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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JULY 31, 2002
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM _______________ TO _______________
COMMISSION FILE NO. 1-12641
RDO EQUIPMENT CO.
(Exact name of registrant as specified in its charter)
DELAWARE 45-0306084
(State of incorporation) (I.R.S. Employer Identification No.)
2829 SOUTH UNIVERSITY DRIVE
FARGO, NORTH DAKOTA 58103
(Address of principal executive offices) (Zip code)
Registrant's telephone number, including area code: (701) 297-4288
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. YES _X_ NO ___
The number of shares outstanding of the registrant as of August 31, 2002:
Class A Common Stock 5,194,108
Class B Common Stock 7,450,492
-----------
Total 12,644,600
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1
PART I - FINANCIAL INFORMATON
ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
RDO EQUIPMENT CO.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) (UNAUDITED)
- ---------------------------------------------------------------------------------------
Three Months Ended Six Months Ended
July 31, July 31,
-------------------- --------------------
2002 2001 2002 2001
-------- -------- -------- --------
Revenues
Equipment and truck sales $103,348 $105,315 $213,629 $218,437
Parts and service 41,215 43,620 79,231 85,130
-------- -------- -------- --------
Total revenues 144,563 148,935 292,860 303,567
Cost of revenues
Equipment and truck sales 93,273 96,022 193,193 198,738
Parts and service 25,988 27,328 49,768 53,547
-------- -------- -------- --------
Total cost of revenues 119,261 123,350 242,961 252,285
-------- -------- -------- --------
Gross profit 25,302 25,585 49,899 51,282
Selling, general and
administrative expenses 22,822 23,186 44,970 47,164
-------- -------- -------- --------
Operating income 2,480 2,399 4,929 4,118
Interest expense 747 2,156 1,613 4,869
Other income 526 554 696 955
-------- -------- -------- --------
Income before income taxes 2,259 797 4,012 204
Income tax provision 926 319 1,645 82
-------- -------- -------- --------
Net income $ 1,333 $ 478 $ 2,367 $ 122
======== ======== ======== ========
Net income per share -
basic and diluted $ 0.10 $ 0.04 $ 0.18 $ 0.01
======== ======== ======== ========
Weighted average shares
outstanding - basic 12,726 13,182 12,863 13,182
======== ======== ======== ========
Weighted average shares
outstanding - diluted 12,806 13,182 12,932 13,182
======== ======== ======== ========
The accompanying notes are an integral part of these condensed consolidated
financial statements.
2
RDO EQUIPMENT CO.
CONDENSED CONSOLIDATED BALANCE SHEETS
July 31, January 31,
(IN THOUSANDS) (UNAUDITED) 2002 2002
- ------------------------------------------------------------------------------------------
ASSETS
Current assets:
Cash and cash equivalents $ 846 $ 852
Accounts receivable, less allowance for doubtful accounts 33,647 26,726
Income tax receivable -- 4,550
Receivables from affiliates 73 38
Inventories 135,675 128,504
Prepaid expenses 751 1,417
Assets held for sale 9,425 8,862
Deferred income tax asset 5,550 5,310
-------- --------
Total current assets 185,967 176,259
Property and equipment, net 14,074 13,192
Other assets:
Goodwill and other 25,077 25,126
Deferred income tax asset -- 504
Deposits 1,611 1,513
-------- --------
Total assets $226,729 $216,594
======== ========
The accompanying notes are an integral part of these condensed consolidated
financial statements.
3
RDO EQUIPMENT CO.
CONDENSED CONSOLIDATED BALANCE SHEETS
July 31, January 31,
(IN THOUSANDS) (UNAUDITED) 2002 2002
- ---------------------------------------------------------------------------------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Floor plan/borrowing base payables $ 102,333 $ 97,416
Notes payable 1,570 975
Current maturities of long-term debt 666 2,612
Accounts payable 3,598 2,042
Accrued liabilities 16,065 12,656
Liabilities associated with assets held for sale 6,813 6,356
Customer advance deposits 3,712 5,298
--------- ---------
Total current liabilities 134,757 127,355
Long-term debt, net of current maturities 3,240 1,382
Deferred income tax liabilities 140 --
--------- ---------
Total liabilities 138,137 128,737
--------- ---------
Commitments and contingencies
Stockholders equity:
Preferred stock, par value $.01 per share; 500,000 shares authorized;
no shares issued in fiscal 2003 and 2002 -- --
Common stocks,
Class A, par value $.01 per share; 20,000,000 shares authorized;
5,731,008 issued in fiscal 2003 and 2002 57 57
Class B, par value $.01 per share; 7,500,000 shares authorized;
7,450,492 issued in fiscal 2003 and 2002 75 75
Additional paid-in-capital 84,471 84,471
Retained earnings 6,047 3,680
Treasury Stock, at cost (516,200 and 148,000 Class A shares in fiscal
2003 and 2002, respectively) (2,058) (426)
--------- ---------
Total stockholders' equity 88,592 87,857
--------- ---------
Total liabilities and stockholders' equity $ 226,729 $ 216,594
========= =========
The accompanying notes are an integral part of these condensed consolidated
financial statements.
4
RDO EQUIPMENT CO.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
Six Months Ended July 31,
(IN THOUSANDS) (UNAUDITED) 2002 2001
- ------------------------------------------------------------------------------------------------------------
Operating activities:
Net income $ 2,367 $ 122
Adjustments to reconcile net income to net cash (used for)
provided by operating activities:
Depreciation and amortization 2,206 3,065
Deferred taxes 404 390
Change in operating assets and liabilities:
Accounts receivable (4,249) 4,081
Inventories (3,878) 8,467
Prepaid expenses 667 352
Deposits (65) (193)
Floor plan payables (1,713) 7,010
Accounts payable and accrued liabilities 3,599 (1,333)
Customer advance deposits (1,586) (3,094)
-------- --------
Net cash (used for) provided by operating activities (2,248) 18,867
Investing activities:
Net sales of rental equipment 179 75
Net purchases of property and equipment (711) (394)
Net assets of acquisitions -- (822)
Net proceeds on sale of dealership -- 3,248
Other, net 55 309
-------- --------
Net cash (used for) provided by investing activities (477) 2,416
Financing activities:
Proceeds from issuance of long-term debt 800 --
Payments on long-term debt (4,544) (1,174)
Purchase of common stock (1,632) --
Net proceeds (payments) of revolving credit facilities 7,500 (26,000)
Net proceeds of bank lines and short-term notes payable 595 719
-------- --------
Net cash provided by (used for) financing activities 2,719 (27,186)
-------- --------
Decrease in cash (6) (5,903)
Cash and cash equivalents, beginning of period 852 7,635
-------- --------
Cash and cash equivalents, end of period $ 846 $ 1,732
======== ========
Supplemental disclosures:
Cash payments for interest $ 1,841 $ 3,511
======== ========
Cash payments for income taxes $ 838 $ 130
======== ========
Non-cash investing and financing activities:
Increase in assets and long-term debt due to refinancing of
operating lease $ 3,656 $ --
======== ========
Decrease in assets related to the sale of dealership through
issuance of a receivable and purchaser's assumption of debt $ -- $ 4,880
======== ========
The accompanying notes are an integral part of these condensed consolidated
financial statements.
5
RDO EQUIPMENT CO.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. BASIS OF PREPARATION:
The condensed consolidated financial statements as of July 31, 2002 and
for the three and six months ended July 31, 2002 and 2001 are unaudited and
reflect all adjustments (consisting only of normal recurring adjustments) which
are, in the opinion of management, necessary for a fair presentation of the
financial position and operating results for the interim periods. The condensed
consolidated financial statements should be read in conjunction with the audited
consolidated financial statements and notes thereto, contained in the Company's
Annual Report on Form 10-K for the fiscal year ended January 31, 2002. The
results of operations for the three and six months ended July 31, 2002 are not
necessarily indicative of the results to be expected for the full year.
Certain reclassifications have been made for consistent presentation.
2. NEW ACCOUNTING PRONOUNCEMENTS
On February 1, 2002, the Company adopted Statement of Financial
Accounting Standards (SFAS) No. 142, Goodwill and Other Intangible Assets, in
its entirety. This statement addresses accounting and financial reporting for
goodwill and intangible assets. Under the new statement, goodwill and intangible
assets with indefinite lives are no longer amortized, but are subject to
impairment testing on at least an annual basis. Other than goodwill, the Company
does not have any intangible assets with indefinite lives or other intangible
assets. The Company completed the process of testing goodwill for impairment in
accordance with the provisions of SFAS No. 142. An independent valuation was
performed utilizing among other things the Company's best estimate of expected
future cash flows. No amounts were impaired at the time of implementation,
February 1, 2002.
The effect of discontinuance of goodwill amortization during the three
and six month periods ended July 31, 2002 was to increase net income by
approximately $155,000 or $0.01 per share and $309,000 or $0.02 per share,
respectively. Prior to February 1, 2002, goodwill was amortized on a
straight-line basis over 30 years. The following pro forma information reflects
the Company's results of operations as they would have appeared had the Company
not recorded goodwill amortization and its related tax effects during fiscal
2002 (dollars in thousands, except per share amounts):
Three Months Ended Six Months Ended
---------------------------- ----------------------------
July 31, 2002 July 31, 2001 July 31, 2002 July 31, 2001
------------- ------------- ------------- -------------
Reported net income $ 1,333 $ 478 $ 2,367 $ 122
Add back: goodwill
amortization, net of tax -- 155 -- 309
--------- --------- --------- ---------
Adjusted net income $ 1,333 $ 633 $ 2,367 431
========= ========= ========= =========
Reported basic and diluted
earnings per share $ 0.10 $ 0.04 $ 0.18 $ 0.01
Add back: goodwill
amortization, net of tax -- 0.01 -- 0.02
--------- --------- --------- ---------
Adjusted basic and diluted
earnings per share $ 0.10 $ 0.05 $ 0.18 $ 0.03
========= ========= ========= =========
6
The Company evaluates the carrying value of goodwill on an annual basis
and when events occur or circumstances change that would more likely than not
reduce the fair value of the reporting unit to which the goodwill is assigned
below its carrying amount. Such circumstances could include, but are not limited
to, (1) a significant adverse change in business climate or in legislation, (2)
unanticipated competition, or (3) a loss of key personnel.
When evaluating whether goodwill is impaired, the Company compares the
fair value of the reporting unit to which the goodwill is assigned to its
carrying amount, including goodwill. The Company considers its three business
segments (Note7) to be reporting units when it tests for goodwill impairment
based on how it manages its business and because the segment level is where the
Company believes goodwill naturally resides. If the carrying amount of a
reporting unit exceeds its fair value, then the amount of the impairment loss
must be measured. The impairment loss would be calculated by comparing the
implied fair value of reporting unit goodwill with its carrying amount. In
calculating the implied fair value of goodwill, the fair value of the reporting
unit is allocated to all of the other assets and liabilities of that unit based
on their fair values. The excess of the fair value of a reporting unit over the
amount assigned to its other assets and liabilities is the implied fair value of
goodwill. An impairment loss would be recognized when the carrying amount of
goodwill exceeds its implied fair value.
Effective February 1, 2002, the Company also adopted SFAS No. 144. This
standard broadens the presentation of discontinued operations to include more
disposal transactions, thus the recognition of discontinued operations is
expected to become more common under this standard. This statement retains the
requirements of SFAS No. 121 (Accounting for the Impairment of Long-Lived Assets
and for Long-Lived Assets to Be Disposed Of) to recognize impairments on
property, plant and equipment, but removes goodwill from its scope. The adoption
of SFAS No. 144 did not have a material impact on the Company's consolidated
financial statements.
In July 2002, the Financial Accounting Standards Board issued SFAS 146,
Accounting for Costs Associated with Exit or Disposal Activities. This Statement
addresses financial accounting and reporting for costs associated with exit or
disposal activities and nullifies Emerging Issues Task Force (EITF) Issue No.
94-3, Liability Recognition for Certain Employee Termination Benefits and Other
Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring).
The provisions of this Statement are effective for exit or disposal activities
that are initiated after December 31, 2002, with early application encouraged.
The Company is reviewing the requirements of this standard and expect this to
have no impact on the Company's financial statements.
3. RESTRUCTURING CHARGES
During the first six months of fiscal 2003, the Company continued the
execution of its plan established during the fourth quarter of fiscal 2001 to
restructure management and to divest itself of the majority of its heavy-duty
truck division. Severance costs paid during the first six months of fiscal 2003
totaled approximately $125,000 leaving a remaining severance accrual of
approximately $34,000. Costs incurred related to lease and other obligations
totaled approximately $68,000 leaving an accrual of approximately $8,000 as of
July 31, 2002. The Company has actively pursued the sale of its Riverside,
California, truck business since establishment of the plan. During the second
quarter of fiscal 2003, the Company signed an agreement to sell the assets of
its Riverside, California, truck business. The transaction is expected to close
in the Company's third fiscal quarter. The assets and liabilities relating to
this truck business are classified as held for sale on the balance sheet.
7
INVENTORIES:
All inventories are valued at the lower of cost or market. The specific
identification method is used to determine cost for new and used equipment and
trucks. Cost is determined using the first-in, first-out method for parts
inventory. Inventories consisted of the following at (in thousands):
July 31, January 31,
2002 2002
---- ----
New equipment & trucks $ 80,298 $ 80,013
Used equipment & trucks 33,135 27,070
Parts and other 22,242 21,421
--------- ---------
$ 135,675 $ 128,504
========= =========
4. FLOOR PLAN/BORROWING BASE PAYABLES:
Floor plan/borrowing base payables are financing arrangements for
inventory and receivables. The terms of certain floor plan arrangements may
include an interest-free term followed by a term during which interest is
charged. Floor plan/borrowing base payables consisted of the following at (in
thousands):
July 31, January 31,
2002 2002
---- ----
Interest-bearing $ 72,097 $ 66,157
Noninterest-bearing 30,236 31,259
--------- ---------
$ 102,333 $ 97,416
========= =========
5. EARNINGS PER SHARE:
Basic net income per common share is computed by dividing net income by
the weighted average number of common shares outstanding during the year.
Diluted net income per share is computed by dividing net income by the sum of
the weighted average number of common shares outstanding plus all additional
common shares that would have been outstanding if potentially dilutive common
shares related to stock options had been issued. The following table reconciles
the number of shares utilized in the net income per common share calculations:
Three Months Six Months
Ended July 31, Ended July 31,
----------------- -----------------
2002 2001 2002 2001
---- ---- ---- ----
Net income available
to common shareholders $ 1,333 $ 478 $ 2,367 $ 122
======= ======= ======= =======
Weighted average number
of shares outstanding - basic 12,726 13,182 12,863 13,182
Dilutive effect of stock options outstanding 80 -- 69 --
------- ------- ------- -------
Weighted average common and potential
common shares outstanding - diluted 12,806 13,182 12,932 13,182
======= ======= ======= =======
Basic net income per share $ 0.10 $ 0.04 $ 0.18 $ 0.01
======= ======= ======= =======
Dilutive net income per share $ 0.10 $ 0.04 $ 0.18 $ 0.01
======= ======= ======= =======
8
Options to purchase 908,199 and 704,474 shares of common stock were
outstanding as of July 31, 2002 and 2001, respectively. Outstanding options of
686,850 and 704,474 were not included in the computations of diluted earnings
per share for the six months ended July 31, 2002 and 2001, respectively, because
the exercise prices were greater than the average market prices of the common
shares for the periods.
6. SEGMENT INFORMATION:
The Company's operations are classified into three business segments,
based upon the way the Company manages its business: construction, agricultural,
and truck. In past reporting, the corporate business segment was designated as
financial services and corporate. Due to the current size and function of
financial services operations, current and future segment reporting will include
financial services information in the operating segment that generated the
financial services revenues and expense. For comparison, this change has also
been reflected in the historical data presented. Construction operations include
the sale, service and rental of construction and material handling equipment to
customers primarily in the construction, manufacturing, warehousing and utility
industries and to units of government. Agricultural operations include the sale,
service and rental of agricultural equipment primarily to customers in the
agricultural industry. Truck operations include the sale and service of
heavy-duty and medium-duty trucks to customers primarily in the transportation
and construction industries and to units of government.
Identifiable assets are those used exclusively in the operations of
each business segment or which are allocated when used jointly. Corporate assets
are principally comprised of cash, income tax receivables, certain property and
equipment, and deferred income taxes.
9
The following table shows the Company's business segments and related
financial information for the three and six months ended July 31, 2002 and 2001
(in thousands):
Three months ended July 31, Construction Agricultural Truck Corporate Total
- ----------------------------------------------------------------------------------------------------------------------
2002:
Revenues $ 71,221 $ 55,489 $ 17,853 $ -- $ 144,563
Interest expense 503 217 27 -- 747
Other income 441 68 17 -- 526
Depreciation and
amortization 753 369 59 -- 1,181
Income (loss) before
income taxes (87) 1,768 578 (a) -- 2,259
Capital expenditures, net 128 99 27 116 370
2001:
Revenues $ 84,970 $ 44,705 $ 19,260 $ -- $ 148,935
Interest expense 1,663 394 99 -- 2,156
Other income 482 110 (38) -- 554
Depreciation and
amortization 694 762 119 -- 1,575
Income (loss) before
income taxes (352) 1,035 114 -- 797
Capital expenditures, net 288 (92) 102 122 420
Six months ended July 31, Construction Agricultural Truck Corporate Total
- ----------------------------------------------------------------------------------------------------------------------
2002:
Revenues $ 149,779 $ 105,098 $ 37,983 $ -- $ 292,860
Interest expense 1,155 406 52 -- 1,613
Other income 575 94 27 -- 696
Depreciation and
amortization 1,341 745 120 -- 2,206
Income before
income taxes 413 2,801 798 (a) -- 4,012
Identifiable assets 125,995 71,142 23,500 6,092 226,729
Goodwill 10,256 9,494 4,572 --- 24,322
Capital expenditures, net 394 (43) 51 130 532
2001:
Revenues $ 162,773 $ 93,207 $ 47,587 $ -- $ 303,567
Interest expense 3,502 760 607 -- 4,869
Other income 732 210 13 -- 955
Depreciation and
amortization 1,432 1,422 211 -- 3,065
Income before
income taxes (1,496) 1,661 39 -- 204
Identifiable assets 168,297 71,579 25,295 11,084 276,255
Goodwill 10,476 9,705 4,663 -- 24,844
Capital expenditures, net (29) 110 48 190 319
(a) Approximately $400,000 of income before taxes in fiscal 2003 is attributable
to the settlement of a vendor obligation that originated in fiscal 1999
associated with the Riverside truck dealership.
10
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
CAUTIONARY STATEMENT REGARDING
FUTURE RESULTS AND FORWARD-LOOKING STATEMENTS
The future results of RDO Equipment Co. (the "Company"), including
results reflected in any forward-looking statement made by or on behalf of the
Company, will be impacted by a number of important factors. The factors
identified below under the subsection entitled "Safe Harbor Statement" are
important factors (but not necessarily all important factors) that could cause
the Company's actual future results to differ materially from those expressed in
any forward-looking statement made by or on behalf of the Company. Any
statements contained or incorporated by reference in this Form 10-Q that are not
statements of historical fact may be deemed to be forward-looking statements.
Without limiting the foregoing, words such as "may," "will," "expect,"
"believe," "anticipate," "estimate" or "continue" or comparable terminology are
intended to identify forward-looking statements. Forward-looking statements, by
their nature, involve substantial risks and uncertainties.
THE BUSINESS
The Company specializes in the distribution, sale, service, rental and
finance of equipment and trucks to the agricultural, construction,
manufacturing, transportation and warehousing industries, as well as to public
service entities, government agencies and utilities. On July 31, 2002, the
Company operated 47 retail stores in nine states - Arizona, California,
Minnesota, Montana, Nebraska, North Dakota, South Dakota, Texas and Washington.
Its stores include one of the largest networks of Deere & Company ("Deere")
construction equipment dealerships and agricultural equipment dealerships in
North America.
The Company generates its revenues from sales of new and used equipment
and trucks, sales of parts and service, rental of equipment, customer financing
and related products and services. In addition to outright sales of new and used
equipment, sales include equipment purchased under rent-to-purchase agreements.
Generally under such agreements, the customer is given a period of several
months to exercise the option to purchase the rented equipment and is allowed to
apply a portion of the rental payments to the purchase price. This
rent-to-purchase equipment is included in the Company's inventory until the
option is exercised and the equipment is purchased.
The Company's highest gross margins have historically been generated
from its parts and service revenues. One of the Company's operating strategies
is to increase the demand for parts and service by establishing, and then
increasing, the base of equipment and trucks held by its customers. Due to
product warranty time frames and usage patterns by customers, there generally is
a time lag between equipment and truck sales and the generation of significant
parts and service revenues from such sales. As a result of this time lag,
increases in parts and service revenues do not necessarily coincide with
increases in equipment and truck sales. In addition, due to differences in gross
margins between equipment and truck sales and parts and service revenues, gross
margin percentages may increase during periods of declining equipment and truck
sales and decline when equipment and truck sales are strong.
Deere, a leading manufacturer and supplier of construction and
agricultural equipment, is the primary supplier of new products sold by the
Company. Sales of new Deere products accounted for approximately 49% of the
Company's sales for the first six months of fiscal 2003. No other supplier
accounted for more than 10% of the Company's new product sales for this period.
The Company's stores also offer complementary products from other suppliers,
used products, new and used parts, product servicing, product rental, loans,
leases and other related products and services.
11
The Company was incorporated in April 1968 and re-incorporated in
Delaware in January 1997. The Company's executive offices are located at 2829
South University Drive, Fargo, North Dakota 58103. The Company's phone number is
(701) 297-4288. References to the Company in this Form 10-Q include its
subsidiaries.
NEW ACCOUNTING PRONOUNCEMENTS
On February 1, 2002, the Company adopted Statement of Financial
Accounting Standards (SFAS) No. 142, Goodwill and Other Intangible Assets, in
its entirety. This statement addresses accounting and financial reporting for
goodwill and intangible assets. Under the new statement, goodwill and intangible
assets with indefinite lives are no longer amortized, but are subject to
impairment testing on at least an annual basis. Other than goodwill, the Company
does not have any intangible assets with indefinite lives or other intangible
assets. The effect of discontinuing goodwill amortization during the three and
six month periods ended July 31, 2002 was to increase net income by
approximately $155,000, or $0.01 per share, and $309,000, or $0.02 per share,
respectively.
Effective February 1, 2002, the Company also adopted SFAS No. 144. This
standard broadens the presentation of discontinued operations to include more
disposal transactions, thus the recognition of discontinued operations is
expected to become more common under this standard. This statement retains the
requirements of SFAS No. 121 (Accounting for the Impairment of Long-Lived Assets
and for Long-Lived Assets to Be Disposed Of) to recognize impairments on
Property, Plant and Equipment, but removes goodwill from its scope. The adoption
of SFAS No. 144 did not have a material impact on the Company's consolidated
financial statements.
In July 2002, the Financial Accounting Standards Board issued SFAS 146,
Accounting for Costs Associated with Exit or Disposal Activities. This Statement
addresses financial accounting and reporting for costs associated with exit or
disposal activities and nullifies Emerging Issues Task Force (EITF) Issue No.
94-3, Liability Recognition for Certain Employee Termination Benefits and Other
Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring).
The provisions of this Statement are effective for exit or disposal activities
that are initiated after December 31, 2002, with early application encouraged.
The Company is reviewing the requirements of this standard and expect this to
have no impact on the Company's financial statements.
CRITICAL ACCOUNTING POLICIES
The Company's discussion and analysis of its financial condition and
results of operations are based on the Company's consolidated financial
statements, which have been prepared in accordance with accounting principles
generally accepted in the United States. The preparation of these consolidated
financial statements requires the Company to make estimates and assumptions that
affect the reported amounts of assets and liabilities at the date of the
consolidated financial statements and the reported amounts of revenues and
expenses during the reporting period. There can be no assurance that actual
results will not differ from those estimates. The Company believes the following
accounting policies affect its more significant judgments and estimates used in
the preparation of its consolidated financial statements.
INVENTORIES. All inventories are valued at the lower of cost or market.
The specific identification method is used to determine cost for new and used
equipment and trucks. Cost is determined using the first-in, first-out method
for parts inventory. The Company regularly evaluates the lower of cost or market
for specific products at both the store and corporate levels which includes
reference to secondary wholesale markets.
12
REVENUE RECOGNITION. Revenue on equipment, truck and parts sales is
recognized upon delivery of product to customers. Rental and service revenue is
recognized at the time such services are provided. In addition to outright sales
of new and used equipment, certain rentals include rent-to-purchase option
agreements. Under such agreements, customers are given a period of several
months to exercise the option to purchase the rented equipment and may be
allowed to apply a portion of the rental payments to the purchase price. This
rent-to-purchase equipment is included in the Company's inventory until the
option is exercised and the equipment is purchased. Rental revenue is recognized
during the rental period of rent-to-purchase transactions and equipment sales
revenue is recognized when the purchase option is exercised.
GOODWILL. The Company evaluates the carrying value of goodwill on an
annual basis and when events occur or circumstances change that would more
likely than not reduce the fair value of the reporting unit to which the
goodwill is assigned below its carrying amount. Such circumstances could
include, but are not limited to, (1) a significant adverse change in business
climate or in legislation, (2) unanticipated competition, or (3) a loss of key
personnel.
When evaluating whether goodwill is impaired, the Company compares the
fair value of the reporting unit to which the goodwill is assigned to its
carrying amount, including goodwill. If the carrying amount of a reporting unit
exceeds its fair value, then the amount of the impairment loss must be measured.
The impairment loss would be calculated by comparing the implied fair value of
reporting unit goodwill with its carrying amount. In calculating the implied
fair value of goodwill, the fair value of the reporting unit is allocated to all
of the other assets and liabilities of that unit based on their fair values. The
excess of the fair value of a reporting unit over the amount assigned to its
other assets and liabilities is the implied fair value of goodwill. An
impairment loss would be recognized when the carrying amount of goodwill exceeds
its implied fair value.
USE OF ESTIMATES
In the normal course of business, the Company must make continuing
estimates of potential future costs and accrue for them. These costs include but
are not limited to tax, health and general liability self-insurance,
uncollectible accounts receivable, and inventory valuation adjustments. These
accruals require the use of management's judgement on the outcome of various
issues. Management's estimates for these items are based on the best available
evidence, but due to changes in facts and circumstances, the ultimate outcomes
of these accruals could be different than management estimates.
GENERAL
During the first six months of fiscal 2003, the Company continued the
execution of its plan established during the fourth quarter of fiscal 2001 to
restructure management and to divest itself of the majority of its heavy-duty
truck division. Severance costs paid during the first six months of fiscal 2003
totaled approximately $125,000 leaving a remaining severance accrual of
approximately $34,000. Costs incurred related to lease and other obligations
totaled approximately $68,000 leaving an accrual of approximately $8,000 as of
July 31, 2002. The Company has actively pursued the sale of its Riverside,
California, truck business since establishment of the plan. During the second
quarter of fiscal 2003, the Company signed an agreement to sell the assets of
its Riverside, California, truck business. The transaction is expected to close
in the Company's third fiscal quarter. The assets and liabilities relating to
this truck business are classified as held for sale on the balance sheet.
13
RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, certain
financial data:
Three Months Ended July 31, Six Months Ended July 31,
----------------------- -----------------------
2002 2001 2002 2001
-------- -------- -------- --------
Revenue Data (in millions):
Total revenues $ 144.6 $ 148.9 $ 292.9 $ 303.6
Construction 49.3% 57.1% 51.1% 53.6%
Agricultural 38.4% 30.0% 35.9% 30.7%
Truck 12.3% 12.9% 13.0% 15.7%
Construction revenues $ 71.2 $ 85.0 $ 149.8 $ 162.8
Equipment sales 67.3% 70.1% 70.0% 70.6%
Parts and service 32.7% 29.9% 30.0% 29.4%
Agricultural revenues $ 55.5 $ 44.7 $ 105.1 $ 93.2
Equipment sales 77.0% 71.6% 77.1% 74.5%
Parts and service 23.0% 28.4% 22.9% 25.5%
Truck revenues $ 17.9 $ 19.2 $ 38.0 $ 47.6
Truck sales 71.3% 71.4% 73.2% 71.7%
Parts and service 28.7% 28.6% 26.8% 28.3%
STATEMENT OF OPERATIONS DATA (AS A PERCENTAGE OF TOTAL REVENUES):
Revenues
Equipment and truck sales 71.5% 70.7% 72.9% 72.0%
Parts and service 28.5 29.3 27.1 28.0
-------- -------- -------- --------
Total revenues 100.0 100.0 100.0 100.0
Gross profit 17.5 17.2 17.0 16.9
Selling, general and
administrative expenses 15.8 15.6 15.4 15.5
-------- -------- -------- --------
Operating income 1.7 1.6 1.6 1.4
Interest expense 0.5 1.5 0.5 1.6
Other income 0.3 0.4 0.2 0.3
Provision for taxes 0.6 0.2 0.5 0.0
-------- -------- -------- --------
Net income 0.9% 0.3% 0.8% 0.1%
======== ======== ======== ========
14
THREE MONTHS ENDED JULY 31, 2002 COMPARED TO THREE MONTHS ENDED JULY 31, 2001
NET INCOME
The Company reported net income of $1,333,000, or $0.10 per share, for
the second quarter of fiscal 2003, compared to a net income of $478,000, or $0.4
per share, for the second quarter of fiscal 2002.
REVENUES
Total revenues of $144.6 million during the second quarter of fiscal
2003 were $4.3 million, or 2.9%, lower than revenues during the second quarter
of the previous year. Construction revenues, which represent the largest segment
of the Company, were $71.2 million during the quarter, a $13.8 million, or
16.2%, decrease in revenue in the segment compared to the prior year due to the
current soft demand for construction equipment, especially in the Company's
southern regions. Agricultural revenues of $55.5 million in the second quarter
of fiscal 2003 were $10.8 million, or 24.2%, higher than in the second quarter
of fiscal 2002. The Company's agricultural dealerships are located in areas
experiencing favorable crop growing conditions, thus creating farmer optimism
which supports higher sales. Truck revenues of $17.9 million were down $1.3
million, or 6.8%, compared to the same period last year. The sale of the Texas
truck dealerships in May 2001 accounted for $600,000 of the decrease. The
remaining decline is attributable to the reduced market demand for trucks.
Equipment and truck sales were $103.3 million during the second quarter
of fiscal 2003, a decrease of $2.0 million, or 1.9%, from the second quarter of
fiscal 2002. Construction equipment sales decreased $11.7 million, or 19.6%, to
$47.9 million. The sale of truck dealerships caused $400,000 of the change and
reduced demand for trucks resulted in an additional $700,000 in sales
reductions. Offsetting these sales decreases, agricultural equipment sales
increased $10.7 million, or 33.4%, to $42.7 million.
Parts and service revenues were $41.2 million in the second quarter of
fiscal 2003, representing a decrease of $2.4 million, or 5.5%, from the prior
year. Parts and service revenues from truck operations decreased approximately
$400,000, or 7.3%, to $5.1 million. The decrease in truck parts and service
revenues was primarily due to the sale of truck dealerships. Construction parts
and service revenues decreased approximately $2.1 million, or 8.3%, to $23.3
million. Agricultural parts and service revenues increased approximately
$100,000, or 0.8%, as sales increased to $12.8 million.
GROSS PROFIT
Gross profit for the second quarter of fiscal 2003 was approximately
$25.3 million, or 17.5% of total revenues, compared to $25.6 million, or 17.2%
of total revenues in fiscal 2002. Although equipment and truck sales dollars
declined 1.9% in the second quarter of fiscal 2003 compared to the second
quarter of fiscal 2002, gross margin dollars for equipment and trucks for the
quarter increased approximately $800,000, as a result, as a percentage of
equipment and truck sales, there was an increase from 8.8% for the second
quarter of fiscal 2002, to 9.7% for fiscal 2003. Approximately $400,000 of the
$800,000 increase was attributable to the finalization and discount of a
manufacturer sponsored obligation that originated in fiscal 1999 as part of the
Company's acquisition of the Riverside truck dealership. Parts and service gross
margins were approximately $15.2 million, or 36.9% of revenues, and $16.2
million, or 37.3% of revenues, for the second quarter of fiscal 2003 and 2002,
respectively.
15
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative (SG&A) expenses decreased $400,000,
from $23.2 million for the second quarter of fiscal 2002 to $22.8 million for
the second quarter of fiscal 2003. Approximately $250,000 of the decrease
occurred as a result of the discontinuance of amortization of goodwill in fiscal
2003. Total SG&A expenses as a percentage of total revenues for fiscal 2003 and
2002 were 15.8% and 15.6%, respectively.
INTEREST EXPENSE
Interest expense decreased approximately $1.5 million, or 68.2%, from
$2.2 million for the second quarter of fiscal 2002 to $700,000 for the same
period in fiscal 2003. Interest expense as a percentage of total revenues
decreased from 1.5% for the second quarter of fiscal 2002 to 0.5% for fiscal
2003. Lower levels of interest-bearing floor plan payables and reductions in
interest rates as well as the sale of truck dealerships were the contributing
factors to the decrease in interest expense.
OTHER INCOME
Other income decreased approximately $100,000, or 16.7%, from the
second quarter of fiscal 2002 to the second quarter of fiscal 2003. Other income
is primarily comprised of finance charges from trade receivables along with
national direct sales income. National direct sales income is a commission
awarded when a manufacturer/supplier sells directly to a national account that
is located in the Company's areas of responsibility.
INCOME TAXES
The estimated provision for income taxes as a percentage of pretax
income was 41.0% for the second quarter of fiscal 2003, compared to the
estimated provision for income taxes as a percentage of pretax loss of 40.0% for
the second quarter of fiscal 2002.
SIX MONTHS ENDED JULY 31, 2002 COMPARED TO SIX MONTHS ENDED JULY 31, 2001
NET INCOME
The Company reported net income of $2,367,000, or $0.18 per share, for
the first six months of fiscal 2003, compared to a net income of $122,000, or
$0.01 per share, for the first six months of fiscal 2002.
REVENUES
Total revenues of $292.9 million during the first six months of fiscal
2003 were $10.7 million, or 3.5%, lower than revenues during the first six
months of the previous year. Construction revenues, which represent the largest
segment of the Company, were $149.8 million during the first six months of
fiscal 2003, a $13.0 million, or 8.0%, decrease in revenue in the segment
compared to the prior year due to the current soft demand for construction
equipment, especially in the Company's southern regions. Agricultural revenues
of $105.1 million in the first six months of fiscal 2003 were $11.9 million, or
12.8%, higher than in the first six months of fiscal 2002. The Company's
agricultural dealerships are located in areas experiencing favorable crop
growing conditions, thus creating farmer optimism which supports higher sales.
Truck revenues of $38.0 million were down $9.6 million, or 20.2%, compared to
the same period last year. The sale of the Texas truck dealerships in May 2001
accounted for $7.4 million of the decrease. The remaining decline is
attributable to the reduced market demand for trucks.
16
Equipment and truck sales were $213.6 million during the first six
months of fiscal 2003, a decrease of $4.8 million, or 2.2%, from the first six
months of fiscal 2002. Construction equipment sales decreased $10.0 million, or
8.7%, to $104.8 million. The sale of truck dealerships caused $4.5 million of
the change and reduced demand for trucks resulted in an additional $1.8 million
in sales reductions. Offsetting these sales decreases, agricultural equipment
sales increased $11.5 million, or 16.6%, to $81.0 million.
Parts and service revenues were $79.2 million in the first six months
of fiscal 2003, representing a decrease of $5.9 million, or 6.9%, from the prior
year. Parts and service revenues from truck operations decreased approximately
$3.3 million, or 24.4%, to $10.2 million. The decrease in truck parts and
service revenues was primarily due to the sale of truck dealerships.
Construction parts and service revenues decreased approximately $2.9 million, or
6.1%, to $45.0 million. Agricultural parts and service revenues increased
approximately $300,000, or 1.3%, as sales increased to $24.0 million.
GROSS PROFIT
Gross profit for the first six months of fiscal 2003 was approximately
$49.9 million, or 17.0% of total revenues, compared to $51.3 million, or 16.9%
of total revenues in fiscal 2002. Although equipment and truck sales dollars
declined 2.2% in the first six months of fiscal 2003 compared to the first six
months of fiscal 2002, gross margin dollars for equipment and trucks for the
first six months of fiscal 2003 increased approximately $800,000, as a result,
as a percentage of equipment and truck sales, there was an increase from 9.0%
for the first six months of fiscal 2002, to 9.6% for fiscal 2003. Approximately
$400,000 of the $800,000 increase was attributable to the finalization and
discount of a manufacturer sponsored obligation that originated in fiscal 1999
as part of the Company's acquisition of the Riverside truck dealership. Parts
and service gross margins were approximately $29.5 million, or 37.2% of
revenues, and $31.6 million, or 37.1% of revenues, for the first six months of
fiscal 2003 and 2002, respectively.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative (SG&A) expenses decreased $2.2
million, from $47.2 million for the first six months of fiscal 2002 to $45.0
million for the first six months of fiscal 2003. Total SG&A expenses as a
percentage of total revenues for fiscal 2003 and 2002 were 15.4% and 15.5%,
respectively. Approximately $500,000 of the decrease occurred as a result of the
discontinuance of amortization of goodwill in fiscal 2003. The remaining
reduction of SG&A costs is largely attributable to the restructuring
accomplished in the second half of fiscal 2002, and continuing costs controls.
SG&A expenses are affected by the contribution of revenues by business segment
and by the mix of revenues within each business segment. As a percentage of
revenues, SG&A expenses are generally higher for construction operations than
for agricultural and truck operations, and lower for equipment and truck sales
than for parts and service revenues. The truck dealership downsizing as
previously discussed along with streamlining the management structure and tight
expense controls throughout the Company, were and will continue through fiscal
2003 to be the primary contributing factors to the decrease in fiscal 2003 SG&A
expenses compared to fiscal 2002.
INTEREST EXPENSE
Interest expense decreased approximately $3.3 million, or 67.4%, from
$4.9 million for the first six months of fiscal 2002 to $1.6 million for the
same period in fiscal 2003. Interest expense as a percentage of total revenues
decreased from 1.6% for the first six months of fiscal 2002 to 0.5% for fiscal
2003. Lower levels of interest-bearing floor plan payables and reductions in
interest rates as well as the sale of truck dealerships were the contributing
factors to the decrease in interest expense.
17
OTHER INCOME
Other income decreased approximately $300,000, or 30.0%, from the first
six months of fiscal 2002 to the first six months of fiscal 2003. Other income
is primarily comprised of finance charges from trade receivables along with
national direct sales income. National direct sales income is a commission
awarded when a manufacturer/supplier sells directly to a national account that
is located in the Company's areas of responsibility.
INCOME TAXES
The estimated provision for income taxes as a percentage of pretax
income was 41.0% for the first six months of fiscal 2003, compared to the
estimated provision for income taxes as a percentage of pretax loss of 40.0% for
the first six months of fiscal 2002.
LIQUIDITY AND CAPITAL RESOURCES
The Company requires cash primarily for financing its inventories of
equipment, trucks and replacement parts, rental equipment, receivables and
capital expenditures, including acquisitions and openings of additional retail
locations. Historically, the Company has met these liquidity requirements
primarily through cash flow generated from operating activities, floor plan
financing, and borrowings under credit agreements with Deere & Company (Deere),
Deere Credit Services, Inc. (Deere Credit), Ag Capital Company (Ag Capital),
Deutsche Financial Services Corporation (Deutsche Financial), Volvo Commercial
Finance LLC The Americas (Volvo Finance), General Motors Acceptance Corporation
(GMAC), CitiCapital Commercial Corporation (CitiCapital) and commercial banks.
Deere and Deere Credit provide the primary source of financing for
equipment inventories, particularly for equipment supplied by Deere. The Deere
and Deere Credit financings are provided through two vehicles, the dealer
statement and a borrowing base revolving credit facility. The dealer statement
provides extended terms and varying interest-free periods, depending on the type
of equipment, to enable dealers to carry representative inventories of equipment
and to encourage the purchase of goods by dealers in advance of seasonal retail
demand. Down payments are not required and interest might not be charged for a
substantial part of the period for which inventories are financed. Often,
purchase discounts are available in lieu of interest-free periods. Variable
market rates of interest based on the prime rate are charged on balances
outstanding after any interest-free periods, which in the past have generally
been four to twelve months for agricultural equipment and four months for
construction equipment. These interest-free periods may be changed at Deere and
Deere Credit's discretion and may be longer depending on special financing
programs offered from time to time. Deere and Deere Credit also provide dealer
statement financing to dealers on used equipment accepted in trade and approved
equipment from other suppliers. The Deere Credit borrowing base revolving credit
facility provides financing for eligible equipment inventories (generally
equipment inventories not financed through the dealer statement) and
receivables. GMAC, Volvo Finance and CitiCapital provide truck floor plan
financing with variable market rates of interest based on the prime or LIBOR
rate.
On July 31, 2002, in addition to manufacturer provided dealer statement
and floor plan financing, the Company had unused credit commitments related to
borrowing base inventory and receivable financing and operating lease financing
of dedicated rental equipment of $52.9 million. The Company had outstanding
floor plan/borrowing base payables of approximately $102.3 million, of which
$72.1 million was interest-bearing as of July 31, 2002. The collateral of
equipment and truck inventories along with eligible receivables would support
$18.1 million of additional borrowing at July 31, 2002. During the first six
months of fiscal 2003 and 2002 the average interest rate under interest-bearing
floor plan/borrowing base financing was approximately 5.31% and 7.85%,
respectively.
18
Currently, the Company has an unsecured bank line of credit totaling
$1.9 million with a maturity date of July 1, 2003 and with a variable interest
rate based on the prime rate (4.75% at July 31, 2002). The Company had
approximately $355,000 of unused availability relating to this line of credit at
July 31, 2002. The average interest rates on the Company's lines of credit
during the first six months of fiscal 2003 and 2002 were 5.67% and 7.53%,
respectively.
The Company believes it has sufficient credit availability from its
existing credit facilities and manufacturers to finance its current and future
operations. Various credit facilities are reviewed and renewed annually. As the
credit facilities approach maturity, the Company believes it will be able to
renew or extend these facilities, or replace these facilities with other
facilities. Subsequent to the end of the Company's second fiscal quarter, the
Company completed a two year renewal of its revolving credit facility with Deere
Credit. The Company believes cash from operations, available cash and borrowing
capacity will be sufficient to fund its planned internal capital expenditures
and other cash needs for fiscal 2003.
The Company's financing agreements contain various covenants which,
among other matters, require the Company to maintain minimum financial ratios,
as defined, and a minimum level of tangible equity. The Company was in
compliance with all covenants as of July 31, 2002.
The Company has various commitments relating to its operations. The
following is a summary of these commitments as of July 31, 2002.
Contractual Obligations and Commercial Commitments
--------------------------------------------------
Within Year 5
(Dollars in Thousands) 1 year Year 2 Year 3 Year 4 or after Total
- ------------------------------------------------------------------------------------------------------------------
Inventory floor plan/
borrowing base payables $ 102,333 $ --- $ --- $ --- $ --- $ 102,333
Long-term debt 666 665 1,876 45 654 3,906
Operating leases and other 8,199 6,764 6,338 5,787 15,751 42,839
- ------------------------------------------------------------------------------------------------------------------
Total $ 111,198 $ 7,429 $ 8,214 $ 5,832 $ 16,405 $ 149,078
==================================================================================================================
The Company's long-term debt is primarily related to the financing of
dedicated rental assets and one dealership location facility. Operating lease
and other commitments are primarily related to dealership locations of $31.9
million, dedicated rental assets and equipment of $10.0 million and vehicles of
$0.9 million.
In addition to the above commitments, certain credit companies provide
direct customer financing (secured by customer owned equipment) and credit
accounts with recourse to the Company totaling $15.2 million and $2.0 million as
of July 31, 2002, respectively. These commitments have off-balance sheet credit
risk because the risk represents generally only a small portion of the total
related accounts, thus only accruals and payments for probable losses are
recognized until the recourse (guarantee) expires. Credit risk represents the
accounting loss that would be recognized at the reporting date if the
counter-parties failed to perform completely as contracted. The credit risk
amounts are equal to the recourse (guaranteed) portion of the contractual
amounts.
Operating activities used net cash of $2.2 million for the first six
months of fiscal 2003. Increased levels of receivable and inventory along with
decreases in floor plan payables and customer deposits were the primary
contributing factors to cash used by operating activities for the first six
months of fiscal 2003. The cash provided by operating activities of $18.9
million for the first six months of fiscal 2002 primarily resulted from
decreased levels of inventory and receivables and increased levels of
19
floor plan payables which were somewhat offset by decreased levels of accounts
payable, accrued liabilities and customer deposits.
Cash used for investing activities was $477,000 for the first six
months of fiscal 2003, which was primarily related to purchases of property and
equipment. Cash provided by investing activities in the first six months of
fiscal 2002 was $2.4 million, primarily related to the net proceeds from the
sale of the Company's Texas truck dealerships partially offset by the Company's
purchase of the remaining 8% minority interest in Salinas Equipment
Distributors, Inc. and purchases of property and equipment.
Cash provided by financing activities was $2.7 million for the first
six months of fiscal 2003. Borrowings on the Company's revolving credit
facilities was the primary source of cash from financing activities which was
used to make payments on long-term debt, purchase treasury stock and fund
increases in receivables and inventories during the first six months of fiscal
2003. Cash used for financing activities was $27.2 million for the first six
months of fiscal 2002. Cash used for financing activities was primarily due to
payments on the Company's revolving credit facilities and long-term debt with
cash being generated from decreases in receivables, inventories and with
proceeds from floor plan financing and the sale of the Company's Texas truck
dealerships.
During the first half of fiscal 2003, the Company continued its
previously announced stock repurchase program and expanded the program,
approving the repurchase of an additional five percent of the outstanding shares
of Class A common stock bringing the total authorized to 15% of the outstanding
shares of Class A common stock. At July 31, 2002, the Company had repurchased
516,200 shares, or 9.1%, of the outstanding shares of Class A common stock at a
total cost of $2,058,000. The Company expects to continue to repurchase shares
in the future as deemed appropriate.
CYCLICALITY
Sales of equipment and trucks, particularly new units, historically
have been cyclical, fluctuating with general economic cycles. During economic
downturns, equipment and truck retailers tend to experience similar periods of
decline and recession as the general economy. The impact of an economic downturn
on retailers is generally less than the impact on manufacturers due to the sale
of parts and service by retailers to maintain used equipment and trucks. The
Company believes that its businesses are influenced by worldwide and local
economic conditions (see "Safe Harbor Statement") and that its geographic and
business diversification may generally reduce the overall impact of economic
cycles on the Company's operations.
SEASONALITY
The Company's agricultural operations, particularly in the Midwest,
generally experience a higher volume of equipment sales in the second and third
fiscal quarters due to the crop-growing season. Typically, farmers purchase
equipment prior to planting or harvesting crops. Winter weather conditions in
the Midwest limit equipment purchases during the Company's first and fourth
fiscal quarters. This seasonal effect can be diminished during periods of
significant and sustained weakness in the agricultural economy during which
farmers generally purchase less equipment.
The Company's construction operations generally experience a higher
volume of equipment sales in the second and third fiscal quarters due to
favorable weather patterns, particularly in the Midwest. The general slowdown in
construction activity at the end of the calendar year influences the fourth
fiscal quarter. Further, winter weather conditions in parts of the Southwest and
South Central also limit construction activity to some degree, typically
resulting in lower sales and rentals of construction equipment.
20
SAFE HARBOR STATEMENT
This statement is made under the Private Securities Litigation Reform
Act of 1995. The future results of the Company, including results related to
forward-looking statements in this Report, involve a number of risks and
uncertainties. Important factors that will affect future results of the Company,
including factors that could cause actual results to differ materially from
those indicated by forward-looking statements, include, but may not be limited
to, those set forth under the caption "Certain Important Factors" in Item 1 of
the Company's Form 10-K dated April 29, 2002 and in other filings with the
Securities and Exchange Commission. The important factors discussed in the
aforementioned Form 10-K include:
o Dependence on Deere
o Deere termination rights
o Effects of downturn in general economic conditions,
cyclicality, seasonality and weather
o Competition
o Available financing for customers
o Substantial inventory financing requirements and lending
industry changes
o Dependence on key personnel
o Growth by acquisition and store openings
In general, the factors that will affect the Company, which are subject
to change, include: general economic conditions worldwide and locally; global
acts of terrorism; interest rates; housing starts; fuel prices; the factors that
affect the construction contractors' confidence and financial health including
construction demand, the amount of government sponsored projects and weather;
the many interrelated factors that affect farmers' confidence, including farm
cash income, farmer debt levels, credit availability, worldwide demand for
agricultural products, world grain stocks, commodity prices, weather, animal and
plant diseases, crop pests, harvest yields, real estate values and government
farm programs; legislation, primarily legislation relating to agriculture, the
environment, commerce, transportation and government spending on infrastructure;
climatic phenomena such as flooding, droughts, La Nina and El Nino; pricing,
product initiatives and other actions of competitors in the various industries
in which the Company competes, including manufacturers and retailers; the levels
of new and used inventories in these industries; the Company's relationships
with its suppliers; production difficulties, including capacity and supply
constraints experienced by the Company's suppliers; practices by the Company's
suppliers; changes in governmental regulations; labor shortages; employee
relations; currency exchange rates; availability, sufficiency and cost of
insurance; financing arrangements relating to the Company's financial services
operations, including credit availability and customer credit risks; dependence
upon the Company's suppliers; termination rights and other provisions which the
Company's suppliers have under dealer and other agreements; risks associated
with growth, expansion and acquisitions; the positions of the Company's
suppliers and other manufacturers with respect to publicly-traded dealers,
dealer consolidation and specific acquisition opportunities; the Company's
acquisition strategies and the integration and successful operation of acquired
businesses; capital needs and capital market conditions; operating and financial
systems to manage operations; dependence upon key personnel; accounting
standards; technological difficulties, especially involving the Company's
suppliers and other third parties which could cause the Company to be unable to
process customer orders, deliver products or services, or perform other
essential functions; the successful closing of the sale of the Company's
Riverside , CA truck dealership; and other risks and uncertainties. The
Company's forward-looking statements are based upon assumptions relating to
these factors. These assumptions are sometimes based upon estimates, data,
communications and other information from suppliers, government agencies and
other sources, which are often revised. The Company makes no commitment to
revise forward-looking statements, or to disclose subsequent facts, events or
circumstances that may bear upon forward-looking statements.
21
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
There has been no material change in the information set forth in Item
7A of the Company's Annual Report on Form 10-K for the fiscal year ended January
31, 2002.
PART II - OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) EXHIBITS.
Exhibits filed with this report are listed in the Exhibit
Index on page 24.
(b) REPORTS ON FORM 8-K.
The Company filed a Current Report on Form 8-K dated May 17,
2002 under Item 4 regarding the decision by the Company's Board of
Directors to dismiss Arthur Andersen LLP as the Company's independent
public accountants and engage PricewaterhouseCoopers LLP to serve as
the Company's independent public accountants for fiscal year 2003.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
RDO EQUIPMENT CO.
(Registrant)
Date: September 11, 2002 By: /s/ Steven B. Dewald
-----------------------------
Steven B. Dewald
Chief Financial Officer
(principal financial officer)
22
CERTIFICATIONS
I, Ronald D. Offutt, certify that:
1. I have reviewed this quarterly report on Form 10-Q of RDO Equipment Co.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report; and
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report.
Date: September 11, 2002 /s/ Ronald D. Offutt
---------------------------
Ronald D. Offutt
Chief Executive Officer
I, Steven B. Dewald, certify that:
1. I have reviewed this quarterly report on Form 10-Q of RDO Equipment Co.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report; and
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report.
Date: September 11, 2002 /s/ Steven B. Dewald
---------------------------
Steven B. Dewald
Chief Financial Officer
The written statements of our Chief Executive Officer and Chief Financial
Officer required pursuant to 18 U.S.C. Section 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002, accompanied the filing of this
report by correspondence to the Securities and Exchange Commission.
23
EXHIBIT INDEX
ITEM NO. ITEM PAGE OF THIS REPORT
- -------- ---- -------------------
10.1 Second Amended and Restated Loan Agreement
between John Deere Construction & Forestry
Company, Deere Credit, Inc., and John Deere
Company and RDO Agriculture Equipment Co.,
RDO Construction Equipment Co., RDO
Financial Services Co. and RDO Material
Handling Co. 25
10.2 Guaranty by RDO Equipment Co. of Loan
Agreement between John Deere Construction &
Forestry Company, Deere Credit, Inc., and
John Deere Company and RDO Agriculture
Equipment Co., RDO Construction Equipment
Co., RDO Financial Services Co. and
RDO Material Handling Co. 44
24