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UNITED STATES
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, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM ____________ TO _____________
COMMISSION FILE NO. 1-12641
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. _X_ YES ___ 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]
The aggregate market value of common equity held by persons other than
directors and officers was approximately $37.8 million as of April 9, 1999. At
that date, 5,731,008 shares of Class A Common Stock and 7,450,492 shares of
Class B Common Stock were outstanding for a total of 13,181,500 shares of Common
Stock.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the annual report to shareholders for the year ended
January 31, 1999 (the "1999 Annual Report") are incorporated by reference in
Part II. Portions of the proxy statement for the annual meeting to be held on
June 3, 1999 ("1999 Proxy Statement") are incorporated by reference in Part III.
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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 is one of the leading and fastest growing companies
engaged in the restructuring and consolidation of the equipment and truck retail
industries. It specializes in the distribution, sale, service, rental and
finance of equipment and trucks to the agricultural, construction,
manufacturing, transportation and warehousing industries, as well as to public
service entities, government agencies and utilities. The Company operates 66
retail stores in 11 states - Arizona, California, Iowa, Minnesota, Montana,
Nebraska, Nevada, North Dakota, South Dakota, Texas and Washington. Its stores
include the largest network of Deere & Company ("Deere") construction equipment
dealerships and agricultural equipment dealerships in North America. 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 truck
dealerships and through the future opening and acquisition of equipment rental
stores.
New products sold by the Company are supplied primarily by Deere,
which is a leading manufacturer and supplier of construction and agricultural
equipment in North America. Sales of new Deere equipment by the Company
accounted for approximately 62% of the Company's new product sales in fiscal
1999. No other supplier accounted for more than 10% of the Company's new product
sales in fiscal 1999. The Company's stores also offer complementary products
from other suppliers, used products, new and used parts, product servicing,
product rental, loans, leases and other related products and services.
For the fiscal year ended January 31, 1999, the Company's revenues
were generated from the following areas of business:
New equipment and truck sales..................... 54%
Used equipment and truck sales.................... 16%
Product support (parts and service revenues)...... 25%
Equipment rental.................................. 4%
Financial services................................ 1%
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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 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 objective, 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 and trucks expands, the Company has the opportunity to
generate additional parts and service business and trade-ins. The Company's
finance subsidiary also assists in structuring transactions to meet the needs of
its customers. 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,
rental and finance revenues currently have higher profit margins than equipment
and truck 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 and truck retailers.
Due to the Company's leadership position, access to capital and 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
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
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, 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
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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.
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 has also focused on expanding
into industries in which product distribution is highly fragmented and the
Company's operating model can be implemented. 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.
ACQUISITIONS, STORE OPENINGS AND DEALER APPOINTMENTS IN FISCAL 1999
During fiscal 1999, the Company made the following acquisitions:
* Volvo truck dealership in Minneapolis/St. Paul,
Minnesota which had annual revenues of approximately $12
million.
* Mack truck dealership in Minneapolis/St. Paul, Minnesota
(and was subsequently consolidated with the Twin Cities
Volvo truck operations) which had annual revenues of
approximately $35 million.
* Volvo and GMC truck dealerships in Fargo and Grand
Forks, North Dakota which had annual revenues of
approximately $31 million.
* Agricultural equipment rental business in Salinas,
California which had annual revenues of approximately
$10 million.
* Material handling equipment business in Grand Island,
Lincoln and Omaha, Nebraska and Sioux City, Iowa which
had annual revenues of approximately $12 million.
* Construction equipment rental business in Las Vegas,
Nevada which had annual revenues of less than $1
million.
In addition, the Company opened new construction equipment rental
stores in Show Low and Tucson, Arizona and Riverside and Temecula, California,
opened a new Vermeer construction equipment store in Minneapolis/St. Paul,
Minnesota, opened a new material handling equipment store in Minneapolis/ St.
Paul, and was appointed a Hyster lift truck dealer for the upper Midwest.
On February 3, 1999, the Company announced its acquisition of a
Volvo truck dealership with full-service truck centers located in Dallas and Ft.
Worth, Texas. This dealership had annual revenues of approximately $33 million.
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CONSTRUCTION EQUIPMENT OPERATIONS
The Company estimates that North American retail sales of new
construction equipment in its target product market (light to medium
applications) in calendar 1998 totaled over $6 billion. Deere is one of the
leading suppliers of construction equipment in North America for light to medium
applications and offers a broad array of products. Currently, the Company
believes Deere has approximately 100 construction dealers which operate
approximately 420 main stores and sales and service centers in North America.
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 believes it is the largest Deere construction equipment
dealer in North America, both in number of stores and total purchases,
accounting for approximately seven percent of Deere's North American
construction equipment sales in calendar 1998. As of the end of fiscal 1999, the
Company operated 25 Deere construction equipment stores located in metropolitan
areas in Arizona, Southern California, Minnesota, Montana, North Dakota, South
Dakota and Central Texas.
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. The
Company's 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 backhoes, excavators, crawler dozers and four-wheel-drive
loaders. The Company's construction equipment stores also offer complementary
equipment from other suppliers, as well as used equipment primarily taken as
trade-ins.
The Company's construction equipment stores are located in areas
with significant construction activity, including Austin, Dallas/Fort Worth,
southeastern 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.
CONSTRUCTION EQUIPMENT RENTAL OPERATIONS
The Company estimates that the North American construction equipment
rental industry was over $15 billion in calendar 1998 with over 15,000 equipment
rental companies. 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
(ranging from hand-held items to excavators), primarily through its 13 RDO
Rental Co. equipment rental stores located in Arizona, Nevada and Southern
California. The Company rents 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
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operations in Arizona, Nevada 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.
AGRICULTURE OPERATIONS
The Company estimates that North American retail sales of new
agricultural equipment in its target product market in calendar 1998 totaled
over $10 billion. Deere is the leading supplier of agricultural equipment in
North America. Within the Deere agricultural dealer system, dealers are not
assigned exclusive territories, but are authorized to operate at specific store
locations. Currently, the Company believes Deere has approximately 1,200
agricultural dealers which operate approximately 1,700 stores in North America.
The Company believes it is the largest Deere agricultural equipment
dealer in North America, both in number of stores and total purchases,
accounting for approximately 1.7 percent of Deere's North American agricultural
sales in calendar 1998. As of the end of fiscal 1999, the Company operated 15
Deere agricultural equipment stores located in Arizona, Southern California,
Minnesota, North Dakota, South Dakota and Washington.
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 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.
The Company also conducts an agricultural equipment rental business
in California which it acquired during fiscal 1999. The Company believes that
the agricultural equipment rental business is a growing trend for many of the
same factors driving the growth in construction equipment rental, especially in
the western, southwestern and south central regions of the United States. The
Company believes that its dealerships and rental operations complement and
support each other.
In October 1998 the Company announced plans to exit the agricultural
irrigation equipment business and its store located in Wadena, Minnesota. These
assets were subsequently sold in November 1998.
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TRUCK OPERATIONS
The Company estimates that North American retail sales of heavy-duty
trucks in calendar 1998 exceeded $10 billion. Mack Trucks, Inc. and Volvo AB are
leading suppliers of heavy-duty trucks in North America. Mack has approximately
190 dealers which operate approximately 260 stores in North America, while Volvo
has approximately 160 dealers which operate approximately 160 stores in North
America. Each Mack or Volvo truck dealer is assigned designated geographical
areas of responsibility within which it has the right to sell new trucks made by
the truck manufacturer.
The Company operates Mack truck centers in Minneapolis/St. Paul,
Minnesota and in Fargo and Grand Forks, North Dakota. Its Volvo truck centers
are located in Minneapolis/St. Paul, Minnesota, in Fargo and Grand Forks, North
Dakota, and in Dallas and Ft. Worth, Texas. The Company's truck centers in
Fargo, Grand Forks, Dallas and Ft. Worth also sell and service GMC trucks, and
its stores in Fargo and Grand Forks also handle Isuzu trucks. The Company's
truck centers are located in high truck traffic areas on or near major highways.
Trucks sold by the Company are generally classified as "Class 8" by
the American Automobile Manufacturers Association (a minimum gross vehicle
weight rating above 33,000 pounds). They are primarily used for over-the-road
and off-highway transportation of general freight and various vocational
applications including the hauling of construction materials, logging, mining,
petroleum, refuse, waste and other specialty uses. Customers generally purchase
these trucks for commercial purposes which are outfitted to perform according to
the user's specifications.
The Company's truck centers display a broad array of new and used
trucks and have fully-equipped service bays to provide on-site service and
maintenance of trucks, including body shops. The Company believes its operating
model gives it a competitive advantage over other truck dealers. In addition,
its truck operations and construction equipment operations have common customers
which presents opportunities for marketing, selling and operating synergies.
MATERIAL HANDLING OPERATIONS
The Company estimates that North American retail sales of lift
trucks and other material handling equipment in its target product market in
calendar 1998 exceeded $5 billion. Hyster Company (part of the material handling
group of NACCO Industries, Inc.) is a leading supplier of lift trucks in North
America. Hyster has approximately 50 dealers which operate approximately 100
stores in North America. Each Hyster dealer is assigned designated geographical
areas of responsibility within which it has the right to sell new Hyster lift
trucks and parts. During fiscal 1999, the Company was appointed a Hyster lift
truck dealer for the upper Midwest - Minnesota, Nebraska, North Dakota, South
Dakota, western Iowa and northwestern Wisconsin.
Hyster lift trucks (also referred to as forklift trucks or
forklifts) are used in a wide variety of business applications, including
manufacturing and warehousing. The principal categories of lift trucks include
electric rider, electric narrow-aisle and electric-motorized hand forklift
trucks primarily for indoor use and internal combustion engine forklift trucks
for indoor or outdoor use.
Shortly after its appointment as a Hyster dealer in fiscal 1999, the
Company acquired the operating assets of two companies engaged in the
distribution, sale, service and rental of material handling equipment with
stores located in Grand Island, Lincoln and Omaha, Nebraska and Sioux City,
Iowa. This acquisition provided the Company with an established platform which
complemented its Hyster operations,
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including aerial and high-reach man lifts manufactured by Genie, Grove, Skyjack
and Upright and other equipment used to move, protect, store or control products
and materials in manufacturing and distribution.
The Company conducts its material handling operations from 11
locations in the upper Midwest of which five locations are dedicated solely to
material handling equipment. The other locations consist of several of the
Company's agricultural and construction equipment stores in Minnesota and North
Dakota. Each store displays a broad array of equipment for sale or rent, and has
fully-equipped service bays to provide on-site service and maintenance.
Customers include commercial, manufacturing, trucking and warehousing
businesses, some of which have fleets of material handling equipment to be
maintained. The Company believes its operating model gives it a competitive
advantage over other material handling equipment retailers, and that its other
operations have common customers with its material handling operations which
presents opportunities for marketing, selling and operating synergies.
USED EQUIPMENT AND TRUCKS
The Company believes that an integral part of its operations is the
handling of used equipment and trucks. Accordingly, the Company has established
a division which assists in the valuation of used products which the Company
receives in trade-ins, assists in the purchase of used products for sale or rent
by its dealership and rental operations, and supports the sale of used products
received as trade-ins or retired from its rental operations. This division also
actively purchases and remarkets on the open market used equipment manufactured
by companies other than Deere such as Caterpillar Inc. ("Caterpillar"), Komatsu
Corporation ("Komatsu") and Volvo AB. The Company's used equipment division
primarily operates in North America, and is expanding its international
activities into Europe and South America.
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; and Riverside, California also operate
undercarriage shops for all makes and sizes of crawler equipment.
FINANCIAL SERVICES
The Company's finance subsidiary, RDO Financial Services Co.,
provides equipment and truck loans and leases to the customers of the Company's
retail network. In fiscal 1999, this subsidiary developed strategic partnerships
with vendors of financial products, as well as additional services such as
revolving credit, farm land financing, extended warranties, credit life
insurance and casualty insurance, which are sold to the Company's customers.
The Company believes that there is a growing trend in the equipment
and truck distribution business toward selling new and used products with
financing and service contracts. In addition, financing incentives are becoming
an important element in the Company's selling efforts. Customers are
increasingly wanting to purchase products from retailers who can also provide
financing and other products and services of the types being offered by the
Company.
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INVENTORY AND ASSET MANAGEMENT
The Company maintains substantial inventories of equipment, trucks
and parts in order to facilitate sales to customers on a timely basis. The
Company also is required to build its inventory of agricultural equipment and
parts 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 the needs of its agricultural customers and to avoid shortages or delays.
The Company maintains a database on sales and inventory, and has a
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 items from the supplier. As a result, the Company minimizes its
investment in inventory while effectively and promptly satisfying its customers'
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.
INVENTORY FINANCING
Having adequate equipment, trucks 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. In its truck segment, the cost of floor
plan financing of truck inventories has a direct relationship to the volume of
retail loans and leases originated on behalf of the floor plan supplier.
Floor plan financing from Deere, Deere Credit Services, Inc. ("Deere
Credit")and NationsBanc Leasing Corporation ("NationsBanc") represents the
primary source of financing for equipment inventories, particularly for
equipment supplied by Deere. Floor plan financing of truck inventories is
primarily supplied by Associates Commercial Corporation ("Associates"), General
Motors Acceptance Corporation ("GMAC") and Volvo Commercial Finance LLC The
Americas. Rental equipment financing is primarily provided by Associates,
Deutsche Financial Services Corporation ("Deutsche") and Deere Credit. All
lenders generally receive a security interest in the inventory or rental
equipment being financed.
CUSTOMER FINANCING OPTIONS
Financing options for customer purchases support the sales
activities of the Company. Financing for purchases by the Company's customers
are available through programs offered by the Company's finance subsidiary, by
manufacturer-sponsored sources (such as Deere Credit) and by major finance
companies (such as Associates). The Company's finance subsidiary coordinates
arrangements for most of the Company's customers who request financing. The
Company does not grant extended payment terms.
PRODUCT WARRANTIES
Warranties for new products 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
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provide additional warranties to retail purchasers of new products. The
manufacturer (such as Deere) pays the Company for repairs to equipment under
warranty. The Company generally sells used products "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. The Company also sells a warranty product offered by Deere on new
and used equipment. The Company itself has not generally provided additional
warranties.
COMPETITION
The Company's construction equipment stores compete with
distributors of equipment produced by manufacturers other than Deere, including
Case Corporation ("Case"), Caterpillar and Komatsu. The Company also faces
competition from distributors of manufacturers of 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.
The Company's truck centers compete with distributors of trucks
produced by manufacturers other than Mack and Volvo, including DaimlerChrysler
AG (Freightliner and Sterling), Ford Motor Co., Navistar International Corp. and
Paccar Inc. (Peterbilt and Kenworth). The Company's material handling stores
compete with distributors of lift trucks produced by manufacturers other than
Hyster, including Clark Material Handling Company, Crown Equipment Corporation,
Nissan Motor Co., Toyota Motor Corp. and another division of the NACCO material
handling group (Yale), and with other equipment rental companies which rent
aerial and high-reach man lifts, lift trucks and other material handling
equipment.
Competition among equipment and truck retailers is primarily based
on price, value, reputation, quality, design and performance of the products
offered by the retailer, the customer service and product servicing provided by
the retailer, and the accessibility of the retailer's stores. The Company
believes that its store locations, broad product lines, quality products,
product support and other customer and financial services enable it to compete
effectively.
BACKLOG
The Company's truck operations sell approximately two-thirds of
their new heavy-duty trucks by customer order, with the remainder sold out of
inventory. The general time period from order placement to delivery is currently
three to eight months. At January 31, 1999, the Company's backlog of confirmed
truck orders (including orders from fleet customers who typically place orders
up to one year in advance of scheduled delivery dates) was approximately $41.4
million. The Company expects to fill all of these orders during fiscal 2000.
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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, without the consent of Deere, 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 equity-to-assets ratio of the Company's
Deere dealerships 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 1999, the Company has calculated the equity-to-assets ratio of the
Company's Deere dealerships to be 31%. 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."
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
11
<PAGE>
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.
VOLVO AGREEMENTS. In May 1998, the Company and Volvo announced a
framework arrangement under which the Company is expanding its presence in
Volvo's truck distribution system by acquiring additional dealer locations as
well as being awarded franchises for locations where no Volvo dealer exists.
This arrangement includes financing and other assistance from Volvo to assist in
acquiring, opening and operating Volvo truck dealership locations. Financing
from Volvo is forgiven or repaid based upon the performance of a dealership
after the Company acquires or opens it.
Under its dealer agreements with Volvo, the Company is an
authorized, exclusive retail dealer of new Volvo trucks and parts in the
territories around its Volvo truck centers. The Company is required, among other
things, to meet sales, service and facilities criteria established by Volvo and
to maintain appropriate inventories of trucks and parts. The Company must also
provide Volvo with financial and planning documents on a regular basis and
provide warranty repairs on covered Volvo trucks. The Company is granted the
right to use various Volvo trademarks in the conduct of its business and the
benefit of Volvo materials and training.
Volvo dealer agreements generally provide for an initial term of up
to five years, and are extended annually. It is Volvo's stated objective that
dealer agreements continue in effect indefinitely so long as the Company
satisfies its obligations and meets its objectives. Volvo may terminate a dealer
agreement upon the occurrence of a material breach enumerated in the agreement
which are typical of dealership agreements generally. Volvo also can reduce or
change the scope of the territories associated with the Company's Volvo truck
dealerships.
OTHER SUPPLIERS. The Company is an authorized dealer at various
stores for suppliers of other products. 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.
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 and trucks 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 dealership in that location. Each dealership store is
generally identified as an authorized dealer or representative of the
manufacturer or manufacturers of the equipment, trucks or other products sold at
the store, and may also display signs of other suppliers.
12
<PAGE>
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 regulate
workplace health and safety, 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.
The Company's truck operations are subject to the National Traffic
and Motor Vehicle Safety Act, Federal Motor Vehicle Safety standards promulgated
by the U.S. Department of Transportation and various state motor vehicle
regulatory agencies. State and local laws and regulations require each truck
dealership to obtain licenses to operate as a dealer in heavy-duty vehicles. The
Company believes that its truck operations are in compliance with all federal,
state and local laws and regulations and that it has obtained all necessary
licenses and permits.
The Company's financial services operations are subject to laws and
regulations with respect to financing, commercial finance regulations that may
be similar to consumer finance regulations in some states, including those
governing interest rates and charges, maximum amounts and maturities of credit
and customer disclosure of transaction terms. The Company's insurance products
and services are subject to laws and regulations with respect to insurance,
licensing, insurance premiums, financing rates and insurance agencies. The
Company believes that it is in compliance with these laws and regulations.
EMPLOYEES
As of January 31, 1999 the Company employed 1,554 full-time
employees. Of this number, 25 employees were located at the Company's corporate
offices and employed in corporate administration. The remaining employees were
involved in the Company's operations: 785 in construction operations, 363 in
agriculture operations, 171 in truck operations, 173 in rental operations and 37
in financing and related services. None of the Company's employees are covered
by a collective bargaining agreement.
CERTAIN IMPORTANT FACTORS
In addition to the matters discussed above, there are 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 23, 1999, and in other filings with the
Securities and Exchange Commission (the "SEC"). Some of these important factors
(but not necessarily all important factors) include the following:
a. General economic conditions worldwide and locally, including
agricultural industry cycles, construction spending, federal,
state and local government spending on highways and other
construction projects, housing starts, interest rates, fuel
prices, currency exchange rates,
13
<PAGE>
customer business cycles, climatic phenomena such as La Nina
and El Nino, and customer confidence in the economy;
b. The length of the crop growing season, farm cash income,
farmer debt levels, adverse weather, animal and plant
diseases, crop pests, harvest yields, world grain stocks,
commodity prices, real estate values, government farm
programs, and the confidence of the Company's agricultural
customers in the farm economy;
c. Changes in governmental regulations, and legislation primarily
relating to agriculture, the environment, commerce and
government spending on infrastructure;
d. The positions of Deere and other manufacturers with respect to
publicly traded dealers, dealer consolidations and specific
acquisition opportunities;
e. The overall success of Deere and the Company's other
suppliers;
f. The manufacture and delivery of competitively-priced, high
quality equipment, trucks and parts by the Company's suppliers
in quantities sufficient to meet the requirements of the
Company's customers on a timely basis;
g. 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;
h. The introduction of new and innovative products by the
Company's suppliers;
i. Capital needs of the Company and the status of markets for
equity and debt financing;
j. The availability and terms of floor plan, customer and other
financing;
k. Risks associated with growth, expansion and acquisitions,
including the management of growth;
l. Integration and successful operation of acquired businesses;
m. Securitization transactions and other financing arrangements
relating to the Company's financial services operations,
including credit availability and customer credit risks;
n. Availability, sufficiency and cost of insurance;
o. Operating and financial systems to manage rapidly growing
operations;
p. Potential impact on the Company and its suppliers of the year
2000 on processing date-sensitive information; and
q. Continued availability of key personnel.
14
<PAGE>
ITEM 2. PROPERTIES.
As of the end of fiscal 1999, the Company owned the real estate for
nine of its stores, leased its executive offices and 23 stores from an Offutt
Entity (as defined in Item 4A below), leased an administrative office and six
stores from other related parties, and leased three administrative offices and
26 stores from unrelated third parties. Lease terms range from one to 11 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 offices held
are as follows:
NAME AGE OFFICE
- ---- --- ------
Ronald D. Offutt 56 Chairman of the Board and Chief Executive Officer
Paul T. Horn 56 President and Chief Operating Officer
Allan F. Knoll 55 Secretary
Thomas K. Espel 40 Chief Financial Officer
Richard J. Moen 51 Chief Administrative Officer and Treasurer
Charles Calhoun 46 Executive Vice President - Used Equipment Division
Steven B. Dewald 38 Senior Vice President - RDO Financial Services Co.
H. David Frambers 55 Executive Vice President - Emerging Divisions
William R. Hutton 51 President - RDO Rental Co.
Mark A. Doda 36 Senior Vice President and Controller
- -------------------
15
<PAGE>
RONALD D. OFFUTT is the Company's founder, Chairman, Chief Executive
Officer and principal stockholder. He has served as a member of the Company's
Office of the Chairman since December 1998, and served as President of the
Company from its formation in 1968 until August 1996. 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
1999. 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 and the father of Christi J. Offutt, the Company's Vice President -
Strategic Development.
PAUL T. HORN has served as a member of the Company's Office of the
Chairman since December 1998, 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
one-fourth 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 a member of the Company's Office of the
Chairman since December 1998, and as Secretary and a director of the Company
since 1974. He served as Chief Financial Officer of the Company from 1974
through January 1999. 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 1999. Mr. Knoll is a graduate of Moorhead State University with degrees
in Business Administration and Accounting.
THOMAS K. ESPEL has served as Chief Financial Officer since February
1999. He previously served as Executive Vice President - Finance since August
1998. Prior to joining the Company, he served as manager of Ag Capital Company
since its inception in 1989 and continues to serve as a member of its Board of
Directors. Under his direction, Ag Capital, an affiliate of R.D. Offutt Company,
grew to more than $450 million in assets managed. RDO Financial Services Co., a
subsidiary of the Company, was formed from the retail credit activities of Ag
Capital. From 1981 through 1988, Mr. Espel held various lending positions at St.
Paul Bank for Cooperatives, a $4 billion institution located in St. Paul,
Minnesota. He has a bachelor's degree from the University of Illinois and a
master's degree from Michigan State University, both in Agricultural Economics -
Finance.
RICHARD J. MOEN has served as 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
16
<PAGE>
use in microwave ovens. Mr. Moen is a graduate of Massachusetts Institute of
Technology, with a degree in Economics, and of Harvard Law School.
CHARLES CALHOUN has served as Executive Vice President - Used
Equipment Division since December 1998. He previously served as Senior Vice
President - Used Commercial Equipment Division since March 1997. Prior to
joining the Company, 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 over 20 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 Co. 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 Executive Vice President - Emerging
Divisions since December 1998. He previously 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.
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.
MARK A. DODA has served as Senior Vice President and Controller
since December 1998. He previously served as Controller 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.
17
<PAGE>
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS.
The information under the captions "Common Stock Information" and
"Dividend Policy" on page 38 of the 1999 Annual Report is incorporated herein by
reference. The Company did not have any unregistered sales of equity securities
during fiscal 1999.
ITEM 6. SELECTED FINANCIAL DATA.
The information under the caption "Selected Financial Data" on page
13 of the 1999 Annual Report 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 1999 Annual Report is incorporated herein by reference.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK.
The Company is exposed to market risk from changes in interest
rates. Market risk is the potential loss arising from adverse changes in market
rates and prices such as interest rates. For fixed rate debt, interest rate
changes affect the fair value of financial instruments but do not impact
earnings or cash flows. Conversely for floating rate debt, interest rate changes
generally do not affect the fair market value but do impact future earnings and
cash flows, assuming other factors are held constant. A one percentage point
increase in interest rates would result in a net increase to the unrealized fair
market value of the fixed rate debt by approximately $175,000. At January 31,
1999, the Company had variable rate floor plan payables, notes payable and long
term debt of $194.4 million and fixed rate notes payable and long term debt of
$7.2 million. Holding other variables constant, the pre-tax earnings and cash
flow impact for the next year resulting from a one percentage point increase in
interest rates would be approximately $1.9 million.
The Company's policy is not to enter into derivatives or other
financial instruments for trading or speculative purposes. Consistent with this
policy, the Company's finance subsidiary RDO Financial Services Co. originates
fixed rate loan and fixed payment leases. On a monthly basis, these loans and
leases are sold into a commercial paper conduit which requires interest swaps to
hedge the interest risk.
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 1999 Annual Report are incorporated herein by reference and are listed in
Item 14(a)(1) on page 20 of this Report. The supplementary data
18
<PAGE>
required by this Item 8 appears as Note 15 entitled "Unaudited Quarterly
Financial Data" on page 35 of the 1999 Annual Report.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
The information regarding directors under the captions "Election of
Directors--Information About Nominees" and "Election of Directors--Other
Information About Nominees" in the 1999 Proxy Statement is incorporated herein
by reference. Information regarding executive officers is presented in Part I of
this Report as Item 4A.
The information under the caption "Beneficial Ownership of
Management - Section 16(a) Beneficial Ownership Reporting Compliance" in the
1999 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 1999 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 1999 Proxy Statement is 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 1999 Proxy Statement is
incorporated herein by reference.
19
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON
FORM 8-K.
(a)(1) FINANCIAL STATEMENTS.
The following are incorporated herein by reference from
the pages indicated in the 1999 Annual Report, 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, 1999, 1998 and 1997--page 20.
Consolidated Balance Sheets as of January 31, 1999 and
1998--page 21.
Consolidated Statements of Stockholders' Equity for the
Years Ended January 31, 1999, 1998 and 1997--page 22.
Consolidated Statements of Cash Flows for the Years
Ended January 31, 1999, 1998 and 1997--page 23.
Notes to Consolidated Financial Statements--pages 24 to
35.
(a)(2) FINANCIAL STATEMENT SCHEDULES.
Schedule II, Valuation and Qualifying Accounts for the
Year Ended January 31, 1999, is included in this Report at page 22,
including Report of Independent Public Accountants.
All other 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 23 and 24 below. Copies of these exhibits are
available upon written request to RDO Equipment Co., Stockholder
Relations, 3030 Harbor Lane, Suite 202, Plymouth, Minnesota 55447.
(b) REPORTS ON FORM 8-K.
The Company filed a Current Report on Form 8-K dated
October 27, 1998 - Item 7(c). Attached to that Current Report was a
copy of a news release issued by the Company on October 27, 1998.
20
<PAGE>
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 23, 1999
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 23, 1999 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 executive officer)
Ronald D. Offutt
/s/ Thomas K. Espel Chief Financial Officer
- ----------------------------- (principal financial officer)
Thomas K. Espel
/s/ Mark A. Doda Senior Vice President and Controller
- ----------------------------- (principal accounting officer)
Mark A. Doda
/s/ Paul T. Horn President, Chief Operating Officer and Director
- -----------------------------
Paul T. Horn
/s/ Allan F. Knoll Secretary and Director
- -----------------------------
Allan F. Knoll
/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
21
<PAGE>
SCHEDULE II
VALUATION AND QUALIFYING ACCOUNTS
FOR THE YEAR ENDED JANUARY 31, 1999
<TABLE>
<CAPTION>
Balance at Additions Balance at
Beginning Charged to Costs End of
of Period and Expenses Deductions(1) Period
------------ ------------------ --------------- ------------
<S> <C> <C> <C> <C>
Accrued Liabilities:
Restructuring Reserve....... $ - $ 2,200,000 $1,915,000 $285,000
</TABLE>
(1) Utilization of previously recorded balances.
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS ON SCHEDULE
To RDO Equipment Co:
We have audited in accordance with generally accepted auditing standards, the
financial statements included in RDO Equipment Co and Subsidiaries' Annual
Report on Form 10-K, and have issued our report thereon dated March 17, 1999.
Our audit was made for the purpose of forming an opinion on those statements
taken as a whole. The schedule listed in Item 14(a)(2) is the responsibility of
the Company's management and is presented for purposes of complying with the
Securities and Exchange Commission's rules and is not part of the basic
financial statements. This schedule has been subjected to the auditing
procedures applied in the audit of the basic financial statements and, in our
opinion, fairly states in all material respects the financial data required to
be set forth therein in relation to the basic financial statements taken as a
whole.
ARTHUR ANDERSEN LLP
Minneapolis, Minnesota,
March 17, 1999
22
<PAGE>
EXHIBIT INDEX FOR FISCAL YEAR
ENDED JANUARY 31, 1999
<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 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).
10.5 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).
</TABLE>
23
<PAGE>
<TABLE>
<S> <C> <C>
10.6 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).
10.7 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).
10.8 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).
10.9 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.
10.10 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.
10.11 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).
13.1 Excerpts from 1999 Annual Report................... Filed herewith.
21.1 Subsidiaries....................................... Filed herewith.
23.1 Consent of Independent Public Accountants.......... Filed herewith.
27.1 Financial Data Schedule............................ Filed herewith.
</TABLE>
- --------------------------
* Management contract or compensatory plan or arrangement filed as an exhibit
pursuant to Item 14(c) of Form 10-K.
24
Exhibit 13.1
SELECTED FINANCIAL DATA
<TABLE>
<CAPTION>
FISCAL YEAR ENDED JANUARY 31,
- -----------------------------------------------------------------------------------------------------------------------------------
(in thousands, except store and per share data) 1999 1998 1997 1996 1995 1994 1993 1992
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Revenues:
Equipment and truck sales $404,093 $301,684 $224,094 $164,054 $135,704 $106,600 $ 73,516 $ 49,097
Parts and service 143,335 113,268 75,820 58,998 48,206 37,512 31,862 22,129
Rental 26,208 14,451 2,499 505 -- -- -- --
Financial services 4,988 -- -- -- -- -- -- --
- -----------------------------------------------------------------------------------------------------------------------------------
Total revenues 578,624 429,403 302,413 223,557 183,910 144,112 105,378 71,226
Cost of revenues 479,275(1) 340,987 245,287 180,839 148,111 116,369 83,548 56,422
- -----------------------------------------------------------------------------------------------------------------------------------
Gross profit 99,349 88,416 57,126 42,718 35,799 27,743 21,830 14,804
Selling, general and administrative expenses 81,682 60,382 41,275 31,655 24,893 20,577 16,737 11,929
Restructuring charges 2,200 -- -- -- -- -- -- --
- -----------------------------------------------------------------------------------------------------------------------------------
Operating income 15,467 28,034 15,851 11,063 10,906 7,166 5,093 2,875
Interest expense, net (12,427) (5,538) (5,046) (2,994) (1,093) (1,334) (908) (1,126)
- -----------------------------------------------------------------------------------------------------------------------------------
Income before taxes 3,040 22,496 10,805 8,069 9,813 5,832 4,185 1,749
Provision for income taxes (2) 1,237 9,156 4,322 3,228 3,925 2,332 1,674 700
Minority interest 135 89 -- -- -- -- -- --
- -----------------------------------------------------------------------------------------------------------------------------------
Net income $ 1,668 $ 13,251 $ 6,483 $ 4,841 $ 5,888 $ 3,500 $ 2,511 $ 1,049
- -----------------------------------------------------------------------------------------------------------------------------------
Net income per share - basic and diluted $ 0.13 $ 1.00 $ 0.77 $ 0.58
- -----------------------------------------------------------------------------------------------------------------------------------
SELECTED OPERATING DATA:
Comparable store revenues increase 5% 11% 26% 11% 25% 32% 12% --
Stores open at beginning of period 50 32 26 22 22 21 17 15
Stores opened 6 3 1 2 -- -- -- 1
Stores acquired 10 16 5 2 -- 1 4 1
Stores consolidated/sold (2) (1) -- -- -- -- -- --
- -----------------------------------------------------------------------------------------------------------------------------------
Stores open at end of period 64 50 32 26 22 22 21 17
- -----------------------------------------------------------------------------------------------------------------------------------
Net purchases of rental equipment $ 19,769 $ 14,185 $ 1,519 $ 6,342 $ -- $ -- $ -- $ --
Net purchases of property and equipment 5,132 3,766 2,137 3,651 1,208 627 681 561
Depreciation and amortization 10,506 5,308 2,606 1,326 690 668 584 504
As of January 31,
- -----------------------------------------------------------------------------------------------------------------------------------
BALANCE SHEET:
Working capital $ 36,739 $ 69,265 $ 72,744 $ 26,596 $ 26,700 $ 22,019 $ 15,284 $ 9,846
Inventories 208,368 220,841 130,955 115,616 77,204 64,768 55,582 40,175
Total assets 379,220 319,432 181,551 148,093 98,315 83,341 68,660 46,129
Floor plan payables (3) 191,030 163,988 64,331 91,614 53,581 46,644 45,149 28,067
Total debt 55,533 31,353 14,409 10,638 3,277 2,946 6,698 6,283
Stockholders' equity 102,738 101,070 87,795 34,284 30,467 24,503 11,105 7,006
</TABLE>
(1) Includes non-recurring $15 million inventory charge in fiscal 1999.
(2) 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.
(3) Includes interest-bearing and noninterest-bearing liabilities incurred in
connection with inventory financing.
PAGE 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 and trucks to the agricultural, construction, manufacturing,
transportation and warehousing industries, including units of state, local and
federal government and utility companies. The Company's largest 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
North America.
The Company's growth has been due to increases in comparable store revenues,
opening additional retail locations, acquisitions of equipment and truck
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
and truck retailers and the ability of the Company to leverage its expertise in
acquisitions, consolidation and retail sales, service and marketing. The
Company's stores are located in Arizona, California, Iowa, Minnesota, Montana,
Nebraska, Nevada, North Dakota, South Dakota, Texas and Washington.
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 and
trucks, sales of parts and service, rental of equipment and customer financing
and related products and services. In addition to sales of new and used
equipment, 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 equipment and trucks held by its customers. Due to
product warranty time frames and usage patterns by customers, there generally is
a time lag between equipment and truck 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 equipment and truck sales. In addition, due to differences in gross
margins between equipment and truck sales and parts and service and rental
revenues, gross margin percentages may decline as the Company builds market
share.
In late fiscal 1998, the Company established a finance subsidiary, RDO Financial
Services Co., to provide equipment and truck loans and leases to the customers
of its retail network. This subsidiary also provides additional products and
services, such as extended warranties, credit life insurance and casualty
insurance.
The Company believes its construction equipment, rental and truck operations
have benefited from favorable economic conditions during recent years, including
low interest rates, low inflation, low fuel prices and moderate economic growth.
The Company believes its agricultural equipment operations have been adversely
affected by successive years of adverse weather and recurrent plant diseases in
the Midwest and by low commodity prices in fiscal 1999. These conditions have
resulted in lower than normal farmer confidence, income and capital spending
plans.
During the third quarter of fiscal 1999, primarily as a result of adverse
conditions in the Midwest farm economy, the Company initiated a number of
corporate actions designed to generate cash, fund growth opportunities,
discontinue non-strategic operations and achieve more cost efficient operations.
These initiatives were undertaken after the Company assessed industry and
financial market conditions, primarily of the agricultural economy, that were
projected to impact the business over the subsequent six to 18 months. The
Company also reviewed industry outlooks from manufacturers, forecasts and
surveys by economists, investment analysts and governmental units, and the
status of capital markets for raising equity and debt. The initiatives included
one-time, non-recurring charges related to inventory and asset writedowns,
reserves and severance costs. A $15.0 million inventory charge enabled the
Company to initiate a new, more aggressive pricing strategy with respect to
equipment sales in the agricultural equipment business segment. This charge is
included in cost of revenues. In addition, the Company recorded a restructuring
charge of $2.2 million in connection with asset writedowns and severance costs,
which included exiting the agricultural irrigation equipment business.
The Company generally experiences lower revenue levels during its first and
fourth quarters primarily due to the crop growing season, winter weather
conditions in the Midwest and a general slowdown in construction activity at the
end of the calendar year. See "Seasonality" below.
Price increases by suppliers of the Company's products have not historically had
a significant impact on the Company's results of operations. See "Effects of
Inflation" below.
The Company requires cash primarily for financing its inventories of equipment,
trucks and replacement parts, acquisitions and openings 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. See "Liquidity and Capital Resources" below.
PAGE 14
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
The Company's strategic plan of internal growth along with growth through
acquisitions was successful in fiscal 1999 and 1998. Comparable store revenues
grew 5% and 11% for fiscal 1999 and 1998, respectively. In fiscal 1999, the
Company purchased four heavy-duty truck retail stores, four material handling
equipment retail stores, an agricultural equipment rental store and a
construction equipment rental store. Four construction equipment rental stores,
a construction equipment retail store and a material handling equipment retail
store were opened in fiscal 1999. In fiscal 1998, the Company purchased five
construction equipment rental stores, five agricultural equipment retail stores,
five construction equipment retail stores and a heavy-duty truck retail store.
The Company also opened three construction equipment rental stores in fiscal
1998. The results of operations of these acquisitions are included in the
Company's results only for the periods after their applicable acquisition dates.
In February 1999, the Company acquired a heavy-duty truck dealership with two
retail stores located in Dallas and Fort Worth, Texas, which is engaged in the
distribution, sale, service, and financing of trucks primarily supplied by
Volvo. Revenues and assets of this acquisition will represent less than 10% of
the total revenues and assets of the Company.
RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, certain financial
data:
FISCAL YEAR ENDED JANUARY 31,
- --------------------------------------------------------------------------------
1999 1998 1997
- --------------------------------------------------------------------------------
REVENUE DATA (IN MILLIONS):
Total revenues $578.6 $429.4 $302.4
Construction 53.9% 55.8% 61.5%
Agricultural 27.3% 39.7% 38.5%
Truck 13.0% 1.5% --
Rental 4.9% 3.0% --
Financial 0.9% -- --
Construction revenues $312.2 $239.3 $186.0
Equipment sales 74.0% 72.5% 72.1%
Parts and service 25.3% 27.0% 26.6%
Rental 0.7% 0.5% 1.3%
Agricultural revenues $157.8 $170.6 $116.4
Equipment sales 70.8% 72.7% 77.3%
Parts and service 29.0% 26.5% 22.7%
Rental 0.2% 0.8% --
Truck revenues $ 75.1 $ 6.6 --
Truck sales 76.1% 52.7% --
Parts and service 23.9% 47.3% --
Rental revenues $ 28.5 $ 12.8 --
Equipment sales 14.8% 5.1% --
Parts and service 2.0% 2.2% --
Rental 83.2% 92.7% --
FISCAL YEAR ENDED JANUARY 31,
- --------------------------------------------------------------------------------
1999 1998 1997
- --------------------------------------------------------------------------------
STATEMENT OF OPERATIONS DATA (AS A PERCENTAGE OF REVENUES):
Revenues
Equipment and truck sales 69.8% 70.3% 74.1%
Parts and service 24.8 26.4 25.1
Rental 4.5 3.3 0.8
Financial services 0.9 -- --
- --------------------------------------------------------------------------------
Total revenues 100.0% 100.0% 100.0%
- --------------------------------------------------------------------------------
Gross profit 17.2%(1) 20.6% 18.9%
Selling, general and
administrative expenses 14.1 14.1 13.6
Restructuring charges 0.4 -- --
- --------------------------------------------------------------------------------
Operating income 2.7 6.5 5.3
Interest expense, net 2.2 1.3 1.7
Provision for taxes (2) 0.2 2.1 1.5
- --------------------------------------------------------------------------------
Net income (2) 0.3% 3.1% 2.1%
- --------------------------------------------------------------------------------
(1) After non-recurring $15 million inventory charge in fiscal 1999.
(2) 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 fiscal 1997.
FISCAL YEAR ENDED JANUARY 31, 1999
COMPARED TO FISCAL YEAR ENDED JANUARY 31, 1998
REVENUES
Revenues increased approximately $149.2 million, or 34.8%, from $429.4 million
for fiscal 1998, to $578.6 million for fiscal 1999. Construction, agricultural,
truck, rental and financial services operations contributed approximately $312.2
million, $157.8 million, $75.1 million, $28.5 million and $5.0 million,
respectively. 57.1% of the increase in revenues, or $85.2 million, was due to
acquisitions and openings completed during fiscal 1999. Of those revenues, $10.4
million came from acquisitions and openings in construction operations, as the
number of retail locations increased from 25 to 31. There were acquisitions and
openings of material handling and construction retail stores in Iowa, Minnesota
and Nebraska. Acquisitions of truck operations added $66.2 million in revenues,
as the number of retail locations increased from one to four in Minnesota and
North Dakota. The acquisitions and openings of equipment rental operations
contributed $8.6 million in revenues as the number of rental locations increased
from eight to 14. One agricultural equipment rental store was acquired in
California while five construction equipment rental stores were opened or
acquired in Arizona, California and Nevada. In all, retail locations increased
from 50 to 64 during fiscal 1999. Comparable store revenues grew 5.2%. The
balance of the increase in revenues is attributable to acquisitions and openings
in fiscal 1998.
Equipment and truck sales increased approximately $102.4 million in fiscal 1999,
or 33.9%, from $301.7 million for fiscal 1998 to $404.1 million for fiscal 1999.
Construction operations contributed approximately $57.6 million of this
increase, with equipment sales
PAGE 15
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
increasing 33.2% to $231.0 million. Acquisitions and openings completed during
fiscal 1999 accounted for approximately $4.6 million of the increase in
construction equipment sales. Truck operations contributed approximately $53.7
million of the total sales increase, with truck sales increasing from $3.5
million to $57.2 million. Acquisitions completed during fiscal 1999 accounted
for approximately $51.9 million of the increase in truck sales. Rental
operations contributed approximately $3.5 million of the equipment sales
increase, with sales increasing from $700,000 to $4.2 million. Acquisitions and
openings completed during fiscal 1999 accounted for $2.2 million of the
increase. Offsetting the increase in equipment and truck sales, agricultural
operations decreased approximately $12.4 million, with sales decreasing 10.0% to
111.7 million. The decrease in equipment sales was primarily attributable to the
depressed Midwest farm economy.
Parts and service revenues increased approximately $30.1 million, or 26.6%, from
$113.2 million for fiscal 1998 to $143.3 million for fiscal 1999. Construction
operations contributed approximately $14.4 million of the increase as sales grew
22.3% to $79.0 million. Of this increase, $4.0 million was due to acquisitions
and openings completed during fiscal 1999. Truck operations contributed
approximately $14.8 million of the increase as sales grew from $3.1 million to
$17.9 million. Of this increase, $14.4 million was due to acquisitions completed
during fiscal 1999. Rental operations contributed approximately $300,000 of the
increase as sales grew from $300,000 to $600,000. Of this increase, $100,000 was
due to acquisitions and openings completed during fiscal 1999. Parts and service
revenues from agricultural operations increased only slightly, 1.3%, or
$600,000, to $45.8 million primarily attributable to adverse conditions in the
Midwest farm economy.
Rental revenues increased approximately $11.7 million, or 80.7%, from $14.5
million for fiscal 1998 to $26.2 million for fiscal 1999. Construction and
rental operations contributed substantially all of this increase. Acquisitions
and openings completed during fiscal 1999 represented approximately $8.2 million
of the increase.
Financial services revenues of approximately $5.0 million were generated in
fiscal 1999. Financial services revenues are comprised primarily of earnings
from interest rate additions on retail installment contracts, gains and service
fee income from securitized loans and leases receivable, and finance charges
from a revolving credit facility available to a portion of the Company's
customers.
GROSS PROFIT
Gross profit increased approximately $10.9 million, or 12.3%, from $88.4 million
in fiscal 1998 to $99.3 million in fiscal 1999. Gross profit for fiscal 1999 was
affected by the $15.0 million inventory charge discussed above. Gross profit as
a percentage of total revenues for fiscal 1999 and 1998 was 17.2% and 20.6%,
respectively. Gross profit, as a percentage of total revenues before the $15.0
million inventory charge, for fiscal 1999 was 19.8%. Gross profit has been
primarily affected by a more competitive and price sensitive market place
affecting the agricultural economy and construction equipment rental industry.
Gross profit is affected by the contribution of revenues by business segment and
by the mix of revenues within each business segment. Revenues from construction,
rental and financial services operations provide the Company with higher gross
margins than do agricultural and truck operations. The Company's highest gross
margins are derived from its parts and service, rental and financial services
revenues.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative (SG&A) expenses as a percent of total
revenues were 14.1% for fiscal 1999 and 1998. Total SG&A expenses increased
approximately $21.3 million, from $60.4 million for fiscal 1998 to $81.7 million
for fiscal 1999. Approximately $10.2 million of the increase was due to the
operations of the Company's acquisitions and openings completed during fiscal
1999. SG&A expenses are affected by the contribution of revenues within each
business segment. As a percentage of revenues, SG&A expenses are higher for
construction and financial services operations than for agricultural, truck and
rental operations. As a percentage of revenues, SG&A expenses are lower for
equipment and truck sales than for parts and service and rental revenues.
INTEREST EXPENSE
Interest expense increased approximately $6.2 million, or 89.9%, from $6.9
million for fiscal 1998 to $13.1 million for fiscal 1999. The higher level of
interest expense is due to the Company operating at normalized debt levels after
having paid down debt following the Offering, the increased number of stores
which expanded inventory levels, and the need to maintain a larger equipment
rental fleet to support expanded rental operations.
INTEREST INCOME
The decline in interest income of $600,000, or 46.2%, from fiscal 1998 is
attributable to reflecting interest rate additions on retail installment
contracts and finance charges relating to its revolving credit facility in the
financial services subsidiary formed in late fiscal 1998. During fiscal 1999,
interest income is comprised of finance charges from trade receivables excluding
those related to the financial services revolving credit facility.
INCOME TAXES
The estimated provision for income taxes as a percentage of pretax income for
fiscal 1999 and 1998 was 40.7%.
NET INCOME
The Company reported net income of $1.7 million, or $0.13 per share for fiscal
1999, which includes a $15.0 million inventory charge and a $2.2 million
restructuring charge, compared to net income of $13.3 million, or $1.00 per
share for fiscal 1998. Net income and net income per share before one-time,
non-recurring inventory and restructuring charges for fiscal 1999 were $11.9
million and $0.90 per share, respectively.
PAGE 16
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
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
contributed $239.4 million, agricultural operations contributed $170.6 million,
rental operations contributed $12.8 million and truck operations contributed
$6.6 million. 47.4% of the increase in revenues, or $60.2 million, was due to
acquisitions and openings complete during fiscal 1998. Of those revenues in
fiscal 1998, $14.0 million came from acquisitions in construction operations, as
the number of retail locations increased from 21 to 25 as a result of
acquisitions in Montana and Texas. Acquisitions of agricultural operations added
$26.8 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 and $6.6 million came from the acquisition of a
full-service truck dealership during fiscal 1998. In all, retail store locations
increased from 32 to 50 during fiscal 1998. Comparable store revenues grew
11.1%. The balance of the increase in revenues is attributable to acquisitions
and openings in fiscal 1997.
Equipment and truck 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 $39.3 million of this
increase, with equipment sales increasing 29.3% to $173.4 million. Acquisitions
completed during fiscal 1998 accounted for $9.7 million of the increase in
construction equipment sales. Agricultural operations contributed an increase of
approximately $34.1 million, with equipment sales increasing 37.9% to 124.1
million. Of the $34.1 million, approximately 44%, or $15.0 million, was due to
acquisitions completed during fiscal 1998. The acquisition and openings of
construction equipment rental stores and the acquisition of a full service truck
dealership during fiscal 1998 contributed the remaining increase of
approximately $4.2 million.
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
equipment and truck 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 $15.2 million of the increase
as sales grew 30.7% to $64.6 million. Of this increase, $4.3 million was due to
acquisitions completed during fiscal 1998. Agricultural operations contributed
an increase of approximately $18.8 million, with sales increasing 71.2% to $45.2
million. Of the increase, $10.4 million was the result of acquisitions completed
during fiscal 1998. The acquisition and openings of construction equipment
rental stores and the acquisition of a full service truck dealership during
fiscal 1998 contributed the remaining increase of approximately $3.4 million.
The acquisition of Sun Valley Equipment Corp. and additional openings of
construction rental stores 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
for fiscal 1997 to $88.4 million for 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
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 $9.1 million of the increase was due to the operations of the
Company's acquisitions and openings completed during fiscal 1998. 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 equipment and truck
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.
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 Offering.
PAGE 17
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
LIQUIDITY AND CAPITAL RESOURCES
The Company requires cash primarily for financing its inventories of equipment,
trucks and replacement parts, acquisitions and openings 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 & Company (Deere), Deere Credit Services, Inc. (Deere
Credit), Ag Capital Company (Ag Capital), NationsBanc Leasing Corporation
(NationsBanc), Deutsche Financial Services Corporation (Deutsche), Associates
Commercial Corporation (Associates), General Motors Acceptance Corporation
(GMAC) and commercial banks. In addition, in January 1997, the Company completed
the Offering raising net proceeds of $68.3 million, which have been used to
satisfy the Company's working capital needs.
Floor plan financing from Deere, Deere Credit and NationsBanc represents the
primary source of financing for equipment inventories, particularly for
equipment supplied by Deere. Floor plan financing of truck inventories is
primarily supplied by Associates and GMAC. On- and off-balance sheet financing
of rental equipment is primarily provided by Deutsche, Deere Credit and
Associates. All lenders receive a security interest in the inventory financed.
In addition to floor plan financing supplied by manufacturers, the Company had
unused credit commitments related to floor plan financing and on- and
off-balance sheet financing of rental equipment of approximately $47.8 million.
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. NationsBanc provides
equipment floor plan financing with variable market rates of interest based on
LIBOR. Associates and GMAC provide truck floor plan financing with variable
market rates of interest based on the prime rate. Deutsche and Associates
provide rental equipment financing using variable market rates of interest based
on LIBOR and the prime rate, respectively.
The Company has available bank lines of credit totaling $27.5 million with
varying maturity dates through December 1, 1999 with variable interest rates
based on LIBOR and prime. The Company had approximately $12.1 million of unused
availability relating to these lines of credit at January 31, 1999.
The Company annually reviews the terms of its financing with its lenders,
including the interest rate. In fiscal 1999, 1998 and 1997 the average interest
rate under interest-bearing floor plan financing was approximately 7.48%, 8.20%,
and 8.25%, respectively. As of January 31, 1999 the Company had outstanding
floor plan payables of approximately $191.0 million, of which $146.1 million was
then interest-bearing. The average interest rates on the Company's lines of
credit during the years ended January 31, 1999, 1998 and 1997 were 8.13%, 8.46%
and 8.58%, respectively
The Company's financing 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 or obtained waiver letters for all debt covenants at January 31,
1999.
Operating activities after the inventory and restructuring charges provided net
cash of $37.7 million and $38.2 million for fiscal 1999 and 1998, respectively,
versus using net cash of $31.9 million in fiscal 1997. The use of net cash in
fiscal 1997 was attributable to paying down floor plan payables from proceeds of
the Offering.
Cash used for investing activities in fiscal 1999, 1998 and 1997 was $55.4
million, $44.9 million and $14.3 million, respectively. The cash used in fiscal
1999, 1998 and 1997 was primarily related to acquisitions and the purchase of
construction equipment for the Company's rental operations. In fiscal 1999,
there was an additional use of cash related to the retained interest of loans
and leases securitized.
Cash provided by financing activities amounted to $17.7 million, $6.3 million,
and $45.9 million for fiscal 1999, 1998 and 1997, respectively. Cash provided by
financing activities in fiscal 1999 was primarily attributable to financing of
rental equipment for the Company's rental operations and net additional
borrowings on the Company's bank lines. 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 included $10.0 million from fiscal 1997 earnings.
The Company believes cash from operations, available cash and borrowing capacity
will be sufficient to fund its planned internal capital expenditures for fiscal
2000.
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.
PAGE 18
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
SEASONALITY
The Company generally experiences a higher volume of equipment sales in the
second and third fiscal quarters of each fiscal year due to the crop growing
season, winter weather conditions in the Midwest and the general slowdown in
construction activity at the end of the calendar year. 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 READINESS
The Company uses both information technology ("IT") and non-IT systems and
assets which will be affected by the date change in the year 2000. Many existing
computer systems and related applications use only two digits to identify a year
in the date field. As the year 2000 approaches, such programs may be unable to
distinguish years beginning with 20 from years beginning with 19. In addition,
such programs may not recognize the year 2000 as a leap year and fail to include
February 29 as a date during the year 2000 or incorrectly include February 29 in
years after 2000. As a result, date sensitive systems and related applications
may fail, or may not process data accurately, before, during or after the year
2000. The Company is in the midst of an ongoing analysis to evaluate and address
the potential for year 2000 issues to impact its operations and management of
its businesses.
The Company's dealership, equipment rental and financial services operations
rely heavily upon third party systems to support critical day-to-day operations,
including sales, inventory, service and parts operations, accounting functions,
submitting warranty claims, ordering equipment, truck and parts, reporting
financial information, and receiving technical information for service
activities. The Company has received and is relying upon assurances from each of
the providers of these systems that year 2000 compliant versions of the systems
have been developed and have been made available to the Company at no additional
cost under existing maintenance agreements. The Company has installed these
updates to make all business software applications year 2000 compliant. In
addition, all application server hardware is year 2000 compliant. The Company
will continue to evaluate these systems, and will monitor all hardware and
software vendors to identify and implement any future releases of corrections
relating to the year 2000.
The Company is also attempting to verify that the critical services provided by
vendors, such as manufacturers and other suppliers, public utilities, financial
institutions and credit bureaus with which the Company conducts business, will
be available without interruption during the transition to the year 2000.
Financial institutions with which the Company conducts critical business
activities include floor plan lending sources and retail lending institutions.
The Company's survey of suppliers is approximately fifty percent complete, and
the Company has not yet identified any suppliers who will not be year 2000
compliant. The Company expects to complete this survey by April 30, 1999. In the
event third party service providers are unable to verify their ability to
address year 2000 issues, the Company will explore alternative sources for such
services.
In addition to the critical systems and services noted above, the Company's
operations use a variety of non-IT devices and systems containing embedded
technology which may fail, or may not process data accurately, before, during or
after the year 2000. Due to the nature of its operations, the Company has
minimal exposure to embedded technology. Such non-critical devices and systems
include personal computers, software applications, phone systems, control
systems, security systems and alarms. The Company has begun evaluating the
impact to its operations of such items and expects to complete this assessment
and analysis by April 30, 1999. The completion of any necessary implementation
and testing is planned for October 31, 1999. The Company expects to identify
non-compliant personal computers and other non-IT equipment which will be
replaced during 1999.
Despite the Company's efforts, there is a risk not all possible problems
associated with year 2000 issues will be corrected. Further, despite assurances
that the Company has received or will receive, there can be no guarantee that
the products, systems and services provided by vendors, or that the systems of
other companies with which the Company does business, will be year 2000
compliant. In addition to risks associated with manufacturers and their year
2000 readiness, the Company believes that its largest risks are associated with
utilities (e.g., electrical power, telephones, data communication lines) which
are beyond the control of the Company. Any non-compliance could result in the
reduction or shutdown of the Company's ability to sell, rent, service and
finance equipment, trucks, parts and ancillary products, which could have a
material adverse effect on the Company.
In connection with acquisitions, the Company attempts to determine beforehand
whether a business being acquired is year 2000 compliant. But that objective is
not always possible, and the Company may be unable to verify year 2000
compliance until after an acquisition is completed. Any business systems
inherited through acquisition that are determined to be non-compliant will be
updated or replaced.
All costs associated with evaluating and correcting year 2000 issues are
expensed as incurred. To date, the costs associated with reviewing and
correcting year 2000 issues have not been material. Costs of any new equipment
will be expensed or capitalized over the asset's useful life, consistent with
the Company's financial policies. The Company is evaluating the estimated cost
of its year 2000 remediation program in concert with the review of year 2000
issues. The Company expects the total cost of these expenditures will be less
than $250,000 of which approximately $50,000 will be expensed and $200,000
capitalized.
PAGE 19
<PAGE>
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
FOR THE YEARS ENDED JANUARY 31,
- ----------------------------------------------------------------------------------------------------------
(in thousands, except per share amounts) 1999 1998 1997
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
REVENUES:
Equipment and truck sales $ 404,093 $ 301,684 $ 224,094
Parts and service 143,335 113,268 75,820
Rental 26,208 14,451 2,499
Financial services 4,988 -- --
- ----------------------------------------------------------------------------------------------------------
Total revenues 578,624 429,403 302,413
COST OF REVENUES (Note 3): 479,275 340,987 245,287
- ----------------------------------------------------------------------------------------------------------
GROSS PROFIT 99,349 88,416 57,126
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES 81,682 60,382 41,275
RESTRUCTURING CHARGES (Note 3): 2,200 -- --
- ----------------------------------------------------------------------------------------------------------
Operating income 15,467 28,034 15,851
INTEREST EXPENSE (13,138) (6,864) (5,720)
INTEREST INCOME 711 1,326 674
- ----------------------------------------------------------------------------------------------------------
Income before income taxes and minority interest 3,040 22,496 10,805
INCOME TAX PROVISION (BENEFIT) 1,237 9,156 (300)
- ----------------------------------------------------------------------------------------------------------
Income before minority interest 1,803 13,340 11,105
MINORITY INTEREST 135 89 --
- ----------------------------------------------------------------------------------------------------------
NET INCOME $ 1,668 $ 13,251 $ 11,105
==========================================================================================================
ACTUAL AND PRO FORMA DATA (Note 9):
Income before income taxes and minority interest 3,040 22,496 10,805
Provision for income taxes 1,237 9,156 4,322
Minority interest 135 89 --
- ----------------------------------------------------------------------------------------------------------
Net income 1,668 $ 13,251 6,483
==========================================================================================================
Basic and diluted net income per share $ 0.13 $ 1.00 $ 0.77
==========================================================================================================
Supplemental net income per share (Note 2) $ 0.13 $ 1.00 $ 0.68
==========================================================================================================
Weighted average shares outstanding - basic 13,182 13,181 8,400
Weighted average shares outstanding - diluted 13,201 13,287 8,400
Weighted average shares outstanding - supplemental (Note 2) 13,201 13,287 9,459
==========================================================================================================
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL
STATEMENTS
PAGE 20
<PAGE>
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
AS OF JANUARY 31,
- -------------------------------------------------------------------------------------------------------------
(in thousands) 1999 1998
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 51 $ 37
Accounts receivable (less allowance for doubtful accounts of $1,616 and $631) 59,233 36,204
Receivables from affiliates 3,197 1,361
Inventories 208,368 220,841
Prepaid expense 1,588 704
Deferred income tax benefit 5,680 1,450
- -------------------------------------------------------------------------------------------------------------
Total current assets 278,117 260,597
PROPERTY AND EQUIPMENT, net 63,702 37,469
OTHER ASSETS:
Goodwill and other, net of accumulated amortization of $1,888 and $781 36,326 19,601
Deposits 1,075 1,765
- -------------------------------------------------------------------------------------------------------------
Total assets $379,220 $319,432
=============================================================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Floor plan payables $191,030 $163,988
Notes payable and current maturities of long-term debt:
Banks and others 13,942 4,423
Affiliates 13,536 2,149
Accounts payable 8,373 7,376
Accrued liabilities 11,649 9,619
Customer advance deposits 2,114 3,043
Dividends payable 734 734
- -------------------------------------------------------------------------------------------------------------
Total current liabilities 241,378 191,332
LONG-TERM DEBT, net of current maturities:
Banks and others 24,565 20,410
Affiliates 3,490 4,371
DEFERRED INCOME TAXES 5,210 1,560
- -------------------------------------------------------------------------------------------------------------
Total liabilities 274,643 217,673
- -------------------------------------------------------------------------------------------------------------
COMMITMENTS AND CONTINGENCIES (Note 11)
MINORITY INTEREST 1,839 689
STOCKHOLDERS' EQUITY (Note 10):
Preferred stock -- --
Common stocks-
Class A 57 57
Class B 75 75
Additional paid-in-capital 84,471 84,471
Retained earnings 18,135 16,467
- -------------------------------------------------------------------------------------------------------------
Total stockholders' equity 102,738 101,070
- -------------------------------------------------------------------------------------------------------------
Total liabilities and stockholders' equity $379,220 $319,432
=============================================================================================================
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL
STATEMENTS.
PAGE 21
<PAGE>
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
FOR THE YEARS ENDED JANUARY 31, 1999, 1998, AND 1997
- ---------------------------------------------------------------------------------------------------------------------------------
COMMON STOCK
------------------------ TOTAL ADDITIONAL
CLASS A CLASS B COMMON PAID-IN RETAINED
(in thousands, except share amounts) SHARES SHARES STOCK CAPITAL EARNINGS TOTAL
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
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
Net income -- -- -- -- 1,668 1,668
- ---------------------------------------------------------------------------------------------------------------------------------
BALANCE, JANUARY 31, 1999 5,731,008 7,450,492 $ 132 $ 84,471 $ 18,135 $ 102,738
=================================================================================================================================
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL
STATEMENTS.
PAGE 22
<PAGE>
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
FOR THE YEARS ENDED JANUARY 31,
- --------------------------------------------------------------------------------------------------------------------
(in thousands) 1999 1998 1997
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
OPERATING ACTIVITIES:
Net income $ 1,668 $ 13,251 $ 11,105
Adjustments to reconcile net income to net
cash provided by (used for) operating activities:
Depreciation and amortization 10,506 5,308 2,606
Deferred taxes (428) 410 (300)
Minority interest 135 89 --
Loss on sale of irrigation division assets 1,360 -- --
Change in operating assets and liabilities:
Accounts receivable (14,519) (10,594) (8,959)
Inventories 25,719 (72,874) (1,330)
Prepaid expenses (667) (118) (185)
Deposits 792 (404) 218
Floor plan payables 14,056 97,495 (37,193)
Accounts payable and accrued liabilities (188) 5,712 3,085
Customer advance deposits (747) (115) (962)
- --------------------------------------------------------------------------------------------------------------------
Net cash provided by (used for) operating activities 37,687 38,160 (31,915)
- --------------------------------------------------------------------------------------------------------------------
INVESTING ACTIVITIES:
Net purchases of rental equipment (19,769) (14,185) (1,519)
Net purchase of property and equipment (5,132) (3,766) (2,137)
Net assets of acquisitions (25,455) (26,478) (10,100)
Retained investment and service fee on securitized receivables (3,813) -- --
Other, net (1,240) (483) (516)
- --------------------------------------------------------------------------------------------------------------------
Net cash used for investing activities (55,409) (44,912) (14,272)
- --------------------------------------------------------------------------------------------------------------------
FINANCING ACTIVITIES:
Proceeds from issuance of long-term debt 15,505 15,777 7,432
Payments on long-term debt (9,330) (9,308) (2,757)
Net proceeds (payments) of bank lines and short-term notes payable 11,561 (67) (2,052)
Issuance of common stock, net of issuance costs -- 24 68,279
Purchase of common stock -- -- (68)
Payment of dividends -- (96) (24,975)
- --------------------------------------------------------------------------------------------------------------------
Net cash provided by financing activities 17,736 6,330 45,859
- --------------------------------------------------------------------------------------------------------------------
INCREASE (DECREASE) IN CASH 14 (422) (328)
CASH AND CASH EQUIVALENTS, beginning of year 37 459 787
- --------------------------------------------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS, end of year $ 51 $ 37 $ 459
====================================================================================================================
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL
STATEMENTS.
PAGE 23
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 Truck Center Co., RDO Financial Services Co., RDO
Material Handling Co., and its majority-owned subsidiaries RDO Rental Co. (80%),
Hall GMC, Inc. (85%), Hall Truck Center, Inc.(85%), and Salinas Equipment
Distributors, Inc. (89%). 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. In November 1998, the assets of MVI were sold to a related
party (see Notes 3 and 12). 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 and trucks to the agricultural, construction, manufacturing,
transportation and warehousing industries, including units of state, local and
federal government and utility companies. Accordingly, the Company's results of
operations can be significantly impacted by the general economic health of these
industries. The Company's stores are located in Arizona, California, Iowa,
Minnesota, Montana, Nebraska, Nevada, North Dakota, South Dakota, Texas and
Washington.
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 43%,
48% and 49% of total revenues for fiscal years 1999, 1998 and 1997,
respectively. No other supplier's equipment accounted for more than 10% of total
revenues.
As discussed in Note 12, the Company has significant transactions with related
parties, primarily related to financing arrangements.
DEERE 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, 1999.
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.
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 and truck inventory, depreciable lives of
property and equipment, allowance for uncollectible accounts, cash flows on
securitized transactions, 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.
PAGE 24
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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, trucks and parts
inventory. The specific identification method is used to determine cost for used
equipment and trucks.
Inventories consisted of the following as of January 31:
(in thousands) 1999 1998
- --------------------------------------------------------------------------------
New Equipment and Trucks $ 152,707 $ 156,732
Used Equipment and Trucks 28,865 39,392
Parts and other 26,796 24,717
- --------------------------------------------------------------------------------
Total $ 208,368 $ 220,841
================================================================================
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost. Maintenance and repairs are charged
to expense as incurred. 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.
Property and equipment consisted of the following as of January 31:
(in thousands) 1999 1998 Lives
- --------------------------------------------------------------------------------
Land $ 614 $ 619 --
Buildings and improvements 7,194 5,151 5-31.5
Equipment, furniture and fixtures 18,044 12,392 3-7
Rental equipment 58,781 27,541 3-7
Construction in progress 184 319 --
- --------------------------------------------------------------------------------
Total 84,817 46,022
Accumulated depreciation (21,115) (8,553)
- --------------------------------------------------------------------------------
Property and equipment, net $ 63,702 $ 37,469
================================================================================
REVENUE RECOGNITION
Revenue on equipment, truck and parts sales is recognized upon delivery of
product to customers. Rental and service revenue is recognized at the time such
services are provided.
SECURITIZED RECEIVABLES
During fiscal 1999, certain loan and lease receivables were securitized wherein
they were sold to a special-purpose corporation which is a related party. The
Company retains a minimum investment in sold receivables, limited to 10%. Upon
sale, a gain was recognized on the receivables for the difference between
carrying value and the sales proceeds based on estimates of future expected cash
flows including adjustments for prepayments and credit losses. The Company will
continue to service the underlying receivables on behalf of the special-purpose
corporation in return for a fee. The Company sold approximately $57.1 million of
loan and lease receivables during fiscal 1999. Approximately $2.2 million of
gains on sales and servicing fee income were recognized as financial service
revenues in the accompanying statement of operations.
SUPPLEMENTAL NET INCOME PER SHARE
Supplemental net income per share for fiscal 1997 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 9.
FAIR VALUE OF FINANCIAL INSTRUMENTS
Unless otherwise disclosed, the carrying amounts of financial instruments,
including cash and cash equivalents, receivables, accounts payable, floor plan
payables, and notes payable approximate fair value because of relatively short
or variable rates on these instruments.
PAGE 25
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NEW ACCOUNTING PRONOUNCEMENTS
Statement of Financial Accounting Standards No. 130, "Reporting Comprehensive
Income," which requires all items required to be recognized under accounting
standards as components of comprehensive income be reported in a financial
statement and displayed with the same prominence as other financial statements.
Adoption of this statement had no impact on the financial statements of the
Company.
3. INVENTORY AND RESTRUCTURING CHARGES:
During the third quarter of fiscal 1999, the Company initiated corporate actions
designed to generate cash, fund growth opportunities, discontinue non-strategic
operations and achieve more cost efficient operations. These initiatives were
undertaken as the Company assessed current industry and financial market
conditions, primarily the financial problems in the agricultural economy, that
were projected to impact the Company's business over the subsequent six to 18
months. These initiatives included one-time, non-recurring charges relating to
inventory and asset writedowns, reserves and severance costs. The Company took a
$15.0 million inventory charge which is included in cost of revenues and a $2.2
million restructuring charge in connection with asset writedowns and severance
costs, which included exiting the agricultural irrigation equipment business.
4. BUSINESS COMBINATIONS:
During fiscal 1999 and 1998, the Company made several acquisitions of
agricultural equipment, construction equipment, equipment rental and heavy-duty
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 which is
amortized over 30 years.
The following summarizes the assets acquired, liabilities assumed and cash
purchase price of the acquisitions made during the years ended January 31:
(in thousands) 1999 1998
- --------------------------------------------------------------------------------
Assets acquired $ 51,032 $ 40,276
Less: liabilities assumed 25,577 13,798
- --------------------------------------------------------------------------------
Cash purchase price $ 25,455 $ 26,478
================================================================================
Number of acquisitions 6 7
================================================================================
The accompanying unaudited pro forma results of operations for the years ended
January 31, 1999 and 1998, give effect to the above acquisitions as if they were
completed at the beginning of fiscal 1998. 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) 1999 1998
- --------------------------------------------------------------------------------
Revenues $ 615,054 $ 553,438
Net income $ 12,193 $ 14,293
Weighted average shares outstanding - basic 13,182 13,181
Weighted average shares outstanding - diluted 13,201 13,287
Basic and diluted net income per share $ 0.92 $ 1.08
Subsequent to the end of fiscal 1999, the Company purchased a heavy-duty truck
dealership with full-service truck centers located in Dallas and Fort Worth,
Texas primarily supplied by Volvo. Total assets of the acquired business were
approximately $13.6 million with unaudited annual revenues of approximately
$33.0 million.
PAGE 26
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
5. FLOOR PLAN PAYABLES:
Floor plan payables are financing arrangements for inventory. The terms of these
arrangements may 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 inventory or in accordance with the terms of the
financing arrangements. All amounts owed to Deere & Company 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:
<TABLE>
<CAPTION>
(in thousands) 1999 1998
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Interest-bearing:
Deere Credit Services, Inc., inventory notes, due as inventory is sold, interest at
various rates, 5.9% to 7.50% at January 31, 1999, based on prime $ 66,145 $ 43,143
NationsBanc Leasing Corporation, 6.94% at January 31, 1999, based on LIBOR 33,900 27,000
Ag Capital Company, 7.44% at January 31, 1999, based on LIBOR 23,333 581
Deere & Company payables, due as inventory is sold, interest at various rates,
4.5% to 7.75% at January 31, 1999, based on prime 8,514 7,365
Associates Commercial Corporation, 7.25% at January 31, 1999, based on prime 6,968 750
General Motors Acceptance Corporation, 7.25% at January 31, 1999, based
on prime 6,457 --
Other 810 350
- -------------------------------------------------------------------------------------------------------------------
146,127 79,189
===================================================================================================================
Noninterest-bearing:
Deere & Company 41,839 79,592
Deere Credit Services, Inc. 2,866 4,673
Other 198 534
- -------------------------------------------------------------------------------------------------------------------
44,903 84,799
- -------------------------------------------------------------------------------------------------------------------
Total $ 191,030 $ 163,988
===================================================================================================================
</TABLE>
The Company has certain floor plan financing agreements containing 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 or obtained waiver letters for
all floor plan covenants at January 31, 1999.
6. 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:
<TABLE>
<CAPTION>
(in thousands) 1999 1998
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Deutsche Financial Services Corporation, a $46.25 million revolving rental
equipment facility, due in various amounts through January 2003, 7.04% at
January 31, 1999, based on LIBOR, collateralized by rental equipment $ 27,551 $ 20,655
Associates Commercial Corporation, rental equipment notes, due in various
amounts through January 2004, interest rates 8.25% to 10.75% at
January 31, 1999, collateralized by rental equipment 3,875 --
Bank lines of credit (see below) 2,660 --
Other 4,421 4,178
- -------------------------------------------------------------------------------------------------------------------
Total 38,507 24,833
Less short-term notes and current maturities of long-term debt (13,942) (4,423)
- -------------------------------------------------------------------------------------------------------------------
$ 24,565 $ 20,410
===================================================================================================================
</TABLE>
PAGE 27
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AFFILIATES
Notes payable and long-term debt due to affiliates consisted of the following as
of January 31:
<TABLE>
<CAPTION>
(in thousands) 1999 1998
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Ag Capital Company, interest (fixed and variable 8.125% to 8.5%)
collateralized by various receivables and fixed assets of the Company $ 4,291 $ 6,520
Ag Capital Company, operating lines (see below) 12,735 --
- -------------------------------------------------------------------------------------------------------------------
Total 17,026 6,520
Less short-term notes and current maturities of long-term debt (13,536) (2,149)
- -------------------------------------------------------------------------------------------------------------------
$ 3,490 $ 4,371
===================================================================================================================
</TABLE>
The Company has bank lines of credit which provide maximum borrowings totaling
$27.5 million with varying maturity dates through December 1, 1999 with variable
interest rates based on LIBOR and prime. The highest balances outstanding under
these lines were $21.1 million, $2.0 million and $3.0 million, for fiscal years
ended January 31, 1999, 1998 and 1997, respectively. The weighted average
interest rates on these lines during such periods were 8.13%, 8.46% and 8.58%,
respectively.
Future debt maturities as of January 31, 1999 are as follows:
<TABLE>
<CAPTION>
(in thousands)
- ----------------------------------------------------------
<S> <C>
2000 $ 27,478
2001 10,362
2002 9,654
2003 6,474
2004 600
Thereafter 965
- ----------------------------------------------------------
$55,533
==========================================================
</TABLE>
The Company has notes payable and long-term debt agreements containing 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 or obtained waiver letters for
all debt covenants at January 31, 1999.
7. EARNINGS PER SHARE
The following summarizes the computation of weighted average shares outstanding
and the net income per share for the years ended January 31:
<TABLE>
<CAPTION>
(in thousands, except per share data) 1999 1998 1997
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net income available to common shareholders $ 1,668 $ 13,251 $ 6,483
Weighted average number of common shares outstanding - basic 13,182 13,181 8,400
Dilutive effect of option plan 19 106 --
Common and potential common shares outstanding - diluted 13,201 13,287 8,400
Basic and dilutive net income per share $ 0.13 $ 1.00 $ 0.77
=========================================================================================================
</TABLE>
8. EMPLOYEE BENEFIT PLANS:
401(k) EMPLOYEE SAVINGS PLAN
The Company's employees participate in a 401(k) employee savings plan 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 $580,000, $409,000 and $214,000 for the fiscal years
ended January 31, 1999, 1998 and 1997, respectively.
PAGE 28
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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, 1999 vest over a four to five year schedule and expire ten years
after the date of grant.
During fiscal 1999, the board of directors approved a repricing of all
outstanding stock options held by the Company's employees. Under the repricing,
its employees were given the option to exchange their current stock options for
35% fewer options with an exercise price of $10 which was slightly greater than
the fair market value ($9.0625) of the Company's common stock on that date. A
total of 468,500 options formerly priced at $15.50 to $17.25 were exchanged for
304,525 options priced at $10. The new options vest 20% per year starting on the
new date of grant.
Information regarding the Plan as of January 31, is as follows:
<TABLE>
<CAPTION>
1999 1998
----------------------- -----------------------
WEIGHTED WEIGHTED
AVERAGE AVERAGE
EXERCISE EXERCISE
OPTIONS PRICE OPTIONS PRICE
- -------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Outstanding, beginning of the period 578,500 $ 15.50 560,000 $ 15.50
Granted 629,025 $ 11.75 35,000 15.50
Canceled (511,000) $ 16.01 (15,000) 15.50
Exercised -- -- (1,500) $ 15.50
- -------------------------------------------------------------------------------------------------------
Outstanding, end of year 696,525 $ 11.74 578,500 $ 15.50
=======================================================================================================
Exercisable, end of year 169,905 $ 13.23 144,500 $ 15.50
=======================================================================================================
Weighted average fair value of options granted $ 4.99 $ 6.71
=======================================================================================================
</TABLE>
Options outstanding at January 31, 1999 have exercise prices ranging from $9.06
to $15.50 and a weighted average remaining contractual life of 9.16 years.
The Company accounts for the Plan under APB Opinion No. 25, under which no
compensation cost has been recognized. Had compensation cost for the 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:
<TABLE>
<CAPTION>
(in thousands, except per share data) 1999 1998
- -------------------------------------------------------------------------------------------------------
<S> <C> <C>
Net income:
As reported $ 1,668 $ 13,251
=======================================================================================================
Pro forma $ 823 $ 12,445
=======================================================================================================
Basic and diluted net income per share:
As reported $ 0.13 $ 1.00
=======================================================================================================
Pro forma $ 0.06 $ 0.94
=======================================================================================================
</TABLE>
PAGE 29
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
In determining the pro forma compensation cost of the options granted during
fiscal 1999 and 1998, as specified by SFAS 123, the fair value of each option
grant was estimated on the date of grant using the Black-Scholes option pricing
model. The weighted average assumptions used in these calculations are
summarized below:
1999 1998
- --------------------------------------------------------------------------------
Risk free interest rate 4.99% 5.95%
Expected life of options granted 4.90 years 4.94 years
Expected volatility of options granted 44.93% 31.71%
9. 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 the Offering
described in Note 10, 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 year ended
January 31, 1997 has been determined assuming that the Company had been taxed as
a C corporation for federal and certain state income tax purposes for such
periods.
Unaudited pro forma income taxes represent the estimated income taxes that would
have been reported had the Company been a taxable entity for both federal and
state income tax purposes for the S corporation period presented. The components
of the income tax provision and pro forma income tax provision are summarized as
follows as of January 31:
PRO FORMA
(in thousands) 1999 1998 1997
- -------------------------------------------------------------------------------
Current:
Federal $ 1,425 $ 7,528 $ 3,386
State 240 1,218 979
Deferred income tax provision (benefit) (428) 410 (43)
- -------------------------------------------------------------------------------
Provision for income taxes $ 1,237 $ 9,156 $ 4,322
===============================================================================
The difference between the federal statutory rate of 34%, 35% and 34% for the
fiscal years ended January 31, 1999, 1998 and 1997, 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) 1999 1998
- -------------------------------------------------------------------------------
Accruals and other reserves $ 1,010 $ 600
Inventory 4,190 540
Compensation accruals 480 310
- -------------------------------------------------------------------------------
Net current deferred tax asset 5,680 1,450
- -------------------------------------------------------------------------------
Property and equipment (4,720) (920)
Goodwill (490) (640)
- -------------------------------------------------------------------------------
Net long-term deferred tax liability (5,210) $ (1,560)
- -------------------------------------------------------------------------------
$ 470 $ (110)
===============================================================================
PAGE 30
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
10. 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 the net proceeds of the
Offering to fund the distribution of accumulated S corporation dividends (see
Note 9), repay certain notes issued in connection with acquisitions, pay down
inventory floor plan financing, fund future acquisitions and for general
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.
The following is a summary of the Company's issued and outstanding shares of
common stock as of January 31:
1999 1998
- --------------------------------------------------------------------------------
Class A shares 5,731,008 5,731,008
Class B shares 7,450,492 7,450,492
- --------------------------------------------------------------------------------
Total shares 13,181,500 13,181,500
================================================================================
11. COMMITMENTS AND CONTINGENCIES:
OPERATING LEASES
The Company leases retail space, vehicles and rental equipment 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 $11.3 million, $6.2
million and $2.7 million for fiscal 1999, 1998 and 1997, 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)
- -------------------------------------------------
2000 $ 14,513
2001 13,337
2002 12,278
2003 9,619
2004 5,599
Thereafter 13,622
- -------------------------------------------------
Total $ 68,968
=================================================
PAGE 31
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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, Inc. agricultural
contracts. The Company has made deposits with Deere Credit Services, Inc. to
partially fund contingent liabilities which may come due. These customer notes
are collateralized by the customer-owned equipment. As of January 31, 1999, the
contingent liability and off-setting deposits are as follows:
FINANCE
GUARANTEED DEPOSITS
(in thousands) AMOUNTS RECEIVABLE
- --------------------------------------------------------------------------------
Ag Capital Company (affiliate) $ 1,006 $ --
ACL Company, LLC (affiliate) 1,526 --
Farmers Equipment Rental, Inc. (affiliate) 91 --
Deere Credit Services, Inc. 3,478 678
- --------------------------------------------------------------------------------
Total $ 6,101 $ 678
================================================================================
The Company factors certain receivables to Deere Credit Services, Inc. with
recourse which, therefore may be charged back to the Company. As of January 31,
1999, receivables with recourse totaled approximately $2.1 million.
As described in Note 2, the Company securitizes certain receivable and lease
contracts. In connection with the securitization, the Company is liable for up
to 10% of the amount of the aggregate outstanding contracts. As of January 31,
1999, recourse on contracts securitized totaled approximately $4.8 million.
MINIMUM REPURCHASE GUARANTEES
The Company has entered into 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, 1999 expire as
follows:
(in thousands)
- -------------------------------------------------
2000 $ 2,979
2001 4,637
2002 2,525
2003 2,287
2004 1,262
Thereafter 72
- -------------------------------------------------
Total $13,762
=================================================
LITIGATION
In the normal course of business, the Company is subject to various claims,
legal actions, contract negotiations and disputes. It provides for losses, if
any, in the year in which they can be reasonably estimated.
PAGE 32
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
12. RELATED-PARTY TRANSACTIONS:
The Company's summary of significant related-party transactions is as follows:
a. Ag Capital Company, 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 parties on a portion of this customer financing as summarized in
Note 11.
b. In addition, the Company has floor plan payables, notes payable and
long-term debt owed to Ag Capital Company to finance inventory, various
receivables and fixed assets as summarized in Notes 5 and 6. Interest
expense paid to related parties totaled $2.1 million, $1.1 million and $1.4
million in fiscal 1999, 1998 and 1997, respectively.
c. The Company had sales to related parties totaling $7.1 million, $10.4
million and $11.2 in fiscal 1999, 1998 and 1997, respectively. The Company
also leases certain retail space and vehicles from related parties. Total
lease expense for these leases totaled $5.9 million, $2.9 million and $1.8
million in fiscal 1999, 1998 and 1997, respectively.
d. In November 1998, the Company sold the assets of MVI, its agricultural
irrigation equipment business, to a related party. Total sales price was
approximately $5.0 million resulting in a loss of approximately $1.4
million.
13. SUPPLEMENTAL CASH FLOW DISCLOSURES:
Supplemental cash flow disclosures for the Company as of January 31 are as
follows:
<TABLE>
<CAPTION>
(in thousands) 1999 1998 1997
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Cash payments for interest $ 13,692 $ 6,610 $ 5,640
=================================================================================================================
Cash payments for income taxes $ 6,730 $ 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 $ 25,577 $ 13,798 $ 11,325
Decrease in assets related to sale of irrigation division assets
through issuance of accounts receivable and purchaser's
assumption of debt $ 5,000 $ -- $ --
=================================================================================================================
Dividends declared, accrued and unpaid $ -- $ -- $ 830
=================================================================================================================
</TABLE>
14. SEGMENT INFORMATION:
During fiscal 1999, the Company adopted Statement of Financial Accounting
Standards No. 131, "Disclosures About Segments of an Enterprise and Related
Information," which requires that companies disclose segment data based on how
management makes decisions about allocating resources to segments and measuring
their performance.
The Company's operations are classified into five business segments:
construction, agricultural, truck, rental and financial services. 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. The truck operations include the sale and service of heavy-duty trucks
to customers primarily in the transportation and construction industries. The
rental operations provide rental of construction and agricultural equipment to
customers primarily in construction and agricultural industries. The financial
services operations primarily provide financing arrangements to customers of the
Company's other business segments, as of fiscal 1999. Previously, similar income
was included in other segments.
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, and deferred income taxes. Financial services includes interest
income and interest expense in revenues and cost of revenues, respectively.
PAGE 33
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following table shows the company's business segments and related financial
information for the fiscal years 1999, 1998 and 1997:
<TABLE>
<CAPTION>
FINANCIAL
SERVICES AND
(in thousands) CONSTRUCTION AGRICULTURAL TRUCK RENTAL CORPORATE TOTAL
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
1999:
Revenues from
external customers $ 312,194 $ 157,776 $ 75,119 $ 28,547 $ 4,988 $ 578,624
Interest income 11 499 65 136 -- 711
Interest expense 6,304 3,169 819 2,846 -- 13,138
Depreciation and
amortization 2,205 959 414 5,813 1,115 10,506
Income (loss) before income
taxes and minority interest 6,346 (7,223) 1,457 555 1,905 3,040
Identifiable assets 173,441 90,951 33,638 53,924 27,266 379,220
Capital expenditures 6,211 516 511 15,942 1,721 24,901
1998:
Revenues from
external customers $ 239,327 $ 170,625 $ 6,604 $ 12,847 $ -- $ 429,403
Interest income 648 551 21 106 -- 1,326
Interest expense 3,521 1,757 141 1,445 -- 6,864
Depreciation and
amortization 1,875 774 51 2,456 152 5,308
Income before income taxes
and minority interest 12,483 8,801 464 748 -- 22,496
Identifiable assets 178,203 99,234 3,222 30,316 8,457 319,432
Capital expenditures 106 1,294 68 15,493 990 17,951
1997:
Revenues from
external customers $ 185,984 $ 116,429 $ -- $ -- $ -- $ 302,413
Interest income 507 167 -- -- -- 674
Interest expense 4,632 1,088 -- -- -- 5,720
Depreciation and
amortization 2,191 372 -- -- 43 2,606
Income before income taxes
and minority interest 5,204 5,601 -- -- -- 10,805
Identifiable assets 111,916 68,177 -- -- 1,458 181,551
Capital expenditures 2,723 871 -- -- 62 3,656
</TABLE>
PAGE 34
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
15. UNAUDITED QUARTERLY FINANCIAL DATA:
<TABLE>
<CAPTION>
(in thousands, except per share data) FIRST SECOND THIRD FOURTH TOTAL YEAR
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
FISCAL 1999:
Total revenues $ 125,945 $ 152,337 $ 150,764 $ 149,578 $ 578,624
Gross profit 23,733 30,794 15,864 28,958 99,349
Net income (loss) 2,456 4,519 (7,264) 1,957 1,668
Net income (loss) per share - basic and diluted 0.19 0.34 (0.55) 0.15 0.13
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
</TABLE>
As discussed in Note 3, the Company incurred one-time, non-recurring inventory
and restructuring charges during the third quarter of fiscal 1999. Net income
and net income per share before the inventory and restructuring charges were
$2.9 million and $0.22 per share, respectively, for the third quarter and $11.9
million and $0.90 per share, respectively, for fiscal 1999.
PAGE 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, 1999 and 1998,
and the related consolidated statements of operations, stockholders' equity and
cash flows for each of the three years in the period ended January 31, 1999.
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, 1999 and 1998, and the results of their
operations and their cash flows for each of the three years in the period ended
January 31, 1999, in conformity with generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Minneapolis, Minnesota,
March 17, 1999
PAGE 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 quarterly high and low reported sales
prices on the New York Stock Exchange during the Company's two most recent
fiscal years were:
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER
FISCAL 1999
High $19.38 $17.63 $13.88 $ 9.56
Low $14.63 $13.75 $ 7.63 $ 7.13
FISCAL 1998
High $18.63 $25.25 $23.38 $22.00
Low $14.88 $15.38 $21.50 $16.00
As of April 9, 1999, the Company had 163 record holders and approximately 3,450
beneficial holders of its Class A Common Stock, and one holder of its Class B
Common Stock.
PAGE 38
Exhibit 21.1
SUBSIDIARIES
<TABLE>
<CAPTION>
Name Under Which
Subsidiary State of Incorporation Subsidiary Does Business
- ---------- ---------------------- ------------------------
<S> <C> <C>
Hall GMC, Inc. North Dakota Corporate Name
(85% owned)
Hall Truck Center, Inc. North Dakota Corporate Name
(85% owned)
Minnesota Valley Irrigation, Inc. Minnesota Corporate Name
(100% owned) (inactive)
RDO Financial Services Co. North Dakota Corporate Name
(100% owned)
RDO Material Handling Co. Minnesota Corporate Name
(100% owned)
RDO Rental Co. Minnesota Corporate Name
(80% owned)
RDO Truck Center Co. North Dakota Corporate Name
(100% owned)
Salinas Equipment Distributors, Inc. California Corporate Name
(89% owned)
</TABLE>
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,
April 28, 1999
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
YEAR ENDED JANUARY 31, 1999
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> JAN-31-1999
<PERIOD-START> FEB-01-1998
<PERIOD-END> JAN-31-1999
<CASH> 51
<SECURITIES> 0
<RECEIVABLES> 64,046
<ALLOWANCES> 1,616
<INVENTORY> 208,368
<CURRENT-ASSETS> 278,117
<PP&E> 84,818
<DEPRECIATION> 21,116
<TOTAL-ASSETS> 379,220
<CURRENT-LIABILITIES> 241,378
<BONDS> 28,055
0
0
<COMMON> 132
<OTHER-SE> 102,606
<TOTAL-LIABILITY-AND-EQUITY> 379,220
<SALES> 578,624
<TOTAL-REVENUES> 578,624
<CGS> 479,275
<TOTAL-COSTS> 479,275
<OTHER-EXPENSES> 83,882
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 13,138
<INCOME-PRETAX> 3,040
<INCOME-TAX> 1,237
<INCOME-CONTINUING> 1,803
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,668
<EPS-PRIMARY> 0.13
<EPS-DILUTED> 0.13
</TABLE>
