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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
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Form 6-K
REPORT OF FOREIGN ISSUER
PURSUANT TO RULE 13a-16 OR 15d-16 OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarter ended September 30, 1999
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RITCHIE BROS. AUCTIONEERS INCORPORATED
9200 Bridgeport Road
Richmond, BC, Canada
V6X 1S1
(604) 273 7564
(Address of principal executive offices)
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[indicate by check mark whether the registrant files or will file annual reports
under cover Form 20-F or Form 40-F]
Form 20-F __ Form 40-F X
[indicate by check mark whether the registrant by furnishing information
contained
in this Form is also thereby furnishing the information to the Commission
pursuant to
rule 12g3-2(b) under the Securities Exchange Act of 1934]
Yes __ No X
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<PAGE> 2
PART 1. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
The accompanying unaudited consolidated financial statements do not include
all information and footnotes required by Canadian or United States generally
accepted accounting principles. However, in the opinion of management, all
adjustments (which consist only of normal recurring adjustments) necessary for a
fair presentation of the results of operations for the relevant periods have
been made. Results for the interim periods are not necessarily indicative of the
results to be expected for the year or any other period. These financial
statements should be read in conjunction with the summary of accounting policies
and the notes to the consolidated financial statements included in the Company's
Report on Form 40-F for the fiscal year ended December 31, 1998, a copy of which
has been filed with the Securities and Exchange Commission.
2
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RITCHIE BROS. AUCTIONEERS INCORPORATED
CONSOLIDATED STATEMENTS OF INCOME
(EXPRESSED IN THOUSANDS OF UNITED STATES DOLLARS EXCEPT PER SHARE AMOUNTS)
(unaudited)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------------ ------------------------
1999 1998 1999 1998
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Auction revenues.......................... $ 20,699 $ 13,869 $ 74,301 $ 64,286
Direct expenses........................... 2,924 2,566 12,028 11,029
---------- ---------- ---------- ----------
17,775 11,303 62,273 53,257
Expenses:
Depreciation and amortization........... 1,608 713 3,842 1,969
General and administrative.............. 12,457 9,382 35,909 30,257
---------- ---------- ---------- ----------
14,065 10,095 39,751 32,226
---------- ---------- ---------- ----------
Income from operations.................... 3,710 1,208 22,522 21,031
Other income (expenses):
Interest expense........................ (852) (117) (1,772) (1,288)
Other................................... 345 2,074 857 2,651
---------- ---------- ---------- ----------
(507) 1,957 (915) 1,363
---------- ---------- ---------- ----------
Income before income taxes................ 3,203 3,165 21,607 22,394
Income taxes:
Current................................. 850 621 6,748 7,981
Future.................................. 207 540 610 540
---------- ---------- ---------- ----------
1,057 1,161 7,358 8,521
---------- ---------- ---------- ----------
Net income................................ $ 2,146 $ 2,004 $ 14,249 $ 13,873
========== ========== ========== ==========
Net income per share:
Basic................................... $ 0.13 $ 0.12 $ 0.85 $ 0.88
========== ========== ========== ==========
Diluted................................. $ 0.13 $ 0.12 $ 0.84 $ 0.87
========== ========== ========== ==========
Weighted average number of shares
outstanding............................. 16,725,382 16,548,666 16,671,752 15,705,754
========== ========== ========== ==========
Diluted weighted average number of shares
outstanding............................. 17,326,789 16,756,391 17,145,709 15,900,758
========== ========== ========== ==========
</TABLE>
See accompanying notes to consolidated financial statements.
3
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RITCHIE BROS. AUCTIONEERS INCORPORATED
CONSOLIDATED BALANCE SHEETS
(EXPRESSED IN THOUSANDS OF UNITED STATES DOLLARS)
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1999 1998
------------- ------------
(UNAUDITED)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................. $ 94,463 $ 73,620
Accounts receivable....................................... 34,823 6,771
Inventory................................................. 10,947 2,355
Advances against auction contracts........................ 425 5,345
Income taxes recoverable.................................. 1,122 --
Prepaid expenses and deposits............................. 1,299 711
-------- --------
143,079 88,802
Capital assets (note 2)..................................... 96,937 61,324
Goodwill (note 3)........................................... 32,183 --
Future income taxes (note 4)................................ 1,857 2,467
-------- --------
$274,056 $152,593
======== ========
LIABILITIES AND EQUITY
Current liabilities:
Auction proceeds payable.................................. $ 80,522 $ 14,030
Accounts payable and accrued liabilities.................. 19,428 21,751
Current bank loans........................................ 7,851 793
Income taxes payable...................................... -- 3,079
-------- --------
107,801 39,653
Bank term loans (note 5).................................... 39,316 8,768
-------- --------
147,117 48,421
SHAREHOLDERS' EQUITY
Share capital (note 6).................................... 69,128 64,728
Additional paid-in capital................................ 4,332 --
Retained earnings......................................... 56,021 41,772
Foreign currency translation adjustment................... (2,542) (2,328)
-------- --------
126,939 104,172
-------- --------
$274,056 $152,593
======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
4
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RITCHIE BROS. AUCTIONEERS INCORPORATED
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
(EXPRESSED IN THOUSANDS OF UNITED STATES DOLLARS)
(unaudited)
<TABLE>
<CAPTION>
FOREIGN
ADDITIONAL CURRENCY TOTAL
SHARE PAID-IN RETAINED TRANSLATION SHAREHOLDERS'
CAPITAL CAPITAL EARNINGS ADJUSTMENT EQUITY
------- ---------- -------- ----------- -------------
<S> <C> <C> <C> <C> <C>
Balance, December 31, 1998.............. $64,728 -- $41,772 $(2,328) $104,172
Common shares issued.................. 1,345 -- -- -- 1,345
Net income............................ -- -- 1,632 -- 1,632
Foreign currency translation
adjustment......................... -- -- -- (422) (422)
------- ------ ------- ------- --------
Balance, March 31, 1999................. 66,073 -- 43,404 (2,750) 106,727
Common shares issued.................. 3,055 -- -- -- 3,055
Warrants issued....................... -- 4,332 -- -- 4,332
Net income............................ -- -- 10,471 -- 10,471
Foreign currency translation
adjustment......................... -- -- -- (147) (147)
------- ------ ------- ------- --------
Balance, June 30, 1999.................. 69,128 4,332 53,875 (2,897) 124,438
Net income............................ -- -- 2,146 -- 2,146
Foreign currency translation
adjustment......................... -- -- -- 355 355
------- ------ ------- ------- --------
Balance, September 30, 1999............. $69,128 $4,332 $56,021 $(2,542) $126,939
======= ====== ======= ======= ========
</TABLE>
See accompanying notes to consolidated financial statements.
5
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RITCHIE BROS. AUCTIONEERS INCORPORATED
CONSOLIDATED STATEMENT OF CASH FLOWS
(EXPRESSED IN THOUSANDS OF UNITED STATES DOLLARS)
(unaudited)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
--------------------
1999 1998
-------- --------
<S> <C> <C>
Cash provided by (used in)
Operations:
Net income................................................ $ 14,249 $ 13,873
Items not involving the use of cash
Depreciation and amortization.......................... 3,842 1,969
Employee share compensation............................ 1,345 --
Future income taxes.................................... 610 540
Changes in non-cash working capital:
Accounts receivable.................................... (28,052) (9,379)
Inventory.............................................. (8,592) (2,058)
Advances against auction contracts..................... 4,920 (9,219)
Prepaid expenses and deposits.......................... (588) (111)
Auction proceeds payable............................... 66,492 44,504
Accounts payable and accrued liabilities............... (2,323) (2,184)
Income taxes payable................................... (4,201) (4,068)
Foreign currency translation adjustment................... (214) (395)
-------- --------
47,488 33,472
Financing:
Issuance of share capital, net of issue costs............. -- 51,775
Reorganization costs...................................... -- (20)
Bank loans................................................ 37,606 2,680
-------- --------
37,606 54,435
Investments:
Goodwill (net of non-cash consideration).................. (25,616) --
Capital asset additions, net.............................. (38,635) (25,375)
-------- --------
(64,251) (25,375)
Increase in cash and cash equivalents....................... 20,843 62,532
Cash and cash equivalents, beginning of period.............. 73,620 27,149
-------- --------
Cash and cash equivalents, end of period.................... $ 94,463 $ 89,681
======== ========
Supplemental disclosure of cash flow information
Interest paid............................................. $ 1,780 $ 1,288
Income taxes paid......................................... $ 8,630 $ 12,951
</TABLE>
See accompanying notes to consolidated financial statements.
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RITCHIE BROS. AUCTIONEERS INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(TABULAR DOLLAR AMOUNTS EXPRESSED IN THOUSANDS OF UNITED STATES DOLLARS)
SEPTEMBER 30, 1999
(Information as at September 30, 1999 and for the nine-month periods
ended September 30, 1999 and 1998 is unaudited)
1. SIGNIFICANT ACCOUNTING POLICIES
(a) BASIS OF PRESENTATION:
These unaudited 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").
These consolidated financial statements have been prepared in accordance
with Canadian generally accepted accounting principles for interim financial
information. Except as disclosed in note 7, these consolidated financial
statements comply, in all material respects, with generally accepted accounting
principles in the United States.
2. 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 September 30, 1999 are as follows:
<TABLE>
<CAPTION>
ACCUMULATED NET BOOK
COST DEPRECIATION VALUE
-------- ------------ --------
<S> <C> <C> <C>
Land and improvements.................................... $ 51,693 $ 1,275 $50,418
Buildings................................................ 40,253 3,438 36,815
Automotive equipment..................................... 6,615 2,156 4,459
Computer equipment....................................... 2,737 1,187 1,550
Yard equipment........................................... 3,114 1,324 1,790
Office equipment......................................... 2,871 1,237 1,634
Leasehold improvements................................... 371 100 271
-------- ------- -------
$107,654 $10,717 $96,937
======== ======= =======
</TABLE>
3. GOODWILL
In April 1999, the Company recorded goodwill of $33,003,000 on the purchase
of the auction business of Forke, Inc. (the "Forke acquisition"). The goodwill
balance is being amortized on a straight line basis over 20 years, resulting in
a charge to income of $825,000 for the nine months ended September 30, 1999.
7
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RITCHIE BROS. AUCTIONEERS INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(TABULAR DOLLAR AMOUNTS EXPRESSED IN THOUSANDS OF UNITED STATES DOLLARS)
SEPTEMBER 30, 1999 -- (CONTINUED)
(Information as at September 30, 1999 and for the nine-month periods
ended September 30, 1999 and 1998 is unaudited)
4. FUTURE INCOME TAXES
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.
5. BANK TERM LOANS
During the nine months ended September 30, 1999, the Company entered into a
$35 million term loan agreement to finance the acquisition of the auction
business of Forke, Inc. and certain related assets. At September 30, 1999 the
loan bore interest at a floating rate, paid quarterly. The Company is required
to make minimum annual payments of $5 million in respect of the principal amount
of the debt.
6. SHARE CAPITAL
SHARES AND WARRANTS ISSUED:
In March 1998, the Company issued 3,335,000 common shares in connection
with its initial public offering. Net proceeds raised from the offering, after
deducting underwriting commissions and other direct costs, and after adding the
future income tax benefit related to the amortization of underwriting costs,
were $53.9 million.
In February 1999, the Company issued 50,000 common shares to an employee.
The transaction was recorded at a share price of $26.875 per share, the market
value of the common shares on the issuance date.
In April, 1999, the Company acquired the auction business of Forke, Inc.
through the payment of $25 million cash and the issuance of 100,000 common
shares and 400,000 warrants to acquire common shares of the Company. The
warrants are fully vested and have an exercise price of $26.69 per share and
expire on April 1, 2001. The shares have been valued using the market price of
$30.55 per share and the warrants have been valued at $4,332,000 using an option
pricing model. The combined value of $7,387,000 for the shares and warrants has
been included as non-cash consideration in the Forke acquisition.
STOCK OPTIONS:
<TABLE>
<CAPTION>
NUMBER OF
SHARES EXERCISE PRICE
--------- --------------
<S> <C> <C>
Outstanding, December 31, 1998.............................. 207,000 $ 0.10 - 26.12
Granted................................................... 27,000 26.88 - 38.63
Exercised................................................. (29,283) 0.10
Cancelled................................................. (4,166) 0.10
------- --------------
Outstanding, September 30, 1999............................. 200,551 $ 0.10 - 38.63
</TABLE>
8
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RITCHIE BROS. AUCTIONEERS INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(TABULAR DOLLAR AMOUNTS EXPRESSED IN THOUSANDS OF UNITED STATES DOLLARS)
SEPTEMBER 30, 1999 -- (CONTINUED)
(Information as at September 30, 1999 and for the nine-month periods
ended September 30, 1999 and 1998 is unaudited)
7. UNITED STATES GENERALLY ACCEPTED ACCOUNTING PRINCIPLES
The consolidated financial statements are prepared in accordance with
Canadian generally accepted accounting principles for interim financial
information which differ, in certain respects, from accounting practices
generally accepted in the United States and from requirements promulgated by the
United States Securities and Exchange Commission.
Material differences to the consolidated financial statements and related
notes of the Company are as follows:
Consolidated statements of net income per share
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
----------------------- -----------------------
1999 1998 1999 1998
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Net income per share in accordance with
United States GAAP
Basic..................................... $ 0.13 $ 0.12 $ 0.85 $ 0.88
Diluted................................... $ 0.13 $ 0.12 $ 0.84 $ 0.87
========== ========== ========== ==========
Weighted average number of shares
outstanding............................... 16,725,382 16,548,666 16,671,752 15,705,754
Diluted average number of shares
outstanding............................... 17,000,873 16,719,396 16,900,269 15,887,926
</TABLE>
Consolidated statements of comprehensive net income
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------- ------------------
1999 1998 1999 1998
-------- ------- ------- -------
<S> <C> <C> <C> <C>
Net income........................................... $ 2,146 $2,004 $14,249 $13,873
Other comprehensive income adjustments
Foreign currency translation....................... 355 (78) (214) (395)
------- ------ ------- -------
Comprehensive net income in accordance with United
States GAAP........................................ $ 2,501 $1,926 $14,035 $13,478
======= ====== ======= =======
</TABLE>
9
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ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
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 three-month
and nine-month periods ended September 30, 1999 compared to the three-month and
nine-month periods ended September 30, 1998. This discussion should be read in
conjunction with the consolidated financial statements and notes thereto
included herein and included in the Company's Annual Report and Report on Form
40-F for the fiscal year ended December 31, 1998. The Company prepares its
consolidated financial statements in accordance with generally accepted
accounting principles in Canada which, except as set out in note 7 to the
consolidated financial statements, result 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.
Ritchie Bros. is the world's leading auctioneer of industrial equipment. At
September 30, 1999, the Company operated from over 70 locations in North and
Central America, Europe, Asia, Australia, Africa 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 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.
Although the Company cannot accurately anticipate the future effect of
inflation, inflation historically has not had a material effect on the Company's
operations.
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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 in 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. 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. The
Company recorded goodwill of $33.0 million on the acquisition, consisting of the
cash paid plus $7.4 million recorded for the fair value of the shares and
warrants issued and $0.6 million of capitalized acquisition expenses. In related
transactions, in the second quarter of 1999, the Company acquired an office
building in Nebraska for $1.3 million and in the third quarter of 1999, the
Company acquired permanent auction sites in North Carolina and New Mexico, and
land and buildings in Texas and Florida for combined consideration of $10.8
million. Operating expenses related to the acquisition commenced in the second
quarter of 1999; however, incremental revenues did not commence until the third
quarter of 1999.
In the first nine months of 1999 the Company opened a new permanent auction
site on the Gold Coast of Australia, near Brisbane, and an upgraded permanent
auction site in Truro, Nova Scotia. In addition, in the third quarter of 1999,
the Company opened sales offices in Panama, Hong Kong and South Africa.
In the second quarter of 1999, the Company purchased 60 acres of land in
Montreal, Quebec and in the third quarter the Company purchased 192 acres (with
plans to develop approximately 55 acres) in Baltimore, Maryland. The Company
intends to construct permanent auction sites in each of these locations which
will replace existing regional auction units in 2000, once the new auction
facilities have been constructed. During the third quarter, the Company also
purchased 152 acres (with plans to develop approximately 60 acres) in Prince
George, British Columbia, and intends to construct a permanent auction site on
this property, replacing the Company's existing Prince George facility which is
located on a 32 acre site.
During the third quarter of 1999, the Company entered into lease agreements
in Singapore and Dubai, U.A.E. The Singapore lease includes up to 15 acres of
land and will be used by the Company to establish a new Asian regional auction
unit. The first auction sale on the Singapore property is scheduled for November
1999. The Dubai lease includes up to 26 acres of land and will enable the
company to replace its existing Dubai location with an expanded regional auction
unit. Construction of purpose-built auction facilities in both Singapore and
Dubai is expected to be completed in 2000.
RESULTS OF OPERATIONS
NINE MONTHS ENDED SEPTEMBER 30, 1999 COMPARED TO NINE MONTHS ENDED SEPTEMBER 30,
1998
Auction Revenues
Auction revenues of $74.3 million for the nine months ended September 30,
1999 increased by $10.0 million, or 15.6%, from the comparable period in 1998
due to increased gross auction sales and higher average auction revenue rates.
Gross auction sales of $808.1 million for the nine months ended September 30,
1999 increased $57.6 million, or 7.7%, from the comparable period in the prior
year, primarily as a result of increased gross auction sales in the United
States offset by decreased gross auction sales in Europe. Results for 1999
included significant auctions in Fort Worth, Texas; Houston, Texas; Las Vegas,
Nevada; Dubai, the United Arab Emirates; and in the Port of Moerdijk, the
Netherlands. Auction revenues as a percentage of gross auction sales have
averaged approximately 8.80% on a long-term basis. In the first nine months of
1999, the auction revenue rate of 9.19% was higher than the long-term average
and higher than the 8.57% rate experienced in the comparable 1998 period. The
Company's expectations with respect to the long-term average auction revenue
rate remain unchanged.
11
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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
specifically related to the auction. Direct expenses of $12.0 million for the
nine-month period ended September 30, 1999 increased by $1.0 million compared to
the comparable 1998 period due to increased auction activity generated by the
Company in the 1999 period. As a percentage of gross auction sales, direct
expenses were 1.49% for the nine months ending September 30, 1999, marginally
higher than the 1.47% experienced in the first nine months of 1998.
Depreciation and Amortization Expense
Depreciation is calculated on capital assets employed in the Company's
business, including building and site improvements, automobiles, yard equipment,
and computers. Amortization results from expensing, over 20 years, the $33.0
million of goodwill recorded as a result of the acquisition of the auction
business of Forke in April 1999. In the nine-month period ending September 30,
1999, depreciation and amortization expense was $3.8 million, compared to $2.0
million in the comparable 1998 period. This increase is the result of the
depreciation of new auction facilities constructed over the past year and
goodwill amortization charges of $0.9 million for the period from April 1, 1999
to September 30, 1999.
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 nine months ended September 30, 1999, the Company incurred G&A
of $35.9 million, as compared to $30.3 million for the comparable nine-month
period in 1998. During the first quarter of 1999 the Company incurred a special
compensation expense of approximately $1.3 million related to a share issuance
to an employee. The Company does not intend to make similar share issuances in
the future. G&A also increased in 1999 due to the operation of new permanent
auction sites and an administrative office in the United States as part of the
acquisition of the auction business of Forke.
Income from Operations
Income from operations was $22.5 million in the nine months ended September
30, 1999 compared to $21.0 million in the comparable 1998 period. This increase
is the result of increased gross auction sales and higher auction revenue rates
in 1999 compared to 1998, partially offset by higher G&A and depreciation and
amortization expenses in the second and third quarters of 1999.
Interest Expense
Interest expense includes interest and bank charges paid on term bank debt.
Interest expense for the nine months ended September 30, 1999 was $1.8 million,
compared to $1.3 million incurred in the nine months ended September 30, 1998.
The increase resulted primarily from debt incurred by the Company in connection
with the acquisition of the auction business and certain assets of Forke in the
1999 period. Management anticipates that interest expense will increase further
as debt is incurred to finance the acquisition of additional permanent auction
sites. See "-- Overview" and "Liquidity and Capital Resources."
Other Income
Other income arises from equipment appraisals performed by the Company, and
other miscellaneous sources. Other income for the nine months ended September
30, 1999 was $0.9 million compared to $2.7 million for the comparable 1998
period. This decrease is attributable to a $1.8 million non-recurring gain in
the 1998 period that arose from the sale of property.
12
<PAGE> 13
Income Taxes
Income taxes of $7.4 million for the nine months ended September 30, 1999
have been computed based on rates of tax that apply in each of the tax
jurisdictions in which the Company operates. The effective tax rate of 34.1% on
net income for the nine months ended September 30, 1999 is lower than the 38.1%
rate the Company experienced in the comparable 1998 period due to initiatives
undertaken by the Company.
THREE MONTHS ENDED SEPTEMBER 30, 1999 COMPARED TO THREE MONTHS ENDED SEPTEMBER
30, 1998
Auction Revenues
Auction revenues of $20.7 million for the three months ended September 30,
1999 increased by $6.8 million, or 49.3%, from the comparable period in 1998 due
to increased gross auction sales and higher average auction revenue rates. Gross
auction sales of $219.0 million for the three months ended September 30, 1999
increased $35.4 million, or 19.3%, from the comparable period in the prior year,
primarily as a result of increased gross auction sales in the United States. A
portion of the increase in gross auction sales is attributable to the
acquisition of the auction business and certain assets of Forke in the second
quarter of 1999; however, management expects that the full impact of this
acquisition will not be experienced until 2000 and that the impact will differ
from quarter to quarter. In addition, because of the integration of the Forke
operations into the Company's business, it is not possible to identify revenues
that are specifically attributable to the Forke transaction. Results for the
third quarter of 1999 included significant auctions in Houston and Fort Worth,
Texas. Auction revenues as a percentage of gross auction sales were 9.45% in the
three months ended September 30, 1999 compared to 7.55% in the comparable 1998
period and a long-term average of 8.80%. The Company's expectations with respect
to the long-term average auction revenue rate remain unchanged.
Direct Expenses
Direct expenses of $2.9 million increased by $0.4 million for the three
months ended September 30, 1999 compared to the comparable 1998 period due to
increased auction activity generated by the Company in the 1999 period. As a
percentage of gross auction sales, direct expenses were 1.34% for the
three-month period ending September 30, 1999, lower than the 1.40% for the
comparable period in 1998.
Depreciation and Amortization Expense
In the three-month period ending September 30, 1999, depreciation and
amortization expense was $1.6 million, compared to $0.7 million in the
comparable 1998 period. This increase is primarily the result of new auction
facilities being depreciated in the three months ending September 30, 1999 and
goodwill amortization of $0.4 million during the period as a result of the
acquisition of the auction business of Forke.
General and Administrative Expense
For the three months ended September 30, 1999, the Company incurred G&A
costs of $12.5 million, as compared to $9.4 million for the comparable
three-month period in 1998. This increase is attributable to an ongoing build-up
in infrastructure to support the growth initiatives of the Company, including
the opening of an administrative office in the United States, the addition of
personnel hired including those as a result of the acquisition of the auction
business of Forke, and new permanent auction sites acquired over the preceding
year.
Income from Operations
Income from operations was $3.7 million for the three months ended
September 30, 1999, an increase of $2.5 million over the comparable period in
1998. This increase is attributable to increased gross auction sales and auction
revenues in the three months ended September 30, 1999, offset by increased
depreciation and G&A in the 1999 period to support the growth plans of the
Company.
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Interest Expense
Interest expense for the three months ended September 30, 1999 was $0.9
million, compared to $0.1 million incurred in the three months ended September
30, 1998. The increase is attributable to debt incurred by the Company in
connection with the acquisition of the auction business and certain assets of
Forke in the 1999 period. Management anticipates that interest expense will
increase further as debt is incurred to finance the acquisition of additional
permanent auction sites. See "-- Overview" and "Liquidity and Capital
Resources."
Other Income
Other income of $0.3 million for the three months ended September 30, 1999
decreased from $2.1 million for the comparable 1998 period due to a
non-recurring gain in the 1998 period of $1.8 million from the sale of property.
Income Taxes
Income taxes of $1.1 million for the three months ended September 30, 1999
have been computed based on rates of tax that apply in each of the tax
jurisdictions in which the Company operates. The effective tax rate of 33.0% is
lower than the 36.7% rate the Company experienced in the comparable 1998 period
due to initiatives undertaken by the Company.
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 September 30, 1999, working capital, including cash, was $35.3 million,
compared to $49.2 million at December 31, 1998.
Net capital expenditures by the Company during the nine months ended
September 30, 1999 were $38.6 million as compared to $25.4 million for the nine
months ended September 30, 1998. In the 1999 period, the Company acquired land
and buildings from Forke in Albuquerque, NM, Statesville, NC, Fort Worth, TX and
Ocala, FL and made unrelated purchases of property in Montreal, QC, Baltimore,
MD, and Prince George, BC. In addition, the Company continued to incur site
development costs in the United States, Canada, Australia and Europe.
The Company is continuing with its plan to add additional permanent auction
sites in selected international locations and is presently in various stages of
commitments to acquire land for development in the United States and Canada.
The Company has established 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 $35.0 million. At September
30, 1999, the Company had no bank debt relating to operations, and bank debt
related to property acquisitions totaled $12.2 million. The Company also has a
$35.0 million term loan facility that was negotiated to finance a portion of the
Forke acquisition, which had been entirely drawn down at September 30, 1999.
All borrowings in connection with the Forke acquisition have been financed
through a bank term loan. At September 30, 1999, the loan bore interest at a
floating rate of 6.03%. Subsequent to the quarter-end, the interest rate on the
majority of the loan was fixed for a four-year period at a rate of 7.21%.
Interest is payable quarterly and the Company is required to make minimum annual
payments of $5 million in respect of the principal amount of the debt. See "--
Overview."
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YEAR 2000 COMPLIANCE
The Company relies on computer systems 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 year
2000 issue, which is common to most companies, relates to the inability of such
computer systems to properly recognize and process date sensitive information
with respect to dates in the Year 2000 and thereafter.
The Company has completed its Year 2000 compliance efforts, which began in
1997, and does not expect any material disruption of its operations as a result
of any failure to achieve Year 2000 compliance. Related costs incurred to date
have not had, and estimated future costs are not anticipated to have, a material
impact on the Company's business, financial condition, or results of operations.
However, as testing of Year 2000 functionality of the Company's systems has
necessarily occurred in a simulated environment, the Company will not be able to
test full system year 2000 interfaces and capabilities prior to the Year 2000.
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 has developed contingency plans in the event of the Company's
or its key suppliers' failure to achieve full Year 2000 compliance. The plans
include 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. 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 contains 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 Forke transaction, the anticipated improvement,
acquisition and development of permanent auction sites, and the financing
available to the Company. 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;
the timing and location of auctions; potential delays in construction or
development of auction sites; actions of competitors; adverse changes in
economic conditions; restrictions affecting the ability of equipment owners to
transport equipment between jurisdictions; the ability of the Company to
integrate the business acquired and personnel hired as a result of the Forke
transaction; and other risks and uncertainties as detailed in the Company's
periodic filings with the United States Securities and Exchange Commission
including its Registration Statement on Form F-10 filed on June 17, 1999. 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.
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PART II. OTHER INFORMATION
ITEM 6. EXHIBITS
<TABLE>
<CAPTION>
NUMBER DESCRIPTION
- ------ -----------
<C> <S>
*3.1 Articles of Amalgamation, as amended
*3.2 By-laws
*4.1 Form of common share certificate
4.2 Description of capital shares contained in the Articles of
Amalgamation (see Exhibit 3.1)
4.3 Description of rights of securityholders contained in the
By-laws (see Exhibit 3.2)
*10.1 1997 Stock Option Plan, as amended
*10.2 Form of Indemnity Agreement for directors and officers
</TABLE>
- ---------------
*Incorporated by reference to the same exhibit number from the Registration
Statement on Form F-1 filed on September 26, 1997, as amended (File No.
333-36457).
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
RITCHIE BROS. AUCTIONEERS INCORPORATED
(Registrant)
Date: November 12, 1999 By: /s/ ROBERT S. ARMSTRONG
------------------------------------
Robert S. Armstrong
Corporate Secretary
16
