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U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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Form 40-F
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(Check One)
[ ] Registration statement pursuant to Section 12 of the
Securities Exchange Act of 1934
or
[X] Annual report pursuant to Section 13(a) or 15(d) of the
Securities Exchange Act of 1934
For the fiscal year ended December 31, 1998 Commission
File Number 001-13475
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RITCHIE BROS. AUCTIONEERS INCORPORATED
(Exact Name of Registrant as Specified in Its Charter)
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NOT APPLICABLE CANADA NOT APPLICABLE
(Translation of Registrant's (Province or Other (I.R.S. Employer
Name Into English (if Jurisdiction of Identification Number (if
Applicable) Incorporation or Applicable)
Organization)
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7389
(Primary Standard Industrial Classification Code Number (if Applicable)
9200 BRIDGEPORT ROAD, RICHMOND, BRITISH COLUMBIA V6X 1S1 (604) 273-7564
(Address and Telephone Number of Registrant's Principal Executive Offices)
LAWCO OF OREGON, INC. 1211 S.W. FIFTH AVENUE, SUITE 1500, PORTLAND, OREGON
97204-3715 (503) 727-2000
(Name, Address (Including Zip Code) and Telephone Number (Including Area Code)
of Agent For Service in the United States)
Securities registered or to be registered pursuant to Section 12(b) of the
Act:
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TITLE OF EACH CLASS NAME OF EACH EXCHANGE ON WHICH REGISTERED
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Common Shares............................. New York Stock Exchange
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Securities registered or to be registered pursuant to Section 12(g) of the
Act:
NOT APPLICABLE
(Title of Class)
Securities for which there is a reporting obligation pursuant to Section
15(d) of the Act:
NOT APPLICABLE
(Title of Class)
For annual reports, indicate by check mark the information filed with this
Form:
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[X] Annual information form [X] Audited annual financial statements
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Indicate the number of outstanding shares of each of the issuer's classes
of capital or common stock as of the close of the period covered by the annual
report.
COMMON SHARES: 16,548,666
Indicate by check mark whether the Registrant by filing the information
contained in this Form is also thereby furnishing the information to the
Commission pursuant to Rule 12g3-2(b) under the Act. If "Yes" is marked,
indicate the filing number assigned to the Registrant in connection with such
Rule.
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Yes [ ] 82- No [X]
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Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Act 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.
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Yes [X] No [ ]
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UNDERTAKING AND CONSENT TO SERVICE OF PROCESS
The Registrant undertakes to make available, in person or by telephone,
representatives to respond to inquiries made by the Commission staff, and to
furnish promptly, when requested to do so by the Commission staff, information
relating to: the securities in relation to which the obligation to file an
annual report on Form 40-F arises; or transactions in said securities.
SIGNATURES
Pursuant to the requirements of the Exchange Act, the Registrant certifies
that it meets all of the requirements for filing on Form 40-F and has duly
caused this annual report to be signed on its behalf by the undersigned, thereto
duly authorized.
RITCHIE BROS. AUCTIONEERS INCORPORATED
By: /s/ ROBERT S. ARMSTRONG
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Name: Robert S. Armstrong
Title: Corporate Secretary
Date: June 16, 1999
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EXHIBIT INDEX
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SEQUENTIALLY
EXHIBIT NO. DESCRIPTION NUMBERED PAGES
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1. Annual Information Form of the Registrant dated May 20, 1999
(which includes management's discussion and analysis for the
year ended December 31, 1998).
2. The following audited consolidated financial statements of
the Registrant, together with the independent auditors'
report dated February 26, 1999 of KPMG LLP, Chartered
Accountants:
a. Consolidated Statements of Income for the year ended
December 31, 1998, for the eight months ended December
31, 1997 and the year ended April 30, 1997.
b. Consolidated Balance Sheets as of December 31, 1998 and
1997.
c. Consolidated Statements of Shareholders' Equity for the
year ended December 31, 1998, the eight months ended
December 31, 1997 and the year ended April 30, 1997.
d. Consolidated Statements of Cash Flows for the year
ended December 31, 1998, the eight months ended
December 31, 1997 and the year ended April 30, 1997.
e. Notes to Consolidated Financial Statements (which
includes reconciliation with United States generally
accepted accounting principles).
3. Consent dated June 16, 1999 of KPMG LLP, Chartered
Accountants.
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EXHIBIT NO. 1
RITCHIE BROS. AUCTIONEERS INCORPORATED
ANNUAL INFORMATION FORM FOR THE YEAR ENDED DECEMBER 31, 1998
MAY 20, 1999
RITCHIE BROS. AUCTIONEERS INCORPORATED
9200 BRIDGEPORT ROAD
RICHMOND, BRITISH COLUMBIA
CANADA V6X 1S1
(604) 273-7564
WWW.RBAUCTION.COM
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TABLE OF CONTENTS
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PAGE
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Definitions................................................. 1-3
The Company................................................. 1-4
Overview.................................................. 1-4
History and Development of the Business................... 1-5
Industry.................................................. 1-6
Competitive Advantages.................................... 1-7
Growth Strategies......................................... 1-8
Operations................................................ 1-9
Marketing and Sales....................................... 1-12
Competition............................................... 1-12
Facilities................................................ 1-13
Employees................................................. 1-14
Governmental and Environmental Regulations................ 1-14
Legal Proceedings......................................... 1-14
Selected Consolidated Financial Information................. 1-15
Five Year Summary......................................... 1-15
Segmented Information..................................... 1-16
Quarterly Summary......................................... 1-17
Dividend Policy............................................. 1-17
Management's Discussion and Analysis of Financial Condition
and Results of Operations................................. 1-18
Overview.................................................. 1-18
Results of Operations..................................... 1-20
Liquidity and Capital Resources........................... 1-21
Year 2000 Compliance...................................... 1-22
Forward-Looking Statements................................ 1-22
Market for Securities....................................... 1-23
Directors and Officers...................................... 1-23
Additional Information...................................... 1-25
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DEFINITIONS
Unless the context otherwise requires, "Ritchie Bros." or the "Company"
refers to Ritchie Bros. Auctioneers Incorporated and its predecessor entities,
either alone or together with its subsidiaries. Unless otherwise specified,
references to years are references to calendar years and references to quarters
are references to calendar quarters. All dollar amounts are denominated in U.S.
Dollars. Effective December 31, 1997, the Company changed its fiscal year end
from April 30 to December 31.
As used in this Annual Information Form,
- "auction revenues" include commissions earned from consignors through
both straight commission and gross guarantee contracts, plus the net
profit on the sale of lots purchased and sold by the Company as
principal;
- "bidder" refers to a person or company that registers to bid at an
auction;
- "buyer" refers to a person or company that makes the highest bid on a
particular lot and is therefore the purchaser of that lot;
- "Common Shares" means the common shares without par value of the
Company;
- "consignor" refers to a person or company that is selling a lot or lots
at an auction;
- "Forke" refers to Forke, Inc. and its predecessor entities, either alone
or together with its subsidiaries;
- "gross auction sales" represent the aggregate selling prices of all lots
sold at an auction or auctions; and
- "lot" refers to an item being sold at auction.
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THE COMPANY
Ritchie Bros. Auctioneers Incorporated was amalgamated on December 12, 1997
under, and is governed by, the Canada Business Corporation Act. The registered
office of the Company is located at 1300 - 777 Dunsmuir Street, Vancouver,
British Columbia, Canada V7Y 1K2. The Company's executive office is located at
9200 Bridgeport Road, Richmond, British Columbia, Canada V6X 1S1 and its
telephone number is (604) 273-7564. The Company maintains a website at
www.rbauction.com.
The following diagram illustrates the primary intercorporate relationships
of the Company and its principal operating subsidiaries:
[Intercorporate Relationships]
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Notes:
1. Ritchie Bros. Holdings Ltd. is a corporation continued under the laws of
Canada.
2. Ritchie Bros. Holdings Inc. is a corporation amalgamated under the laws of
the state of Washington, U.S.A.
3. Ritchie Bros. Auctioneers (Canada) Ltd. is a corporation incorporated under
the laws of Canada.
4. Ritchie Bros. Properties Ltd. is a corporation incorporated under the laws
of Canada.
5. Ritchie Bros. Auctioneers B.V. is a corporation incorporated under the laws
of The Netherlands.
6. Ritchie Bros. Auctioneers Limited is a corporation incorporated under the
laws of Cyprus.
7. Ritchie Bros. Auctioneers (America) Inc. is a corporation incorporated
under the laws of the state of Washington, U.S.A.
8. Ritchie Bros. Properties Inc. is a corporation incorporated under the laws
of the state of Washington, U.S.A.
OVERVIEW
Ritchie Bros. is the world's leading auctioneer of industrial equipment,
operating through more than 50 locations throughout North America, Europe, Asia,
Australia and the Middle East. The Company sells, through public auctions, a
broad range of used industrial equipment, including equipment used in the
construction, transportation, mining, forestry, petroleum and agricultural
industries. In its 36 years of operation, Ritchie Bros. has auctioned over $8.5
billion worth of equipment in over 1,750 auctions in 16 countries. In 1998, the
Company sold over $1 billion worth of industrial equipment.
Ritchie Bros. conducts its auctions on an unreserved basis. There are no
minimum prices and consignors are not permitted to bid on their own equipment or
in any way artificially affect selling prices. Every item is sold to the highest
bidder on the day of the auction.
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The Company's worldwide marketing efforts and reputation for conducting
fair auctions, together with the fact that it does not charge buyers' premiums,
enable Ritchie Bros. to attract a broad international base of customers to its
auctions, thereby providing a global marketplace that can transcend local market
conditions. Management believes that the Company's reputation and leading market
position, as well as the breadth and international composition of the customers
at Ritchie Bros.' auctions, result in a greater volume of consigned equipment
and higher gross auction sales than in other auction venues.
Ritchie Bros.' auction business has experienced significant growth over the
last five years. During that period, the Company's gross auction sales have
grown from $567.5 million in its fiscal year ended April 30, 1994 to $1,087.8
million in its fiscal year ended December 31, 1998, representing a compound
annual growth rate of 14.9%. During the same period, the Company's annual
auction revenues have grown from $50.1 million to $94.9 million, representing a
compound annual growth rate of 14.7%.
HISTORY AND DEVELOPMENT OF THE BUSINESS
Ritchie Bros. held its first major industrial auction in 1963, selling over
$600,000 worth of construction equipment in Radium, British Columbia. The
success of this auction prompted Ken, John and Dave Ritchie to focus their
attention on industrial auctions. While the Company's early auction sales were
held primarily in Western Canada, Ritchie Bros. expanded eastward through the
1960s.
By 1970, the Company had established operations in the U.S. and held its
first U.S. sale in Beaverton, Oregon. Throughout the 1970s and 1980s, additional
auctions were held across Canada and in an increasing number of American states.
In 1987, the Company held its first European auctions, in Liverpool and
Rotterdam. Ritchie Bros.' first Australian auction was held in 1990. This was
followed by expansion into Asia and subsequent sales in Hong Kong, Japan, the
Philippines and Thailand. The Company held its first Mexican auction in 1995 and
its first Middle Eastern auction, in Dubai, in 1997. By the end of 1998, Ritchie
Bros. had conducted over 1,750 auctions in 16 countries.
In 1994, Ritchie Bros. introduced its prototype auction facility, opening
new permanent auction sites in Fort Worth, Texas and Olympia, Washington that
represented significant improvements over the facilities being used at the time
by equipment auctioneers. The Company has since constructed similar buildings in
various locations in Canada, the U.S., Europe and Australia.
The Company has always used available technologies to augment its live
auctions and enhance customer service. Ritchie Bros. maintains a website at and
has been active on the internet since 1996 when it introduced its first website
as a marketing tool, allowing the Company to communicate with international
customers who otherwise would not have timely access to auction information. The
Company's current website provides customers with a wide range of features in
multiple languages, giving customers current information about the equipment
consigned to Ritchie Bros. auctions. The site also facilitates internet-based
absentee bidding, on-line consignments and the ability to broadcast live
auctions.
In March 1998, Ritchie Bros. completed its initial public offering (the
"IPO") of Common Shares, selling 3,335,000 Common Shares at $17.00 per share.
The Company allocated the net proceeds of approximately $54.0 million to the
acquisition and development of additional permanent auction sites, the
replacement or upgrade of certain existing permanent sites and general corporate
purposes. Ritchie Bros.' Common Shares trade on the New York Stock Exchange
under the ticker symbol "RBA."
On April 1, 1999, Ritchie Bros. completed the acquisition (the "Forke
Acquisition") of the industrial auction business of Forke, a major auctioneer of
industrial equipment that operated primarily in the United States. Consideration
paid to Forke consisted of $25.0 million in cash, 100,000 Common Shares and
warrants to acquire 400,000 Common Shares prior to April 1, 2001 at an exercise
price of $26.69 per share. In related transactions, Ritchie Bros. has acquired
an office building in Nebraska and has agreed to acquire land, buildings and
other tangible assets, subject to satisfactory completion of customary due
diligence. The office building and these other assets are being acquired for a
combined purchase price of $12.4 million. These potential acquisitions include
permanent auction sites in Albuquerque, New Mexico; Statesville, North Carolina;
and Ocala, Florida. Assuming completion of these real property acquisitions, and
after the planned
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opening of additional permanent auction sites in Rotterdam, The Netherlands
(which will replace an existing regional auction unit), Morris (near Chicago),
Illinois and Perris (near Los Angeles), California, the Company expects to be
operating 17 permanent auction sites and five regional auction units.
INDUSTRY
Ritchie Bros. operates in the auction segment of the used equipment
marketplace. Management believes that of the approximately $1 trillion of used
industrial equipment in existence worldwide, an estimated $100 billion of used
equipment changes ownership each year. Of this total, only a fraction is
currently traded through auctions, with the majority being sold directly or
through dealers and brokers. The international used equipment market includes
both mobile and stationary equipment, trucks and trailers produced by
manufacturers such as Case, Caterpillar, Hitachi, Ingersoll Rand, John Deere,
Kenworth, Komatsu, Mack and Volvo for the construction, mining, forestry,
petroleum, agriculture and transportation industries, among others. Examples of
industrial equipment include crawler tractors, excavators, loader backhoes and
wheel loaders. Much of the equipment can be used in multiple industries and in
diverse geographic locations.
Growing Market for Used Industrial Equipment. The international used
industrial equipment market has experienced substantial growth in recent years
as a result of the following factors:
- An increasing, cumulative supply of used equipment, as a result of the
substantial ongoing production of new industrial equipment by the major
manufacturers.
- Rising turnover rates among equipment owners and sales of idle or
underutilized equipment, resulting from the increase in the size of
rental fleets as well as the global trends toward outsourcing and
reducing investment in capital assets.
- Growing demand for used industrial equipment caused by increased
infrastructure expenditures in emerging markets and worldwide economic
growth.
- Increasing preference of equipment users to purchase high quality used
equipment instead of purchasing new equipment at a higher initial cost,
particularly in times of economic uncertainty.
Growth of the Auction Segment of the Used Industrial Equipment Market. The
industrial equipment auction market has grown rapidly in recent years, as
evidenced by the Company's own gross auction sales having more than doubled over
the last six years. Management believes that auctions represent an increasingly
important distribution channel for industrial equipment for the following
reasons:
- The ability of auctioneers to market a wide range of equipment and
related assets and therefore offer a comprehensive service to buyers and
sellers.
- The increasing preference of sellers to access the auction marketplace
in order to achieve a sale quickly and to maximize proceeds.
- The ability of auctioneers to deliver high net proceeds on the sale of
equipment.
- The convenience of the auction marketplace to buyers, who often want to
purchase many different types of equipment produced by different
manufacturers.
- The increasing acceptance of the auction method of buying and selling
all manner of goods, due in part to the recent high profile of internet
auction companies.
Attractiveness of Industrial Equipment Auction Market. In addition to the
growth of both the used equipment market and the auction segment of that market,
management believes that there are certain compelling characteristics of the
industrial equipment auction business model:
- The industrial equipment auction business is relatively insulated from
cyclical economic trends. In many cases, economic fluctuations or
downturns can lead to increased levels of used equipment for
consignment, and in greater demand for used, rather than new, equipment.
For example, Ritchie Bros.' gross auction sales increased during the
economic recessions of the 1980's and 1990's.
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- Industrial equipment auctioneers typically are not restricted to selling
lines of equipment provided by a particular manufacturer or manufactured
for a particular industry, or to holding auctions in particular
geographic regions. As a result, auction companies can respond quickly
to changing market forces and address a variety of customer demands.
- The industrial equipment auction business is not capital intensive and
auction companies do not bear the risks associated with holding
inventory over extended periods.
- The industrial equipment auction industry is generally fragmented and
Ritchie Bros. is the only participant that conducts auctions on a global
scale.
- Used industrial equipment is well-suited to the auction method of buying
and selling because items of used equipment cannot be valued on a
commodity basis. The unreserved auction method gives buyers and sellers
confidence that the equipment has traded for a fair market price.
COMPETITIVE ADVANTAGES
Ritchie Bros. has several key strengths that provide distinct competitive
advantages. Management believes that these advantages have enabled the Company
to attract an increasing number of consignors and bidders to its auctions,
thereby achieving significant and profitable growth.
Reputation for Conducting Only Unreserved Auctions. Management believes
that the Company's highly publicized commitment to fair dealing and the
unreserved auction process is a key contributor to the Company's growth and
success. All Ritchie Bros. auctions are unreserved, meaning that there are no
minimum prices; each and every item is sold to the highest bidder on the day of
the auction. Each consignor is prohibited by contract from bidding on its own
consigned items at the auction or in any way artificially affecting the auction
result. In addition, the Company adheres to a policy prohibiting it from
artificially affecting the auction result by bidding on any items being
auctioned. Each bidder has confidence that if he or she makes the highest bid
for an item, even if that bid is less than the item's anticipated sale price,
the item will be sold to that bidder. Management believes that Ritchie Bros.'
reputation for conducting only unreserved auctions is a major reason why bidders
are willing to travel to a Ritchie Bros. auction, making the Company's
commitment to the unreserved auction method a significant competitive advantage.
Ability to Transcend Local Market Conditions. Ritchie Bros. markets each
auction to a global customer base of potential bidders. Because bidders are
willing to travel between regions and countries in order to attend Ritchie
Bros.' auctions, consignors have confidence that they will receive the world
market price for their equipment. Due to the Company's ability to attract a
global bidding audience, the market conditions of the local region do not
necessarily dictate the results of its auctions. Approximately 25% of Ritchie
Bros.' gross auction sales for its fiscal year ended December 31, 1998
represented purchases by bidders from countries outside of the country in which
the auction was held. Depending on the location of the auction, buyers from
outside the auction area may account for 50% or more of the gross auction sales
at a Ritchie Bros. auction. Management believes that this breadth of
participants generally enables Ritchie Bros. to transcend local market
conditions and to sell equipment at world market prices.
International Scope. Ritchie Bros. has substantial expertise in marketing,
assembling and conducting auctions in new international markets. The Company has
experience in currency exchange risk management, import and export regulatory
issues, local political and economic issues, licensing and other regulatory
requirements, and cultural and business traditions in the international markets
in which it operates. Ritchie Bros. has conducted auctions in 16 countries and
regularly holds auctions in North America, Europe, Asia, Australia and the
Middle East.
Proprietary Databases. Ritchie Bros. maintains sophisticated databases
containing information on over one million pieces of equipment sold at auctions
around the world, detailed information regarding new equipment prices, and
updated listings of stolen equipment. These databases and the Company's
centrally-controlled appraisal process gives the Company the confidence to offer
consignors gross guarantee and outright purchase contracts and enables the
Company to manage the risks associated with such contracts. Together with the
Company's unique and comprehensive information regarding the flow of equipment
coming to
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market, these databases give Ritchie Bros. the opportunity to identify market
trends and develop marketing initiatives in response to those trends.
The Company also maintains a proprietary customer information database
containing information regarding potential bidders. This database contains
detailed information on over 250,000 active customers from over 160 countries,
including each customer's auction attendance, trade association memberships,
buying and travel habits and sales tax and banking information. This database
allows the Company to identify potential customers that might be interested in
the equipment being sold at any particular auction.
Size and Financial Resources. Ritchie Bros. is the largest company in the
highly fragmented industrial equipment auction market. Based upon an industry
source that reports sales by companies in the construction equipment segment of
the industrial equipment auction market, the reported gross auction sales of
Ritchie Bros. in 1998 in that segment exceeded the combined gross auction sales
of the other 31 reported auctioneers (excluding Forke) and exceeded four times
the gross auction sales of the next largest auctioneer (excluding Forke).
Although the Company is not relying on such industry source as an expert, the
Company believes that the information provided is reliable. In addition to its
strong market position, the Company also has the financial resources to offer
gross guarantee and outright purchase contracts, invest in new technologies and
expand into new markets. Management believes that these are significant
competitive advantages.
Dedicated and Experienced Workforce. Ritchie Bros.' dedicated and
motivated employees are an important strength of the Company. Including the 42
former Forke staff members who have joined Ritchie Bros. in connection with the
Forke Acquisition, the Company has 420 full-time employees. Of the Company's 188
sales and managerial employees, 55 have been with the Company (or Forke) for
over 10 years and an additional 33 have been with the Company (or Forke) for
over five years. All employees participate in a performance bonus plan tying
their overall compensation to corporate and personal performance, and none are
compensated on a commission basis. In addition, key employees have a substantial
equity stake in the Company. With an average of 19 years of experience in the
business, the 19 senior regional and head-office managers who comprise the
Ritchie Bros. Management Advisory Committee offer unique expertise and
commitment to the Company.
GROWTH STRATEGIES
Ritchie Bros. intends to continue its growth primarily by moving into new
areas in stages, committing to markets and regions that the Company has already
explored, developed and in which the Company expects to be profitable.
Management has successfully implemented this conservative approach to growth for
36 years. Some of the key elements of Ritchie Bros.' growth strategy are
highlighted below.
Enhance Profitability through the Application of the Company's Growth
Model. At the core of Ritchie Bros' internal growth strategy is a five-stage
approach for developing permanent auction sites. The first stage is to identify
the home markets for buyers who travel to Ritchie Bros. auctions. Second, an
auction is held at a temporary "off-site" location in that region with the
intention of developing its consignor base in the area. Third, a modest local
sales office is established and staffed with one or more territory managers.
These full-time Ritchie Bros. representatives are tasked with developing the
territory, organizing more off-site auctions and sourcing equipment for other
regions. Generally, the fourth stage, the development of a regional auction
unit, is initiated only if management believes that a minimum of $25.0 million
annual gross auction sales is achievable at the proposed site. During this
stage, land and facilities are leased, additional personnel are deployed and
auctions are held every three to six months.
The decision to move to the final stage, the development of a permanent
auction site, is usually based on anticipated annual gross auction sales of at
least $40.0 million. At this final stage, Ritchie Bros. purchases land and
constructs purpose-built facilities that include an auction theater,
administrative offices and other conveniences which are generally not available
at off-site and regional facilities. In addition to enhancing the Company's
corporate profile in the region and drawing more buyers, permanent sites
typically generate higher net income than locations at previous stages of
development. At a permanent auction site, territory managers can concentrate on
signing up equipment and servicing customers, instead of spending time
connecting phone and power lines, arranging for temporary permits and other
infrastructure related tasks. By establishing itself
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in its local markets and by holding frequent and regularly scheduled auctions at
its permanent sites, the Company is able to enhance its profitability.
The Company is currently proceeding with several specific projects, in each
case developing a new permanent auction site as a replacement for a regional
auction unit. In June 1999, the Company will be opening its new site in The
Netherlands. In the fall of 1999, the Company expects to open new sites in
Morris (near Chicago), Illinois and Perris (near Los Angeles), California. In
the first half of 2000, the Company expects to open a new site in Montreal,
Quebec. The Company recently chose to not renew its lease for its regional
auction unit in the Philippines and is currently in negotiations for an
alternate site in a superior location that will enable Ritchie Bros. to better
serve the Asian market.
The Company's strategic focus is on following its model of internally
generated growth rather than on pursuing acquisitions; however, it is willing to
consider acquisition opportunities provided they fit with the Company's overall
growth strategy.
Expand into New Geographic Markets. The Company intends to continue the
geographic expansion of its operations by (i) establishing additional auction
operations in markets where it has developed a strong long-term presence, such
as parts of the United States and Canada; (ii) increasing its presence in newer
markets, such as Europe, Asia, Australia and the Middle East, where it has begun
to develop significant business; and (iii) entering new markets such as South
America and Africa. Regions outside North America represent the majority of the
global marketplace for used industrial equipment and management believes that
these markets offer significant growth opportunities for Ritchie Bros. The
success of the Company's auctions in diverse countries such as Australia,
Germany, Hong Kong, Italy, Japan, Mexico, The Netherlands, The Philippines and
the United Arab Emirates demonstrates the Company's ability to adapt its
operations to, and successfully compete in, new international markets.
Management believes that the Company's experience and demonstrated success in
developing new geographic markets, its established international base of
customers and its reputation as the world's leading industrial equipment
auctioneer will provide significant advantages to the Company in its efforts to
expand into new territories.
Expand into New Auction Market Segments. Ritchie Bros. will continue to
assess possible opportunities to expand its presence in market segments that the
Company has not historically emphasized. In particular, management believes that
expansion opportunities exist in the agriculture and transportation segments of
the used equipment market. Ritchie Bros. intends to leverage its expertise,
infrastructure and reputation to generate additional business in these segments.
This lateral growth is a natural complement to the Company's traditional focus
on construction equipment and will allow Ritchie Bros. to increase revenue from
its existing permanent auction sites and regional auction units.
Utilize New Technologies. Ritchie Bros. is committed to using new
technologies to augment its live auctions, allowing customers to participate
remotely if they are unable to attend the auctions in person. While the Company
does not currently envision a migration of its business to a virtual
internet-based auction model, it recognizes that technology can be used to
enhance customer service. Ritchie Bros. maintains a website at www.rbauction.com
and has been active on the internet since 1996 when it introduced its first
website as a marketing tool, allowing the Company to communicate with
international customers who otherwise would not have timely access to
information regarding upcoming auctions.
The Company's current website was introduced in March 1999 and provides
customers with a range of features in multiple languages including on-line
auction brochures, on-line catalogs and an equipment search engine, giving
customers a wide array of current information about the equipment consigned to
Ritchie Bros. auctions. This site also offers internet-based absentee bidding,
on-line consignments and the ability to broadcast live auctions. Ritchie Bros.
has established a track record for implementing newly developed technologies to
augment and improve its auction process and the Company plans to take advantage
of additional technologies as they become available.
OPERATIONS
Ritchie Bros. auctions are conducted by employees based at the Company's
offices in North America, Europe, Asia, Australia and the Middle East. In 1998,
approximately 75% of the Company's auctions were held at permanent auction sites
or regional auction units. The remaining 25% were "off-site" auctions,
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typically held on leased or consignor-owned land. The decision of whether to
hold a particular auction at a Ritchie Bros. site or at an off-site location is
driven by the nature, amount and location of the equipment to be sold.
The Company holds over 100 auctions a year in locations around the world. A
Ritchie Bros. auction typically brings together more than 1,000 buyers and
sellers from multiple regions. In 1998, the average Ritchie Bros. auction
attracted 1,036 bidders who bid on 973 lots selling for an average of $10,500
per lot and a total of $10.2 million per auction. Every Ritchie Bros. auction,
regardless of location, is conducted in a consistent manner so that bidders from
one country are comfortable attending an auction in another country.
In 1994, the Company developed a specialized auction site design as a model
for its permanent sites. To date, this model has been used to construct sites in
Fort Worth, Texas; Olympia, Washington; Atlanta, Georgia; Toronto, Ontario;
Brisbane, Australia and Rotterdam, The Netherlands. Similar facilities are at
various stages of development in Morris (near Chicago), Illinois; Perris (near
Los Angeles), California and Montreal, Quebec. The main building on each site is
approximately 25,000 square feet including offices, covered theatre style
seating for approximately 900 bidders, an auction display area, space for bidder
registration, catering and restrooms, and meeting areas for representatives from
transportation companies, finance companies and customs brokers.
Management believes that Ritchie Bros.' auctions generally draw a larger
number of bidders than other industrial equipment auctions. The larger bidder
audience at a Ritchie Bros. auction attracts potential consignors who reason
that a large international audience of bidders competing for the same items will
result in world market prices being achieved, thereby maximizing the proceeds on
the sale of their equipment. Greater volume and selection of consigned equipment
at an auction, in turn, attracts more bidders to the auction in a process that
is self-reinforcing. The following are some of the key elements of Ritchie
Bros.' auction process:
Attracting the Bidders. The Company's customer information database
contains comprehensive and detailed information regarding potential bidders
that, in the view of management, significantly enhances the Company's ability to
effectively market its auction services. This proprietary database contains
information on over 250,000 active customers from over 160 countries including
each customer's auction attendance, trade association memberships, buying and
travel habits and sales tax and banking information. This database allows the
Company to identify which customers might be interested in the equipment being
sold at a particular auction. Prior to each auction, an average of 50,000
strategically selected customers receive full-color auction brochures for that
particular auction. In conjunction with this direct mail campaign, the Company
conducts targeted regional and industry-specific advertising and marketing
campaigns. In addition, information about all of the consigned equipment is
posted on the Ritchie Bros. web site where potential bidders can review the
information using customized search engines.
Management believes that assembling a wide selection of equipment displayed
in a central location is a critical element of a successful auction of used
equipment. The Company's carefully planned layout of the auction yard enables
bidders to evaluate and compare the equipment. Easy access to the equipment,
repair records and other relevant information allows bidders to determine the
fair value of the equipment and bid with confidence.
During 1998, Ritchie Bros. registered over 109,000 bidders, ranging from
small contractors and owner-operators to Fortune 100 companies and government
agencies. Of these bidders, 32% purchased one or more items. During this period,
no one buyer accounted for more than 1% of gross auction sales, and the top 10
represented less than 4% of gross auction sales.
Attracting the Equipment. The Company solicits equipment consignments of
any magnitude, ranging from single pieces of equipment consigned by local
owner-operators to large equipment fleets offered by multi-national consortiums
upon the completion of major construction projects. While the majority of the
Company's gross auction sales comes from items that sell for less than $100,000,
the Company also sells items with values exceeding $500,000. For consignors,
Ritchie Bros.' comprehensive services typically begin with an
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<PAGE> 11
equipment appraisal that gives the prospective consignor a reliable and credible
estimate of the value of the appraised equipment.
Ritchie Bros.' willingness to take consignment of a customer's full
equipment fleet (and all ancillary assets, including inventories, parts, tools,
attachments and construction materials), rather than only the most desirable
items, is another important service offered by Ritchie Bros. to the consignor.
During 1998, Ritchie Bros. sold equipment for over 14,000 consignors.
During this period, no one consignor accounted for more than 2% of gross auction
sales, and the top 10 represented less than 10% of gross auction sales.
Attractive Contract Options. Ritchie Bros. offers consignors several
contract options to meet their individual needs. These can include a straight
commission contract whereby the seller receives the gross proceeds on the sale
minus an agreed commission rate, as well as alternate arrangements including
guaranteed proceeds or an outright purchase of the equipment.
Straight Commission. Under a straight commission consignment, Ritchie
Bros. earns a commission based on the auction sale price of the equipment.
The commission rate is negotiated on a consignor-by-consignor basis.
Straight commission consignments typically represent approximately
two-thirds of the Company's gross auction sales (67% in 1998).
Gross Guarantee. Under this type of consignment, Ritchie Bros.
guarantees the consignor a minimum level of gross sale proceeds, regardless
of the actual results of the auction. When the Company guarantees gross
proceeds, it earns a commission on the guaranteed amount and typically
participates in a negotiated percentage of any proceeds in excess of the
guaranteed amount. If auction proceeds are less than the guaranteed amount,
the Company would not earn its full commission or, if sufficiently lower,
the Company would incur a loss.
Outright Purchase. Under the outright purchase method, Ritchie Bros.
purchases the equipment from the consignor and then auctions the equipment
as principal.
Ritchie Bros.' commission structure reflects the degree of risk assumed by
the Company with respect to the equipment being sold. In general, lower
commissions are charged for straight commission sales than for gross guarantee
sales. In the case of outright purchases, pricing takes into account the risk of
ownership that is assumed by the Company. Management believes that the Company's
ability to offer these alternatives is a significant competitive advantage that
helps the Company promote the unreserved auction method of buying and selling
used equipment and, in particular, the use of Ritchie Bros. auctions.
Occasionally, the Company advances to consignors a portion of the estimated
auction proceeds prior to the auction. The Company generally makes such advances
only after taking possession of the equipment and upon receipt of a security
interest in the equipment to secure the obligation.
Value-Added Services. Ritchie Bros. provides a wide array of services to
make the auction process convenient for buyers and sellers of equipment:
- Ritchie Bros. personnel perform extensive title searches on the
equipment consigned and the Company warrants free and clear title on
each piece of equipment that it sells.
- Equipment being offered at the auction is available for inspection by
prospective buyers or their representatives prior to the auction and
service records are made available for inspection. Where possible,
prospective buyers are put in touch with the consignors so that bidders
can conduct their own investigations before bidding.
- Regular customers are invited to become "Express Bidders" and thereby
benefit from expedited check-in procedures. Additional privileges are
extended to the Company's largest customers.
- To assist bidders with their prospective purchases, Ritchie Bros.
arranges for representatives of finance companies, transportation
companies, customs brokerages and other service providers to be present
at the auction site.
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<PAGE> 12
- Where relevant, translation services are provided and in some cases, the
auctioneer's current "ask" number is displayed on large screens (in
multiple currencies, if necessary).
- A reception is typically held on the evening before the auction to give
customers a chance to network among themselves and meet various Company
representatives.
- The Company contracts with selected painters and other trade service
providers at each of its auction sites and often provides facilities for
on-site cleaning and refurbishment of equipment.
- Ritchie Bros. handles all marketing, the collection and disbursement of
auction proceeds and the coordination of payments to lienholders.
- The Company arranges for on-site catering, public telephones and other
services.
MARKETING AND SALES
Since the IPO, Ritchie Bros.' marketing and sales force has grown from 124
regional and territory managers to 157, including additions related to the Forke
Acquisition. These representatives are deployed by geographic region around the
world. Each territory manager is primarily responsible for the development of
customer relationships and solicitation of consignments in the manager's region.
Each territory manager is also involved in the appraisal and proposal
presentation process. To encourage global teamwork and superior customer
service, none of the Company's employees is paid a commission. Territory
managers, and all other Ritchie Bros. employees, are compensated by a
combination of base salary and performance bonus.
In support of Ritchie Bros. territory managers, the Company follows a dual
marketing strategy, promoting both Ritchie Bros. and the auction industry in
general, and marketing specific auctions. The dual strategy is designed to
attract both consignors and bidders. These advertising and promotional efforts
include the use of trade journals and magazines and attendance at numerous trade
shows held around the world. The Company also participates in international,
national and local trade associations. The auction specific advertising consists
of the production and mailing of full color pictorial auction brochures to a
targeted selection from the Company's proprietary database of over 250,000
active customers. Trade journal, newspaper, radio and television advertising
augment the effort. In addition, the Company's website is updated daily by the
addition of major items committed that day to upcoming auctions, and gives
customers access to auction brochures, catalogs and other marketing materials.
In addition to regional marketing through its territory managers, the
Company markets through its national accounts team to large national customers,
typically consisting of major equipment owners (such as rental companies),
manufacturers or finance companies who have recurring, large scale equipment
disposition requirements in various regions and countries and can therefore
benefit from Ritchie Bros.' international network of auction sites.
Building strong name recognition throughout its target markets is an
important part of the Company's marketing program. Accordingly, the Company has
implemented programs to continually enhance recognition of the Ritchie Bros.
corporate name and logo through consistent design elements in its advertising,
signage, facilities and employee uniforms.
COMPETITION
Both the international used equipment market and the auction segment of
that market are highly fragmented. The Company competes for potential consignors
with other auction companies and with equipment dealers (both franchised and
independent) and brokers. When competing for potential purchasers of equipment,
the Company competes against other auction companies, equipment manufacturers,
distributors and dealers that sell new or used equipment, and equipment rental
companies.
The Company believes that the principal competitive factors in the
industrial equipment market are reputation, customer service, commission pricing
and structure, and the ability to deliver the highest net return to the
equipment seller.
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<PAGE> 13
While Ritchie Bros. is significantly larger than its largest auction
competitor, some of the equipment dealers that compete against the Company have
significantly greater financial and marketing resources and name recognition
than the Company.
FACILITIES
Ritchie Bros.' head office is located in Vancouver, Canada. The Company
also owns an office building in Lincoln, Nebraska which was acquired in
connection with the Forke Acquisition and which now serves as the Company's main
administrative office for U.S. operations.
With respect to auction sites, the Company attempts to establish sites in
industrial areas close to major cities. Although the Company leases some
temporary auction sites, the Company prefers to purchase land and construct
purpose-built facilities once it has determined that a region can generate
sufficient gross auction sales. Permanent sites generally range in size from 20
to 60 acres. The following table lists Ritchie Bros.' existing permanent sites,
sites expected to be acquired in connection with the Forke Acquisition and sites
under development:
<TABLE>
<CAPTION>
YEAR PLACED
IN SERVICE SIZE
LOCATION BY RITCHIE BROS. (ACRES) STATUS
- -------- ---------------- ------- ------
<S> <C> <C> <C>
United States
Atlanta, Georgia................ 1996..... 40
Denver, Colorado................ 1985..... 39
Fort Worth, Texas............... 1994..... 60
Houston, Texas.................. 1993..... 25
Minneapolis, Minnesota.......... 1991 29
Olympia, Washington............. 1994 26
Phoenix, Arizona................ 1987 9
Tampa, Florida.................. 1995 48 To be replaced by Ocala site being
acquired in connection with the
Forke Acquisition
Canada
Edmonton, Alberta............... 1976 25
Halifax, Nova Scotia............ 1997 26
Prince George, British 32
Columbia..................... 1980
Toronto, Ontario................ 1998 65
Vancouver, British Columbia..... 1979 8
Other
Brisbane, Australia............. 1999 42 First auction: April 20, 1999
Rotterdam, The Netherlands...... 1999 53 First auction: June 16, 1999
Sites to be Acquired in Connection with the Forke Acquisition
Albuquerque, New Mexico*........ 16
Fort Worth, Texas*.............. 27 Not expected to be used for
auctions
Ocala, Florida*................. 64 Will replace existing site in
Tampa
Statesville, North Carolina*.... 40
Sites under Development
Morris, Illinois................ 60 Expected completion: Q4 1999
Perris, California.............. 66 Expected completion: Q4 1999
Montreal, Quebec................ 60 Expected completion: Q2 2000
</TABLE>
- ---------------
* acquisition is dependent on satisfactory completion of customary due
diligence
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<PAGE> 14
Certain of these properties are subject to encumbrances granted as security
for term loans of the Company.
Following the acquisition of sites in connection with the Forke Acquisition
(noted above *) and the opening of a permanent auction site in Rotterdam (which
is replacing an existing regional auction unit), the Company expects to be
operating 17 permanent auction sites and five regional auction units. The
regional auction units, which have been conducting recurring auctions, typically
on premises that are leased on a short-term basis, are located in Baltimore,
Maryland; Chicago, Illinois; Riverside, California; Montreal, Quebec; and
Toluca, Mexico.
EMPLOYEES
The Company had 369 full-time employees at December 31, 1998. At May 20,
1999, the Company had 420 full-time employees, including 42 employees who have
joined the Company in connection with the Forke Acquisition. The Company also
employs approximately 300 employees on a recurring temporary basis in connection
with its auctions. The Company expects to increase its customer service and
auction yard employees as it expands its operations. The Company is not subject
to any collective bargaining agreements and believes that its relationships with
its employees are good.
GOVERNMENTAL AND ENVIRONMENTAL REGULATIONS
In the countries in which it operates, the Company is subject to a variety
of federal, provincial, state and local laws, rules and regulations relating to,
among other things, the auction business, imports and exports of equipment,
worker safety and the use, storage, discharge and disposal of environmentally
sensitive materials. In addition, the Company is subject to various local zoning
requirements with regard to the location of its auction sites, which vary from
location to location.
Under certain of the laws regulating the use, storage, discharge and
disposal of environmentally sensitive materials, an owner or lessee of real
estate may be liable for the costs of removal or remediation of certain
hazardous or toxic substances located on or in, or emanating from, such
property, as well as related costs of investigation and property damage. Such
laws often impose liability without regard to whether the owner or lessee knew
of, or was responsible for, the presence of such hazardous or toxic substances.
In connection with its site acquisitions, including the properties related to
the Forke Acquisition, the Company obtains Phase I environmental assessment
reports prepared by independent environmental consultants. A Phase I assessment
consists of a site visit, historical record review, interviews and reports, with
the purpose of identifying potential environmental conditions associated with
the subject property. There can be no assurance, however, that acquired or
leased sites have been operated in compliance with environmental laws and
regulations or that future uses or conditions will not result in the imposition
of environmental liability upon the Company or expose the Company to third-party
actions such as tort suits.
The Company believes that it is in compliance in all material respects with
all laws, rules, regulations and requirements that affect its business, and that
compliance with such laws, rules, regulations and requirements do not impose a
material impediment on the Company's ability to conduct its business.
LEGAL PROCEEDINGS
From time to time the Company has been, and expects to continue to be,
subject to legal proceedings and claims in the ordinary course of its business.
Such claims, even if lacking merit, could result in the expenditure of
significant financial and managerial resources. The Company is not aware of any
legal proceedings or claims that it believes will have, individually or in the
aggregate, a material adverse effect on the Company or on its financial
condition or results of operation.
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<PAGE> 15
SELECTED CONSOLIDATED FINANCIAL INFORMATION
The selected consolidated financial information presented below should be
read in conjunction with "Management's Discussion and Analysis of Financial
Condition and Results of Operations" (included elsewhere in this Annual
Information Form) and the Company's audited financial statements for the year
ended December 31, 1998. Effective December 31, 1997, the Company changed its
fiscal year end from April 30 to December 31. All dollar amounts in the table
are in thousands, except per share data.
FIVE YEAR SUMMARY
<TABLE>
<CAPTION>
EIGHT
YEAR ENDED MONTHS
DECEMBER 31, ENDED FISCAL YEAR ENDED APRIL 30,
------------------------ DECEMBER 31, -------------------------------------------------
1998 1997(1) 1997(1) 1997(1) 1996(1) 1995(1) 1994(1)
---------- ----------- ------------ ---------- ---------- ---------- ----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Auction revenues.................. $ 94,899 $ 85,009 $ 60,034 $ 72,186 $ 65,306 $ 51,326 $ 50,066
Direct expenses................... (16,010) (17,351) (13,041) (13,908) (13,138) (12,979) (11,925)
---------- ---------- ---------- ---------- ---------- ---------- ----------
78,889 67,658 46,993 58,278 52,168 38,347 38,141
Depreciation...................... (2,752) (2,548) (1,540) (2,014) (1,820) (1,708) (1,327)
General and administrative
expense......................... (39,315) (37,724) (27,414) (31,099) (26,848) (24,628) (20,801)
Employee equity participation
expense(2)...................... -- (10,346) (10,346) -- -- -- --
---------- ---------- ---------- ---------- ---------- ---------- ----------
Income from operations............ 36,822 17,040 7,693 25,165 23,500 12,011 16,013
Interest expense.................. (1,569) (2,034) (1,380) (1,081) (1,104) (1,274) (611)
Other income...................... 3,251 754 576 917 1,179 677 1,336
---------- ---------- ---------- ---------- ---------- ---------- ----------
Income before income taxes........ 38,504 15,760 6,889 25,001 23,575 11,414 16,738
Income taxes...................... (13,670) (7,438) (4,491) (5,992) (4,428) (2,975) (2,456)
---------- ---------- ---------- ---------- ---------- ---------- ----------
Net income........................ $ 24,834 $ 8,322 $ 2,398 $ 19,009 $ 19,147 $ 8,439 $ 14,282
========== ========== ========== ========== ========== ========== ==========
Net income per share
-- basic........................ $ 1.56 $ 0.65 $ 0.19 $ 1.49 $ 1.51 $ 0.66 $ 1.12
-- diluted...................... 1.54 0.64 0.18 1.49 1.51 0.66 1.12
US GAAP -- Net income(3).......... $ 24,814 $ 6,969 $ 1,045 $ 19,009 $ 19,147 $ 8,439 $ 14,282
========== ========== ========== ========== ========== ========== ==========
US GAAP -- Net income per share
-- basic........................ $ 1.56 $ 0.54 $ 0.08 $ 1.49 $ 1.51 $ 0.66 $ 1.12
-- diluted...................... 1.54 0.54 0.08 1.49 1.51 0.66 1.12
Weighted average number of shares
outstanding(4)
-- basic........................ 15,918,214 12,877,777 12,958,753 12,715,667 12,715,667 12,715,667 12,715,667
-- diluted...................... 16,116,242 12,933,701 13,042,069 12,715,667 12,715,667 12,715,667 12,715,667
BALANCE SHEET DATA (END OF
PERIOD):
Working capital (including
cash)........................... $ 49,149 $ 3,322 $ 3,322 $ 39,707 $ 33,132 $ 21,822 $ 23,900
Total assets...................... 152,593 70,460 70,460 142,858 150,969 98,621 87,802
Long term debt.................... 8,768 4,623 4,623 5,755 6,547 6,985 7,282
Total shareholders' equity........ 104,172 25,706 25,706 59,325 48,801 37,718 35,449
SELECTED OPERATING DATA:
Gross auction sales (5)........... $1,087,800 $ 946,415 $ 681,425 $ 792,865 $ 752,735 $ 634,058 $ 567,506
Auction revenues as percentage of
gross auction sales............. 8.72% 8.98% 8.81% 9.10% 8.68% 8.09% 8.82%
Number of consignors.............. 14,432 13,636 9,985 12,088 10,744 10,460 8,650
Number of buyers.................. 34,613 33,340 23,917 30,630 27,837 27,401 25,812
Number of permanent auction sites
(end of period)................. 13 13 13 13 12 11 10
</TABLE>
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<PAGE> 16
(1) For all pre-1998 periods presented, the majority of the Company's business
operations was conducted by predecessor entities that were partnerships.
Consequently, many financial statement items for or in these prior periods
are not comparable with post-1997 results. In particular, the pre-1998
balances of the following line items are not meaningful for comparative
purposes: general and administrative expense, income from operations, income
before income taxes, income taxes, net income and net income per share.
(2) Non-recurring employee equity participation expense for the periods ended
December 31, 1997 reflects grants to employees of options to purchase
196,333 Common Shares with an exercise price of $0.10 per share, and
issuances to other employees of 497,999 Common Shares at the price of $0.10
per share. These option grants and Common Share issuances were made prior to
the IPO.
(3) Net income under US GAAP for the periods ended December 31, 1997 reflects
restructuring expenses and taxes of $1.4 million incurred in connection with
a corporate reorganization (these expenses are reflected under Canadian GAAP
as reductions to shareholders' equity in the Company's consolidated
financial statements).
(4) Weighted average number of shares outstanding for all periods has been
calculated after giving retroactive effect to the 12,715,667 Common Shares
issued in connection with a corporate reorganization that was completed in
1997 as if those Common Shares had been issued at the beginning of the
earliest period presented.
(5) Gross auction sales represent the aggregate selling prices of all items sold
at Ritchie Bros.' auctions. Gross auction sales are key to understanding the
financial results of the Company, since the amount of revenues and, to a
lesser extent, certain expenses, are dependent upon them.
SEGMENTED INFORMATION
The Company's principal business activity is the sale of consignment and
self-owned equipment at auctions. This business represents a single operating
segment. In 1998, auction revenues derived from auction sales in the United
States represented 52.4% of the Company's total auction revenues.
Summarized information on the Company's activities generated by geographic
segment are as follows:
<TABLE>
<CAPTION>
UNITED STATES CANADA OTHER COMBINED
------------- ------- ------- --------
(DOLLAR AMOUNTS IN THOUSANDS)
<S> <C> <C> <C> <C>
Year ended December 31, 1998
Auction revenues.............................. $49,747 $16,105 $29,047 $ 94,899
Identifiable assets........................... 73,045 21,850 57,698 152,593
Year ended December 31, 1997 (Unaudited)
Auction revenues.............................. 44,615 16,095 24,299 85,009
Identifiable assets........................... 53,441 2,357 14,662 70,460
Eight months ended December 31, 1997
Auction revenues.............................. 32,254 13,664 14,116 60,034
Identifiable assets........................... 53,441 2,357 14,662 70,460
Year ended April 30, 1997
Auction revenues.............................. 36,845 16,910 18,431 72,186
Identifiable assets........................... 82,045 27,650 33,163 142,858
</TABLE>
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<PAGE> 17
QUARTERLY SUMMARY (UNAUDITED)
(dollar amounts in thousands, except per share data)
<TABLE>
<CAPTION>
NET INCOME
PER SHARE
GROSS AUCTION AUCTION ---------------
PERIOD SALES REVENUE NET INCOME BASIC DILUTED
- ------ ------------- ------- ---------- ----- -------
<S> <C> <C> <C> <C> <C>
1998
1st quarter.......................... $ 227,637 $21,229 $ 3,377 $0.24 $0.24
2nd quarter.......................... 339,219 29,188 8,492 0.51 0.51
3rd quarter(1)....................... 183,633 13,869 2,004 0.12 0.12
4th quarter.......................... 337,311 30,613 10,961 0.66 0.65
---------- ------- ------- ----- -----
$1,087,800 $94,899 $24,834 $1.56(2) $1.54(2)
========== ======= ======= ===== =====
1997(3)
1st quarter.......................... $ 146,915 $13,710
2nd quarter.......................... 329,700 30,525
3rd quarter.......................... 163,455 15,629
4th quarter.......................... 306,345 25,145
---------- -------
$ 946,415 $85,009
========== =======
</TABLE>
- ---------------
(1) Net income for the third quarter of 1998 includes non-recurring income of
$1.2 million or $0.07 per share.
(2) Net income per share on a full year basis does not equal the sum of the
quarterly amounts because the number of Common Shares outstanding changed
significantly in March 1998 when the Company completed its IPO.
(3) Represents calendar quarters in the unaudited twelve-month period ended
December 31, 1997. Net income and net income per share amounts for the
twelve-month period ended December 31, 1997 are not meaningful for
comparative purposes (see "Management's Discussion and Analysis of Financial
Condition and Results of Operations").
DIVIDEND POLICY
The declaration and payment of dividends on the Common Shares will be
subject to the discretion of the Board of Directors and the retention of
sufficient cash to fund the Company's growth initiatives. Because Ritchie Bros.
is a holding company with no material assets other than the shares of its
subsidiaries, its ability to pay dividends on the Common Shares is dependent on
the income and cash flow of its subsidiaries. No financing agreements to which
the subsidiaries of Ritchie Bros. are party currently restrict those
subsidiaries from paying dividends to Ritchie Bros. The Company has not declared
or paid any dividends on the Common Shares since its IPO.
1-17
<PAGE> 18
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The following is substantially as was included in the Company's 1998 Annual
Report which was published and distributed to the Company's shareholders on
March 31, 1999. Certain statements made in this section relating to the Forke
Acquisition have been updated from statements included in the Annual Report and
certain other statements are superceded by statements contained elsewhere in
this Annual Information Form.
OVERVIEW
The following discussion summarizes the significant factors affecting the
consolidated operating results and financial condition of Ritchie Bros.
Auctioneers Incorporated ("Ritchie Bros." or the "Company") for the year ended
December 31, 1998 compared to the twelve months ended December 31, 1997. This
discussion should be read in conjunction with the consolidated financial
statements and notes thereto included herein. The Company prepares its
consolidated financial statements in accordance with generally accepted
accounting principles in Canada which, except as set out in note 9 to the
consolidated financial statements, results in materially consistent financial
position and results of operations to that which would be reported under
generally accepted accounting principles in the United States. Amounts discussed
below are based on consolidated financial statements prepared in accordance with
Canadian accounting principles.
Effective December 31, 1997, the Company changed its fiscal year end from
April 30 to December 31. The financial results for the year ended December 31,
1998 represent the first full fiscal year on the basis of the Company's new
reporting year. The financial results for the transition period from May 1, 1997
to December 31, 1997 are also reported in the consolidated financial statements.
Results for the transition period are not necessarily indicative of operations
for a full year.
For comparative information purposes, unaudited consolidated statements of
income and cash flows prepared by management are presented for the twelve-month
period ended December 31, 1997. Such information reflects all adjustments that
are, in the opinion of management, necessary to reflect a fair presentation of
the results of operations for such period. The discussion that follows compares
the audited results for the year ended December 31, 1998 to the unaudited
results for the twelve months ended December 31, 1997. The Company believes that
this approach provides readers with the most meaningful information.
Ritchie Bros. is the world's leading auctioneer of industrial equipment,
operating through over 50 locations, including 13 permanent auction sites and 8
regional auction units, in 14 countries in North America, Europe, Asia,
Australia and the Middle East. The Company sells, through unreserved public
auctions, a broad range of used equipment, including equipment utilized in the
construction, transportation, mining, forestry, petroleum and agricultural
industries.
Gross auction sales represent the aggregate selling prices of all items
sold at Ritchie Bros. auctions during the periods indicated. Gross auction sales
are key to understanding the financial results of the Company, since the amount
of auction revenues and to a lesser extent, certain expenses, are dependent on
it. Auction revenues include commissions earned as agent for consignors through
both straight commission and gross guarantee contracts, plus the net profit on
the sale of equipment purchased and sold by the Company as principal. Under a
gross guarantee contract, the consignor is guaranteed a minimum amount of
proceeds on the sale of its equipment. When the Company guarantees gross
proceeds, it earns a commission on the guaranteed amount and typically
participates in a negotiated percentage of proceeds, if any, in excess of the
guaranteed amount. If auction proceeds are less than the guaranteed amount, the
Company's commission would be reduced, or, if sufficiently lower, the Company
would incur a loss. Auction revenues are reduced by the amount of any losses on
gross guarantee consignments and sales by the Company as principal. Auction
revenues also include interest income earned that is incidental to the auction
business.
The Company's gross auction sales and auction revenues are affected by the
seasonal nature of the auction business. Gross auction sales and auction
revenues tend to increase during the second and fourth
1-18
<PAGE> 19
calendar quarters during which the Company generally conducts more auctions than
in the first and third calendar quarters.
The Company's gross auction sales and auction revenues are also affected on
a period-to-period basis by the timing of major auctions. In newer markets where
the Company is developing operations, the number and size of auctions and, as a
result, the level of gross auction sales and auction revenues, is likely to vary
more dramatically from period to period than in the Company's established
markets where the number, size and frequency of the Company's auctions are more
consistent. Finally, economies of scale are achieved as the Company's operations
in a region mature from conducting intermittent auctions, establishing a
regional auction unit, and ultimately to developing a permanent auction site.
Economies of scale are also achieved when the size of the Company's auctions
increases.
The Company is aware of potential restrictions that may affect the ability
of equipment owners to transport certain equipment between some jurisdictions.
Management believes that these potential restrictions have not had a significant
impact on the Company's business, financial condition or results of operations
to date. However, the extent of any future impact on the Company's business,
financial condition or results of operations from these potential restrictions
cannot be predicted at this time.
Income taxes reported in periods prior to the completion of a corporate
reorganization in December 1997 are not indicative of taxes that would normally
be incurred on reported income. Prior to the reorganization, the majority of
Ritchie Bros.' business operations was carried on by predecessor entities to the
Company that were partnerships.
Consequently, most of the income of the predecessor partnerships was
included for income tax purposes in the income of the partner entities, many of
which were not predecessor entities to the Company. As a result of the
reorganization, the Company is subject to income taxation in all relevant
jurisdictions.
Prior to the reorganization the Company's general and administrative
expense fluctuated significantly from period to period, primarily as a result of
the amount and timing of profit distributions paid as bonuses to certain of the
beneficial owners of the Company's predecessor entities. During this period,
certain other beneficial owners were remunerated through profit distributions
that did not result in charges against the Company's income. The differences in
timing, magnitude and characterization of remuneration affect the comparability
of general and administrative expense between 1997 and 1998.
On April 1, 1999, Ritchie Bros. acquired the auction business of Forke,
Inc. ("Forke"), a major auctioneer of industrial equipment headquartered in
Lincoln, Nebraska. Whereas Ritchie Bros. operates through over 50 locations
throughout North America, Europe, Asia, Australia and the Middle East, Forke
operated primarily in the United States. Forke had been conducting industrial
auctions since 1921 and pioneered the industrial auction business in the United
States. In related transactions, the Company has acquired an office building in
Nebraska and has entered into agreements to acquire four permanent auction sites
in Florida, North Carolina, Texas and New Mexico, subject to satisfactory
completion of customary due diligence. The Company did not acquire Forke's
equipment finance business. To acquire Forke's auction business, the Company
paid cash of $25 million, issued 100,000 common shares of the Company, and
granted warrants to acquire 400,000 common shares of the Company at an exercise
price of $26.69 per share. To acquire the four permanent auction sites and the
office building referred to above, and certain other tangible assets, the
Company has agreed to pay $12.4 million. The Company is financing these
transactions substantially with a term loan facility. The Company expects that
the Forke transaction will give rise to incremental operating costs commencing
April 1, 1999. Incremental gross auction sales and auction revenues are not
expected to commence until July 1999. These incremental amounts are expected to
be material, but the actual amounts are unknown as they will be dependent, in
part, on the productivity of the new employees.
Although the Company cannot accurately anticipate the future effect of
inflation, inflation historically has not had a material effect on the Company's
operations.
1-19
<PAGE> 20
RESULTS OF OPERATIONS
AUCTION REVENUES
Auction revenues of $94.9 million for the year ended December 31, 1998
increased by $9.9 million, or 11.6%, from the twelve months ended December 31,
1997 due to increased gross auction sales, partially offset by a marginally
lower average percentage of auction revenues earned by the Company on gross
auction sales. Gross auction sales of $1.088 billion for the year ended December
31, 1998 increased by $141.3 million, or 14.9%, from the prior period, primarily
as a result of increased gross auction sales in the United States and Europe.
Results for 1998 included significant gross auction sales for certain auctions
held by the Company in Rotterdam, The Netherlands, Fort Worth, Texas, and Dubai,
the United Arab Emirates. Auction revenues as a percentage of gross auction
sales have averaged 8.80% on a long-term basis. In 1998, the auction revenue
rate of 8.72% was fractionally lower than the long-term average and lower than
the 8.98% rate experienced in 1997. The Company's expectations with respect to
the long-term average auction revenue rate remain unchanged.
DIRECT EXPENSES
Direct expenses are expenses that are incurred as a direct result of an
auction sale being held. Direct expenses include the costs of hiring personnel
to assist in conducting the auction, lease expenses for temporary auction sites,
travel costs for full time employees to attend and work at the auction site,
security hired to safeguard equipment while at the auction site, and advertising
costs specifically related to the auction. Direct expenses decreased by $1.3
million to $16.0 million for the year ended December 31, 1998 compared to the
prior period. As a percentage of gross auction sales, direct expenses were 1.47%
for the year ending December 31, 1998, lower than the 1.83% experienced during
1997. This decrease was primarily a result of fewer but larger auctions being
held in 1998 as compared to 1997 and the related expense efficiencies arising
from conducting large auctions. As a percentage of gross auction sales, direct
expenses incurred in both periods were lower than the Company's long-term
average of 1.90%. This difference is a result of relatively more large auctions
being held by the Company during both 1998 and 1997 than in other prior periods.
The Company anticipates that it will continue to hold these large auctions and
that direct expenses as a percentage of gross auction sales will, in future
periods, be lower than the average that the Company has experienced over the
last several years.
DEPRECIATION EXPENSE
Depreciation is calculated on capital assets employed in the Company's
business, including building and site improvements, automobiles, yard equipment,
and computers. In the year ending December 31, 1998, depreciation increased
marginally from 1997, due to an increase in depreciable fixed assets. Management
anticipates that depreciation expense will increase as existing auction sites
are improved and additional permanent auction sites are acquired and developed.
GENERAL AND ADMINISTRATIVE EXPENSE
General and administrative expense ("G&A") includes employee expenses, such
as salaries, wages, performance bonuses and benefits, non-auction related
travel, institutional advertising, insurance, general office, and computer
expenses. For the year ended December 31, 1998, the Company incurred G&A of
$39.3 million. Management does not consider G&A of $37.7 million in 1997 to be
meaningful as a comparable number since the expenses incurred in 1997 reflect
results prior to the reorganization and, as a result, certain components are not
comparable on a period to period basis with the expenses incurred in 1998. See
"-- Overview". Management anticipates that G&A will increase in the future due
to an increased level of administrative infrastructure to support expansion of
the Company's operations.
EMPLOYEE EQUITY PARTICIPATION EXPENSE
Employee equity participation expense of $10.3 million incurred in the
twelve months ended December 31, 1997 related to the issuance of shares and
options to employees of the Company on a
1-20
<PAGE> 21
discounted basis pursuant to the Employee Equity Participation Program described
in note 5 to the consolidated financial statements. In 1998, no such discounted
shares or options were issued and management does not anticipate further
issuances of shares or grants of options under the Employee Equity Participation
Program.
INCOME FROM OPERATIONS
Income from operations was $36.8 million in the year ended December 31,
1998. Management does not consider the 1997 results to be meaningful as a
comparable number because certain components of G&A are not comparable on a
period to period basis, and because of the effect of the employee equity
participation expense in 1997.
INTEREST EXPENSE
Interest expense includes interest and bank charges paid on term bank debt.
Interest expense for the year ended December 31, 1998 decreased $0.4 million to
$1.6 million, compared to $2.0 million incurred in the twelve months ended
December 31, 1997. Management plans to partially finance the acquisition of
additional permanent auction sites and the Forke assets by incurring debt, which
should result in an increase in interest expense in the future.
OTHER INCOME
Other income arises from equipment appraisals performed by the Company, and
other miscellaneous sources. Other income for the year ended December 31, 1998
of $3.3 million increased by $2.5 million from 1997 due primarily to $1.8
million of non-recurring income ($1.2 million after giving effect to income tax)
during 1998. This non-recurring income was generated primarily as a result of a
gain on the disposal of a permanent auction site that has been replaced with a
new facility. The balance of the increase resulted primarily from increased
appraisal revenues and the recovery of miscellaneous prior period charges.
INCOME TAXES
Income taxes of $13.7 million for the year ended December 31, 1998 have
been computed based on rates of tax that apply in each of the tax jurisdictions
in which the Company operates. The effective rate of tax on net income for 1998
of 35.5% is marginally lower than the rate the Company would normally expect for
subsequent years because, during 1998, the Company earned a slightly higher than
usual percentage of its income in lower tax rate jurisdictions. Income taxes for
the twelve months ended December 31, 1997 are not meaningful as a comparable
number because of the non-comparability of net income before tax and, since
prior to the reorganization, many of the predecessor entities to the Company
were partnerships not subject to corporate income taxation. See "-- Overview".
LIQUIDITY AND CAPITAL RESOURCES
The Company's cash can fluctuate significantly from period to period,
largely due to differences in timing of receipt of gross sale proceeds from
buyers and the payment of net amounts due to consignors. If auctions are
conducted near a period end, the Company may hold cash in respect of those
auctions that will not be paid to consignors until after the period end.
Accordingly, management believes a more meaningful measure of the Company's
liquidity is working capital, including cash.
At December 31, 1998 and December 31, 1997, working capital was $49.1
million and $3.3 million respectively. The increase in working capital of $45.8
million resulted primarily from the receipt of proceeds from the Company's
initial public offering in March 1998 of approximately $51.6 million, and from
net income earned during the year ended December 31, 1998. This increase was
partially offset by capital expenditures incurred by the Company during the
period.
Net capital expenditures by the Company during the year ended December 31,
1998 were $37.1 million as compared to $5.1 million for the twelve months ended
December 31, 1997. In 1998, the Company acquired
1-21
<PAGE> 22
land for use as permanent auction sites and incurred site development costs in
the United States, Canada, Australia and Europe.
The Company is continuing with its plan to add additional permanent auction
sites around the world and is presently in various stages of commitments to
acquire land for development in the United States and Canada.
The Company has completed negotiations of credit facilities with financial
institutions in the United States, Canada, Europe, and Australia. The Company
presently has access to credit lines for operations exceeding $95.0 million and
to credit lines for funding property acquisitions exceeding $40.0 million. Of
these credit lines, at December 31, 1998, the Company had no bank debt relating
to operations, and bank debt related to property acquisitions totaled $9.6
million.
YEAR 2000 COMPLIANCE
The Company relies on computer systems and software to operate its
business, including applications used to control information about bidders and
consignors and to operate certain of its marketing, finance and administrative
functions. The Company initiated its "Year 2000" compliance efforts in 1997.
Management believes that only minor modifications remain to be completed to make
its systems Year 2000 compliant and that related costs incurred to date have
not, and estimated future costs will not, have a material impact on the
Company's business, financial condition, or results of operations.
The most reasonable likely worst case Year 2000 scenario would involve the
failure of one or more of the Company's key suppliers to become Year 2000
compliant. In such a scenario, the Company's ability to adequately advertise its
auctions and account for receipts and payments as efficiently as it does at
present could be negatively affected.
The Company is presently developing contingency plans in the event of the
Company's or its key suppliers' failure to achieve full Year 2000 compliance and
management anticipates these will be completed prior to June 1999. The plan
includes identifying alternate organizations that may act as replacements for
those with which the Company presently conducts business and which may not
achieve full Year 2000 compliance, including one or more of its lenders,
marketing service suppliers, or external software providers. The plan also
includes development of internal back-up systems and identification of available
replacement resources to restore operations to present levels in the event of
Year 2000 non-compliance. Failure by the Company or any of its key suppliers to
achieve full Year 2000 compliance in a timely manner or consistent with its
current cost estimates, or to rectify deficiencies through any contingency
plans, could have a material adverse effect on the Company's business, financial
condition and results of operations.
FORWARD-LOOKING STATEMENTS
This Management's Discussion and Analysis of Financial Condition and
Results of Operations and other sections of this Annual Information Form contain
forward-looking statements that involve risks and uncertainties. These
statements are based on current expectations and estimates about the Company's
business. These statements include, in particular, statements relating to
auction revenue rates, direct expense rates, G&A increases, income tax rates,
the anticipated improvement, acquisition and development of permanent auction
sites, the anticipated acquisition of Forke assets, financing available to the
Company, and the future-oriented comments contained throughout this Annual
Information Form. Words such as "expects", "intends", "plans", "believes",
"estimates" and variations of such words and similar expressions are intended to
identify such forward-looking statements. These statements are not guarantees of
future performance and involve certain risks, uncertainties and assumptions that
are difficult to predict. The following important factors, among others, could
affect the Company's actual results and could cause such results to differ
materially from those expressed in the Company's forward-looking statements: the
many factors that impact on the supply of and demand for used equipment;
fluctuations in the market values of used equipment; periodic and seasonal
variations in operating results or financial conditions; potential delays in
construction or development of auction sites; actions of competitors; the
possibility that the Forke acquisition will not be completed; adverse changes in
economic conditions; restrictions affecting the ability of equipment owners to
1-22
<PAGE> 23
transport equipment between jurisdictions; and other risks and uncertainties as
detailed in the Company's Rule 424(b) Prospectus dated March 9, 1998. The
Company undertakes no obligation to update publicly any forward-looking
statements, whether as a result of new information, future events or otherwise.
Forward-looking statements should be considered in light of these factors.
MARKET FOR SECURITIES
The Common Shares of the Company are listed and traded on the New York
Stock Exchange (the "NYSE") under the ticker symbol "RBA". The NYSE is the
principal market for the Common Shares.
DIRECTORS AND OFFICERS
The names and municipalities of residence of the directors and officers of
the Company and their principal occupations are set forth below.
DIRECTORS
<TABLE>
<CAPTION>
DIRECTOR
NAME AND MUNICIPALITY OF RESIDENCE PRINCIPAL OCCUPATION SINCE
- ---------------------------------- -------------------- --------
<S> <C> <C>
DAVID E. RITCHIE...................... Chief Executive Officer of the Company 1997
Leduc, Alberta
C. RUSSELL CMOLIK(2).................. President and Chief Operating Officer of the 1997
Surrey, British Columbia Company
PETER J. BLAKE(1)..................... Vice President - Finance and Chief Financial 1997
Vancouver, British Columbia Officer of the Company
CHARLES E. CROFT(1)(2)................ President and Director of Falcon Pacific 1998
Salt Spring, British Columbia Financial Corp. and its subsidiaries
G. EDWARD MOUL(1)(2).................. Director and officer of The McEmcy Company of 1998
West Vancouver, British Columbia Canada Ltd., Peace Portal Properties Ltd. and
certain other private real estate holding
companies
</TABLE>
- ---------------
(1) Member of the Audit Committee
(2) Member of the Compensation Committee
The Company does not have an Executive Committee and is required to have an
Audit Committee. Each director will serve until the next annual general meeting
or until his successor is elected or appointed.
OFFICERS
<TABLE>
<CAPTION>
NAME AND MUNICIPALITY OF RESIDENCE POSITION WITH THE COMPANY
- ---------------------------------- -------------------------
<S> <C>
DAVID E. RITCHIE....................... Chief Executive Officer
Leduc, Alberta
C. RUSSELL CMOLIK...................... President and Chief Operating Officer
Surrey, British Columbia
PETER J. BLAKE......................... Vice President - Finance and Chief Financial Officer
Vancouver, British Columbia
JOHN T. WILD........................... Vice President - Administration
Surrey, British Columbia
ROBERT J. CARSWELL..................... Vice President/Senior Valuations Analyst
Langley, British Columbia
</TABLE>
1-23
<PAGE> 24
<TABLE>
<CAPTION>
NAME AND MUNICIPALITY OF RESIDENCE POSITION WITH THE COMPANY
- ---------------------------------- -------------------------
<S> <C>
FRANK S. MCFADDEN...................... Vice President/Senior Valuations Analyst
Surrey, British Columbia
DONALD F. CHALMERS..................... Vice President - Western Canada and Prairie Divisions
Sherwood Park, Alberta
MARVIN R. CHANTLER..................... Vice President - Eastern Canada and Great Lakes
Loretto, Ontario Divisions
SYLVAIN M. TOUCHETTE................... Vice President - Quebec Division
Carignan, Quebec
ROGER W. RUMMEL........................ Vice President - Northwest, Southwest and Mexico
Phoenix, Arizona Divisions
KENNETH D. ASBURY...................... Vice President - Central and North Central Divisions
Arvada, Colorado
EDWARD H. BANSER....................... Vice President - South Central Division
Fort Worth, Texas
MICHAEL J. RITCHIE..................... Vice President - Northeast Division
Annapolis, Maryland
MARTIN E. POPE......................... Vice President - Southeast Division
Newnan, Georgia
ROBERT K. MACKAY....................... Vice President - Asia Pacific Division
Delta, British Columbia
ROBERT K. WHITSIT...................... Vice President - US Operations
Lincoln, Nebraska
C. DENIS PREVOST....................... Vice President - National Accounts
Surrey, British Columbia
ROBERT L. BRAWLEY...................... Vice President
Aurora, Colorado
RANDALL J. WALL........................ Managing Director - Europe and Middle East Divisions
Braaschaat, Belgium
GARY CAUFIELD.......................... Senior Manager - Special Projects
Coquitlam, British Columbia
HELEN MENGES........................... Manager - Search Department
Vancouver, British Columbia
ROBERT S. ARMSTRONG.................... Manager - Finance and Corporate Relations, Corporate
New Westminster, British Columbia Secretary
ROBERT MCLEOD.......................... Manager - Finance and Administration, US Operations
Vancouver, British Columbia
DEBORA JOHNSON......................... Controller - Canadian Operations
Surrey, British Columbia
ERROL OLSEN............................ Controller - US Operations
North Vancouver, British Columbia
</TABLE>
As of April 30, 1999, the directors and senior officers (the senior
officers are the Chief Executive Officer, Chief Operating Officer, Chief
Financial Officer and Corporate Secretary) of the Company, as a group,
beneficially owned, directly or indirectly, or exercised control or direction
over 42.8% of the outstanding Common Shares of the Company.
1-24
<PAGE> 25
ADDITIONAL INFORMATION
The Company shall provide to any person, upon request to the Corporate
Secretary of the Company:
(a) when the securities of the Company are in the course of a distribution
pursuant to a short form prospectus or a preliminary short form
prospectus has been filed in respect of a distribution of its
securities;
(i) one copy of this Annual Information Form, together with one copy
of any document, or the pertinent pages of any document,
incorporated by reference in this Annual Information Form;
(ii) one copy of the comparative financial statements of the Company
for its most recently completed financial year together with the
accompanying report of the auditor and one copy of any interim
financial statements of the Company subsequent to the financial
statements for the Company's most recently completed financial
year;
(iii) one copy of the Information Circular of the Company in respect of
its most recent annual meeting of shareholders that involved the
election of directors; and
(iv) one copy of any other documents that are incorporated by reference
into the preliminary short form prospectus or the short form
prospectus and are not required to be provided under (i) to (iii)
above; or
(b) at any other time, one copy of any of the documents referred to in
(a)(i), (ii) and (iii) above, provided that the Company may require
the payment of a reasonable charge if the request is made by a person
who is not a security holder of the Company.
Additional information, including directors' and officers' remuneration and
indebtedness to the Company, principal holders of the Company's securities,
options to purchase securities and interests of insiders in material
transactions, where applicable, is contained in the Company's Information
Circular for its most recent annual meeting of shareholders that involved the
election of directors, and additional financial information is provided in the
Company's comparative financial statements for its most recently completed
financial year.
Copies of these documents may be obtained upon request from the Corporate
Secretary of the Company, 9200 Bridgeport Road, Richmond, British Columbia, V6X
1S1 (telephone number: (604) 273-7564).
1-25
<PAGE> 1
EXHIBIT NO. 2
CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1998 AND 1997 (UNAUDITED), THE EIGHT-MONTH
PERIOD ENDED DECEMBER 31, 1997 AND THE YEAR ENDED APRIL 30, 1997
2-1
<PAGE> 2
INDEPENDENT AUDITORS' REPORT
To the Shareholders of
Ritchie Bros. Auctioneers Incorporated
We have audited the consolidated balance sheets of Ritchie Bros.
Auctioneers Incorporated (the "Company") as at December 31, 1998 and 1997 and
the consolidated statements of income, shareholders' equity and cash flows for
the years ended December 31, 1998 and 1997 (Unaudited), for the eight months
ended December 31, 1997 and the year ended April 30, 1997. These 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 Canadian generally accepted
auditing standards. Those standards require that we plan and perform an audit to
obtain reasonable assurance 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.
In our opinion, these consolidated financial statements present fairly, in
all material respects, the financial position of the Company as at December 31,
1998 and 1997 and the results of its operations and the changes in its cash
flows for the years ended December 31, 1998 and 1997 (Unaudited), for the eight
months ended December 31, 1997 and the year ended April 30, 1997 in accordance
with generally accepted accounting principles in Canada.
Significant measurement differences between Canadian and United States
accounting principles are explained and quantified in note 9.
/s/ KPMG LLP
- ------------------------------------------------------
Chartered Accountants
Vancouver, Canada
February 26, 1999
2-2
<PAGE> 3
RITCHIE BROS. AUCTIONEERS INCORPORATED
CONSOLIDATED STATEMENTS OF INCOME
(EXPRESSED IN THOUSANDS OF UNITED STATES DOLLARS)
<TABLE>
<CAPTION>
EIGHT MONTHS
YEAR ENDED YEAR ENDED ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31, APRIL 30,
1998 1997 1997 1997
------------ ------------ ------------ -----------
(UNAUDITED)
<S> <C> <C> <C> <C>
Auction revenues........................ $ 94,899 $ 85,009 $ 60,034 $ 72,186
Direct expenses......................... (16,010) (17,351) (13,041) (13,908)
----------- ----------- ----------- -----------
78,889 67,658 46,993 58,278
Expenses:
Depreciation.......................... 2,752 2,548 1,540 2,014
General and administrative............ 39,315 37,724 27,414 31,099
Employee equity participation (note
5(d)).............................. -- 10,346 10,346 --
----------- ----------- ----------- -----------
42,067 50,618 39,300 33,113
----------- ----------- ----------- -----------
Income from operations.................. 36,822 17,040 7,693 25,165
Other income (expenses)
Interest expense...................... (1,569) (2,034) (1,380) (1,081)
Other................................. 3,251 754 576 917
----------- ----------- ----------- -----------
1,682 (1,280) (804) (164)
----------- ----------- ----------- -----------
Income before income taxes.............. 38,504 15,760 6,889 25,001
Income taxes (note 7)
Current............................... 13,962 7,438 4,491 5,992
Future................................ (292) -- -- --
----------- ----------- ----------- -----------
13,670 7,438 4,491 5,992
----------- ----------- ----------- -----------
Net income.............................. $ 24,834 $ 8,322 $ 2,398 $ 19,009
=========== =========== =========== ===========
Net income per share (note 1(l))
Basic................................. $ 1.56 $ 0.65 $ 0.19 $ 1.49
Diluted............................... 1.54 0.64 0.18 1.49
Weighted average number of shares
outstanding........................... 15,918,214 12,877,777 12,958,753 12,715,667
=========== =========== =========== ===========
</TABLE>
Approved on behalf of the Board of Directors
<TABLE>
<S> <C>
/s/ C. RUSSELL CMOLIK /s/ PETER J. BLAKE
C. Russell Cmolik Peter J. Blake
Director Director
</TABLE>
See accompanying notes to consolidated financial statements.
2-3
<PAGE> 4
RITCHIE BROS. AUCTIONEERS INCORPORATED
CONSOLIDATED BALANCE SHEETS
(EXPRESSED IN THOUSANDS OF UNITED STATES DOLLARS)
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31,
1998 1997
------------ ------------
<S> <C> <C>
ASSETS
Current assets
Cash and cash equivalents................................. $ 73,620 $27,149
Accounts receivable....................................... 6,771 6,744
Inventory................................................. 2,355 7,081
Advances against auction contracts........................ 5,345 1,261
Prepaid expenses and deposits............................. 711 1,218
-------- -------
88,802 43,453
Capital assets (note 3)..................................... 61,324 27,007
Future income taxes (note 7)................................ 2,467 --
-------- -------
$152,593 $70,460
======== =======
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Auction proceeds payable.................................. $ 14,030 $17,728
Accounts payable and accrued liabilities.................. 21,751 17,131
Current bank loans (note 4)............................... 793 730
Income taxes payable...................................... 3,079 4,542
-------- -------
39,653 40,131
Bank term loans (note 4).................................... 8,768 4,623
-------- -------
48,421 44,754
Shareholders' equity
Share capital (note 5).................................... 64,728 10,866
Retained earnings......................................... 41,772 16,958
Foreign currency translation adjustment................... (2,328) (2,118)
-------- -------
104,172 25,706
Subsequent event (note 10)
-------- -------
$152,593 $70,460
======== =======
</TABLE>
See accompanying notes to consolidated financial statements.
2-4
<PAGE> 5
RITCHIE BROS. AUCTIONEERS INCORPORATED
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(EXPRESSED IN THOUSANDS OF UNITED STATES DOLLARS)
<TABLE>
<CAPTION>
FOREIGN
CURRENCY TOTAL
SHARE RETAINED TRANSLATION SHAREHOLDERS'
CAPITAL EARNINGS ADJUSTMENT EQUITY
------- -------- ----------- -------------
<S> <C> <C> <C> <C>
Balance, April 30, 1996......................... $ 3,337 $47,015 $(1,551) $ 48,801
Net proceeds on common shares issued............ 28 -- -- 28
Capital contributions to partnerships........... -- 166 -- 166
Net income...................................... -- 19,009 -- 19,009
Drawings and dividends.......................... -- (8,073) -- (8,073)
Refundable taxes on investment income........... -- (29) -- (29)
Foreign currency translation adjustment......... -- -- (577) (577)
------- ------- ------- --------
Balance, April 30, 1997......................... 3,365 58,088 (2,128) 59,325
Common shares redeemed.......................... (2,845) -- -- (2,845)
Employee equity participation (note 5(d))....... 10,346 -- -- 10,346
Net income...................................... -- 2,398 -- 2,398
Drawings and dividends.......................... -- (42,175) -- (42,175)
Reorganization costs............................ -- (1,353) -- (1,353)
Foreign currency translation adjustment......... -- -- 10 10
------- ------- ------- --------
Balance, December 31, 1997...................... 10,866 16,958 (2,118) 25,706
Net proceeds on common shares issued............ 53,862 -- -- 53,862
Net income...................................... -- 24,834 -- 24,834
Reorganization costs............................ -- (20) -- (20)
Foreign currency translation adjustment......... -- -- (210) (210)
------- ------- ------- --------
Balance, December 31, 1998...................... $64,728 $41,772 $(2,328) $104,172
======= ======= ======= ========
</TABLE>
See accompanying notes to consolidated financial statements.
2-5
<PAGE> 6
RITCHIE BROS. AUCTIONEERS INCORPORATED
CONSOLIDATED STATEMENTS OF CASH FLOWS
(EXPRESSED IN THOUSANDS OF UNITED STATES DOLLARS)
<TABLE>
<CAPTION>
EIGHT
YEAR ENDED YEAR ENDED MONTHS ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31, APRIL 30,
1998 1997 1997 1997
------------ ------------ ------------ ----------
(UNAUDITED)
<S> <C> <C> <C> <C>
Cash provided by (used in)
Operations:
Net income................................. $24,834 $ 8,322 $ 2,398 $19,009
Items not involving the use of cash
Depreciation............................ 2,752 2,548 1,540 2,014
Employee equity participation........... -- 10,346 10,346 --
Future income taxes..................... (2,467) -- -- --
Changes in non-cash working capital
Accounts receivable..................... (27) (2,389) 7,363 20,788
Inventory............................... 4,726 455 11,073 (8,148)
Advances against auction contracts...... (4,084) 1,395 5,211 (351)
Prepaid expenses and deposits........... 507 (711) (446) (202)
Auctions proceeds payable............... (3,698) 10,434 (35,749) (22,526)
Accounts payable and accrued
liabilities........................... 4,620 9,329 8,203 (1,272)
Payables to affiliated entities......... -- (3,078) (3,818) 459
Income taxes payable.................... (1,463) 2,077 (540) 1,845
Foreign currency translation adjustment.... (210) (417) 10 (577)
------- -------- -------- -------
25,490 38,311 5,591 11,039
------- -------- -------- -------
Financing:
Issuance (redemption) of share capital..... 53,862 (2,833) (2,845) 28
Payables to employees and others........... -- (1,317) (1,279) 57
Bank loans................................. 4,208 (1,326) (5,596) 2,802
Drawings and dividends paid................ -- (42,756) (42,175) (8,073)
Capital contributions...................... -- -- -- 166
Refundable taxes on investment income...... -- (29) -- (29)
Reorganization costs....................... (20) (1,353) (1,353) --
------- -------- -------- -------
58,050 (49,614) (53,248) (5,049)
------- -------- -------- -------
Investments:
Capital asset additions, net............... (37,069) (5,120) (3,174) (5,171)
------- -------- -------- -------
Increase (decrease) in cash and cash
equivalents................................ 46,471 (16,423) (50,831) 819
Cash and cash equivalents, beginning of
period..................................... 27,149 43,572 77,980 77,161
------- -------- -------- -------
Cash and cash equivalents, end of period..... $73,620 $ 27,149 $ 27,149 $77,980
======= ======== ======== =======
Supplemental disclosure of cash flow
information
Interest paid.............................. $ 1,570 $ 1,853 $ 1,242 $ 1,068
Income taxes paid.......................... $16,735 $ 5,098 $ 5,332 $ 4,147
</TABLE>
See accompanying notes to consolidated financial statements.
2-6
<PAGE> 7
RITCHIE BROS. AUCTIONEERS INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1998 AND 1997 (UNAUDITED),
EIGHT MONTHS ENDED DECEMBER 31, 1997 AND YEAR ENDED APRIL 30, 1997
(Tabular dollar amounts expressed in thousands of United States Dollars)
1. SIGNIFICANT ACCOUNTING POLICIES
(a) BASIS OF PRESENTATION
These consolidated financial statements present the financial position,
results of operations and changes in shareholders' equity and cash flows of
Ritchie Bros. Auctioneers Incorporated (the "Company"), a company incorporated
in July 1997 under the Canada Business Corporations Act, and its subsidiary
predecessor businesses. These predecessor businesses comprised the Ritchie Bros.
Auctioneers group of companies and partnerships (the "Group"). In the
eight-month period ended December 31, 1997, the businesses of the partnerships
within the Group were transferred into corporations, the shares of which,
together with the shares of the corporations within the Group, were exchanged by
their owners for shares of the Company (the "Reorganization"). All inter-entity
accounts and transactions have been eliminated on consolidation.
On November 1, 1997, prior to completion of the Reorganization, the owners
of the Group entered into the Equity Interest and Income Sharing Agreement (the
"Agreement") which confirmed the existing voting, earnings allocation and
liquidation rights of each owner. These rights were based upon the owners'
interests in the Group, taken as a whole, which was treated as a single global
enterprise since prior to May 1, 1992. The rights and obligations specified in
the Agreement were those of an agreement which has been in effect at all times
since May 1, 1992 and which modified the terms of any written agreements
containing provisions that may have been inconsistent with the Agreement. Each
owner's rights under the Agreement were determined in accordance with such
owner's ownership percentage of the Group ("Global Ownership Percentage"), which
was equal to the number of units of ownership of the Group allocated to the
owner divided by the total number of units outstanding. The owners' respective
Global Ownership Percentages were determined on the basis of the Group taken as
a whole, and not on the basis of the documentation governing the owners' equity
interests in the predecessor entities within the Group. The Group has been
legally obligated to make and has made earnings allocations in accordance with
the terms of the Agreement since prior to May 1, 1992. As a result of these
agreements and practices, each owner's ownership interest in the Company upon
completion of the Reorganization represents a substantially identical interest
to such owner's ownership interest in the Group prior to the Reorganization.
Because the Reorganization was a non-substantive exchange, the Group's
assets, liabilities, revenues and expenses have been consolidated at the
historical cost amounts recorded in the individual entity accounts, and carried
forward into the consolidated accounts of the Company together with costs of the
Reorganization.
The consolidated financial statements of the Company have been prepared in
accordance with generally accepted accounting principles in Canada which, except
as disclosed in note 9, also comply, in all material respects, with generally
accepted accounting principles in the United States.
The Group included three partnerships, one situated in Canada and two
situated in the United States, all of which were non-taxable entities. The Group
also included the companies that were partners of the United States partnerships
and certain, but not all, of the companies that were partners of the Canadian
partnership. To the extent that the Group included these partner entities, these
consolidated financial statements include provisions for taxes chargeable
against partnership income. To the extent that the partner entities did not form
part of the Group, no taxes have been provided on the net income allocated to
those companies. Note 9 sets out the pro forma impact as if all income were
taxed within the Group. These consolidated financial statements also do not
include any of the other assets, liabilities, revenues or expenses of the
partner entities not included in the Group.
2-7
<PAGE> 8
RITCHIE BROS. AUCTIONEERS INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
YEARS ENDED DECEMBER 31, 1998 AND 1997 (UNAUDITED),
EIGHT MONTHS ENDED DECEMBER 31, 1997 AND YEAR ENDED APRIL 30, 1997
(Tabular dollar amounts expressed in thousands of United States Dollars)
1. SIGNIFICANT ACCOUNTING POLICIES -- (CONTINUED)
In calendar 1997, the Company changed its fiscal year-end from April 30 to
December 31. As a result, the transition period from May 1, 1997 to December 31,
1997 is separately reported herein. In addition, for information purposes only,
the consolidated statements of income and cash flows for the 12 months ended
December 31, 1997 have been presented.
The financial information for the year ended December 31, 1997 is
unaudited; however, in the opinion of management, such information includes all
adjustments (consisting only of normal recurring adjustments) necessary for a
fair presentation of such financial information.
(b) CASH EQUIVALENTS
Cash equivalents consist of highly liquid investments having an original
term to maturity of three months or less when acquired.
(c) INVENTORY
Inventory is primarily represented by goods held for auction and has been
valued at the lower of cost, determined by the specific identification method,
and net realizable value.
(d) ADVANCES AGAINST AUCTION CONTRACTS
Advances against auction contracts represent funds advanced to consignors
against proceeds from future auctions.
(e) CAPITAL ASSETS
All capital assets are stated at cost. Depreciation is provided to charge
the cost of the assets to operations over their estimated useful lives based on
their usage predominantly as follows:
<TABLE>
<S> <C>
Improvements.................................. 30 years straight-line
Buildings..................................... 30 years straight-line
Automotive equipment.......................... 30% declining balance
Computer equipment............................ 30% declining balance
Yard equipment................................ 20-30% declining balance
Office equipment.............................. 20% declining balance
Leasehold improvements........................ Term of leases
</TABLE>
(f) REVENUE RECOGNITION
Auction revenues are recognized when the specific items are sold and title
passes to the purchaser and are represented by the commissions received from the
consignor and the net proceeds received from the sale of self-owned equipment.
(g) INCOME TAXES
Income taxes are accounted for using the asset and liability method
pursuant to Section 3465, Income Taxes, of The Handbook of the Canadian
Institute of Chartered Accountants. Future taxes are recognized for
2-8
<PAGE> 9
RITCHIE BROS. AUCTIONEERS INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
YEARS ENDED DECEMBER 31, 1998 AND 1997 (UNAUDITED),
EIGHT MONTHS ENDED DECEMBER 31, 1997 AND YEAR ENDED APRIL 30, 1997
(Tabular dollar amounts expressed in thousands of United States Dollars)
1. SIGNIFICANT ACCOUNTING POLICIES -- (CONTINUED)
the tax consequences of "temporary differences" by applying enacted statutory
tax rates applicable to future years to differences between the financial
statement carrying amounts and the tax bases of existing assets and liabilities.
The effect on deferred taxes for a change in tax rates is recognized in income
in the period that includes the enactment date. In addition, Section 3465
requires the recognition of future tax benefits to the extent that realization
of such benefits is more likely than not.
(h) FOREIGN CURRENCY TRANSLATION
The Company's reporting currency is the United States dollar. The
functional currency for each of the Company's operations is the country of
residency. Each of these operations is considered to be self-sustaining.
Accordingly, the financial statements of operations of the Company that are not
located in the United States have been translated into United States dollars
using the exchange rate at the end of each reporting period for asset and
liability amounts and the average exchange rate for each reporting period for
amounts included in the determination of income. Any gains or losses from this
translation have been included in the foreign currency translation adjustment
account which is included in equity.
Monetary assets and liabilities recorded in foreign currencies are
translated into the appropriate functional currency at the rate of exchange in
effect at the balance sheet date. Foreign currency denominated transactions are
translated into the appropriate functional currency at the exchange rate in
effect on the date of the transaction. Any exchange gains and losses are
included in the determination of income.
(i) USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires the Company to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting periods. Actual results could differ from such estimates and
assumptions.
(j) FINANCIAL INSTRUMENTS
Carrying amounts of certain of the Company's financial instruments,
including cash and cash equivalents, accounts receivable, auction proceeds
payable and accounts payable and accrued liabilities, approximate fair value due
to their short maturities. Based on borrowing rates currently available to the
Company for loans with similar terms, the carrying value of its bank loans
approximates fair value.
(k) CREDIT RISK
The Company does not extend credit to purchasers of auctioned items.
Equipment is not normally released to the purchasers until it is paid for in
full.
(l) NET INCOME PER SHARE
Net income per share has been calculated based on the weighted average
number of common shares outstanding after giving retroactive effect to the
12,715,667 common shares issued on the reorganization. Diluted net income per
share has been calculated after giving effect to the outstanding options.
2-9
<PAGE> 10
RITCHIE BROS. AUCTIONEERS INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
YEARS ENDED DECEMBER 31, 1998 AND 1997 (UNAUDITED),
EIGHT MONTHS ENDED DECEMBER 31, 1997 AND YEAR ENDED APRIL 30, 1997
(Tabular dollar amounts expressed in thousands of United States Dollars)
2. CHANGE IN ACCOUNTING POLICY
In the fourth quarter of 1998, the Company changed its policy for
accounting for income taxes by adopting the provisions of Section 3465, Income
Taxes, of The Handbook of the Canadian Institute of Chartered Accountants. Under
this standard, current income taxes are recognized for the estimated income
taxes payable for the current period. Future income tax assets and liabilities
are recognized for temporary differences between the tax and accounting bases of
assets and liabilities as well as for the benefit of losses available to be
carried forward to future years for tax purposes that are likely to be realized.
The adoption of Section 3465 did not impact amounts reported in the prior
period.
3. CAPITAL ASSETS
Capital assets at December 31, 1998 are as follows:
<TABLE>
<CAPTION>
ACCUMULATED NET BOOK
COST DEPRECIATION VALUE
------- ------------ --------
<S> <C> <C> <C>
Land and improvements....................................... $36,631 $ 900 $35,731
Buildings................................................... 21,056 2,825 18,231
Automotive equipment........................................ 5,164 1,606 3,558
Computer equipment.......................................... 1,920 739 1,181
Yard equipment.............................................. 2,619 1,124 1,495
Office equipment............................................ 1,996 1,018 978
Leasehold improvements...................................... 200 50 150
------- ------ -------
$69,586 $8,262 $61,324
======= ====== =======
</TABLE>
Capital assets at December 31, 1997 are as follows:
<TABLE>
<CAPTION>
ACCUMULATED NET BOOK
COST DEPRECIATION VALUE
------- ------------ --------
<S> <C> <C> <C>
Land and improvements....................................... $12,830 $ 535 $12,295
Buildings................................................... 11,490 2,726 8,764
Automotive equipment........................................ 3,974 1,002 2,972
Computer equipment.......................................... 1,384 433 951
Yard equipment.............................................. 2,320 1,082 1,238
Office equipment............................................ 1,454 874 580
Leasehold improvements...................................... 225 18 207
------- ------ -------
$33,677 $6,670 $27,007
======= ====== =======
</TABLE>
2-10
<PAGE> 11
RITCHIE BROS. AUCTIONEERS INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
YEARS ENDED DECEMBER 31, 1998 AND 1997 (UNAUDITED),
EIGHT MONTHS ENDED DECEMBER 31, 1997 AND YEAR ENDED APRIL 30, 1997
(Tabular dollar amounts expressed in thousands of United States Dollars)
4. BANK TERM LOANS
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31,
1998 1997
------------ ------------
<S> <C> <C>
7.88% term loan, due in monthly instalments of $31,162
including interest, settled September 8, 1998............. $ -- $1,720
8.75% term loan, due in monthly instalments of $60,967
including interest, settled September 8, 1998............. -- 3,633
6.90% term loan, due in monthly instalments of $81,200
including interest, with the final payment occurring on
July 1, 2004.............................................. 4,499 --
Term loan, bearing interest at the Amsterdam Interbank
Offered Rate plus 7/8%, due in quarterly instalments of
$66,600 including interest, with the final payment
occurring on June 30, 2013................................ 5,062 --
------ ------
9,561 5,353
Less current portion........................................ (793) (730)
------ ------
$8,768 $4,623
====== ======
</TABLE>
At December 31, 1998, the Company had undrawn operating credit lines
available of in excess of $95,000,000. In addition, the Company had undrawn
credit lines of approximately $31,000,000 available to fund property
acquisitions.
The bank term loans are secured by deeds of trust on specific property.
As at December 31, 1998, principal repayments are required as follows in
the next five years:
<TABLE>
<S> <C>
1999........................................................ $ 793
2000........................................................ 1,001
2001........................................................ 1,053
2002........................................................ 1,109
2003........................................................ 1,169
Thereafter.................................................. 4,436
------
$9,561
======
</TABLE>
2-11
<PAGE> 12
RITCHIE BROS. AUCTIONEERS INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
YEARS ENDED DECEMBER 31, 1998 AND 1997 (UNAUDITED),
EIGHT MONTHS ENDED DECEMBER 31, 1997 AND YEAR ENDED APRIL 30, 1997
(Tabular dollar amounts expressed in thousands of United States Dollars)
5. SHARE CAPITAL
(a) AUTHORIZED
Unlimited number of common shares, without par value
Unlimited number of senior preferred shares, without par value, issuable in
series
Unlimited number of junior preferred shares, without par value, issuable in
series
(b) ISSUED
<TABLE>
<S> <C>
Number of common shares issued during the period ended
December 31, 1997:
For cash, pursuant to the Employee Equity Participation
Program................................................ 497,999
On reorganization......................................... 12,715,667
----------
Balance December 31, 1997................................... 13,213,666
Number of common shares issued during the year ended
December 31, 1998, pursuant to an equity offering......... 3,335,000
----------
Issued and outstanding, December 31, 1998................... 16,548,666
==========
</TABLE>
(c) OPTIONS
The Company has adopted a stock option plan which provides for the award of
stock options to selected employees, directors and officers of the Company and
to other persons approved by the Board of Directors. Stock option activity for
1997 and 1998 is presented below:
<TABLE>
<CAPTION>
NUMBER OF EXERCISE PRICE
SHARES PER SHARE
--------- --------------
<S> <C> <C>
Outstanding, April 30, 1997................................. -- $ --
Granted (note 5(d))....................................... 196,333 0.10
------- -------------
Outstanding, December 31, 1997.............................. 196,333 0.10
Granted................................................... 36,000 26.12
Cancelled................................................. (25,333) 0.10
------- -------------
Outstanding, December 31, 1998.............................. 207,000 $0.10 - 26.12
======= =============
</TABLE>
The options outstanding at December 31, 1998 expire from dates ranging to
July 31, 2004.
(d) EMPLOYEE EQUITY PARTICIPATION
Substantially all the full-time employees who were not beneficial owners of
the predecessor entities to the Company have been granted an equity interest in
the Company pursuant to the Employee Equity Participation Program by means of
issuances of common shares at a cash price of $0.10 per share or grants of stock
options having an exercise price of $0.10 per share. During the year ended
December 31, 1997, the Company issued 497,999 common shares and granted stock
options to purchase 196,333 common shares under the Program. The shares issued
and options granted have fully vested with the holders. The excess of the
estimated mid-point of the offering price range of the shares estimated at the
time to be issued to the public of $15.00 over the issuance price of the shares
or the exercise price of the options granted, as applicable in the
2-12
<PAGE> 13
RITCHIE BROS. AUCTIONEERS INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
YEARS ENDED DECEMBER 31, 1998 AND 1997 (UNAUDITED),
EIGHT MONTHS ENDED DECEMBER 31, 1997 AND YEAR ENDED APRIL 30, 1997
(Tabular dollar amounts expressed in thousands of United States Dollars)
5. SHARE CAPITAL -- (CONTINUED)
circumstances, pursuant to the Program is considered to be compensatory for
accounting purposes and has been recorded as employee equity participation
expense in the accompanying consolidated financial statements.
(e) OFFERING
The Company filed a registration statement with the Securities and Exchange
Commission in the United States pursuant to which the Company issued and sold
3,335,000 common shares (the "Offering"). For services provided in connection
with the Offering, the Company paid the underwriters a per share commission.
6. SEGMENTED INFORMATION
The Company's principal business activities include the sale of consignment
and self-owned equipment at auctions. This business represents a single
operating segment.
Summarized information on the Company's activities generated by geographic
segment are as follows:
<TABLE>
<CAPTION>
UNITED STATES CANADA OTHER COMBINED
------------- ------- ------- --------
<S> <C> <C> <C> <C>
Year ended December 31, 1998
Auction revenues.............................. $49,747 $16,105 $29,047 $94,899
Identifiable assets........................... 73,045 21,850 57,698 152,593
Year ended December 31, 1997 (Unaudited)
Auction revenues.............................. 44,615 16,095 24,299 85,009
Identifiable assets........................... 53,441 2,357 14,662 70,460
Eight months ended December 31, 1997
Auction revenues.............................. 32,254 13,664 14,116 60,034
Identifiable assets........................... 53,441 2,357 14,662 70,460
Year ended April 30, 1997
Auction revenues.............................. 36,845 16,910 18,431 72,186
Identifiable assets........................... 82,045 27,650 33,163 142,858
</TABLE>
2-13
<PAGE> 14
RITCHIE BROS. AUCTIONEERS INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
YEARS ENDED DECEMBER 31, 1998 AND 1997 (UNAUDITED),
EIGHT MONTHS ENDED DECEMBER 31, 1997 AND YEAR ENDED APRIL 30, 1997
(Tabular dollar amounts expressed in thousands of United States Dollars)
7. INCOME TAXES
Income tax expense differs from that determined by applying the United
States statutory tax rate to the Company's results of operations as follows:
<TABLE>
<CAPTION>
EIGHT
YEAR ENDED YEAR ENDED MONTHS ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31, APRIL 30,
1998 1997 1997 1997
------------ ------------ ------------ ----------
(UNAUDITED)
<S> <C> <C> <C> <C>
Statutory tax rate in the United States... 39% 39% 39% 39%
------- ------- ------ -------
Expected income tax expense............... $15,017 $ 6,147 $2,687 $ 9,750
Differences
Different tax rates in non-U.S.
jurisdictions........................ (2,028) (831) (247) (411)
Partnership income not taxed in Group... -- (1,566) (806) (3,899)
U.S. income taxed at lower graduated
rates................................ -- (397) (128) (548)
Employee equity participation expense
not tax deductible................... -- 2,894 2,894 --
Other................................... 681 1,191 91 1,100
------- ------- ------ -------
Actual income tax expense............... $13,670 $ 7,438 $4,491 $ 5,992
======= ======= ====== =======
</TABLE>
If all partnership income had been taxed in the Group, income taxes would
have been as follows:
<TABLE>
<CAPTION>
EIGHT
YEAR ENDED YEAR ENDED MONTHS ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31, APRIL 30,
1998 1997 1997 1997
------------ ------------ ------------ ----------
(UNAUDITED)
<S> <C> <C> <C> <C>
Income taxes.............................. $13,670 $9,004 $5,297 $9,891
======= ====== ====== ======
</TABLE>
FUTURE INCOME TAXES
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31,
1998 1997
------------ ------------
<S> <C> <C>
Future income tax benefit of options granted................ $ 853 $ --
Future income tax benefit resulting from tax deductible
financing costs incurred in the course of the Company's
initial public offering in March 1998..................... 1,740 --
Future income tax recovery on unused tax losses, expiring on
December 31, 2005......................................... 324 --
Future income tax liabilities arising from temporary
differences between the tax basis of net assets and their
carrying value
Capital assets......................................... (475) --
Accounts payable....................................... 25 --
------ ----
$2,467 $ --
====== ====
</TABLE>
2-14
<PAGE> 15
RITCHIE BROS. AUCTIONEERS INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
YEARS ENDED DECEMBER 31, 1998 AND 1997 (UNAUDITED),
EIGHT MONTHS ENDED DECEMBER 31, 1997 AND YEAR ENDED APRIL 30, 1997
(Tabular dollar amounts expressed in thousands of United States Dollars)
8. UNCERTAINTY DUE TO THE YEAR 2000 ISSUE
The Year 2000 Issue arises because many computerized systems use two digits
rather than four to identify a year. Date-sensitive systems may recognize the
year 2000 as 1900 or some other date, resulting in errors when information using
year 2000 dates is processed. In addition, similar problems may arise in some
systems which use certain dates in 1999 to represent something other than a
date. The effects of the Year 2000 Issue may be experienced before, on, or after
January 1, 2000, and, if not addressed, the impact on operations and financial
reporting may range from minor errors to significant systems failure which could
affect an entity's ability to conduct normal business operations. It is not
possible to be certain that all aspects of the Year 2000 Issue affecting the
entity, including those related to the efforts of customers, suppliers, or other
third parties, will be fully resolved.
9. UNITED STATES GENERALLY ACCEPTED ACCOUNTING PRINCIPLES
The consolidated financial statements are prepared in accordance with
generally accepted accounting principles ("GAAP") in Canada which differ, in
certain respects, from accounting practices generally accepted in the United
States and from requirements promulgated by the Securities and Exchange
Commission. Material measurement differences to these consolidated financial
statements are as follows:
CONSOLIDATED STATEMENTS OF COMPREHENSIVE NET INCOME AND NET INCOME PER SHARE
<TABLE>
<CAPTION>
EIGHT
YEAR ENDED YEAR ENDED MONTHS ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31, APRIL 30,
1998 1997 1997 1997
------------ ------------ ------------ ----------
(UNAUDITED)
<S> <C> <C> <C> <C>
Net income in accordance with Canadian
GAAP....................................... $24,834 $8,322 $2,398 $19,009
Effect of differences in accounting for
reorganization costs (note 9(i))........... (20) (434) (434) --
Income tax effect from the reorganization
(note 9(i))................................ -- (919) (919) --
------- ------ ------ -------
Net income in accordance with United States
GAAP....................................... 24,814 6,969 1,045 19,009
Other comprehensive income (loss) adjustments
(note 9(ii))
Foreign currency translation............... (210) (417) 10 (577)
------- ------ ------ -------
Comprehensive net income in accordance with
United States GAAP......................... $24,604 $6,552 $1,055 $18,432
======= ====== ====== =======
Net income per share in accordance with
United States GAAP
Basic...................................... $ 1.56 $ 0.54 $ 0.08 $ 1.49
Diluted.................................... 1.54 0.54 0.08 1.49
</TABLE>
2-15
<PAGE> 16
RITCHIE BROS. AUCTIONEERS INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
YEARS ENDED DECEMBER 31, 1998 AND 1997 (UNAUDITED),
EIGHT MONTHS ENDED DECEMBER 31, 1997 AND YEAR ENDED APRIL 30, 1997
(Tabular dollar amounts expressed in thousands of United States Dollars)
9. UNITED STATES GENERALLY ACCEPTED ACCOUNTING PRINCIPLES -- (CONTINUED)
(i) Reorganization costs
In accordance with generally accepted accounting principles in Canada,
costs incurred with respect to the Reorganization have been charged, net
of tax, against equity. Under generally accepted accounting principles
in the United States, such amounts are required to be charged against
income. Such costs have only been incurred in the eight months ended
December 31, 1997 and the years ended December 31, 1998 and 1997
(Unaudited).
(ii) Other comprehensive income (loss)
Beginning in fiscal year 1998, the Company adopted Statement of
Financial Accounting Standards No. 130 ("SFAS 130") "Reporting
Comprehensive Income". This statement established standards for
reporting and display of comprehensive income and its components.
Comprehensive income includes the change in equity or net assets of the
Company during the period from non-owner sources, including foreign
exchange adjustments, included as separate components of shareholders'
equity.
10. SUBSEQUENT EVENT
On February 19, 1999, the Company entered into an agreement to acquire the
auction business and certain assets of Forke Auctioneers, Inc., a major
auctioneer of industrial equipment headquartered in Lincoln, Nebraska. The
transaction is expected to close in March or April of 1999, subject to
regulatory clearance and other customary conditions. Terms and conditions of
this acquisition, by agreement, cannot be disclosed until closing. The Company
intends to finance this acquisition substantially with a bank term loan.
2-16
<PAGE> 1
EXHIBIT NO. 3
CONSENT OF KPMG LLP, CHARTERED ACCOUNTANTS
To the Board of Directors
Ritchie Bros. Auctioneers Incorporated
Dear Sirs
We consent to the use of our report dated February 26, 1999, included in this
annual report on Form 40-F.
We also consent to the incorporation by reference of such report in Registration
Statements (No. 333-65533 and No. 333-71577) on Form S-8 of Ritchie Bros.
Auctioneers Incorporated filed with the Securities and Exchange Commission.
/s/ KPMG LLP
- ---------------------------------------------------------
KPMG LLP
Chartered Accountants
Vancouver, Canada
June 16, 1999
3-1
