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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, 1999 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: 16,733,264
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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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: March 24, 2000
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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 March 24,
2000 (which includes Management's Discussion and Analysis of
Financial Condition and Results of Operations for the year
ended December 31, 1999).
2. The following audited consolidated financial statements of
the Registrant, together with the independent auditors'
report dated February 18, 2000 of KPMG LLP, Chartered
Accountants:
a. Consolidated Statements of Income for the years ended
December 31, 1999, 1998 and 1997, and for the eight
months ended December 31, 1997.
b. Consolidated Balance Sheets as of December 31, 1999 and
1998.
c. Consolidated Statements of Shareholders' Equity for the
years ended December 31, 1999, and 1998, the eight
months ended December 31, 1997.
d. Consolidated Statements of Cash Flows for the years
ended December 31, 1999, 1998, 1997, and the eight
months ended December 31, 1997.
e. Notes to Consolidated Financial Statements (which
includes reconciliation with United States generally
accepted accounting principles).
3. Consent dated March 24, 2000 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, 1999
March 24, 2000
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.................................................. 1-5
Competitive Advantages.................................... 1-7
Growth Strategies......................................... 1-8
Operations................................................ 1-9
Marketing and Sales....................................... 1-11
Competition............................................... 1-12
Facilities................................................ 1-12
Employees................................................. 1-13
Governmental and Environmental Regulations................ 1-13
Legal Proceedings......................................... 1-13
Selected Consolidated Financial Information................. 1-14
Five Year Summary......................................... 1-14
Segmented Information..................................... 1-15
Quarterly Summary......................................... 1-16
Dividend Policy............................................. 1-16
Management's Discussion and Analysis of Financial Condition
and Results of Operations................................. 1-17
Overview.................................................. 1-17
Results of Operations..................................... 1-18
Liquidity and Capital Resources........................... 1-20
Year 2000 Compliance...................................... 1-20
Forward-Looking Statements................................ 1-21
Risk Factors................................................ 1-22
Market for Securities....................................... 1-25
Directors and Officers...................................... 1-25
Additional Information...................................... 1-27
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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:
LOGO
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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 70 locations in North and Central America, Europe,
Asia, Australia, Africa 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.
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.
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.
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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. While the
Company's early auction sales were held primarily in Western Canada, Ritchie
Bros. expanded eastward through the 1960's.
By 1970, the Company had established operations in the U.S. and held its
first U.S. sale in Beaverton, Oregon. Throughout the 1970's and 1980's,
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 countries
including, Japan, the Philippines and Singapore. The Company held its first
Mexican auction in 1995 and its first Middle Eastern auction, in Dubai, in 1997.
The Company also held its first Central American auction, in Panama, in 1999.
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
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 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. acquired land, buildings and other
tangible assets, including an office building in Nebraska and certain auction
sites, for a combined purchase price of $12.1 million.
After opening permanent auction sites in Rotterdam, The Netherlands and
Brisbane, Australia in 1999, the Company was operating 17 permanent auction
sites and eight regional auction units.
INDUSTRY
Ritchie Bros. operates in the auction segment of the used equipment
marketplace. Research analysts estimate that there is approximately $1 trillion
of used industrial equipment in existence worldwide, and that approximately $100
billion of this 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 and trucks and trailers produced
by manufacturers such as 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.
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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 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, 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. 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.
- 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.
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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. On average, buyers from outside
the region in which the auction is being held, account for over 50% 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 18 countries and
regularly holds auctions in North and Central 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 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 300,000 active customers from over 180 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 world's leading
auctioneer of industrial equipment. 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. The Company has
approximately 450 full-time employees. All employees
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participate in a performance bonus plan tying their overall compensation to
corporate and personal performance, and none are compensated on a commission
basis.
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. 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 that is typically followed in the development of 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 a 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 typically 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 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 site development projects.
In 2000, the Company expects to open new permanent auction sites to replace
regional auction units in Perris (near Los Angeles), California; Morris (near
Chicago), Illinois; Montreal, Quebec; and Baltimore, Maryland. The Company also
plans to build auction facilities at its regional auction units in Singapore and
Dubai, United Arab Emirates. Other expansion projects may also be completed
during 2000.
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, Central America 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, Singapore 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
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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 and to enhance its 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 and Central America, Europe, Asia, Australia, Africa and the
Middle East. In 1999, approximately 80% of the Company's auctions were held at
permanent auction sites or regional auction units. The remaining 20% were
"off-site" auctions, 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. 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
scheduled to open in 2000 in Morris (near Chicago), Illinois; Perris (near Los
Angeles), California; Montreal, Quebec; and Baltimore, Maryland. 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 most other industrial equipment auctions. The large
bidder audiences, including international bidders, increases the likelihood of
world market prices being achieved, thereby maximizing the proceeds on the sale
of 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 300,000 active customers from over 180 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
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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.
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 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.
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.
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.
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<PAGE> 14
- 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.
- Where relevant, translation services are provided and in some cases, the
auctioneer's current "bid" 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
As at December 31, 1999, the Company employed approximately 165 regional,
area and territory managers. 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 300,000
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.
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<PAGE> 15
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.
While Ritchie Bros. is significantly larger than its largest auction
competitor, some of the other distributors and marketers of equipment 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. The following table lists Ritchie Bros.'
permanent sites and sites under development as at December 31, 1999:
<TABLE>
<CAPTION>
YEAR PLACED IN SERVICE SIZE
LOCATION BY RITCHIE BROS. (ACRES) STATUS
- -------- ---------------------- ------- ------
<S> <C> <C> <C>
United States
Albuquerque, New Mexico............... 1999 16
Atlanta, Georgia...................... 1996 40
Denver, Colorado...................... 1985 39
Fort Worth, Texas..................... 1994 60
Houston, Texas........................ 1993 25
Minneapolis, Minnesota................ 1991 29
Morris, Illinois...................... 60 Scheduled to open in 2000
Ocala, Florida........................ 1999 64
Olympia, Washington................... 1994 26
Perris, California.................... 66 Scheduled to open in 2000
Phoenix, Arizona...................... 1987 9
Statesville, North Carolina........... 1999 40
Baltimore, Maryland................... 55 Scheduled to open in 2000
Canada
Edmonton, Alberta..................... 1976 25
Halifax, Nova Scotia.................. 1997 26
Prince George, British Columbia....... 1980 32
Toronto, Ontario...................... 1998 65
Vancouver, British Columbia........... 1979 8
Montreal, Quebec...................... 60 Scheduled to open in 2000
Other
Brisbane, Australia................... 1999 42
Rotterdam, The Netherlands............ 1999 53
</TABLE>
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<PAGE> 16
Certain of these properties are subject to encumbrances granted as security
for term loans of the Company.
The Company also owns property in addition to the acreage noted on certain
of the above auction sites, which may be available for future expansion or sale.
The Company has recently acquired land in Prince George, British Columbia and
Edmonton, Alberta and intends to develop replacement permanent auction sites on
these locations.
In addition to these 21 locations, the Company operates regional auction
units, which have been conducting recurring auctions, typically on leased
premises, located in Toluca, Mexico; Stockton, California; Singapore; and Dubai,
United Arab Emirates.
EMPLOYEES
The Company had approximately 450 full-time employees at December 31, 1999.
The Company also employs up to 1,000 part-time employees each year. 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, 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 does 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> 17
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, 1999. 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
MONTHS
ENDED
YEAR ENDED DECEMBER 31, DECEMBER 31, FISCAL YEAR ENDED APRIL 30,
--------------------------------------- ------------ ---------------------------------------
1999 1998 1997 1997 1997 1996 1995
----------- ----------- ----------- ------------ ----------- ----------- -----------
(UNAUDITED) (1)
(1) (1) (1) (1)
<S> <C> <C> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Auction revenues............... $ 104,624 $ 94,899 $ 85,009 $ 60,034 $ 72,186 $ 65,306 $ 51,326
Direct expenses................ (17,469) (16,010) (17,351) (13,041) (13,908) (13,138) (12,979)
----------- ----------- ----------- ----------- ----------- ----------- -----------
87,155 78,889 67,658 46,993 58,278 52,168 38,347
Depreciation................... (5,581) (2,752) (2,548) (1,540) (2,014) (1,820) (1,708)
General & administrative
expense....................... (47,346) (39,315) (37,724) (27,414) (31,099) (26,848) (24,628)
Employee equity participation
expense(2).................... -- -- (10,346) (10,346) -- -- --
----------- ----------- ----------- ----------- ----------- ----------- -----------
Income from operations......... 34,228 36,822 17,040 7,693 25,165 23,500 12,011
Interest expense............... (1,705) (1,569) (2,034) (1,380) (1,081) (1,104) (1,274)
Other income................... 1,209 3,251 754 576 917 1,179 677
----------- ----------- ----------- ----------- ----------- ----------- -----------
Income before income taxes..... 33,732 38,504 15,760 6,889 25,001 23,575 11,414
Income taxes................... (11,452) (13,670) (7,438) (4,491) (5,992) (4,428) (2,975)
----------- ----------- ----------- ----------- ----------- ----------- -----------
Net income..................... $ 22,280 $ 24,834 $ 8,322 $ 2,398 $ 19,009 $ 19,147 $ 8,439
=========== =========== =========== =========== =========== =========== ===========
Net income per share --
basic......................... 1.34 1.56 0.65 0.19 1.49 1.51 0.66
Net income per share --
diluted....................... 1.31 1.54 0.64 0.18 1.49 1.51 0.66
US GAAP -- Net income(3)....... $ 22,280 $ 24,814 $ 6,969 $ 1,045 $ 19,009 $ 19,147 $ 8,439
=========== =========== =========== =========== =========== =========== ===========
US GAAP -- Net income per share
-- basic...................... 1.34 1.56 0.54 0.08 1.49 1.51 0.66
US GAAP -- Net income per share
-- diluted.................... 1.32 1.54 0.54 0.08 1.49 1.51 0.66
Weighted average number of
shares outstanding(4)
-- Basic...................... 16,686,595 15,918,214 12,877,777 12,958,753 12,715,667 12,715,667 12,715,667
-- Diluted.................... 17,191,783 16,116,242 12,933,701 13,042,069 12,715,667 12,715,667 12,715,667
BALANCE SHEET DATA (END OF
PERIOD):
Working capital (including
cash)......................... $ 25,980 $ 49,149 $ 3,322 $ 3,322 $ 39,707 $ 33,132 $ 21,822
Total assets................... 216,146 152,593 70,460 70,460 142,858 150,969 98,621
Long term debt................. 35,728 8,768 4,623 4,623 5,755 6,547 6,985
Total shareholders' equity..... 134,395 104,172 25,706 25,706 59,325 48,801 37,718
SELECTED OPERATING DATA:
Gross auction sales(5)......... $ 1,170,529 $ 1,087,800 $ 946,415 $ 681,425 $ 792,865 $ 752,735 $ 634,058
Auction revenues as percentage
of gross auction sales........ 8.94% 8.72% 8.98% 8.81% 9.10% 8.68% 8.09%
Number of consignors........... 16,185 14,432 13,636 9,985 12,088 10,744 10,460
Number of buyers............... 38,958 34,613 33,340 23,917 30,630 27,837 27,401
Number of permanent auction
sites (end of period)......... 17 13 13 13 13 12 11
</TABLE>
Notes:
- ---------------
(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
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<PAGE> 18
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. Diluted weighted average shares outstanding has
been determined in accordance with US GAAP.
(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 1999, auction revenues derived from auction sales in the United
States represented 61.9% 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, 1999
Auction revenues................................ $64,766 $17,110 $22,748 $104,624
Capital assets and goodwill..................... 94,662 17,463 30,101 142,226
Year ended December 31, 1998
Auction revenues................................ $49,747 $16,105 $29,047 $ 94,899
Capital assets.................................. 31,529 9,203 20,592 61,324
Year ended December 31, 1997 (Unaudited)
Auction revenues................................ 44,615 16,095 24,299 85,009
Capital assets.................................. 19,604 6,373 1,030 27,007
Eight months ended December 31, 1997
Auction revenues................................ 32,254 13,664 14,116 60,034
Capital assets.................................. 19,604 6,373 1,030 27,007
</TABLE>
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<PAGE> 19
QUARTERLY SUMMARY (UNAUDITED)
(dollar amounts in thousands, except per share data)
<TABLE>
<CAPTION>
NET INCOME PER SHARE
GROSS AUCTION AUCTION NET ---------------------
PERIOD SALES REVENUE INCOME BASIC DILUTED(1)
- ------ ------------- -------- ---------- ------ ------------
<S> <C> <C> <C> <C> <C>
1999
1(st) quarter........................ $ 201,764 $ 18,013 $ 1,632 $0.10 $0.10
2(nd) quarter........................ 387,288 35,589 10,471 0.63 0.62
3(rd) quarter........................ 219,024 20,699 2,146 0.13 0.13
4(th) quarter........................ 362,453 30,323 8,031 0.48 0.47
---------- -------- ------- ----- -----
$1,170,529 $104,624 $22,280 $1.34 $1.32
========== ======== ======= ===== =====
1998
1(st) quarter........................ $ 227,637 $ 21,229 $ 3,377 $0.24 $0.24
2(nd) quarter........................ 339,219 29,188 8,492 0.51 0.51
3(rd) quarter(2)..................... 183,633 13,869 2,004 0.12 0.12
4(th) quarter........................ 337,311 30,613 10,961 0.66 0.65
---------- -------- ------- ----- -----
$1,087,800 $ 94,899 $24,834 $1.56(3) $1.54(3)
========== ======== ======= ===== =====
</TABLE>
- ---------------
(1) Diluted net income per share has been calculated in accordance with US GAAP.
(2) Net income for the third quarter of 1998 includes non-recurring income of
$1.2 million, or $0.07 per share.
(3) 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.
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.
1-16
<PAGE> 20
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 year ended
December 31, 1999 compared to the year ended December 31, 1998. 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,
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
December 31, 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.
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
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<PAGE> 21
throughout North and Central America, Europe, Asia, Australia, Africa, 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, New Mexico, and
Florida, and land and buildings in Texas 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.
During 1999 the Company held auctions for the first time in Singapore and
Panama and opened sales offices in those countries as well as in Hong Kong,
South Africa, Austria, Italy and several cities in North America. In addition,
new permanent auction sites were opened in the Port of Moerdijk, The Netherlands
and on the Gold Coast of Australia, near Brisbane. As well, an upgraded
permanent auction site was opened in Truro, Nova Scotia. Also during 1999, the
Company purchased 60 acres of land in Montreal, Quebec and 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 in 2000, which
will replace existing regional auction units, once the new auction facilities
have been constructed. During the year, 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 in
2000, replacing the Company's existing Prince George facility which is located
on a 32 acre site.
Also during 1999 the Company entered into lease agreements in Singapore and
Dubai, U.A.E. The Singapore lease includes up to 15 acres of land. 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
modest purpose-built auction facilities in both Singapore and Dubai is expected
to be completed in 2000.
Finally, in 1999, the Company improved the functionality of its Internet
site to better service its customers, and plans to further improve the site
during 2000 and beyond. The Company plans to introduce initiatives that include
live Internet broadcasts of some of its auctions, amongst other features.
RESULTS OF OPERATIONS
Auction Revenues
Auction revenues of $104.6 million for the year ended December 31, 1999
increased by $9.7 million, or 10.2%, from 1998 due to higher average auction
revenue rates and increased gross auction sales. Gross auction sales of $1.17
billion for the year ended December 31, 1999 increased $82.7 million, or 7.6%,
over the prior year, primarily as a result of increased gross auction sales in
the United States, partially 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. In addition, the Company held auctions for the first
time in Singapore and Panama. Auction revenues as a percentage of gross auction
sales have averaged approximately 8.80% on a long-term basis. In the year ended
December 31, 1999, the auction revenue rate of 8.94% was higher than the
long-term average and higher than the 8.72% rate experienced in the year ended
December 31, 1998. 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
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<PAGE> 22
safeguard equipment while at the auction site and advertising specifically
related to the auction. Direct expenses of $17.5 million for the year ended
December 31, 1999 increased by $1.5 million compared to 1998 due to increased
auction activity generated by the Company in 1999. As a percentage of gross
auction sales, direct expenses were 1.49% for the year ended December 31, 1999,
roughly consistent with the 1.47% ratio experienced in the prior year. Direct
expenses as a percentage of gross auction sales are expected to fluctuate
slightly based on the size and location of auctions held each period. Management
expects that, on average, direct expenses as a percentage of gross auction sales
should remain fairly close to the 1.5% level in 2000.
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 year ended December 31, 1999,
depreciation and amortization expense was $5.6 million, compared to $2.8 million
in 1998. This increase is the result of the depreciation of new auction
facilities constructed over the past year and goodwill amortization charges of
$1.2 million for the period from April 1, 1999 to December 31, 1999. 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, 1999, the Company incurred G&A of
$47.3 million, as compared to $39.3 million in 1998. This increase in
expenditures is attributable to an increase in employee numbers and
infrastructure to support the growth initiatives of the Company. Included in
these expenditures are costs related 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. In addition, 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. Future
levels of G&A will be affected by infrastructure and workforce expansion
necessary to support the Company's growth plans and other factors.
Income from Operations
Income from operations was $34.2 million for the year ended December 31,
1999 compared to $36.8 million in 1998. This decrease is the result of higher
G&A and depreciation and amortization expenses in 1999, partially offset by
increased gross auction sales and higher auction revenue rates in 1999 compared
to 1998.
Interest Expense
Interest expense includes interest and bank charges paid on term bank debt.
Interest expense for the year ended December 31, 1999 was $1.7 million, compared
to $1.6 million incurred in 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 1999. This increase was partially offset
by the capitalization of $0.9 million (1998 -- nil) of interest related to
properties under development during the year. Management anticipates that
interest expense will increase further as debt is incurred to finance the
development 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 year ended December 31, 1999
was $1.2 million compared to $3.3 million for 1998. This decrease is
attributable primarily to a non-recurring $1.8 million gain in the 1998 period
that arose from the sale of property.
1-19
<PAGE> 23
Income Taxes
Income taxes of $11.5 million for the year ended December 31, 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 33.9% on net income for
the year ended December 31, 1999 is lower than the 35.5% rate the Company
experienced in 1998 primarily 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 December 31, 1999, working capital including cash was $26.0 million,
compared to $49.1 million at December 31, 1998. This decrease of $23.1 million
during the year was due in part to the allocation of working capital to fund a
portion of the Company's capital expenditure program. In addition, the Company's
current portion of bank debt increased from $0.8 million at December 31, 1998 to
$5.4 million at December 31, 1999 reflecting debt incurred to partially finance
the acquisition of the Forke auction business and the acquisition and
development of certain permanent auction sites.
Net capital expenditures by the Company during the year ended December 31,
1999 were $53.5 million as compared to $37.1 million for the year ended December
31, 1998. In the 1999 period, the Company acquired land and buildings from Forke
in Albuquerque, NM, Statesville, NC, Fort Worth, TX, Ocala, FL and Lincoln, NB
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
expects that it will incur an average of $20 to $25 million per year in capital
expenditures over the next few years. Actual expenditure levels will depend on
the Company's ability to identify and capitalize on suitable auction site
development opportunities.
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 of approximately $112.0 million and to
credit lines for funding property acquisitions of approximately $35.7 million.
At December 31, 1999, the Company had no bank debt relating to operations, and
bank debt related to property acquisitions totaled $12.7 million, leaving a net
credit line of $23.0 million available for property acquisitions. 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 December
31, 1999. At December 31, 1999, the majority of the loan bore interest at a
fixed 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".
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. To the best of the
Company's knowledge, no disruptions to the Company's operations occurred or are
likely to occur as a result of the Year 2000 Issue. However, Management believes
that it is not yet possible to conclude that all aspects of the Year 2000 issue
that may affect the Company, including those related to customers, suppliers, or
other third parties, have been fully resolved.
1-20
<PAGE> 24
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, the development of
Internet-related initiatives, and the financing available to the Company. Words
such as "expects", "intends", "plans", "believes", "estimates", "anticipates"
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 have an impact on the supply of and demand for used equipment;
fluctuations in the market values of used equipment; potential inability to
achieve and manage growth; 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; potential losses from price guarantees, purchases of inventory,
advances by the Company and guarantees of clear title; risks of noncompliance
with governmental and environmental regulation; potential inadequacy of
insurance coverage; risks of international operations; dependence of key
personnel; failure, pace or lack of development of Internet-related initiatives;
and other risks and uncertainties as detailed in the Company's periodic filings
with the United States Securities and Exchange Commission including its annual
return for 1999 filed on Form 40-F in March 2000. 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.
1-21
<PAGE> 25
RISK FACTORS
POTENTIAL INABILITY TO ACHIEVE AND MANAGE GROWTH
A principal component of the Company's strategy is to continue to grow by
increasing income from operations in the Company's existing markets and by
expanding into new geographic markets. The Company is also assessing
opportunities to expand its presence in the auction market segments that the
Company has not historically emphasized. The Company's future growth will depend
upon a number of factors, both within and outside of the Company's control,
including the Company's identification and development of new markets; the
identification and acquisition on favorable terms of suitable new auction sites
and, possibly, of suitable acquisition candidates; the ability to hire and train
qualified personnel; the successful integration of new sites and any acquired
businesses (including Forke, which was the Company's first material business
acquisition) with the Company's existing operations; the acceptance by potential
consignors and industrial equipment buyers of the auction process generally, as
well as of the Company's expansion into new markets and market segments; the
establishment and maintenance of favorable relationships with consignors and
bidders in new markets and the maintenance of such relationships in existing
markets; the receipt of any required governmental authorizations for proposed
development or expansion; and the Company's ability to manage expansion and to
obtain required financing. The failure to identify, purchase, develop and
integrate new sites effectively could adversely affect the Company's financial
condition and results of operations. There can be no assurance that the Company
will successfully expand its operations or that any expansion will be
profitable. Further, the results achieved by the Company to date may not be
indicative of its prospects or its ability to penetrate new markets, many of
which may have different competitive conditions and demographic characteristics
than the Company's current markets. See "The Company -- Growth Strategies" for
further details.
As a result of expanding its operations, the Company will experience growth
in the number of its employees, the scope of its operating and financial systems
and the geographic area of its operations. This growth will increase the
operating complexity of the Company and the level of responsibility of existing
and new management personnel. There can be no assurance that the Company will be
able to attract and retain qualified management and employees, that the
Company's current operating and financial systems and controls will be adequate
as the Company grows, or that any steps taken to attract and retain management
and employees and to improve such systems and controls will be sufficient.
QUARTERLY AND SEASONAL VARIATIONS IN OPERATING RESULTS
The Company's revenues and operating results historically have fluctuated
from quarter to quarter. These fluctuations have been and are expected to
continue to be caused by a number of factors, including the timing of auctions;
seasonal results of operations (with peak auction revenues and operating income
typically occurring in the second and fourth calendar quarters of each year,
primarily due to the seasonal nature of the construction and natural resources
industries); general economic conditions in the Company's markets; the timing of
acquisitions and development of auction sites and related costs; and the
effectiveness of integrating new sites or acquired businesses. Additionally, the
Company generally incurs substantial costs in entering new markets and the
profitability of operations at a new location is uncertain, in part because the
number and size of auctions at new locations is more variable than at the
Company's more established locations. These factors, among others, may cause the
Company's results of operations in some future quarters to be below the
expectations of investors or results of previous quarters, which could have a
material adverse effect on the market price of the Common Shares. Further, the
Company began incurring incremental operating costs associated with the Forke
Acquisition as of April 1, 1999. Calendar year 2000 will represent the first
full fiscal year of incremental gross auction sales and auction revenues
associated with the Forke Acquisition. 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 new employees hired in connection with the Forke
Acquisition.
1-22
<PAGE> 26
POTENTIAL LOSSES FROM PRICE GUARANTEES, PURCHASES OF INVENTORY, ADVANCES BY THE
COMPANY AND GUARANTEES OF CLEAR TITLE
The Company generally offers its services to consignors of used industrial
equipment on a straight commission basis. In certain circumstances the Company
will, subject to its evaluation of the equipment, either (1) offer to guarantee
the consignor a minimum level of gross sale proceeds, regardless of the ultimate
results of the auction or (2) offer to purchase the equipment directly from the
consignor and then auction such equipment as principal. 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. If auction proceeds are
less than the purchase price paid by the Company, the Company would incur a
loss. Because all its auctions are unreserved, the Company cannot protect itself
against such losses by bidding on or acquiring any items at the auctions. In
recent periods, guarantees and purchases and sales by the Company as principal
have represented approximately one-third of the Company's annual gross auction
sales. See "The Company -- Operations" for further details.
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 to be auctioned and upon receipt
of a security interest in the equipment to secure the obligation. If the Company
were unable to auction the equipment or if auction proceeds were less than
amounts advanced, the Company could incur a loss. See "The Company --
Operations" for further details.
The Company guarantees that each item purchased at its auctions is free of
liens and other encumbrances. While the Company expends considerable effort
ensuring that all liens have been identified and, if necessary, dealt with prior
to the auction sale, there have been instances where liens have not been
properly identified or discharged and the Company has had to make payments to
the relevant lienholders. If the Company is not able to recover sufficient funds
from the consignors to offset the payment to the lienholders, the Company would
incur a loss and such losses could be material.
ADVERSE CHANGES IN ECONOMIC CONDITIONS; INDUSTRY CYCLICALITY
A substantial portion of the Company's revenues is derived from customers
in industries that are cyclical in nature and subject to changes in general or
regional economic conditions. Adverse changes or downturns in a given industry
may decrease demand for related equipment and lead to lower auction revenues.
Although auction sales to residents of countries or regions other than the
country or region in which the auction is held have generally been increasing in
recent years, approximately one-half of auction revenues are generated by same
country or same region purchasers. As a result, the Company's operating results
in a particular country or region may be adversely affected by events or
conditions in that country or region, such as a local economic slowdown, adverse
weather affecting local industries and other factors. The Company's operating
results may also be adversely affected by increases in interest rates that may
lead to a decline in economic activity.
RISKS OF COMPETITION
The international industrial equipment market and the industrial equipment
auction market are highly fragmented. The Company competes for potential
purchasers of industrial equipment with other auction companies and with
indirect competitors such as equipment manufacturers, distributors and dealers
that sell new or used equipment, as well as equipment rental companies. The
Company also competes for potential consignors with other auction companies and
with indirect competitors such as used equipment dealers. The Company's direct
competitors are primarily regional auction companies. Some of the Company's
indirect competitors have significantly greater financial and marketing
resources and name recognition than the Company. New competitors with greater
financial and other resources than the Company may enter the industrial
equipment auction market in the future. Additionally, existing or future
competitors may succeed in entering and establishing successful operations in
new geographic markets prior to the Company's entry into such markets. They may
also compete against the Company via Internet-based services. To the extent
existing or future competitors seek to gain or retain market share by reducing
commission rates, the Company may
1-23
<PAGE> 27
also be required to modify its commission rates, which may adversely affect the
Company's results of operations and financial condition.
RISKS OF NONCOMPLIANCE WITH GOVERNMENTAL AND ENVIRONMENTAL REGULATION
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. Failure to comply with such laws, rules and regulations
could result in a substantial liability to the Company, suspension or cessation
of certain of the Company's operations, restrictions on the Company's ability to
expand at its present locations or into new locations, requirements for the
acquisition of additional equipment or other significant expenses.
The development or expansion of auction sites is contingent upon receipt of
required licenses, permits and other governmental authorizations. The inability
of the Company to obtain such required items could have an adverse effect on its
results of operations and financial condition. Additionally, changes or
concessions required by regulatory authorities could result in significant
delays in, or prevent completion of, such development or expansion. 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 real estate, as well as
related costs of investigation and property damage. Such laws often impose such
liability without regard to whether the owner or lessee knew of or was
responsible for the presence of such hazardous or toxic substances. There can be
no assurance that environmental contamination does not exist at the Company's
acquired or leased auction sites from prior activities at such locations or from
neighboring properties or that additional auction sites acquired or leased by
the Company will not prove to be so contaminated. Any such contamination could
materially adversely affect the Company's financial condition or results of
operations.
The Company is aware of potential restrictions in the United States and
Europe that may affect the ability of equipment owners to transport certain
equipment between certain jurisdictions. If these restrictions were to
materially affect the ability of customers to ship equipment to or from the
Company's auction sites, the restrictions could materially adversely affect the
Company's business, financial condition and results of operations.
The imposition of additional export or import regulations or of additional
duties, taxes or other charges on exports or imports could have a material
adverse impact on participation in the Company's auctions by international
bidders and consignors. Reduced participation by such parties could materially
adversely affect the Company's business, financial condition and results of
operations.
POTENTIAL INADEQUACY OF INSURANCE COVERAGE
The Company maintains property and general liability insurance. There can
be no assurance that such insurance will remain available to the Company at
commercially reasonable rates or that the amount of such coverage will be
adequate to cover any liability incurred by the Company. If the Company is
liable for amounts exceeding the limits of its insurance coverage or for claims
outside the scope of its coverage, its business, results of operations and
financial condition could be materially adversely affected.
RISKS OF INTERNATIONAL OPERATIONS
The Company conducts auctions in North and Central America, Europe, Asia,
Australia and the Middle East and intends to expand its international presence.
The Company's operations in international markets may be affected by fluctuating
currency exchange rates and by changing economic, political and governmental
conditions and regulations.
1-24
<PAGE> 28
DEPENDENCE ON KEY PERSONNEL
The Company's future performance and development will depend to a
significant extent on the efforts and abilities of David E. Ritchie, a
co-founder of the Company and its Chairman and Chief Executive Officer, and of
its other executive officers, particularly C. Russell Cmolik, President and
Chief Operating Officer. The loss of the services of one or more of such
individuals or other senior managers could have a material adverse effect on the
Company's business. The Company does not maintain key man insurance for any of
its employees. The Company's ongoing success will depend on its continuing
ability to attract, develop and retain skilled personnel in all areas of its
business.
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 Company 1997
Surrey, British Columbia
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 Financial 1998
Salt Spring, British Columbia Corp. and its subsidiaries
G. Edward Moul(1)(2)................. Director and officer of The McEmcy Company of Canada 1998
West Vancouver, British Columbia 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.
1-25
<PAGE> 29
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 and Human Resources
Surrey, British Columbia
Robert J. Carswell........................... Vice President/Senior Valuations Analyst
Langley, British Columbia
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 -- Southwest and Mexico Divisions
Phoenix, Arizona
Edward H. Banser............................. Vice President -- South Central Division
Fort Worth, Texas
Michael G. 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 -- Central and North Central Divisions
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
Dale Finlan.................................. Chief Information Officer
Burnaby, British Columbia
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
</TABLE>
1-26
<PAGE> 30
As of March 15, 2000, the directors and executive officers (the executive
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 42.6% of the outstanding Common Shares of the Company.
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).
1-27
<PAGE> 31
EXHIBIT NO. 2
CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1999, 1998, AND 1997 (UNAUDITED),
AND THE EIGHT-MONTH PERIOD ENDED DECEMBER 31, 1997.
2-1
<PAGE> 32
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, 1999 and 1998 and
the consolidated statements of income, shareholders' equity and cash flows for
the years ended December 31, 1999 and 1998 and for the eight months ended
December 31, 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,
1999 and 1998 and the results of its operations and its cash flows for the years
ended December 31, 1999 and 1998 and for the eight months ended December 31,
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 18, 2000
2-2
<PAGE> 33
RITCHIE BROS. AUCTIONEERS INCORPORATED
CONSOLIDATED STATEMENTS OF INCOME
(EXPRESSED IN THOUSANDS OF UNITED STATES DOLLARS)
<TABLE>
<CAPTION>
EIGHT
YEAR ENDED YEAR ENDED YEAR ENDED MONTHS ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31,
1999 1998 1997 1997
------------ ------------ ------------ ------------
(UNAUDITED)
<S> <C> <C> <C> <C>
Auction revenues......................... $ 104,624 $ 94,899 $ 85,009 $ 60,034
Direct expenses.......................... (17,469) (16,010) (17,351) (13,041)
----------- ----------- ----------- ------------
87,155 78,889 67,658 46,993
Expenses
Depreciation and amortization.......... 5,581 2,752 2,548 1,540
General and administrative............. 47,346 39,315 37,724 27,414
Employee equity participation (note
6(e))............................... -- -- 10,346 10,346
----------- ----------- ----------- ------------
52,927 42,067 50,618 39,300
----------- ----------- ----------- ------------
Income from operations................... 34,228 36,822 17,040 7,693
Other income (expenses)
Interest expense....................... (1,705) (1,569) (2,034) (1,380)
Other.................................. 1,209 3,251 754 576
----------- ----------- ----------- ------------
(496) 1,682 (1,280) (804)
----------- ----------- ----------- ------------
Income before income taxes............... 33,732 38,504 15,760 6,889
Income taxes (note 8)
Current................................ 10,902 13,962 7,438 4,491
Future................................. 550 (292) -- --
----------- ----------- ----------- ------------
11,452 13,670 7,438 4,491
----------- ----------- ----------- ------------
Net income............................... $ 22,280 $ 24,834 $ 8,322 $ 2,398
=========== =========== =========== ============
Net income per share (note 1(m))
Basic.................................. $ 1.34 $ 1.56 $ 0.65 $ 0.19
Diluted................................ 1.31 1.54 0.64 0.18
----------- ----------- ----------- ------------
Weighted average number of shares
outstanding............................ 16,686,595 15,918,214 12,877,777 12,958,753
=========== =========== =========== ============
</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> 34
RITCHIE BROS. AUCTIONEERS INCORPORATED
CONSOLIDATED BALANCE SHEETS
(EXPRESSED IN THOUSANDS OF UNITED STATES DOLLARS)
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31,
1999 1998
------------ ------------
<S> <C> <C>
ASSETS
Current assets
Cash and cash equivalents................................. $ 55,921 $ 73,620
Accounts receivable....................................... 9,645 6,771
Inventory................................................. 3,495 2,355
Advances against auction contracts........................ 856 5,345
Prepaid expenses and deposits............................. 1,221 711
Income taxes recoverable.................................. 865 --
-------- --------
72,003 88,802
Capital assets (note 2)..................................... 110,459 61,324
Goodwill (note 3)........................................... 31,767 --
Future income taxes (note 8)................................ 1,917 2,467
-------- --------
$216,146 $152,593
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Auction proceeds payable.................................. $ 16,178 $ 14,030
Accounts payable and accrued liabilities.................. 17,891 21,751
Short-term debt (note 4).................................. 6,529 --
Current bank term loans (note 5).......................... 5,425 793
Income taxes payable...................................... -- 3,079
-------- --------
46,023 39,653
Bank term loans (note 5).................................... 35,728 8,768
-------- --------
81,751 48,421
Shareholders' equity
Share capital (note 6).................................... 69,130 64,728
Additional paid-in capital (note 6(h)).................... 4,332 --
Retained earnings......................................... 64,052 41,772
Foreign currency translation adjustment................... (3,119) (2,328)
-------- --------
134,395 104,172
======== ========
$216,146 $152,593
======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
2-4
<PAGE> 35
RITCHIE BROS. AUCTIONEERS INCORPORATED
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(EXPRESSED IN THOUSANDS OF UNITED STATES DOLLARS)
<TABLE>
<CAPTION>
FOREIGN
ADDITIONAL CURRENCY TOTAL
SHARE PAID-IN RETAINED TRANSLATION SHAREHOLDERS'
CAPITAL CAPITAL EARNINGS ADJUSTMENT EQUITY
------- ---------- -------- ----------- -------------
<S> <C> <C> <C> <C> <C>
Balance, April 30, 1997................. $ 3,365 $ -- $58,088 $(2,128) $ 59,325
Common shares redeemed.................. (2,845) -- -- -- (2,845)
Employee equity participation (note
6(e))................................. 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
Net proceeds on stock options
exercised............................. 3 -- -- -- 3
Employee share compensation............. 1,344 -- -- -- 1,344
Common shares issued on acquisition of
goodwill (note 6(h)).................. 3,055 -- -- -- 3,055
Warrants issued on acquisition of
goodwill (note 6(h)).................. -- 4,332 -- -- 4,332
Net income.............................. -- -- 22,280 -- 22,280
Foreign currency translation
adjustment............................ -- -- -- (791) (791)
------- ------ ------- ------- --------
Balance, December 31, 1999.............. $69,130 $4,332 $64,052 $(3,119) $134,395
======= ====== ======= ======= ========
</TABLE>
See accompanying notes to consolidated financial statements.
2-5
<PAGE> 36
RITCHIE BROS. AUCTIONEERS INCORPORATED
CONSOLIDATED STATEMENTS OF CASH FLOWS
(EXPRESSED IN THOUSANDS OF UNITED STATES DOLLARS)
<TABLE>
<CAPTION>
EIGHT
YEAR ENDED YEAR ENDED YEAR ENDED MONTHS ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31,
1999 1998 1997 1997
------------ ------------ ------------ ------------
(UNAUDITED)
<S> <C> <C> <C> <C>
Cash and cash equivalents provided by (used
in)
Operations
Net income............................ $ 22,280 $ 24,834 $ 8,322 $ 2,398
Items not involving the use of cash
Depreciation........................ 4,345 2,752 2,548 1,540
Amortization of goodwill.............. 1,236 -- -- --
Employee equity participation......... -- -- 10,346 10,346
Employee share compensation........... 1,344 -- -- --
Future income taxes................... 550 (2,467) -- --
Changes in non-cash working capital
Accounts receivable................... (2,874) (27) (2,389) 7,363
Inventory............................. (1,140) 4,726 455 11,073
Advances against auction contracts.... 4,489 (4,084) 1,395 5,211
Prepaid expenses and deposits......... (510) 507 (711) (446)
Auctions proceeds payable............. 2,148 (3,698) 10,434 (35,749)
Accounts payable and accrued
liabilities......................... (3,860) 4,620 9,329 8,203
Payables to affiliated entities....... -- -- (3,078) (3,818)
Income taxes.......................... (3,944) (1,463) 2,077 (540)
Foreign currency translation
adjustment............................ (791) (210) (417) 10
-------- -------- -------- -------
23,273 25,490 38,311 5,591
-------- -------- -------- -------
Financing
Issuance (redemption) of share capital... 3 53,862 (2,833) (2,845)
Payables to employees and others......... -- -- (1,317) (1,279)
Bank term loans.......................... 31,592 4,208 (1,326) (5,596)
Short-term debt.......................... 6,529 -- -- --
Drawings and dividends paid.............. -- -- (42,756) (42,175)
Refundable taxes on investment income.... -- -- (29) --
Reorganization costs..................... -- (20) (1,353) (1,353)
-------- -------- -------- -------
38,124 58,050 (49,614) (53,248)
-------- -------- -------- -------
Investments
Capital asset additions.................. (53,480) (37,069) (5,120) (3,174)
Acquisition of goodwill.................. (25,616) -- -- --
-------- -------- -------- -------
(79,096) (37,069) (5,120) (3,174)
-------- -------- -------- -------
Increase (decrease) in cash and cash
equivalents.............................. (17,699) 46,471 (16,423) (50,831)
Cash and cash equivalents, beginning of
period................................... 73,620 27,149 43,572 77,980
-------- -------- -------- -------
Cash and cash equivalents, end of period... $ 55,921 $ 73,620 $ 27,149 $27,149
======== ======== ======== =======
Supplemental disclosure of cash flow
information
Interest paid............................ $ 2,633 $ 1,570 $ 1,853 $ 1,242
Income taxes paid........................ 14,861 16,735 5,098 5,332
Non-cash investing activities
Common shares issued on acquisition of
goodwill............................ 3,055 -- -- --
Warrants issued on acquisition of
goodwill............................ 4,332 -- -- --
Non-cash financing activities
Employee equity participation......... -- -- 10,346 10,346
Employee share compensation........... 1,344 -- -- --
======== ======== ======== =======
</TABLE>
See accompanying notes to consolidated financial statements.
2-6
<PAGE> 37
RITCHIE BROS. AUCTIONEERS INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997 (UNAUDITED)
AND EIGHT MONTHS ENDED DECEMBER 31, 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 subsidiaries
and 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 (the "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 8 sets out the pro forma impact as if all income earned by
partnerships in the Group prior to the Reorganization 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> 38
RITCHIE BROS. AUCTIONEERS INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997 (UNAUDITED)
AND EIGHT MONTHS ENDED DECEMBER 31, 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 AND 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 and include capitalized interest
costs on property under development. 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
Computer software............................. 3 years straight-line
Yard equipment................................ 20-30% declining balance
Office equipment.............................. 20% declining balance
Leasehold improvements........................ Term of leases
</TABLE>
(f) GOODWILL
Goodwill, which represents the intangible assets acquired, is being
amortized on a straight-line basis over the expected period to be benefited,
which is 20 years. The Company periodically assesses the recoverability of this
intangible asset by determining whether the amortization of the goodwill balance
over its remaining life can be recovered through estimated future operating cash
flows.
2-8
<PAGE> 39
RITCHIE BROS. AUCTIONEERS INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997 (UNAUDITED)
AND EIGHT MONTHS ENDED DECEMBER 31, 1997
(Tabular dollar amounts expressed in thousands of United States Dollars)
1. SIGNIFICANT ACCOUNTING POLICIES -- (CONTINUED)
(g) 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.
(h) INCOME TAXES
Income taxes are accounted for using the asset and liability method whereby
future taxes are recognized for 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 future taxes of a change in
tax rates is recognized in income in the period that includes the enactment date
of future tax benefits. To the extent that realization of future tax assets is
not considered to be more likely than not, a valuation allowance is provided.
(i) 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 currency of 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 shareholders' 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 on these
are included in the determination of income.
(j) 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.
(k) FINANCIAL INSTRUMENTS
Carrying amounts of certain of the Company's financial instruments,
including cash and cash equivalents, accounts receivable, auction proceeds
payable, accounts payable and accrued liabilities and short-term debt,
approximate their 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 term loans approximates fair value.
2-9
<PAGE> 40
RITCHIE BROS. AUCTIONEERS INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997 (UNAUDITED)
AND EIGHT MONTHS ENDED DECEMBER 31, 1997
(Tabular dollar amounts expressed in thousands of United States Dollars)
1. SIGNIFICANT ACCOUNTING POLICIES -- (CONTINUED)
(l) 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.
(m) 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 and
warrants.
2. CAPITAL ASSETS
Capital assets at December 31, 1999 are as follows:
<TABLE>
<CAPTION>
ACCUMULATED NET
COST DEPRECIATION BOOK VALUE
-------- ------------ ----------
<S> <C> <C> <C>
Land and buildings under development..................... $ 12,764 $ -- $ 12,764
Land and improvements.................................... 48,723 1,426 47,297
Buildings................................................ 43,808 3,535 40,273
Automotive equipment..................................... 6,633 2,224 4,409
Computer equipment....................................... 2,492 1,131 1,361
Computer software........................................ 525 185 340
Yard equipment........................................... 3,474 1,391 2,083
Office equipment......................................... 2,999 1,329 1,670
Leasehold improvements................................... 380 118 262
-------- ------- --------
$121,798 $11,339 $110,459
======== ======= ========
</TABLE>
Capital assets at December 31, 1998 are as follows:
<TABLE>
<CAPTION>
ACCUMULATED NET
COST DEPRECIATION BOOK VALUE
------- ------------ ----------
<S> <C> <C> <C>
Land and buildings under development...................... $ 8,225 $ -- $ 8,225
Land and improvements..................................... 29,774 900 28,874
Buildings................................................. 19,688 2,825 16,863
Automotive equipment...................................... 5,164 1,606 3,558
Computer equipment........................................ 1,742 739 1,003
Computer software......................................... 178 -- 178
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>
During the year, interest of $918,581 (1998 -- $Nil) was capitalized to
cost of the buildings.
2-10
<PAGE> 41
RITCHIE BROS. AUCTIONEERS INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997 (UNAUDITED)
AND EIGHT MONTHS ENDED DECEMBER 31, 1997
(Tabular dollar amounts expressed in thousands of United States Dollars)
3. GOODWILL
On April 1, 1999, the Company acquired goodwill of $33,003,000.
Consideration given was as follows:
<TABLE>
<S> <C>
Cash..................................................... $25,000
Acquisition costs........................................ 616
Issue of shares and warrants (note 6(h))................. 7,387
-------
$33,003
=======
</TABLE>
Goodwill is disclosed net of accumulated amortization of $1,236,000.
4. SHORT-TERM DEBT
Short-term debt consists of a Banker's Acceptance in the amount of $3.4
million payable in March 2000 bearing interest at 6.13% and lines of credit in
the amount of $3.1 million with a weighted average interest rate of 8.21%.
5. BANK TERM LOANS
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31,
1999 1998
------------ ------------
<S> <C> <C>
6.90% term loan, due in monthly instalments of $81,200
including interest, settled in 1999....................... $ -- $4,499
Term loan of NLG 9.6 million, secured by deeds of trust on
specific property, bearing interest at the Amsterdam
Interbank Offered Rate plus 7/8%, due in quarterly
instalments of $57,000 including interest, with the final
payment occurring in 2013................................. 4,395 5,062
Term loan, unsecured, with $25 million bearing interest at
7.21% and $10 million bearing interest at 6.70%, due in
minimum annual instalments of $5 million ($1.75 million
towards principal, $3.25 million towards a sinking fund),
with the final payment occurring in 2004.................. 35,000 --
Term loan of AUD $2.7 million, secured by deeds of trust on
specific property, with $1.5 million bearing interest at
6.5% and $1 million bearing interest at the Australian
prime rate, due in quarterly instalments of $49,275,
including interest, with final payment occurring in
2010...................................................... 1,758 --
------- ------
41,153 9,561
Less current portion........................................ (5,425) (793)
------- ------
$35,728 $8,768
======= ======
</TABLE>
At December 31, 1999, the Company had undrawn operating credit lines
available in excess of $112,000,000. In addition, the Company had undrawn credit
lines of approximately $23,000,000 available to fund property acquisitions.
2-11
<PAGE> 42
RITCHIE BROS. AUCTIONEERS INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997 (UNAUDITED)
AND EIGHT MONTHS ENDED DECEMBER 31, 1997
(Tabular dollar amounts expressed in thousands of United States Dollars)
5. BANK TERM LOANS -- (CONTINUED)
As at December 31, 1999, principal repayments including sinking fund
requirements are as follows for the next five years:
<TABLE>
<S> <C>
2000....................................................... $ 5,425
2001....................................................... 5,425
2002....................................................... 5,425
2003....................................................... 5,425
2004....................................................... 15,425
Thereafter................................................. 4,028
-------
$41,153
=======
</TABLE>
6. 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
----------
Issued and outstanding, 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
Number of common shares issued during the year ended
December 31, 1999:
For cash, pursuant to stock options exercised............. 34,598
Employee share compensation (note 6(g))................... 50,000
Pursuant to acquisition of goodwill (note 6(h))........... 100,000
----------
Issued and outstanding, December 31, 1999................... 16,733,264
==========
</TABLE>
2-12
<PAGE> 43
RITCHIE BROS. AUCTIONEERS INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997 (UNAUDITED)
AND EIGHT MONTHS ENDED DECEMBER 31, 1997
(Tabular dollar amounts expressed in thousands of United States Dollars)
6. SHARE CAPITAL -- (CONTINUED)
(c) OPTIONS
The Company has 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. At December 31, 1999, there
were 1,240,667 shares authorized for grants of options under the stock option
plan. Stock option activity for 1997, 1998 and 1999 is presented below:
<TABLE>
<CAPTION>
NUMBER OF OPTIONS EXERCISE PRICE
OUTSTANDING WEIGHTED AVERAGE
----------------- ----------------
<S> <C> <C>
Outstanding, April 30, 1997............................... -- $ --
Granted (note 6(e))..................................... 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 4.67
Granted................................................. 27,000 31.23
Cancelled............................................... (4,166) 0.10
Exercised............................................... (34,598) 0.10
------- ------
Outstanding, December 31, 1999............................ 195,236 $ 9.20
======= ======
Exercisable, December 31, 1999............................ 175,236 $ 6.52
======= ======
</TABLE>
The options outstanding at December 31, 1999 expire from dates ranging to
August 9, 2009.
The following is a summary of stock options outstanding and exercisable at
December 31, 1999.
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
----------------------- ----------------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
NUMBER REMAINING EXERCISE NUMBER EXERCISE
RANGE OF EXERCISE PRICES OUTSTANDING LIFE (YEARS) PRICE EXERCISABLE PRICE
- ------------------------ ----------- ------------ -------- ----------- --------
<S> <C> <C> <C> <C> <C>
$0.10.................................... 132,236 4.58 $ 0.10 132,236 $ 0.10
$26.12 -- $38.625........................ 63,000 6.59 $28.31 43,000 $26.24
</TABLE>
With respect to the options granted in 1998 and 1999, the current market
price did not exceed the exercise price, therefore, no compensation expense has
been recorded.
(d) WARRANTS
<TABLE>
<CAPTION>
1999 1998
------- ----
<S> <C> <C>
Warrants outstanding (note 6(h))............................ 400,000 Nil
======= ===
</TABLE>
(e) EMPLOYEE EQUITY PARTICIPATION
Substantially all the full-time employees at the time of the Reorganization
who were not beneficial owners of the predecessor entities to the Company were
granted an equity interest in the Company pursuant to
2-13
<PAGE> 44
RITCHIE BROS. AUCTIONEERS INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997 (UNAUDITED)
AND EIGHT MONTHS ENDED DECEMBER 31, 1997
(Tabular dollar amounts expressed in thousands of United States Dollars)
6. SHARE CAPITAL -- (CONTINUED)
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 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 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.
(f) OFFERING
In 1998, 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.
(g) EMPLOYEE SHARE COMPENSATION
During 1999, the Company issued 50,000 common shares to an employee. The
transaction was recorded at the market value of the common shares on the
issuance date of $26.88 per share. Compensation expense of $1,344,000 has been
recorded for this issuance.
(h) ACQUISITION OF GOODWILL
During 1999, the Company acquired intangible assets related to an auction
business 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.
7. 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.
2-14
<PAGE> 45
RITCHIE BROS. AUCTIONEERS INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997 (UNAUDITED)
AND EIGHT MONTHS ENDED DECEMBER 31, 1997
(Tabular dollar amounts expressed in thousands of United States Dollars)
7. SEGMENTED INFORMATION -- (CONTINUED)
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, 1999
Auction revenues.............................. $64,766 $17,110 $22,748 $104,624
Capital assets and goodwill................... 94,662 17,463 30,101 142,226
Year ended December 31, 1998
Auction revenues.............................. 49,747 16,105 29,047 94,899
Capital assets................................ 31,529 9,203 20,592 61,324
Year ended December 31, 1997 (unaudited)
Auction revenues.............................. 44,615 16,095 24,299 85,009
Capital assets................................ 19,604 6,373 1,030 27,007
Eight months ended December 31, 1997
Auction revenues.............................. 32,254 13,664 14,116 60,034
Capital assets................................ 19,604 6,373 1,030 27,007
</TABLE>
8. 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 YEAR ENDED MONTHS ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31,
1999 1998 1997 1997
------------ ------------ ------------ ------------
(UNAUDITED)
<S> <C> <C> <C> <C>
Statutory tax rate in the United
States................................ 39% 39% 39% 39%
------- ------- ------- ------
Expected income tax expense............. $13,155 $15,017 $ 6,147 $2,687
Differences
Different tax rates in non-U.S.
jurisdictions...................... (1,289) (2,028) (831) (247)
Partnership income not taxed in
Group.............................. -- -- (1,566) (806)
U.S. income taxed at lower graduated
rates.............................. -- -- (397) (128)
Employee equity participation expense
not tax deductible................. -- -- 2,894 2,894
Other................................. (414) 681 1,191 91
------- ------- ------- ------
Actual income tax expense............. $11,452 $13,670 $ 7,438 $4,491
======= ======= ======= ======
</TABLE>
2-15
<PAGE> 46
RITCHIE BROS. AUCTIONEERS INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997 (UNAUDITED)
AND EIGHT MONTHS ENDED DECEMBER 31, 1997
(Tabular dollar amounts expressed in thousands of United States Dollars)
If all partnership income for the period including the Reorganization had
been taxed in the Group, income taxes would have been as follows:
<TABLE>
<CAPTION>
EIGHT
YEAR ENDED MONTHS ENDED
DECEMBER 31, DECEMBER 31,
1997 1997
------------ ------------
(UNAUDITED)
<S> <C> <C>
Income taxes................................................ $9,004 $5,297
====== ======
</TABLE>
Future income tax assets and liabilities are as follows:
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31,
1999 1998
------------ ------------
<S> <C> <C>
Future income tax assets
Tax deductible benefit of options granted................. $ 652 $ 853
Tax deductible financing costs incurred in the course of
the Company's initial public offering in March 1998.... 1,305 1,740
Unused tax losses, expiring on December 31, 2005 and
2006................................................... 543 324
Accounts payable.......................................... 20 25
------ ------
Total future income tax assets.............................. 2,520 2,942
Future income tax liabilities arising from temporary
differences between the tax basis of net assets and their
carrying value
Capital assets............................................ (441) (475)
Goodwill.................................................. (162) --
------ ------
Total future income tax liabilities......................... (603) (475)
------ ------
$1,917 $2,467
====== ======
</TABLE>
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 net income per share
<TABLE>
<CAPTION>
EIGHT
YEAR ENDED YEAR ENDED YEAR ENDED MONTHS ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31,
1999 1998 1997 1997
------------ ------------ ------------ ------------
(UNAUDITED)
<S> <C> <C> <C> <C>
Net income per share in accordance with
United States GAAP
Basic................................. $1.34 $1.56 $0.54 $0.08
Diluted............................... 1.32 1.54 0.54 0.08
===== ===== ===== =====
</TABLE>
2-16
<PAGE> 47
RITCHIE BROS. AUCTIONEERS INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997 (UNAUDITED)
AND EIGHT MONTHS ENDED DECEMBER 31, 1997
(Tabular dollar amounts expressed in thousands of United States Dollars)
9. UNITED STATES GENERALLY ACCEPTED ACCOUNTING PRINCIPLES -- (CONTINUED)
Consolidated statements of comprehensive net income
<TABLE>
<CAPTION>
EIGHT
YEAR ENDED YEAR ENDED YEAR ENDED MONTHS ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31,
1999 1998 1997 1997
------------ ------------ ------------ ------------
(UNAUDITED)
<S> <C> <C> <C> <C>
Net income in accordance with Canadian
GAAP.................................. $22,280 $24,834 $8,322 $2,398
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........................... 22,280 24,814 6,969 1,045
Other comprehensive income (loss) (note
9(ii))
Foreign currency translation
adjustment............................ (791) (210) (417) 10
------- ------- ------ ------
Comprehensive net income in accordance
with United States GAAP............... $21,489 $24,604 $6,552 $1,055
======= ======= ====== ======
</TABLE>
(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)
Comprehensive income (loss) includes the change in equity or net assets of
the Company during the period from non-owner sources, including foreign exchange
adjustments, and reflected as a separate component of shareholders' equity.
2-17
<PAGE> 48
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 18, 2000, 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
March 24, 2000
3-1
