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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED JANUARY 31, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM _______________ TO _______________
COMMISSION FILE NO. 1-12641
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RDO EQUIPMENT CO.
(Exact name of registrant as specified in its charter)
DELAWARE 45-0306084
(State of incorporation) (I.R.S. Employer Identification No.)
2829 SOUTH UNIVERSITY DRIVE
FARGO, NORTH DAKOTA 58103
(Address of principal executive offices) (Zip code)
Registrant's telephone number, including area code: (701) 297-4288
Securities registered pursuant to Section 12(b) of the Act:
CLASS A COMMON STOCK, $.01 PAR VALUE
Securities registered pursuant to Section 12(g) of the Act: NONE
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. YES __X__ NO ____
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K [x].
As of April 3, 1998, 5,731,008 shares of Class A Common Stock of the
registrant were outstanding, and the aggregate market value of the Class A
Common Stock of the registrant as of that date (based upon the last reported
sale price of the Class A Common Stock on that date as reported by the New York
Stock Exchange), excluding outstanding shares beneficially owned by directors
and executive officers, was approximately $77 million.
DOCUMENTS INCORPORATED BY REFERENCE
Part II of this Annual Report on Form 10-K incorporates by reference
information (to the extent specific pages are referred to herein) from the
registrant's Annual Report to Shareholders for the year ended January 31, 1998
(the "1998 Annual Report"). Part III of this Annual Report on Form 10-K
incorporates by reference information (to the extent specific sections are
referred to herein) from the registrant's Proxy Statement for its 1998 Annual
Meeting to be held May 28, 1998 (the "1998 Proxy Statement").
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CAUTIONARY STATEMENT REGARDING
FUTURE RESULTS AND FORWARD-LOOKING STATEMENTS
The future results of RDO Equipment Co. (the "Company"), including
results reflected in any forward-looking statement made by or on behalf of the
Company, will be impacted by a number of important factors. The factors
identified below in the section entitled "Certain Important Factors" are
important factors (but not necessarily all important factors) that could cause
the Company's actual future results to differ materially from those expressed in
any forward-looking statement made by or on behalf of the Company. Any
statements contained or incorporated by reference in this Annual Report on Form
10-K that are not statements of historical fact may be deemed to be
forward-looking statements. Without limiting the foregoing, words such as "may,"
"will," "expect," "believe," "anticipate," "estimate" or "continue" or
comparable terminology are intended to identify forward-looking statements.
Forward-looking statements, by their nature, involve substantial risks and
uncertainties.
PART I
ITEM 1. BUSINESS.
GENERAL
The Company operates 50 retail stores specializing in the distribution,
sale, service, rental and finance of agricultural, construction, material
handling and transportation equipment, parts and supplies. The Company's stores
are located in eight states - Arizona, California, Minnesota, Montana, North
Dakota, South Dakota, Texas and Washington. These stores include the largest
network of Deere & Company ("Deere") construction equipment dealerships and
agricultural equipment dealerships in the United States. The Company believes
that its network of stores enables it to achieve benefits by increasing
operational synergies. The Company expects to continue to expand through future
acquisitions of agricultural, construction, material handling and transportation
dealerships and through the future opening and acquisition of equipment rental
stores.
The equipment and parts sold by the Company are supplied primarily by
Deere, which is a leading manufacturer and supplier of construction and
agricultural equipment in the United States. Sales of new Deere equipment by the
Company accounted for approximately 71% of the Company's new equipment sales in
fiscal 1998. No other supplier accounted for more than 10% of the Company's new
equipment sales in fiscal 1998. The Company's stores also offer complementary
equipment from other suppliers, used equipment, new and used parts, equipment
servicing, equipment rental, loans and other related products and services.
For the fiscal year ended January 31, 1998, the Company's revenues were
generated from the following areas of business:
New equipment sales................................. 52%
Used equipment sales................................ 19%
Product support (parts and service revenues)........ 26%
Equipment rental income............................. 3%
The Company, a Delaware corporation, is the surviving entity resulting
from a merger between the Company and RDO Equipment Co., a North Dakota
corporation ("RDO-North Dakota") which was effective January 22, 1997 (the
"Merger"). RDO-North Dakota was originally incorporated in North
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Dakota on March 13, 1968. The Company's executive offices are located at 2829
South University Drive, Fargo, North Dakota 58103. The Company's phone number is
(701) 297-4288. References to the Company in this report include its
subsidiaries and RDO-North Dakota.
GROWTH STRATEGY
The key elements of the Company's growth strategy 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 store offers a broad array of products based on
the nature of that 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 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.
PURSUING ADDITIONAL ACQUISITIONS. Acquisitions are expected to continue
to be an important element of the Company's growth strategy, particularly given
the consolidation trends among equipment retailers. Due to the Company's
leadership position 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 equipment retailer can be
successfully integrated into the Company's existing operations, i.e., whether
the operations of an acquisition candidate 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 equipment
retailer into its operations by implementing the Company's operating model and
seeks to enhance the acquired retailer's performance within its target market.
Integration of an acquisition generally is completed within the first six to 12
months, although it can take several years before the benefits of the Company's
operating model, store network, strategies and systems are fully realized.
Generally, equipment manufacturers require that their prior approval be given to
prospective acquisitions of their dealerships.
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. 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, marketing, purchasing and employee recruitment,
allowing its store managers and personnel more time to focus on making sales and
providing product support to customers.
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CAPITALIZING ON DIVERSITY OF OPERATIONS. A major focus of the Company's
strategy has been to expand its stores into geographic areas that have a large
base of activity and that provide the Company with opportunities to continue to
develop its store network. The Company believes that its business
diversification 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 its initial base in
the Midwest helps to diminish the effects of seasonality and weather, as well as
local and regional economic fluctuations.
RECENT ACQUISITIONS
During fiscal 1998 the Company acquired a Mack truck center in North
Dakota, three Deere construction equipment stores in Texas, two Deere
construction equipment stores in Montana, four Deere agricultural equipment
stores in southwestern Arizona and southeastern California, and one Deere
agricultural equipment store in North Dakota. The acquisition of the
agricultural stores in the Southwest enabled the Company to realize operating
efficiencies by consolidating one of its construction equipment stores with its
newly acquired agricultural operations. The Company also acquired a Valmont
irrigation dealership in Central North Dakota which was combined with the
Company's store in Bismarck. In addition, the Company acquired five construction
equipment rental stores in Arizona and opened three construction equipment
rental stores in Arizona and Southern California.
In January 1998 the Company announced a preliminary agreement to
acquire Hall GMC, Inc. and Hall Truck Center, Inc. which operate two
full-service Volvo, GMC and Isuzu truck centers in North Dakota. The combined
revenues and assets of these proposed acquisitions will represent less than ten
percent of the Company's total revenues and assets.
CONSTRUCTION EQUIPMENT OPERATIONS
The Company estimates that United States retail sales of new
construction equipment in its target product market (light to medium
applications) in calendar 1997 totaled over $6 billion. Deere is one of the
leading suppliers of construction equipment in the United States for light to
medium applications and offers a broad array of products. Currently, Deere has
approximately 100 construction dealers which operate approximately 355 stores in
the United States. Each dealer within the Deere construction dealer system is
assigned designated geographic areas of responsibility within which it has the
right to sell new Deere construction products.
The Company is the largest Deere construction equipment dealer in the
United States, both in number of stores and total revenues, and accounted for
approximately eight percent of Deere's United States construction equipment
sales in calendar 1997. As of the end of fiscal 1998, the Company owned and
operated 25 Deere construction equipment stores located in metropolitan areas in
Arizona, Southern California, Minnesota, Montana, North Dakota, South Dakota and
Central Texas, and one Mack truck center in North Dakota.
Customers of the Company's construction equipment stores are diverse
and include contractors, for both residential and commercial construction,
utility companies, and federal, state and local government agencies. These
stores provide a full line of equipment for light to medium size applications
and related product support to their customers. Primary products include John
Deere backhoe loaders, hydraulic excavators, crawler dozers and four-wheel drive
loaders. While the sale of new Deere construction equipment is the main focus,
the Company's construction equipment stores also offer complementary equipment
from other suppliers, as well as used equipment taken as trade-ins.
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The Company's construction equipment stores are located in areas with
significant construction activity, including Austin, Dallas-Fort Worth, southern
Los Angeles, Minneapolis-St. Paul, Phoenix, San Antonio and San Diego. Each
construction equipment 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 construction equipment. The Company believes it has a competitive
advantage over other construction equipment dealers given its ability to draw on
its network of construction stores for equipment and parts, the focus on used
equipment and the economies of scale inherent in its centralized administrative,
purchasing and inventory management functions. The Company attributes the
success of its construction equipment stores to its continuing implementation of
its operating model.
AGRICULTURAL EQUIPMENT OPERATIONS
The Company estimates that United States retail sales of new
agricultural equipment in its target product market in calendar 1997 totaled
over $10 billion. Deere is the leading supplier of agricultural equipment in the
United States. Within the Deere agricultural dealer system, dealers are not
assigned exclusive territories, but are authorized to operate at specific store
locations. Currently, Deere has approximately 1,250 agricultural dealers which
operate approximately 1,500 stores in the United States.
The Company is the largest Deere agricultural equipment dealer in the
United States, both in number of stores and total revenues, and accounted for
approximately one percent of Deere's United States agricultural equipment sales
in calendar 1997. As of the end of fiscal 1998, the Company owned and operated
15 Deere agricultural equipment stores located in Arizona, Southern California,
Minnesota, North Dakota, South Dakota and Washington, and one agricultural store
focused on Valmont irrigation equipment.
The Company's agricultural equipment stores are a full-service supplier
to farmers, offering a broad range of farm equipment and related products for
the crops grown in each of their areas. As a result of the customer mix and
Deere's product offering, the core products include combines, tractors, planting
equipment and tillage equipment. The Company's agricultural equipment 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 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 equipment 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, the focus on used equipment and the
economies of scale inherent in its centralized administrative, purchasing and
inventory management functions.
EQUIPMENT RENTAL OPERATIONS
The Company estimates that the United States equipment rental industry
was over $15 billion in calendar 1997 with over 15,000 equipment rental
companies. The Company believes that no
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single company's revenues represented more than three percent of the total. The
growth in this industry is being driven primarily by construction and industrial
companies that are increasingly outsourcing their equipment needs to reduce
their investment in non-core assets and to convert equipment costs from fixed to
variable.
The Company maintains a rental fleet of construction equipment,
primarily through its RDO Rental Co. equipment rental stores in Arizona and
Southern California. The Company rents the construction 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 36 to 48 months of service. The Company
believes that the rental business will be an area of growth for it as the
Company expands its operations in Arizona and California, as well as in its
Midwest and Texas operations. The Company believes that its network of
construction equipment stores support the sale of the used equipment retired
from its rental fleet through the ability to relocate 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.
PARTS AND SERVICE
The Company's 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 its
operations. Each 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 construction equipment stores located in
Dallas, Texas; Minneapolis, Minnesota; Riverside, California; and San Antonio,
Texas also operate undercarriage shops for all makes and sizes of crawler
equipment.
FINANCIAL SERVICES
The Company recently established a finance subsidiary, RDO Financial
Services Company, to provide equipment loans and leases to the customers of its
retail network. This subsidiary is also exploring opportunities to provide
additional products and services, such as extended warranties, credit life
insurance, disability insurance and casualty insurance.
INVENTORY AND ASSET MANAGEMENT
The Company maintains substantial inventories of equipment and parts in
order to facilitate sales to customers on a timely basis. The Company also is
required to build 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 has 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, and 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
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effectively and promptly satisfying its customers' parts needs. Using this
system, the Company also monitors inventory levels and mix in its network and at
each store and makes adjustments as needed in accordance with its operating
plan.
DEALERSHIP AGREEMENTS
DEERE CONSTRUCTION DEALER AGREEMENTS. The Company has agreements with
Deere which authorize the Company to act as a dealer of Deere construction,
utility and forestry equipment (the "Construction Dealer Agreements"). The
Company's areas of responsibility for the sale of Deere construction equipment
are: (i) in the Midwest: almost all of Minnesota, Montana, 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: Central
Texas, including the Austin, Dallas-Fort Worth and San Antonio metropolitan
areas.
Pursuant to the Construction Dealer Agreements, the Company is
required, among other things, to maintain suitable facilities, provide competent
management, actively promote the sale of construction equipment 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 construction equipment
dealers. The Construction Dealer Agreements also entitle the Company to use John
Deere trademarks and tradenames, with certain restrictions.
DEERE AGRICULTURAL DEALER AGREEMENTS. The Company has non-exclusive
dealership agreements with Deere for each of its Deere agricultural equipment
stores, each of which authorizes the Company to act as a dealer in Deere
agricultural equipment (the "Agricultural Dealer Agreements") at a specific
authorized store location. The terms of the Agricultural Dealer Agreements are
substantially the same as the Construction Dealer Agreements. The Deere
agricultural equipment 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.
DEERE DEALERSHIP AGREEMENTS - OTHER PROVISIONS. Under an agreement with
Deere, 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 managers of the Company's
Deere equipment stores, 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 Deere equipment store
within the Company's designated areas of responsibility and for the acquisition
of any other Deere dealership. 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 agreement, or if such ratio would fall below 30% as a result
of such action. As of the end of fiscal 1998, the Company's equity-to-assets
ratio was 31.6%. 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."
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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 construction equipment
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 construction equipment 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 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 network, 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 is an important factor affecting the
Company's results of operations.
DEERE. Floor plan financing from Deere and Deere Credit Services, Inc.
("Deere Credit") represents the primary source of financing for wholegoods
inventories, particularly for equipment supplied by Deere. Deere and Deere
Credit offer floor plan financing to the Company and other 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 based on
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 twelve months for agricultural equipment and one to five months for
construction 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. After the
interest-free period from Deere, the Company generally shifts its financing to
its line of credit with Deere Credit.
OTHER LENDERS. During fiscal 1998, the Company entered into revolving
credit agreements with Deutsche Financial Services and NationsBank for financing
rental equipment and inventory, respectively. The Company also finances
inventory through its line of credit at Ag Capital Company ("Ag Capital"), an
Offutt Entity as defined below. Financing may also be available through floor
plan financing programs for equipment from suppliers other than Deere, which may
be financed by such suppliers themselves or through third-party lenders,
depending on which alternative provides the Company with the most favorable
terms. All lenders generally receive a security interest in the rental equipment
or inventory being financed.
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CUSTOMER FINANCING OPTIONS
Financing options for customer purchases support the sales activities
of the Company. Significant financing sources for purchases by the Company's
customers are through programs offered by Deere and Ag Capital. Recently, the
Company's financial services subsidiary has been coordinating arrangements for
most of the Company's customers who request financing. 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 January 31, 1998,
was $986,000.
AG CAPITAL AND OTHERS. Ag Capital, a cooperative lending institution,
provides financing to the Company's customers. Some of this financing is with
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 $2.2 million as of January 31, 1998. ACL Company,
LLC and Farmers Equipment Rental, Inc., both of which are Offutt Entities, also
provided financing to customers for which the Company has some contingent
recourse liability, which contingent liability was approximately $2.1 million as
of January 31, 1998. These contingent liabilities are also capped at an amount
equal to 10% of the amount of the aggregate outstanding contracts.
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.
PRODUCT WARRANTIES
Product warranties for new equipment and parts are generally provided
by the manufacturer. The term and scope of these warranties vary greatly by
manufacturer and by product. The Company does not provide additional warranties
to retail purchasers of new equipment. The manufacturer (such as Deere) pays the
Company for repairs to 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 transferable and has not yet expired. While the Company has
not generally provided additional warranties, the Company's new finance
subsidiary is exploring opportunities to provide extended warranties.
COMPETITION
The Company's construction equipment stores compete with distributors
of equipment produced by manufacturers other than Deere, including Case
Corporation ("Case"), Caterpillar Inc. ("Caterpillar"), and Komatsu Corporation.
The Company also faces competition from distributors of manufacturers of
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specific types of construction 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 Corporation, Case,
Caterpillar, and New Holland N.V., a subsidiary of Fiat. The Company's
agricultural equipment stores also compete with other Deere agricultural
dealerships. Competing Deere agricultural stores may be located in close
proximity to one of the Company's agricultural equipment stores. The Company's
equipment rental stores compete with other equipment rental companies, including
equipment dealers. Equipment rental businesses generally make available for
short-term rent used equipment manufactured by the foregoing manufacturers,
including those who are suppliers to the Company.
Competition among equipment retailers is primarily based on price,
value, reputation, quality and design of the products offered by the retailer,
the customer service and equipment servicing provided by the retailer, and the
accessibility of the retailer's stores. The Company believes that its broad
product line, product support and quality products enable it to compete
effectively.
INTELLECTUAL PROPERTY RIGHTS
RDO Equipment Co. is a registered service mark 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 with respect to new equipment obtained from manufacturers other than
Deere are licensed from their respective owners. The Company historically has
operated each of its dealerships under either the RDO Equipment Co. service mark
and 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. Each Deere store also is identified as
either an authorized John Deere construction or agricultural equipment store and
may display signs of other suppliers.
ENVIRONMENTAL AND GOVERNMENTAL 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 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 material financial liability to the
Company. 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.
EMPLOYEES
As of January 31, 1998 the Company employed 1,214 full-time employees.
Of this number, 20 employees were located at the Company's corporate offices and
employed in corporate administration. The balance of the employees were involved
in the Company's operations: 154 were employed in administration, 246 in
equipment sales and rental operations, 195 in parts sales, 577 in servicing
equipment and 22 in financing. None of the Company's employees are covered by a
collective bargaining agreement.
<PAGE>
CERTAIN IMPORTANT FACTORS
In addition to the matters discussed above, there are several important
factors that could cause the Company's future results to differ materially from
those anticipated by the Company or which are reflected in any forward-looking
statement which may be made by or on behalf of the Company. Many of these
important factors are identified and discussed in greater detail in the
Company's Form 8-K dated April 24, 1998, as it may be supplemented or amended
from time to time in subsequent filings with the Securities and Exchange
Commission (the "SEC"). Some of these important factors (but not necessarily all
important factors) include the following:
(i) The overall success of Deere and the Company's other
suppliers;
(ii) The availability and terms of floor plan, customer and other
financing;
(iii) The incentive and discount programs provided by Deere and the
Company's other suppliers, and their promotional and marketing
efforts for the Company's products;
(iv) The introduction of new and innovative products by the
Company's suppliers;
(v) The manufacture and delivery of competitively-priced, high
quality equipment and parts by the Company's suppliers in
quantities sufficient to meet the requirements of the
Company's customers on a timely basis;
(vi) General economic conditions worldwide and locally, including
agricultural industry cycles, construction spending, federal,
state and local government spending on highways and other
construction projects, new housing starts, interest rates,
economic recessions, customer business cycles, climatic
phenomena such as El Nino, and customer confidence in the
economy;
(vii) The length of the crop growing season, adverse weather, animal
and plant diseases, crop pests, harvest yields, real estate
values, government farm programs, and the confidence of the
Company's agricultural customers in the farm economy;
(viii) The positions of Deere and other equipment manufacturers with
respect to publicly traded dealers, dealer consolidations and
specific acquisition opportunities;
(ix) Risks associated with growth, expansion and acquisitions,
including the management of growth;
(x) Integration and successful operation of acquired businesses;
(xi) Operating and financial systems to manage rapidly growing
operations; and
(xii) Continued availability of key personnel.
<PAGE>
ITEM 2. PROPERTIES.
As of the end of fiscal 1998, the Company owned the real estate for 10
of its stores, leased its executive offices and 14 stores from an Offutt Entity
(as defined in Item 4A below), and leased 26 stores from unrelated third
parties. Lease terms range from one to 15 years and some leases include an
option to purchase the leased property. The Company believes that all of its
facilities are in good operating condition.
ITEM 3. LEGAL PROCEEDINGS.
There are no material pending legal, governmental, administrative or
other proceedings to which the Company is a party or of which any of its
property is the subject.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None.
ITEM 4A. EXECUTIVE OFFICERS OF THE REGISTRANT.
The executive officers of the Company, their ages and the offices held,
as of April 3, 1998, are as follows:
<TABLE>
<CAPTION>
NAME AGE OFFICE
- ---- --- ------
<S> <C> <C>
Ronald D. Offutt 55 Chairman of the Board and Chief Executive Officer
Paul T. Horn 55 President and Chief Operating Officer
Allan F. Knoll 54 Chief Financial Officer and Secretary
Richard J. Moen 50 Chief Administrative Officer and Treasurer
Gary R. Allan 49 Senior Vice President - West Agricultural Division
Charles Calhoun 45 Senior Vice President - Used Construction Equipment Division
Steven B. Dewald 37 Senior Vice President - RDO Financial Services Company
H. David Frambers 54 Senior Vice President - Midwest Construction Division
Randolph F. Goss 45 Senior Vice President - South Central Construction Division
William R. Hutton 50 President - RDO Rental Co.
Larry B. Kerkhoff 44 Senior Vice President - Midwest Agricultural Division
<PAGE>
Larry E. Scott 55 Senior Vice President - Southwest Construction Division
Mark A. Doda 35 Controller
</TABLE>
- ---------------------
RONALD D. 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 R.D. Offutt Company ("Offutt
Co.") and other entities he owns, controls or manages (collectively, the "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. Mr. Offutt spent approximately
one-half of his time on business of the Company during fiscal 1998. He serves on
the Board of Directors of High Plains Corporation, an ethanol producer based in
Wichita, Kansas. 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. Mr. Offutt is the brother-in-law of Larry E. Scott, the
Company's Senior Vice President - Southwest Construction Division.
PAUL T. 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 an
employee of the Company and has spent substantially all of his time on the
business of the Company. Mr. Horn serves as a director and officer and is a
beneficial stockholder of many of the Offutt Entities. Mr. Horn currently serves
as Vice Chairman of the Board of Directors of 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 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. Mr. Knoll spent
approximately two-thirds of his time on the business of the Company during
fiscal 1998. Mr. Knoll is a graduate of Moorhead State University with degrees
in Business Administration and Accounting.
RICHARD J. 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 of Harvard Law School.
GARY R. ALLAN has served as Senior Vice President - West Agricultural
Division since the Company's acquisition in May 1997 of four agricultural stores
located in southwestern Arizona and southeastern California. He joined the
Company as Senior Vice President - Northwest Agricultural Division in October
1996 in connection with the Company's acquisition of two agricultural stores
located in the State of Washington. Previously, Mr. Allan was the President of
the acquired 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
<PAGE>
Federal Savings and Loan in Yakima, Washington. Mr. Allan attended Columbia
Basin College and Eastern Washington University.
CHARLES CALHOUN has served as Senior Vice President - Used Commercial
Equipment Division since March 1997. Previously, he was Vice President and an
owner of the construction dealership in Texas which was acquired by the Company
in July 1996. Subsequent to this acquisition and prior to his appointment as
Senior Vice President, Mr. Calhoun managed the Texas construction dealership and
started the Used Construction Equipment Division. He has 21 years of experience
in the construction equipment business, and is a graduate of Texas Tech
University with a degree in Marketing.
STEVEN B. DEWALD has served as Senior Vice President - RDO Financial
Services Company since December 1997. From September 1996 through November 1997,
he served as Director of Finance of Ag Capital Company, an Offutt Entity. Prior
to joining Ag Capital, from February 1995 to August 1996, Mr. Dewald managed
personal investments, including real estate development and fast food
restaurants. From 1989 until February 1995, he held increasingly responsible
positions as a financial officer of Metropolitan Financial Corporation, a
regional thrift holding company acquired in 1995 by U.S. Bancorp (formerly First
Bank System, Inc.) at which time he was serving as Executive Vice President and
Chief Financial Officer. Mr. Dewald worked for Ernst & Young from 1983 to 1989.
He is a graduate of Concordia College of Moorhead with a degree in Accounting
and Healthcare Finance.
H. DAVID FRAMBERS has served as Senior Vice President - Midwest
Construction Division since July 1996 and from July 1996 until March 1997 also
served as Senior Vice President - South Central Construction Division. With the
expansion of the Construction Division, he became Vice President and General
Manager of the Construction 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 Construction 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.
RANDOLPH F. GOSS has served as Senior Vice President - South Central
Construction Division since March 1997. He joined the Company in January 1997
and managed the Company's Texas construction dealership until his appointment as
Senior Vice President. Prior to joining the Company, Mr. Goss was Vice President
- - Sales and Marketing of Source, Inc., a telecommunications company, from March
1996 until January 1997. From March 1995 until March 1996, he served as Vice
President - National Accounts of American Hi-Lift Corporation, a division of
Vibroplant USA, Inc. engaged in the rental and sale of equipment. Prior thereto,
Mr. Goss was employed by Hertz Equipment Rental Corporation as Director of
National Accounts (1992 until March 1995) and as Director of Sales, Southwest
Region (1987 until 1992). Mr. Goss attended the University of Miami (Florida).
WILLIAM R. HUTTON has served as President of RDO Rental Co., an 80%
owned subsidiary of the Company, since March 1997. He is also the President of
W.R. Hutton & Associates, Inc., a private investment firm with offices in
Arizona, which owns the remaining 20% of RDO Rental Co. From 1984 until February
1997, he was President and owner of Sun Valley Equipment Corp., the Arizona
construction equipment rental business acquired by RDO Rental Co. in February
1997. From 1977 to 1980, Mr. Hutton was Vice President and one of the founders
of Sunstate Equipment Corp. From 1971 to 1977, Mr. Hutton was a regional manager
for U.S. Rentals, Inc. He attended Glendale Community College.
<PAGE>
LARRY B. KERKHOFF has served as Senior Vice President - Midwest
Agricultural Division since July 1996. Prior to that time, he was the manager of
the Company's agricultural equipment store in Breckenridge, Minnesota, since
1990. 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. Mr. Kerkhoff serves on the Board of Directors of the
North Dakota Implement Dealers Association. 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 has served as Senior Vice President - Southwest
Construction Division 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 26 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.
Mr. Scott is the brother-in-law of Ronald D. Offutt, the Company's founder,
Chairman, Chief Executive Officer and principal stockholder.
MARK A. 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 1985 through 1991, Mr. Doda worked for Deloitte & Touche
LLP. Mr. Doda is a graduate of the University of North Dakota with a degree in
Accounting.
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS.
The information under the captions "Common Stock Information" and
"Dividend Policy" on page 38 of the Company's 1998 Annual Report to Shareholders
is incorporated herein by reference. The Company did not have any unregistered
sales of equity securities during fiscal 1998.
ITEM 6. SELECTED FINANCIAL DATA.
The information under the caption "Selected Financial Data" on page 13
of the 1998 Annual Report to Shareholders is incorporated herein by reference.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS.
The information under the caption "Management's Discussion and Analysis
of Financial Condition and Results of Operations" on pages 14 through 19 of the
Company's 1998 Annual Report to Shareholders is incorporated herein by
reference.
<PAGE>
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK.
Not applicable.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
The Company's Consolidated Financial Statements and the report of its
independent public accountants, Arthur Andersen LLP, on pages 20 through 36 of
the Company's 1998 Annual Report to Shareholders are incorporated herein by
reference and are listed in Item 14(a)(1) on page 17 of this Report. The
supplementary data required by this Item 8 appears as Note 13 entitled
"Unaudited Quarterly Financial Data" on page 35 of the 1998 Annual Report to
Shareholders.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE.
Not applicable.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
The information under the captions "Election of Directors--Information
About Nominees" and "Election of Directors--Other Information About Nominees" in
the Company's 1998 Proxy Statement is incorporated herein by reference.
The information under the caption "Section 16(a) Beneficial Ownership
Reporting Compliance" in the Company's 1998 Proxy Statement is incorporated
herein by reference.
ITEM 11. EXECUTIVE COMPENSATION.
The information under the captions "Election of Directors--Compensation
of Directors" and "Executive Compensation and Other Benefits" in the Company's
1998 Proxy Statement is incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The information under the captions "Principal Stockholders" and
"Beneficial Ownership of Management" in the Company's 1998 Proxy Statement are
incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
The information under the caption "Election of Directors - Certain
Relationships and Related Transactions" in the Company's 1998 Proxy Statement is
incorporated herein by reference.
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON
FORM 8-K
(a)(1) FINANCIAL STATEMENTS OF REGISTRANT.
The following are incorporated herein by reference from the pages
indicated in the Company's 1998 Annual Report to Shareholders, copies
of which are included as Exhibit 13.1 to this Report:
Report of Independent Public Accountants--Arthur Andersen LLP--page 36.
Consolidated Statements of Operations for the Years Ended January 31,
1998, 1997 and 1996--page 20.
Consolidated Balance Sheets as of January 31, 1998 and 1997--page 21.
Consolidated Statements of Stockholders' Equity for the Years Ended
January 31, 1998, 1997 and 1996--page 22.
Consolidated Statements of Cash Flows for the Years Ended January 31,
1998, 1997 and 1996-- page 23.
Notes to Consolidated Financial Statements--pages 24 to 35.
(a)(2) FINANCIAL STATEMENT SCHEDULES OF REGISTRANT.
Financial Statement Schedules are omitted because of the absence of the
conditions under which they are required or because the information required is
included in the consolidated financial statements or notes thereto.
(a)(3) EXHIBITS.
The exhibits to this Report are listed in the Exhibit Index on pages 19
to 21 below.
A copy of any of the exhibits listed or referred to above will be
furnished at a reasonable cost to any person who was a shareholder of the
Company as of April 3, 1998, upon receipt from any such person of a written
request for any such exhibit. Such request should be sent to RDO Equipment Co.,
Stockholder Relations, 3030 Harbor Lane, Suite 202, Plymouth, Minnesota 55447.
The following is a list of each management contract or compensatory
plan or arrangement required to be filed as an exhibit to this Annual Report on
Form 10-K pursuant to Item 14(a)(3):
1. RDO Equipment Co. 1996 Stock Incentive Plan, including forms
of option agreements.
2. Form of Agreement Re: Confidentiality, Assignment of
Inventions and Non-Competition.
<PAGE>
3. Form of Indemnification Agreement between the Company and each
of its executive officers and directors.
(b) REPORTS ON FORM 8-K.
None.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
Date: April 24, 1998
RDO EQUIPMENT CO.
By: /s/ Ronald D. Offutt
------------------------------------
Ronald D. Offutt
Chairman and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below on April 24, 1998 by the following persons on
behalf of the registrant and in the capacities indicated.
Signature Title
- --------- -----
/s/ Ronald D. Offutt Chairman of the Board, Chief Executive Officer
- ---------------------------- and Director (principal
Ronald D. Offutt executive officer)
/s/ Paul T. Horn President, Chief Operating Officer and Director
- ----------------------------
Paul T. Horn
/s/ Allan F. Knoll Chief Financial Officer, Secretary and Director
- ---------------------------- (principal financial officer)
Allan F. Knoll
/s/ Mark A. Doda Controller
- ---------------------------- (principal accounting officer)
Mark A. Doda
/s/ Bradford M. Freeman Director
- ----------------------------
Bradford M. Freeman
/s/ Ray A. Goldberg Director
- ----------------------------
Ray A. Goldberg
/s/ Norman M. Jones Director
- ----------------------------
Norman M. Jones
/s/ James D. Watkins Director
- ----------------------------
James D. Watkins
<PAGE>
RDO EQUIPMENT CO.
EXHIBIT INDEX TO ANNUAL REPORT ON FORM 10-K
FOR THE FISCAL YEAR ENDED JANUARY 31, 1998
<TABLE>
<CAPTION>
ITEM NO. ITEM METHOD OF FILING
- -------- ---- ----------------
<S> <C> <C>
3.1 Certificate of Incorporation....................................... Incorporated by reference to Exhibit 3.1 to the
Company's Registration Statement on Form S-1
(File No. 333-13267).
3.2 Bylaws............................................................. Incorporated by reference to Exhibit 3.2 to the
Company's Registration Statement on Form S-1
(File No. 333-13267).
4.1 Specimen Form of the Company's Class A Common Stock Certificate.... Incorporated by reference to Exhibit 4.2 to the
Company's Registration Statement on Form S-1
(File No. 333-13267).
4.2 Specimen Form of the Company's Class B Common Stock Certificate.... Incorporated by reference to Exhibit 4.3 to the
Company's Registration Statement on Form S-1
(File No. 333-13267)
10.1 Agreement between Ronald D. Offutt, RDO Equipment Co., John
Deere Company and John Deere Construction Equipment Company........ Incorporated by reference to Exhibit 10.1 to the
Company's Registration Statement on Form S-1
(File No. 333-13267).
10.2 Form of Deere Agricultural Dealer Agreement Package................ Incorporated by reference to Exhibit 10.2 to the
Company's Registration Statement on Form S-1
(File No. 333-13267)
10.3 Form of Deere Construction Dealer Agreement Package................ Incorporated by reference to Exhibit 10.3 to the
Company's Registration Statement on Form S-1
(File No. 333-13267).
10.4 First Amended and Restated Credit Agreement between RDO
Equipment Co. and Ag Capital Company dated December 18, 1997....... Filed herewith electronically.
<PAGE>
10.5 First Amended and Restated Credit Agreement between Minnesota
Valley Irrigation, Inc. and Ag Capital Company dated February
13, 1998........................................................... Filed herewith electronically.
10.6 Deere Agricultural Dealer Finance Agreement........................ Incorporated by reference to Exhibit 10.6 to the
Company's Registration Statement on Form S-1
(File No. 333-13267).
10.7 Deere Construction Dealer Finance Agreement........................ Incorporated by reference to Exhibit 10.7 to the
Company's Registration Statement on Form S-1
(File No. 333-13267).
10.8 RDO Equipment Co. 1996 Stock Incentive Plan, including forms of
option agreements.................................................. Incorporated by reference to Exhibit 10.8 to the
Company's Annual Report on Form 10-K for the
fiscal year ended January 31, 1997.
10.9 Form of Indemnification Agreement entered into by the Company
with each of its executive officers and directors.................. Incorporated by reference to Exhibit 10.9 to the
Company's Registration Statement on Form S-1
(File No. 333-13267).
10.10 Corporate Service Agreement between RDO Equipment Co. and R.D.
Offutt Company, dated as of November 1, 1996....................... Incorporated by reference to Exhibit 10.10 to
the Company's Registration Statement on Form S-1
(File No. 333-13267).
10.12 Agreement and Plan of Merger by and between RDO Equipment Co.
(North Dakota) and RDO Equipment Co. (Delaware).................... Incorporated by reference to Exhibit 10.13 to
the Company's Registration Statement on Form S-1
(File No. 333-13267).
10.13 Tax Agreement Relating to S Corporation Distribution, with
Supplement......................................................... Incorporated by reference to Exhibit 10.14 to
the Company's Registration Statement on Form S-1
(File No. 333-13267).
10.14 Agreement between RDO Equipment Co., John Deere Company and
John Deere Construction Equipment Company.......................... Incorporated by reference to Exhibit 10.15 to
the Company's Registration Statement on Form S-1
(File No. 333-13267).
<PAGE>
10.15 Form of Agreement re: Confidentiality, Assignment of Inventions
and Non-Competition entered into by the Company with each of its
executive officers and directors................................... Incorporated by reference to Exhibit 10.15 to
the Company's Annual Report on Form 10-K for the
fiscal year ended January 31, 1997.
13.1 Excerpts from 1998 Annual Report to Shareholders................... Filed herewith electronically.
21.1 Subsidiaries of the Registrant..................................... Filed herewith electronically.
23.1 Consent of Independent Public Accountants.......................... Filed herewith electronically.
27.1* Financial Data Schedule for Fiscal 1998............................ Filed herewith electronically.
27.2* Financial Data Schedule for Fiscal 1997 (Restated in accordance
with FAS No. 128).................................................. Filed herewith electronically.
27.3* Financial Data Schedule for Fiscal 1996 (Restated in accordance
with FAS No. 128).................................................. Filed herewith electronically.
27.4* Financial Data Schedule for Quarter 3 of Fiscal 1997 (Restated
in accordance with FAS No. 128).................................... Filed herewith electronically.
27.5* Financial Data Schedule for Quarter 2 of Fiscal 1997 (Restated
in accordance with FAS No. 128).................................... Filed herewith electronically.
27.6* Financial Data Schedule for Quarter 1 of Fiscal 1997 (Restated
in accordance with FAS No. 128).................................... Filed herewith electronically.
</TABLE>
- ------------------------------
* Submitted only with the electronic filing of this report with the SEC.
EXHIBIT 10.4
AG CAPITAL COMPANY
FIRST AMENDED AND RESTATED CREDIT AGREEMENT
THIS FIRST AMENDED AND RESTATED CREDIT AGREEMENT made and entered
into as of December 18, 1997 (the "Effective Date"), by and between RDO
EQUIPMENT CO., a Delaware corporation (the "Borrower"), whose address is 2829
South University Drive, P.O. Box 7160, Fargo, North Dakota, 58109-7160, and AG
CAPITAL COMPANY, a Delaware corporation (the "Lender"), whose address is 1500
Radisson Tower, 201 North 5th Street, Fargo, North Dakota 58102, amends and
restates that certain Ag Capital Company Loan Agreement, dated as of October 31,
1997 (herein the "Prior Agreement") among the Borrower and the Lender.
RECITALS
1. The Lender and the Borrower have agreed that the terms and
conditions of the Prior Agreement should be amended and restated to clarify
certain provisions thereof for the benefit of both parties.
2. The Lender and the Borrower hereby agree that from and after the
Effective Date, the Prior Agreement shall be deemed amended and restated in its
entirety as set forth below.
NOW, THEREFORE, for and in consideration of the loans and advances
to be made by the Lender to the Borrower hereunder, the mutual covenants,
promises and agreements contained herein, and other good and valuable
consideration the receipt and sufficiency of which are hereby acknowledged, the
Borrower and the Lender agree as follows:
The following terms when used in this Credit Agreement shall, except
where the context otherwise requires, have the following meanings both in the
singular and plural forms thereof:
1. DEFINITIONS
"Advance" means any advance by the Lender made under either of the
Seasonal Commitments. (The face amount of any letter of credit issued by the
Lender for the account of the Borrower shall be deemed an Advance hereunder).
"Affiliate" means any corporation, association, partnership, joint
venture or other business entity directly or indirectly controlling or
controlled by, or under direct or indirect common control of, the Borrower or
any of its Subsidiaries.
"Assignee" has the meaning set forth in Section 20.14.
"Borrower" means RDO Equipment Co., a Delaware corporation.
"Business Day" means any day on which the Lender is open for the
transaction of business of the kind contemplated by this Credit Agreement.
"Change of Control" means the occurrence of any of the following
circumstances:
(a) any person or two or more persons acting in concert acquire
beneficial ownership (within the meaning of Rule 13d-3 of the
SEC under the Securities Exchange Act of 1934), directly or
indirectly, of securities of the Borrower (or other securities
convertible into such securities)
<PAGE>
representing 25% or more of the combined voting power of all
securities of the Borrower entitled to vote in the election of
directors; or
(b) during any period, whether commencing before or after the date
hereof, the membership of the Board of Directors of the
Borrower changes for any reason (other than by reason of
death, disability, or scheduled retirement) so that the
majority of the Board of Directors is made up of persons who
were not directors at the beginning of such period.
"Collateral" means all of the assets of the Borrower or any other
party in which the Lender holds a security interest pursuant to any of the Loan
Documents.
"Credit Agreement" means this First Amended and Restated Credit
Agreement, as originally executed and as may be amended, modified, supplemented,
or restated from time to time by written agreement between the Borrower and the
Lender.
"Current Assets" means, at any date, the aggregate amount of all
assets of the Borrower that are classified as current assets, on a consolidated
basis, in accordance with GAAP.
"Current Liabilities" means, at any time, the aggregate amount of
all liabilities of the Borrower that are classified as current liabilities, on a
consolidated basis, in accordance with GAAP (including taxes and other proper
accruals and the matured portion of any indebtedness).
"Debt" means (i) all items of indebtedness or liability that, in
accordance with GAAP, would be included in determining total liabilities as
shown on the liabilities side of a balance sheet as at the date of which Debt is
to be determined; (ii) indebtedness secured by any mortgage, pledge, lien or
security interest existing on property owned by the Person whose Debt is being
determined, whether or not the indebtedness secured thereby shall have been
assumed; (iii) all obligations, contingent or otherwise, relative to the face
amount of all letters of credit, whether or not drawn, and banker's acceptances
issued for the account of such Person, and (iv) guaranties, endorsements (other
than for purposes of collection in the ordinary course of business) and other
contingent obligations in respect of, or to purchase or otherwise acquire
indebtedness of others.
"Default" means any event which if continued uncured would, with
notice or lapse of time or both, constitute an Event of Default.
"Environmental Laws" has the meaning set forth in Section 16.17.
"ERISA" means the Employee Retirement Income Security Act of 1974,
as amended and as may be further amended from time to time, and the rules and
regulations promulgated thereunder by any governmental agency or authority, as
from time to time in effect.
"Event of Default" means any event of default described in Section
19 hereof.
"Fixed Rate" means such rate of interest as may be quoted to
Borrower by Lender at Lender's sole discretion upon request made by Borrower
before 11:00 a.m. (central time) at least two Business Days prior to the
beginning of the calendar month specified by Borrower in such request for
Interest Rate Periods as specified by Borrower in such request.
"Fixed Rate Amount" means the amount of any Loan which accrues
interest at a Fixed Rate, which shall be specified in any request by the
Borrower to Lender for a Fixed Rate, and which must be in increments of
$100,000, unless otherwise agreed to by the Lender.
<PAGE>
"GAAP" means the generally accepted accounting principles in the
United States in effect from time to time including, but not limited to,
Financial Accounting Standards Board (FASB) Standards and Interpretations,
Accounting Principles Board (APB) Opinions and Interpretations, Committee on
Accounting Procedure (CAP) Accounting Research Bulletins, and certain other
accounting principles which have substantial authoritative support.
"Government Yield" means as of any date of determination the yield
(converted as necessary to the equivalent semi-annual compound rate) on U.S.
Treasury securities having a maturity date closest to the weighted average
maturity of the relevant Loan (to the scheduled installment dates), as published
in The Wall Street Journal (or, if not so published, as determined by the Lender
by using the average quotes obtained by the Lender from three primary dealers
that market U.S. Treasury securities in the secondary market). "U.S. Treasury
securities" means actively traded U.S. Treasury bonds, bills and notes and, if
more than one issue of U.S. Treasury securities is scheduled to mature at or
about the time of the end of the weighted average maturity of the Loan, then to
the extent possible the U.S. Treasury security issued most recently prior to the
date of determination will be chosen as the basis of the Government Yield.
"Hazardous Substance" has the meaning set forth in Section 16.16
hereof.
"Interest Differential" means as of the date of any full or partial
prepayment on any Loan, the Government Yield with respect to such Loan measured
on the date the rate at which interest on such Loan is accruing immediately
prior to such prepayment is set, minus the Government Yield with respect to such
Loan as of the date of such prepayment.
"Interest Rate Period" means the period specified by the Lender in
response to a request by the Borrower that any Fixed Rate Amount of any Loan
accrue interest at a Fixed Rate. All Interest Rate Periods shall be months, but
in no event shall end later than the Maturity with respect to the Seasonal Loan,
and the final maturity date for each other Loan.
"Issuance Spread" is the amount by which the rate per annum at which
interest accrues on any Loan as of any date such rate is set exceeded the
Government Yield as of such date.
"Lender" means Ag Capital Company, a Delaware corporation, its
successors and assigns.
"Letter of Credit I" shall mean the standby letter of credit issued
by the St. Paul Bank for Cooperatives for the benefit of Leonard V. Bergan in
the face amount not to exceed Three Hundred Forty-Five Thousand Dollars
($345,000) in form and substance satisfactory to the Lender and the Borrower.
"Letter of Credit Note I" means the note No. 29220 in the stated
amount of the Letter of Credit I, or if less, in the amount of any reimbursement
obligations as they arise under the Letter of Credit I.
"Letter of Credit II" shall mean the standby letter of credit issued
by the St. Paul Bank for Cooperatives for the benefit of Leonard V. Bergan in
the face amount not to exceed Five Hundred Fifteen Thousand Dollars ($515,000)
in form and substance satisfactory to the Lender and the Borrower.
"Letter of Credit Note II" means the note No. 292201 in the stated
amount of the Letter of Credit II, or if less, in the amount of any
reimbursement obligations as they arise under the Letter of Credit II.
"Leverage Ratio" means the ratio of the total liabilities (including
Debt) of the Borrower to the Tangible Net Worth of the Borrower, as determined
on a consolidated basis, in accordance with GAAP.
<PAGE>
"LIBOR" for any day during any calendar month means the rate of
interest per annum determined by the Lender to be the arithmetic mean (rounded
upward, if necessary, to the nearest 1/100th of 1%) of the rates of interest per
annum notified to the Lender by at least two (2) major banks in the London
interbank eurodollar market as the rate of interest at which dollar deposits in
the approximate amount of the investment associated with such one month period
would be offered to major banks in the London interbank market at their request,
in each case at or about 11:00 a.m. (Fargo time) on the second Business Day
prior to the commencement of such calendar month.
"Lien" means any lien, security interest, pledge, mortgage,
statutory or tax lien, or other encumbrance of any kind whatsoever (including
without limitation, the lien or retained security title of a conditional
vendor), whether arising under a security instrument or as a matter of law,
judicial process or otherwise or by an agreement of the Borrower to grant any
lien or security interest or to pledge, mortgage or otherwise encumber any of
its assets.
"Loan" means any of the Seasonal Loan I, Seasonal Loan II, Term Loan
I, Term Loan II, Term Loan III, Term Loan IV, Term Loan V, Term Loan VI, Term
Loan VII, Letter of Credit I and Letter of Credit II.
"Loan Documents" means this Credit Agreement and the Subject Notes
and such other documents as the Lender may reasonably require as security for,
or otherwise executed in connection with, any loan hereunder, all as originally
executed and as may be amended, modified or supplemented from time to time by
written agreement between the parties thereto.
"Material Adverse Occurrence" means any occurrence which materially
adversely affects the present or prospective financial condition or operations
of the Borrower, or which impairs, or may impair, in the Lender's reasonable
judgment, the ability of the Borrower to perform its obligations under the Loan
Documents.
"Maturity" of the Seasonal Note means the earlier of (a) the date on
which the Seasonal Note becomes due and payable upon the occurrence of an Event
of Default; or (b) the Termination Date.
"Mortgages" means the mortgages dated January 31, 1996 expressly
securing Term Note IV, and other obligations to Lender, and mortgages dated June
16, 1992 expressly securing Term Note I, February 24, 1992 expressly securing
Term Note II and October 14, 1991, expressly securing Term Note III and as
provided in each such mortgage, other obligations to Lender.
"Mortgage Secured Notes and Loans" has the meaning set forth in
Section 13.8.
"Person" means any natural person, corporation, firm, association,
government, governmental agency or any other entity, whether acting in an
individual fiduciary or other capacity.
"Premises" has the meaning set forth in Section 16.17 hereof.
"Reference Rate" means for any day the rate of interest indicated as
the "prime rate" in the "Money Rates" section of the Wall Street Journal for
such day (or if no such rate is published for such day for the earliest
preceding day for which such rate is published). If such rate ceases to be
published, the "Reference Rate" shall mean a comparable rate determined by the
Lender as indicated in a written notice to the Borrower."
"Regulatory Change" means any change after the date hereof in any
(or the adoption after the date hereof of any new) (a) Federal or state law or
foreign law applying to the Lender (or its successors or
<PAGE>
assigns); or (b) regulation, interpretation, directive or request (whether or
not having the force of law) applying or in the reasonable opinion of the Lender
(or its successors or assigns) applicable to, the Lender (or its successors or
assigns) of any court or governmental authority charged with the interpretation
or administration of any law referred to in clause (a) of this definition or of
any fiscal, monetary, or other authority having jurisdiction over the Lender (or
its successors or assigns).
"Seasonal Commitment" means the Lender's obligation to extend
Advances to the Borrower under Sections 2 and 3, as the context may require.
"Seasonal Loan I" means, at any date, the aggregate amount of all
Advances made by the Lender to the Borrower pursuant to Section 2 hereof.
"Seasonal Note I" means the note No. 29210, dated October 31, 1997,
in the original principal amount of Fifteen Million Dollars ($15,000,000.00)
made by the Borrower payable to the order of the Lender, together with all
extensions, renewals, modifications, substitutions and changes in form thereof
effected by written agreement between the Borrower and the Lender.
"Seasonal Loan II" means, at any date, the aggregate amount of all
Advances made by the Lender to the Borrower pursuant to Section 3 hereof.
"Seasonal Note II" means the note No. 292101, dated October 31,
1997, in the original principal amount of Five Million Dollars ($5,000,000.00)
made by the Borrower payable to the order of the Lender, together with all
extensions, renewals, modifications, substitutions and changes in form thereof
effected by written agreement between the Borrower and the Lender.
"Security Agreement" means the Security Agreement dated as of
January 31, 1997 executed by the Borrower in favor of the Lender, as originally
executed and as may be amended, modified or supplemented from time to time by
written agreement between the Borrower and the Lender, and various other
security agreements previously executed in favor of the Lender by Borrower.
"Subject Note(s)" means the Seasonal Note I, the Seasonal Note II,
the Letter of Credit Note I, the Letter of Credit Note II and the Term Notes.
"Subsidiary" means any corporation of which more than fifty percent
(50%) of the outstanding capital stock having ordinary voting power to elect a
majority of the board of directors of such corporation (irrespective of whether,
at the time, stock of any other class or classes of such corporation shall have
or might have voting power by reason of the happening of any contingency) is at
the time, directly or indirectly, owned by the Borrower and/or one or more
Subsidiary or Affiliate.
"Tangible Net Worth" means, at any date, the excess, if any, of the
Borrower's total assets over the Borrower's total liabilities on such date,
excluding from total assets the aggregate amount carried as assets on the books
of the Borrower for goodwill, licenses, patents, trademarks, trade names
treasury stock, unamortized debt discount and expenses, leasehold improvements,
copyrights, franchises, organization costs, write-ups in the book value of the
assets of the Borrower resulting from a revaluation thereof, and any other
intangible assets, all as determined in accordance with GAAP.
"Term Loan I" means the loan evidenced by the Term Note I (No.
4550).
"Term Note I" means the note No. 4550, dated June 16, 1992, in the
original principal amount of Eighty Thousand Dollars ($80,000), made by the
Borrower payable to the order of the Lender, together
<PAGE>
with all extensions, renewals, modifications, substitutions and changes in form
thereof effected by written agreement between the Borrower and the Lender.
"Term Loan II" means the loan evidenced by the Term Note II (No.
4560).
"Term Note II" means the note No. 4560, dated February 24, 1992, in
the original principal amount of One Hundred Fifty-Eight Thousand Three Hundred
Sixty-Eight and 78/100 Dollars ($158,368.78) made by the Borrower payable to the
order of the Lender, together with all extensions, renewals, modifications,
substitutions and changes in form thereof effected by written agreement between
the Borrower and the Lender.
"Term Loan III" means the loan evidenced by the Term Note III (No.
4910).
"Term Note III" means the note No. 4910, dated October 14, 1991, in
the original principal amount of Three Hundred Fifty Thousand Dollars ($350,000)
made by the Borrower payable to the order of the Lender, together with all
extensions, renewals, modifications, substitutions and changes in form thereof
effected by written agreement between the Borrower and the Lender.
"Term Loan IV" means the loan evidenced by the Term Note IV (No.
20020).
"Term Note IV" means the note No. 20020, dated January 29, 1996 in
the original principal amount of Eight Hundred Ninety-Eight Thousand Two Hundred
Dollars ($898,200) made by the Borrower payable to the order of the Lender,
together with all extensions, renewals, modifications, substitutions and changes
in form thereof effected by written agreement between the Borrower and the
Lender.
"Term Loan V" means the loan evidenced by the Term Note V (No.
24900).
"Term Note V" means the note No. 24900, dated October 18, 1996 in
the original principal amount of Three Hundred Fifty-Five Thousand Dollars
($355,000) made by the Borrower payable to the order of the Lender, together
with all extensions, renewals, modifications, substitutions and changes in form
thereof effected by written agreement between the Borrower and the Lender.
"Term Loan VI" means the loan evidenced by the Term Note VI (No.
27370).
"Term Note VI" means the note No. 27370, dated January 31, 1997 in
the original principal amount of One Million Eight Hundred Fifty-Five Thousand
Seven Hundred and Three Dollars ($1,855,703) made by the Borrower payable to the
order of the Lender, together with all extensions, renewals, modifications,
substitutions and changes in form thereof effected by written agreement between
the Borrower and the Lender.
"Term Loan VII" means the loan evidenced by the Term Note VII (No.
27380).
"Term Note VII" means the note No. 27380, dated January 31, 1997 in
the original principal amount of Two Million Five Hundred Fifty-Nine Thousand
Dollars ($2,559,000) made by the Borrower payable to the order of the Lender,
together with all extensions, renewals, modifications, substitutions and changes
in form thereof effected by written agreement between the Borrower and the
Lender.
"Term Notes" means Term Note I (No. 4550), Term Note II (No. 4560),
Term Note III (No. 4910), Term Note IV (No. 20020), Term Note V (No. 24900),
Term Note VI (No. 27370) and Term Note VII (No. 27380).
<PAGE>
"Termination Date" means the earlier of (a) June 1, 1998; or (b) the
date upon which the obligation of the Lender to make Advances is terminated
pursuant to Section 2.7 or Section 3.7 .
"Working Capital" means the Borrower's Current Assets minus its
Current Liabilities (other than deferred income taxes and any current portion of
liabilities otherwise included in the Current Liabilities).
2. THE SEASONAL LOAN I
2.1. Commitment for Seasonal Loan I. Subject to the Conditions of
Lending set forth in Section 15 hereof, the Lender agrees to make
Advances under Seasonal Loan I to the Borrower from time to time
from the date of this Credit Agreement through the Termination Date,
provided, however, that the Lender shall not be obligated to make
any such Advance, if after giving effect to such Advance, the
aggregate outstanding principal amount of all such Advances would
exceed Fifteen Million Dollars ($15,000,000). Within the limits set
forth above, the Borrower may borrow, repay and reborrow amounts
under the Seasonal Note I.
2.2. The Seasonal Note I. All Advances shall be evidenced by, and
the Borrower shall repay such Advances to the Lender in accordance
with, the terms of the Seasonal Note I but in no event later than
the date of Maturity; including without limitation the provision of
the Seasonal Note I that the principal amount payable thereunder at
any time shall not exceed the then unpaid principal amount of all
Advances under Seasonal Loan I made by the Lender.
2.3. Records of Advances and Payments. The aggregate amount of all
unpaid Advances under Seasonal Loan I set forth on the records of
the Lender shall be rebuttable presumptive evidence of the principal
amount owing and unpaid on the Seasonal Note I.
2.4. Payments and Interest on the Seasonal Note I.
(a) Except to the extent any part thereof is a Fixed Rate Amount,
the Borrower agrees to pay interest on the outstanding
principal amount of the Seasonal Note I from the date hereof
until paid in full at a per annum rate equal to the Reference
Rate, minus 0.375%.
(b) Interest accrued on the Seasonal Note I through Maturity shall
be payable for each month on the fifteenth (15th) day of the
following calendar month, commencing January 15, 1998, and at
Maturity when the entire outstanding principal amount shall be
due and payable. Interest accrued after Maturity shall be
payable upon demand.
2.5. Manner of Borrowing. The Borrower shall give the Lender written
or telephonic notice of each requested Advance under Seasonal Loan I
by not later than 1:00 p.m. (Minneapolis time) on the date such
Advance is to be made. Each Advance under Seasonal Loan I shall be
deposited to an account designated by the Borrower or as otherwise
indicated in the corresponding request by the Borrower.
2.6. Payments. Any other provision of this Credit Agreement to the
contrary notwithstanding, the Borrower shall make all payments of
interest on and principal of the Seasonal Note I to the Lender at
its office shown on the first page hereof (or to such other
locations as may from time to time be specified by the Lender).
<PAGE>
2.7. Termination. The obligation of the Lender to make Advances
under Seasonal Loan I shall terminate:
(a) Upon receipt by the Lender of three (3) days' written notice
of termination from the Borrower given at any time when no
amount is outstanding under the Seasonal Note I;
(b) Immediately and without further action upon the occurrence of
an Event of Default of the nature referred to in Subsection
19.1((d)) or
(c) Immediately when any Event of Default (other than one of the
nature specified in Subsection 19.1((d))) shall have occurred
and be continuing and either (i) the Lender shall have
demanded payment of the Seasonal Note I or (ii) the Lender
shall elect by giving notice to Borrower.
3. THE SEASONAL LOAN II
3.1. Commitment for Seasonal Loan II. Subject to the Conditions of
Lending set forth in Section 15 hereof, the Lender agrees to make
Advances under Seasonal Loan II to the Borrower from time to time
from the date of this Credit Agreement through the Termination Date,
provided, however, that the Lender shall not be obligated to make
any such Advance, if after giving effect to any such Advance, the
aggregate outstanding principal amount of all such Advances would
exceed Five Million Dollars ($5,000,000). Within the limits set
forth above, the Borrower may borrow, repay and reborrow amounts
under the Seasonal Note II.
3.2. The Seasonal Note II. All Advances shall be evidenced by, and
the Borrower shall repay such Advances to the Lender in accordance
with, the terms of the Seasonal Note II but in no event later than
the date of Maturity; including without limitation the provision of
the Seasonal Note II that the principal amount payable thereunder at
any time shall not exceed the then unpaid principal amount of all
Advances under Seasonal Loan II made by the Lender.
3.3. Records of Advances and Payments. The aggregate amount of all
unpaid Advances set forth on the records of the Lender shall be
rebuttable presumptive evidence of the principal amount owing and
unpaid on the Seasonal Note II.
3.4. Payments and Interest on the Seasonal Note II.
(a) Except to the extent any part thereof is a Fixed Rate Amount,
the Borrower agrees to pay interest on the outstanding
principal amount of the Seasonal Note II from the date hereof
until paid in full at a per annum rate equal to the Reference
Rate minus 0.375%.
(b) Interest accrued on the Seasonal Note II through Maturity
shall be payable for each month on the fifteenth (15th) day of
the following calendar month, commencing January 15, 1998, and
at Maturity when the entire outstanding principal amount shall
be due and payable. Interest accrued after Maturity shall be
payable upon demand.
3.5. Manner of Borrowing. The Borrower shall give the Lender written
or telephonic notice of each requested Advance under Seasonal Loan
II by not later than 1:00 p.m. (Minneapolis time) on the date such
Advance is to be made. Each Advance under Seasonal Loan II shall be
deposited to an account designated by the Borrower or as otherwise
indicated in the corresponding request by the Borrower.
<PAGE>
3.6. Payments. Any other provision of this Credit Agreement to the
contrary notwithstanding, the Borrower shall make all payments of
interest on and principal of the Seasonal Note II to the Lender at
its office shown on the first page hereof (or to such other
locations as may from time to time be specified by the Lender).
3.7. Termination. The obligation of the Lender to make Advances
under Seasonal Loan II shall terminate:
(a) Upon receipt by the Lender of three (3) days' written notice
of termination from the Borrower given at any time when no
amount is outstanding under the Seasonal Note II;
(b) Immediately and without further action upon the occurrence of
an Event of Default of the nature referred to in Subsection
19.1((d)) or
(c) Immediately when any Event of Default (other than one of the
nature specified in Subsection 19.1((d))) shall have occurred
and be continuing and either (i) the Lender shall have
demanded payment of the Seasonal Note II or (ii) the Lender
shall elect by giving notice to Borrower.
4. THE TERM LOAN I
4.1. Term Loan. The Lender has previously made Term Loan I to the
Borrower, of which the principal amount of $23,761.50 is currently
outstanding.
4.2. Term Note I. To evidence the Term Loan I made by the Lender to
the Borrower hereunder, the Borrower has executed and delivered to
the Lender the Term Note I. The Borrower agrees to pay to the Lender
amounts outstanding under the Term Note I in installments as set
forth in said note, with all outstanding principal and accrued
interest due and payable October 1, 1999.
4.3. Payments and Interest on the Term Note I.
(a) Except to the extent any part thereof is a Fixed Rate Amount,
the Borrower agrees to pay interest on the unpaid principal
balance of the Term Note I outstanding from time to time at a
rate per annum equal to the Reference Rate.
(b) After the date hereof, the principal and accrued interest on
the amount outstanding under Term Note I through the end of
each calendar month hereafter shall be payable on the
fifteenth (15th) day following the end of each such calendar
month in equal monthly payments of $1,200 commencing January
15, 1998 and continuing on the fifteenth (15th) day of each
calendar month thereafter until October 1, 1999, when the
entire amount of principal and interest shall be due and
payable in full. Lender shall have the right to adjust the
amount of such payments to maintain the original 7 year
amortization to the extent required by changes in the rate at
which interest accrues on Term Note I.
5. TERM LOAN II
5.1. Term Loan II. The Lender has previously made Term Loan II to
the Borrower, of which the principal amount of $79,057.40 is
currently outstanding.
5.2. Term Note II. To evidence the Term Loan II made by the Lender
to the Borrower hereunder, the Borrower has executed and delivered
to the Lender the Term Note II. The Borrower
<PAGE>
agrees to pay to the Lender amounts outstanding under the Term Note
II in installments as set forth in said note, with all outstanding
principal and accrued interest due and payable February 15, 2001.
5.3. Payments and Interest on the Term Note II.
(a) The Borrower agrees to pay interest on the unpaid principal
balance of the Term Note II outstanding from time to time at a
rate per annum equal to 9.90% computed on the basis of a year
of 365 days.
(b) After the date hereof, the principal and accrued interest on
the amount outstanding under Term Note II through the end of
each calendar month hereafter shall be payable on the
fifteenth (15th) day following the end of each such calendar
month in equal monthly payments of $2,045 commencing January
15, 1998 and continuing on the fifteenth (15th) day of each
calendar month thereafter until February 15, 2001, when the
entire amount of principal and interest shall be due and
payable in full.
6. TERM LOAN III
6.1. Term Loan III. The Lender has previously made Term Loan III to
the Borrower, of which the principal amount of $173,258.57 is
currently outstanding.
6.2. Term Note III. To evidence the Term Loan III made by the Lender
to the Borrower hereunder, the Borrower has executed and delivered
to the Lender the Term Note III. The Borrower agrees to pay to the
Lender amounts outstanding under the Term Note III in installments
as set forth in said note, with all outstanding principal and
accrued interest due and payable October 1, 2001.
6.3. Payments and Interest on the Term Note III.
(a) The Borrower agrees to pay interest on the unpaid principal
balance of the Term Note III outstanding from time to time at
a rate per annum equal to 9.70% computed on the basis of a
year of 365 days.
(b) After the date hereof, the principal and accrued interest on
the amount outstanding under Term Note III through the end of
each calendar month hereafter shall be payable on the
fifteenth (15th) day following the end of each such calendar
month in equal monthly payments of $4,567.33 commencing
January 15, 1998 and continuing on the fifteenth (15th) day of
each calendar month thereafter until October 1, 2001, when the
entire amount of principal and interest shall be due and
payable in full.
7. TERM LOAN IV
7.1. Term Loan IV. The Lender has previously made Term Loan IV to
the Borrower, of which the principal amount of $845,626.23 is
currently outstanding.
7.2. Term Note IV. To evidence the Term Loan IV made by the Lender
to the Borrower hereunder, the Borrower has executed and delivered
to the Lender the Term Note IV. The Borrower agrees to pay to the
Lender amounts outstanding under the Term Note IV in installments as
set forth in said note, with all outstanding principal and accrued
interest due and payable February 1, 2006.
<PAGE>
7.3. Payments and Interest on the Term Note IV.
(a) Except to the extent any part thereof is a Fixed Rate Amount,
the Borrower agrees to pay interest on the unpaid principal
balance of the Term Note IV outstanding from time to time at a
rate per annum equal to the Reference Rate.
(b) After the date hereof, the principal and accrued interest on
the amount outstanding under Term Note IV through the end of
each calendar month hereafter shall be payable on the
fifteenth (15th) day following the end of each such calendar
month in equal monthly payments of $8,370 commencing January
15, 1998 and continuing on the fifteenth (15th) day of each
calendar month thereafter until February 1, 2006, when the
entire amount of principal and interest shall be due and
payable in full. Lender shall have the right to adjust the
amount of such payments to maintain the original 15 year
amortization to the extent required by changes in the rate
interest accrues on Term Note IV.
8. TERM LOAN V
8.1. Term Loan V. The Lender has previously made Term Loan V to the
Borrower, of which the principal amount of $295,000.00 is currently
outstanding.
8.2. Term Note V. To evidence the Term Loan V made by the Lender to
the Borrower hereunder, the Borrower has executed and delivered to
the Lender the Term Note V. The Borrower agrees to pay to the Lender
amounts outstanding under the Term Note V in installments as set
forth in said note, with all outstanding principal and accrued
interest due and payable December 1, 2002.
8.3. Payments and Interest on the Term Note V.
(a) Except to the extent any part thereof is a Fixed Rate Amount,
the Borrower agrees to pay interest on the unpaid principal
balance of the Term Note V outstanding from time to time at a
rate per annum equal to the Reference Rate.
(b) After the date hereof, the principal and accrued interest on
the amount outstanding under Term Note V through the end of
each calendar quarter hereafter shall be payable on the
fifteenth (15th) day following the end of each such calendar
quarter in equal quarterly payments of $15,000 of principal,
plus interest accrued through such period, commencing January
15, 1998 and continuing on the fifteenth (15th) day following
each calendar quarter thereafter until December 1, 2002, when
the entire amount of principal and interest shall be due and
payable in full.
9. TERM LOAN VI
9.1. Term Loan VI. The Lender has previously made Term Loan VI to
the Borrower, of which the principal amount of $1,762,928.00 is
currently outstanding.
9.2. Term Note VI. To evidence the loan made by the Lender to the
Borrower hereunder, the Borrower has executed and delivered to the
Lender the Term Note. The Borrower agrees to pay to the Lender
amounts outstanding under the Term Note VI in installments as set
forth in said note, with all outstanding principal and accrued
interest due and payable February 1, 2002.
<PAGE>
9.3. Payments and Interest on the Term Note VI.
(a) Except to the extent any part thereof is a Fixed Rate Amount,
the Borrower agrees to pay interest on the unpaid principal
balance of the Term Note VI outstanding from time to time at a
rate per annum equal to the Reference Rate.
(b) After the date hereof, the principal and accrued interest on
the amount outstanding under Term Note VI through the end of
each quarterly period ending immediately prior to the
following described payment dates hereafter shall be payable
on the fifteenth (15th) day following the end of each such
quarterly period in quarterly payments of $30,925 of
principal, plus interest accrued through such period,
commencing February 15, 1998 and continuing on the fifteenth
(15th) day of each of May, August, December and February
thereafter until February 1, 2002, when the entire amount of
principal and interest shall be due and payable in full.
10. TERM LOAN VII
10.1. Term Loan VII. The Lender has previously made Term Loan VII to
the Borrower, of which the principal amount of $2,175,150.00 is
currently outstanding.
10.2. Term Note VII. To evidence the loan made by the Lender to the
Borrower hereunder, the Borrower has executed and delivered to the
Lender the Term Note. The Borrower agrees to pay to the Lender
amounts outstanding under the Term Note VII in installments as set
forth in said note, with all outstanding principal and accrued
interest due and payable February 1, 2002.
10.3. Payments and Interest on the Term Note VII.
(a) Except to the extent any part thereof is a Fixed Rate Amount,
the Borrower agrees to pay interest on the unpaid principal
balance of the Term Note VII outstanding from time to time at
a rate per annum equal to the Reference Rate.
(b) After the date hereof, the principal and accrued interest on
the amount outstanding under Term Note VII through the end of
each quarterly period ending immediately prior to the
following described payment dates hereafter shall be payable
on the fifteenth (15th) day following the end of each such
quarterly period in quarterly payments of $127,950 of
principal, plus interest accrued through such period,
commencing February 15, 1998 and continuing on the fifteenth
(15th) day of each of May, August, December and February
thereafter until February 1, 2002, when the entire amount of
principal and interest shall be due and payable in full.
11. LETTER OF CREDIT I
11.1. Issuance of Letter of Credit I; Letter of Credit Fee.
(a) The Lender shall cause the Letter of Credit I to be issued
upon request by the Borrower and upon issuance of the Letter
of Credit I, the Borrower shall make and deliver to the Lender
the Letter of Credit Note I.
(b) Upon issuance of the Letter of Credit I, the Borrower agrees
to pay the Lender a commission equal to a per annum rate of
.75% of the face amount thereof payable in full in advance in
quarterly installments due on the first day of each calendar
quarter.
<PAGE>
11.2. Repayment of Drawings. Forthwith when a draft or other demand
for payment under the Letter of Credit I is received by the Lender
or the Lender receives notice thereof from any other issuer of such
Letter of Credit I, the Lender shall give notice thereof to the
Borrower by telecopy or telephone, which shall constitute a demand
for payment under the Letter of Credit Note I; provided that the
Borrower shall not be deemed to be in payment default thereunder
until after the second Business Day after such notice.
11.3. Payments and Interest on Letter of Credit Note I.
(a) The Borrower agrees to pay interest on the unpaid principal
balance of the Letter of Credit Note I outstanding from time
to time at a rate equal to the Reference Rate minus .375%.
(b) Payments of principal and interest on amounts outstanding
under the Letter of Credit Note I shall be payable on demand.
11.4. Obligations Absolute. The Borrower's obligation to reimburse
the Lender for payments and disbursements made by the Lender
under or in connection with the Letter of Credit I and to pay
the Letter of Credit Note I shall be absolute and
unconditional under any and all circumstances and irrespective
of any setoff, counterclaim or defense to payment which the
Borrower may have or have had against the Lender, including,
without limitation, any defense based on the failure of the
demand for payment under such Letter of Credit I to conform to
the terms of such Letter of Credit I or the legality,
validity, regularity or enforceability of such Letter of
Credit I or any defense based on the identity of the
transferee of such Letter of Credit I or the sufficiency of
the transfer if such Letter of Credit I is transferable;
provided, however, that the Borrower shall not be obligated to
reimburse the Lender for any wrongful payment or disbursement
made under any Letter of Credit I as a result of acts or
omissions constituting gross negligence or willful misconduct
on the part of the Lender or any of its officers, employees or
agents.
12. LETTER OF CREDIT II
12.1. Issuance of Letter of Credit II; Letter of Credit Fee.
(a) The Lender shall cause the Letter of Credit II to be issued
upon request by the Borrower and upon issuance of the Letter
of Credit II, the Borrower shall make and deliver to the
Lender the Letter of Credit Note II.
(b) Upon issuance of the Letter of Credit II, the Borrower agrees
to pay the Lender a commission equal to a per annum rate of
.75% of the face amount thereof payable in advance in
quarterly installments due on the first day of each calendar
quarter.
12.2. Repayment of Drawings. Forthwith when a draft or other demand
for payment under the Letter of Credit II is received by the Lender
or the Lender receives notice thereof from any other issuer of such
Letter of Credit II, the Lender shall give notice thereof to the
Borrower by telecopy or telephone, which shall constitute a demand
for payment under the Letter of Credit Note II; provided that the
Borrower shall not be deemed to be in payment default thereunder
until after the second Business Day after such notice.
12.3. Payments and Interest on Letter of Credit Note II.
(a) The Borrower agrees to pay interest on the unpaid principal
balance of the Letter of Credit Note II outstanding from time
to time at a rate equal to the Reference Rate minus .375%.
<PAGE>
(b) Payments or principal and interest on amounts outstanding
under the Letter of Credit Note II shall be payable on demand.
12.4. Obligations Absolute. The Borrower's obligation to reimburse
the Lender for payments and disbursements made by the Lender under
or in connection with the Letter of Credit II and to pay the Letter
of Credit Note II shall be absolute and unconditional under any and
all circumstances and irrespective of any setoff, counterclaim or
defense to payment which the Borrower may have or have had against
the Lender, including, without limitation, any defense based on the
failure of the demand for payment under such Letter of Credit II to
conform to the terms of such Letter of Credit II or the legality,
validity, regularity or enforceability of such Letter of Credit II
or any defense based on the identity of the transferee of such
Letter of Credit II or the sufficiency of the transfer if such
Letter of Credit II is transferable; provided, however, that the
Borrower shall not be obligated to reimburse the Lender for any
wrongful payment or disbursement made under any Letter of Credit II
as a result of acts or omissions constituting gross negligence or
willful misconduct on the part of the Lender or any of its officers,
employees or agents.
13. GENERAL PROVISIONS
13.1. Computation of Interest.
(a) All computations of interest on the outstanding principal
amount of each Subject Note shall be computed on the basis of
a year comprised of 360 days to the extent such interest is
computed based on LIBOR, 360 days to the extent such interest
is computed based on the Reference Rate, but charged for the
actual number of days elapsed, and such number of days as is
indicated in the confirmation described in Section 14.2 with
respect to any Fixed Rate Amount. Each change in the interest
rate payable on each Subject Note due to a change in the
Reference Rate shall take place simultaneously with the
corresponding change in the Reference Rate. Whenever any
payment to be made by or to the Lender or other holder(s) of
any Subject Note shall otherwise be due on a day which is not
a Business Day, such payment shall be made on the next
succeeding Business Day, and such extension of time shall be
included in computing the fees or interest payable on such
next succeeding Business Day.
(b) No provision of this Credit Agreement or any Subject Note
shall require the payment or permit the collection of interest
in excess of the rate permitted by applicable law.
13.2. Default Rate; Late Payment. Notwithstanding anything to the
contrary herein, upon the occurrence and during the continuation of
an Event of Default, the Borrower shall pay interest on the
outstanding principal amount of each of the Subject Notes at a rate
per annum equal to the greater of (i) two percent (2%) in excess of
the rate applicable to the unpaid principal amount of each such
Subject Note immediately before the occurrence of such Event of
Default or (ii) two percent (2%) in excess of the Reference Rate in
effect from time to time. In addition, the Borrower shall be
obligated to pay $25.00 with respect to any installment on any
Subject Note paid after the date it is due, to compensate Lender for
the administrative expenses associated with such past-due payments,
subject to the maximum allowable late payment under North Dakota
law.
13.3. Security. The indebtedness, liabilities and other obligations
of the Borrower to the Lender under each Subject Note and this
Credit Agreement are secured by, inter alia, security interests
granted pursuant to all security interests, liens and mortgages
heretofore or hereafter granted by the Borrower to the Lender as
security for the obligations to the Lender, except that the Seasonal
<PAGE>
Notes I and II and the Letter of Credit Notes I and II are not
secured by any such collateral or agreements, notwithstanding
anything to the contrary therein.
13.4. Voluntary Prepayments. The Borrower may prepay the principal
of any of the Subject Notes, in whole or in part, only so long as
(i) any such prepayment is in a minimum amount of $100,000 or a
multiple thereof; (ii) any such prepayment shall be accompanied by
the interest accrued on the amount prepaid to the date of the
prepayment; (iii) any such prepayment shall be accompanied by the
prepayment premium specified in, and computed in accordance with,
the provisions of Section 13.6 set forth below and (iv) all amounts
prepaid shall be applied in accordance with the terms of such
Subject Note.
13.5. Manner of Payments. Any other provision of this Credit
Agreement to the contrary notwithstanding, the Borrower shall make
all payments of interest on and principal of the Subject Notes to
the Lender at its office shown on the first page hereof.
13.6. Funding Losses; Prepayment Premiums.
(a) The Borrower hereby agrees that upon demand by the Lender
(which demand shall be accompanied by a statement setting
forth the basis for the calculations of the amount being
claimed and the Lender's calculation of the amount of such
demand) the Borrower will indemnify the Lender against any
loss or expense which the Lender may have sustained or
incurred (including, without limitation, any net loss or
expense incurred by reason of the liquidation or reemployment
of deposits or other funds acquired by such Bank to fund or
maintain such loans) or which the Lender may be deemed to have
sustained or incurred, as reasonably determined by the Lender,
(i) as a consequence of any failure by the Borrower to make
any payment when due of any amount due hereunder in connection
with any such loans, (ii) due to any failure of the Borrower
to borrow or convert any such Loans accruing interest based on
LIBOR or Fixed Rate Amounts on a date specified therefor in a
notice thereof or (iii) due to any payment or prepayment of
any such loans on a date other than the last day of the
applicable Interest Rate Period (if a Fixed Rate Amount).
(b) If at the time of any prepayment of any Subject Note
hereunder, the Interest Differential is greater than zero, the
Borrower shall pay to the Lender a prepayment premium equal to
the present value (discounted from the previously scheduled
payment dates for interest on the Loan at a rate equal to the
Government Yield with respect to such Loan on the date of
prepayment plus the Issuance Spread) of the product of (a) the
Interest Differential, times (b) the amount prepaid, times (c)
a fraction, the numerator of which is the number of days
scheduled to fall between the interest payment dates on the
Loan and the denominator of which is 365. If the portion
prepaid covers several installments, the Lender may, at its
option, either calculate such payment for each installment or
calculate such payment based on the weighted average maturity
of the portion prepaid.
13.7. Increased Costs. If any Regulatory Change or other change in
any existing law, rule or regulation or in the interpretation or
administration thereof by any governmental authority, central bank
or comparable agency shall subject the Lender or one or more of its
sources of financing to increased costs, the Borrower shall pay to
the Lender within fifteen (15) days of demand therefor, Borrower's
pro rata share (based on the amount of all loans outstanding from
the Lender) of any such amount required to compensate the Lender or
such other Persons for such costs.
<PAGE>
13.8. Collateral Allocation. To the extent the Lender receives
proceeds of any Collateral after the exercise of remedies provided
for in Section 19.2: (a) proceeds of accounts and inventory shall be
applied first to any obligations of the Borrower relating to or
arising under the Seasonal Notes and Loans I and II, pro rata in
accordance with the principal amount outstanding thereunder and then
to all the other obligations to the Lender under the Loan Documents;
(b) proceeds of each of the Mortgages shall be applied first to any
obligations of the Borrower relating to or arising under each of the
Term Notes and corresponding Term Loans referenced as expressly
secured thereby in the definition of the term "Mortgages" herein
(the "Mortgage Secured Notes and Loans"), and then to all other
obligations to the Lender under the Loan Documents; and (c) proceeds
of all other Collateral shall be applied first to all the
obligations of the Borrower to the Lender under the Loan Documents,
other than those relating to or arising under the Seasonal Notes and
Loans or the Mortgage Secured Notes and Loans, and then to all other
obligations to the Lender under the Loan Documents, pro rata in
accordance with the respective principal amounts thereof.
13.9. Loan Agreement Reference. Any reference in any Subject Note to
any Loan Agreement or Credit Agreement shall be deemed to be a
reference to this Credit Agreement, as it may from time to time be
amended, modified, supplemented or restated. Any conflict between
the terms of any Subject Note, and the terms of this Credit
Agreement, shall be resolved in favor of the terms of this Credit
Agreement.
14. FIXED RATE AMOUNTS
14.1. Availability. Any Fixed Rate Amount of any Loan may bear
interest at a Fixed Rate. A Loan may accrue a different Fixed Rate
on different Fixed Rate Amounts simultaneously. A Fixed Rate shall
be effective to the extent the Lender responds to any request
therefor by the Borrower prior to the date such Fixed Rate is to
first accrue.
14.2. Confirmation. The Lender shall confirm any Fixed Rate to the
Borrower in writing which shall reference and confirm:
(a) The applicable Subject Note number;
(b) The applicable Fixed Rate Amount;
(c) The applicable Fixed Rate;
(d) The applicable date such Fixed Rate becomes effective;
(e) The number of days which will comprise the year over which
such Fixed Rate is to be computed; and
(f) The date upon which such Fixed Rate expires.
14.3. Rate After Interest Rate Period. Interest on any Fixed Rate
Amount shall accrue at the rate otherwise provided for hereunder
commencing the date following the last day of the corresponding
Interest Rate Period, which may, if the Borrower has appropriately
requested and the Lender has quoted, be a new Fixed Rate.
15. CONDITIONS OF LENDING
<PAGE>
15.1. Conditions Precedent. This Credit Agreement and the Lender's
obligations hereunder are subject to receipt on or prior to the date
hereof, by the Lender of the following, each to be in form and
substance satisfactory to the Lender, unless the Lender waives
receipt of any of the following in writing:
(a) This Credit Agreement and the Subject Notes each appropriately
completed and duly executed by the Borrower;
(b) A Certificate of Good Standing for the Borrower issued by the
Secretary of State in all states where the Borrower is
qualified to do business;
(c) A copy of the Borrower's Bylaws, together with all amendments,
certified by the Secretary of the Borrower to be a true and
correct copy thereof;
(d) A copy of the Certificate of Incorporation of the Borrower,
together with all amendments, certified by the Secretary of
State of the state of the Borrower's incorporation to be a
true and correct copy thereof;
(e) A certified copy of the resolutions of the Board of Directors
of the Borrower authorizing or ratifying the transactions
contemplated hereby, and the execution, delivery and
performance of the Loan Documents, and designating the
officers authorized to execute the Loan Documents to which the
Borrower is a party and to perform the obligations of the
Borrower thereunder;
(f) A certificate of the Secretary of the Borrower certifying the
names of the officers authorized to execute the Loan
Documents, together with a sample of the true signature of
each such officer;
(g) A favorable opinion of counsel for the Borrower, satisfactory
to the Lender, as to the matters set forth in Subsections
16.1, 16.2, 16.3, 16.5, 16.7 and 16.9 (delivered not later
than January 15, 1998), and other matters as requested by the
Lender, satisfactory to the Lender and its counsel;
(h) The Security Agreement and Mortgages duly executed by the
Borrower;
(i) Policies or certificates of insurance evidencing insurance
coverage required under this Credit Agreement and any other of
the Loan Documents; and
(j) Such other documents, information and actions as the Lender
may reasonably request.
15.2. Conditions Precedent to all Loans and Advances. The obligation
of the Lender to make any Loan or Advance hereunder, including the
initial Loans and Advances, is subject to the satisfaction of each
of the following, unless waived in writing by the Lender:
(a) The representations and warranties set forth in Section 16 are
true and correct in all material respects on the date hereof
and on the date of any Loan or Advance (as if made on the date
of such Loan or Advance, except to the extent that such
representations and warranties expressly relate solely to an
earlier date).
(b) No Default or Event of Default shall have occurred and be
continuing.
<PAGE>
(c) No litigation, arbitration or governmental investigation or
proceeding shall be pending, or, to the knowledge of the
Borrower, threatened, against the Borrower or affecting the
business or operations of the Borrower which was not
previously disclosed to the Lender and which, if determined
adversely to the Borrower, would have a material adverse
effect on the operation or financial condition of the
Borrower.
(d) No Default or Event of Default shall result from the making of
any such Loan or Advance.
(e) No Material Adverse Occurrence shall have occurred and be
continuing.
(f) Each request for a Loan or Advance and each acceptance of the
proceeds of such request by the Borrower shall constitute a
representation and warranty by the Borrower that on the date
of acceptance of such proceeds (both immediately before and
after giving effect to such acceptance) the statements made in
Section 16 are true and correct with the same effect as if
then made, except to the extent such statements expressly
relate solely to an earlier date.
16. REPRESENTATIONS AND WARRANTIES
The Borrower represents and warrants to the Lender as follows:
16.1. Organization, etc. The Borrower is a corporation validly
organized and existing and in good standing under the laws of the
State of Delaware, has full power and authority to own its property
and conduct its business substantially as presently conducted by it
and is duly qualified and licensed to do business and is in good
standing as a foreign corporation in each other jurisdiction where
the nature of its business makes such qualification or licensing
necessary. The Borrower has full power and authority to enter into
and perform its obligations under the Loan Documents and to obtain
the loans and Advances hereunder.
16.2. Due Authorization. The execution, delivery and performance by
the Borrower of the Loan Documents have been duly authorized by all
necessary corporate action, do not require any approval or consent
of, or any registration, qualification or filing with, any
governmental agency or authority or any approval or consent of any
other Person (including, without limitation, any stockholder, do not
and will not conflict with, result in any violation of or constitute
any default under, any provision of the Borrower's Articles of
Incorporation or Bylaws, any agreement binding on or applicable to
the Borrower or any of its property, or any law or governmental
regulation or court decree or order, binding upon or applicable to
the Borrower or of any of its property and will not result in the
creation or imposition of any Lien on any of its property pursuant
to the provisions of any agreement binding on or applicable to the
Borrower or any of its property except pursuant to the Loan
Documents.
16.3. Validity of the Loan Documents. The Loan Documents to which
the Borrower is a party are the legal, valid and binding obligations
of the Borrower and are enforceable in accordance with their terms,
subject only to bankruptcy, insolvency, reorganization, moratorium
or similar laws, rulings or decisions at the time in effect
affecting the enforceability of rights of creditors generally and to
general equitable principles which may limit the right to obtain
equitable remedies.
16.4. Financial Information. The financial statements of the
Borrower furnished to the Lender have been and will be prepared in
accordance with GAAP consistently applied by the Borrower and
present fairly the financial condition of the Borrower as of the
dates thereof and for the periods covered thereby. The Borrower is
not aware of any contingent liabilities or obligations which would,
upon becoming non-contingent liabilities or obligations, be a
Material Adverse Occurrence.
<PAGE>
Since the date of the most recent such statements, neither the
condition (financial or otherwise), the business nor the properties
of the Borrower have been materially and adversely affected in any
way.
16.5. Litigation, Other Proceedings. Except as previously disclosed
to and approved of in writing by the Lender, there is no action,
suit or proceeding at law or equity, or before or by any
governmental department, commission, board, bureau, agency or
instrumentality, domestic or foreign, pending or, to the knowledge
of the Borrower, threatened, against the Borrower or any of its
property, which is reasonably likely to result in a Material Adverse
Occurrence; and the Borrower is not in default with respect to any
final judgment, writ, injunction, decree, rule or regulation of any
court or governmental department, commission, board, bureau, agency
or instrumentality, domestic or foreign, where such default would be
a Material Adverse Occurrence.
16.6. Title to Assets. Except for Liens permitted by Section 18.2,
the Borrower has good and marketable title to all of its assets,
real and personal.
16.7. Lien Priority. The Liens created by the Security Agreement are
attached and first, perfected Liens on the Collateral.
16.8. Guarantees and Indebtedness. Except as disclosed on financial
statements of the Borrower furnished to the Lender, the Borrower is
not a party to any material contract of guaranty or suretyship and
none of its assets is subject to any contract of that nature and the
Borrower is not indebted to any other party, except the Lender.
16.9. Margin Stock. No part of any loan or Advance hereunder shall
be used at any time by the Borrower to purchase or carry margin
stock (within the meaning of Regulation G, T, U or X promulgated by
the Board of Governors of the Federal Reserve System) or to extend
credit to others for the purpose of purchasing or carrying any
margin stock. The Borrower is not engaged principally, or as one of
its important activities, in the business of extending credit for
the purposes of purchasing or carrying any such margin stock. No
part of the proceeds of any loan or Advance hereunder will be used
by the Borrower for any purpose which violates, or which is
inconsistent with, any regulations promulgated by the Board of
Governors of the Federal Reserve System.
16.10. Taxes. The Borrower has filed all federal, state and other
income tax returns which are required to be filed through the date
of this Credit Agreement and has paid all taxes as shown on said
returns, and all taxes due or payable without returns and all
assessments received to the extent such taxes and assessments have
become due. All tax liabilities of the Borrower are adequately
provided for on its books, including interest and penalties. No
income tax liability of a material nature has been asserted by
taxing authorities for taxes in excess of those already paid. The
Borrower has made all required withholding deposits.
16.11. Accuracy of Information. All factual information furnished by
or on behalf of the Borrower to the Lender for purposes of or in
connection with this Credit Agreement or any transaction
contemplated by this Credit Agreement is, and all other such factual
information furnished by or on behalf of the Borrower to the Lender
in the future, will be true and accurate in every material respect
on the date as of which such information is dated or certified. No
such information contains any material misstatement of fact or omits
any material fact or any fact necessary to prevent such information
from being misleading.
<PAGE>
16.12. Material Agreements. The Borrower is not a party to any
agreement or instrument or subject to any restriction that
materially and adversely affects its business, property or assets,
operations or condition (financial or otherwise).
16.13. Defaults. The Borrower is not in default in the performance,
observance or fulfillment of any of the obligations, covenants or
conditions contained in any: (a) agreement to which such entity is a
party, which default might have a material adverse effect on the
business, properties or assets, operations, or condition (financial
or otherwise) of the Borrower; or (b) instrument evidencing any
indebtedness or under any agreement relating to such indebtedness.
16.14. ERISA. (a) No Reportable Event has occurred and is continuing
with respect to any Plan; (b) the Pension Benefit Guaranty
Corporation or any successor entity has not instituted proceedings
to terminate any Plan; and (c) each Plan of the Borrower has been
maintained and funded in all material respects in accordance with
its terms and with ERISA. All undefined capitalized terms used in
this Section shall have the meanings ascribed to them in ERISA.
16.15. Financial Status. The Borrower is not insolvent (as such term
is defined in Section 101(32) of the United States Bankruptcy Code
of 1978, as amended or Minnesota Statutes Section 513.42, as
amended) and will not be rendered insolvent (as such term is defined
in Section 101(32) of the United States Bankruptcy Code of 1978, as
amended or Minnesota Statutes Section 513.42, as amended) by
execution of this Credit Agreement or any other of the Loan
Documents, or consummation of the transactions contemplated thereby.
16.16. Survival of Representations. All representations and
warranties contained in this Section 16 shall survive the delivery
of the Notes and the making of the loans and Advances evidenced
thereby and any investigation at any time made by or on behalf of
Lender shall not diminish its rights to rely thereon.
16.17. Environmental Matters.
(a) Definitions. As used in this Credit Agreement, the following
terms shall have the following meanings:
(i) "Environmental Law" means any federal, state, local or
other governmental statute, regulation, law or ordinance
dealing with the protection of human health and the
environment.
(ii) "Hazardous Substances" means pollutants, contaminants,
hazardous substances, hazardous wastes, petroleum and
fractions thereof, and all other chemicals, wastes,
substances and materials listed in, regulated by or
identified in any Environmental Law.
(iii) "Premises" means all premises where the Borrower
conducts its business and has any rights of possession.
(b) To the Borrower's best knowledge, there are not present in, on
or under the Premises any Hazardous Substances in such form or
quantity as to create any liability or obligation for either
the Borrower or the Lender under common law of any
jurisdiction or under any Environmental Law, and no Hazardous
Substances have ever been stored, buried, spilled, leaked,
discharged, emitted or released in, on or under the Premises
in such a way as to create any such liability.
<PAGE>
(c) There are not and there never have been any requests, claims,
notices, investigations, demands, administrative proceedings,
hearings or litigation, relating in any way to the Premises or
the Borrower, alleging liability under, violation of, or
noncompliance with any Environmental Law or any license,
permit or other authorization issued pursuant thereto. To the
Borrower's best knowledge, no such matter is threatened or
impending.
(d) To the Borrower's best knowledge, the Premises are not and
never have been listed on the National Priorities List, the
Comprehensive Environmental Response, Compensation and
Liability Information System or any similar federal, state or
local list, schedule, log, inventory or database.
16.18. Subsidiaries. The Borrower has the Subsidiaries listed on the
financial statements previously delivered to the Lender.
17. AFFIRMATIVE COVENANTS
As long as there remains any amount outstanding under the Subject
Notes or the Lender has any obligation to make Advances under the Seasonal
Commitment, the Borrower shall, unless waived in writing by the Lender:
17.1. Financial Statements and Reports. Furnish to the Lender, at
the times set forth below, the following financial statements,
reports and information:
(a) As soon as available, but in any event within 125 days after
each fiscal year end, audited financial statements of the
Borrower, and all corporations and subsidiaries, directly or
indirectly controlled by the Borrower, including without
limitation a balance sheet, and the related statements of
income, retained earnings and cash flows, prepared on a
consolidated and consolidating basis certified by certified
public accountants satisfactory to the Lender to have been
prepared in accordance with GAAP consistently applied;
(b) As soon as available, but in any event within forty-five ( 45)
days after the last day of each quarterly fiscal period
unaudited financial statements of the Borrower consisting of a
balance sheet and the related statements of income, retained
earnings and cash flows prepared on a consolidated and
consolidating basis dated as of the last Business Day of such
quarterly fiscal period in form and detail as reasonably
required by the Lender certified by the chief financial
officer of the Borrower to have been prepared from the records
of the Borrower on the basis of accounting principles
consistently applied by the Borrower;
(c) As soon as available, but in any event within ninety (90) days
following each fiscal year-end, an operating budget and cash
flow forecast for the fiscal year immediately following such
fiscal year-end.
(d) Promptly upon obtaining knowledge thereof, notice of the
occurrence of any Default or Event of Default and of the
violation by the Borrower of any law, rule or regulation, the
non-compliance with which could be reasonably expected to be a
Material Adverse Occurrence;
(e) To the extent applicable, promptly after the sending or filing
thereof, copies of all regular and periodic financial reports
which the Borrower shall file with the U.S. Securities and
Exchange Commission, or any national securities exchange;
<PAGE>
(f) Such other information concerning the business, operations and
condition (financial or otherwise) of the Borrower as the
Lender may reasonably request.
17.2. Maintenance of Corporate Existence. Maintain and preserve its
corporate existence.
17.3. Taxes. Pay and discharge as the same shall become due and
payable, all taxes, assessments and other governmental charges and
levies against or on any of its property, as well as claims of any
kind which, if unpaid, might become a Lien upon any of its
properties, unless such tax, levy, charge assessment or Lien is
being contested in good faith by the Borrower and is supported by an
adequate book reserve. The Borrower shall make all required
withholding deposits.
17.4. Notices. As soon as practicable, give notice to the Lender of:
(a) The commencement of any litigation relating to the Borrower
which might reasonably result in a Material Adverse Occurrence
or relating to the transactions contemplated by this Credit
Agreement;
(b) The commencement of any material arbitration or governmental
proceeding or investigation not previously disclosed to the
Lender which has been instituted or, to the knowledge of the
Borrower, is threatened against the Borrower or its property
which might reasonably result in a Material Adverse
Occurrence;
(c) Any Reportable Event or "prohibited transaction" or the
imposition of a Withdrawal Liability, within the meaning of
ERISA, in connection with any Plan and, when known, any action
taken by the Internal Revenue Service, Department of Labor or
Pension Benefit Guaranty Corporation with respect thereto, and
any adverse development which occurs in any litigation,
arbitration or governmental investigation or proceeding
previously disclosed to the Lender which if determined
adversely to the Borrower would constitute a Material Adverse
Occurrence; and
(d) Any Default or Event of Default under this Credit Agreement.
17.5. Compliance with Laws. Carry on its business activities in
substantial compliance with all applicable federal or state laws and
all applicable rules, regulations and orders of all governmental
bodies and offices having power to regulate or supervise its
business activities. The Borrower shall maintain all material
rights, liens, franchises, permits, certificates of compliance or
grants of authority required in the conduct of its business. Without
limiting the foregoing undertakings, the Borrower specifically
agrees that it will comply with all applicable Environmental Laws
and obtain and comply with all permits, licenses and similar
approvals required by any Environmental laws, and will not generate,
use, transport, treat, store or dispose of any Hazardous Substances
in such a manner as to create any liability or obligation under the
common law of any jurisdiction or any Environmental Law.
17.6. Books and Records. Keep books and records reflecting all of
its business affairs and transactions in accordance with GAAP
consistently applied and permit the Lender, and its representatives,
at reasonable times and intervals, to visit all of its offices,
discuss its financial matters with officers of the Borrower and its
independent public accountants (and by this provision the Borrower
authorizes its independent public accountants to participate in such
discussions) and examine any of its books and other corporate
records.
<PAGE>
17.7. Insurance. Procure and maintain insurance with financially
sound and reputable insurers, insurance with respect to the
Collateral and its other property against damage and loss by theft,
fire, collision (in the case of motor vehicles) and such other risks
as are required by the Lender in an amount equal to the fair market
value thereof and, in any event, in an amount sufficient to avoid
the application of any coinsurance provisions and naming the Lender
loss payee. The Borrower shall also procure and maintain other such
insurance including workers compensation insurance, liability and
business interruption insurance, and other insurance as the Lender
may require and/or that may be required under any of the Loan
Documents, all in such amounts as may be required by the Lender.
Policies of all such insurance shall contain an agreement by the
insurer to provide the Lender thirty (30) days prior written notice
of cancellation and an agreement that the Lender's interest shall
not be impaired or invalidated by any act or neglect of the Borrower
nor by the occupation of properties owned or leased by the Borrower
or other properties wherein the Collateral is located for purposes
more hazardous than those permitted by such policies. The Borrower
shall provide evidence of such insurance and the policies of
insurance or copies thereof to the Lender upon request.
17.8. Maintain Property. Maintain and keep its assets, property and
equipment in good repair, working order and condition and from time
to time make or cause to be made all needed renewals, replacements
and repairs.
17.9. Conduct of Business. Continue to engage primarily in the
business being conducted on the date of this Credit Agreement.
17.10. Working Capital. Maintain at all times the ratio of its Net
Working Capital to liabilities owed to parties providing floor plan
financing to Borrower at not less than 1.0:4.0.
17.11. Leverage Ratio. Maintain as of each fiscal quarter end a
Leverage Ratio of not more than 4.5:1.0.
17.12. Further Assurances. The Borrower agrees upon reasonable
request by the Lender to execute and deliver such further
instruments, deeds and assurances, including financing statements
under the Uniform Commercial Code of Minnesota and/or any other
relevant states, and to do such further acts as may be necessary or
proper to carry out more effectively the purposes of this Credit
Agreement and the Loan Documents and, without limiting the
foregoing, to make subject to the liens and security interests of
the Security Agreement and any other of the Loan Documents any
property agreed to be subjected, or intended to be subject, or
covered by the granting clauses of the Security Agreement or such
other of the Loan Documents.
17.13. ERISA Compliance. Comply in all material respects at all
times with all applicable provisions of ERISA and the regulations
and published interpretations thereunder.
18. NEGATIVE COVENANTS
As long as there remains any amount outstanding under the Subject
Notes or the Lender has any obligation to make Advances under the Seasonal Loan
Commitment, the Borrower shall not, unless waived in writing by the Lender:
18.1. Consolidation; Merger; Sale of Assets; Acquisitions.
Consolidate with or merge into or with any other entity; or sell
(other than sales of inventory in the ordinary course of business),
transfer, lease or otherwise dispose of all or a substantial part of
its assets; or acquire a substantial interest in another Person
either through the purchase of all or substantially all of the
assets of that
<PAGE>
Person or the purchase of a controlling equity interest in that
Person; provided that the foregoing shall not prohibit any
transaction immediately after which:
(a) The Borrower is a surviving entity;
(b) Borrower's Tangible Net Worth is not less than the amount
thereof immediately prior thereto; and
(c) The aggregate price paid by the Borrower in all such
transactions in any consecutive twelve (12) month period is
not greater than $100,000,000;
18.2. Liens. Create, incur, assume or suffer to exist any Lien or
any of its property, real or personal, except (a) Liens in favor of
the Lender; (b) Liens disclosed to and approved of in writing by the
Lender; (c) Liens for current taxes and assessments which are not
yet due and payable; and (d) purchase money security interests to
secure the indebtedness permitted under Section 18.3 below.
18.3. Additional Indebtedness. Create, incur, assume or suffer to
exist any indebtedness except: (a) indebtedness in favor of the
Lender; (b) current liabilities incurred in the ordinary course of
business; (c) indebtedness existing on the date of this Credit
Agreement and disclosed to and approved of in writing by the Lender;
and (d) purchase money indebtedness incurred in connection with the
acquisition of fixed assets not to exceed $1,000,000 in the
aggregate during any fiscal year of the Borrower.
18.4. Guaranties. Assume, guarantee, endorse or otherwise become
liable in connection with the indebtedness of any other person or
entity except endorsements of negotiable instruments for deposit or
collection in the ordinary course of business.
18.5. Dividends. Declare or pay any dividends, purchase, redeem,
retire or otherwise acquire for value any of its capital stock now
or hereafter outstanding, return any capital to its stockholders as
such, at any time any Default or Event of Default has occurred and
is continuing.
18.6. Change in Ownership or Business. Permit (a) Change of control,
or (b) the line of business presently engaged in by the Borrower.
18.7. Investments; Subsidiaries. The Borrower will not purchase or
hold beneficially any stock or other securities or evidences of
indebtedness of, make or permit to exist any loans or advances to,
or create or acquire any Subsidiary or make any investment or
acquire any interest whatsoever in, any other Person, except:
(a) Investments in direct obligations of the United States of
America or any agency or instrumentality thereof whose
obligations constitute the full faith and credit obligations
of the United States of America having a maturity of one (1)
year or less, commercial paper issued by a U.S. corporation
rated "A-1" or "A-2" by Standard & Poor's Corporation or "P-1"
or "P-2" by Moody's Investor Service, investments in money
market mutual funds whose underlying assets are exclusively
investments which would otherwise be permitted investments
under this Section 18.7(a), or repurchase agreements,
certificates of deposit or bankers' acceptances having a
maturity of one (1) year or less issued by members of the
Federal Reserve System having deposits in excess of
$500,000,000 (which certificates of deposit or bankers'
acceptances are fully insured by the Federal Deposit Insurance
Corporation);
<PAGE>
(b) Travel advances or loans to officers and employees of the
Borrower (not including contracts made in the ordinary course
of business with any such officers or employees) not exceeding
at any one time an aggregate of $25,000;
(c) Advances in the form of progress payments, prepaid rent or
security deposits;
(d) Existing investments as described in the Borrower's financial
statements;
(e) Investments constituting contracts made in the ordinary course
of business of the Borrower;
(f) Investments in wholly-owned subsidiaries of the Borrower
existing as of the date hereof;
(g) Transitions and investments permitted under Section 18.1; and
(h) Investments not otherwise permitted in this Section 18.7 not
to exceed $1,000,000 in the aggregate (on a book value basis)
at any time outstanding.
19. EVENTS OF DEFAULT AND REMEDIES
19.1. Events of Default. The term "Event of Default" shall mean any
of the following events:
(a) The Borrower shall default in the payment when due, or if
payable on demand, upon demand, of any principal or interest
on any of the Subject Notes; or
(b) The Borrower shall default (other than a default in payment
under subsection (a) above) in the due performance and
observance of any of the covenants contained in any of the
Loan Documents and such default shall continue unremedied for
a period of thirty (30) days after notice from the Lender to
the Borrower thereof; or
(c) An event has occurred which would, at such time or with the
passage of time, constitute an "event of default" (however
legally styled) under any other loan obligation, lease, bond,
debenture, security agreement, note, or instrument or
agreement evidencing Debt and any applicable grace period
specified in such agreement or evidence of Debt has expired;
or
(d) The Borrower shall become insolvent or generally fail to pay
or admit in writing its inability to pay its debts as they
become due; or the Borrower shall apply for, consent to, or
acquiesce in the appointment of a trustee, receiver or other
custodian for itself or any of its property, or make a general
assignment for the benefit of its creditors; or trustee,
receiver or other custodian shall otherwise be appointed for
the Borrower or any of its assets; or any bankruptcy,
reorganization, debt arrangement, or other case or proceeding
under any bankruptcy or insolvency law, or any dissolution or
liquidation proceeding shall be commenced by or against the
Borrower; or the Borrower shall take any action to authorize,
or in furtherance of, any of the foregoing; or
(e) Any representation or warranty set forth in this Credit
Agreement or any other Loan Document shall be untrue in any
material respect on the date as of which the facts set forth
are stated or certified; or
(f) The occurrence of any Material Adverse Occurrence; or
(g) A Reportable Event (as defined under ERISA) shall have
occurred; or
<PAGE>
(h) The rendering against the Borrower of a final judgment, decree
or order for the payment of money in excess of $500,000
(unless the payment of such judgment in the amount of such
excess is insured), and the continuance of such judgment,
decree or order unsatisfied for any 30 consecutive day period
without a stay of execution.
(i) The occurrence of a Change of Control; or
(j) The Lender shall in good faith deem itself insecure.
19.2. Remedies; Cumulative. If an Event of Default described in
Section 19.1(d) shall occur, the full unpaid balance of each of the
Subject Notes (outstanding balance plus accrued interest) and all
other obligations of the Borrower to the Lender shall automatically
be due and payable without declaration, notice, presentment, protest
or demand of any kind (all of which are hereby expressly waived) and
the obligation of the Lender to make additional Advances shall
automatically terminate. If any other Event of Default shall occur
and be continuing, the Lender may terminate its obligation to make
additional Advances and may declare the outstanding balance of the
each of the Subject Notes and all other obligations of the Borrower
to the Lender to be due and payable without further notice,
presentment, protest or demand of any kind (all of which are hereby
expressly waived), whereupon the full unpaid amount of each of the
Subject Notes and all other obligations of the Borrower to the
Lender shall become immediately due and payable. Upon any Event of
Default, the Lender shall be entitled to exercise any and all rights
and remedies available under any of the Loan Documents or otherwise
available at law or in equity to collect the Subject Notes and all
other obligations of the Borrower to the Lender, to realize upon or
otherwise pursue any and all Collateral and other security
(including without limitation any and all guarantees) for the loans
under this Credit Agreement and to, without notice to the Borrower,
and without further action, apply any and all monies owing by Lender
to the Borrower to the payment of the Subject Notes, and all other
obligations of the Borrower hereunder, in such order as the Lender
elects (subject to Section 13.8).
20. MISCELLANEOUS
20.1. Waivers, Amendments. The provisions of the Loan Documents may
from time to time be amended, modified, or waived, if such
amendment, modification or waiver is in writing and signed by the
Lender. No failure or delay on the part of the Lender or the
holder(s) of the Subject Notes in exercising any power or right
under any of the Loan Documents shall operate as a waiver thereof,
nor shall any single or partial exercise of any such power or right
preclude any other or further exercise thereof or the exercise of
any other power or right. No notice to or demand on the Borrower in
any case shall entitle it to any notice or demand in similar or
other circumstances.
20.2. Notices. All communications and notices provided under this
Credit Agreement shall be in writing and addressed or delivered to
the Borrower or the Lender at their respective addresses shown on
the first page hereof, or to any party at such other address as may
be designated by such party in a written notice to the other
parties. Such notices shall be delivered by any of the following
means: (i) mailing through the United States Postal Service, postage
prepaid, by registered or certified mail, return receipt requested;
(ii) delivery by reputable overnight delivery service including
without limitation, and by way of example only: Federal Express,
DHL, Airborne Express and Express Mail; or (iii) delivery by
reputable private personal delivery service. Notices delivered in
accordance with (i) above shall be deemed delivered the second
Business Day after deposit in the mail; notices delivered in
accordance with (ii) above shall be deemed delivered the first
Business Day after delivery to the delivery service; and notices
delivered in accordance with
<PAGE>
(iii) above shall be deemed delivered the same Business Day as that
specified by the notifying party to the delivery service.
20.3. Costs and Expenses. The Borrower agrees to pay all expenses
for the preparation of this Credit Agreement, including exhibits,
and any amendments to this Credit Agreement as may from time to time
hereafter be required, and the reasonable attorneys fees and legal
expenses of counsel for the Lender, from time to time incurred in
connection with the preparation and execution of this Credit
Agreement and any document relevant to this Credit Agreement, any
amendments hereto or thereto, and the consideration of legal
questions relevant hereto and thereto. The Borrower agrees to
reimburse Lender upon demand for, all out-of-pocket expenses
(including reasonable attorneys fees and legal expenses) in
connection with the Lender's enforcement of the obligations of the
Borrower hereunder or under the Note or any other of the Loan
Documents, whether or not suit is commenced including, without
limitation, attorneys fees, and legal expenses in connection with
any appeal of a lower court's order or judgment. The obligations of
the Borrower under this Section 20.3 shall survive any termination
of this Credit Agreement.
20.4. Interest Limitation. All agreements between the Borrower and
the Lender are hereby expressly limited so that in no contingency or
event whatsoever, whether by reason of acceleration of maturity of
the indebtedness evidenced or secured thereby or otherwise, shall
the rate of interest charged or agreed to be paid to the Lender for
the use, forbearance, loaning or detention of such indebtedness
exceed the maximum permissible interest rate under applicable law
("Maximum Rate"). If for any reason or in any circumstance
whatsoever fulfillment of any provision of this Credit Agreement
and/or the Subject Notes, any document securing or executed in
connection herewith or therewith, or any other agreement between the
Borrower and the Lender, at any time shall require or permit the
interest rate applied thereunder to exceed the Maximum Rate, then
the interest rate shall automatically be reduced to the Maximum
Rate, and if the Lender should ever receive interest at a rate that
would exceed the Maximum Rate, the amount of interest received which
would be in excess of the amount receivable after applying the
Maximum Rate to the balance of the outstanding obligation shall be
applied to the reduction of the principal balance of the outstanding
obligation for which the amount was paid and not to the payment of
interest thereunder. This provision shall control every other
provision of any and all agreements between the Borrower and the
Lender and shall also be binding upon and applicable to any
subsequent holder of any of the Subject Notes.
20.5. Severability. Any provision of this Credit Agreement or any
other of the Loan Documents executed pursuant hereto which is
prohibited or unenforceable in any jurisdiction shall, as to such
jurisdiction, be ineffective to the extent of such portion or
unenforceability without invalidating the remaining provisions of
this Credit Agreement or such Loan Document or affecting the
validity or enforceability of such provisions in any other
jurisdiction.
20.6. Cross-References. References in this Credit Agreement or in
any other of the Loan Documents executed pursuant hereto to any
Section are, unless otherwise specified, to such Section of this
Credit Agreement or such Loan Document, as the case may be.
20.7. Headings. The various headings of this Credit Agreement or of
any other of the Loan Documents executed pursuant hereto are
inserted for convenience only and shall not affect the meaning or
interpretation of this Credit Agreement or such Loan Document or any
provisions hereof or thereof.
<PAGE>
20.8. Governing Law; Venue; Waiver of Jury Trial. Each of the Loan
Documents shall be deemed to be a contract made under and governed
by the laws of the State of North Dakota (without regard to the laws
of conflict of any jurisdiction) as to all matters, including
without limitation, matters of validity, interpretation,
construction, effect, performance and remedies. The Borrower hereby
consents to the personal jurisdiction of the state and federal
courts located in the State of North Dakota in connection with any
controversy related to this Credit Agreement and any other of the
Loan Documents, waives any argument that venue in such forums is not
convenient and agrees that any litigation instigated by the Borrower
against the Lender in connection herewith or therewith shall be
venued in the federal or state court that has jurisdiction over
matters arising in Fargo, North Dakota. THE BORROWER AND LENDER
IRREVOCABLY WAIVE ALL RIGHT TO TRIAL BY JURY IN ANY ACTION,
PROCEEDING OR COUNTERCLAIM ARISING OUT OF OR RELATING TO ANY LOAN
DOCUMENT OR ANY INSTRUMENT OR DOCUMENT DELIVERED THEREUNDER.
20.9. Successors and Assigns. This Credit Agreement shall be binding
upon and shall inure to the benefit of the parities hereto and their
respective successors and assigns, except that Borrower may not
assign or transfer its rights hereunder without the prior written
consent of Lender.
20.10. Recitals Incorporated. The recitals to this Credit Agreement
are incorporated into and constitute an integral part of this Credit
Agreement.
20.11. Multiple Counterparts. This Credit Agreement may be executed
in one or more counterparts and by the different parties on separate
counterparts, each of which shall be deemed to be an original and
all of which shall constitute one and the same instrument.
20.12. Indemnity. In addition to the payment of expenses pursuant to
Section 20.3, the Borrower agreed to indemnify, defend and hold
harmless the Lender, and any of its participants, assignees, parent
corporations, subsidiary corporations, affiliated corporations and
successor corporations, and all present and future officers,
directors, employees, attorneys and agents of the foregoing (the
"Indemnitees") from and against any of the following (collectively,
"Indemnified Liabilities"):
(a) any and all transfer taxes, documentary taxes, assessments or
charges made by any governmental authority by reason of the
execution and delivery of the Loan Documents or the making of
the Advances or the Loans;
(b) any claims, loss or damage to which any Indemnitee may be
subjected if any representation or warranty contained in this
Agreement proves to be incorrect in any respect or as a result
of any violation of the covenant contained in this Agreement;
and
(c) any and all other liabilities, losses, damages, penalties,
judgments, suits, claims, costs and expenses of any kind or
nature whatsoever (including, without limitation, the
reasonable fees and disbursements of counsel) in connection
with the foregoing and any other investigative, administrative
or judicial proceedings, whether or not such Indemnitee shall
be designated a party thereto, which may be imposed on,
incurred by or asserted against any such Indemnitee, in any
manner related to or arising out of or in connection with the
making of the Advances or the Loans and the Loan Documents or
the use or intended use of the proceeds of the Advances or the
Loans.
<PAGE>
If any investigative, judicial or administrative proceeding arising
from any of the foregoing is brought against any Indemnitee, upon
such Indemnitee's request, the Borrower, or counsel designated by
the Borrower and satisfactory to the Indemnitee, will resist and
defend such action, suit or proceeding to the extent and in the
manner directed by the Indemnitee, at the Borrower's sole costs and
expense. Each Indemnitee will use its best efforts to cooperate in
the defense of any such action, suit or proceeding. If the foregoing
undertaking to indemnify, defend and hold harmless may be held to be
unenforceable because it violates any law or public policy, the
Borrower shall nevertheless make the maximum contribution to the
payment and satisfaction of each of the Indemnified Liabilities
which is permissible under applicable law. The Borrower's obligation
under this Section 20.12 shall survive the termination of this
Credit Agreement and the discharge of the Borrower's other
obligations hereunder.
20.13. Prior Agreement Superseded; Complete Agreement. This Credit
Agreement amends, restates, and supersedes the Prior Agreement in
its entirety and all obligations, liabilities and indebtedness of
the Borrower incurred or arising thereunder shall be deemed to have
been incurred and arising hereunder. Furthermore, this Credit
Agreement, together with the Loan Documents, comprises the complete
and integrated agreement of the parties on the subject matter hereof
and supersedes all prior agreements, written or oral, on the subject
matter hereof.
Assignments; Participants; Waiver of Claims. Lender may sell, assign
or grant a participation in the Subject Notes, in whole or in part and may
disclose information relating to the Borrower or otherwise relevant to this
Agreement, to such Persons and their financing sources ("Assignees"). No
Assignee shall be deemed a partner or agent of the Lender. The Borrower
irrevocably agrees that any claims it may have or may assert against the Lender
for breach of contract (or related tort claims) shall be personal to the Lender
and shall not be asserted by way of direct claim or offset against any Assignee
or against any Loan sold or assigned to any Assignee (and the Borrower hereby
irrevocably waives any right it otherwise may have, now or hereafter, to assert
any such claim). The Borrower acknowledges that the Assignees shall rely on the
foregoing waiver and agreement.
(REMAINDER OF PAGE INTENTIONALLY LEFT BLANK)
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Credit
Agreement to be executed by their respective officers thereunto duly authorized
as of the day and year first above written.
RDO EQUIPMENT CO.,
a Delaware Corporation
By:
----------------------------------
Its:
---------------------------------
AG CAPITAL COMPANY,
a Delaware Corporation
By:
----------------------------------
Its:
---------------------------------
EXHIBIT 10.5
AG CAPITAL COMPANY
FIRST AMENDED AND RESTATED CREDIT AGREEMENT
THIS FIRST AMENDED AND RESTATED CREDIT AGREEMENT made and entered
into as of February 13, 1998 (the "Effective Date"), by and between Minnesota
Valley Irrigation, Inc., a Minnesota corporation (the "Borrower"), whose address
is P.O. Box 509, Highway 10 East, Wadena, Minnesota 56482, and AG CAPITAL
COMPANY, a Delaware corporation (the "Lender"), whose address is 1500 Radisson
Tower, 201 North 5th Street, Fargo, North Dakota 58102, amends and restates that
certain Ag Capital Company Loan Agreement, dated as of October 31, 1997 (herein
the "Prior Agreement") among the Borrower and the Lender.
RECITALS
1. The Lender and the Borrower have agreed that the terms and
conditions of the Prior Agreement should be amended and restated to clarify
certain provisions thereof for the benefit of both parties.
2. The Lender and the Borrower hereby agree that from and after the
Effective Date, the Prior Agreement shall be deemed amended and restated in its
entirety as set forth below.
NOW, THEREFORE, for and in consideration of the loans and advances
to be made by the Lender to the Borrower hereunder, the mutual covenants,
promises and agreements contained herein, and other good and valuable
consideration the receipt and sufficiency of which are hereby acknowledged, the
Borrower and the Lender agree as follows:
The following terms when used in this Credit Agreement shall, except
where the context otherwise requires, have the following meanings both in the
singular and plural forms thereof:
1. DEFINITIONS
"Acceptable Accounts Receivable" means any receivable owned by the
Borrower, less than 90 days old, which is in form and subject to documentation
acceptable to Lender.
"Advance" means any advance by the Lender made under the Seasonal
Commitment.
"Affiliate" means any corporation, association, partnership, joint
venture or other business entity directly or indirectly controlling or
controlled by, or under direct or indirect common control of, the Borrower or
any of its Subsidiaries.
"Assignee" has the meaning set forth in Section 9.14.
"Borrower" means Minnesota Valley Irrigation, Inc., a Minnesota
corporation.
"Borrowing Base Certificate" means the certificate in the form
attached hereto which sets forth the Borrowing Base as of the date indicated
thereon.
"Borrowing Base" means, at any time, the lesser of (a) $4,000,000 or
(b) the sum of (i) eighty five percent (85%) of Acceptable Accounts Receivable;
(ii) sixty five percent (65%) of new and used wholegoods and parts inventory,
net of unpaid accounts payable on such inventories; plus (iii) twenty percent
(20%) of eligible work in process, if any, all as determined in accordance with
GAAP.
<PAGE>
"Business Day" means any day on which the Lender is open for the
transaction of business of the kind contemplated by this Credit Agreement.
"Change of Control" means the occurrence of any of the following
circumstances:
(a) any person or two or more persons acting in concert acquire
beneficial ownership (within the meaning of Rule 13d-3 of the
SEC under the Securities Exchange Act of 1934), directly or
indirectly, of securities of the Borrower (or other securities
convertible into such securities) representing 25% or more of
the combined voting power of all securities of the Borrower
entitled to vote in the election of directors; or
(b) during any period, whether commencing before or after the date
hereof, the membership of the Board of Directors of the
Borrower changes for any reason (other than by reason of
death, disability, or scheduled retirement) so that the
majority of the Board of Directors is made up of persons who
were not directors at the beginning of such period.
"Collateral" means all of the assets of the Borrower or any other
party in which the Lender holds a security interest pursuant to any of the Loan
Documents.
"Credit Agreement" means this First Amended and Restated Credit
Agreement, as originally executed and as may be amended, modified, supplemented,
or restated from time to time by written agreement between the Borrower and the
Lender.
"Current Assets" means, at any date, the aggregate amount of all
assets of the Borrower that are classified as current assets, on a consolidated
basis, in accordance with GAAP.
"Current Liabilities" means, at any time, the aggregate amount of
all liabilities of the Borrower that are classified as current liabilities, on a
consolidated basis, in accordance with GAAP (including taxes and other proper
accruals and the matured portion of any indebtedness).
"Debt" means (i) all items of indebtedness or liability that, in
accordance with GAAP, would be included in determining total liabilities as
shown on the liabilities side of a balance sheet as at the date of which Debt is
to be determined; (ii) indebtedness secured by any mortgage, pledge, lien or
security interest existing on property owned by the Person whose Debt is being
determined, whether or not the indebtedness secured thereby shall have been
assumed; (iii) all obligations, contingent or otherwise, relative to the face
amount of all letters of credit, whether or not drawn, and banker's acceptances
issued for the account of such Person, and (iv) guaranties, endorsements (other
than for purposes of collection in the ordinary course of business) and other
contingent obligations in respect of, or to purchase or otherwise acquire
indebtedness of others.
"Default" means any event which if continued uncured would, with
notice or lapse of time or both, constitute an Event of Default.
"Environmental Laws" has the meaning set forth in Section 5.17
"Equity to Asset Ratio" means the ratio of the total equity
(including minority interests and subordinate debt) of the Borrower to the total
assets of the Borrower, as determined on a combined basis, in accordance with
GAAP.
<PAGE>
"ERISA" means the Employee Retirement Income Security Act of 1974,
as amended and as may be further amended from time to time, and the rules and
regulations promulgated thereunder by any governmental agency or authority, as
from time to time in effect.
"Event of Default" means any event of default described in Section
88817 hereof.
"GAAP" means the generally accepted accounting principles in the
United States in effect from time to time including, but not limited to,
Financial Accounting Standards Board (FASB) Standards and Interpretations,
Accounting Principles Board (APB) Opinions and Interpretations, Committee on
Accounting Procedure (CAP) Accounting Research Bulletins, and certain other
accounting principles which have substantial authoritative support.
"Hazardous Substance" has the meaning set forth in Section 5.17
hereof.
"Lender" means Ag Capital Company, a Delaware corporation, its
successors and assigns.
"Lien" means any lien, security interest, pledge, mortgage,
statutory or tax lien, or other encumbrance of any kind whatsoever (including
without limitation, the lien or retained security title of a conditional
vendor), whether arising under a security instrument or as a matter of law,
judicial process or otherwise or by an agreement of the Borrower to grant any
lien or security interest or to pledge, mortgage or otherwise encumber any of
its assets.
"Loan" means the Seasonal Loan.
"Loan Documents" means this Credit Agreement, the Subject Note, the
Security Agreement, and such other documents as the Lender may reasonably
require as security for, or otherwise executed in connection with, any loan
hereunder, all as originally executed and as may be amended, modified or
supplemented from time to time by written agreement between the parties thereto.
"Material Adverse Occurrence" means any occurrence which materially
adversely affects the present or prospective financial condition or operations
of the Borrower, or which impairs, or may impair, in the Lender's reasonable
judgment, the ability of the Borrower to perform its obligations under the Loan
Documents.
"Maturity" of the Seasonal Note means the earlier of (a) the date on
which the Seasonal Note becomes due and payable upon the occurrence of an Event
of Default; or (b) the Termination Date.
"Net Working Capital" means Current Assets, plus the then current
portion of the Borrower's long-term Debt, minus Current Liabilities, all as
determined on a consolidated basis, in accordance with GAAP.
"Person" means any natural person, corporation, firm, association,
government, governmental agency or any other entity, whether acting in an
individual fiduciary or other capacity.
"Premises" has the meaning set forth in Section 5.17 hereof.
"Reference Rate" means for any day the rate of interest indicated as
the "prime rate" in the "Money Rates" section of the Wall Street Journal, for
such day (or if no such rate is published for such day for the earliest
preceding day for which such rate is published). If such rate ceases to be
published, the "Reference Rate" shall mean a comparable rate determined by the
Lender as indicated in a written notice to the Borrower."
<PAGE>
"Regulatory Change" means any change after the date hereof in any
(or the adoption after the date hereof of any new) (a) Federal or state law or
foreign law applying to the Lender (or its successors or assigns); or (b)
regulation, interpretation, directive or request (whether or not having the
force of law) applying or in the reasonable opinion of the Lender (or its
successors or assigns) applicable to, the Lender (or its successors or assigns)
of any court or governmental authority charged with the interpretation or
administration of any law referred to in clause (a) of this definition or of any
fiscal, monetary, or other authority having jurisdiction over the Lender (or its
successors or assigns).
"Seasonal Commitment" means the sum of Four Million Dollars
($4,000,000.00) or the Lender's obligation to extend Advances to the Borrower
under Section 2, as the context may require.
"Seasonal Loan" means, at any date, the aggregate amount of all
Advances made by the Lender to the Borrower pursuant to Section 2 hereof.
"Seasonal Note" means the Seasonal Note, dated October 31, 1997, in
the original principal amount of Four Million Dollars ($4,000,000.00) made by
the Borrower payable to the order of the Lender, together with all extensions,
renewals, modifications, substitutions and changes in form thereof effected by
written agreement between the Borrower and the Lender.
"Security Agreement" means the Security Agreement, dated October 2,
1995, executed by the Borrower in favor of the Lender, and such other previously
executed security agreements, as originally executed and as may be amended,
modified or supplemented from time to time by written agreement between the
Borrower and the Lender.
"Subject Note(s)" means the Seasonal Note.
"Subsidiary" means any corporation of which more than fifty percent
(50%) of the outstanding capital stock having ordinary voting power to elect a
majority of the board of directors of such corporation (irrespective of whether,
at the time, stock of any other class or classes of such corporation shall have
or might have voting power by reason of the happening of any contingency) is at
the time, directly or indirectly, owned by the Borrower and/or one or more
Subsidiary or Affiliate.
"Termination Date" means the earlier of (a) June 1, 1998; or (b) the
date upon which the obligation of the Lender to make Advances is terminated
pursuant to Section 2.7.
2. THE SEASONAL LOAN
2.1. Commitment for Seasonal Loan. Subject to the Conditions of
Lending set forth in Section 4 hereof, the Lender agrees to make
Advances to the Borrower from time to time from the date of this
Credit Agreement through the Termination Date, provided, however,
that the Lender shall not be obligated to make any Advance, if after
giving effect to such Advance, the aggregate outstanding principal
amount of all Advances would exceed Four Million Dollars
($4,000,000.00). Within the limits set forth above, the Borrower may
borrow, repay and reborrow amounts under the Seasonal Note.
2.2. The Seasonal Note. All Advances shall be evidenced by, and the
Borrower shall repay such Advances to the Lender in accordance with,
the terms of the Seasonal Note; including without limitation the
provision of the Seasonal Note that the principal amount payable
thereunder at any time shall not exceed the then unpaid principal
amount of all Advances made by the Lender.
<PAGE>
2.3. Records of Advances and Payments. The aggregate amount of all
unpaid Advances set forth on the records of the Lender shall be
rebuttable presumptive evidence of the principal amount owing and
unpaid on the Seasonal Note.
2.4. Payments and Interest on the Seasonal Note.
(a) The Borrower agrees to pay interest on the outstanding
principal amount of the Seasonal Note from the date hereof
until paid in full at a rate per annum equal to Reference Rate
minus 0.375 percentage points.
(b) After the date hereof, interest accrued on the Seasonal Note
through Maturity shall be payable for each calendar month on
the fifteenth (15th) day of the following calendar month,
commencing March 15, 1998, and at Maturity, when the entire
outstanding principal amount shall be due and payable.
Interest accrued after Maturity shall be payable upon demand.
2.5. Manner of Borrowing. The Borrower shall give the Lender written
or telephonic notice of each requested Advance by not later than
1:00 p.m. (Minneapolis time) on the date such Advance is to be made.
Each Advance shall be deposited to an account designated by the
Borrower or as otherwise indicated in the corresponding request by
the Borrower.
2.6. Payments. Any other provision of this Credit Agreement to the
contrary notwithstanding, the Borrower shall make all payments of
interest on and principal of the Seasonal Note to the Lender at its
office shown on the first page hereof (or to such other locations as
may from time to time be specified by the Lender).
2.7. Termination. The obligation of the Lender to make Advances
shall terminate:
(a) Upon receipt by the Lender of three (3) days' written notice
of termination from the Borrower given at any time when no
amount is outstanding under the Seasonal Note;
(b) Immediately and without further action upon the occurrence of
an Event of Default of the nature referred to in Subsection
8.1(d) or
(c) Immediately when any Event of Default (other than one of the
nature specified in Subsection 8.1(d)) shall have
occurred and be continuing and either (i) the Lender shall
have demanded payment of the Seasonal Note or (ii) the Lender
shall elect to terminate such obligation by giving notice to
Borrower.
3. GENERAL PROVISIONS
3.1. Computation of Interest.
(a) All computations of interest on the outstanding principal
amount of each Subject Note shall be computed on the basis of
a year comprised of 360 days. Each change in the interest
rate payable on each Subject Note due to a change in the
Reference Rate shall take place simultaneously with the
corresponding change in the Reference Rate. Whenever any
payment to be made by or to the Lender or other holder(s) of
any Subject Note shall otherwise be due on a day which is not
a Business Day, such payment shall be made on the next
succeeding Business Day, and such extension of time shall be
included in computing the fees or interest payable on such
next succeeding Business Day.
<PAGE>
(b) No provision of this Credit Agreement or any Subject Note
shall require the payment or permit the collection of interest
in excess of the rate permitted by applicable law.
3.2. Default Rate; Late Payment. Notwithstanding anything to the
contrary herein, upon the occurrence and during the continuation of
an Event of Default, the Borrower shall pay interest on the
outstanding principal amount of each of the Subject Notes at a rate
per annum equal to the greater of (i) two percent (2%) in excess of
the rate applicable to the unpaid principal amount of each such
Subject Note immediately before the occurrence of such Event of
Default or (ii) two percent (2%) in excess of the Reference Rate in
effect from time to time. In addition, the Borrower shall be
obligated to pay $25.00 with respect to any installment on any
Subject Note paid after the date it is due, to compensate Lender for
the administrative expenses associated with such past-due payments,
subject to the maximum allowable late payment under North Dakota
law.
3.3. Security. The indebtedness, liabilities and other obligations
of the Borrower to the Lender under each Subject Note and this
Credit Agreement are secured by, inter alia, security interests
granted pursuant to all security interests, liens and mortgages
heretofore or hereafter granted by the Borrower to the Lender as
security for the obligations to the Lender.
3.4 Manner of Payments. Any other provision of this Credit Agreement
to the contrary notwithstanding, the Borrower shall make all
payments of interest on and principal of the Subject Notes to the
Lender at its office shown on the first page hereof.
3.5 Increased Costs. If any Regulatory Change or other change in any
existing law, rule or regulation or in the interpretation or
administration thereof by any governmental authority, central bank
or comparable agency shall subject the Lender or one or more of its
sources of financing to increased costs, the Borrower shall pay to
the Lender within fifteen (15) days of demand therefor, Borrower's
pro rata share (based on the amount of all loans outstanding from
the Lender) of any such amount required to compensate the Lender or
such other Persons for such costs.
3.6. Collateral Allocation. To the extent the Lender receives
proceeds of any Collateral after the exercise of remedies provided
for in Section 8.2: (a) proceeds of accounts and inventory shall
be applied first to any obligations of the Borrower relating to or
arising under the Seasonal Note and Loan, and then to all the other
obligations to the Lender under the Loan Documents; (b) proceeds of
all other Collateral shall be applied first to all the obligations
of the Borrower to the Lender under the Loan Documents, other than
those relating to or arising under the Seasonal Note and Loan , and
then to all other obligations to the Lender under the Loan
Documents, pro rata in accordance with the respective principal
amounts thereof.
3.7. Loan Agreement Reference. Any reference in any Subject Note to
any Loan Agreement or Credit Agreement shall be deemed to be a
reference to this Credit Agreement, as it may from time to time be
amended, modified or restated. Any conflict between the terms of any
Subject Note, and the terms of this Credit Agreement shall be
resolved in favor of the terms of this Credit Agreement.
<PAGE>
4. CONDITIONS OF LENDING
4.1. Conditions Precedent. This Credit Agreement and the Lender's
obligations hereunder are subject to receipt, on or prior to the
date hereof, by the Lender of the following, each to be in form and
substance satisfactory to the Lender, unless the Lender waives
receipt of any of the following in writing:
(a) This Credit Agreement and the Subject Notes each appropriately
completed and duly executed by the Borrower;
(b) The Security Agreement and corresponding financing
statement(s) appropriately completed and duly executed by the
Borrower;
(c) The Guaranty of any Person, as required by the Lender,
appropriately completed and duly executed by the Guarantor.
(d) A current UCC financing statement search, federal and state
tax lien search, judgment and bankruptcy search, reflecting
results satisfactory to the Lender, on the Borrower from the
appropriate filing offices as required by the Lender;
(e) A Certificate of Good Standing for the Borrower issued by the
Secretary of State in all states where the Borrower is
qualified to do business;
(f) A copy of the Borrower's Bylaws, together with all amendments,
certified by the Secretary of the Borrower to be a true and
correct copy thereof;
(g) A copy of the Articles of Incorporation of the Borrower,
together with all amendments, certified by the Secretary of
State of the state of the Borrower's incorporation to be a
true and correct copy thereof;
(h) A certified copy of the resolutions of the Board of Directors
of the Borrower authorizing or ratifying the transactions
contemplated hereby, and the execution, delivery and
performance of the Loan Documents, and designating the
officers authorized to execute the Loan Documents to which the
Borrower is a party and to perform the obligations of the
Borrower thereunder;
(i) A certificate of the Secretary of the Borrower certifying the
names of the officers authorized to execute the Loan
Documents, together with a sample of the true signature of
each such officer;
(j) A favorable opinion of counsel for the Borrower, satisfactory
to the Lender, as to the matters set forth in Subsections 5.1,
5.2, 5.3, 5.5, 5.7 and 5.9 (delivered not later than March 31,
1998), and other matters as requested by the Lender,
satisfactory to the Lender and its counsel;
(k) Policies or certificates of insurance evidencing insurance
coverage required under this Credit Agreement and any other of
the Loan Documents;
(l) A completed Borrowing Base Certificate each dated as of the
most recent month end.
(m) Such other documents, information and actions as the Lender
may reasonably request.
<PAGE>
4.2. Conditions Precedent to all Loans and Advances. The obligation
of the Lender to make any Advance hereunder, including the initial
Advance, is subject to the satisfaction of each of the following,
unless waived in writing by the Lender:
(a) The representations and warranties set forth in Section 5 are
true and correct in all material respects on the date hereof
and on the date of any Advance (as if made on the date of such
Advance, except to the extent that such representations and
warranties expressly relate solely to an earlier date).
(b) No Default or Event of Default shall have occurred and be
continuing.
(c) No litigation, arbitration or governmental investigation or
proceeding shall be pending, or, to the knowledge of the
Borrower, threatened, against the Borrower or affecting the
business or operations of the Borrower which was not
previously disclosed to the Lender and which, if determined
adversely to the Borrower, would have a material adverse
effect on the operation or financial condition of the
Borrower.
(d) No Default or Event of Default shall result from the making of
any Advance.
(e) No Material Adverse Occurrence shall have occurred and be
continuing.
(f) Each request for an Advance and each acceptance of the
proceeds of such request by the Borrower shall constitute a
representation and warranty by the Borrower that on the date
of acceptance of such proceeds (both immediately before and
after giving effect to such acceptance) the statements made in
Section 5 are true and correct with the same effect as if then
made, except to the extent such statements expressly relate
solely to an earlier date.
5. REPRESENTATIONS AND WARRANTIES
The Borrower represents and warrants to the Lender as follows:
5.1. Organization, etc. The Borrower is a corporation validly
organized and existing and in good standing under the laws of the
State of Minnesota, has full power and authority to own its property
and conduct its business substantially as presently conducted by it
and is duly qualified and licensed to do business and is in good
standing as a foreign corporation in each other jurisdiction where
the nature of its business makes such qualification or licensing
necessary. The Borrower has full power and authority to enter into
and perform its obligations under the Loan Documents and to obtain
the Loans and Advances hereunder.
5.2. Due Authorization. The execution, delivery and performance by
the Borrower of the Loan Documents have been duly authorized by all
necessary corporate action, do not require any approval or consent
of, or any registration, qualification or filing with, any
governmental agency or authority or any approval or consent of any
other Person (including, without limitation, any stockholder, do not
and will not conflict with, result in any violation of or constitute
any default under, any provision of the Borrower's Articles of
Incorporation or Bylaws, any agreement binding on or applicable to
the Borrower or any of its property, or any law or governmental
regulation or court decree or order, binding upon or applicable to
the Borrower or of any of its property and will not result in the
creation or imposition of any Lien on any of its property pursuant
to the provisions of any agreement binding on or applicable to the
Borrower or any of its property except pursuant to the Loan
Documents.
<PAGE>
5.3. Validity of the Loan Documents. The Loan Documents to which the
Borrower is a party are the legal, valid and binding obligations of
the Borrower and are enforceable in accordance with their terms,
subject only to bankruptcy, insolvency, reorganization, moratorium
or similar laws, rulings or decisions at the time in effect
affecting the enforceability of rights of creditors generally and to
general equitable principles which may limit the right to obtain
equitable remedies.
5.4. Financial Information. The financial statements of the Borrower
furnished to the Lender have been and will be prepared in accordance
with GAAP consistently applied by the Borrower and present fairly
the financial condition of the Borrower as of the dates thereof and
for the periods covered thereby. The Borrower is not aware of any
contingent liabilities or obligations which would, upon becoming
non-contingent liabilities or obligations, be a Material Adverse
Occurrence. Since the date of the most recent such statements,
neither the condition (financial or otherwise), the business nor the
properties of the Borrower have been materially and adversely
affected in any way.
5.5. Litigation, Other Proceedings. Except as previously disclosed
to and approved of in writing by the Lender, there is no action,
suit or proceeding at law or equity, or before or by any
governmental department, commission, board, bureau, agency or
instrumentality, domestic or foreign, pending or, to the knowledge
of the Borrower, threatened, against the Borrower or any of its
property, which is reasonably likely to result in a Material Adverse
Occurrence; and the Borrower is not in default with respect to any
final judgment, writ, injunction, decree, rule or regulation of any
court or governmental department, commission, board, bureau, agency
or instrumentality, domestic or foreign, where such default would be
a Material Adverse Occurrence.
5.6. Title to Assets. Except for Liens permitted by Section 7.2, the
Borrower has good and marketable title to all of its assets, real
and personal.
5.7. Lien Priority. The Liens created by the Security Agreement are
attached and first, perfected Liens on the Collateral.
5.8. Guarantees and Indebtedness. Except as disclosed on financial
statements of the Borrower furnished to the Lender, the Borrower is
not a party to any material contract of guaranty or suretyship and
none of its assets is subject to any contract of that nature and the
Borrower is not indebted to any other party, except the Lender.
5.9. Margin Stock. No part of any Loan or Advance hereunder shall be
used at any time by the Borrower to purchase or carry margin stock
(within the meaning of Regulation G, T, U or X promulgated by the
Board of Governors of the Federal Reserve System) or to extend
credit to others for the purpose of purchasing or carrying any
margin stock. The Borrower is not engaged principally, or as one of
its important activities, in the business of extending credit for
the purposes of purchasing or carrying any such margin stock. No
part of the proceeds of any Loan or Advance hereunder will be used
by the Borrower for any purpose which violates, or which is
inconsistent with, any regulations promulgated by the Board of
Governors of the Federal Reserve System.
5.10. Taxes. The Borrower has filed all federal, state and other
income tax returns which are required to be filed through the date
of this Credit Agreement and has paid all taxes as shown on said
returns, and all taxes due or payable without returns and all
assessments received to the extent such taxes and assessments have
become due. All tax liabilities of the Borrower are adequately
provided for on its books, including interest and penalties. No
income tax liability of a material
<PAGE>
nature has been asserted by taxing authorities for taxes in excess
of those already paid. The Borrower has made all required
withholding deposits.
5.11. Accuracy of Information. All factual information furnished by
or on behalf of the Borrower to the Lender for purposes of or in
connection with this Credit Agreement or any transaction
contemplated by this Credit Agreement is, and all other such factual
information furnished by or on behalf of the Borrower to the Lender
in the future, will be true and accurate in every material respect
on the date as of which such information is dated or certified. No
such information contains any material misstatement of fact or omits
any material fact or any fact necessary to prevent such information
from being misleading.
5.12. Material Agreements. The Borrower is not a party to any
agreement or instrument or subject to any restriction that
materially and adversely affects its business, property or assets,
operations or condition (financial or otherwise).
5.13. Defaults. The Borrower is not in default in the performance,
observance or fulfillment of any of the obligations, covenants or
conditions contained in any: (a) agreement to which such entity is a
party, which default might have a material adverse effect on the
business, properties or assets, operations, or condition (financial
or otherwise) of the Borrower; or (b) instrument evidencing any
indebtedness or under any agreement relating to such indebtedness.
5.14. ERISA. (a) No Reportable Event has occurred and is continuing
with respect to any Plan; (b) the Pension Benefit Guaranty
Corporation or any successor entity has not instituted proceedings
to terminate any Plan; and (c) each Plan of the Borrower has been
maintained and funded in all material respects in accordance with
its terms and with ERISA. All undefined capitalized terms used in
this Section shall have the meanings ascribed to them in ERISA.
5.15. Financial Status. The Borrower is not insolvent (as such term
is defined in Section 101(32) of the United States Bankruptcy Code
of 1978, as amended or Minnesota Statutes Section 513.42, as
amended) and will not be rendered insolvent (as such term is defined
in Section 101(32) of the United States Bankruptcy Code of 1978, as
amended or Minnesota Statutes Section 513.42, as amended) by
execution of this Credit Agreement or any other of the Loan
Documents, or consummation of the transactions contemplated thereby.
5.16. Survival of Representations. All representations and
warranties contained in this Section 5 shall survive the delivery of
the Notes and the making of the Loans and Advances evidenced thereby
and any investigation at any time made by or on behalf of Lender
shall not diminish its rights to rely thereon.
5.17. Environmental Matters.
(a) Definitions. As used in this Credit Agreement, the following
terms shall have the following meanings:
(i) "Environmental Law" means any federal, state, local or
other governmental statute, regulation, law or ordinance
dealing with the protection of human health and the
environment.
(ii) "Hazardous Substances" means pollutants, contaminants,
hazardous substances, hazardous wastes, petroleum and
fractions thereof, and all other chemicals, wastes,
<PAGE>
substances and materials listed in, regulated by or
identified in any Environmental Law.
(iii) "Premises" means all premises where the Borrower
conducts its business and has any rights of possession.
(b) To the Borrower's best knowledge, there are not present in, on
or under the Premises any Hazardous Substances in such form or
quantity as to create any liability or obligation for either
the Borrower or the Lender under common law of any
jurisdiction or under any Environmental Law, and no Hazardous
Substances have ever been stored, buried, spilled, leaked,
discharged, emitted or released in, on or under the Premises
in such a way as to create any such liability.
(c) There are not and there never have been any requests, claims,
notices, investigations, demands, administrative proceedings,
hearings or litigation, relating in any way to the Premises or
the Borrower, alleging liability under, violation of, or
noncompliance with any Environmental Law or any license,
permit or other authorization issued pursuant thereto. To the
Borrower's best knowledge, no such matter is threatened or
impending.
(d) To the Borrower's best knowledge, the Premises are not and
never have been listed on the National Priorities List, the
Comprehensive Environmental Response, Compensation and
Liability Information System or any similar federal, state or
local list, schedule, log, inventory or database.
5.18. Subsidiaries. The Borrower has the Subsidiaries listed on the
financial statements previously delivered to the Lender.
6. AFFIRMATIVE COVENANTS
As long as there remains any amount outstanding under the Subject
Notes or the Lender has any obligation to make Advances under the Seasonal
Commitment, the Borrower shall, unless waived in writing by the Lender:
6.1. Financial Statements and Reports. Furnish to the Lender, at the
times set forth below, the following financial statements, reports
and information:
(a) As soon as available, but in any event within one hundred
twenty five (125) days after each fiscal year end, annual
audited financial statements of the Borrower, and Subsidiaries
prepared on a consolidated basis, certified by certified
public accountants satisfactory to the Lender to have been
prepared in accordance with GAAP consistently applied;
(a) As soon as available, but in any event within thirty (30) days
after the last day of each monthly fiscal period unaudited
financial statements of the Borrower consisting of a balance
sheet and the related statements of income, retained earnings
and cash flows prepared on a consolidated basis dated as of
the last Business Day of such quarterly fiscal period in form
and detail as reasonably required by the Lender certified by
the chief financial officer of the Borrower to have been
prepared from the records of the Borrower on the basis of
accounting principles consistently applied by the Borrower;
<PAGE>
(c) As soon as available, but in any event within ninety (90) days
following each fiscal year-end, an operating budget and cash
flow forecast for the fiscal year immediately following such
fiscal year-end.
(d) Promptly upon obtaining knowledge thereof, notice of the
occurrence of any Default or Event of Default and of the
violation by the Borrower of any law, rule or regulation, the
non-compliance with which could be reasonably expected to be a
Material Adverse Occurrence;
(e) To the extent applicable, promptly after the sending or filing
thereof, copies of all regular and periodic financial reports
which the Borrower shall file with the U.S. Securities and
Exchange Commission, or any national securities exchange;
(f) As soon as available, but in any event within thirty (30) days
after the last day of each monthly fiscal period, a Borrowing
Base certificate.
(g) Such other information concerning the business, operations and
condition (financial or otherwise) of the Borrower as the
Lender may reasonably request.
6.2. Maintenance of Corporate Existence. Maintain and preserve its
corporate existence.
6.3. Taxes. Pay and discharge as the same shall become due and
payable, all taxes, assessments and other governmental charges and
levies against or on any of its property, as well as claims of any
kind which, if unpaid, might become a Lien upon any of its
properties, unless such tax, levy, charge assessment or Lien is
being contested in good faith by the Borrower and is supported by an
adequate book reserve. The Borrower shall make all required
withholding deposits.
6.4. Notices. As soon as practicable, give notice to the Lender of:
(a) The commencement of any litigation relating to the Borrower
which might reasonably result in a Material Adverse Occurrence
or relating to the transactions contemplated by this Credit
Agreement;
(b) The commencement of any material arbitration or governmental
proceeding or investigation not previously disclosed to the
Lender which has been instituted or, to the knowledge of the
Borrower, is threatened against the Borrower or its property
which might reasonably result in a Material Adverse
Occurrence;
(c) Any Reportable Event or "prohibited transaction" or the
imposition of a Withdrawal Liability, within the meaning of
ERISA, in connection with any Plan and, when known, any action
taken by the Internal Revenue Service, Department of Labor or
Pension Benefit Guaranty Corporation with respect thereto, and
any adverse development which occurs in any litigation,
arbitration or governmental investigation or proceeding
previously disclosed to the Lender which if determined
adversely to the Borrower would constitute a Material Adverse
Occurrence; and
(d) Any Default or Event of Default under this Credit Agreement.
6.5. Compliance with Laws. Carry on its business activities in
substantial compliance with all applicable federal or state laws and
all applicable rules, regulations and orders of all governmental
bodies and offices having power to regulate or supervise its
business activities. The Borrower
<PAGE>
shall maintain all material rights, liens, franchises, permits,
certificates of compliance or grants of authority required in the
conduct of its business. Without limiting the foregoing
undertakings, the Borrower specifically agrees that it will comply
with all applicable Environmental Laws and obtain and comply with
all permits, licenses and similar approvals required by any
Environmental laws, and will not generate, use, transport, treat,
store or dispose of any Hazardous Substances in such a manner as to
create any liability or obligation under the common law of any
jurisdiction or any Environmental Law.
6.6. Books and Records. Keep books and records reflecting all of its
business affairs and transactions in accordance with GAAP
consistently applied and permit the Lender, and its representatives,
at reasonable times and intervals, to visit all of its offices,
discuss its financial matters with officers of the Borrower and its
independent public accountants (and by this provision the Borrower
authorizes its independent public accountants to participate in such
discussions) and examine any of its books and other corporate
records.
6.7. Insurance. Procure and maintain insurance with financially
sound and reputable insurers, insurance with respect to the
Collateral and its other property against damage and loss by theft,
fire, collision (in the case of motor vehicles) and such other risks
as are required by the Lender in an amount equal to the fair market
value thereof and, in any event, in an amount sufficient to avoid
the application of any coinsurance provisions and naming the Lender
loss payee. The Borrower shall also procure and maintain other such
insurance including workers compensation insurance, liability and
business interruption insurance, and other insurance as the Lender
may require and/or that may be required under any of the Loan
Documents, all in such amounts as may be required by the Lender.
Policies of all such insurance shall contain an agreement by the
insurer to provide the Lender thirty (30) days prior written notice
of cancellation and an agreement that the Lender's interest shall
not be impaired or invalidated by any act or neglect of the Borrower
nor by the occupation of properties owned or leased by the Borrower
or other properties wherein the Collateral is located for purposes
more hazardous than those permitted by such policies. The Borrower
shall provide evidence of such insurance and the policies of
insurance or copies thereof to the Lender upon request.
6.8. Maintain Property. Maintain and keep its assets, property and
equipment in good repair, working order and condition and from time
to time make or cause to be made all needed renewals, replacements
and repairs.
6.9. Conduct of Business. Continue to engage primarily in the
business being conducted on the date of this Credit Agreement.
6.10. Net Working Capital. Maintain as of the end of each calendar
month Net Working Capital of not less than $1,400,000.
6.11. Equity to Asset Ratio. Maintain as of each calendar month an
Equity to Asset Ratio of not less than .30:1.0. In the event the
Equity to Asset Ratio falls below .30:1.0, the applicable interest
rate to the subject note shall increase to a variable rate of
Reference Rate. Upon the curing of the default, the interest rate on
the subject note shall revert to the initially agreed upon interest
rate effective on the date which the default is cured. It is further
agreed that at no time shall the Equity to Asset Ratio fall below
.20:1.0.
6.12. Further Assurances. The Borrower agrees upon reasonable
request by the Lender to execute and deliver such further
instruments, deeds and assurances, including financing statements
<PAGE>
under the Uniform Commercial Code of Minnesota and/or any other
relevant states, and to do such further acts as may be necessary or
proper to carry out more effectively the purposes of this Credit
Agreement and the Loan Documents and, without limiting the
foregoing, to make subject to the liens and security interests of
the Security Agreement and any other of the Loan Documents any
property agreed to be subjected, or intended to be subject, or
covered by the granting clauses of the Security Agreement or such
other of the Loan Documents.
6.13 ERISA Compliance. Comply in all material respects at all times
with all applicable provisions of ERISA and the regulations and
published interpretations thereunder.
7. NEGATIVE COVENANTS
As long as there remains any amount outstanding under the Subject
Notes or the Lender has any obligation to make Advances under the Seasonal Loan
Commitment, the Borrower shall not, unless waived in writing by the Lender:
7.1. Consolidation; Merger; Sale of Assets; Acquisitions.
Consolidate with or merge into or with any other entity; or sell
(other than sales of inventory in the ordinary course of business),
transfer, lease or otherwise dispose of all or a substantial part of
its assets; or acquire a substantial interest in another Person
either through the purchase of all or substantially all of the
assets of that Person or the purchase of a controlling equity
interest in that Person.
7.2. Liens. Create, incur, assume or suffer to exist any Lien or any
of its property, real or personal, except (a) Liens in favor of the
Lender; (b) Liens disclosed to and approved of in writing by the
Lender; (c) Liens for current taxes and assessments which are not
yet due and payable; and (d) purchase money security interests to
secure the indebtedness permitted under Section 7.3 below.
7.3. Additional Indebtedness. Create, incur, assume or suffer to
exist any indebtedness except: (a) indebtedness in favor of the
Lender; (b) current liabilities incurred in the ordinary course of
business; (c) indebtedness existing on the date of this Credit
Agreement and disclosed to and approved of in writing by the Lender;
and (d) purchase money indebtedness incurred in connection with the
acquisition of fixed assets not to exceed $500,000 in the aggregate
during any fiscal year of the Borrower.
7.4. Guaranties. Assume, guarantee, endorse or otherwise become
liable in connection with the indebtedness of any other person or
entity except endorsements of negotiable instruments for deposit or
collection in the ordinary course of business.
7.5. Change in Ownership or Business. Permit a material change in
(a) the ownership or management of the Borrower as in effect on the
date of this Credit Agreement, or (b) the line of business presently
engaged in by the Borrower.
7.6. Dividends. Declare or pay any dividends, purchase, redeem,
retire or otherwise acquire for value any of its capital stock now
or hereafter outstanding, return any capital to its stockholders as
such, or make any distribution of assets to its stockholders as
such, at any time any Default or Event of Default has occurred and
is continuing.
7.7. Investments; Subsidiaries. The Borrower will not purchase or
hold beneficially any stock or other securities or evidences of
indebtedness of, make or permit to exist any loans or advances to,
or create or acquire any Subsidiary or make any investment or
acquire any interest whatsoever in, any other Person, except:
<PAGE>
(a) Investments in direct obligations of the United States of
America or any agency or instrumentality thereof whose
obligations constitute the full faith and credit obligations
of the United States of America having a maturity of one (1)
year or less, commercial paper issued by a U.S. corporation
rated "A-1" or "A-2" by Standard & Poor's Ratings Services or
"P-1" or "P-2" by Moody's Investors Service, investments in
money market mutual funds whose underlying assets are
exclusively investments which would otherwise be permitted
investments under this Section 7.6(a), or repurchase
agreements, certificates of deposit or bankers' acceptances
having a maturity of one (1) year or less issued by members of
the Federal Reserve System having deposits in excess of
$500,000,000 (which certificates of deposit or bankers'
acceptances are fully insured by the Federal Deposit Insurance
Corporation);
(b) Travel advances or loans to officers and employees of the
Borrower (not including contracts made in the ordinary course
of business with any such officers or employees) not exceeding
at any one time an aggregate of $25,000;
(c) Advances in the form of progress payments, prepaid rent or
security deposits;
(d) Existing investments as described in the financial statements
previously delivered to the Lender;
(e) Investments constituting transactions made in the ordinary
course of business of the Borrower;
(f) Investments in wholly-owned subsidiaries of the Borrower
existing as of the date hereof; and
(g) Investments not otherwise permitted in this Section 7.7 not to
exceed $5,000,000 in the aggregate (on a book value basis) at
any time outstanding.
8. EVENTS OF DEFAULT AND REMEDIES
8.1. Events of Default. The term "Event of Default" shall mean any
of the following events:
(a) The Borrower shall default in the payment when due, or if
payable on demand, upon demand, of any principal or interest
on any of the Subject Notes; or
(b) The Borrower shall default (other than a default in payment
under subsection (a) above) in the due performance and
observance of any of the covenants contained in any of the
Loan Documents and such default shall continue unremedied for
a period of thirty (30) days after notice from the Lender to
the Borrower thereof; or
(c) An event has occurred which would, at such time or with the
passage of time, constitute an "event of default" (however
legally styled) under any other loan obligation, lease, bond,
debenture, security agreement, note, or instrument or
agreement evidencing Debt and any applicable grace period
specified in such agreement or evidence of Debt has expired;
or
(d) The Borrower shall become insolvent or generally fail to pay
or admit in writing its inability to pay its debts as they
become due; or the Borrower shall apply for, consent to, or
acquiesce in the appointment of a trustee, receiver or other
custodian for itself or any of its property, or make a general
assignment for the benefit of its creditors; or trustee,
receiver or other custodian shall otherwise be appointed for
the Borrower or any of its assets; or any
<PAGE>
bankruptcy, reorganization, debt arrangement, or other case or
proceeding under any bankruptcy or insolvency law, or any
dissolution or liquidation proceeding shall be commenced by or
against the Borrower; or the Borrower shall take any action to
authorize, or in furtherance of, any of the foregoing; or
(e) Any representation or warranty set forth in this Credit
Agreement or any other Loan Document shall be untrue in any
material respect on the date as of which the facts set forth
are stated or certified; or
(f) The occurrence of any Material Adverse Occurrence; or
(g) A Reportable Event (as defined under ERISA) shall have
occurred; or
(h) The rendering against the Borrower of a final judgment, decree
or order for the payment of money in excess of $250,000
(unless the payment of such judgment in the amount of such
excess is insured), and the continuance of such judgment,
decree or order unsatisfied for any 30 consecutive day period
without a stay of execution.
(i) The occurrence of a Change of Control; or
(j) The Lender shall in good faith deem itself insecure.
8.2. Remedies; Cumulative. If an Event of Default described in
Section 8.1(d) shall occur, the full unpaid balance of each of the
Subject Notes (outstanding balance plus accrued interest) and all
other obligations of the Borrower to the Lender shall automatically
be due and payable without declaration, notice, presentment, protest
or demand of any kind (all of which are hereby expressly waived) and
the obligation of the Lender to make additional Advances shall
automatically terminate. If any other Event of Default shall occur
and be continuing, the Lender may terminate its obligation to make
additional Advances and may declare the outstanding balance of the
each of the Subject Notes and all other obligations of the Borrower
to the Lender to be due and payable without further notice,
presentment, protest or demand of any kind (all of which are hereby
expressly waived), whereupon the full unpaid amount of each of the
Subject Notes and all other obligations of the Borrower to the
Lender shall become immediately due and payable. Upon any Event of
Default, the Lender shall be entitled to exercise any and all rights
and remedies available under any of the Loan Documents or otherwise
available at law or in equity to collect the Subject Notes and all
other obligations of the Borrower to the Lender, to realize upon or
otherwise pursue any and all Collateral and other security
(including without limitation any and all guarantees) for the loans
under this Credit Agreement and to, without notice to the Borrower,
and without further action, apply any and all monies owing by Lender
to the Borrower to the payment of the Subject Notes, and all other
obligations of the Borrower hereunder, in such order as the Lender
elects (subject to Section 3.6).
9. MISCELLANEOUS
9.1. Waivers, Amendments. The provisions of the Loan Documents may
from time to time be amended, modified, or waived, if such
amendment, modification or waiver is in writing and signed by the
Lender. No failure or delay on the part of the Lender or the
holder(s) of the Subject Notes
<PAGE>
in exercising any power or right under any of the Loan Documents
shall operate as a waiver thereof, nor shall any single or partial
exercise of any such power or right preclude any other or further
exercise thereof or the exercise of any other power or right. No
notice to or demand on the Borrower in any case shall entitle it to
any notice or demand in similar or other circumstances.
9.2. Notices. All communications and notices provided under this
Credit Agreement shall be in writing and addressed or delivered to
the Borrower or the Lender at their respective addresses shown on
the first page hereof, or to any party at such other address as may
be designated by such party in a written notice to the other
parties. Such notices shall be delivered by any of the following
means: (i) mailing through the United States Postal Service, postage
prepaid, by registered or certified mail, return receipt requested;
(ii) delivery by reputable overnight delivery service including
without limitation, and by way of example only: Federal Express,
DHL, Airborne Express and Express Mail; or (iii) delivery by
reputable private personal delivery service. Notices delivered in
accordance with (i) above shall be deemed delivered the second
Business Day after deposit in the mail; notices delivered in
accordance with (ii) above shall be deemed delivered the first
Business Day after delivery to the delivery service; and notices
delivered in accordance with (iii) above shall be deemed delivered
the same Business Day as that specified by the notifying party to
the delivery service.
9.3. Costs and Expenses. The Borrower agrees to pay all expenses for
the preparation of this Credit Agreement, including exhibits, and
any amendments to this Credit Agreement as may from time to time
hereafter be required, and the reasonable attorneys fees and legal
expenses of counsel for the Lender, from time to time incurred in
connection with the preparation and execution of this Credit
Agreement and any document relevant to this Credit Agreement, any
amendments hereto or thereto, and the consideration of legal
questions relevant hereto and thereto. The Borrower agrees to
reimburse Lender upon demand for, all out-of-pocket expenses
(including reasonable attorneys fees and legal expenses) in
connection with the Lender's enforcement of the obligations of the
Borrower hereunder or under the Note or any other of the Loan
Documents, whether or not suit is commenced including, without
limitation, attorneys fees, and legal expenses in connection with
any appeal of a lower court's order or judgment. The obligations of
the Borrower under this Section 9.3 shall survive any termination of
this Credit Agreement.
9.4. Interest Limitation. All agreements between the Borrower and
the Lender are hereby expressly limited so that in no contingency or
event whatsoever, whether by reason of acceleration of maturity of
the indebtedness evidenced or secured thereby or otherwise, shall
the rate of interest charged or agreed to be paid to the Lender for
the use, forbearance, loaning or detention of such indebtedness
exceed the maximum permissible interest rate under applicable law
("Maximum Rate"). If for any reason or in any circumstance
whatsoever fulfillment of any provision of this Credit Agreement
and/or the Subject Notes, any document securing or executed in
connection herewith or therewith, or any other agreement between the
Borrower and the Lender, at any time shall require or permit the
interest rate applied thereunder to exceed the Maximum Rate, then
the interest rate shall automatically be reduced to the Maximum
Rate, and if the Lender should ever receive interest at a rate that
would exceed the Maximum Rate, the amount of interest received which
would be in excess of the amount receivable after applying the
Maximum Rate to the balance of the outstanding obligation shall be
applied to the reduction of the principal balance of the outstanding
obligation for which the amount was paid and not to the payment of
interest thereunder. This provision shall control every other
provision of any and all agreements between the Borrower and the
Lender and shall also be binding upon and applicable to any
subsequent holder of any of the Subject Notes.
<PAGE>
9.5. Severability. Any provision of this Credit Agreement or any
other of the Loan Documents executed pursuant hereto which is
prohibited or unenforceable in any jurisdiction shall, as to such
jurisdiction, be ineffective to the extent of such portion or
unenforceability without invalidating the remaining provisions of
this Credit Agreement or such Loan Document or affecting the
validity or enforceability of such provisions in any other
jurisdiction.
9.6. Cross-References. References in this Credit Agreement or in any
other of the Loan Documents executed pursuant hereto to any Section
are, unless otherwise specified, to such Section of this Credit
Agreement or such Loan Document, as the case may be.
9.7. Headings. The various headings of this Credit Agreement or of
any other of the Loan Documents executed pursuant hereto are
inserted for convenience only and shall not affect the meaning or
interpretation of this Credit Agreement or such Loan Document or any
provisions hereof or thereof.
9.8. Governing Law; Venue; Waiver of Jury Trial. Each of the Loan
Documents shall be deemed to be a contract made under and governed
by the laws of the State of North Dakota (without regard to the laws
of conflict of any jurisdiction) as to all matters, including
without limitation, matters of validity, interpretation,
construction, effect, performance and remedies. The Borrower hereby
consents to the personal jurisdiction of the state and federal
courts located in the State of North Dakota in connection with any
controversy related to this Credit Agreement and any other of the
Loan Documents, waives any argument that venue in such forums is not
convenient and agrees that any litigation instigated by the Borrower
against the Lender in connection herewith or therewith shall be
venued in the federal or state court that has jurisdiction over
matters arising in Fargo, North Dakota. THE BORROWER AND LENDER
IRREVOCABLY WAIVE ALL RIGHT TO TRIAL BY JURY IN ANY ACTION,
PROCEEDING OR COUNTERCLAIM ARISING OUT OF OR RELATING TO ANY LOAN
DOCUMENT OR ANY INSTRUMENT OR DOCUMENT DELIVERED THEREUNDER.
9.9. Successors and Assigns. This Credit Agreement shall be binding
upon and shall inure to the benefit of the parities hereto and their
respective successors and assigns, except that Borrower may not
assign or transfer its rights hereunder without the prior written
consent of Lender.
9.10. Recitals Incorporated. The recitals to this Credit Agreement
are incorporated into and constitute an integral part of this Credit
Agreement.
9.11. Multiple Counterparts. This Credit Agreement may be executed
in one or more counterparts and by the different parties on separate
counterparts, each of which shall be deemed to be an original and
all of which shall constitute one and the same instrument.
9.12. Indemnity. In addition to the payment of expenses pursuant to
Section 9.3, the Borrower agrees to indemnify, defend and hold
harmless the Lender, and any of its participants, assignees, parent
corporations, subsidiary corporations, affiliated corporations and
successor corporations, and all present and future officers,
directors, employees, attorneys and agents of the foregoing (the
"Indemnitees"), from and against any of the following (collectively,
"Indemnified Liabilities"):
(a) any and all transfer taxes, documentary taxes, assessments or
charges made by any governmental authority by reason of the
execution and delivery of the Loan Documents or the making of
the Advances or the Loans;
<PAGE>
(b) any claims, loss or damage to which any Indemnitee may be
subjected if any representation or warranty contained in this
Agreement proves to be incorrect in any respect or as a result
of any violation of the covenant contained in this Agreement;
and
(c) any and all other liabilities, losses, damages, penalties,
judgments, suits, claims, costs and expenses of any kind or
nature whatsoever (including, without limitation, the
reasonable fees and disbursements of counsel) in connection
with the foregoing and any other investigative, administrative
or judicial proceedings, whether or not such Indemnitee shall
be designated a party thereto, which may be imposed on,
incurred by or asserted against any such Indemnitee, in any
manner related to or arising out of or in connection with the
making of the Advances or the Loans and the Loan Documents or
the use or intended use of the proceeds of the Advances or the
Loans.
If any investigative, judicial or administrative proceeding arising
from any of the foregoing is brought against any Indemnitee, upon
such Indemnitee's request, the Borrower, or counsel designated by
the Borrower and satisfactory to the Indemnitee, will resist and
defend such action, suit or proceeding to the extent and in the
manner directed by the Indemnitee, at the Borrower's sole costs and
expense. Each Indemnitee will use its best efforts to cooperate in
the defense of any such action, suit or proceeding. If the foregoing
undertaking to indemnify, defend and hold harmless may be held to be
unenforceable because it violates any law or public policy, the
Borrower shall nevertheless make the maximum contribution to the
payment and satisfaction of each of the Indemnified Liabilities
which is permissible under applicable law. The Borrower's obligation
under this Section 9.129.129.1218.12 shall survive the termination
of this Credit Agreement and the discharge of the Borrower's other
obligations hereunder.
9.13. Prior Agreement Superseded; Complete Agreement. This Credit
Agreement amends, restates, and supersedes the Prior Agreement in
its entirety and all obligations, liabilities and indebtedness of
the Borrower incurred or arising thereunder shall be deemed to have
been incurred and arising hereunder. Furthermore, this Credit
Agreement, together with the Loan Documents, comprises the complete
and integrated agreement of the parties on the subject matter hereof
and supersedes all prior agreements, written or oral, on the subject
matter hereof.
9.14. Assignments; Participants; Waiver of Claims. The Lender may
sell, assign or grant a participation in the Subject Notes, in whole
or in part and may disclose information relating to the Borrower or
otherwise relevant to this Agreement, to such Persons and their
financing sources ("Assignees"). No Assignee shall be deemed a
partner or agent of the Lender. The Borrower irrevocably agrees that
any claims it may have or may assert against the Lender for breach
of contract (or related tort claims) shall be personal to the Lender
and shall not be asserted by way of direct claim or offset against
any Assignee or against any Loan sold or assigned to any Assignee
and the Assignee hereby irrevocably waives any right it otherwise
may have, now or hereafter, to assert any such claim). The Borrower
acknowledges that the Assignees shall rely on the foregoing waiver
and agreement.
(REMAINDER OF PAGE INTENTIONALLY LEFT BLANK)
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Credit
Agreement to be executed by their respective officers thereunto duly authorized
as of the day and year first above written.
MINNESOTA VALLEY IRRIGATION, INC.,
a Minnesota corporation
By:
----------------------------------
Its:
---------------------------------
AG CAPITAL COMPANY,
a Delaware Corporation
By:
----------------------------------
Its:
---------------------------------
EXHIBIT 13.1
SELECTED FINANCIAL DATA
<TABLE>
<CAPTION>
Fiscal Year Ended January 31,
(in thousands, except store and per share data) 1998 1997 1996 1995 1994 1993 1992
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Revenues:
Wholegoods sales $ 301,684 $ 224,094 $ 164,054 $ 135,704 $ 106,600 $ 73,516 $ 49,097
Parts and service 113,268 75,820 58,998 48,206 37,512 31,862 22,129
Rental 14,451 2,499 505 -- -- -- --
- -----------------------------------------------------------------------------------------------------------------------------------
Total revenues 429,403 302,413 223,557 183,910 144,112 105,378 71,226
Cost of revenues 340,987 245,287 180,839 148,111 116,369 83,548 56,422
- -----------------------------------------------------------------------------------------------------------------------------------
Gross profit 88,416 57,126 42,718 35,799 27,743 21,830 14,804
Selling, general and administrative expenses 60,382 41,275 31,655 24,893 20,577 16,737 11,929
- -----------------------------------------------------------------------------------------------------------------------------------
Operating income 28,034 15,851 11,063 10,906 7,166 5,093 2,875
Interest expense, net (5,538) (5,046) (2,994) (1,093) (1,334) (908) (1,126)
- -----------------------------------------------------------------------------------------------------------------------------------
Income before income taxes 22,496 10,805 8,069 9,813 5,832 4,185 1,749
Provision for income taxes (1) 9,156 4,322 3,228 3,925 2,332 1,674 700
Minority interest 89 -- -- -- -- -- --
===================================================================================================================================
Net income $ 13,251 $ 6,483 $ 4,841 $ 5,888 $ 3,500 $ 2,511 $ 1,049
===================================================================================================================================
Net income per share - basic and diluted $ 1.00 $ .77 $ .58
================================================================================
SELECTED OPERATING DATA:
Comparable store revenues increase 11% 26% 11% 25% 32% 12% --
Stores open at beginning of period 32 26 22 22 21 17 15
Stores opened 3 1 2 0 0 0 1
Stores acquired 16 5 2 0 1 4 1
Stores consolidated (1) -- -- -- -- -- --
- -----------------------------------------------------------------------------------------------------------------------------------
Stores open at end of period 50 32 26 22 22 21 17
- -----------------------------------------------------------------------------------------------------------------------------------
Net purchases of rental equipment $ 14,185 $ 1,519 $ 6,342 $ -- $ -- $ -- $ --
Net purchases of property and equipment 3,766 2,137 3,651 1,208 627 681 561
Depreciation and amortization 5,308 2,606 1,326 690 668 584 504
As of January 31,
- -----------------------------------------------------------------------------------------------------------------------------------
BALANCE SHEET:
Working capital $ 69,265 $ 72,744 $ 26,596 $ 26,700 $ 22,019 $ 15,284 $ 9,846
Inventories 220,841 130,955 115,616 77,204 64,768 55,582 40,175
Total assets 319,432 181,551 148,093 98,315 83,341 68,660 46,129
Floor plan payables (2) 163,988 64,331 91,614 53,581 46,644 45,149 28,067
Total debt 31,353 14,409 10,638 3,277 2,946 6,698 6,283
Stockholders' equity 101,070 87,795 34,284 30,467 24,503 11,105 7,006
</TABLE>
(1) Prior to January 20, 1997, the Company elected to be treated as an S
corporation under the Internal Revenue Code. A pro forma provision for
income taxes was computed as if the Company were subject to corporate
income taxes based on the tax laws in effect during these fiscal years.
(2) Includes interest-bearing and noninterest-bearing liabilities incurred in
connection with inventory financing.
13
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
As a specialty retailer, the Company distributes, sells, services, rents and
finances equipment for agricultural, construction, material handling and
transportation customers, including units of state, local and federal government
and utility companies. The Company's primary supplier of new equipment and parts
is Deere & Company (Deere). The Company operates the largest network of John
Deere construction and agricultural equipment retail stores in the United
States. The Company's stores are located in Arizona, California, Minnesota,
Montana, North Dakota, South Dakota, Texas and Washington.
The Company's growth in recent years has been due to increases in comparable
store revenues, opening additional retail locations, acquisitions of equipment
retailers and implementation of the Company's operating model. The increase in
comparable store revenues is primarily the result of growing market shares,
adding new product offerings, and acquiring stores in high growth markets. The
acquisitions are primarily the result of consolidation trends among equipment
retailers and the ability of the Company to leverage its expertise in
acquisitions, consolidation and retail sales, service and marketing.
In January 1997, the Company completed an initial public offering of Class A
Common Stock, issuing 4,830,000 shares (Offering). The proceeds of the Offering,
$68.3 million after offering costs, were used to repay indebtedness incurred to
finance acquisitions in the aggregate amount of approximately $10.1 million, to
make an S corporation distribution of approximately $15.0 million in connection
with the termination of the Company's S corporation tax status, and to finance
acquisitions, new stores, internal growth and working capital needs.
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 rent-to-purchase 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.
The Company's highest gross margins have historically been generated from its
parts and service and rental 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 and rental 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, affecting its 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. Winter weather in the Midwest also limits construction activity
and, therefore, also typically results in lower sales of construction equipment
in the first and fourth fiscal quarters.
The Company requires cash primarily for financing its inventories of wholegoods
and replacement parts, acquisitions of additional retail locations, rental
equipment 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 Company, an
affiliate of the Company (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. More
recently, the Company entered into revolving credit agreements with Deutsche
Financial Services and NationsBank for financing rental equipment and inventory,
respectively. All lenders receive a security interest in the inventory financed.
Deere and Deere Credit offer floor plan financing to the Company and other Deere
dealers for extended periods and with varying interest-free periods, depending
on the type of equipment, to enable dealers to carry representative inventories
of equipment and to encourage the purchase of goods by dealers in advance of
seasonal retail demand. Down payments are not required and interest may not be
charged for a substantial part of the period for which
14
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
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 twelve months for agricultural equipment and one to five
months for construction equipment. Deere also provides financing to dealers on
used equipment accepted in trade and approved equipment from other suppliers.
Deutsche Financial Services provides rental equipment financing and NationsBank
provides inventory financing using variable market rates of interest based on
the prime rate and LIBOR, respectively.
The Company believes its construction equipment operations have benefited from
favorable economic conditions during recent years, including low interest rates,
low inflation and moderate economic growth. Despite generally favorable grain
prices during recent years, the Company believes its agricultural equipment
operations have been adversely affected by successive years of adverse weather
and recurrent plant diseases in the Midwest. These conditions have resulted in
lower than normal farmer confidence, income and capital spending plans. Price
increases by suppliers of the Company's products have not historically had a
significant impact on the Company's results of operations.
The Company recently established a finance subsidiary, RDO Financial Services
Company, to provide equipment loans and leases to the customers of its retail
network. This subsidiary is also exploring opportunities to provide additional
products and services, such as extended warranties, credit life insurance,
disability insurance and casualty insurance.
The Company's strategic plan of internal growth along with growth through
acquisitions resulted in the Company completing a number of acquisitions during
fiscal 1998 and 1997 along with achieving comparable store revenue growth of
11.1% and 25.5% for fiscal 1998 and 1997, respectively. In fiscal 1998, the
Company purchased five equipment rental stores, five agricultural equipment
retail stores, five construction equipment retail stores, and a truck center. In
addition to these acquisitions, three equipment rental stores were opened in
fiscal 1998. In fiscal 1997, the Company purchased two agricultural equipment
retail stores and three construction equipment retail stores. In addition to
these acquisitions, the Company opened a construction equipment retail store in
fiscal 1997. The results of operations of these acquisitions are included in the
Company's results of operations only for the periods after their applicable
acquisition dates.
In January 1998, the Company preliminarily agreed to acquire Hall GMC, Inc. and
Hall Truck Center, Inc. which are engaged in the distribution, sale, service,
rental and financing of trucking equipment primarily supplied by Volvo, GMC and
Isuzu. These operations are conducted at full-service truck centers located in
Fargo and Grand Forks, North Dakota. Revenues and assets of the proposed
acquisition will represent less than 10% of the total revenues and assets of the
Company.
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 in January 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 for fiscal 1997 and
1996.
RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, certain financial
data as a percentage of total revenues:
Fiscal Year Ended January 31, 1998 1997 1996
- -----------------------------------------------------------------
Revenues
Wholegoods sales 70.3% 74.1% 73.4%
Parts and service 26.4 25.1 26.4
Rental 3.3 0.8 0.2
- -----------------------------------------------------------------
Total revenues 100.0% 100.0% 100.0%
=================================================================
Gross profit 20.6% 18.9% 19.1%
Selling, general and
administrative expenses 14.1 13.6 14.2
- -----------------------------------------------------------------
Operating income 6.5 5.3 4.9
Interest expense, net 1.3 1.7 1.3
Provision for taxes (1) 2.1 1.5 1.4
- -----------------------------------------------------------------
Net income (1) 3.1% 2.1% 2.2%
=================================================================
(1) Prior to January 20, 1997, the Company elected to be treated as an S
corporation under the Internal Revenue Code. A pro forma provision for
income taxes was computed as if the Company were subject to corporate
income taxes based on the tax laws in effect during these fiscal years.
FISCAL YEAR ENDED JANUARY 31, 1998 COMPARED
TO FISCAL YEAR ENDED JANUARY 31, 1997
REVENUES
Revenues increased approximately $127.0 million, or 42.0%, from $302.4 million
for fiscal 1997, to $429.4 million for fiscal 1998. Construction operations,
including equipment rental, contributed $258.8 million and agricultural
operations contributed $170.6 million. 76.5% of the increase in revenues, or
$97.2 million, was due to acquisitions completed during the fiscal year. Of
those revenues in fiscal 1998, $41.3 million came from acquisitions in
construction operations, as the number of retail locations
15
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
increased from 21 to 26 as a result of acquisitions in North Dakota, Texas and
Montana. Acquisitions of agricultural operations added $43.1 million in
revenues, as the number of retail locations increased from 11 to 16 as a result
of acquisitions in Arizona, California and North Dakota. An additional $12.8
million came from the acquisition of Sun Valley Equipment Corp. in February of
1997 and the subsequent opening of three more construction equipment rental
stores during the fiscal year. In all, retail store locations increased from 32
to 50 during fiscal 1998. Growth in comparable store revenues of 11.1% accounted
for the balance of the increase in revenues.
Wholegoods sales increased approximately $77.6 million in fiscal 1998, or 34.6%,
from $224.1 million for fiscal 1997 to $301.7 million for fiscal 1998.
Construction operations contributed approximately $43.5 million of this
increase, with sales increasing 32.4% to $177.6 million. Acquisitions accounted
for $29.5 million of the increase in wholegoods construction sales. Agricultural
operations contributed the remaining increase of approximately $34.1 million,
with sales increasing 37.9% to 124.1 million. Of the $34.1 million, just over
77%, or $26.3 million, was due to acquisitions.
Parts and service revenues increased approximately $37.4 million, or 49.3%, from
$75.8 million for fiscal 1997 to $113.2 million for fiscal 1998. In the most
recent fiscal year parts and service revenues grew at a faster pace than did
wholegoods sales primarily due to the acquisition of agricultural stores in
Arizona and California for which parts and service revenues represent a higher
portion of the revenue mix than the Company's other operations. Construction
operations contributed approximately $18.6 million of the increase as sales grew
37.7% to $68.0 million. Of this increase, $12.8 million was due to acquisitions.
Agricultural operations contributed the remaining increase of approximately
$18.8 million, with sales increasing 71.2% to $45.2 million. Of the increase,
$15.5 million was the result of acquisitions.
The acquisition of Sun Valley Equipment Corp. in fiscal 1998 contributed
approximately $12.0 million of rental revenues to the total of $14.5 million
reported for the fiscal year. Fiscal 1997 rental revenues were approximately
$2.5 million.
GROSS PROFIT
Gross profit increased approximately $31.3 million, or 54.8%, from $57.1 million
in fiscal 1997 to $88.4 million in fiscal 1998. Gross profit as a percentage of
total revenues for fiscal 1998 and 1997 was 20.6% and 18.9%, respectively. The
Company's highest gross margins are derived from its parts and service and
rental revenues. The increase in gross margin as a percent of total revenues is
primarily due to parts and service and rental revenues representing an increased
portion of the revenue mix in fiscal 1998.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative (SG&A) expenses as a percent of total
revenues increased from 13.6% for fiscal 1997 to 14.1% for fiscal 1998. Total
SG&A expenses increased approximately $19.1 million, from $41.3 million in
fiscal 1997 to $60.4 million for fiscal 1998. Approximately $14.6 million of the
increase was due to the operations of the Company's acquisitions. These
expenses, as a percentage of total revenues, increased primarily as a result of
the parts and service and rental revenues representing an increased portion of
the Company's revenue mix. SG&A expenses, as a percentage of revenues, are
greater for parts and service and rental revenues than for wholegoods sales.
INTEREST EXPENSE
Interest expense increased approximately $1.2 million, or 21.0%, from $5.7
million for fiscal 1997 to $6.9 million for fiscal 1998. The increase was due
primarily to the increase in floor plan financing associated with the
inventories and assets of the Company's acquisitions.
INTEREST INCOME
Interest income increased approximately $600,000, or 85.7%, from $700,000 for
fiscal 1997 to $1.3 million for fiscal 1998. Of this increase, approximately
$500,000 was from the operations of the Company's acquisitions. Interest income
is comprised of finance charges from trade receivables and earnings from
interest rate additions on retail installment contracts.
INCOME TAXES
The provision for taxes as a percentage of pretax income was 40.7% and 40.0% for
fiscal 1998 and 1997, respectively. During fiscal 1997, the Company was an S
corporation and, therefore, was not subject to corporate income taxes. A pro
forma income tax provision has been computed for fiscal 1997 as if the Company
were subject to corporate income taxes.
16
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
NET INCOME
Net income increased approximately $6.8 million, or 104.6%, to $13.3 million, or
$1.00 per share, for fiscal 1998, compared to pro forma $6.5 million, or pro
forma $0.77 per share, for fiscal 1997. On a per share basis, the growth in net
income was partially offset by the greater number of shares outstanding
resulting from the Company's initial public offering in January 1997.
FISCAL YEAR ENDED JANUARY 31, 1997 COMPARED
TO FISCAL YEAR ENDED JANUARY 31, 1996
REVENUES
Revenues increased approximately $78.8 million, or 35.3%, from $223.6 million
for fiscal 1996 to $302.4 million for fiscal 1997. Construction operations
contributed approximately $53.2 million of this increase, with revenues
increasing 40.1% to $186.0 million. The increase in construction 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 construction 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, $15.0 million of the increase in revenues from construction operations
resulted from the Company's acquisition of retail stores in Texas. The opening
of a construction store in Prescott Valley, Arizona, the addition of an
undercarriage service facility at the Company's construction store in Riverside,
California, and the addition of a dedicated construction 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 $25.6 million, with revenues in fiscal 1997 increasing 28.2% to
$116.4 million. Of this increase in agricultural revenues, $6.1 million was due
to the Company's acquisition of retail stores in Washington. A portion of the
increase in total revenues was the result of a 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, a highly positive
outlook of farmers for the agricultural economy generated increased activity in
all aspects of the Company's agricultural operations.
Wholegoods sales increased approximately $60.0 million in fiscal 1997, or 36.6%,
from $164.1 million for fiscal 1996 to $224.1 million for fiscal 1997.
Construction operations contributed approximately $39.7 million of this
increase, with sales increasing 42.1% to $134.1 million. Of this increase, $10.5
million was due to the acquisition of retail stores in Texas. Agricultural
operations contributed the remaining increase of approximately $20.3 million,
with sales increasing 29.1% to $90.0 million. Of this increase, $4.3 million was
due to the acquisition of retail stores in Washington. The increase in
wholegoods sales in fiscal 1997 for both construction and agricultural
operations 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.
Parts and service revenue increased approximately $16.8 million, or 28.5%, from
$59.0 million for fiscal 1996 to $75.8 million for fiscal 1997. Of this
increase, $6.2 million was due to acquisitions 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 construction store in Riverside,
California contributed approximately $1.1 million of parts and service revenue
in fiscal 1996 compared to $2.2 million in fiscal 1997.
Rental revenue of $2.5 million was generated in fiscal 1997 as the result of the
commencement of construction equipment rental operations in the Southwest region
in November 1995 compared to $505,000 in fiscal 1996.
GROSS PROFIT
Gross profit increased approximately $14.4 million, or 33.7%, from $42.7 million
for fiscal 1996 to $57.1 million for fiscal 1997. Gross profit as a percentage
of total revenues for fiscal 1997 and 1996 was 18.9% and 19.1%, respectively.
The Company's highest gross margins are derived from its parts and service
revenues. For these periods, there was a small change in the revenue mix between
17
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
wholegoods sales and parts and service revenues which contributed to the
reduction in gross margin percent.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative (SG&A) expenses as a percentage of total
revenues decreased from 14.2% for fiscal 1996 to 13.6% for fiscal 1997, due
primarily to relatively stable fixed costs compared to a larger base of total
revenues. Total SG&A expenses increased approximately $9.6 million, from $31.7
million for fiscal 1996 to $41.3 million for fiscal 1997. Approximately $3.7
million of the increase was due to acquisitions during fiscal 1997. 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 $1.9 million, or 50%, from $3.8 million
for fiscal 1996 to $5.7 million for fiscal 1997. The increase was due primarily
to the increased levels of floor plan payables associated with higher inventory
levels, the financing of the construction equipment rental fleet discussed
above, and the acquisition debt associated with the Company's acquisitions.
INTEREST INCOME
Interest income decreased approximately $149,000, or 18.1% from $823,000 for
fiscal 1996 to $674,000 for fiscal 1997. Interest income is comprised of finance
charges from trade receivables and earnings from interest rate additions on
retail installment contracts.
PRO FORMA PROVISION FOR TAXES
In the fourth quarter of fiscal 1997, the Company recognized a one-time income
tax benefit of $300,000 due to changing its status from an S corporation to a C
corporation during the period. This benefit is excluded from pro forma net
income and pro forma net income per share which are being reported as if the
Company had been a taxable entity for fiscal 1997 and 1996. The 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 $1.7 million, or 35.4%, to $6.5
million, or $0.77 per share, for fiscal 1997, compared to $4.8 million, or $0.58
per share, for fiscal 1996.
LIQUIDITY AND CAPITAL RESOURCES
The Company requires cash primarily for financing its inventories of wholegoods
and replacement parts, acquisitions of additional retail locations, rental
equipment 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. In addition, in January
1997, the Company completed the Offering raising net proceeds of $68.3 million
which are being used to satisfy the Company's working capital needs.
Floor plan financing from Deere and Deere Credit represents the primary source
of financing for wholegoods inventories, particularly for equipment supplied by
Deere. More recently, the Company entered into revolving credit agreements with
Deutsche Financial Services and NationsBank for financing of rental equipment
and inventory, respectively. 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 twelve
months for agricultural equipment and one to five months for construction
equipment. Deere also provides financing to dealers on used equipment accepted
in trade and approved equipment from other suppliers. Deutsche Financial
Services provides rental equipment financing and NationsBank provides inventory
financing using variable market rates of interest based on the prime rate and
LIBOR, respectively.
18
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
The Company annually reviews the terms of its financing with its lenders,
including the interest rate. In fiscal 1998, 1997 and 1996 the average interest
rate under interest-bearing floor plan financing was approximately 8.20%, 8.25%,
and 8.85%, respectively. As of January 31, 1998 the Company had outstanding
floor plan payables of approximately $164.0 million, of which $79.2 million was
then interest-bearing.
During fiscal 1998, operating activities provided net cash of $38.2 million
versus using net cash of $31.9 million in fiscal 1997 and provided net cash of
$12.1 million in fiscal 1996. The changes in fiscal 1998 and 1997 were primarily
attributable to changes in floor plan payables.
Cash used for investing activities in fiscal 1998, 1997 and 1996 was $44.9
million, $14.3 million and $11.8 million, respectively. The cash used in fiscal
1998, 1997 and 1996 was primarily related to acquisitions and the purchase of
construction equipment for the Company's rental operations.
Cash provided by financing activities amounted to $6.3 million and $45.9 million
for fiscal 1998 and 1997, respectively. Cash provided by financing activities in
fiscal 1998 was primarily attributable to financing of rental equipment for the
Company's rental operations. In fiscal 1997, cash provided by financing
activities was primarily attributable to net proceeds of $68.3 million from the
Offering, partially offset by the distribution to its pre-Offering stockholders
of $25.0 million of previously undistributed accumulated S corporation earnings,
which includes $10.0 million from fiscal 1997 earnings. In fiscal 1996, the
Company utilized net cash from financing activities of $200,000.
The Company believes cash from operations, available cash and borrowing capacity
will be sufficient to fund its planned internal capital expenditures for fiscal
1999.
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 construction 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 trends.
YEAR 2000 COMPLIANCE
The Company uses software and related technologies throughout its business that
will be affected by the date change in the year 2000. A study is well underway
with both internal and third party resources to ensure that the Company's
systems continue to meet its needs and those of its customers. The Company
believes that any necessary modification, maintenance or replacement of existing
computer systems or software will permit the Company to address this issue
without significant operational problems. It is anticipated that these efforts
will be complete by the summer of 1999, allowing time for testing. The Company
is also requiring all of its major software and data service suppliers to be
Year 2000 compliant, as well as requiring all of its major equipment suppliers,
lending institutions and other vendors to inform the Company as to the status of
their efforts to be Year 2000 compliant. Although the Company has not yet fully
assessed the expense and related potential effect on the Company, the Company
does not anticipate that compliance with year 2000 needs will have a material
effect on the Company's financial position or results of operations.
19
<PAGE>
CONSOLIDATED STATEMENTS OF OPERATIONS RDO EQUIPMENT CO. AND SUBSIDIARIES
<TABLE>
<CAPTION>
For the Years Ended January 31,
(in thousands, except per share amounts) 1998 1997 1996
- -------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
REVENUES:
Wholegoods sales $ 301,684 $ 224,094 $ 164,054
Parts and service 113,268 75,820 58,998
Rental 14,451 2,499 505
- -------------------------------------------------------------------------------------------------
Total revenues 429,403 302,413 223,557
COST OF REVENUES 340,987 245,287 180,839
- -------------------------------------------------------------------------------------------------
GROSS PROFIT 88,416 57,126 42,718
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES 60,382 41,275 31,655
- -------------------------------------------------------------------------------------------------
Operating income 28,034 15,851 11,063
INTEREST EXPENSE (6,864) (5,720) (3,817)
INTEREST INCOME 1,326 674 823
- -------------------------------------------------------------------------------------------------
Income before income taxes and minority interest 22,496 10,805 8,069
INCOME TAX PROVISION (BENEFIT) 9,156 (300) --
Income before minority interest 13,340 11,105 8,069
MINORITY INTEREST 89 -- --
- -------------------------------------------------------------------------------------------------
NET INCOME $ 13,251 $ 11,105 $ 8,069
=================================================================================================
ACTUAL AND PRO FORMA DATA (Note 7):
Income before income taxes and minority interest $ 22,496 $ 10,805 $ 8,069
Provision for income taxes 9,156 4,322 3,228
Minority interest 89 -- --
- -------------------------------------------------------------------------------------------------
Net income $ 13,251 $ 6,483 $ 4,841
=================================================================================================
Basic and diluted net income per share $ 1.00 $ 0.77 $ 0.58
=================================================================================================
Supplemental net income per share (Note 2) $ 1.00 $ 0.68 $ 0.51
=================================================================================================
Weighted average shares outstanding - basic 13,181 8,400 8,370
Weighted average shares outstanding - diluted 13,287 8,400 8,370
Weighted average shares outstanding - supplemental (Note 2) 13,287 9,459 9,429
=================================================================================================
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL
STATEMENTS.
20
<PAGE>
CONSOLIDATED BALANCE SHEETS RDO EQUIPMENT CO. AND SUBSIDIARIES
<TABLE>
<CAPTION>
As of January 31
(in thousands) 1998 1997
- ----------------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 37 $ 459
Accounts receivable (less allowance for doubtful accounts of $631 and $929) 36,204 24,982
Receivables from affiliates 1,361 --
Inventories 220,841 130,955
Prepaid expense 704 499
Deferred income tax benefit 1,450 540
- ----------------------------------------------------------------------------------------------------
Total current assets 260,597 157,435
PROPERTY AND EQUIPMENT, net 37,469 15,642
OTHER ASSETS:
Deposits 1,765 1,360
Goodwill and other, net of accumulated amortization of $781 and $185 19,601 7,114
- ----------------------------------------------------------------------------------------------------
Total assets $319,432 $181,551
====================================================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Floor plan payables $163,988 $ 64,331
Notes payable and current maturities of long-term debt:
Banks and others 4,423 4,933
Affiliates 2,149 651
Accounts payable 7,376 5,153
Accrued liabilities 9,619 5,652
Customer advance deposits 3,043 3,141
Dividends payable 734 830
- ----------------------------------------------------------------------------------------------------
Total current liabilities 191,332 84,691
LONG-TERM DEBT, net of current maturities:
Banks and others 20,410 3,522
Affiliates 4,371 5,303
DEFERRED INCOME TAXES 1,560 240
- ----------------------------------------------------------------------------------------------------
Total liabilities 217,673 93,756
- ----------------------------------------------------------------------------------------------------
COMMITMENTS AND CONTINGENCIES (Note 9)
MINORITY INTEREST 689 --
STOCKHOLDERS' EQUITY (Note 8):
Preferred stock -- --
Common stocks-
Class A 57 57
Class B 75 75
Additional paid-in-capital 84,471 84,447
Retained earnings 16,467 3,216
- ----------------------------------------------------------------------------------------------------
Total stockholders' equity 101,070 87,795
- ----------------------------------------------------------------------------------------------------
Total liabilities and stockholders' equity $319,432 $181,551
====================================================================================================
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL
STATEMENTS.
21
<PAGE>
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
RDO EQUIPMENT CO. AND SUBSIDIARIES
For the years ended January 31, 1998, 1997 and 1996
(in thousands, except share amounts)
<TABLE>
<CAPTION>
Common Stock Additional
-------------------- Total Paid-In Retained
Class A Class B Amount Capital Earnings Total
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
BALANCE, JANUARY 31, 1995 891,508 7,458,492 $ 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 7,458,492 84 16,284 17,916 34,284
Issuance of common stock 4,830,000 -- 48 68,231 -- 68,279
Purchase of common stock (20,383) -- -- (68) -- (68)
Net income -- -- -- -- 11,105 11,105
Dividends paid and payable -- -- -- -- (25,805) (25,805)
- ------------------------------------------------------------------------------------------------------------------
BALANCE, JANUARY 31, 1997 5,721,508 7,458,492 $ 132 $ 84,447 $ 3,216 $ 87,795
Class B common stock
converted to Class A common stock 8,000 (8,000) -- -- -- --
Issuance of common stock 1,500 -- -- 24 -- 24
Net income -- -- -- -- 13,251 13,251
- ------------------------------------------------------------------------------------------------------------------
BALANCE, JANUARY 31, 1998 5,731,008 7,450,492 $ 132 $ 84,471 $ 16,467 $ 101,070
==================================================================================================================
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL
STATEMENTS.
22
<PAGE>
CONSOLIDATED STATEMENTS OF CASH FLOWS RDO EQUIPMENT CO. AND SUBSIDIARIES
<TABLE>
<CAPTION>
For the Years Ended January 31,
(in thousands) 1998 1997 1996
- -------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
OPERATING ACTIVITIES:
Net income $ 13,251 $ 11,105 $ 8,069
Adjustments to reconcile net income to net
cash provided by (used for) operating activities:
Depreciation and amortization 5,308 2,606 1,326
Deferred taxes 410 (300) --
Minority interest 89 -- --
Change in operating assets and liabilities:
Accounts receivable (10,594) (8,959) (432)
Inventories (72,874) (1,330) (29,266)
Prepaid expenses (118) (185) (36)
Deposits (404) 218 (343)
Floor plan payables 97,495 (37,193) 32,723
Accounts payable and accrued liabilities 5,712 3,085 (125)
Customer advance deposits (115) (962) 184
- -------------------------------------------------------------------------------------------------
Net cash provided by (used for) operating activities 38,160 (31,915) 12,100
- -------------------------------------------------------------------------------------------------
INVESTING ACTIVITIES:
Net purchases of rental equipment (14,185) (1,519) (6,342)
Net purchase of property and equipment (3,766) (2,137) (3,651)
Net assets of acquisitions (26,478) (10,100) (1,263)
Other, net (483) (516) (571)
- -------------------------------------------------------------------------------------------------
Net cash used for investing activities (44,912) (14,272) (11,827)
- -------------------------------------------------------------------------------------------------
FINANCING ACTIVITIES:
Proceeds from issuance of long-term debt 15,777 7,432 5,862
Payments on long-term debt (9,308) (2,757) (510)
Net payments of bank lines and short-term notes payable (67) (2,052) (1,269)
Issuance of common stock, net of issuance costs 24 68,279 68
Purchase of common stock -- (68) --
Payment of dividends (96) (24,975) (4,320)
- -------------------------------------------------------------------------------------------------
Net cash provided by (used for) financing activities 6,330 45,859 (169)
- -------------------------------------------------------------------------------------------------
INCREASE (DECREASE) IN CASH (422) (328) 104
CASH AND CASH EQUIVALENTS, beginning of year 459 787 683
- -------------------------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS, end of year $ 37 $ 459 $ 787
=================================================================================================
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL
STATEMENTS.
23
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS RDO EQUIPMENT CO. AND SUBSIDIARIES
1. NATURE OF BUSINESS:
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the results of RDO Equipment Co.,
a C corporation (RDO) and its wholly-owned subsidiaries, Minnesota Valley
Irrigation, Inc. (MVI), RDO Mack Sales and Service, Inc., RDO Financial Services
Company, and its 80%-owned subsidiary RDO Rental Co. RDO acquired MVI in January
1997 when both were owned and controlled by the same majority stockholder. The
acquisition was effected through the issuance of 191,725 shares of RDO common
stock. Because RDO and MVI were under common control, the acquisition was
accounted for essentially as a pooling of interests. RDO and its consolidated
subsidiaries are referred to herein as the Company.
BUSINESS
As a specialty retailer, the Company distributes, sells, services, rents and
finances equipment for agricultural, construction, material handling and
transportation customers, including units of state, local and federal government
and utility companies. The Company's stores are located in Arizona, California,
Minnesota, Montana, 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.
The Company's major supplier of new equipment and parts for sale is Deere &
Company (Deere). Revenues from new Deere equipment and parts accounted for 48%,
49% and 48% of total revenues for fiscal years 1998, 1997 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 construction 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,
maintain suitable facilities, actively promote the sale of Deere equipment,
fulfill warranty obligations and 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 the death of the controlling stockholder
and a subsequent change in control, as defined. The Company was in compliance
with the terms of the Deere agreements at January 31, 1998.
Deere is obligated to make floor plan and other financing programs available to
the Company that it offers to other dealers, provide promotional and marketing
materials, and authorize the Company to use Deere trademarks and trade names.
24
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS RDO EQUIPMENT CO. AND SUBSIDIARIES
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 valuation of 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.
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid investments purchased with original
maturities of three months or less to be cash equivalents.
INVENTORIES
All inventories are valued at the lower of cost or market. Cost is determined
using the first-in, first-out method for new equipment and parts inventory. The
specific identification method is used to determine cost for used equipment.
Inventories consisted of the following as of January 31 (in thousands):
1998 1997
- -----------------------------------------------------------------------
New equipment $ 156,732 $ 75,233
Used equipment 39,392 40,094
Parts and other 24,717 15,628
- -----------------------------------------------------------------------
Total $ 220,841 $ 130,955
=======================================================================
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 as of January 31 (in
thousands):
1998 1997 Lives
- -----------------------------------------------------------------------------
Land $ 619 $ 850 --
Buildings and improvements 5,151 3,919 5-31.5
Equipment, furniture and fixtures 12,392 8,064 3-7
Rental equipment 27,541 8,624 3-7
Construction in progress 319 198 --
- -----------------------------------------------------------------------------
Total 46,022 21,655
Accumulated depreciation (8,553) (6,013)
- -----------------------------------------------------------------------------
Property and equipment, net $ 37,469 $ 15,642
=============================================================================
25
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS RDO EQUIPMENT CO. AND SUBSIDIARIES
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.
SUPPLEMENTAL NET INCOME PER SHARE
Supplemental net income per share for fiscal 1997 and 1996 is computed based on
weighted average shares outstanding, adjusted for the number of shares for which
proceeds would have been necessary to fund the $15 million distribution of
accumulated undistributed S corporation earnings discussed in Note 7.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In March 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 128, "Earnings per Share" (SFAS 128), which
changes the way companies calculate their earnings per share (EPS). SFAS 128
replaces primary EPS with basic EPS. Basic EPS is computed by dividing reported
earnings by weighted average shares outstanding, excluding potentially dilutive
securities. Fully diluted EPS, termed diluted EPS under SFAS 128, is also to be
disclosed. The Company adopted SFAS 128 during fiscal 1998. Accordingly, all
prior periods presented have been restated to conform to the provisions of SFAS
No. 128. A reconciliation of these amounts for the years ended January 31 is as
follows (in thousands, except per share data):
<TABLE>
<CAPTION>
1998 1997 1996
- ------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net income available to common shareholders $ 13,251 $ 6,483 4,841
======================================================================================================
Weighted average number of common shares outstanding - basic 13,181 8,400 8,370
Dilutive effect of option plan 106 -- --
- ------------------------------------------------------------------------------------------------------
Common and potential common shares outstanding - diluted 13,287 8,400 8,370
======================================================================================================
Basic and dilutive net income per share $ 1.00 $ 0.77 $ 0.58
======================================================================================================
</TABLE>
Statement of Financial Accounting Standards No. 131, "Disclosures About Segments
of an Enterprise and Related Information," effective for fiscal years beginning
after December 15, 1997, supercedes Statement of Financial Accounting Standards
No. 14, "Financial Reporting for Segments of a Business Enterprise," and
requires that companies disclose segment data based on how management makes
decisions about allocating resources to segments and measuring their
performance. The Company expects to include the required segment disclosures
beginning with its annual financial statements for fiscal year ending January
31, 1999. Adoption of the standard will require additional disclosures in the
Company's consolidated financial statements; however, it will not have an effect
on consolidated net income or stockholders' equity.
3. BUSINESS COMBINATIONS:
During fiscal 1998 and 1997, the Company made several acquisitions of
agricultural equipment, construction equipment, equipment rental and heavy truck
operations. These acquisitions have been accounted for using the purchase method
of accounting and, accordingly, the assets acquired and liabilities assumed have
been recorded at their estimated fair values as of the dates of acquisition. The
excess purchase price over the fair value of the assets acquired and liabilities
assumed has been recorded as goodwill.
26
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS RDO EQUIPMENT CO. AND SUBSIDIARIES
The following summarizes the net assets acquired, liabilities assumed and cash
purchase price of the acquisitions made during the years ended January 31 (in
thousands):
1998 1997
- -------------------------------------------------------------
Assets acquired $ 40,276 $ 21,425
Less: liabilities assumed 13,798 11,325
- -------------------------------------------------------------
Cash purchase price $ 26,478 $ 10,100
=============================================================
Number of acquisitions 7 2
=============================================================
The accompanying unaudited pro forma results of operations for the years ended
January 31, 1998 and 1997, give effect to the acquisitions as if they were
completed at the beginning of fiscal 1997. The unaudited pro forma financial
information does not purport to represent what the Company's results of
operations would actually have been if such transactions in fact had occurred at
such date or to project the Company's results of future operations as of January
31 (in thousands, except per share data):
<TABLE>
<CAPTION>
1998 1997
- ---------------------------------------------------------------------------------------
<S> <C> <C>
Revenues $453,661 $406,860
=======================================================================================
Net income $ 13,594 $ 8,107
=======================================================================================
Weighted average shares outstanding - basic 13,181 8,400
=======================================================================================
Weighted average shares outstanding - diluted 13,287 8,400
=======================================================================================
Basic and diluted net income per share $ 1.02 $ 0.96
=======================================================================================
</TABLE>
4. FLOOR PLAN PAYABLES:
Floor plan payables are financing arrangements for inventory. The terms of these
arrangements generally include a one- to twelve-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 as of January 31 (in
thousands):
<TABLE>
<CAPTION>
1998 1997
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C>
Interest-bearing:
Deere Credit Services inventory notes, due as inventory is sold, interest at various
rates, 5.9% to 8.75% during fiscal 1998 and 8.25% during fiscal 1997 $ 43,143 $ 10,927
NationsBank, interest based on LIBOR, 7.34% to 7.75% during fiscal 1998 27,000 --
Deere & Company payables, due as inventory is sold, interest at various rates, 4.5%
to 9.00% during fiscal 1998 and 8.75% during fiscal 1997 7,365 3,744
Ag Capital Company, interest based on prime 8.125% to 8.5% during fiscal
1998 and 8.25% during fiscal 1997 581 347
Other 1,100 325
- -----------------------------------------------------------------------------------------------------------
79,189 15,343
===========================================================================================================
Noninterest-bearing:
Deere & Company 79,592 46,860
Deere Credit Services 4,673 1,580
Other 534 548
- -----------------------------------------------------------------------------------------------------------
84,799 48,988
- -----------------------------------------------------------------------------------------------------------
Total $163,988 $ 64,331
===========================================================================================================
</TABLE>
27
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS RDO EQUIPMENT CO. AND SUBSIDIARIES
5. NOTES PAYABLE AND LONG-TERM DEBT:
BANKS AND OTHERS
Notes payable and long-term debt to banks and others consisted of the following
as of January 31 (in thousands):
<TABLE>
<CAPTION>
1998 1997
- ---------------------------------------------------------------------------------------------------
<S> <C> <C>
Deutsche Financial Services, Inc. rental equipment notes,
due in various amounts through January 2003, interest based on prime, 8.0%,
collateralized by rental equipment $ 20,655 $ --
Deere Credit Services rental equipment notes -- 5,115
Bank lines of credit (see below) -- 1,420
Other 4,178 1,920
- ---------------------------------------------------------------------------------------------------
Total 24,833 8,455
Less short-term notes and current maturities of long-term debt (4,423) (4,933)
- ---------------------------------------------------------------------------------------------------
$ 20,410 $ 3,522
===================================================================================================
</TABLE>
The Company has a bank line of credit totaling $2,000,000 available through July
1, 1998 with interest at prime. During the fiscal years ended January 31, 1997
and 1996, the Company had operating lines of credit totaling $3,000,000. The
highest balances outstanding under these lines were $2,000,000, $3,000,000 and
$2,972,000, for fiscal years ended January 31, 1998, 1997 and 1996,
respectively. The weighted average interest rates on these lines during such
periods were 8.46%, 8.58% and 8.41%, respectively.
AFFILIATES
Notes payable and long-term debt due to affiliates consisted of the following as
of January 31 (in thousands):
<TABLE>
<CAPTION>
1998 1997
- -------------------------------------------------------------------------------------------
<S> <C> <C>
Ag Capital Company, interest (variable 8.125% to 8.5%) collateralized by
various receivables and fixed assets of the Company $ 6,520 $ 5,954
Less- Short-term notes and current maturities of long-term debt (2,149) (651)
- -------------------------------------------------------------------------------------------
$ 4,371 $ 5,303
===========================================================================================
</TABLE>
Future maturities of all debt as of January 31, 1998 are as follows (in
thousands):
1999 $ 6,572
2000 8,559
2001 6,234
2002 5,502
2003 3,345
Thereafter 1,141
------------------------------------
$ 31,353
====================================
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, 1998.
28
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS RDO EQUIPMENT CO. AND SUBSIDIARIES
6. 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 $409,000, $214,000 and $194,000
for the fiscal years ended January 31, 1998, 1997 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 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.
STOCK-BASED COMPENSATION PLAN
The Company's 1996 Stock Incentive Plan (the Plan) provides 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), provides for an authorization of shares of Class A common stock for
issuance thereunder limited to 10% of the total number of shares of Class A
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, vesting schedule and
expiration date of any stock options granted under the Plan. Options outstanding
at January 31, 1998 vest over a four- to five-year schedule and expire ten years
after the date of grant.
Information regarding the Plan as of January 31, is as follows:
<TABLE>
<CAPTION>
1998 1997
------------------- -------------------
Weighted Weighted
Average Average
Exercise Exercise
Options Price Options Price
- ------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Outstanding, beginning of the period 560,000 $ 15.50 -- --
Granted 35,000 15.50 560,000 $ 15.50
Canceled (15,000) 15.50 -- --
Exercised (1,500) 15.50 -- --
- ------------------------------------------------------------------------------------------
Outstanding, end of year 578,500 $ 15.50 560,000 $ 15.50
==========================================================================================
Exercisable, end of year 144,500 $ 15.50 40,000 $ 15.50
==========================================================================================
Weighted average fair value of options granted $ 6.71 $ 6.30
======== ========
</TABLE>
Options outstanding at January 31, 1998 have an exercise price of $15.50 and a
weighted average remaining contractual life of 9.02 years.
29
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS RDO EQUIPMENT CO. AND SUBSIDIARIES
The Company accounts for this stock option plan under APB Opinion No. 25, under
which no compensation cost has been recognized. Had compensation cost for this
plan been determined consistent with Statement of Financial Accounting Standards
No. 123, "Accounting for Stock-Based Compensation" (SFAS 123), the Company's pro
forma net income and pro forma net income per common share would have been as
follows as of January 31 (in thousands, except per share data):
1998 1997
- ---------------------------------------------------------------------------
Net income:
As reported 13,251 6,483
===========================================================================
Pro forma 12,445 6,349
===========================================================================
Basic and diluted net income per share:
As reported $ 1.00 $ 0.77
===========================================================================
Pro forma $ 0.94 $ 0.76
===========================================================================
In determining the compensation cost of the options granted during fiscal 1998
and 1997, as specified by SFAS 123, the fair value of each option grant has been
estimated on the date of grant using the Black-Scholes option pricing model, and
the weighted average assumptions used in these calculations are summarized
below:
1998 1997
- ----------------------------------------------------------------------
Risk free interest rate 5.95% 6.34%
Expected life of options granted 4.94 4.71
Expected volatility of options granted 31.71% 36.00%
7. INCOME TAXES:
Prior to January 20, 1997, the Company had elected to be treated as an S
corporation under the Internal Revenue Code. Under this election, the Company
was not directly subject to income taxes. Instead, corporate taxable earnings
were passed through to the stockholders, who were responsible for any taxes
which may have been due. The Company previously made distributions to its
stockholders to enable them to pay the corresponding taxes on such corporate
taxable earnings. In connection with the reorganization and Offering described
in Note 8, the Company terminated S corporation federal tax status and changed
to a C corporation and, accordingly, is subject to federal and certain state
income taxes. In conjunction with this termination, the Company distributed to
its stockholders the previously undistributed S corporation earnings accumulated
as of the termination date.
Pro forma net income and pro forma net income per share for the years ended
January 31, 1997 and 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 all S corporation periods presented. The
components of the income tax provision and pro forma income tax provision are
summarized as follows as of January 31 (in thousands):
Pro Forma
--------------------
1998 1997 1996
- --------------------------------------------------------------------------
Current:
Federal $ 7,528 $ 3,386 $ 2,433
State 1,218 979 757
Deferred income tax provision (benefit) 410 (43) 38
- --------------------------------------------------------------------------
Provision for income taxes $ 9,156 $ 4,322 $ 3,228
==========================================================================
30
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS RDO EQUIPMENT CO. AND SUBSIDIARIES
The difference between the federal statutory rate of 35%, 34% and 34% for the
fiscal years ended January 31, 1998, 1997 and 1996, respectively, and the
provision for income taxes and pro forma provision for income taxes represents
the impact of state income taxes, net of the federal benefit.
Effective with the termination of the Company's S corporation status on January
20, 1997, the Company provided for deferred income taxes for cumulative
temporary differences between the tax basis and financial reporting basis of its
assets and liabilities totaling $300,000.
The current deferred tax asset and the long-term deferred tax liability
consisted of the following temporary differences between the financial statement
carrying amounts and the tax basis of assets and liabilities at January 31(in
thousands):
1998 1997
- -------------------------------------------------------------------
Accruals and other reserves $ 600 $ 560
Inventory 540 (250)
Compensation accruals 310 230
- -------------------------------------------------------------------
Net current deferred tax asset 1,450 540
- -------------------------------------------------------------------
Property and equipment (920) (240)
Goodwill (640) --
- -------------------------------------------------------------------
Net long-term deferred tax liability $ (1,560) $ (240)
- -------------------------------------------------------------------
$ (110) $ 300
===================================================================
8. INITIAL PUBLIC OFFERING, REORGANIZATION AND CAPITAL STOCK:
INITIAL PUBLIC OFFERING
In January 1997, the Company completed the sale of 4,830,000 shares (including
the Underwriters' overallotment option) of Class A common stock (the Offering)
for net proceeds of $68,279,000. The Company used a portion of the net proceeds
of this Offering to fund the distribution of accumulated S corporation dividends
(see Note 7), repay certain notes issued in connection with the acquisitions,
pay down inventory floor plan financing, fund future acquisitions and for
general corporate purposes.
REORGANIZATION
In fiscal 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 effective immediately prior to the Offering. This
reclassification and stock split has been retroactively reflected in the
accompanying consolidated financial statements.
CAPITAL STOCK
The authorized capital stock of the Company consists of 20,000,000 shares of
Class A common stock, 7,500,000 shares of Class B common stock and 500,000
shares of preferred stock, each with a par value of $0.01 per share. 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.
31
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS RDO EQUIPMENT CO. AND SUBSIDIARIES
The following is a summary of the Company's issued and outstanding shares of
common stock as of January 31:
1998 1997
- ---------------------------------------------------------------------
Class A shares 5,731,008 5,721,508
Class B shares 7,450,492 7,458,492
- ---------------------------------------------------------------------
Total shares 13,181,500 13,180,000
=====================================================================
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 2010. Generally, the leases require the Company to pay taxes, insurance
and maintenance costs. Lease expense was $6,226,000, $2,733,000 and $2,055,000
for fiscal 1998, 1997 and 1996, respectively.
Future minimum lease payments, by year, required under leases with initial or
remaining terms of one year or more consist of the following (in thousands):
1999 $ 8,025
2000 7,051
2001 6,244
2002 5,803
2003 3,351
Thereafter 8,441
---------------------------------
Total $ 38,915
=================================
GUARANTEES
Certain credit companies provide financing to the Company's customers. A portion
of this financing is with recourse to the Company. The contingent liability is
capped at 10% of the amount of the aggregate outstanding affiliate contracts and
3% of the aggregate outstanding Deere Credit Services agricultural contracts.
The Company has made deposits with Deere Credit Services to partially fund
contingent liabilities which may come due. These customer notes are
collateralized by the customer-owned equipment. As of January 31, 1998, the
contingent liability and off-setting deposits are as follows (in thousands):
Finance
Guaranteed Deposits
Amounts Receivable
- ----------------------------------------------------------------------------
Ag Capital Company (affiliate) $ 2,201 $ --
ACL Company, LLC (affiliate) 1,674 --
Farmers Equipment Rental, Inc.(affiliate) 473 --
Deere Credit Services 986 986
- ----------------------------------------------------------------------------
Total $ 5,334 $ 986
============================================================================
In addition, the Company factors receivables to Deere Credit Services and
certain receivables are factored with recourse and may be charged back to the
Company. As of January 31, 1998, receivables with recourse totaled approximately
$2,414,000.
32
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS RDO EQUIPMENT CO. AND SUBSIDIARIES
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 as of January 31, 1998 expire as
follows (in thousands):
1999 $ 1,270
2000 3,113
2001 4,290
2002 2,678
2003 2,331
Thereafter 72
----------------------------------
Total $ 13,754
==================================
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, ACL Company, LLC 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 and Farmers Equipment Rental, Inc. to
finance inventory, various receivables and fixed assets as summarized in
Notes 4 and 5. Interest expense paid to related entities totaled $1,121,000,
$1,354,000 and $849,000 in fiscal 1998, 1997 and 1996, respectively.
c. The Company had sales to related entities totaling $10,372,000, $11,198,000
and $5,492,000 in fiscal 1998, 1997 and 1996, respectively. The Company also
leases certain retail space and vehicles from related entities. Total lease
expense for these leases totaled $2,944,000, $1,793,000 and $1,089,000 in
fiscal 1998, 1997 and 1996, respectively.
11. SUPPLEMENTAL CASH FLOW DISCLOSURES:
Supplemental cash flow disclosures for the Company as of January 31 are as
follows (in thousands):
<TABLE>
<CAPTION>
1998 1997 1996
- --------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Cash payments for interest $ 6,610 $ 5,640 $ 3,820
========================================================================================================
Cash payments for income taxes 7,725 -- --
========================================================================================================
Supplemental disclosures of noncash investing and financing activities:
Increase in assets related to acquisitions through issuance and
assumption of debt and issuance of common stock $13,798 $11,325 $ 9,991
========================================================================================================
Dividends declared, accrued and unpaid $ -- $ 830 $ --
========================================================================================================
</TABLE>
33
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS RDO EQUIPMENT CO. AND SUBSIDIARIES
12. SEGMENT INFORMATION:
The Company's operations are classified into two business segments: construction
and agricultural. The construction operations include the sale, service and
rental of construction 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. 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 and equipment, deferred income taxes and goodwill.
The following table shows revenues, operating income and other financial
information by business segment for the fiscal years 1998, 1997 and 1996 (in
thousands):
Corporate
Construction Agricultural and Other Total
- ------------------------------------------------------------------------------
1998:
Revenues $258,778 $170,625 $ -- $429,403
Operating income 18,027 10,007 -- 28,034
Depreciation and amortization 4,042 653 613 5,308
Identifiable assets 206,496 94,059 18,877 319,432
Capital expenditures 15,667 1,294 990 17,951
1997:
Revenues $185,984 $116,429 $ -- $302,413
Operating income 9,330 6,521 -- 15,851
Depreciation and amortization 2,191 372 43 2,606
Identifiable assets 107,460 66,556 7,535 181,551
Capital expenditures 2,723 871 62 3,656
1996:
Revenues 132,731 90,826 -- 223,557
Operating income (loss) 6,244 5,186 (367) 11,063
Depreciation and amortization 979 311 36 1,326
Identifiable assets 99,083 48,797 213 148,093
Capital expenditures 7,855 2,001 137 9,993
34
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS RDO EQUIPMENT CO. AND SUBSIDIARIES
13. UNAUDITED QUARTERLY FINANCIAL DATA (IN THOUSANDS):
<TABLE>
<CAPTION>
First Second Third Fourth Total Year
- -------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Fiscal 1998:
Total revenues $ 84,798 $124,270 $111,501 $108,834 $429,403
Gross profit 17,039 23,575 24,849 22,953 88,416
Net income 2,379 3,816 4,397 2,659 13,251
Net income per share -
basic and diluted 0.18 0.29 0.33 0.20 1.00
Fiscal 1997:
Total revenues $ 70,886 $ 82,887 $ 75,487 $ 73,153 $302,413
Gross profit 12,168 14,936 15,705 14,317 57,126
Pro forma net income 1,597 2,262 2,041 583 6,483
Pro forma net income per share -
basic and diluted 0.19 0.27 0.24 0.07 0.77
</TABLE>
35
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
TO RDO EQUIPMENT CO.:
We have audited the accompanying consolidated balance sheets of RDO Equipment
Co. (a Delaware corporation) and Subsidiaries as of January 31, 1998 and 1997,
and the related consolidated statements of operations, stockholders' equity and
cash flows for each of the three years in the period ended January 31, 1998.
These consolidated 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 financial position of RDO Equipment Co. and
Subsidiaries as of January 31, 1998 and 1997, and the results of their
operations and their cash flows for each of the three years in the period ended
January 31, 1998, in conformity with generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Minneapolis, Minnesota,
March 12, 1998
36
<PAGE>
DIVIDEND POLICY
The Company intends to retain the earnings of the Company to support the
Company's operations and to finance expansion and growth, and it does not intend
to pay cash dividends in the foreseeable future. Payment of dividends rests
within the discretion of the Board of Directors and will depend upon, among
other factors, the Company's earnings, capital requirements, financial
condition, and any dividend restrictions under its dealership and credit
agreements.
COMMON STOCK INFORMATION
The Class A Common Stock of RDO Equipment Co. is traded on the New York Stock
Exchange under the symbol "RDO." The Company made its initial public offering on
January 23, 1997, at a price of $15.50 per share. The high and low reported
sales prices on the New York Stock Exchange during each of the Company's fiscal
quarters since the initial public offering were:
High Low
- -------------------------------------------------------------------
Fiscal 1997
Fourth Quarter $ 19.00 $ 17.13
Fiscal 1998
First Quarter $ 18.63 $ 14.88
Second Quarter 25.25 15.38
Third Quarter 23.38 21.50
Fourth Quarter 22.00 16.00
As of April 3, 1998, the Company had 89 record holders and approximately 3,035
beneficial holders of its Class A Common Stock, and one holder of its Class B
Common Stock.
38
EXHIBIT 21.1
SUBSIDIARIES OF RDO EQUIPMENT CO.
Name Under Which
Subsidiary State of Incorporation Subsidiary Does Business
- ---------- ---------------------- ------------------------
Hall GMC, Inc. (1) North Dakota Corporate Name
(85% owned)
Hall Truck Center, Inc. (1) North Dakota Corporate Name
(85% owned)
Minnesota Valley Irrigation, Inc. Minnesota Corporate Name
(100% owned)
RDO Financial Services Company North Dakota Corporate Name
(100% owned)
RDO Mack Sales and Service, North Dakota Corporate Name
Inc. (100% owned)
RDO Material Handling Co. Minnesota Corporate Name
(100% owned)
RDO Rental Co. Minnesota Corporate Name
(80% owned)
- ----------------------------
(1) Pending acquisition.
EXHIBIT 23.1
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the incorporation of our
report included in this Form 10-K into the Company's previously filed
Registration Statement File No. 333-31615.
ARTHUR ANDERSEN LLP
Minneapolis, Minnesota,
March 12, 1998
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> JAN-31-1998
<PERIOD-START> FEB-01-1997
<PERIOD-END> JAN-31-1998
<CASH> 37
<SECURITIES> 0
<RECEIVABLES> 38,196
<ALLOWANCES> 631
<INVENTORY> 220,841
<CURRENT-ASSETS> 260,597
<PP&E> 46,022
<DEPRECIATION> 8,553
<TOTAL-ASSETS> 319,432
<CURRENT-LIABILITIES> 191,332
<BONDS> 24,781
0
0
<COMMON> 132
<OTHER-SE> 100,938
<TOTAL-LIABILITY-AND-EQUITY> 319,432
<SALES> 429,403
<TOTAL-REVENUES> 429,403
<CGS> 340,987
<TOTAL-COSTS> 340,987
<OTHER-EXPENSES> 60,382
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 6,864
<INCOME-PRETAX> 22,496
<INCOME-TAX> 9,156
<INCOME-CONTINUING> 13,340
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 13,251
<EPS-PRIMARY> 1.00
<EPS-DILUTED> 1.00
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<RESTATED>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> JAN-31-1997
<PERIOD-START> FEB-01-1996
<PERIOD-END> JAN-31-1997
<CASH> 459
<SECURITIES> 0
<RECEIVABLES> 25,911
<ALLOWANCES> 929
<INVENTORY> 130,955
<CURRENT-ASSETS> 157,435
<PP&E> 21,655
<DEPRECIATION> 6,013
<TOTAL-ASSETS> 181,551
<CURRENT-LIABILITIES> 84,691
<BONDS> 8,825
0
0
<COMMON> 132
<OTHER-SE> 87,663
<TOTAL-LIABILITY-AND-EQUITY> 181,551
<SALES> 302,413
<TOTAL-REVENUES> 302,413
<CGS> 245,287
<TOTAL-COSTS> 245,287
<OTHER-EXPENSES> 41,275
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 5,720
<INCOME-PRETAX> 10,805
<INCOME-TAX> 4,322
<INCOME-CONTINUING> 6,483
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 6,483
<EPS-PRIMARY> .77
<EPS-DILUTED> .77
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<RESTATED>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> JAN-31-1996
<PERIOD-START> FEB-01-1995
<PERIOD-END> JAN-31-1996
<CASH> 787
<SECURITIES> 0
<RECEIVABLES> 16,578
<ALLOWANCES> 555
<INVENTORY> 115,616
<CURRENT-ASSETS> 132,738
<PP&E> 17,235
<DEPRECIATION> 4,196
<TOTAL-ASSETS> 148,093
<CURRENT-LIABILITIES> 106,142
<BONDS> 7,667
0
0
<COMMON> 84
<OTHER-SE> 34,200
<TOTAL-LIABILITY-AND-EQUITY> 148,093
<SALES> 223,557
<TOTAL-REVENUES> 223,557
<CGS> 180,839
<TOTAL-COSTS> 180,839
<OTHER-EXPENSES> 31,655
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 3,817
<INCOME-PRETAX> 8,069
<INCOME-TAX> 3,228
<INCOME-CONTINUING> 4,841
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 4,841
<EPS-PRIMARY> .58
<EPS-DILUTED> .58
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<RESTATED>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> JAN-31-1997
<PERIOD-START> FEB-01-1996
<PERIOD-END> OCT-31-1996
<CASH> 18
<SECURITIES> 0
<RECEIVABLES> 26,986
<ALLOWANCES> 706
<INVENTORY> 125,766
<CURRENT-ASSETS> 152,376
<PP&E> 21,501
<DEPRECIATION> 5,716
<TOTAL-ASSETS> 176,712
<CURRENT-LIABILITIES> 131,598
<BONDS> 10,830
0
0
<COMMON> 84
<OTHER-SE> 34,200
<TOTAL-LIABILITY-AND-EQUITY> 176,712
<SALES> 229,260
<TOTAL-REVENUES> 229,260
<CGS> 186,451
<TOTAL-COSTS> 186,451
<OTHER-EXPENSES> 29,492
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 4,116
<INCOME-PRETAX> 9,834
<INCOME-TAX> 3,934
<INCOME-CONTINUING> 5,900
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 5,900
<EPS-PRIMARY> .70
<EPS-DILUTED> .70
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<RESTATED>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> JAN-31-1997
<PERIOD-START> FEB-01-1996
<PERIOD-END> JUL-31-1996
<CASH> 488
<SECURITIES> 0
<RECEIVABLES> 26,902
<ALLOWANCES> 600
<INVENTORY> 128,183
<CURRENT-ASSETS> 155,542
<PP&E> 19,163
<DEPRECIATION> 5,134
<TOTAL-ASSETS> 175,902
<CURRENT-LIABILITIES> 132,563
<BONDS> 4,381
0
0
<COMMON> 84
<OTHER-SE> 38,874
<TOTAL-LIABILITY-AND-EQUITY> 175,902
<SALES> 153,773
<TOTAL-REVENUES> 153,773
<CGS> 126,669
<TOTAL-COSTS> 126,669
<OTHER-EXPENSES> 18,523
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 2,607
<INCOME-PRETAX> 6,431
<INCOME-TAX> 2,572
<INCOME-CONTINUING> 3,859
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 3,859
<EPS-PRIMARY> .46
<EPS-DILUTED> .46
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<RESTATED>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JAN-31-1997
<PERIOD-START> FEB-01-1996
<PERIOD-END> APR-30-1996
<CASH> 37
<SECURITIES> 0
<RECEIVABLES> 22,019
<ALLOWANCES> 489
<INVENTORY> 123,415
<CURRENT-ASSETS> 145,393
<PP&E> 17,079
<DEPRECIATION> 4,649
<TOTAL-ASSETS> 159,911
<CURRENT-LIABILITIES> 119,496
<BONDS> 4,426
0
0
<COMMON> 188
<OTHER-SE> 35,801
<TOTAL-LIABILITY-AND-EQUITY> 159,911
<SALES> 70,886
<TOTAL-REVENUES> 70,886
<CGS> 58,718
<TOTAL-COSTS> 58,718
<OTHER-EXPENSES> 8,595
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,259
<INCOME-PRETAX> 2,663
<INCOME-TAX> 1,065
<INCOME-CONTINUING> 1,598
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,598
<EPS-PRIMARY> .19
<EPS-DILUTED> .19
</TABLE>
