income taxes (at an assumed rate
of 40%) for the periods presented.
RESULTS OF OPERATIONS
The following discussion and analysis includes the Company's historical
results of operations for fiscal 1994, 1995, 1996, and the nine months ended
October 31, 1995 and 1996, without giving effect to pro forma results of
operations for the California operations acquired in February 1995, the Central
Texas Acquisition, or the Washington Acquisition, except as expressly indicated.
27
<PAGE>
The following table sets forth, for the periods indicated, certain financial
data as a percentage of total revenues:
<TABLE>
<CAPTION>
NINE MONTHS
FISCAL YEAR ENDED ENDED
JANUARY 31, OCTOBER 31,
------------------------------- --------------------
1994 1995 1996 1995 1996
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
Revenues:
Wholegoods sales.................................... 74.0% 73.8% 73.4% 74.2% 74.2%
Parts and service................................... 26.0 26.2 26.4 25.8 25.0
Rental.............................................. -- -- 0.2 -- 0.8
--------- --------- --------- --------- ---------
Total revenues........................................ 100.0% 100.0% 100.0% 100.0% 100.0%
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
Gross profit.......................................... 19.2% 19.5% 19.1% 18.7% 18.7%
Selling, general, and administrative expense.......... 14.2 13.4 14.0 13.3 12.9
--------- --------- --------- --------- ---------
Operating income...................................... 5.0 6.1 5.1 5.4 5.8
Interest expense, net................................. 1.0 0.7 1.4 1.0 1.5
Pro forma provision for taxes(1)...................... 1.5 2.2 1.5 1.8 1.7
--------- --------- --------- --------- ---------
Pro forma net income(1)............................... 2.5% 3.2% 2.2% 2.6% 2.6%
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
</TABLE>
- ------------------------
(1) Pro forma provision for taxes and pro forma net income reflect the impact of
the tax provision as if the Company were a C corporation subject to income
taxes (at an assumed rate of 40%) during these periods.
NINE MONTHS ENDED OCTOBER 31, 1996 COMPARED TO NINE MONTHS ENDED
OCTOBER 31, 1995
REVENUES
Revenues increased approximately $52.5 million, or 29.7%, from $176.8
million for the first nine months of fiscal 1996 to $229.3 million for the first
nine months of fiscal 1997. Industrial operations contributed approximately
$38.3 million of this increase, with revenues increasing 36.3% to $144.1
million. The increase in industrial revenues was due in part to a change in the
discount program offered by Deere on governmental sales. During fiscal 1996,
Deere significantly reduced the discounts it offered for sales to the government
sector. As a result, the Company's pricing on governmental sales was less
competitive and it lost market share and sales in fiscal 1996. In fiscal 1997,
Deere reversed the adjustments it had made to the discounts, resulting in the
Company being able to be more competitive and increase sales. Also adding to the
increase in industrial revenues was a substantial increase in market share and
an increase in product support, resulting from the continued implementation of
the Company's operating model. In addition, $9.1 million of the increase in
revenues from industrial operations resulted from the inclusion of four months
of operations of the Central Texas operations, the acquisition of which was
effective July 1, 1996. The May 1995 opening of an industrial store in Prescott,
Arizona, the addition of an undercarriage service facility at the Company's
industrial store in Riverside, California, and the November 1995 addition of a
dedicated industrial equipment rental fleet in the Southwest region also
contributed to the increase in total revenues.
Agricultural operations contributed the remaining increase in revenues of
approximately $14.3 million, with revenues increasing 19.8% to $85.2 million. Of
this increase in agricultural revenues, $646,000 was due to the Company's
October 1, 1996 acquisition of the Washington operations. In general, the
increase in total revenues was the result of some shift in business from the
fourth quarter of the previous fiscal year due to the cold weather and farmer
uncertainty about the United States farm program. In addition, the highly
positive outlook of farmers for the agricultural economy generated increased
activity in all aspects of the Company's agricultural operations.
28
<PAGE>
Wholegoods sales increased approximately $38.8 million, or 29.6%, from
$131.2 million for the first nine months of fiscal 1996 to $170.0 million for
the first nine months of fiscal 1997. Industrial operations contributed
approximately $28.1 million of this increase, with sales increasing 36.7% to
$104.6 million. Of this increase, $6.6 million was due to the acquisition of the
Central Texas operations. Agricultural operations contributed the remaining
increase of approximately $10.7 million, with sales increasing 19.6% to $65.4
million. The increase in wholegoods sales for both the Industrial and
Agricultural Divisions was due to the factors discussed in the preceding
paragraphs. Wholegoods sales also increased as a result of the Company's
marketing strategy, which focuses on increased market share, customer
relationship training of its sales force, and utilization of software to track
and manage sales calls. See "Business--Sales and Marketing." Management also
focused on increasing inventory to provide stores with a wider selection of
wholegoods inventory and to build the base of equipment.
Parts and service revenue increased approximately $11.7 million, or 25.7%,
from $45.6 million for the first nine months of fiscal 1996 to $57.3 million for
the first nine months of fiscal 1997. Of this increase, $3.1 million was due to
the acquisitions of the Central Texas and Washington operations and the majority
of the remaining portion of the increase was due to the increase in the base of
wholegoods owned by the Company's customers. Parts and service revenue did not
grow at the same rate as wholegoods sales, partially due to the time lag factor
discussed above and partially due to service capacity constraints, both in
facilities and personnel. The Company has added, and continues to add, service
bay facilities and personnel to its stores to expand its service capacity. The
May 1995 opening of the undercarriage service facility at the industrial store
in Riverside, California contributed approximately $774,000 of parts and service
revenue in the first nine months of fiscal 1996 compared to $1.8 million in the
first nine months of fiscal 1997.
Rental revenue of $1.9 million was generated in the first nine months of
fiscal 1997 as the result of the commencement of industrial equipment rental
operations in the Southwest region in November 1995.
GROSS PROFIT
Gross profit increased approximately $9.7 million, or 29.3%, from $33.1
million for the first nine months of fiscal 1996 to $42.8 million for the first
nine months of fiscal 1997. Gross profit as a percentage of total revenues for
the first nine months of both fiscal 1996 and 1997 was 18.7%. As noted above,
the Company's highest gross margins are derived from its parts and service
revenues. For these periods, there was a small, but not significant, change in
the revenue mix between wholegoods sales and parts and service revenues.
SELLING, GENERAL, AND ADMINISTRATIVE EXPENSE
Selling, general, and administrative expense as a percentage of total
revenues decreased from 13.3% for the first nine months of fiscal 1996 to 12.9%
for the first nine months of fiscal 1997, due primarily to relatively stable
fixed costs compared to a larger base of total revenues. Total selling, general,
and administrative expense increased approximately $5.9 million, from $23.6
million for the first nine months of fiscal 1996 to $29.5 million for the first
nine months of fiscal 1997. Approximately $1.5 million of the increase was due
to the operations of the recent acquisitions. The remaining portion of the
increase was primarily due to increases in variable expenses, such as
commissions and bonus incentives, incurred in connection with generating higher
total revenues and net income.
INTEREST EXPENSE
Interest expense increased approximately $1.7 million, or 69.0%, from $2.4
million for the first nine months of fiscal 1996 to $4.1 million for the first
nine months of fiscal 1997. The increase was due primarily to the increased
levels of floor plan payables associated with higher inventory levels, the
financing of the industrial equipment rental fleet discussed above, and the
acquisition debt associated with the acquisitions of the Central Texas and
Washington operations.
29
<PAGE>
PRO FORMA PROVISION FOR TAXES
Pro forma provision for taxes as a percentage of pretax income was
consistent between these two periods at an assumed rate of 40%.
PRO FORMA NET INCOME
Pro forma net income increased approximately $1.3 million, or 28.3%, from
$4.6 million for the first nine months of fiscal 1996 to $5.9 million for the
first nine months of fiscal 1997.
FISCAL YEAR ENDED JANUARY 31, 1996 COMPARED TO FISCAL YEAR ENDED JANUARY 31,
1995
REVENUES
Revenues increased approximately $39.7 million, or 21.6%, from $183.9
million for fiscal 1995 to $223.6 million for fiscal 1996. Industrial operations
contributed approximately $28.3 million of this increase with revenues
increasing 25.7% to $139.0 million. Approximately $16.9 million of the increase
in industrial revenues was due to the Company's February 1995 acquisition of the
California operations. Approximately $2.0 million of the industrial revenues
increase was due to the Prescott, Arizona store, which opened in May 1995.
Excluding the California and Prescott operations, same store industrial revenues
increased approximately $9.4 million, or 8.5%, from $110.6 million in fiscal
1995 to $120.0 million in fiscal 1996. The same store industrial revenues
increased at a lower rate than in prior fiscal years due in part to a change in
the discount program offered by Deere on sales to the government sector. During
fiscal 1996, Deere significantly reduced the discounts it offered on such sales.
As a result, the Company's pricing on governmental sales was less competitive
and it experienced reductions in market share and sales to the government
sector. The Company was able to replace a portion of these governmental sales
with other sales, but not to the extent necessary to achieve its expected growth
rate in same store sales. It should be noted that in fiscal 1997 Deere reversed
the adjustments it had made to the discount program on governmental sales and
increased the discounts back to their previous levels. Also impacting total
revenues in fiscal 1996 were weather factors in the Midwest. The winter of
1995/1996 was extremely cold, with numerous record low temperatures set in both
December 1995 and January 1996. As a result, customers in the Midwest did not
buy wholegoods and equipment was not able to be moved for normal servicing.
Agricultural operations contributed the remaining increase in revenues of
approximately $11.3 million, with agricultural revenues increasing 15.4% to
$84.6 million. All of the increase in agricultural revenues was due to same
store sales increases, primarily as a result of the successful implementation of
the Company's strategy to increase its market share. The rate of increase in
same store sales for the Agricultural Division was not as high as prior years
due to the same weather factors that impacted industrial sales and farmer
uncertainty about the United States farm program. During fiscal 1995 and 1996,
all of the Company's agricultural stores were located in the Midwest. Through
the first three quarters of fiscal 1996, total agricultural revenues had
increased 22.0% over the same period of fiscal 1995. The cold weather in the
fourth quarter of fiscal 1996 was the primary factor for a 10.5% decrease in
revenues from the same quarter in fiscal 1995.
Wholegoods sales increased approximately $28.3 million, or 20.9%, from
$135.7 million in fiscal 1995 to $164.0 million in fiscal 1996. Industrial
operations contributed approximately $17.8 million of this increase, with sales
increasing 21.8% to $99.4 million. Of this increase, $9.2 million was due to the
acquisition of the California operations, and $1.7 million was due to the
opening of the Prescott store. Excluding the California and Prescott operations,
same store sales of industrial wholegoods increased approximately $6.9 million,
or 8.5%, to $88.5 million. Agricultural operations contributed the remaining
increase in wholegoods sales of approximately $10.5 million, with sales
increasing 19.4% to $64.6 million. All of the increase in agricultural
wholegoods sales was due to same store sales increases. The Industrial Division
was affected by the change in the Deere discount program on governmental sales
and the weather factors discussed above, which slowed the rate of same store
sales increases, while the reduction in the rate of same store sales increases
for the Agricultural Division was due to the weather factors discussed above.
30
<PAGE>
Wholegoods sales also increased as a result of the Company's marketing strategy,
which focuses on increased market share, customer relationship training of its
sales force, and utilization of software to track and manage sales calls. See
"Business--Sales and Marketing."
Parts and service revenue increased approximately $10.7 million, or 22.4%,
from $48.2 million in fiscal 1995 to $59.0 million in fiscal 1996. Approximately
$7.6 million of the increase was due to the acquisition of the California
operations and $292,000 was due to the newly-opened Prescott store. Excluding
the California and Prescott operations, same store parts and service revenue
increased approximately $2.9 million, or 6.0%, to $51.1 million in fiscal 1996.
Parts and service growth did not keep pace with the rates of increase in prior
years due in part to the weather factors discussed above. In addition, parts and
service revenue growth did not keep pace with the growth in wholegoods sales due
to service capacity constraints, both in facilities and personnel. The Company
has added, and continues to add, service bay facilities and personnel to its
stores to expand its service capacity.
The Company commenced industrial equipment rental operations in the fourth
quarter of fiscal 1996 by implementing a rental fleet of industrial equipment in
the Southwest region. Rental revenue was $505,000 in fiscal 1996.
GROSS PROFIT
Gross profit increased approximately $6.9 million, or 19.3%, from $35.8
million in fiscal 1995 to $42.7 million in fiscal 1996. Gross profit as a
percentage of total revenues decreased slightly from 19.5% in fiscal 1995 to
19.1% in fiscal 1996. Lower gross margins resulted in large part from reduced
Deere discounts on governmental sales of industrial equipment. In an effort to
offset the reduction in the volume of sales to the governmental sector, the
Company pursued an aggressive pricing policy with respect to other industrial
wholegoods sales. In addition, the Company had a marketing strategy designed to
increase market share at newly-acquired industrial stores by competing more
aggressively on price for selected wholegoods in those markets.
SELLING, GENERAL, AND ADMINISTRATIVE EXPENSE
As a percentage of total revenues, selling, general, and administrative
expense increased from 13.4% in fiscal 1995 to 14.0% in fiscal 1996. Total
selling, general, and administrative expense increased by approximately $6.7
million, or 27.2%, from fiscal 1995 to fiscal 1996. This increase was primarily
due to expenses incurred by the newly-acquired industrial stores in California,
which have higher compensation and occupancy costs relative to the Company's
other industrial stores. Approximately $4.1 million of the increase was due to
expenses associated with the California and Prescott operations. Excluding these
operations, selling, general, and administrative expense increased approximately
$2.6 million, or 10.4%, primarily due to increases in variable expenses such as
commissions and incentive bonuses incurred in connection with generating higher
total revenues.
INTEREST EXPENSE
Interest expense increased approximately $1.9 million, or 100.0%, from $1.9
million in fiscal 1995 to $3.8 million in fiscal 1996. Approximately $400,000 of
the increase was associated with inventory financing for the California and
Prescott operations. Approximately $75,000 of the increase was associated with
the financing of the Company's industrial equipment rental fleet. The remaining
$1.4 million increase was a result of increased levels of floor plan payables
incurred as a result of higher inventory levels, a change in Deere floor plan
payment terms, which shortened the interest-free period on certain purchases of
industrial equipment, and an increase in the weighted average interest rate on
interest bearing floor plan financing from 7.25% in fiscal 1995 to 8.83% in
fiscal 1996.
31
<PAGE>
PRO FORMA PROVISION FOR TAXES
Pro forma provision for taxes as a percentage of pretax income was
consistent between these two periods at an assumed rate of 40%.
PRO FORMA NET INCOME
Pro forma net income decreased by approximately $1.1 million, or 18.6%, from
$5.9 million in fiscal 1995 to $4.8 million in fiscal 1996.
FISCAL YEAR ENDED JANUARY 31, 1995 COMPARED TO FISCAL YEAR ENDED JANUARY 31,
1994
REVENUES
The results for fiscal 1995 exceeded management's expectations based on the
Company's historical trends. Revenues increased approximately $39.8 million, or
27.6%, from $144.1 million in fiscal 1994 to $183.9 million in fiscal 1995.
Industrial operations contributed approximately $23.8 million of this increase,
with total revenues increasing 27.5% to $110.5 million. Approximately $4.1
million of the increase in industrial revenues was due to a full year of revenue
from the industrial store located in Rapid City, South Dakota, which was
acquired in September 1993. Excluding the impact of the Rapid City store, same
store industrial sales increased 23.2% to $105.3 million. Sales increased at
virtually all industrial stores, resulting from a generally favorable
construction market. Also contributing to the increase was a significant
multiple unit equipment sale.
Agricultural operations contributed the remaining increase of approximately
$16.0 million, with revenues increasing 27.9% to $73.4 million. All of the
agricultural revenue increase was due to same store sales increases. The
increase in same store agricultural revenues was largely due to extremely
favorable market and crop conditions. These conditions, combined with an
interest waiver program from Deere on used combines, generated significant
sales. In addition, two of the Company's agricultural stores had multiple unit
combine sales. The increase was also caused, to a lesser extent, by a
significant increase in sales of irrigation equipment and supplies in response
to an increase in the market demand for processed potatoes.
Wholegoods sales increased approximately $29.1 million, or 27.3%, from
$106.6 million in fiscal 1994 to $135.7 million in fiscal 1995. Industrial
operations contributed approximately $18.3 million of this increase, with sales
increasing 28.9% to $81.6 million. Approximately $2.8 million of the increase
was the result of a full year of wholegoods sales from the Rapid City store. The
remaining increase of $15.5 million was due to same store sales increases.
Agricultural operations contributed the remaining increase of approximately
$10.8 million, with sales increasing 24.9% to $54.1 million. In general, the
increase in same store sales was due to the factors discussed above. In
addition, wholegoods sales increased as a result of a revised marketing strategy
initiated in March 1994, which focuses on increased market share, customer
relationship training of the Company's sales force, and utilization of software
to track and manage sales calls. See "Business--Sales and Marketing."
Parts and service revenue increased approximately $10.7 million, or 28.5%,
from $37.5 million in fiscal 1994 to $48.2 million in fiscal 1995. This increase
was primarily due to the factors discussed above. An addition to the
undercarriage repair shop in Minneapolis, a new facility in St. Cloud, and the
acquisition of the Rapid City store also contributed to increased parts and
service revenue.
GROSS PROFIT
Gross profit increased approximately $8.1 million, or 29.3%, from $27.7
million in fiscal 1994 to $35.8 million in fiscal 1995, primarily due to the
increase in total revenues discussed above. Gross profit as a percentage of
total revenues increased slightly from 19.2% to 19.5% from fiscal 1994 to fiscal
1995. This increase was due largely to an increase in the margins on wholegoods
sales.
32
<PAGE>
SELLING, GENERAL, AND ADMINISTRATIVE EXPENSE
As a percentage of total revenues, selling, general, and administrative
expense decreased from 14.2% in fiscal 1994 to 13.4% in fiscal 1995. This
decrease was a result of relatively stable fixed costs compared to a larger base
of total revenues. Total selling, general, and administrative expense increased
approximately $4.3 million, or 20.9%, from $20.6 million in fiscal 1994 to $24.9
million in fiscal 1995, primarily due to increases in variable expenses such as
commissions and bonus incentives incurred in connection with higher total
revenues and net income.
INTEREST EXPENSE
Interest expense increased approximately $225,000, or 13.5%, from $1.7
million in fiscal 1994 to $1.9 million in fiscal 1995. Higher interest expense
was the result of increased levels of floor plan financing incurred in
connection with higher inventory levels to support wholegoods sales growth.
PRO FORMA PROVISION FOR TAXES
Pro forma provision for taxes as a percentage of pretax income was
consistent between these two periods at an assumed rate of 40%.
PRO FORMA NET INCOME
Pro forma net income increased by approximately $2.4 million, or 68.6%, from
$3.5 million in fiscal 1994 to $5.9 million in fiscal 1995.
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 operating activities,
floor plan financing, and borrowings under credit agreements with Deere, Deere
Credit, Ag Capital, 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, to enable dealers to
carry representative inventories 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 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 currently six to eight months for agricultural
equipment and one to five months for industrial equipment. Deere also provides
financing to dealers on used equipment accepted in trade and approved equipment
from other manufacturers. See "Business--Floor Plan Financing" and "Certain
Relationships and Related Transactions."
The Company annually reviews the terms of its financing with its lenders,
including the interest rate. In fiscal 1994, 1995, and 1996, the average
interest rate under interest bearing floor plan financing was approximately
7.0%, 7.25%, and 8.85%, respectively. As of October 31, 1996, the Company had
outstanding floor plan payables of approximately $100.6 million, of which $61.6
million was then interest bearing, at an average annual rate of 8.25%.
During the first nine months of fiscal 1997, operating activities provided
net cash of $6.0 million versus $8.9 million in the first nine months of fiscal
1996. Net cash provided by operating activities in fiscal 1994, 1995, and 1996
was $2.8 million, $3.2 million, and $12.1 million, respectively. The increase in
fiscal 1996 was primarily attributable to increased levels of floor plan
payables.
33
<PAGE>
Cash used for investing activities was approximately $14.1 million for the
first nine months of fiscal 1997 versus $11.6 million in the first nine months
of fiscal 1996. The increase was primarily due to the net assets acquired in the
Central Texas and Washington Acquisitions. Cash used for investing activities in
fiscal 1994, 1995, and 1996 was $600,000, $1.3 million, and $11.8 million,
respectively. The increase in fiscal 1996 was primarily related to the purchase
of industrial equipment for its rental operations in the Southwest and for the
acquisition of dealerships. Capital expenditures for these years were primarily
attributable to purchases of property and equipment.
Cash provided by financing activities amounted to $7.4 million for the first
nine months of fiscal 1997 versus $2.3 million for the first nine months of
fiscal 1996 and was primarily attributable to net proceeds from debt incurred by
the Company to acquire dealership assets. See "Certain Relationships and Related
Transactions." In fiscal 1994, 1995, and 1996, the Company utilized net cash
from financing activities of $2.2 million, $1.5 million, and $200,000,
respectively. The decrease in net cash utilized in fiscal 1996 reflects cash
provided by an increase in long-term debt of $5.9 million primarily to fund the
purchase of the fleet of industrial rental equipment for the Southwest.
The Company's capital expenditures for the last three months of fiscal 1997
are expected to approximate $600,000, relating primarily to construction of
additional service bays. The Company anticipates that cash from operations and
borrowing capacity will be sufficient to fund its planned capital expenditures
for the remainder of fiscal 1997 and fiscal 1998.
INCOME TAXES
The Company has historically elected to be taxed as an S corporation for
income tax purposes, and the Company's existing stockholders have paid the
income taxes on the Company's taxable income directly. The Company made
distributions to its stockholders of $2.3 million, $3.8 million, and $4.3
million during fiscal 1994, 1995, and 1996, respectively, primarily in order to
provide the funds to the stockholders to pay such taxes, and $7.5 million during
the first nine months of fiscal 1997. Dividends declared in excess of taxes for
the first nine months of fiscal 1997 were approximately $5.9 million, of which
$2.2 million was unpaid as of October 31, 1996.
As a result of the termination of the S corporation election, the Company
will record a net deferred income tax asset of approximately $850,000, which
relates primarily to the timing differences between financial and income tax
reporting of certain items attributable to the periods in which the Company
elected to be treated as an S corporation.
EFFECTS OF INFLATION
Inflation has not had a material impact upon operating results and the
Company does not expect it to have such an impact in the future. To date, in
those instances in which the Company has experienced cost increases, it has been
able to increase selling prices to offset such increases in cost. There can be
no assurance, however, that the Company's business will not be affected by
inflation or that it can continue to increase its selling prices to offset
increased costs and remain competitive.
SEASONALITY
The Company generally experiences a higher volume of wholegoods sales in the
second and third fiscal quarters of each fiscal year due to the crop growing
season and winter weather conditions in the Midwest. Typically, farmers purchase
agricultural equipment immediately prior to planting or harvesting crops, which
occurs during the Company's second and third fiscal quarters. As a result, sales
of agricultural equipment generally are lower in the first and fourth fiscal
quarters. Winter weather in the Midwest also limits construction to some degree
and, therefore, also typically results in lower sales of industrial equipment in
the first and fourth fiscal quarters. 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
34
<PAGE>
trends. See "Risk Factors--Effects of Downturn in General Economic Conditions;
Cyclicality, Seasonality, and Weather."
QUARTERLY FINANCIAL INFORMATION
The following table sets forth certain unaudited financial information for
each quarter during fiscal 1994, 1995, 1996, and the first three quarters of
fiscal 1997. The amounts shown are not necessarily comparable or indicative of
actual trends, since these amounts reflect the addition of stores during these
periods.
<TABLE>
<CAPTION>
GROSS PRO FORMA NET
QUARTERS ENDED TOTAL REVENUES PROFIT OPERATING INCOME INCOME AFTER TAXES(1)
- ------------------------------------------- -------------- ----------- ----------------- ---------------------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Fiscal 1994:
April 30, 1993........................... $ 35,224 $ 6,546 $ 1,880 $ 970
July 31, 1993............................ 38,331 7,204 2,659 1,232
October 31, 1993......................... 40,774 7,550 1,754 953
January 31, 1994......................... 29,783 6,443 873 345
Fiscal 1995:
April 30, 1994........................... 45,472 8,806 3,017 1,540
July 31, 1994............................ 49,732 9,768 3,632 2,026
October 31, 1994......................... 48,713 9,822 2,694 1,477
January 31, 1995......................... 39,993 7,403 1,563 845
Fiscal 1996:
April 30, 1995........................... 52,029 9,765 2,646 1,130
July 31, 1995............................ 57,718 10,863 3,122 1,619
October 31, 1995......................... 67,078 12,480 3,739 1,847
January 31, 1996......................... 46,732 9,610 1,556 245
Fiscal 1997:
April 30, 1996........................... 70,886 12,168 3,573 1,597
July 31, 1996............................ 82,887 14,936 5,008 2,262
October 31, 1996......................... 75,487 15,705 4,736 2,041
</TABLE>
- ------------------------
(1) Assumes the Company was taxed as a C corporation for all periods presented.
35
<PAGE>
BUSINESS
GENERAL
Through its 32 stores, the Company owns and operates the largest networks of
Deere industrial stores and agricultural stores in the United States. The 21
industrial stores and 11 agricultural stores sell, service, and rent industrial
and agricultural equipment primarily supplied by Deere. The Company's revenues
have grown at a compound annual rate of 33% over the past five fiscal years,
from $71.2 million in fiscal 1992 to $223.6 million in fiscal 1996.
The Company's stores are located in Arizona, California, Minnesota, North
Dakota, South Dakota, Texas, and Washington. The Company expects to continue to
expand its networks through future acquisitions as the consolidation of Deere
equipment dealers continues to develop. The Company has acquired 13 stores in
the past five years, including 11 industrial stores and two agricultural stores.
The Company believes that its networks of industrial and agricultural stores
enable it to achieve benefits from increasing operational synergies.
The equipment and parts sold by the Company primarily are supplied by Deere,
which is a leading manufacturer and supplier of industrial and agricultural
equipment in the United States. Sales of new Deere equipment by the Company
accounted for approximately 72% of the Company's new equipment sales in fiscal
1996. No other supplier accounted for more than 7% of the Company's new
equipment sales in fiscal 1996. The Company expects that Deere products will
continue to account for the majority of its industrial and agricultural
equipment sales. The Company's stores also offer complementary equipment from
other suppliers, used equipment, new and used parts, equipment servicing,
equipment rental, and other related products and services.
For the fiscal year ended January 31, 1996, the Company's revenues were
generated from the following areas of business:
<TABLE>
<S> <C>
New equipment sales.................................................. 51%
Used equipment sales................................................. 22%
Product support, parts, service...................................... 26%
Equipment rental income.............................................. 1%
</TABLE>
INDUSTRY OVERVIEW
INDUSTRIAL EQUIPMENT INDUSTRY. Management estimates that United States
retail sales of new industrial equipment in its target product market in
calendar 1995 totaled approximately $5.7 billion. Deere is one of the leading
suppliers of industrial equipment in the United States for light to medium
applications and offers a broad array of products. Currently, Deere has
approximately 110 industrial dealers which operate approximately 355 stores in
the United States. Each dealer within the Deere industrial system is assigned
designated geographic areas of responsibility within which it has the right to
sell new Deere industrial products. Over the last five years, while the number
of Deere industrial stores has remained constant, the number of Deere industrial
dealers has declined by more than 30%. This dealer consolidation is being
driven, in part, by an increasing need for capital, owners' concerns about
succession, and Deere's support for consolidation of its dealers. The Company
expects to benefit from this consolidation trend by continuing its strategic
acquisition of Deere industrial dealerships.
AGRICULTURAL EQUIPMENT INDUSTRY. Management estimates that United States
retail sales of new agricultural equipment in its target product market in
calendar 1995 totaled approximately $10.1 billion. Deere is the leading supplier
of agricultural equipment in the United States. Within the Deere agricultural
system, dealers are not assigned exclusive territories, but are given authorized
store locations. Currently, Deere has approximately 1,275 agricultural dealers
which operate approximately 1,545 stores in the United States. The Company
believes that Deere agricultural dealerships also face an increasing need for
capital, owners' concerns about succession, and Deere's support for
consolidation and, as a result, that a
36
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consolidation of Deere agricultural dealers will occur. The Company expects that
it will have increasing opportunities to complete strategic acquisitions of
Deere agricultural dealerships as this consolidation trend develops.
GROWTH STRATEGY
In order to capitalize on industry consolidation trends, expand its market
leadership position, and further develop its industrial and agricultural
equipment operations, the Company has developed its growth strategy, the key
elements of which are:
INCREASING MARKET SHARE. The Company seeks to increase its market share by
enhancing customer service and generating customer loyalty. To accomplish this,
the Company offers a broad range of products, utilizes aggressive marketing
programs, trains its employees to have a strong customer orientation, employs
state-of-the-art service equipment, and maintains a computerized real-time
inventory system. Each industrial and agricultural store offers a broad array of
its respective Deere equipment lines, and also sells complementary products from
other suppliers, based on the nature of each store's customer base.
As the installed base of equipment expands with the Company's increasing
market share, the Company has the opportunity to generate additional parts and
service business. The Company believes that each customer's experience with the
Company's parts and service departments and other value-added services can
positively influence such customer's overall satisfaction. Parts and service
currently account for approximately 26% of the Company's total revenues but have
higher profit margins than wholegoods sales.
The Company also has diversified its business into complementary fields to
serve its customers' needs, expand its customer base, and enhance its revenues
by developing its industrial equipment rental fleet, offering undercarriage
service at strategic locations, and selling irrigation equipment at one store.
PURSUING ADDITIONAL ACQUISITIONS. Acquisitions have been and will continue
to be an important element of the Company's growth strategy, particularly given
the consolidation trends among industrial and agricultural equipment dealers.
Over the past five years, the Company has acquired 11 industrial stores and two
agricultural stores from seven dealers. Due to the Company's leadership position
in the industry and its track record in completing and integrating acquisitions,
the Company believes that attractive acquisition candidates will continue to
become available to the Company.
The Company believes that its management team has substantial experience in
evaluating potential acquisition candidates and determining whether a particular
dealership can be successfully integrated into the Company's existing
operations, i.e., whether the operations of dealerships to be acquired can be
enhanced by utilizing the Company's operating model and being part of the
Company's network of stores. Upon consummation of each acquisition, the Company
integrates the dealership into its industrial or agricultural operations by
implementing the Company's operating model and seeks to enhance the acquired
dealership's performance within its target market. Integration of an acquisition
is completed generally within the first six to 12 months, although it can take
several years before the benefits of the Company's operating model, store
networks, strategies, and systems are fully realized. The consent of Deere is
required for the acquisition of any Deere dealership. Accordingly, the Company
must obtain Deere's consent before completing any future acquisitions it may
negotiate. See "Risk Factors--Risks Associated With Expansion."
IMPLEMENTING THE RDO OPERATING MODEL. The Company has developed a proven
operating model designed to improve the performance and profitability of each of
its stores. Components of this operating model include (i) pursuing aggressive
marketing programs, (ii) allowing store employees to focus on customers by
managing administrative functions, training, and purchasing at the corporate
level, (iii) providing a full complement of parts and state-of-the-art service
functions, including a computerized real-time inventory system and quick
response, on-site repair service, (iv) motivating store level management in
accordance with corporate goals, and (v) focusing on cost structures at the
store level.
37
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The Company implements its operating model in a variety of areas. For
example, the Company is proactive in attracting new customers by sending
targeted direct mailings, hosting open houses and service clinics, and
participating in trade shows. Additionally, the Company centralizes certain
functions such as accounting, purchasing, and employee recruitment, allowing its
store managers and personnel more time to focus on making sales and providing
product support to customers.
CAPITALIZING ON DIVERSITY OF OPERATIONS. A major focus of the Company's
strategy has been to expand its networks of industrial and agricultural stores
into geographic areas that have a large base of construction or agricultural
activity and that provide the Company with opportunities to continue to develop
its store networks. The Company believes that its business diversification into
both industrial and agricultural store operations has significantly increased
its customer base, while also mitigating the effects of industry-specific
economic cycles. Similarly, the Company's geographic diversification into
regions outside the Midwest helps to diminish the effects of seasonality, as
well as local and regional economic fluctuations. Typically, other Deere dealers
operate only industrial or agricultural dealerships, with a limited number of
stores concentrated in a specific geographic region. Based on information
published by Deere, the Company believes the average United States Deere
industrial dealer has less than four stores, as compared to the Company's 21
industrial stores, and the average United States Deere agricultural dealer
operates a single store as compared to the Company's 11 agricultural stores.
RECENT AND CONTEMPLATED ACQUISITIONS
The Company has acquired three industrial stores and two agricultural stores
in calendar 1996. These recent acquisitions extend the Company's networks into
Texas and Washington, which the Company believes will provide platforms for
future growth.
Effective as of July 1, 1996, the Company completed the Central Texas
Acquisition, pursuant to which it acquired a Deere industrial dealership with
three industrial stores located in the Dallas-Fort Worth and Waco, Texas
metropolitan areas. This acquisition gives the Company a market presence in
Texas and a Deere area of responsibility covering 35 counties. The purchase
price for the net assets acquired was approximately $8.4 million, which was
financed by a short-term note payable to Ag Capital, which will be repaid using
a portion of the net proceeds of this Offering. See "Use of Proceeds," "Certain
Relationships and Related Transactions," and Note 13 to the Combined Financial
Statements.
Effective as of October 1, 1996, the Company completed the Washington
Acquisition, pursuant to which it acquired a Deere agricultural dealership with
two stores located in Pasco and Sunnyside, Washington. The purchase price for
the net assets was approximately $2.7 million, net of $6.0 million of
liabilities assumed. Approximately $1.0 million of the purchase price was
financed by a note payable to the seller, with the balance of $1.7 million
financed by a short-term note payable to Ag Capital, which will be repaid using
a portion of the net proceeds of this Offering. The Company also may be
obligated to pay additional consideration of up to $750,000 in the event certain
performance criteria are met over a three-year period following completion of
the acquisition. See "Use of Proceeds," "Certain Relationships and Related
Transactions," and Note 13 to the Combined Financial Statements.
The Company has entered into a letter of intent to acquire certain assets of
an industrial equipment rental company with five locations in Arizona, which had
unaudited total revenues of approximately $6.7 million and $6.0 million in
calendar year 1995 and the nine months ended September 30, 1996, respectively.
If this contemplated acquisition is completed, the Company would expect to use
approximately $2.4 million of the net proceeds of this Offering and assume
certain liabilities currently estimated to approximate $10.0 million. The
Company also may be obligated to pay additional consideration of up to $1.0
million in the event certain performance criteria are met over a five-year
period following completion of the acquisition. The transaction would likely be
structured such that the rental operation acquired would be owned 80% by the
Company and 20% by the current owner, with the Company having a right to
purchase the minority interest. This contemplated acquisition is subject to a
number of conditions, including the negotiation and execution of a definitive
agreement and the completion of due diligence. There can be no assurance that
such conditions will be fulfilled or that this contemplated acquisition will be
consummated.
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<PAGE>
The Company currently is not a party to any other agreement or understanding
with respect to other possible acquisitions.
INDUSTRIAL DIVISION
The Company is the largest Deere industrial dealer in the United States both
in number of stores and total revenues and accounted for approximately 6% of
Deere's United States industrial equipment sales in calendar 1995. The Company
owns and operates 21 industrial stores located in metropolitan areas in Arizona,
Southern California, Minnesota, North Dakota, South Dakota, and Texas. The
revenues of the Industrial Division have increased from $30.5 million in fiscal
1992 to $139.0 million in fiscal 1996, representing a compound annual growth
rate of 46%. The historic growth of the Industrial Division is the result of
same store sales increases, which have averaged 21% per year from fiscal 1992
through fiscal 1996, and the acquisition of 11 stores over the same period. The
Company began its industrial operations in 1989 by acquiring a Deere industrial
dealership with stores located in Bismarck, Fargo, Grand Forks, and Minot, North
Dakota.
Customers of the Company include contractors, for both residential and
commercial construction, utility companies, and federal, state, and local
government agencies. The Industrial Division has a diverse customer base and no
customer represented more than 5% of the Division's sales. The Industrial
Division provides a full line of equipment for light to medium size applications
and related product support to its customers. Its primary products include John
Deere backhoe loaders, hydraulic excavators, crawler dozers, and four-wheel
drive loaders. While the sale of new Deere industrial equipment is the main
focus, the Company's industrial stores also offer complementary equipment from
other suppliers, as well as used equipment taken as trade-ins.
The industrial stores are located in areas with significant construction
activity, including Dallas-Fort Worth, southern Los Angeles, Minneapolis-St.
Paul, Phoenix, and San Diego. Each industrial store displays a broad array of
new and used equipment and has a series of fully-equipped service bays to
provide on-site service and maintenance of industrial equipment. The Company
believes it has a competitive advantage over other industrial dealers given its
ability to draw on its network of industrial stores for equipment and parts and
the economies of scale inherent in its centralized administrative, purchasing,
and inventory management functions. The Company attributes the success of its
Industrial Division to its continuing implementation of its operating model.
Deere has established an Industrial Mark of Excellence Program to recognize
its industrial dealers which meet certain criteria, including targeted sales
growth, financial performance, customer satisfaction, and product support. In
calendar 1995, approximately 32% of the Deere United States industrial dealers
achieved Mark of Excellence status. The Industrial Division achieved Mark of
Excellence status for calendar 1995 for both its Midwest and Southwest areas of
responsibility, and has achieved such status for its operations each year since
1989.
The Company's industrial stores are located and were acquired or opened as
described below:
<TABLE>
<CAPTION>
CALENDAR YEAR
LOCATION ACQUIRED/OPENED
- ----------------------------------------------------------------------- -----------------------
<S> <C> <C>
MIDWEST:
*Bismarck, ND.......................................................... 1989 Acquired
Minot, ND............................................................. 1989 Acquired
Fargo, ND............................................................. 1989 Acquired
Grand Forks, ND....................................................... 1989 Acquired
Minneapolis, MN....................................................... 1990 Acquired
Rochester, MN......................................................... 1990 Acquired
St. Cloud, MN......................................................... 1990 Acquired
Mankato, MN........................................................... 1992 Acquired
Sioux Falls, SD....................................................... 1992 Acquired
</TABLE>
39
<PAGE>
<TABLE>
<CAPTION>
CALENDAR YEAR
LOCATION ACQUIRED/OPENED
- ----------------------------------------------------------------------- -----------------------
<S> <C> <C>
*Rapid City, SD........................................................ 1993 Acquired
Marshall, MN.......................................................... 1996 Opened
SOUTHWEST:
Flagstaff, AZ......................................................... 1992 Acquired
Phoenix, AZ........................................................... 1992 Acquired
Tucson, AZ............................................................ 1992 Acquired
Prescott, AZ.......................................................... 1995 Opened
Riverside, CA......................................................... 1995 Acquired
San Diego, CA......................................................... 1995 Acquired
Brawley, CA........................................................... 1996 Opened
SOUTH CENTRAL:
Fort Worth, TX........................................................ 1996 Acquired
Irving, TX............................................................ 1996 Acquired
Waco, TX.............................................................. 1996 Acquired
</TABLE>
- ------------------------
* Agricultural equipment also sold at this location.
AGRICULTURAL DIVISION
The Company is the largest Deere agricultural dealer in the United States
both in number of stores and total revenues and accounted for approximately 1%
of Deere's United States agricultural equipment sales in calendar 1995. The
revenues of the Agricultural Division increased from $40.7 million in fiscal
1992 to $84.6 million in fiscal 1996, representing a compound annual growth rate
of 20%. The historic growth of the Agricultural Division is primarily due to
same store sales growth resulting from the Company's continued implementation of
its operating model, including aggressive sales programs to build market share,
as well as a favorable agricultural economy. The Company began its agricultural
operations in 1968 by acquiring a Deere agricultural store located in Casselton,
North Dakota. The Company owns and operates 11 agricultural stores located in
Minnesota, North Dakota, South Dakota, and Washington.
The Company's agricultural stores are full-service suppliers to farmers,
offering a broad range of farm equipment and related products. The Agricultural
Division sold equipment, parts, or service to over 32,000 customers in fiscal
1996 and no customer represented more than 7% of the Division's sales. The
Company's customers primarily farm corn, soybeans, wheat, sugar beets, and
potatoes. As a result of the customer mix and Deere's product offering, the core
products of the Agricultural Division include combines, tractors, planting
equipment, and tillage equipment. The Company's agricultural stores also carry
other harvesting and crop handling machinery, as well as lawn and grounds care
equipment. The sale of new Deere agricultural equipment is the primary focus of
the Company's agricultural equipment sales and accounts for a majority of the
Division's new equipment sales. A wide variety of additional agricultural
equipment lines, which complement the Deere products, is also offered according
to local market demand. The agricultural stores also sell used equipment,
generally acquired as trade-ins. The Company's store in Wadena, Minnesota sells
irrigation equipment supplied by Valmont Industries Inc. and vegetable storage
ventilation equipment.
The agricultural stores are located in areas with significant concentrations
of farmers and typically serve customers within a 25 to 50 mile radius. Each
store displays a broad array of new and used equipment and has fully-equipped
service bays to provide on-site service and maintenance of agricultural
equipment. The Company believes it has a competitive advantage over other
agricultural dealers given its ability to draw on its network of agricultural
stores for equipment and parts and the economies of scale inherent in its
centralized administrative, purchasing, and inventory management functions.
40
<PAGE>
Deere has established the John Deere Signature Award Program to recognize
its agricultural dealers which meet certain criteria, including targeted sales
growth, customer satisfaction, and dealer image. For calendar year 1995,
approximately 36% of the Deere United States agricultural dealers were awarded
Signature status in at least one category, and 17% achieved Signature status in
all categories. Eight of the Company's Deere agricultural equipment stores were
awarded Signature status in calendar year 1995, including four stores that
achieved Signature status in all categories.
The Company's agricultural stores are located and were acquired or opened as
described below:
<TABLE>
<CAPTION>
LOCATION CALENDAR YEAR ACQUIRED/OPENED
- ------------------------------------------------------------ -------------------------------
<S> <C> <C>
MIDWEST:
Casselton, ND.............................................. 1968 Acquired
Lisbon, ND................................................. 1976 Opened
Breckenridge, MN........................................... 1983 Acquired
Kindred, ND................................................ 1986 Opened
Barnesville, MN............................................ 1987 Acquired
Fargo, ND.................................................. 1987 Acquired
Washburn, ND............................................... 1989 Acquired
*Aberdeen, SD............................................... 1990 Acquired
Wadena, MN................................................. 1992 Opened
NORTHWEST:
Pasco, WA.................................................. 1996 Acquired
Sunnyside, WA.............................................. 1996 Acquired
</TABLE>
- ------------------------
* Industrial equipment also sold at this location.
PARTS AND SERVICE
The Company's industrial and agricultural stores offer a broad range of
replacement parts and fully-equipped service and repair facilities for their
respective product lines. The Company believes that product support through
parts and service will be increasingly important to its ability to attract and
retain customers for both its industrial and agricultural equipment operations.
As of October 31, 1996, 121 of the Company's employees were employed in its
parts business and 394 were employed in its service business.
Each industrial and agricultural equipment store includes service bays
staffed by highly trained service technicians. Technicians are also available to
make on-site repairs of equipment that cannot be brought in for service. The
Company's service technicians receive training from Deere and certain other
suppliers, as well as additional on-site training conducted by the Company. The
industrial stores located in Minneapolis, Minnesota and Riverside, California
also operate full-service undercarriage shops for all makes and sizes of crawler
equipment. The Company recently opened an undercarriage shop at one of its
Dallas-Fort Worth industrial stores.
As part of its product support efforts, the Company provides proactive and
comprehensive customer service by maintaining service histories for each piece
of equipment owned by its customers, having longer service hours in times of
peak service usage, providing on-site repair service at customer locations,
scheduling off-season maintenance activities with customers, notifying customers
of periodic service requirements, and providing training programs to customers
to better educate them as to maintenance requirements, as well as teaching
preventive maintenance that customers can perform themselves. At the time
equipment is purchased, the Company also offers customers the option of
purchasing guaranteed maintenance contracts. The Company believes that these
product support services help attract customers, develop and strengthen existing
customer relationships, and promote customer loyalty.
41
<PAGE>
RENTAL FLEET OPERATIONS
The Company maintains a rental fleet of industrial equipment, primarily in
its Arizona and Southern California operations. The Company rents the industrial
equipment to customers on a short-term basis, generally for a specified number
of days or weeks, at competitive rates. The Company believes that its rental
operations will continue to benefit from the trend among businesses to outsource
operations, including equipment ownership, in order to minimize their capital
investment in equipment as well as reducing or eliminating the down-time,
maintenance, repair, and storage costs associated with equipment ownership. Used
rental equipment is then sold by the Company, generally after 18 to 24 months of
service. The Company believes that the rental business will be an area of growth
as it expands its operations in Arizona and California, as well as in its
recently acquired Dallas-Fort Worth operations. The Company's network of
industrial stores support the sale of the used equipment retired from the rental
fleet through the ability to move used equipment to various geographic regions
based on market demand, the access to an expanded customer base, and the
availability of trained personnel to service the used equipment to enhance its
resale value.
The Company has entered into a letter of intent to acquire certain assets of
an industrial equipment rental company with five locations in Arizona. See
"--Recent and Contemplated Acquisitions." This contemplated acquisition is
subject to a number of conditions, and there can be no assurance that such
conditions will be fulfilled or that this contemplated acquisition will be
consummated.
INVENTORY AND ASSET MANAGEMENT
The Company maintains substantial inventories of equipment and parts at its
stores in order to facilitate sales to customers on a timely basis. The Company
also is required to build up its inventory in advance of its second and third
fiscal quarters, which historically have higher sales, to ensure that it will
have sufficient inventory available to meet its customer needs and to avoid
shortages or delays. Deere recently has developed an inventory warehouse that
its dealers may access to obtain equipment to facilitate inventory management.
In addition, to maximize asset productivity, the Company maintains a
complete database on sales and inventory of parts and equipment. The Company has
a sophisticated, centralized real-time inventory control system. This system
enables each store to access the available inventory of the Company's other
stores before ordering additional parts or equipment from the supplier. As a
result, the Company minimizes its investment in inventory while still
effectively and promptly satisfying its customers' parts needs. Using this
system, the Company also monitors inventory levels and mix at each store and
makes adjustments as needed in accordance with its operating plan. The Company's
management information system and database also are used to monitor market
conditions, sales information, and customer demand, as well as to assess product
merchandising strategies. The Company has begun to use the Internet for direct
sales of parts to a small but growing number of its retail customers. The
Company's parts business is also supported by a network established by Deere
which connects each industrial and agricultural store to Deere's warehouses. The
Company does not accept returns of equipment, but does accept returns of parts.
The level of parts returns historically has not been material.
STORE OPERATIONS
The Company believes that management of its stores at the individual store
level is crucial to the success of its overall operations. Each store has its
own manager, who reports directly to one of the four Senior Vice Presidents of
Operations. The Company's store managers on average have more than ten years of
experience in industrial or agricultural sales and more than five years of
experience as a store manager. Each store also typically is staffed by a parts
manager and service manager. The Company has a bonus plan for its store managers
which rewards managers who demonstrate strong performance based on sales growth,
net income, and return on assets. See "Management--Cash Bonus Incentives." Sales
personnel
42
<PAGE>
are compensated and evaluated on their success rate in obtaining sales, their
systematic contacting of potential customers, and their advance awareness of
potential sales in their area of responsibility. The Company also has recently
adopted the Incentive Plan, which will be used to provide stock-based incentive
compensation to store managers and others. See "Management--1996 Stock Incentive
Plan." Under the Company's operating model, decision-making for customer-related
issues is decentralized, with each store manager responsible for such matters as
the type of equipment to stock, equipment pricing, customer credit approvals,
staffing levels, and customer satisfaction.
MANAGEMENT STRUCTURE
Management of the day-to-day operations of the Company's industrial and
agricultural networks is coordinated by the Company's four Senior Vice
Presidents of Operations, including monitoring the Company's effectiveness and
actual day-to-day performance in areas such as annual budgets, inventory
forecasting, and marketing efforts. Historically, each Division had one Senior
Vice President. As the Company has expanded through its recent acquisitions, the
Company has appointed two Senior Vice Presidents for its Industrial Division and
two Senior Vice Presidents for its Agricultural Division. Responsibility for
stores and operations within each Division is assigned based on the geographical
locations of stores. The Company works to maintain open communications among the
stores to identify and pursue potential areas of growth.
The Company maintains a small corporate staff at its headquarters in Fargo
and in Minneapolis. The corporate staff handles corporate planning, financial
reporting and analysis, execution of the Company's business strategy, and other
centralized functions for the Company's overall operations. The corporate staff
focuses on functions that are not directly related to interactions with
customers such as accounting systems, training, purchasing, internal
communication systems, facilities management, employee recruitment, benefit plan
management, and Company-wide standard policies and procedures.
SALES AND MARKETING
The Company has developed and implemented a comprehensive marketing program.
Action plans are developed for each store and monitored on a regular basis.
Centralized marketing efforts include setting forecasts, developing marketing
strategies, establishing market share goals, initiating public relations, and
choosing advertising mediums to be used. Each individual store is responsible
for its own targeted marketing program for its particular customer base.
The Company is highly proactive with existing and potential customers in
both its industrial and agricultural operations. The Company attempts to
increase customer awareness of its products and services through its targeted
direct mailings, advertisements in trade journals, and participation in trade
shows. Open houses, service clinics, and seminars on a variety of topics such as
agri-business, servicing of equipment, and preventive maintenance are used to
build and maintain the Company's customer base. In addition to its own marketing
efforts, the Company actively participates in the advertising and promotional
programs of Deere and other suppliers. The Company also participates in
cooperatively funded programs with suppliers, including advertising in trade
journals, participating in trade shows sponsored by such suppliers, and
developing point-of-purchase in-store displays of various equipment and parts.
Building strong name recognition throughout its target markets is an
important part of the Company's marketing program. Accordingly, the Company has
implemented programs to continually enhance recognition of the Company's
corporate name and logomark through consistent design elements in its signage,
facilities, vehicle identification program, merchandising and point-of-purchase
programs, and employee uniform and clothing standards.
Product support also is an important part of the Company's marketing
program. The Company believes that product support plays a key role in
establishing and maintaining solid customer relationships. For both its
industrial and agricultural operations, the Company promotes its ability to
support both the
43
<PAGE>
products it sells and products sold by others. The parts and service departments
are coordinated and operated as one function, providing a cooperative effort in
providing solutions for the customer. To increase its knowledge of its existing
and potential customers, the Company uses a sophisticated computerized database
to track each customer, identify in advance potential purchases of industrial
and agricultural equipment, and maintain a comprehensive record as to equipment
purchases, anticipated equipment needs, and individual customer preferences. The
Company also conducts training programs for its store managers and sales
personnel on sales techniques and methods for building stronger customer
relationships.
DEALERSHIP AGREEMENTS
DEERE INDUSTRIAL DEALER AGREEMENTS. The Company has entered into agreements
with Deere which authorize the Company to act as a dealer of Deere construction,
utility, and forestry equipment (the "Industrial Dealer Agreements"). The
Company's areas of responsibility for the sale of Deere industrial equipment
are: (i) in the Midwest: almost all of Minnesota, North Dakota, and South
Dakota, and small portions of Iowa and Wyoming; (ii) in the Southwest: Arizona
and part of Southern California; and (iii) in the South Central: North Central
Texas, including the Dallas-Fort Worth and Waco metropolitan areas.
Pursuant to the Industrial Dealer Agreements, the Company is required, among
other things, to maintain suitable facilities, provide competent management,
actively promote the sale of the equipment covered by the agreements in the
designated areas of responsibility, fulfill the warranty obligations of Deere,
maintain inventory in proportion to the sales potential in each area of
responsibility, provide service and maintain sufficient parts inventory to
service the needs of its customers, maintain adequate working capital, and
maintain stores only in authorized locations. Deere is obligated to make
available to the Company any finance plans, lease plans, floor plans, parts
return programs, sales or incentive programs or similar plans or programs it
offers to other dealers. Deere also provides the Company with promotional items
and marketing materials prepared by Deere for its dealers. The Industrial Dealer
Agreements also entitle the Company to use John Deere trademarks and tradenames,
with certain restrictions. For a description of the rights of Deere to terminate
its dealer agreements with the Company, see "Risk Factors--Deere Termination
Rights."
DEERE AGRICULTURAL DEALER AGREEMENTS. The Company has entered into
non-exclusive dealership agreements with Deere for each of its agricultural
stores, which authorize the Company to act as a dealer in Deere agricultural
equipment (the "Agricultural Dealer Agreements"). The Agricultural Dealer
Agreements establish the Company's specific authorized store locations. The
terms of the Agricultural Dealer Agreements are substantially the same as the
Industrial Dealer Agreements. All of the agricultural stores also offer John
Deere lawn and grounds equipment, for which the Company has entered into
non-exclusive Lawn and Garden Dealer Agreements containing substantially the
same terms as the Agricultural Dealer Agreements. For a description of the
rights of Deere to terminate its dealer agreements with the Company, see "Risk
Factors--Deere Termination Rights."
DEERE DEALERSHIP AGREEMENTS--OTHER PROVISIONS. The Deere Agreement also
provides that the Company cannot engage in discussions to acquire other Deere
dealerships without Deere's prior written consent, which Deere may withhold in
its sole discretion. In addition, Deere has the right to have input into the
selection of Company's management personnel, including store managers, and to
have input with respect to the selection of nominees to the Company's Board of
Directors and the removal of directors. The prior consent of Deere is required
for the opening of any store within the Company's designated areas of
responsibility and for the acquisition of any other Deere dealership. There can
be no assurance that any such consent will be given by Deere. In addition, the
Company is prohibited from making acquisitions, initiating new business
activity, paying dividends, repurchasing its capital stock, or making any other
distributions to stockholders if the Company's equity to assets ratio is below
30%, as calculated by Deere under the Deere Agreement, or if such ratio would
fall below 30% as a result of such action. The Company
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<PAGE>
believes its equity-to-assets ratio at the time of consummation of this Offering
and at the end of fiscal 1997 will be at least 30%. In the event of Mr. Offutt's
death, Deere has the right to terminate the Company's dealer appointments upon
the occurrence of a "change of control." See "Risk Factors--Deere Termination
Rights."
The Company's Deere dealer appointments are not exclusive. Deere could
appoint other dealers in close proximity to the Company's existing stores. The
areas of responsibility assigned to the Company's industrial dealerships can be
reduced by Deere upon 120 days prior written notice. In addition, the dealer
agreements can be amended at any time without the Company's consent, so long as
the same amendment is made to the dealer agreements of all other Deere dealers.
Deere also has the right to sell directly to federal, state, or local
governments, as well as national accounts. To the extent Deere appoints other
dealers in the Company's markets, reduces the areas of responsibility relating
to the Company's industrial stores, or amends the dealer agreements or directly
sells substantial amounts of equipment to government entities and national
accounts, the Company's results of operations and financial condition could be
adversely affected.
OTHER SUPPLIERS. In addition to Deere, the Company is an authorized dealer
at various stores for suppliers of other equipment. The terms of such
arrangements vary, but most of the dealership agreements contain termination
provisions allowing the supplier to terminate the agreement after a specified
notice period (usually 180 days), upon a change of control, and in the event of
Mr. Offutt's death.
FLOOR PLAN FINANCING
Having adequate wholegoods and parts inventories at each of the Company's
industrial and agricultural equipment stores is important to meeting its
customer needs and to its sales. Accordingly, the Company attempts to maintain
at each store, or have readily available at other stores in its industrial and
agricultural store networks, sufficient inventory to satisfy anticipated
customer needs. Inventory levels fluctuate throughout the year and tend to
increase before the primary sales seasons for agricultural equipment. The cost
of financing its inventory also is an important factor affecting the Company.
See "Management's Discussion and Analysis of Financial Condition and Results of
Operations--Liquidity and Capital Resources."
DEERE. Deere and Deere Credit offer floor plan financing to Deere dealers
for extended periods, to enable dealers to carry representative inventories of
equipment and to encourage the purchase of goods by dealers in advance of
seasonal retail demand.
Deere charges variable market rates of interest at or over the prime rate on
balances outstanding after any interest-free periods and retains a security
interest in the inventories, which it inspects periodically. The interest-free
periods, which Deere changes periodically, are currently six to eight months for
agricultural equipment and one to five months for industrial equipment. Deere
also provides financing for used equipment accepted in trade, repossessed
equipment, and approved equipment from other suppliers, and receives a security
interest in such equipment.
The Company has a line of credit for $50.0 million with Deere Credit. After
the interest-free period, the Company generally shifts its financing to Deere
Credit to obtain a lower interest rate. The rate charged by Deere Credit is at
the prime rate, which as of December 31, 1996 was 8.25%.
OTHER SUPPLIERS. For equipment from suppliers other than Deere, the Company
primarily finances its inventory through its line of credit at Ag Capital.
Financing also may be available through floor plan financing programs provided
by the suppliers, which may be financed by such suppliers themselves or through
third party lenders, depending on which option provides the Company with the
most favorable terms. The interest rate on the Ag Capital line of credit is the
prime rate, which as of December 31, 1996 was 8.25%. See "Certain Relationships
and Related Transactions."
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<PAGE>
CUSTOMER FINANCING OPTIONS
Financing options for customer purchases support the sales activities of the
Company. The primary financing for purchases by the Company's customers are
through programs offered by Deere and Ag Capital. The Company does not grant
extended payment terms to its customers.
DEERE. Deere's credit subsidiaries provide and administer financing for
retail purchases and leases of new and used equipment, primarily through Deere
Credit. Deere Credit retains a security interest in the equipment financed. A
portion of the customer financing provided by Deere is recourse to the Company.
Deere retains a reserve for amounts that the Company may be obligated to pay
Deere, by retaining 1% of the face amount of each contract financed until the
reserve reaches 3% of the total dollar amount of contracts outstanding. In the
event a customer defaults in paying Deere and there is a deficiency in the
amount owed to Deere, the Company has the option of paying the amount due under
its recourse obligations or using a portion of its reserve. The Company's
liability is capped at the amount of the reserve, which, as of October 31, 1996,
was $847,000. See Note 9 of the Combined Financial Statements. The Company's
historical losses in connection with this contingent recourse liability have not
been material.
AG CAPITAL AND OTHERS. Ag Capital, a cooperative lending institution, also
provides financing to the Company's customers. Some of the financing provided by
Ag Capital to its customers also is recourse to the Company. This contingent
liability is capped at an amount equal to 10% of the amount of the aggregate
outstanding contracts, which contingent liability was approximately $3.4 million
as of October 31, 1996. Another Offutt Entity, Farmers Equipment Rental, also
has provided financing to customers for which the Company has some contingent
recourse liability, which contingent liability was approximately $900,000 as of
October 31, 1996. This contingent liability also is capped at an amount equal to
10% of the amount of the aggregate outstanding contracts. See "Certain
Relationships and Related Transactions" and Note 9 to the Combined Financial
Statements.
REPURCHASE CONTRACTS. The Company enters into repurchase contracts with
certain of its customers, primarily its governmental customers, pursuant to
which the Company, at the request of the customer, may be required to repurchase
the equipment at a price fixed in the contract after a specified period of time,
typically five years, subject to certain conditions. The repurchased equipment
is then sold by the Company as used equipment. Although there can be no
assurance that the proceeds to the Company upon sale of such equipment will be
equal to or exceed the repurchase price paid to the customer for such equipment,
the Company believes its multiple stores facilitate the sale of repurchased
equipment. See Note 9 to the Combined Financial Statements.
PERSONAL GUARANTY
Ronald D. Offutt, the Chairman, Chief Executive Officer, and principal
stockholder of the Company, has personally guaranteed all amounts owed to Deere
and its affiliates. Under the Deere Agreement, the Company is permitted to
replace the personal guaranty of Mr. Offutt with a letter of credit in an amount
and from a financial institution acceptable to Deere. The amount of the letter
of credit required by Deere would be adjusted annually based on the level of
Company's floor plan financing with Deere and its affiliates and the Company's
equity to assets ratio. If Mr. Offutt should elect not to continue to provide
his personal guaranty, the Company would be required to establish the letter of
credit. As of October 31, 1996, the Company would be required to have a letter
of credit of approximately $41.0 million to secure the then outstanding Deere
floor plan financing, which was approximately $89.1 million as of October 31,
1996, at an annual cost of approximately $205,000.
COMPETITION
The Company's industrial equipment stores compete with distributors of
equipment produced by manufacturers other than Deere, including Case,
Caterpillar, and Komatsu. The Company also faces
46
<PAGE>
competition from distributors of manufacturers of specific types of industrial
equipment, including JCB backhoes, Kobelco excavators, Komatsu wheel loaders and
crawler dozers, and Bobcat skid loaders. The Company's agricultural equipment
stores compete with distributors of equipment from suppliers other than Deere,
including Agco, Case, and New Holland. The Company's agricultural equipment
stores also compete with other Deere dealerships. Competing Deere agricultural
stores may be located in close proximity to one of the Company's agricultural
stores. Competition among equipment dealers is primarily based on price, value,
reputation, quality, and design of the products offered by the dealer, the
customer service and equipment servicing provided by the dealer, and the
accessibility of the stores. The Company believes that its broad product line,
product support, and superior quality products will enable it to compete
effectively.
PRODUCT WARRANTIES
Product warranties for new equipment and parts are provided by the supplier.
The term and scope of these warranties vary greatly by supplier and by product.
The Company does not provide additional warranties to retail purchasers of new
equipment. Deere pays the Company for repairs to Deere equipment under warranty.
The Company generally sells used equipment "as is" and without manufacturer's
warranty, although manufacturers sometimes provide limited warranties if the
manufacturer's original warranty is transferrable and has not yet expired.
Typically, the Company does not provide additional warranties on used equipment.
TRADEMARKS
RDO Equipment is a registered servicemark owned by the Company. John Deere
is a registered trademark of Deere & Company, the Company's use of which is
authorized under the Deere dealership agreements. Trademarks and tradenames of
new equipment obtained from suppliers other than Deere are licensed from their
respective owners. The Company historically has operated each of its industrial
and agricultural stores under either the RDO Equipment tradename or, for
purposes of continuity at a particular store if there was strong local name
recognition and customer loyalty, the name historically used by the Deere
dealership in that location. Beginning in fiscal 1995, the Company began to
implement a program to operate all of its industrial and agricultural stores
under the RDO Equipment tradename and servicemark. The Company expects to
complete this program at its existing stores in fiscal 1998. Each store also is
identified as either an authorized John Deere industrial or agricultural
equipment store and may display signs of other suppliers.
PRODUCT LIABILITY AND LEGAL PROCEEDINGS
From time to time, the Company is involved in various litigation matters
involving ordinary and routine claims incidental to the Company's business. The
Company believes that there are no claims or litigation pending, the outcome of
which could have a material adverse effect on the financial position or results
of operations of the Company; however, the ultimate legal and financial
liability of the Company cannot be estimated with certainty. Products that have
been or may be sold by the Company may expose it to potential liabilities for
personal injury or property damage claims relating to the use of such products.
The Company maintains third-party liability insurance, including product
liability coverage, in amounts deemed adequate by management. To date, the
aggregate costs to the Company for claims, including product liability actions,
have not been material. An uninsured or partially insured claim, or a claim for
which the manufacturer is not liable or does not assume responsibility, however,
could have a material adverse effect on the financial condition of the Company.
See "Risk Factors--Product Liability Risk."
ENVIRONMENTAL STANDARDS AND GOVERNMENT REGULATIONS
The Company's operations are subject to numerous federal, state, and local
rules and regulations, including laws and regulations designed to protect the
environment and to regulate the discharge of
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materials into the environment, primarily relating to its service operations.
Based on current laws and regulations, the Company believes that it is in
compliance with such laws and regulations and that its policies, practices, and
procedures are designed to prevent unreasonable risk of environmental damage or
violation of environmental laws and regulations and any resulting financial
liability to the Company and the Company is not aware of any federal, state, or
local laws or regulations that have been enacted or adopted, the compliance with
which would have a material adverse effect on the Company's results of
operations or would require the Company to make any material capital
expenditures. No assurance can be given that future changes in such laws or
regulations or changes in the nature of the Company's operations or the effects
of activities of prior occupants or activities at neighboring facilities will
not have an adverse impact on the Company's operations. See "Risk
Factors--Government Regulation."
EMPLOYEES
As of October 31, 1996, the Company employed 771 full-time employees. Of
this number, 13 employees were located at the Company's corporate offices and
employed in corporate administration. The balance of the employees were located
at the various stores: 94 were employed in administration, 149 in equipment
sales and rental operations, 121 in parts sales, and 394 in servicing equipment.
None of the Company's employees is covered by a collective bargaining agreement.
PROPERTIES
The Company owns the real estate for eight of its stores, leases its
executive offices and eight stores from various Offutt Entities, and leases 16
stores from unrelated third parties. Lease terms range from one to ten years and
some leases include an option to purchase the leased property. See "Certain
Relationships and Related Transactions." The Company believes that all of its
facilities are in good operating condition.
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MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
The directors and executive officers of the Company are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION(S)
- ------------------------------ ---- ----------------------------------------
<S> <C> <C>
Ronald D. Offutt(1)........... 54 Chairman, Chief Executive Officer, and a
Director
Paul T. Horn(1)............... 54 President, Chief Operating Officer, and
a Director
Allan F. Knoll(1)(2).......... 53 Chief Financial Officer, Secretary, and
a Director
Richard J. Moen............... 49 Chief Administrative Officer and
Treasurer
Gary R. Allan................. 48 Senior Vice President,
Agricultural--Northwest Operations
H. David Frambers............. 53 Senior Vice President,
Industrial--Midwest and South Central
Operations
Larry B. Kerkhoff............. 43 Senior Vice President,
Agricultural--Midwest Operations
Larry E. Scott................ 54 Senior Vice President,
Industrial--Southwest Operations
Mark A. Doda.................. 34 Controller
Bradford M. Freeman(2)(4)..... 54 Director
Ray A. Goldberg(3)(4)......... 70 Director
Norman M. Jones(3)(4)......... 66 Director
James D. Watkins(2)(4)........ 49 Director
</TABLE>
- ------------------------
(1) Member of Executive Committee following completion of this Offering
(2) Member of the Compensation Committee following completion of this Offering
(3) Member of the Audit Committee following completion of this Offering
(4) Will become a director following completion of this Offering
RONALD D. OFFUTT. Mr. Offutt is the Company's founder, Chairman, Chief
Executive Officer, and principal stockholder. Mr. Offutt was first elected
President of the Company in 1968, upon formation of the Company. Mr. Offutt also
serves as Chief Executive Officer and Chairman of the Board of Offutt Co., and
he owns, controls, or manages the other Offutt Entities, which are engaged in a
variety of businesses such as farming, food processing, auto dealerships, and
agricultural financing activities, some of which transact business with the
Company. See "Certain Relationships and Related Transactions." Mr. Offutt will
continue to spend approximately 25% of his time on the Company's business. Mr.
Offutt is Chairman of the Board of Regents of Concordia College of Moorhead and
is a graduate of Concordia College of Moorhead with a degree in Economics.
PAUL T. HORN. Mr. Horn has served as President of the Company since August
1996 and as Chief Operating Officer and a Director of the Company since 1986.
Prior to October 1, 1996, he was an employee of Offutt Co. and spent
approximately 25% of his time on the business of the Company. Since such date,
he has been a full-time employee of the Company. Mr. Horn serves as a director
and officer and is a beneficial stockholder of many Offutt Entities, and he will
continue to hold many of these positions upon consummation of this Offering. See
"Certain Relationships and Related Transactions." Mr. Horn currently serves as
Chairman of the Board of Crop Growers Insurance Corp., a crop insurance company,
and Northern Grain Company, a regional grain elevator. Mr. Horn is a graduate of
Michigan State University with degrees in Business Administration and Agronomy.
ALLAN F. KNOLL. Mr. Knoll has served as Chief Financial Officer, Secretary,
and a Director of the Company since 1974. Mr. Knoll also serves as Chief
Financial Officer and Secretary of Offutt Co., and serves as a director and
officer and is a beneficial stockholder of many of the Offutt Entities. See
"Certain Relationships and Related Transactions." Mr. Knoll will continue to
spend approximately 25% of his time
49
<PAGE>
on the business of the Company. Mr. Knoll is a graduate of Moorhead State
University with degrees in Business Administration and Accounting.
RICHARD J. MOEN. Mr. Moen has served as the Chief Administrative Officer
and Treasurer of the Company since October 1996. Prior to joining the Company,
from August 1993 until September 1996, Mr. Moen served as Vice President--Legal
Services of ConAgra Diversified Products Companies, a division of ConAgra, Inc.
("ConAgra"), a diversified international food company. From March 1988 until
August 1993, Mr. Moen served as Executive Vice President--Administration,
General Counsel, Secretary, and a director of Golden Valley Microwave Foods,
Inc., a company specializing in food products designed for use in microwave
ovens. Mr. Moen is a graduate of Massachusetts Institute of Technology, with a
degree in Economics, and Harvard Law School.
GARY R. ALLAN. Mr. Allan has served as Senior Vice President,
Agricultural--Northwest Operations since the closing of the Washington
Acquisition in October 1996. Prior to that closing, Mr. Allan was the President
of the Washington agricultural stores and had held such position since 1986. He
is also a partner in Coho L.T.D., a diversified farming company located in
Pasco, Washington, and currently serves on the Board of Directors of Yakima
Federal Savings and Loan in Yakima, Washington. Mr. Allan attended Columbia
Basin College and Eastern Washington University.
H. DAVID FRAMBERS. Mr. Frambers has served as Senior Vice President,
Industrial--Midwest and South Central Operations since July 1996. With the
expansion of the Industrial Division, he became Vice President and General
Manager of the Industrial Division for the Midwest and Southwest regions and
held such position from 1991 to July 1996. Mr. Frambers served as Vice President
and General Manager of the Agricultural and Industrial Divisions from 1986 to
1991. Prior to joining the Company, he was the manager of a Deere agricultural
dealership in Grand Forks, North Dakota from 1979 to 1986. From 1968 to 1979 he
was employed by Deere in sales and marketing and held positions as the territory
manager based in Denver, Colorado, the store manager at Fargo Implement, Fargo,
North Dakota, and a division sales manager for Deere in Minneapolis, Minnesota.
He is a graduate of Kansas State College with a degree in Industrial Technology.
LARRY B. KERKHOFF. Mr. Kerkhoff has served as Senior Vice President,
Agricultural--Midwest Operations since July 1996. Prior to that time, he was the
manager of the Company's agricultural equipment store in Breckenridge,
Minnesota, since 1991. He has been in agri-business for over 20 years. Prior to
joining the Company, he was with Kibble Equipment, a Deere agricultural
dealership, in Montevideo, Minnesota. He is a graduate of Mankato Area
Vocational Institute--Diesel Mechanics Program and Mankato State University with
a degree in Business Administration.
LARRY E. SCOTT. Mr. Scott has served as Senior Vice President,
Industrial--Southwest Operations since July 1996. Prior to that time, he served
as a Vice President and General Manager of the Agricultural Division since 1991.
Mr. Scott has been involved in management in the agricultural business for 24
years. He managed the Company's agricultural stores in Casselton, North Dakota,
Breckenridge, Minnesota, and Fargo, North Dakota prior to becoming Vice
President of the Agricultural Division. He is a graduate of North Dakota State
University with a degree in Mathematics and a minor in Business Administration.
MARK A. DODA. Mr. Doda has served as Controller of the Company since
September 1992. Prior to joining the Company, Mr. Doda served as a Division
Controller for Graco, Inc., a manufacturer of fluid handling systems, from
January 1992 to September 1992. From January 1985 to December 1991, Mr. Doda
worked for Deloitte & Touche LLP. Mr. Doda is a graduate of the University of
North Dakota with a degree in Accounting.
BRADFORD M. FREEMAN. Mr. Freeman will become a director following the
consummation of this Offering. Mr. Freeman is a founding partner of Freeman
Spogli & Co., a private equity investment firm with offices in Los Angeles and
New York. Since its founding in 1983, Freeman Spogli & Co. has organized
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the acquisitions of 22 companies with aggregate transaction values in excess of
$6.0 billion. Mr. Freeman serves on the Board of Trustees of Stanford
University. Mr. Freeman is a graduate of Stanford University and Harvard
Business School.
RAY A. GOLDBERG. Mr. Goldberg will become a director following the
consummation of this Offering. Mr. Goldberg is currently the Moffett Professor
of Agriculture and Business and head of the Agribusiness Program at the Harvard
Graduate School of Business Administration where he has been a professor since
1955. Mr. Goldberg also serves as a director of Pioneer Hi-Bred International,
Inc., a seed company, and is a member of the Advisory Council to Rabobank U.S.A.
NORMAN M. JONES. Mr. Jones will become a director following the
consummation of this Offering. From 1995 to the present, Mr. Jones has been the
Chairman of First Bank Savings, fsb, the thrift subsidiary of First Bank System,
Inc. Prior to 1995, Mr. Jones was the Chairman and Chief Executive Officer of
Metropolitan Financial Corporation, a regional thrift holding company, where he
was employed from 1952 through 1995. Mr. Jones has served on the committees of
numerous savings and loan organizations and he currently serves on the Board of
Directors of First Bank System, Inc., and Lutheran Health Systems, Inc., an
owner and manager of a network of hospitals. Mr. Jones is a member of the Board
of Regents for Concordia College of Moorhead, Minnesota, a board member and
Chairman of Luther Seminary Foundation, an Advisory Board Member for
Slumberland, Inc., a retail furniture chain, and an Advisory Board Member for
the Board of Pension for the Evangelical Lutheran Church of America. Mr. Jones
is a graduate of Concordia College of Moorhead.
JAMES D. WATKINS. Mr. Watkins will become a director following the
consummation of this Offering. Mr. Watkins founded Golden Valley Microwave
Foods, Inc. in 1978 and continuously served as its Chairman and Chief Executive
Officer until it was acquired by ConAgra in July 1991. Since that acquisition,
Mr. Watkins has served in ConAgra's Office of the President as President and
Chief Operating Officer of ConAgra Diversified Products Companies. Mr. Watkins
currently serves as a Trustee of Ronald McDonald House Charities and as a member
of the Board of Overseers, Carlson School of Management, University of
Minnesota. Mr. Watkins is a graduate of the University of Minnesota with a
degree in Economics and Fine Arts.
Mr. Scott is the brother-in-law of Mr. Offutt. There are no other family
relationships among the directors and executive officers of the Company. Under
the Deere Agreement, Deere has the right to have input with respect to the
selection of nominees to the Company's Board of Directors and the removal of
directors.
TERM OF OFFICE
Members of the Board of Directors are elected annually to serve for one-year
terms or until their successors are elected and qualify.
BOARD COMMITTEES
The Board of Directors has established three committees of the Board which
will take effect upon consummation of this Offering: the Executive Committee,
the Audit Committee, and the Compensation Committee. The Executive Committee has
the authority to take all actions that the Board as a whole is able to take,
except as limited by applicable law. The Audit Committee recommends the
appointment of auditors and oversees the accounting and audit functions of the
Company. The Compensation Committee determines executive officers' and key
employees' salaries and bonuses and administers the Incentive Plan. Upon
consummation of this Offering, Messrs. Offutt, Horn, and Knoll will be appointed
to serve on the Executive Committee, Messrs. Knoll, Freeman, and Watkins will be
appointed to serve on the Compensation Committee, and Messrs. Goldberg and Jones
will be appointed to serve on the Audit Committee.
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<PAGE>
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
In fiscal 1996, the Company had no Compensation Committee but the Board of
Directors performed equivalent functions. Of the members of the Board of
Directors in such year, Mr. Offutt served as the Company's Chairman and Chief
Executive Officer, Mr. Horn served as the Chief Operating Officer, and Mr. Knoll
served as the Company's Chief Financial Officer.
DIRECTOR COMPENSATION
Directors who are not employees or officers of the Company will receive
$1,000 per month and $500 for each Board and committee meeting attended.
Directors who are employees or officers of the Company do not receive additional
compensation for service as a director. In addition, all directors are entitled
to be reimbursed for certain expenses in connection with attendance at Board and
committee meetings. At the time such person first becomes a director of the
Company, each non-employee director will receive options to purchase 10,000
shares of Class A Common Stock, with such vesting periods as the Compensation
Committee may determine. See "--1996 Stock Incentive Plan."
EXECUTIVE COMPENSATION
Historically Messrs. Offutt, Horn, and Knoll were not compensated directly
by the Company for their services, which represented approximately 25% of each
of their time. Their services were provided to the Company pursuant to an
arrangement with Offutt Co. The compensation paid by Offutt Co. to each of
Messrs. Offutt, Horn, and Knoll for their services to the Company was $30,000,
$50,000, and $50,000 in each of fiscal 1994, 1995, and 1996, respectively.
Commencing as of October 1, 1996, each of these officers has been paid directly
by the Company for their services to the Company. Messrs. Offutt and Knoll
receive salaries from the Company of $50,000 per year for their part-time
services, and Mr. Horn receives from the Company a salary of $150,000 per year
for his full-time services. Messrs. Offutt, Horn, and Knoll each are eligible
for an incentive bonus from the Company.
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<PAGE>
The following table describes the compensation paid or earned for services
rendered to the Company in fiscal 1996 by the Company's Chief Executive Officer
and four most highly compensated other executive officers.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
ANNUAL COMPENSATION(1)
------------------------------- ALL OTHER
NAME AND PRINCIPAL POSITION SALARY CASH BONUS COMPENSATION(1)
- ---------------------------------------- ------------- ------------- ----------------
<S> <C> <C> <C>
Ronald D. Offutt
Chairman and Chief Executive
Officer............................... $ 50,000(2) -- --
Paul T. Horn
President and Chief Operating
Officer............................... $ 50,000(2) -- --
Allan F. Knoll
Chief Financial Officer and
Secretary............................. $ 50,000(2) -- --
H. David Frambers
Senior Vice President,
Industrial--Midwest and South Central
Operations............................ $ 52,000 $ 148,813 --
Larry E. Scott
Senior Vice President,
Industrial--Southwest Operations...... $ 52,000 $ 147,986 --
</TABLE>
- ------------------------
(1) No executive officer of the Company received perquisites or other personal
benefits exceeding $50,000 or 10% of such officer's total annual salary and
bonus.
(2) Prior to October 1, 1996, Messrs. Offutt, Horn, and Knoll were not paid
directly by the Company, but were compensated by Offutt Co. The amount
reflected in the table is the amount of compensation paid for the services
provided by each of them to the Company in fiscal 1996.
No option grants were made during fiscal 1996 to any of the executive
officers named in the Summary Compensation Table or any other employee of the
Company.
1996 STOCK INCENTIVE PLAN
The Board of Directors and stockholders of the Company have adopted the
Incentive Plan. The Incentive Plan is intended to advance the best interests of
the Company and its stockholders by attracting, retaining, and motivating
employees, directors, advisors, and consultants of the Company. The Incentive
Plan provides for the grant of stock options (which may be non-qualified stock
options or incentive stock options for tax purposes), stock appreciation rights
issued independent of or in tandem with such options ("SARs"), restricted stock
awards, and performance stock awards, thereby increasing the personal stake of
Incentive Plan participants in the continued success and growth of the Company.
The Incentive Plan is administered by the Compensation Committee (the
"Committee"), which consists of three members, including at least two
non-employee directors of the Company who are disinterested within the meaning
of Rule 16b-3 under the Securities Exchange Act of 1934, as amended (the
"Exchange Act"). The Committee has broad authority to interpret and administer
the Incentive Plan, including the power to grant and modify awards and the power
to limit or eliminate in its discretion as it may deem advisable to comply with
or obtain preferential treatment under any applicable tax or other law, rule, or
regulation. The Committee also has broad authority to accelerate the vesting of
an award or the time at which any award is exercisable or to waive any condition
or restriction on the vesting, exercise, or receipt of any award. The Board of
Directors may at any time amend, suspend, discontinue, or terminate the
Incentive Plan without stockholder approval or approval of participants, subject
to certain limitations.
Initially, 1,250,000 shares of Class A Common Stock are available for
issuance under the Incentive Plan. In addition, as of February 1 of each year
the Incentive Plan is in effect, if the total number of shares
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<PAGE>
of Common Stock issued and outstanding, not including any shares of Class A
Common Stock issued under the Incentive Plan, exceeds the total number of shares
of Common Stock issued and outstanding as of February 1 of the preceding year
(or, for fiscal 1997, as of the commencement of the Incentive Plan), the number
of shares available will be increased by an amount such that the total number of
shares available for issuance under the Incentive Plan equals 10% of the total
number of shares of Common Stock outstanding, not including any shares issued
under the Incentive Plan. Lapsed, forfeited, or cancelled awards will not count
against these limits. Cash exercises of SARs and cash settlements of other
awards will also not be counted against these limits but the total number of
SARs and other awards settled in cash shall not exceed the total number of
shares authorized for issuance under the Incentive Plan (without reduction for
issuances).
As of the date of this Prospectus, no awards have been made under the
Incentive Plan. Prior to consummation of this Offering, the Company plans to
grant options to purchase an aggregate of approximately 600,000 shares of Class
A Common Stock under the Incentive Plan at the initial public offering price.
CASH BONUS INCENTIVES
The Company expects that annual cash bonuses will be a substantial portion
of the cash compensation of its management team. For its senior management,
bonuses are determined based on achievement of a variety of factors, including
targeted return on assets and earnings per share growth. Each store manager is
evaluated based on a number of performance criteria, including efficiency of
asset management, store profitability, sales growth, productivity, and product
support. Bonuses are accrued monthly based on the actual year-to-date
performance of the managers. A portion of each bonus is paid quarterly, with the
balance paid after the final bonus amount is determined at the end of each year.
401(K) EMPLOYEE SAVINGS PLAN
The Company's employees participate in a 401(k) employee savings plan,
sponsored by an Offutt Entity, which covers substantially all employees. The
Company matches a portion of employee contributions up to an annual maximum of
$900 per employee. Contributions to the plan by the Company were $121,000,
$151,000, and $194,000 for fiscal 1994, 1995, and 1996, respectively, and
$151,000 and $166,000 for the nine months ended October 31, 1995 and 1996,
respectively.
LIMITATION OF LIABILITY AND INDEMNIFICATION OF OFFICERS AND DIRECTORS
The Company's Certificate of Incorporation contains provisions (i)
eliminating the personal liability of its directors, officers, employees, and
other agents for monetary damages resulting from breaches of their fiduciary
duty to the fullest extent permitted by the law, and (ii) indemnifying its
directors and officers to the fullest extent permitted by the DGCL. These
provisions in the Certificate of Incorporation do not eliminate the duty of care
and, in appropriate circumstances, equitable remedies such as an injunction or
other forms of non-monetary relief would remain available under Delaware law.
Each director will continue to be subject to liability for breach of a
director's duty of loyalty to the Company or its stockholders, for acts or
omissions not in good faith or involving intentional misconduct, for knowing
violations of law, for any transaction from which the director derived an
improper personal benefit, and for improper distributions to stockholders. These
provisions also do not affect a director's responsibilities under any other
laws, such as the federal securities laws or state or federal environmental
laws.
The DGCL and the Company's Certificate of Incorporation also provide that
the Company shall, under certain circumstances and subject to certain
limitations, indemnify any person made or threatened to be made a party to a
proceeding by reason of that person's former or present official capacity with
the Company against judgments, penalties, fines, settlements, and reasonable
expenses. Any such person is also entitled, subject to certain limitations, to
payment or reimbursement of reasonable expenses in
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advance of the final disposition of the proceeding. The Company has entered into
indemnification agreements with its directors and executive officers which
indemnify such persons to the fullest extent permitted by its Certificate of
Incorporation, its Bylaws, and the DGCL. The Company also intends to obtain
directors' and officers' liability insurance.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The Company historically has engaged, and expects to engage in the future,
in various business transactions with various of the Offutt Entities, including
Ag Capital, a significant provider of working capital and floor plan financing
to the Company and financing to the Company's customers. Messrs. Offutt, Horn,
and Knoll each serve as officers or directors and have ownership interests in
various of the Offutt Entities, including all of the Offutt Entities which have
engaged in and will continue to engage in transactions with the Company, as
described below. The Company believes that all of these transactions were made
on terms no less favorable to the Company than could have been obtained from
unaffiliated third parties. All future transactions between the Company and any
of the Offutt Entities or any of the Company's officers, directors, principal
stockholders, and their affiliates will be approved both by a majority of all
members of the Company's Board of Directors and by a majority of the independent
and disinterested outside directors, and will continue to be on terms believed
to be no less favorable to the Company than could be obtained from unaffiliated
third parties.
The Company had sales to the Offutt Entities of agricultural equipment and
related parts and service totalling $1.9 million, $3.5 million, $5.5 million,
and $4.9 million in fiscal 1994, 1995, 1996, and the nine months ended October
31, 1996, respectively.
The Company leases eight of its dealership facilities and many of its
service vehicles from an Offutt Entity. Total rent expense for these leases
totalled $579,000, $737,000, $1.1 million, and $1.1 million in fiscal 1994,
1995, 1996, and the nine months ended October 31, 1996, respectively. These
leases have terms expiring at various times from 1997 to 2007.
In October 1995, the Company acquired all the outstanding capital stock of a
Deere agricultural equipment dealership located in Kindred, North Dakota, which
was controlled by Mr. Offutt, in exchange for 233,559 shares of the Company's
Class B Common Stock, $520,000 in cash, and a note payable for $375,000 which
bears interest at a rate per annum of 10% and is due January 31, 1999. The
amount of consideration paid for the capital stock of the dealership was
determined by the Company's Board of Directors. See Note 3 to the Combined
Financial Statements.
The Company receives corporate support services from various Offutt
Entities, including office space for its executive offices, use of conference
and meeting facilities, use of an aircraft for Company business, administration
of the Company's 401(k) plan, and real estate management services. The Company
has historically paid for such services based on its pro rata usage of services
as compared to the usage of other Offutt Entities or at a fixed charge. Total
charges for such services totalled $48,000, $56,000, $77,000, and $94,000 in
fiscal 1994, 1995, 1996, and the nine months ended October 31, 1996,
respectively. Effective upon consummation of this Offering, all such services
will be provided to the Company pursuant to a three-year Corporate Services
Agreement, which is terminable by the Company in whole or in part on 30 days'
notice, on the same cost basis as in prior years.
Ag Capital and Farmers Equipment Rental provide financing to the Company's
customers. The total amounts of such customer financing outstanding as of the
end of fiscal 1994, 1995, 1996, and the nine months ended October 31, 1996, were
$12.2 million, $24.3 million, $32.8 million, and $43.8 million, respectively. A
portion of the financing provided by Ag Capital and Farmers Equipment Rental is
recourse to the Company. See "Business--Customer Financing Options" and Note 9
to the Combined Financial Statements. The Company finances certain of its
working capital needs, primarily inventory financing for non-Deere equipment,
fixed assets, and acquisitions through Ag Capital and other Offutt Entities.
Interest on such inventory financing typically bears interest at the prime rate
as it varies from time to time. Total
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interest paid to Offutt Entities was $771,000, $627,000, $849,000, and $829,000
in fiscal 1994, 1995, 1996, and the nine months ended October 31, 1996,
respectively. The total amount outstanding under these financing arrangements at
October 31, 1996 was $25.1 million, with an interest rate, as of that date, of
8.25%. See "Business--Floor Plan Financing" and Notes 5 and 6 to the Combined
Financial Statements as to floor plan payables, notes payable, and long-term
debt due to various Offutt Entities.
To facilitate sales to certain customers, the Company guarantees a portion
of the outstanding balances of certain customer notes and lease contracts
financed by third parties, including customer financing provided by Ag Capital
and other Offutt Entities. The amount guaranteed by the Company to Ag Capital
and other Offutt Entities for customer financing was $4.4 million as of October
31, 1996.
In September 1996, the Company entered into an agreement to acquire MVI, a
company controlled by Mr. Offutt, in exchange for 191,725 shares of Class B
Common Stock. The exchange ratio was determined by the Company's Board of
Directors. Because the Company and MVI have been under common ownership of the
same controlling stockholder, the financial statements of the Company have been
combined with the financial statements of MVI in the financial statements
presented in this Prospectus. MVI is a dealer involved in the sale and service
of irrigation equipment and vegetable ventilation systems.
At various times in the past, to facilitate its money management the Company
has deposited funds with various Offutt Entities on a short-term and interest
bearing basis, as described in Note 4 to the Combined Financial Statements. In
addition, in connection with its reorganization in fiscal 1994, the Company had
notes outstanding from the stockholders in the amounts of $5.4 million and
$921,000 in fiscal 1994 and 1995, respectively. All such short-term notes were
repaid in fiscal 1995 and 1996 and the Company has no plans to make similar
arrangements in the future. See Notes 4 and 12 to the Combined Financial
Statements.
In October 1996, the Company sold its auto dealership, located in Lisbon,
North Dakota, to an Offutt Entity. The total purchase price for the net assets
was $123,000, which was considered by the Board of Directors of the Company to
be the market value of such net assets. The results of operations of this
dealership have not been included with the Company's results of operations for
any of the periods presented.
Effective as of July 1, 1996, the Company completed the Central Texas
Acquisition and financed $8.4 million of the purchase price with a short-term
note, due February 28, 1997, payable to Ag Capital. The interest rate on this
indebtedness is at the prime rate and, as of December 31, 1996 was 8.25%. A
portion of the net proceeds of this Offering will be used to pay this
indebtedness in full.
The principal stockholder and operator of the Deere agricultural dealership
acquired by the Company in the Washington Acquisition is Gary Allan, who, upon
completion of the acquisition, became the Senior Vice President,
Agricultural--Northwest Operations of the Company. The purchase price of the
Washington Acquisition was approximately $2.7 million, including cash in the
amount of $1.7 million, and a five-year note in the amount of $1.0 million, with
an interest rate of 8.25% per annum. In addition, the Company has agreed to make
an additional payment, up to a maximum of $750,000, in the event the acquired
Washington operations meet certain operating and profit objectives during the
next three years.
The Washington Acquisition was financed by the Company with a short-term
note in the amount of $1.7 million, due February 28, 1997, payable to Ag
Capital, which bears interest at prime, which was 8.25% as of December 31, 1996.
A portion of the net proceeds of this Offering will be used to repay this
indebtedness in full.
Under the Deere agreements, Mr. Offutt currently personally guarantees all
Company obligations to Deere. Mr. Offutt has the right to terminate his personal
guaranty at any time, which would require the Company to obtain a letter of
credit in an amount meeting Deere's then current guidelines from a bank
acceptable to Deere. As of October 31, 1996, the required amount of the letter
of credit to replace
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Mr. Offutt's personal guaranty was approximately $41.0 million, which the
Company estimates would cost approximately $205,000 per year.
Prior to fiscal 1997, a portion of the net income of the Company was
distributed to the stockholders, primarily to enable them to pay the tax
liability incurred by them due to the Company's election to be taxed as an S
corporation. Distributions declared to date in fiscal 1997 approximate the net
income of the Company for that period. Dividends declared and paid for the
fiscal years ended January 31, 1994, 1995, 1996, and during the nine-month
period ended October 31, 1996 aggregated approximately $2.3 million, $3.8
million, $4.3 million, and $7.5 million, respectively, and dividends declared
but unpaid as of October 31, 1996 were $2.2 million. This amount, plus net
income before taxes for the fourth quarter of fiscal 1997 (estimated to be
approximately $900,000), is expected to be distributed as a dividend to the
existing stockholders prior to consummation of this Offering. In addition,
simultaneously with the consummation of this Offering, the Company will pay from
the net proceeds of this Offering to its existing stockholders an additional
aggregate distribution of approximately $15.0 million. This amount represents
substantially all of the previously undistributed, accumulated net income of the
Company as of January 31, 1996 with respect to which such stockholders have
previously paid taxes. Purchasers of Class A Common Stock in this Offering will
not receive any of these distributions. The Company will enter into a tax
agreement with its existing stockholders prior to the consummation of this
Offering. This agreement will provide that, to the extent such undistributed
taxable income of the Company, as subsequently established in connection with
the filing of the Company's tax return for the Company's last S corporation tax
year, is less than these distributions, such stockholders will make a payment
equal to such difference to the Company, and if such undistributed taxable
income is greater than these distributions, the Company will make an additional
distribution equal to such difference to such stockholders. This agreement will
also provide that the Company will indemnify its existing stockholders against
additional income taxes resulting from adjustments made (as a result of a final
determination made by a competent tax authority) to the taxable income reported
by the Company as an S corporation for periods prior to termination of the S
corporation status, but only to the extent those adjustments provide a tax
benefit to the Company.
The Company and Mr. Offutt have entered into a mutual indemnification
agreement relating to federal and certain state and local income tax liabilities
of the Company and for tax years during which the Company has elected to be
treated as an S corporation. This agreement generally provides that the Company
will indemnify Mr. Offutt, and Mr. Offutt will indemnify the Company, against
any increase in the indemnified party's income tax liabilities (including
interest and penalties and all expenses, attorneys' fees, and accountants' fees
incurred in connection therewith) for those jurisdictions in which an S
corporation election was made or deemed to have been made. Mr. Offutt's
indemnification is limited to the prior S corporation distributions he has
received.
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PRINCIPAL STOCKHOLDERS
The following table sets forth information known to the Company with respect
to the beneficial ownership of the Common Stock as the date of this Prospectus,
and as adjusted to reflect the sale of the shares of Class A Common Stock
offered hereby, for (i) each person known by the Company to beneficially own
more than 5% of the Common Stock, (ii) each of the executive officers named in
the summary compensation table, (iii) each of the Company's current directors
and persons who will be a Company director following completion of this
Offering, and (iv) all executive officers, current directors, and directors
following completion of this Offering as a group. Except as otherwise indicated,
the Company believes that the beneficial owners of the Common Stock listed
below, based on information provided by such owners, have sole investment and
voting power with respect to such shares, subject to community property laws
where applicable. Unless otherwise noted, the address of each of the
stockholders named below is the Company's principal executive administrative
office.
<TABLE>
<CAPTION>
SHARES BENEFICIALLY OWNED SHARES BENEFICIALLY OWNED
PRIOR TO OFFERING AFTER OFFERING
--------------------------------------- ---------------------------------------
NUMBER OF NUMBER OF PERCENT OF NUMBER OF NUMBER OF PERCENT OF
CLASS A CLASS B TOTAL CLASS A CLASS B TOTAL
NAME OF STOCKHOLDER SHARES SHARES VOTING POWER(1) SHARES SHARES VOTING POWER(1)
- ------------------------------------ ---------- ---------- --------------- ---------- ---------- ---------------
<S> <C> <C> <C> <C> <C> <C>
Ronald D. Offutt.................... 7,458,492(2) 7,458,492 97.1% 7,458,492(2) 7,458,492 85.4%
Paul T. Horn........................ 413,580(3) -- 1.4 413,580(3) -- 1.2
Allan F. Knoll...................... 639,170(4) -- 2.1 639,170(4) -- 1.8
H. David Frambers................... 106,142 -- 0.4 106,142 -- 0.3
Larry E. Scott...................... 214,777 -- 0.7 214,777 -- 0.6
Bradford M. Freeman(5).............. -- -- -- -- -- --
Ray A. Goldberg(5).................. -- -- -- -- -- --
Norman M. Jones(5).................. -- -- -- -- -- --
James D. Watkins(5)................. -- -- -- -- -- --
All executive officers, current
directors, and directors following
completion of this Offering as a
group (13 persons)................ 7,966,908 7,458,492 98.8 7,966,908 7,458,492 86.9
</TABLE>
- ------------------------
(1) In calculating the percent of total voting power, the voting power of shares
of Class A Common Stock (one vote per share) and Class B Common Stock (four
votes per share) is aggregated.
(2) Includes the 7,458,492 shares of Class A Common Stock into which Mr.
Offutt's 7,458,492 shares of Class B Common Stock are convertible on a
one-for-one basis, including an aggregate of 991,600 shares of Class A
Common Stock that Messrs. Horn and Knoll have the right to acquire from Mr.
Offutt pursuant to option agreements.
(3) Includes 383,005 shares of Class A Common Stock that Mr. Horn has the right
to acquire from Mr. Offutt pursuant to an option agreement.
(4) Includes 608,595 shares of Class A Common Stock that Mr. Knoll has the right
to acquire from Mr. Offutt pursuant to an option agreement.
(5) Will become a director following completion of this Offering. Does not
include options for 10,000 shares of Class A Common Stock each will receive
upon consummation of this Offering, or shares each may purchase in this
Offering or subsequent thereto.
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DESCRIPTION OF CAPITAL STOCK
Upon consummation of this Offering, the authorized capital stock of the
Company will consist of 20,000,000 shares of Class A Common Stock and 7,500,000
shares of Class B Common Stock, each with a par value of $0.01 per share, and
500,000 shares of Preferred Stock, with no par value. As of the date of this
Prospectus, after giving effect to the stock split and stock exchange in
connection with the Company's reincorporation, there were 891,508 shares of
Class A Common Stock and 7,458,492 shares of Class B Common Stock outstanding,
which were held of record by 10 stockholders, and no shares of Preferred Stock
outstanding. After consummation of this Offering, 5,091,508 shares of Class A
Common Stock and 7,458,492 shares of Class B Common Stock will be issued and
outstanding, assuming no exercise of the Underwriters' over-allotment option.
The following summary of the terms and provisions of the Company's capital stock
does not purport to be complete and is qualified in its entirety by reference to
the Company's Certificate of Incorporation and Bylaws, which have been filed as
exhibits to the Company's registration statement, of which this Prospectus is a
part, and applicable law.
COMMON STOCK
DIVIDENDS. Holders of record of shares of Common Stock are entitled to
receive such dividends when, if, and as may be declared by the Board of
Directors out of funds legally available for such purposes. No dividends may be
declared or paid on any share of any class of Common Stock unless such dividend,
at the same rate per share, is simultaneously declared or paid on each share of
the other class of Common Stock. In the case of a stock dividend or
distribution, holders of Class A Common Stock are entitled to receive the same
percentage dividend or distribution as holders of Class B Common Stock and vice
versa, except that stock dividends and distributions shall be made in shares of
Class A Common Stock to the holders of Class A Common Stock and in shares of
Class B Common Stock to the holders of Class B Common Stock.
VOTING RIGHTS. Holders of Class A Common Stock are entitled to one vote per
share and holders of Class B Common Stock are entitled to four votes per share.
Holders of shares of Common Stock vote as a single class on all matters
submitted to a vote of stockholders except with respect to future issuances of
Class B Common Stock and as otherwise required by law. The Certificate of
Incorporation provides that all issuances of Class B Common Stock must be
approved by the affirmative vote of a majority of each class of Common Stock,
voting separately as a class, except with respect to (i) payment of stock
dividends on Class B Common Stock, and (ii) a stock split, reclassification, or
other subdivision of the Class B Common Stock. Under Delaware law, the
affirmative vote of the holders of a majority of the outstanding shares of any
class of Common Stock is required to approve, among other things, a change in
the designations, preferences, or limitations on the shares of such class of
Common Stock.
CONVERTIBILITY. Each share of Class B Common Stock is convertible, at the
option of its holder, into one share of Class A Common Stock at any time. The
Class A Common Stock is not convertible into Class B Common Stock. Each share of
Class B Common Stock shall automatically be converted into one share of Class A
Common Stock (i) in the event of Mr. Offutt's death, or (ii) in the event such
share shall be transferred (including, without limitation, by way of sale,
assignment, exchange, gift, bequest, or appointment or otherwise) to any person
or entity other than a trust arrangement pursuant to which Mr. Offutt retains
the right to control the voting of such shares.
LIQUIDATION RIGHTS. Upon liquidation, dissolution, or winding-up of the
Company, the holders of Class A Common Stock are entitled to share ratably with
the holders of Class B Common Stock in all assets available for distributions
after payment in full to creditors.
OTHER PROVISIONS. The holders of Common Stock are not entitled to
preemptive or subscription rights. Any stockholder action required or permitted
may be taken without a meeting, without prior notice and without vote, by
written consent of the holders of outstanding voting stock having sufficient
votes necessary to authorize or take such action at a meeting at which all
shares entitled to vote thereon were present and voted. In any merger,
consolidation, or business combination, the consideration to be received
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<PAGE>
per share by holders of Class A Common Stock must be identical to that received
by holders of Class B Common Stock. All outstanding shares of Class A Common
Stock offered hereby will be, upon issuance, validly issued, fully paid, and
nonassessable.
PREFERRED STOCK
The Board of Directors has the authority to issue up to 500,000 shares of
Preferred Stock in one or more series and to designate the rights, preferences,
and privileges of each series, including dividend rights, conversion rights,
voting rights, terms of redemption, liquidation preferences, sinking fund terms,
and the number of shares constituting any series or the designation of such
series, any or all of which may be greater than the rights of the Common Stock,
without any further vote or action by stockholders. The issuance of Preferred
Stock could adversely affect the voting power of holders of both classes of
Common Stock and the likelihood that such holders will receive dividend payments
and payments upon liquidation. The issuance of Preferred Stock also could have
the effect of delaying, deferring, or preventing a change of control of the
Company. The Company has no present plans to issue any shares of Preferred
Stock.
PROVISIONS WITH POTENTIAL ANTI-TAKEOVER EFFECT
The Company is subject to Section 203 of the DGCL. In general, Section 203
prohibits a publicly-held Delaware corporation from engaging in a "business
combination" with an "interested stockholder" for a period of three years
following the date the person became an interested stockholder, unless (with
certain exceptions) the "business combination" or the transaction in which the
person became an interested stockholder is approved in a prescribed manner.
Generally, a "business combination" includes a merger, asset or stock sale, or
other transaction resulting in a financial benefit to the interested
stockholder. Generally, an "interested stockholder" is a person who, together
with affiliates and associates, owns (or, in the case of affiliates or
associates of the corporation, within three years prior to the determination of
interested stockholder status, did own) 15% or more of a corporation's voting
stock. The existence of this provision could have anti-takeover effects with
respect to transactions not approved in advance by the Board of Directors, which
could discourage takeover attempts that might result in a premium over the
market price of the Common Stock. For purposes of Section 203, Mr. Offutt and
the Offutt Entities would not be prohibited from engaging in such transactions.
The Company's Certificate of Incorporation or By-laws, as applicable, among
other things, (i) limits the right of stockholders to call special stockholders'
meetings, (ii) requires stockholders to follow an advance notification procedure
for certain stockholder nominations of candidates to the Board of Directors and
for new business to be conducted at stockholders' meetings, and (iii) provides
that the Board of Directors, without action by the stockholders, may issue and
fix the rights and preferences of shares of Preferred Stock. These provisions
may have the effect of delaying, deferring, or preventing a change of control of
the Company without further action by the stockholders, may discourage bids for
the Class A Common Stock at a premium over the market price of the Class A
Common Stock, may adversely affect the market price of, and the voting and other
rights of, the holders of the Class A Common Stock, and could have the effect of
discouraging certain attempts to acquire the Company or remove incumbent
management or members of the Company's Board of Directors even if some of the
Company's stockholders deemed such an attempt to be in their best interests.
The Deere Agreement permits Deere to terminate the Company's dealer
appointments if Mr. Offutt, during his lifetime, ceases to (i) own or control
shares representing in excess of 50% of all outstanding voting power or whatever
percentage is required to control corporate actions that require a stockholder
vote, and (ii) own 35% of the outstanding Common Stock. In the event of Mr.
Offutt's death, Deere thereafter will have the right to terminate the Company's
dealer appointments upon the occurrence of a "change of control." A "change of
control" is defined for these purposes as (i) the sale, lease, exchange, or
other transfer of substantially all of the Company's assets, (ii) a merger,
consolidation, reorganization, or similar transaction in which the Company's
stockholders do not own more than 50% of the voting power of
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the surviving entity (provided that if they own more than 50% but less than 80%
of the voting power, the merger must be approved by a majority of the directors
who were directors at the time of Mr. Offutt's death or subsequent directors
whose election has been approved by existing directors ("Continuity
Directors")), (iii) a vote by the stockholders to approve a transaction set
forth in (i) or (ii), (iv) the acquisition by a person other than Mr. Offutt or
his heirs of 50% or more of the voting power of the Company (20% if such
acquisition has not been approved by a majority of the Continuity Directors),
(v) a change in the corporate executive officers without Deere's approval, or
(vi) if Continuity Directors cease to constitute a majority of the Company's
Board of Directors. See "Risk Factors--Deere Termination Rights." These
provisions could discourage or prevent a third party from acquiring a
significant equity position or control of the Company.
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar of the Common Stock is Norwest Bank
Minnesota, National Association.
SHARES ELIGIBLE FOR FUTURE SALE
Upon consummation of this Offering, the Company will have outstanding
5,091,508 shares of Class A Common Stock and 7,458,492 shares of Class B Common
Stock (5,721,508 shares of Class A Common Stock if the Underwriters'
over-allotment option is exercised in full). Of these shares, all of the
4,200,000 shares of Class A Common Stock sold in this Offering will be freely
tradeable by persons other than "affiliates" of the Company. The 891,508 shares
of Class A Common Stock and 7,458,492 shares of Class B Common Stock outstanding
prior to this Offering are "restricted securities" under the Securities Act.
These shares, and any shares purchased by affiliates of the Company, may not be
sold unless they are registered under the Securities Act or unless an exemption
from registration, such as the exemption provided by Rule 144 under the
Securities Act, is available. The Class B Common Stock is convertible on a
one-for-one basis into Class A Common Stock and must be converted to effect any
sale of such shares.
In general, under Rule 144 as currently in effect, a person (or persons
whose shares are aggregated), including an affiliate of the Company, who has
beneficially owned "restricted securities" for at least two years is entitled to
sell in any three-month period a number of shares that does not exceed the
greater of (i) 1% of the then outstanding shares of the Class A Common Stock, or
(ii) the average weekly trading volume of the Class A Common Stock during the
four calendar weeks immediately preceding the date on which notice of the sale
is filed with the Securities and Exchange Commission (the "Commission") pursuant
to Rule 144 (or, if no such notice is required, the date of receipt of the order
to execute the transaction by the broker or the date of execution of the
transaction directly with a market maker). Sales under Rule 144 also are subject
to certain other requirements relating to manner of sale, notice of sale, and
availability of current public information about the Company. A person (or
persons whose shares are aggregated) who is not and has not been an affiliate of
the Company at any time during the three months immediately preceding the sale
of the Class A Common Stock is entitled to sell "restricted securities" pursuant
to Rule 144(k) without regard to the limitations described above, provided that
three years have elapsed since the later of the date on which such restricted
shares were acquired from the Company or the date they were acquired from an
affiliate of the Company.
After expiration of the lock-up agreements, which will be 180 days after the
date of this Prospectus, in addition to the shares sold in this Offering, an
aggregate of approximately 7,924,716 shares of Class A Common Stock will be
available for sale in the public market, including 7,033,208 shares of Class A
Common Stock into which shares of Class B Common Stock are convertible on a
one-for-one basis, subject in certain cases to volume and manner of sale
limitations. The remaining approximately 425,284 shares held by existing
stockholders will become eligible for public resale at various times over a
period of less than two years following the consummation of this Offering,
subject to volume and manner of sale limitations pursuant to Rule 144.
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Prior to this Offering, there has been no established trading market for the
Class A Common Stock, and no predictions can be made as to the effect that sales
of Class A Common Stock under Rule 144, pursuant to a registration statement, or
otherwise, or the availability of shares of Class A Common Stock for sale, will
have on the market price prevailing from time to time. Sales of substantial
amounts of Class A Common Stock in the public market, or the perception that
such sales could occur, could depress the prevailing market price. Such sales
may also make it more difficult for the Company to sell equity securities or
equity-related securities in the future at a time and price that it deems
appropriate. See "Risk Factors--Shares Eligible for Future Sale."
Certain stockholders of the Company, holding in the aggregate approximately
8,350,000 shares of Common Stock, have agreed not to offer, sell, contract to
sell, announce their intention to sell, pledge, or otherwise dispose of any such
Common Stock for a period of 180 days after the date of this Prospectus without
the prior written consent of Credit Suisse First Boston Corporation. See
"Underwriting."
The Company has agreed that it will not offer, sell, contract to sell,
announce its intention to sell, pledge, or otherwise dispose of, directly or
indirectly, or file with the Commission a registration statement under the
Securities Act relating to, any additional shares of its Common Stock, other
than with respect to the Incentive Plan, or securities convertible into or
exchangeable or exercisable for any shares of the Common Stock without the prior
written consent of Credit Suisse First Boston Corporation for a period of 180
days after the date of this Prospectus.
The Company intends to file a registration statement under the Securities
Act to register an aggregate of 1,250,000 shares of Class A Common Stock
reserved for issuance under the Incentive Plan, thus permitting the resale of
such shares by non-affiliates in the public market without restriction under the
Securities Act, subject, however, to vesting requirements with the Company and
the lock-up agreements described above.
62
<PAGE>
UNDERWRITING
Under the terms and subject to the conditions of the Underwriting Agreement
dated January 23, 1997 (the "Underwriting Agreement"), the Underwriters named
below (the "Underwriters"), for whom Credit Suisse First Boston Corporation and
Dain Bosworth Incorporated are acting as representatives (the
"Representatives"), have severally, but not jointly, agreed to purchase from the
Company the following respective numbers of shares of Class A Common Stock:
<TABLE>
<CAPTION>
NUMBER
UNDERWRITERS OF SHARES
- ------------------------------------------------------------ ----------
<S> <C>
Credit Suisse First Boston Corporation...................... 1,200,000
Dain Bosworth Incorporated.................................. 1,200,000
Arnhold and S. Bleichroeder, Inc. .......................... 50,000
George K. Baum & Company.................................... 50,000
William Blair & Company, L.L.C.............................. 50,000
Crowell, Weedon & Co........................................ 50,000
Donaldson, Lufkin & Jenrette Securities Corporation......... 100,000
A.G. Edwards & Sons, Inc. .................................. 100,000
Furman Selz LLC............................................. 50,000
Invemed Associates, Inc..................................... 100,000
Edward D. Jones & Co., L.P.................................. 50,000
John G. Kinnard and Company, Incorporated................... 50,000
Ladenburg, Thalmann & Co. Inc. ............................. 50,000
Merrill Lynch, Pierce, Fenner & Smith Incorporated.......... 100,000
Montgomery Securities....................................... 100,000
J.P. Morgan Securities Inc. ................................ 100,000
Morgan Stanley & Co. Incorporated........................... 100,000
NatWest Securities Limited.................................. 100,000
Oppenheimer & Co., Inc. .................................... 100,000
PaineWebber Incorporated.................................... 100,000
Piper Jaffray Inc. ......................................... 50,000
Principal Financial Securities, Inc. ....................... 50,000
Rauscher Pierce Refsnes, Inc. .............................. 50,000
The Seidler Companies Incorporated.......................... 50,000
Smith Barney Inc. .......................................... 100,000
Stephens Inc. .............................................. 50,000
Wedbush Morgan Securities................................... 50,000
----------
Total............................................... 4,200,000
----------
----------
</TABLE>
The Underwriting Agreement provides that the obligations of the Underwriters
are subject to certain conditions precedent and that the Underwriters will be
obligated to purchase all of the shares of Class A Common Stock offered hereby
(other than those shares covered by the over-allotment option described below),
if any are purchased. The Underwriting Agreement provides that, in the event of
a default by an Underwriter, in certain circumstances the purchase commitments
of non-defaulting Underwriters may be increased or the Underwriting Agreement
may be terminated.
The Company has granted to the Underwriters an option, expiring at the close
of business on the 30th day after the date of this Prospectus, to purchase up to
630,000 additional shares of Class A Common Stock at the initial public offering
price less the underwriting discounts and commissions, all as set forth on the
cover page of this Prospectus. Such option may be exercised only to cover
over-allotments in the sale of the shares of Class A Common Stock. To the extent
such option is exercised, each Underwriter will become
63
<PAGE>
obligated, subject to certain conditions, to purchase approximately the same
percentage of such additional shares of Class A Common Stock from the Company as
it was obligated to purchase from the Company pursuant to the Underwriting
Agreement.
The Company has been advised by the Representatives that the Underwriters
propose to offer the shares of Class A Common Stock to the public initially at
the public offering price set forth on the cover page of this Prospectus and,
through the Representatives, to certain dealers at such price less a concession
of $0.62 per share and the Underwriters and such dealers may allow a discount of
$0.10 per share on sales to certain other dealers. After the initial public
offering, the public offering price and concession and discount to dealers may
be changed by the Representatives.
The Representatives have informed the Company that they do not expect
discretionary sales by the Underwriters to exceed 5% of the shares of Class A
Common Stock being offered hereby.
At the request of the Company, the Underwriters have reserved for sale, at
the initial public offering price, approximately 5% of the shares offered hereby
for employees and officers of the Company and the Offutt Entities who have
expressed an interest in purchasing such shares of Class A Common Stock in this
Offering. In addition, at the request of the Company, approximately 100,000
shares offered hereby have been reserved for sale, at the initial public
offering price, to the four individuals who will become non-employee directors
of the Company following completion of this Offering. The number of shares
available for sale to the general public will be reduced to the extent such
persons purchase such reserved shares. Any reserved shares not so purchased will
be offered by the Underwriters to the general public on the same basis as the
other shares offered hereby.
Certain stockholders of the Company, holding in the aggregate approximately
8,350,000 shares of Common Stock, have agreed not to offer, sell, contract to
sell, announce their intention to sell, pledge, or otherwise dispose of any such
Common Stock for a period of 180 days after the date of this Prospectus without
the prior written consent of Credit Suisse First Boston Corporation. See "Shares
Eligible for Future Sale."
The Company has agreed that it will not offer, sell, contract to sell,
announce its intention to sell, pledge, or otherwise dispose of, directly or
indirectly, or file with the Commission a registration statement under the
Securities Act relating to, any additional shares of its Common Stock, other
than with respect to the Incentive Plan, or securities convertible into or
exchangeable or exercisable for any shares of the Common Stock without the prior
written consent of Credit Suisse First Boston Corporation for a period of 180
days after the date of this Prospectus.
Prior to this Offering, there has been no public trading market for the
Class A Common Stock. Accordingly, the initial public offering price for the
shares has been determined by negotiation among the Company and the
Representatives. In determining such price, consideration has been given to
various factors, including the history of and prospects for the industry in
which the Company operates, the Company's past and present operations, its past
and present operating income and earnings and the trends of such operating
income and earnings, the prospects for operating income and earnings of the
Company, an assessment of the Company's management, stock prices of comparable
companies, and the general condition of the securities markets. There can be no
assurance, however, that the price at which the Class A Common Stock will sell
in the public market after this Offering will not be lower than the price at
which it is sold by the Underwriters.
The Company and Ronald D. Offutt have agreed to indemnify the Underwriters
against certain liabilities, including civil liabilities under the Securities
Act, or contribute to payments which the Underwriters may be required to make in
respect thereof.
The shares of Class A Common Stock have been approved for listing on the
NYSE under the symbol "RDO." In order to meet the requirements for listing the
Class A Common Stock on the NYSE, the
64
<PAGE>
Underwriters have undertaken to the NYSE to sell lots of 100 or more shares of
Class A Common Stock to a minimum of 2,000 beneficial holders.
NOTICE TO CANADIAN RESIDENTS
RESALE RESTRICTIONS
The distribution of the shares of Class A Common Stock in Canada is being
made only on a private placement basis exempt from the requirement that the
Company prepare and file a prospectus with the securities regulatory authorities
in each province where trades of the shares of Class A Common Stock are
effected. Accordingly, any resale of the Class A Common Stock in Canada must be
made in accordance with applicable securities laws which will vary depending on
the relevant jurisdiction, and which may require resales to be made in
accordance with available statutory exemptions or pursuant to a discretionary
exemption granted by the applicable Canadian securities regulatory authority.
Purchasers are advised to seek legal advice prior to any resale of the shares of
Class A Common Stock.
REPRESENTATIONS OF PURCHASERS
Each purchaser of shares of Class A Common Stock in Canada who receives a
purchase confirmation will be deemed to represent to the Company and the dealer
from whom such purchase confirmation is received that (i) such purchaser is
entitled under applicable provincial securities laws to purchase such shares of
Class A Common Stock without the benefit of a prospectus qualified under such
securities laws, (ii) where required by law, that such purchaser is purchasing
as principal and not as agent, and (iii) such purchaser has reviewed the text
above under "--Resale Restrictions."
RIGHTS OF ACTION AND ENFORCEMENT
The securities being offered are those of a foreign issuer and Ontario
purchasers will not receive the contractual right of action prescribed by
section 32 of the Regulation under the SECURITIES ACT(Ontario). As a result,
Ontario purchasers must rely on other remedies that may be available, including
common law rights of action for damages or rescission or rights of action under
the civil liability provisions of the United States federal securities laws.
All of the issuer's directors and officers as well as the experts named
herein may be located outside of Canada and, as a result, it may not be possible
for Ontario purchasers to effect service of process within Canada upon the
issuer or such persons. All or a substantial portion of the assets of the issuer
and such persons may be located outside of Canada and, as a result, it may not
be possible to satisfy a judgment against the issuer or such persons in Canada
or to enforce a judgment obtained in Canadian courts against such issuer or
persons outside of Canada.
NOTICE TO BRITISH COLUMBIA RESIDENTS
A purchaser of shares of Class A Common Stock to whom the SECURITIES ACT
(British Columbia) applies is advised that such purchaser is required to file
with the British Columbia Securities Commission a report within ten days of the
sale of any of the shares of Class A Common Stock acquired by such purchaser
pursuant to this Offering. Such report must be in the form attached to British
Columbia Securities Commission Blanket Order BOR #95/17, a copy of which may be
obtained from the Company. Only one such report must be filed in respect of
shares of Class A Common Stock acquired on the same date and under the same
prospectus exemption.
65
<PAGE>
LEGAL MATTERS
The validity of the shares of Class A Common Stock offered hereby is being
passed upon for the Company by Oppenheimer Wolff & Donnelly, Minneapolis,
Minnesota. Certain legal matters will be passed upon for the Underwriters by
McDermott, Will & Emery, Chicago, Illinois.
EXPERTS
The combined financial statements of RDO Equipment Co. and Affiliate as of
and for the year ended January 31, 1996 included in this Prospectus and
elsewhere in the Registration Statement have been audited by Arthur Andersen
LLP, independent public accountants, as indicated in their report with respect
thereto, and are included herein in reliance upon the authority of said firm as
experts in giving said report. The combined financial statements of the Company
and MVI as of January 31, 1995 and for each of the two years ended January 31,
1995 appearing elsewhere herein have been included in reliance upon the report
of Eide Helmeke PLLP, independent public accountants, and upon their authority
as experts in accounting and auditing.
Effective as of April 17, 1995, the Company's Board of Directors dismissed
Eide Helmeke PLLP and appointed Arthur Andersen LLP as the Company's independent
public accountants. The report of Eide Helmeke PLLP on the Company's financial
statements as of January 31, 1995 and for each of the two years ended January
31, 1995, did not contain an adverse opinion or disclaimer of opinion and was
not qualified or modified as to uncertainty, audit scope, or accounting
principles. In connection with the audits for the fiscal years ended January 31,
1994 and 1995, and through April 17, 1995, there were no disagreements with Eide
Helmeke PLLP on any matter of accounting principles or practices, financial
statement disclosure or auditing scope or procedure at the time of the change of
independent public accountants or with respect to the Company's financial
statements. Prior to retaining Arthur Andersen LLP, the Company had not
consulted with Arthur Andersen LLP regarding the application of accounting
principles or the type of audit opinion that might be rendered on the Company's
financial statements.
ADDITIONAL INFORMATION
The Company has filed with the Commission, Washington, D.C. 20549, a
Registration Statement under the Securities Act with respect to the shares of
Class A Common Stock offered hereby. This Prospectus does not contain all the
information set forth in the Registration Statement and the exhibits and
schedules thereto. For further information with respect to the Company and the
Class A Common Stock offered hereby, reference is made to the Registration
Statement and to the exhibits and schedules filed therewith. Although all
material terms and provisions of any material contract or other document are
referred to in this Prospectus and described herewith, such descriptions are not
necessarily complete, and in each instance reference is made to the copy of such
contract or other document filed as an exhibit to the Registration Statement,
each such statement being qualified in all respects by such reference. A copy of
the Registration Statement may be inspected without charge at the offices of the
Commission at 450 Fifth Street, N.W., Washington, D.C. 20549, and at the
Commission's regional offices at 500 West Madison Street, Suite 1400, Chicago,
Illinois 60661-2511 and 7 World Trade Center, Suite 1300, New York, New York
10048. Copies of all or any part of the Registration Statement may be obtained
from the Public Reference Section of the Commission in Washington, D.C. upon the
payment of the fees prescribed by the Commission. The Commission maintains a Web
site (http://www.sec.gov) that contains reports, proxy statements, and other
information that have been or will be filed by the Company.
The Company intends to furnish holders of the Class A Common Stock with
annual reports containing financial statements audited by independent public
accountants, and quarterly updates for each of the first three quarters of each
fiscal year containing summary unaudited financial information. Upon issuance of
the Class A Common Stock, the Company also will be subject to the informational
requirements of the Exchange Act.
66
<PAGE>
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
RDO EQUIPMENT CO.:
Reports of Independent Public Accountants
--Arthur Andersen LLP................................................... F-2
--Eide Helmeke PLLP..................................................... F-3
Combined Balance Sheets as of January 31, 1995 and 1996, and as of
October 31, 1996 (unaudited).......................................... F-4
Combined Statements of Operations for the Years Ended January 31, 1994,
1995, and 1996, and Nine Months Ended October 31, 1995 and 1996
(unaudited)........................................................... F-5
Combined Statements of Stockholders' Equity for the Years Ended January
31, 1994, 1995, and 1996, and Nine Months Ended October 31, 1996
(unaudited)........................................................... F-6
Combined Statements of Cash Flows for the Years Ended January 31, 1994,
1995, and 1996, and Nine Months Ended October 31, 1995 and 1996
(unaudited)........................................................... F-7
Notes to Combined Financial Statements.................................. F-8
PRO FORMA UNAUDITED FINANCIAL STATEMENTS:
Introduction to Pro Forma Unaudited Financial Statements................ F-20
Pro Forma Unaudited Balance Sheet as of October 31, 1996................ F-21
Notes to Pro Forma Unaudited Balance Sheet.............................. F-22
Pro Forma Unaudited Statement of Operations for the Year Ended January
31, 1996.............................................................. F-23
Pro Forma Unaudited Statement of Operations for the Nine Months Ended
October 31, 1996...................................................... F-24
Notes to Pro Forma Unaudited Statements of Operations................... F-25
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To RDO Equipment Co.:
We have audited the accompanying combined balance sheet of RDO Equipment Co.
(a North Dakota corporation) and Affiliate as of January 31, 1996, and the
related combined statements of operations, stockholders' equity and cash flows
for the year then ended. These combined financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the combined financial position of RDO Equipment Co.
and Affiliate as of January 31, 1996, and the combined results of their
operations and their cash flows for the year then ended, in conformity with
generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Minneapolis, Minnesota,
March 29, 1996 (except for Note 13,
as to which the date is January 2, 1997)
F-2
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To RDO Equipment Co.:
We have audited the accompanying combined balance sheet of RDO Equipment Co.
(a North Dakota corporation) and Affiliate as of January 31, 1995, and the
related combined statements of operations, stockholders' equity and cash flows
for each of the two years in the period ended January 31, 1995. These combined
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the combined financial position of RDO Equipment Co.
and Affiliate as of January 31, 1995, and the combined results of their
operations and their cash flows for each of the two years in the period ended
January 31, 1995, in conformity with generally accepted accounting principles.
EIDE HELMEKE PLLP
Fargo, North Dakota,
December 15, 1995
F-3
<PAGE>
RDO EQUIPMENT CO. AND AFFILIATE
COMBINED BALANCE SHEETS
(IN THOUSANDS)
ASSETS
<TABLE>
<CAPTION>
OCTOBER 31,
JANUARY 31, 1996,
--------------------- OCTOBER 31, AS ADJUSTED
1995 1996 1996 FOR
--------- ---------- ----------- DISTRIBUTION
(UNAUDITED) -----------
(UNAUDITED)
(NOTE 8)
<S> <C> <C> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents..................................... $ 683 $ 787 $ 18 $ 18
Accounts receivable (less allowance for doubtful accounts of
$319, $555, and $706)....................................... 10,906 15,533 26,157 26,157
Receivables from affiliates................................... 396 490 123 123
Notes receivable from affiliates.............................. 4,010 -- -- --
Inventories................................................... 77,204 115,616 125,766 125,766
Prepaid expenses.............................................. 270 312 312 312
--------- ---------- ----------- -----------
Total current assets........................................ 93,469 132,738 152,376 152,376
PROPERTY AND EQUIPMENT, net..................................... 3,625 13,039 15,785 15,785
OTHER ASSETS:
Deposits...................................................... 1,111 1,579 1,433 1,433
Other......................................................... 110 737 7,118 7,118
--------- ---------- ----------- -----------
Total assets................................................ $ 98,315 $ 148,093 $ 176,712 $ 176,712
--------- ---------- ----------- -----------
--------- ---------- ----------- -----------
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Floor plan payables........................................... $ 53,581 $ 91,614 $ 100,612 $ 100,612
Notes payable and current maturities of long-term debt--
Banks and others............................................ 233 2,835 5,012 5,012
Affiliates.................................................. 1,965 136 10,916 10,916
Accounts payable.............................................. 4,229 4,104 5,389 5,389
Accrued liabilities........................................... 2,926 3,350 5,917 5,917
Customer advance deposits..................................... 3,835 4,103 1,506 1,506
Distributions payable......................................... -- -- 2,246 17,246
--------- ---------- ----------- -----------
Total current liabilities................................... 66,769 106,142 131,598 146,598
LONG-TERM DEBT, net of current maturities:
Banks and others.............................................. 641 6,469 6,008 6,008
Affiliates.................................................... 438 1,198 4,822 4,822
--------- ---------- ----------- -----------
COMMITMENTS AND CONTINGENCIES (Note 9)
STOCKHOLDERS' EQUITY:
Common stock (Note 1)......................................... 84 84 84 84
Additional paid-in capital.................................... 16,216 16,284 16,216 16,216
Retained earnings............................................. 14,167 17,916 17,984 2,984
--------- ---------- ----------- -----------
Total stockholders' equity.................................. 30,467 34,284 34,284 19,284
--------- ---------- ----------- -----------
Total liabilities and stockholders' equity.................. $ 98,315 $ 148,093 $ 176,712 $ 176,712
--------- ---------- ----------- -----------
--------- ---------- ----------- -----------
</TABLE>
The accompanying notes are an integral part of these combined balance sheets.
F-4
<PAGE>
RDO EQUIPMENT CO. AND AFFILIATE
COMBINED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEARS ENDED JANUARY 31, OCTOBER 31,
---------------------------------- ----------------------
1994 1995 1996 1995 1996
---------- ---------- ---------- ---------- ----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
REVENUES:
Wholegoods sales................................... $ 106,600 $ 135,704 $ 164,054 $ 131,211 $ 170,036
Parts and service.................................. 37,512 48,206 58,998 45,614 57,322
Rental............................................. -- -- 505 -- 1,902
---------- ---------- ---------- ---------- ----------
Total Revenues................................... 144,112 183,910 223,557 176,825 229,260
COST OF SALES........................................ 116,369 148,111 180,839 143,718 186,451
---------- ---------- ---------- ---------- ----------
GROSS PROFIT......................................... 27,743 35,799 42,718 33,107 42,809
SELLING, GENERAL, AND ADMINISTRATIVE EXPENSES........ 20,577 24,893 31,655 23,600 29,492
---------- ---------- ---------- ---------- ----------
OPERATING INCOME..................................... 7,166 10,906 11,063 9,507 13,317
INTEREST EXPENSE..................................... (1,670) (1,895) (3,817) (2,435) (4,116)
INTEREST INCOME...................................... 336 802 823 586 633
---------- ---------- ---------- ---------- ----------
NET INCOME BEFORE INCOME TAXES....................... $ 5,832 $ 9,813 $ 8,069 $ 7,658 $ 9,834
---------- ---------- ---------- ---------- ----------
---------- ---------- ---------- ---------- ----------
UNAUDITED PRO FORMA DATA (Notes 8 and 13):
Income before income taxes......................... $ 5,832 $ 9,813 $ 8,069 $ 7,658 $ 9,834
Provision for income taxes......................... 2,332 3,925 3,228 3,063 3,934
---------- ---------- ---------- ---------- ----------
Net income......................................... $ 3,500 $ 5,888 $ 4,841 $ 4,595 $ 5,900
---------- ---------- ---------- ---------- ----------
---------- ---------- ---------- ---------- ----------
Pro forma net income per share....................... $ .51 $ .63
---------- ----------
---------- ----------
Weighted average shares outstanding.................. 9,429 9,414
---------- ----------
---------- ----------
</TABLE>
The accompanying notes are an integral part of these combined financial
statements.
F-5
<PAGE>
RDO EQUIPMENT CO. AND AFFILIATE
COMBINED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED JANUARY 31, 1994, 1995, AND 1996
AND THE NINE MONTHS ENDED OCTOBER 31, 1996
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
COMMON STOCK
---------------------------------------------
CLASS B
--------------------- ADDITIONAL
MVI TOTAL PAID-IN RETAINED
CLASS A SHARES RDO SHARES AMOUNT CAPITAL EARNINGS TOTAL
--------- --------- ---------- ----------- ----------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE, January 31, 1993.......... 275,037 191,725 4,408,962 $ 49 $ 6,405 $ 4,651 $ 11,105
Conversion of debt to equity..... -- -- 1,940,347 19 5,480 -- 5,499
Issuance of common stock......... 616,471 -- 917,458 16 4,331 -- 4,347
Net income....................... -- -- -- -- -- 5,832 5,832
Dividends paid................... -- -- -- -- -- (2,280) (2,280)
--------- --------- ---------- ----- ----------- --------- ---------
BALANCE, January 31, 1994.......... 891,508 191,725 7,266,767 84 16,216 8,203 24,503
Net income....................... -- -- -- -- -- 9,813 9,813
Dividends paid................... -- -- -- -- -- (3,849) (3,849)
--------- --------- ---------- ----- ----------- --------- ---------
BALANCE, January 31, 1995.......... 891,508 191,725 7,266,767 84 16,216 14,167 30,467
Issuance of common stock......... 20,383 -- -- -- 68 -- 68
Net income....................... -- -- -- -- -- 8,069 8,069
Dividends paid................... -- -- -- -- -- (4,320) (4,320)
--------- --------- ---------- ----- ----------- --------- ---------
BALANCE, January 31, 1996.......... 911,891 191,725 7,266,767 84 16,284 17,916 34,284
Purchase of common stock......... (20,383) -- -- -- (68) -- (68)
Net income (unaudited)........... -- -- -- -- -- 9,834 9,834
Dividends paid (unaudited)....... -- -- -- -- -- (7,520) (7,520)
Dividends payable (unaudited).... -- -- -- -- -- (2,246) (2,246)
--------- --------- ---------- ----- ----------- --------- ---------
BALANCE, October 31, 1996
(unaudited)...................... 891,508 191,725 7,266,767 $ 84 $ 16,216 $ 17,984 $ 34,284
--------- --------- ---------- ----- ----------- --------- ---------
--------- --------- ---------- ----- ----------- --------- ---------
</TABLE>
The accompanying notes are an integral part of these combined financial
statements.
F-6
<PAGE>
RDO EQUIPMENT CO. AND AFFILIATE
COMBINED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEARS ENDED JANUARY 31, OCTOBER 31,
--------------------------------- ----------------------
1994 1995 1996 1995 1996
--------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
OPERATING ACTIVITIES:
Net income........................................... $ 5,832 $ 9,813 $ 8,069 $ 7,658 $ 9,834
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization...................... 668 690 1,326 614 1,930
Change in operating assets and liabilities:
Accounts and notes receivable.................... (1,052) (5,285) (432) (2,717) (10,257)
Inventories...................................... (9,186) (12,436) (29,266) (14,726) 4,259
Prepaid expenses................................. (47) (199) (36) 50 2
Deposits......................................... (64) (405) (343) (296) 146
Floor plan payables.............................. 3,142 8,995 32,723 16,391 (912)
Accounts payable and accrued liabilities......... 2,032 971 (125) 3,531 3,586
Customer advance deposits........................ 1,508 1,072 184 (1,593) (2,597)
--------- ---------- ---------- ---------- ----------
Net cash provided by operating activities...... 2,833 3,216 12,100 8,912 5,991
--------- ---------- ---------- ---------- ----------
INVESTING ACTIVITIES:
Purchase of property and equipment................... (627) (1,208) (9,993) (9,674) (3,182)
Purchase of net assets of dealerships................ -- -- (1,263) (1,263) (10,100)
Other, net........................................... 43 (46) (571) (632) (860)
--------- ---------- ---------- ---------- ----------
Net cash used for investing activities......... (584) (1,254) (11,827) (11,569) (14,142)
--------- ---------- ---------- ---------- ----------
FINANCING ACTIVITIES:
Proceeds from issuance of long-term debt............. 1,024 250 5,862 4,962 3,397
Payments on long-term debt........................... (736) (565) (510) (287) (1,383)
Net proceeds (payments) of bank lines and short-term
notes payable...................................... (259) (1,711) (1,269) 562 12,956
Proceeds from collection of notes receivable from
affiliates......................................... -- 1,259 -- -- --
Issuance of common stock............................. 70 -- 68 68 --
Purchase of common stock............................. -- -- -- -- (68)
Payment of dividends................................. (2,280) (761) (4,320) (2,964) (7,520)
--------- ---------- ---------- ---------- ----------
Net cash provided by (used for) financing
activities................................... (2,181) (1,528) (169) 2,341 7,382
--------- ---------- ---------- ---------- ----------
INCREASE (DECREASE) IN CASH............................ 68 434 104 (316) (769)
CASH AND CASH EQUIVALENTS, beginning of period......... 181 249 683 683 787
--------- ---------- ---------- ---------- ----------
CASH AND CASH EQUIVALENTS, end of period............... $ 249 $ 683 $ 787 $ 367 $ 18
--------- ---------- ---------- ---------- ----------
--------- ---------- ---------- ---------- ----------
</TABLE>
The accompanying notes are an integral part of these combined financial
statements.
F-7
<PAGE>
RDO EQUIPMENT CO. AND AFFILIATE
NOTES TO COMBINED FINANCIAL STATEMENTS
(INFORMATION AS OF OCTOBER 31, 1995 AND 1996, AND
FOR THE NINE MONTHS THEN ENDED IS UNAUDITED)
1. NATURE OF BUSINESS:
PRINCIPLES OF COMBINATION
The financial statements of RDO Equipment Co. (RDO) have been combined with
the financial statements of Minnesota Valley Irrigation, Inc. (MVI or
Affiliate), a Minnesota corporation, as RDO entered into an agreement to acquire
MVI in September 1996 and MVI is wholly owned by the majority stockholder of
RDO. RDO and MVI, collectively, are referred to herein as the Company. The
acquisition, which will be effective upon successful completion of the proposed
initial public offering (see Note 13), will be effected through the issuance of
191,725 shares of RDO common stock in exchange for 200 shares of MVI common
stock. Because RDO and MVI are under common control, the merger will be
accounted for essentially as a pooling of interests. In connection with the
proposed initial public offering, the Company declared a 44.5-for-1 stock split
and reincorporated in Delaware (see Note 13). This stock split and the MVI stock
exchange have been retroactively reflected in the combined financial statements.
CAPITAL STOCK
Upon consummation of the proposed initial public offering (see Note 13), the
authorized capital stock of the Company will consist of 20,000,000 shares of
Class A Common Stock and 7,500,000 shares of Class B Common Stock, each with a
par value of $0.01 per share; and 500,000 shares of Preferred Stock, no par
value. The economic rights of each class of common stock are the same, but the
voting rights differ. Each share of Class A Common Stock is entitled to one vote
per share and each share of Class B Common Stock is entitled to four votes per
share. In addition, the shares of Class B Common Stock contain restrictions as
to transferability and are convertible into shares of Class A Common Stock on a
one-for-one basis.
Following is a summary of the outstanding Common Stock of RDO and MVI as of
January 31, 1995 and 1996 and October 31, 1996 (as adjusted for the 44.5-for-1
stock split).
<TABLE>
<CAPTION>
JANUARY 31,
-------------------- OCTOBER 31,
1995 1996 1996
--------- --------- -----------
<S> <C> <C> <C>
RDO Common Stock: par value $.01; 8,158,275 shares issued and outstanding at
January 31, 1995 and October 31, 1996 and 8,178,658 shares issued and
outstanding at January 31, 1996............................................... $ 81,582 $ 81,786 $ 81,582
MVI Common Stock: par value $.01; 191,725 shares issued and outstanding (also
as adjusted for the 21.5-for-1 exchange ratio used to effect the
acquisition).................................................................. 1,917 1,917 1,917
--------- --------- -----------
Total...................................................................... $ 83,499 $ 83,703 $ 83,499
--------- --------- -----------
--------- --------- -----------
</TABLE>
Upon consummation of the MVI merger and proposed initial public offering,
7,458,492 shares of the Company's outstanding common stock will be designated as
Class B Common Stock and the 891,508 remaining outstanding shares will be
designated as Class A Common Stock. There are no shares of Preferred Stock
issued or outstanding as of October 31, 1996.
BUSINESS
The Company is engaged in the sale, servicing, and rental of industrial and
agricultural equipment to customers primarily in the construction and
agricultural industries and to governmental agencies. The
F-8
<PAGE>
1. NATURE OF BUSINESS: (CONTINUED)
Company's headquarters are located in Fargo, North Dakota. The Company owns and
operates industrial and agricultural equipment dealerships located in Arizona,
California, Minnesota, North Dakota, South Dakota, Texas, and Washington.
Accordingly, the Company's results of operations can be significantly impacted
by the general economic health of the construction and agricultural industries.
MVI is a dealer involved in the sales and service of irrigation equipment and
vegetable storage ventilation systems.
The Company's major supplier of new equipment and parts for sale is Deere &
Company (Deere), which accounted for 47%, 47%, and 48% of total revenues for
fiscal years 1994, 1995, and 1996, respectively, and 47% and 48% of total
revenues for the nine months ended October 31, 1995 and 1996, respectively. No
other supplier's equipment accounted for more than 10% of total revenues.
As discussed in Note 10, the Company has significant transactions with
related parties, primarily related to financing arrangements.
DEALERSHIP AGREEMENTS
The Company has entered into agreements with Deere which authorize the
Company to act as an authorized dealer of Deere industrial and agricultural
equipment. The dealer agreements continue until terminated by Deere or the
Company in accordance with the specified provisions.
The Company is required to meet certain performance criteria and equity
ratios, to maintain suitable facilities, to actively promote the sale of Deere
equipment, to fulfill warranty obligations, and to maintain stores only in the
authorized locations. The Company's principal stockholder is also required to
maintain certain voting control and ownership interests. The agreements also
contain certain provisions that must be complied with in order to retain the
Company's dealership agreements in the event of certain changes in control, as
defined, or the death of the controlling stockholder.
Deere is obligated to make available to the Company floor plan and other
financing programs that it offers to other dealers, provide promotional and
marketing materials, and authorize the Company to use Deere trademarks and trade
names.
2. SIGNIFICANT ACCOUNTING POLICIES:
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets, liabilities, revenues
and expenses during the reporting period and disclosure of contingent assets and
liabilities. The ultimate results could differ from those estimates. Estimates
are used for such items as used equipment inventory, depreciable lives of
property and equipment, allowance for uncollectible accounts, inventory
reserves, and guarantees. As better information becomes available or as actual
amounts are determinable, the recorded estimates are revised.
INTERIM FINANCIAL STATEMENTS
The combined balance sheet as of October 31, 1996, and the related combined
statements of operations, stockholders' equity and cash flows for the nine
months ended October 31, 1995 and 1996, are unaudited and are not covered by the
reports of independent public accountants. However, in the opinion of
management, these interim financial statements include all adjustments
(consisting of only normal recurring adjustments) which are necessary for the
fair presentation of the results for the interim periods presented. The results
of operations for the unaudited nine-month period ended October 31, 1996 are not
necessarily indicative of the results which may be expected for the entire
fiscal year.
F-9
<PAGE>
2. SIGNIFICANT ACCOUNTING POLICIES: (CONTINUED)
CASH AND CASH EQUIVALENTS
For financial reporting purposes, the Company considers all highly liquid
investments purchased with original maturities of three months or less to be
cash equivalents. Cash equivalents consist primarily of certificates of deposit.
INVENTORIES
All inventories are valued at the lower of cost or market. Cost is
determined using the first-in, first-out (FIFO) method for new equipment and
parts inventory. The specific identification method is used to determine cost
for used equipment.
Inventories consisted of the following (in thousands):
<TABLE>
<CAPTION>
JANUARY 31,
--------------------- OCTOBER 31,
1995 1996 1996
--------- ---------- -----------
<S> <C> <C> <C>
New equipment............................................. $ 47,541 $ 72,647 $ 75,378
Used equipment............................................ 21,333 32,056 35,418
Parts and other........................................... 8,330 10,913 14,970
--------- ---------- -----------
Total................................................. $ 77,204 $ 115,616 $ 125,766
--------- ---------- -----------
--------- ---------- -----------
</TABLE>
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost. Maintenance and repairs are
charged to expense as incurred. Major betterments and improvements which extend
the useful life of the related item are capitalized and depreciated.
Depreciation is provided for over the estimated useful lives of the individual
assets using accelerated and straight-line methods. In fiscal 1996, the Company
began using the straight-line method of depreciation exclusively for all new
additions. The impact on net income resulting from this change was not material.
Property and equipment consisted of the following (dollars in thousands):
<TABLE>
<CAPTION>
JANUARY 31, USEFUL
-------------------- OCTOBER 31, LIVES
1995 1996 1996 (YEARS)
--------- --------- ----------- -----------
<S> <C> <C> <C> <C>
Land.............................................. $ 224 $ 488 $ 800 --
Buildings and improvements........................ 2,020 3,394 3,654 31.5
Equipment, furniture and fixtures................. 4,174 5,585 7,783 5-7
Rental equipment.................................. 201 7,750 9,191 5-7
Construction in progress.......................... 442 18 73 --
--------- --------- -----------
Total....................................... 7,061 17,235 21,501
Accumulated depreciation.......................... (3,436) (4,196) (5,716)
--------- --------- -----------
Property and equipment, net....................... $ 3,625 $ 13,039 $ 15,785
--------- --------- -----------
--------- --------- -----------
</TABLE>
REVENUE RECOGNITION
Revenue on equipment and parts sales is recognized upon delivery of product
to customers. Rental and service revenue is recognized at the time such services
are provided.
F-10
<PAGE>
2. SIGNIFICANT ACCOUNTING POLICIES: (CONTINUED)
NET INCOME PER SHARE
Net income per share is computed based on weighted average shares
outstanding, which have been retroactively restated for the 44.5-for-1 stock
split discussed in Notes 1 and 13 and the number of shares whose proceeds would
be necessary to repay the $15.0 million dividend of accumulated undistributed
S-corporation earnings discussed in Note 8.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENT
The Financial Accounting Standards Board has issued Statement of Financial
Accounting Standards (SFAS) No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to Be Disposed Of," which requires
companies to review long-lived assets and certain identifiable intangibles for
impairment whenever events or changes in circumstances indicate that the
carrying amount of such assets may not be recoverable. This pronouncement also
provides guidance to be considered in performing such reviews. The Company will
be required to adopt SFAS No. 121 in fiscal 1997. The Company expects that the
ultimate adoption of SFAS No. 121 will not have a significant impact on its
financial position or results of operations.
3. BUSINESS COMBINATIONS:
In October 1995, the Company acquired all the common stock of Cass County
Equipment Co. (Cass), which was controlled by the Company's majority
stockholder, in exchange for 233,559 shares (adjusted for the 44.5-for-1 stock
split) of the Company's common stock, $520,000 in cash, and a note payable for
$375,000. Because the Company and Cass were under common control, the merger has
been accounted for essentially as a pooling of interests. Accordingly, the
Company's financial statements include the historical carrying amounts of the
combined net assets and results of the operations of the combined entities for
all periods presented.
In February 1995, the Company purchased the assets and assumed certain
liabilities of Whitney Machinery, Inc. (Whitney). Total consideration for the
acquisition was $2,699,000. The acquisition has been accounted for using the
purchase method. Accordingly, the purchase price was allocated to assets and
liabilities based on the estimated fair value at the acquisition date. The
excess of purchase price over the fair value of the net assets totaled $625,000
and is being amortized over 30 years. The fiscal 1996 financial statements
include Whitney's results of operations from the date of acquisition. Pro forma
results of operations for fiscal 1994 and 1995, had the acquisition taken place
on February 1, 1993, were not significantly different from reported amounts.
4. NOTES RECEIVABLE--AFFILIATES:
Short-term notes receivable from affiliates, all of which were repaid in
fiscal 1996, were as follows as of January 31, 1995 (in thousands):
<TABLE>
<S> <C>
Majority stockholder, demand note, interest at 8.0%................. $ 922
Farmers Equipment Rental, Inc., demand note, interest at 7.5%....... 2,408
R. D. Offutt Company, demand notes, interest ranging from 7.5% to
8.0%............................................................... 680
---------
$ 4,010
---------
---------
</TABLE>
5. FLOOR PLAN PAYABLES:
Floor plan payables include borrowings from Deere, Ag Capital and other
vendors under floor plan financing arrangements for inventory. The terms of
these arrangements generally include a one-to-twelve-
F-11
<PAGE>
5. FLOOR PLAN PAYABLES: (CONTINUED)
month interest-free term followed by a term during which interest is charged.
Payoff of the floor plan generally occurs at the earlier of sale of the
equipment or in accordance with the terms of the financing arrangements. All
amounts owed to Deere are guaranteed by the majority stockholder of the Company
and are collateralized by inventory. Floor plan payables consist of the
following (in thousands):
<TABLE>
<CAPTION>
JANUARY 31,
-------------------- OCTOBER 31,
1995 1996 1996
--------- --------- -----------
<S> <C> <C> <C>
INTEREST BEARING:
Deere Credit Services inventory notes, due as inventory is sold, interest at
various rates from 5.65% to 9.25%.......................................... $ 608 $ 20,015 $ 46,051
Deere & Company payables, due as inventory is sold, interest at various rates
from 8.25% to 9.0%......................................................... 14,496 17,487 5,069
Ag Capital Company, interest based on prime (8.5% at January 31, 1995 and
1996 and 8.25% at October 31, 1996)........................................ 3,858 7,299 9,388
Other........................................................................ 628 363 1,064
--------- --------- -----------
19,590 45,164 61,572
--------- --------- -----------
NON-INTEREST BEARING:
Deere Credit Services........................................................ -- -- 2,183
Deere & Company.............................................................. 33,991 45,147 35,796
Other........................................................................ -- 1,303 1,061
--------- --------- -----------
33,991 46,450 39,040
--------- --------- -----------
Total...................................................................... $ 53,581 $ 91,614 $ 100,612
--------- --------- -----------
--------- --------- -----------
</TABLE>
6. NOTES PAYABLE AND LONG-TERM DEBT:
BANKS AND OTHERS
Notes payable and long-term debt to banks and others consisted of the
following (in thousands):
<TABLE>
<CAPTION>
JANUARY 31,
-------------------- OCTOBER 31,
1995 1996 1996
--------- --------- -----------
<S> <C> <C> <C>
Deere Credit Services rental equipment notes, due in various amounts through
January 2000, interest at various rates from 8.25% to 9.0%, collateralized by
rental equipment................................................................. $ -- $ 3,533 $ 6,233
Bank lines of credit (see below).................................................. -- 3,472 2,433
Other............................................................................. 874 2,299 2,354
--------- --------- -----------
Total......................................................................... 874 9,304 11,020
Less short-term notes and current maturities of long-term debt.................... (233) (2,835) (5,012)
--------- --------- -----------
$ 641 $ 6,469 $ 6,008
--------- --------- -----------
--------- --------- -----------
</TABLE>
The Company has bank lines of credit totaling $3,000,000 through May 1,
1997 at variable interest rates. Bank lines of credit are guaranteed by the
majority stockholder of the Company. During the fiscal years ended January
31, 1994, 1995, and 1996, the highest balances outstanding under these lines
were $562,000, $750,000, and $2,972,000, respectively. The weighted average
interest rates on these lines during such periods were 6.86%, 7.94%, and
8.41%, respectively.
F-12
<PAGE>
6. NOTES PAYABLE AND LONG-TERM DEBT: (CONTINUED)
AFFILIATES
Notes payable and long-term debt due to affiliates consist of the following
(in thousands):
<TABLE>
<CAPTION>
JANUARY 31,
-------------------- OCTOBER 31,
1995 1996 1996
--------- --------- -----------
<S> <C> <C> <C>
Ag Capital Company, bridge loans related to acquisition of net assets of Central
Texas and Washington (See Note 13), interest based on prime (8.25%),
collateralized by substantially all assets of the Company...................... $ -- $ -- $ 10,100
Ag Capital Company, other, interest at 8.25%, collateralized by property and
equipment...................................................................... 611 1,334 5,638
Farmers Equipment Rental, Inc., interest at prime plus 1% (9.50% at January 31,
1995) collateralized by inventory and equipment, paid in fiscal 1996........... 1,792 -- --
--------- --------- -----------
Total.......................................................................... 2,403 1,334 15,738
Less short-term notes and current maturities of long-term debt................... (1,965) (136) (10,916)
--------- --------- -----------
$ 438 $ 1,198 $ 4,822
--------- --------- -----------
--------- --------- -----------
</TABLE>
Future maturities of all debt as of January 31, 1996 are as follows (in
thousands):
<TABLE>
<S> <C>
1997............................................................... $ 2,971
1998............................................................... 4,901
1999............................................................... 1,505
2000............................................................... 391
2001............................................................... 116
Thereafter......................................................... 754
---------
$ 10,638
---------
---------
</TABLE>
The Company's debt agreements contain various restrictive covenants which,
among other matters, require the Company to maintain minimum net worth levels,
as defined, and place limits on additional indebtedness. The Company was in
compliance with all debt covenants at January 31, 1996 and October 31, 1996.
7. EMPLOYEE BENEFIT PLANS:
401(k) EMPLOYEE SAVINGS PLAN
The Company's employees participate in a 401(k) employee savings plan
sponsored by an affiliate which covers substantially all employees. The Company
matches a portion of employee contributions up to an annual maximum of $900 per
employee. Contributions to the plan by the Company were $121,000, $151,000, and
$194,000 for the fiscal years ended January 31, 1994, 1995, and 1996,
respectively, and $151,000 and $166,000 for the nine months ended October 31,
1995 and 1996, respectively.
EMPLOYEE HEALTH BENEFIT TRUST
The Company participates in a tax-exempt voluntary employee benefit trust
sponsored by an affiliate which provides health and dental benefits for
full-time employees. In the event of a deficiency in the trust, additional
monthly premiums could be assessed to the Company; however, management
anticipates no
F-13
<PAGE>
7. EMPLOYEE BENEFIT PLANS: (CONTINUED)
substantial increases in premiums at the present time. The maximum liability to
the Company is limited by stop-loss insurance to the lesser of $35,000 per
employee or 120% of expected claims for the year.
8. INCOME TAXES:
The Company has elected to be treated as an S corporation under the Internal
Revenue Code. Under this election, the Company is not directly subject to income
taxes. Instead, corporate taxable earnings are passed through to the
stockholders, who are responsible for any taxes which may be due.
In connection with the pending reorganization and offering described in Note
13, both RDO and MVI will terminate their S corporation federal tax status and
change to C corporations and, accordingly, will be subject to federal and
certain state income taxes. Prior to such termination, the Company will
distribute to its current stockholders all, or a portion of, accumulated S
corporation earnings as of the termination date. Through January 31, 1996, the
amount of the undistributed accumulated Subchapter S corporation earnings was
approximately $15.0 million. Accrual of this distribution payable has been
reflected in the unaudited balance sheet as of October 31, 1996, adjusted for
the distribution. Additional undistributed Subchapter S corporation earnings of
$2.2 million have been declared but unpaid as of October 31, 1996.
Pro forma net income and pro forma net income per share for the year ended
January 31, 1996, and for the nine months ended October 31, 1996, have been
determined assuming that the Company had been taxed as a C corporation for
federal and certain state income tax purposes for such periods.
Unaudited pro forma income taxes represent the estimated income taxes that
would have been reported had the Company been a taxable entity for both federal
and state income tax purposes for the fiscal years ended January 31, 1994, 1995,
and 1996. The components of the unaudited pro forma income tax provision are
summarized as follows (in thousands):
<TABLE>
<CAPTION>
YEAR ENDED JANUARY 31,
-------------------------------
1994 1995 1996
--------- --------- ---------
<S> <C> <C> <C>
Currently payable:
Federal........................................................ $ 1,671 $ 3,319 $ 2,433
State.......................................................... 504 992 757
Deferred......................................................... 157 (386) 38
--------- --------- ---------
Unaudited pro forma provision for income taxes................... $ 2,332 $ 3,925 $ 3,228
--------- --------- ---------
--------- --------- ---------
</TABLE>
A reconciliation of taxes based on the federal statutory rate of 34% and the
unaudited pro forma provision for income taxes for the fiscal years ended
January 31, 1994, 1995, and 1996 is summarized as follows:
<TABLE>
<CAPTION>
YEAR ENDED JANUARY 31,
-------------------------------------
1994 1995 1996
----- ----- -----
<S> <C> <C> <C>
Income taxes at the federal statutory rate............................ 34% 34% 34%
State income taxes, net of federal benefit............................ 6 6 6
-- -- --
Unaudited pro forma provision for income taxes........................ 40% 40% 40%
-- -- --
-- -- --
</TABLE>
Effective with the termination of the Company's S corporation status, the
Company will provide for deferred income taxes for cumulative temporary
differences between the tax basis and financial reporting basis of its assets
and liabilities at the date of termination. If the termination had occurred at
October 31, 1996, the net deferred income tax asset would have approximated
$850,000.
F-14
<PAGE>
8. INCOME TAXES: (CONTINUED)
The pro forma deferred tax asset consisted of the following temporary
differences between the financial statement carrying amounts and the tax basis
of assets and liabilities (in thousands):
<TABLE>
<CAPTION>
JANUARY 31,
--------------------
1995 1996
--------- ---------
<S> <C> <C>
Deferred tax assets:
Accruals and reserves...................................................... $ 417 $ 320
Compensation accruals...................................................... 384 480
Other...................................................................... 17 6
--------- ---------
Total deferred tax assets................................................ 818 806
Deferred tax liabilities:
Property and equipment..................................................... (191) (249)
Inventory.................................................................. (332) (300)
--------- ---------
Total deferred tax liabilities........................................... (523) (549)
--------- ---------
Net deferred tax asset................................................... $ 295 $ 257
--------- ---------
--------- ---------
</TABLE>
9. COMMITMENTS AND CONTINGENCIES:
OPERATING LEASES
The Company leases retail space and vehicles under various noncancelable
operating leases. The leases have varying terms and expire at various dates
through 2007. Generally, the leases require the Company to pay taxes, insurance
and maintenance costs. Rent expense was $1,033,000, $1,386,000, and $2,055,000
for fiscal 1994, 1995, and 1996, respectively, and $1,528,000 and $1,897,000 for
the nine months ended October 31, 1995 and 1996, respectively.
Future minimum rental payments, by year, required under leases with initial
or remaining terms of one year or more consist of the following (in thousands):
<TABLE>
<S> <C>
1997................................................................ $ 1,746
1998................................................................ 1,360
1999................................................................ 1,112
2000................................................................ 909
2001................................................................ 843
Thereafter.......................................................... 1,088
---------
$ 7,058
---------
---------
</TABLE>
GUARANTEES
The Company has guaranteed a portion of the remaining outstanding balances
of certain customer notes and lease contracts financed by credit companies. The
Company has made deposits with the finance
F-15
<PAGE>
9. COMMITMENTS AND CONTINGENCIES: (CONTINUED)
companies to partially fund contingent liabilities which may come due. These
customer notes are collateralized by equipment. The contingent liability and
off-setting deposits are as follows (in thousands):
<TABLE>
<CAPTION>
JANUARY 31, 1996 OCTOBER 31, 1996
-------------------------- --------------------------
FINANCE FINANCE
GUARANTEED DEPOSITS GUARANTEED DEPOSITS
AMOUNTS RECEIVABLE AMOUNTS RECEIVABLE
----------- ------------- ----------- -------------
<S> <C> <C> <C> <C>
Ag Capital Company (affiliate).................................. $ 1,862 $ -- $ 3,442 $ --
Farmers Equipment Rental, Inc. (affiliate)...................... 1,418 -- 942 --
Deere Credit Services........................................... 771 745 847 847
Other........................................................... 25 3 224 6
----------- ----- ----------- -----
Total......................................................... $ 4,076 $ 748 $ 5,455 $ 853
----------- ----- ----------- -----
----------- ----- ----------- -----
</TABLE>
MINIMUM REPURCHASE GUARANTEES
The Company has entered into various sales agreements with certain customers
which are subject to repurchase agreements. Pursuant to these agreements, the
Company, at the discretion of the customer, may be required to repurchase
equipment at specified future dates at specified repurchase prices. With respect
to these agreements, the Company believes the estimated future retail values of
the equipment exceed the guaranteed repurchase prices. The Company accounts for
significant transactions which have a guaranteed repurchase feature as leases.
The Company's existing repurchase agreements expire as follows (in
thousands):
<TABLE>
<S> <C>
1997................................................................ $ 270
1998................................................................ 296
1999................................................................ 1,640
2000................................................................ 1,362
2001................................................................ 3,250
Thereafter.......................................................... 2,998
---------
Total............................................................. $ 9,816
---------
---------
</TABLE>
10. RELATED-PARTY TRANSACTIONS:
The Company has transactions with companies which are related through common
ownership. A summary of significant related-party transactions is as follows:
a. Ag Capital Company and Farmers Equipment Rental, Inc. provide financing
to customers purchasing equipment, parts and repair service from the
Company. The Company is contingently liable to these related entities on
a portion of this customer financing as summarized in Note 9.
b. In addition, the Company has floor plan payables, notes payable and
long-term debt owed to Ag Capital Company and Farmers Equipment Rental,
Inc. to finance inventory as summarized in Notes 5 and 6. Interest
expense paid to related entities totaled $771,000, $627,000, and $849,000
in fiscal 1994, 1995, and 1996, respectively, and $727,000 and $829,000
during the nine months ended October 31, 1995 and 1996, respectively.
c. The Company's notes receivable from affiliates are summarized in Note 4.
d. The Company had sales to related entities totaling $1,885,000,
$3,450,000, and $5,492,000 in fiscal 1994, 1995, and 1996, respectively,
and $3,000,000 and $4,931,000 during the nine months ended October 31,
1995 and 1996, respectively. The Company also leases certain retail space
and
F-16
<PAGE>
10. RELATED-PARTY TRANSACTIONS: (CONTINUED)
vehicles from related entities. Total rent expense for these leases
totaled $579,000, $737,000, and $1,089,000 in fiscal 1994, 1995, and
1996, respectively, and $827,000 and $1,138,000 during the nine months
ended October 31, 1995 and 1996, respectively.
11. SUPPLEMENTAL CASH FLOW DISCLOSURES:
Supplemental cash flow disclosures for the Company are as follows (in
thousands):
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED JANUARY 31, OCTOBER 31,
------------------------------- --------------------
1994 1995 1996 1995 1996
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
Cash payments for interest...................................... $ 1,436 $ 1,937 $ 3,820 $ 2,329 $ 4,015
Supplemental disclosures of noncash investing and financing
activities:
Increase in assets related to acquisitions of dealerships
through issuance and assumption of debt and issuance of
common stock................................................ $ -- $ -- $ 9,991 $ 9,991 $ 11,325
Dividends declared, accrued and unpaid........................ $ -- $ -- $ -- $ -- $ 2,246
Reduction of notes receivable from affiliates and other
receivables through payment of dividends.................... $ -- $ 3,088 $ -- $ -- $ --
Conversion of long-term debt due to affiliates to common
stock....................................................... $ 5,499 $ -- $ -- $ -- $ --
Issuance of common stock in exchange for short-term note
receivable from affiliate................................... $ 4,347 $ -- $ -- $ -- $ --
</TABLE>
12. SEGMENT INFORMATION:
The Company's operations are classified into two business segments:
industrial and agricultural. The industrial operations include the sale,
service, and rental of industrial equipment to customers primarily in the
construction and utility industries and to units of government. Agricultural
operations include the sale, service, and rental of agricultural equipment
primarily to customers in the agricultural industry.
Operating earnings by business segment are defined as revenues less
operating costs and expenses. Income and expense not allocated to business
segments include investment income, interest expense, and corporate
administrative costs.
Identifiable assets are those used exclusively in the operations of each
business segment or which are allocated when used jointly. Corporate assets are
principally comprised of cash, short-term investments, certain property, plant,
and equipment and stockholder notes receivable which originated from the
Company's reorganization in fiscal 1994. These stockholder notes receivable of
$5.4 million and $921,000 in fiscal 1994 and 1995, respectively, have all been
repaid.
F-17
<PAGE>
12. SEGMENT INFORMATION: (CONTINUED)
The following tables show sales, operating income and other financial
information by business segment for the fiscal years 1994, 1995, and 1996 (in
thousands):
<TABLE>
<CAPTION>
CORPORATE
INDUSTRIAL AGRICULTURAL AND OTHER TOTAL
---------- ----------- ----------- ----------
<S> <C> <C> <C> <C>
1994:
Revenues.................................. $ 86,721 $ 57,391 $ -- $ 144,112
Operating income (loss)................... 4,234 3,436 (504) 7,166
Depreciation.............................. 423 245 -- 668
Identifiable assets....................... 48,990 28,962 5,389 83,341
Capital expenditures...................... 448 179 -- 627
1995:
Revenues.................................. 110,546 73,364 -- 183,910
Operating income (loss)................... 6,709 4,796 (599) 10,906
Depreciation.............................. 388 239 7 634
Identifiable assets....................... 59,573 37,110 1,632 98,315
Capital expenditures...................... 540 643 25 1,208
1996:
Revenues.................................. 138,972 84,585 -- 223,557
Operating income (loss)................... 6,604 4,826 (367) 11,063
Depreciation.............................. 750 307 28 1,085
Identifiable assets....................... 102,289 45,591 213 148,093
Capital expenditures...................... 7,855 2,001 137 9,993
</TABLE>
13. PENDING OFFERING, CHANGE IN TAX STATUS, AND RECENT ACQUISITIONS:
PROPOSED INITIAL PUBLIC OFFERING
The Company has filed a Registration Statement with the Securities and
Exchange Commission for the sale of up to 4,830,000 shares (including the
Underwriters' over-allotment option to purchase up to 630,000 shares) of Class A
Common Stock (the Offering). The Company expects to use the net proceeds of this
Offering (estimated to be approximately $59.5 million) to fund the distribution
of accumulated S corporation dividends (see Note 8), repay certain notes issued
in connection with the acquisitions of Mega Equipment Company (Central Texas)
and Liberty Agricultural, Inc. (Washington) (see Acquisitions Completed
Subsequent to January 31, 1996 below), pay down inventory floor plan financing,
fund potential future acquisitions, and for general corporate purposes. The
over-allotment option, which will grant to the Underwriters an option to
purchase up to 630,000 additional shares of Class A Common Stock at the initial
public offering price, is exercisable for a period of 30 days from the effective
date.
REORGANIZATION
On January 2, 1997, the Company's Board of Directors approved the
reclassification and split of each share of common stock into 44.5 shares of
either Class A or Class B Common Stock to be effected immediately prior to the
Offering. This reclassification and stock split has been retroactively reflected
in the accompanying combined financial statements.
CHANGE IN TAX STATUS
The Company will terminate its S corporation federal tax election
immediately prior to the consummation of this Offering and, accordingly, will be
subject to federal and certain state income taxes as a C corporation from that
date forward (see Note 8).
F-18
<PAGE>
13. PENDING OFFERING, CHANGE IN TAX STATUS, AND RECENT ACQUISITIONS: (CONTINUED)
STOCK INCENTIVE PLAN
In connection with the proposed initial public offering, the Company will
adopt the 1996 Stock Incentive Plan (the Plan) to provide incentives to key
employees, directors, advisors, and consultants of the Company. The Plan, which
is administered by the Compensation Committee of the Board of Directors (the
Committee), will provide for an authorization of shares of common stock for
issuance thereunder such that the total number of shares available for issuance
under the Plan equals 10% of the total number of shares of Common Stock issued
and outstanding. Under the Plan, the Company may grant eligible recipients
incentive stock options, nonqualified stock options, restricted stock, stock
appreciation rights, stock awards, or any combination thereof. The Committee
establishes the exercise price of any stock options granted under the Plan.
ACQUISITIONS COMPLETED SUBSEQUENT TO JANUARY 31, 1996
Effective July 1, 1996, the Company acquired certain assets and assumed
certain liabilities of Mega Equipment Company (Central Texas), which consists of
three full-service industrial stores located in the Dallas/Fort Worth
metropolitan area and Waco, Texas. Total consideration for the net assets
acquired, which has been accounted for using the purchase method, was
approximately $8.4 million and was financed by debt from Ag Capital, which will
be repaid with a portion of the net proceeds from the proposed initial public
offering. Resulting goodwill of approximately $4.4 million is being amortized
over 30 years. The Company also acquired certain new equipment and parts
inventory from Deere to stock the Central Texas dealership. Total consideration
for such inventory of approximately $7.7 million was financed through Deere
floor plan financing arrangements. Central Texas' results of operations have
been included in the Company's results of operations beginning on July 1, 1996.
Effective October 1, 1996, the Company purchased certain assets and assumed
certain liabilities of Liberty Agricultural, Inc. (Washington), a full-service
agricultural equipment dealership with two stores located in Pasco and
Sunnyside, Washington. The total purchase price for the net assets of Washington
was approximately $2.7 million and was financed with debt, a portion of which
will be repaid with the net proceeds from the proposed initial public offering.
The purchase agreement also calls for future contingent consideration of up to
$750,000 in the event certain performance criteria are met over a three-year
period. The Company anticipates accounting for the contingent consideration
paid, if any, as compensation expense. The Washington acquisition has been
accounted for under the purchase method and resulted in goodwill of
approximately $1.6 million, which will be amortized over 30 years. Washington's
results of operations have been included in the Company's results of operations
beginning on October 1, 1996.
14. UNAUDITED QUARTERLY FINANCIAL DATA (IN THOUSANDS):
<TABLE>
<CAPTION>
QUARTER
------------------------------------------
FIRST SECOND THIRD FOURTH TOTAL YEAR
--------- --------- --------- --------- ----------
<S> <C> <C> <C> <C> <C>
Fiscal 1995:
Total revenues...................... $ 45,472 $ 49,732 $ 48,713 $ 39,993 $ 183,910
Gross profit........................ 8,806 9,768 9,822 7,403 35,799
Net income before income taxes...... 2,566 3,376 2,461 1,410 9,813
Fiscal 1996:
Total revenues...................... 52,029 57,718 67,078 46,732 223,557
Gross profit........................ 9,765 10,863 12,480 9,610 42,718
Net income before income taxes...... 1,884 2,697 3,078 410 8,069
</TABLE>
F-19
<PAGE>
RDO EQUIPMENT CO. AND AFFILIATE
INTRODUCTION TO PRO FORMA UNAUDITED FINANCIAL STATEMENTS
FOR THE YEAR ENDED JANUARY 31, 1996 AND THE
NINE-MONTH PERIOD ENDED OCTOBER 31, 1996
The following unaudited pro forma consolidated financial information
consists of pro forma unaudited consolidated statements of operations of the
Company for the fiscal year ended January 31, 1996 and for the nine-month period
ended October 31, 1996 and a pro forma consolidated balance sheet of the Company
as of October 31, 1996. The unaudited pro forma consolidated financial
statements give effect to the July 1, 1996 acquisition of certain net assets of
Mega Equipment Co. (Central Texas) and the October 1, 1996 acquisition of
certain net assets of Liberty Agricultural, Inc. (Washington). The pro forma
unaudited consolidated statements of operations give effect to such transactions
as if the transactions had occurred on February 1, 1995. The Central Texas and
Washington acquisitions have been reflected in the Company's historical balance
sheet as of October 31, 1996.
Effective July 1, 1996, the Company acquired certain assets and assumed
certain liabilities of Central Texas. Total consideration for the acquisition,
which has been accounted for using the purchase method, was $8.4 million and was
financed by borrowings from an affiliated entity, all of which will be repaid
out of the net proceeds from the Offering. Resulting goodwill of approximately
$4.4 million is being amortized over 30 years. The Company acquired certain new
equipment and parts inventory from Deere to stock the Central Texas dealership.
Total consideration for such inventory of approximately $7.7 million was
financed through the John Deere floor plan financing arrangement.
Effective October 1, 1996, the Company purchased certain assets and assumed
certain liabilities of Washington, a full-service agricultural equipment
dealership with two stores located in Pasco and Sunnyside, Washington. The
purchase price was approximately $2.7 million and was financed by debt, a
portion of which will be repaid out of the net proceeds from the Offering. The
acquisition has been accounted for using the purchase method. Resulting goodwill
of approximately $1.6 million will be amortized over 30 years.
The unaudited pro forma consolidated statement of operations for the year
ended January 31, 1996, reflects the audited historical combined income
statement of the Company for the year ended January 31, 1996, the audited
historical income statement of Central Texas for the year ended December 31,
1995 and the unaudited historical income statement of Washington for its year
ended December 31, 1995. The unaudited pro forma consolidated statement of
operations for the nine months ended October 31, 1996, reflect the unaudited
historical combined financial statements of the Company as of the nine months
ended October 31, 1996, the unaudited historical statement of operations of
Central Texas for the five-month period preceding the Central Texas acquisition,
and the unaudited historical statement of operations of Washington for the
eight-month period preceding the Washington acquisition.
The pro forma unaudited consolidated financial statements and accompanying
notes should be read in conjunction with the historical combined financial
statements and notes thereto appearing elsewhere or incorporated by reference in
this Registration Statement. The pro forma unaudited consolidated financial
statements do not purport to represent what the results of operations or
financial positions of what the Company would actually have been if the
aforementioned transactions had occurred on February 1, 1995 or on October 31,
1996 or at any future date.
F-20
<PAGE>
RDO EQUIPMENT CO.
PRO FORMA UNAUDITED BALANCE SHEET
AS OF OCTOBER 31, 1996
(IN THOUSANDS)
ASSETS
<TABLE>
<CAPTION>
PRO FORMA PRO
THE COMPANY ADJUSTMENTS FORMA
----------- --------------- -------------
<S> <C> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents.................. $ 18 $ -- $ 18
Accounts receivable........................ 26,280 -- 26,280
Inventories................................ 125,766 -- 125,766
Prepaid expenses........................... 312 -- 312
----------- --------------- -------------
Total current assets..................... 152,376 -- 152,376
PROPERTY AND EQUIPMENT, net.................. 15,785 -- 15,785
DEFERRED INCOME TAXES........................ -- 850(1) 850
OTHER ASSETS:
Deposits................................... 1,433 -- 1,433
Goodwill and other intangibles, net........ 6,512 -- 6,512
Other...................................... 606 -- 606
----------- --------------- -------------
Total assets............................. $ 176,712 $ 850 $ 177,562
----------- --------------- -------------
----------- --------------- -------------
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Floor plan payables........................ $ 100,612 $ -- $ 100,612
Notes payable and current maturities of
long-term debt--
Banks and others......................... 5,012 -- 5,012
Affiliates............................... 10,916 -- 10,916
Accounts payable........................... 5,389 -- 5,389
Accrued liabilities........................ 5,917 -- 5,917
Customer advance deposits.................. 1,506 -- 1,506
Distributions payable...................... 2,246 15,000(2) 17,246
----------- --------------- -------------
Total current liabilities.............. 131,598 15,000 146,598
----------- --------------- -------------
LONG-TERM DEBT, net of current maturities:
Banks and others........................... 6,008 -- 6,008
Affiliates................................. 4,822 -- 4,822
----------- --------------- -------------
Total long-term debt..................... 10,830 -- 10,830
----------- --------------- -------------
STOCKHOLDERS' EQUITY:
Common stock............................... 84 -- 84
Additional paid-in capital................. 16,216 -- 16,216
Retained earnings.......................... 17,984 850(1) 3,834
(15,000)(2)
----------- --------------- -------------
Total stockholders' equity............... 34,284 (14,150) 20,134
----------- --------------- -------------
Total liabilities and stockholders'
equity................................. $ 176,712 $ 850 $ 177,562
----------- --------------- -------------
----------- --------------- -------------
</TABLE>
F-21
<PAGE>
RDO EQUIPMENT CO.
NOTES TO PRO FORMA UNAUDITED BALANCE SHEET
AS OF OCTOBER 31, 1996
(IN THOUSANDS)
Pro forma adjustments related to the Company's reorganization and change in
tax status:
(1) Reflects a deferred income tax asset of $850, and a corresponding credit
to retained earnings, as if the Company and Washington had converted to C
corporations as of October 31, 1996.
(2) Reflects $15,000 distribution to be paid to the existing stockholders,
which represents substantially all of the previously undistributed,
accumulated S corporation net income of the Company as of January 31,
1996 and will be paid out of the proceeds of the Company's proposed
initial public offering of common stock.
F-22
<PAGE>
RDO EQUIPMENT CO.
PRO FORMA UNAUDITED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED JANUARY 31, 1996
(IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
CENTRAL
THE TEXAS WASHINGTON PRO FORMA PRO
COMPANY ACQUISITION ACQUISITION ADJUSTMENTS FORMA
------------ ------------ ------------ -------------- -------------
<S> <C> <C> <C> <C> <C>
REVENUES:
Wholegoods sales........................... $ 164,054 $ 20,769 $ 10,137 $ (2,200)(1) $ 192,760
Parts and service.......................... 58,998 7,280 5,935 -- 72,213
Rental..................................... 505 -- -- -- 505
------------ ------------ ------------ ------- -------------
Total revenues........................... 223,557 28,049 16,072 (2,200) 265,478
Cost of sales................................ 180,839 22,054 12,234 (2,200)(1) 212,824
(103)(2)
------------ ------------ ------------ ------- -------------
Gross profit................................. 42,718 5,995 3,838 103 52,654
Selling, general and administrative expense.. 31,655 5,468 3,008 (1,765)(3) 38,858
175(4)
240(5)
77(6)
------------ ------------ ------------ ------- -------------
Operating income............................. 11,063 527 830 1,376 13,796
Interest expense............................. (3,817) (423) (361) (662)(7) (1,584)
3,679(8)
Interest income.............................. 823 155 53 -- 1,031
------------ ------------ ------------ ------- -------------
Net income before income taxes............... 8,069 259 522 4,393 13,243
Provision for income taxes(9)................ 3,228 96 193 1,780 5,297
------------ ------------ ------------ ------- -------------
Net income................................... $ 4,841 $ 163 $ 329 $ 2,613 $ 7,946
------------ ------------ ------------ ------- -------------
------------ ------------ ------------ ------- -------------
Net income per common share.................. $ .63
-------------
-------------
Weighted average shares outstanding.......... 12,570(10)
-------------
-------------
</TABLE>
See the accompanying notes to pro forma unaudited statements of operations.
F-23
<PAGE>
RDO EQUIPMENT CO.
PRO FORMA UNAUDITED STATEMENT OF OPERATIONS
FOR THE NINE MONTHS ENDED OCTOBER 31, 1996
(IN THOUSANDS EXCEPT PER SHARE AMOUNTS))
<TABLE>
<CAPTION>
CENTRAL
THE TEXAS WASHINGTON PRO FORMA PRO
COMPANY ACQUISITION ACQUISITION ADJUSTMENTS FORMA
------------ ------------ ------------ -------------- -------------
<S> <C> <C> <C> <C> <C>
REVENUES:
Wholegoods sales........................... $ 170,036 $ 11,088 $ 9,920 $ -- $ 191,044
Parts and service.......................... 57,322 2,333 5,222 -- 64,877
Rental..................................... 1,902 -- -- -- 1,902
------------ ------------ ------------ ------ -------------
Total revenues........................... 229,260 13,421 15,142 -- 257,823
Cost of sales................................ 186,451 10,620 11,510 -- 208,581
------------ ------------ ------------ ------ -------------
Gross profit................................. 42,809 2,801 3,632 -- 49,242
Selling, general and administrative expense.. 29,492 1,567 2,540 105(4) 33,908
180(5)
24(6)
------------ ------------ ------------ ------ -------------
Operating income............................. 13,317 1,234 1,092 (309) 15,334
Interest expense............................. (4,116) (352) (221) (317)(7) (2,247)
2,759(8)
Interest income.............................. 633 110 73 -- 816
------------ ------------ ------------ ------ -------------
Net income before income taxes............... 9,834 992 944 2,133 13,903
Provision for income taxes(9)................ 3,934 367 349 911 5,561
------------ ------------ ------------ ------ -------------
Net income................................... $ 5,900 $ 625 $ 595 $ 1,222 $ 8,342
------------ ------------ ------------ ------ -------------
------------ ------------ ------------ ------ -------------
Net income per common share.................. $ .66
-------------
-------------
Weighted average shares outstanding.......... 12,555(10)
-------------
-------------
</TABLE>
See the accompanying notes to pro forma unaudited statements of operations.
F-24
<PAGE>
RDO EQUIPMENT CO.
NOTES TO PRO FORMA UNAUDITED STATEMENTS OF OPERATIONS
YEAR ENDED JANUARY 31, 1996 AND THE NINE MONTHS ENDED OCTOBER 31, 1996
(1) To reflect reclassification of certain Central Texas revenues and costs of
goods sold to a basis consistent with the Company's.
(2) To reflect the current year impact of the conversion of Central Texas and
Washington from LIFO to FIFO.
(3) To eliminate salary and bonus payments made to the previous owner of
Central Texas who was not retained as an employee after the acquisition, net
of estimated compensation to be paid to a new general manager.
(4) Reflects amortization of $6.0 million of goodwill over 30 years arising
from the acquisitions of Central Texas and Washington.
(5) Reflects increase in rent expense related to new leases on buildings used
in the Washington operations.
(6) Reflects the net change in depreciation expense associated with certain
assets not acquired, and the write-up to fair market value of certain assets
acquired, from Central Texas and Washington.
(7) The pro forma adjustments to interest expense arising from the acquisitions
of Central Texas and Washington are presented below (in thousands):
<TABLE>
<CAPTION>
NINE MONTHS
YEAR ENDED ENDED OCTOBER
JANUARY 31, 1996 31, 1996
----------------- -------------
<S> <C> <C>
Eliminate interest on debt not assumed........................ $ (254) $ (200)
Interest on acquisition debt.................................. 916 517
----- -----
Pro forma interest adjustment............................... $ 662 $ 317
----- -----
----- -----
</TABLE>
(8) Eliminates interest expense on acquisition debt and floor plan financing
which is to be paid with proceeds of the Company's proposed initial public
offering of common stock.
(9) To provide for federal and state income tax expense as if the Company,
Central Texas and Washington had been taxed as C corporations for all
periods presented at rates which reflect the federal statutory rate plus the
net effect of state taxes.
(10) Reflects the shares of common stock issued to reduce acquisition debt and
floor plan financing and to pay the $15.0 million S corporation
distribution.
F-25
<PAGE>
[PHOTOS]
[inside back cover: four photos, one depicting a harvester and three
depicting various store locations]
<PAGE>
NO DEALER, SALESPERSON OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATION NOT CONTAINED IN THIS PROSPECTUS AND,
IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATION MUST NOT BE RELIED UPON AS
HAVING BEEN AUTHORIZED BY THE COMPANY OR ANY UNDERWRITER. THIS PROSPECTUS DOES
NOT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO BUY ANY OF THE
SECURITIES OFFERED HEREBY IN ANY JURISDICTION TO ANY PERSON TO WHOM IT IS
UNLAWFUL TO MAKE SUCH OFFER IN SUCH JURISDICTION. NEITHER THE DELIVERY OF THIS
PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE
ANY IMPLICATION THAT THE INFORMATION HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT
TO THE DATE HEREOF OR THAT THERE HAS BEEN NO CHANGE IN THE AFFAIRS OF THE
COMPANY SINCE SUCH DATE.
--------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary........................................................ 3
Risk Factors.............................................................. 9
Use of Proceeds........................................................... 18
S Corporation Distributions............................................... 18
Reincorporation........................................................... 19
Dividend Policy........................................................... 19
Dilution.................................................................. 20
Capitalization............................................................ 22
Selected Combined and Pro Forma Financial and Operating Data.............. 23
Management's Discussion and Analysis of Financial Condition and Results of
Operations.............................................................. 26
Business.................................................................. 36
Management................................................................ 49
Certain Relationships and Related Transactions............................ 55
Principal Stockholders.................................................... 58
Description of Capital Stock.............................................. 59
Shares Eligible for Future Sale........................................... 61
Underwriting.............................................................. 63
Notice to Canadian Residents.............................................. 65
Legal Matters............................................................. 66
Experts................................................................... 66
Additional Information.................................................... 66
Index to Financial Statements............................................. F-1
</TABLE>
--------------
UNTIL FEBRUARY 17, 1997 (25 DAYS AFTER THE COMMENCEMENT OF THE OFFERING), ALL
DEALERS EFFECTING TRANSACTIONS IN THE REGISTERED SECURITIES, WHETHER OR NOT
PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS.
THIS IS IN ADDITION TO THE OBLIGATION OF DEALERS TO DELIVER A PROSPECTUS WHEN
ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR
SUBSCRIPTIONS.
4,200,000 SHARES
[LOGO]
CLASS A COMMON STOCK
($.01 par value)
PROSPECTUS
CREDIT SUISSE FIRST BOSTON
DAIN BOSWORTH
INCORPORATED
