================================================================================
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 OCTOBER 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 November 30,
2002:
Class A Common Stock 5,179,808
Class B Common Stock 7,450,492
----------
Total 12,630,300
================================================================================
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 Nine Months Ended
October 31, October 31,
---------------------- ----------------------
2002 2001 2002 2001
-------- -------- -------- --------
Revenues
Equipment and truck sales $ 97,834 $ 92,502 $311,463 $310,939
Parts and service 41,242 42,995 120,473 128,125
-------- -------- -------- --------
Total revenues 139,076 135,497 431,936 439,064
Cost of revenues
Equipment and truck sales 87,673 83,695 280,866 282,433
Parts and service 25,591 27,141 75,359 80,688
-------- -------- -------- --------
Total cost of revenues 113,264 110,836 356,225 363,121
-------- -------- -------- --------
Gross profit 25,812 24,661 75,711 75,943
Selling, general and
administrative expenses 23,713 23,279 68,683 70,443
-------- -------- -------- --------
Operating income 2,099 1,382 7,028 5,500
Interest expense 735 1,756 2,348 6,625
Gain on sale of dealerships 734 -- 734 --
Other income 482 378 1,178 1,333
-------- -------- -------- --------
Income before income taxes 2,580 4 6,592 208
Income tax provision 1,058 1 2,703 83
-------- -------- -------- --------
Net income $ 1,522 $ 3 $ 3,889 $ 125
======== ======== ======== ========
Net income per share -
basic and diluted $ 0.12 $ -- $ 0.30 $ 0.01
======== ======== ======== ========
Weighted average shares
outstanding - basic 12,643 13,181 12,790 13,181
======== ======== ======== ========
Weighted average shares
outstanding - diluted 12,714 13,181 12,859 13,181
======== ======== ======== ========
The accompanying notes are an integral part of these condensed consolidated
financial statements.
2
RDO EQUIPMENT CO.
CONDENSED CONSOLIDATED BALANCE SHEETS
October 31, January 31,
(IN THOUSANDS) (UNAUDITED) 2002 2002
- -------------------------------------------------------------------------------------------------
ASSETS
Current assets:
Cash and cash equivalents $ 3,319 $ 852
Accounts receivable, less allowance for doubtful accounts 32,538 26,726
Income tax receivable -- 4,550
Receivables from affiliates 205 38
Inventories 125,418 128,504
Prepaid expenses 619 1,417
Assets held for sale -- 8,862
Deferred income tax asset 5,200 5,310
-------- --------
Total current assets 167,299 176,259
Property and equipment, net 15,585 13,192
Other assets:
Goodwill and other 25,516 25,126
Deferred income tax asset -- 504
Deposits 1,684 1,513
-------- --------
Total assets $210,084 $216,594
======== ========
The accompanying notes are an integral part of these condensed consolidated
financial statements.
3
RDO EQUIPMENT CO.
CONDENSED CONSOLIDATED BALANCE SHEETS
October 31, January 31,
(IN THOUSANDS) (UNAUDITED) 2002 2002
- ---------------------------------------------------------------------------------------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Floor plan/borrowing base payables $ 89,910 $ 97,416
Notes payable 245 975
Current maturities of long-term debt 755 2,612
Accounts payable 3,877 2,042
Accrued liabilities 18,967 12,656
Liabilities associated with assets held for sale -- 6,356
Customer advance deposits 2,635 5,298
--------- ---------
Total current liabilities 116,389 127,355
Long-term debt, net of current maturities 3,025 1,382
Deferred income tax liabilities 720 --
--------- ---------
Total liabilities 120,134 128,737
--------- ---------
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 7,569 3,680
Treasury Stock, at cost (549,000 and 148,000 Class A shares in fiscal
2003 and 2002, respectively) (2,222) (426)
--------- ---------
Total stockholders' equity 89,850 87,857
--------- ---------
Total liabilities and stockholders' equity $ 210,084 $ 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
Nine Months Ended October 31,
(IN THOUSANDS) (UNAUDITED) 2002 2001
- -------------------------------------------------------------------------------------------------------------------------
Operating activities:
Net income $ 3,889 $ 125
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation and amortization 3,355 4,491
Deferred taxes 1,334 350
Gain on sale of dealerships (734) --
Change in operating assets and liabilities:
Accounts receivable 358 11,855
Inventories 9,997 33,838
Prepaid expenses 801 818
Deposits (80) (380)
Floor plan payables (2,163) (12,748)
Accounts payable and accrued liabilities 4,785 (3,753)
Customer advance deposits (2,663) (3,277)
-------- --------
Net cash provided by operating activities 18,879 31,319
Investing activities:
Net (purchases) sales of rental equipment (968) 585
Net (purchases) sales of property and equipment (1,515) (572)
Net assets of acquisitions -- (822)
Net proceeds on sale of dealerships 2,847 3,248
Other, net (380) (308)
-------- --------
Net cash (used for) provided by investing activities (16) 2,131
Financing activities:
Proceeds from issuance of long-term debt 1,775 --
Payments on long-term debt (5,645) (1,692)
Purchase of common stock (1,796) (9)
Payment of dividends -- (731)
Net payments of revolving credit facilities (10,000) (26,900)
Net payments of bank lines and short-term notes payable (730) (10,923)
-------- --------
Net cash used for financing activities (16,396) (40,255)
-------- --------
Increase (decrease) in cash 2,467 (6,805)
Cash and cash equivalents, beginning of period 852 7,635
-------- --------
Cash and cash equivalents, end of period $ 3,319 $ 830
======== ========
Supplemental disclosures:
Cash payments for interest $ 2,589 $ 5,325
======== ========
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 note receivable $ 454 $ --
======== ========
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 October 31, 2002
and for the three and nine months ended October 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 nine months ended October 31,
2002 are not necessarily indicative of the results to be expected for the full
year.
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 nine month periods ended October 31, 2002 was to increase net income by
approximately $155,000 or $0.01 per share and $464,000 or $0.04 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 Nine Months Ended
-------------------------- ---------------------------
October 31, October 31, October 31, October 31,
2002 2001 2002 2001
---------- ---------- ----------- ----------
Reported net income $ 1,522 $ 3 $ 3,889 $ 125
Add back: goodwill
amortization, net of tax -- 155 -- 464
---------- ---------- ----------- ----------
Adjusted net income $ 1,522 $ 158 $ 3,889 $ 589
========== ========== =========== ==========
Reported basic and diluted
earnings per share $ 0.12 $ -- $ 0.18 $ 0.01
Add back: goodwill
amortization, net of tax -- 0.01 -- 0.03
---------- ---------- ----------- ----------
Adjusted basic and diluted
earnings per share $ 0.12 $ 0.01 $ 0.18 $ 0.04
========== ========== =========== ==========
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
6
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 had no 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 expects this to
have no impact on the Company's financial statements.
3. RESTRUCTURING CHARGES:
During the first nine 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 nine months of fiscal 2003
totaled approximately $159,000. Costs incurred related to lease and other
obligations totaled approximately $76,000. There are no remaining accruals
relating to severance, lease or other obligations as of October 31, 2002. During
the third quarter of fiscal 2003, the Company sold the assets of its Riverside,
California truck business realizing a gain on sale of $734,000. The sale of the
Riverside, California truck business completes the execution of this plan.
7
4. 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. The first-in, first-out method is used to determine cost for parts
inventory. Inventories consisted of the following at (in thousands):
October 31, January 31,
2002 2002
--------- ---------
New equipment & trucks $ 73,296 $ 80,013
Used equipment & trucks 30,754 27,070
Parts and other 21,368 21,421
--------- ---------
$ 125,418 $ 128,504
========= =========
5. 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):
October 31, January 31,
2002 2002
--------- ---------
Interest-bearing $ 57,250 $ 66,157
Noninterest-bearing 32,660 31,259
--------- ---------
$ 89,910 $ 97,416
========= =========
6. 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 Ended Nine Months Ended
October 31, October 31,
-------------------- --------------------
2002 2001 2002 2001
------- ------- ------- -------
Net income available
to common shareholders $ 1,522 $ 3 $ 3,889 $ 125
======= ======= ======= =======
Weighted average number
of shares outstanding - basic 12,643 13,181 12,790 13,181
Dilutive effect of stock options outstanding 71 -- 69 --
------- ------- ------- -------
Weighted average common and potential
common shares outstanding - diluted 12,714 13,181 12,859 13,181
======= ======= ======= =======
Basic net income per share $ 0.12 $ -- $ 0.30 $ 0.01
======= ======= ======= =======
Dilutive net income per share $ 0.12 $ -- $ 0.30 $ 0.01
======= ======= ======= =======
8
Options to purchase 903,299 and 693,774 shares of common stock were
outstanding as of October 31, 2002 and 2001, respectively. Outstanding options
of 682,950 and 693,774 were not included in the computations of diluted earnings
per share for the nine months ended October 31, 2002 and 2001, respectively,
because the exercise prices were greater than the average market prices of the
common shares for the periods.
7. 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,
medium, and light-duty trucks to customers primarily in the transportation and
construction industries, to units of government and retail customers.
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 nine months ended October 31, 2002 and
2001 (in thousands):
Three months ended October 31, Construction Agricultural Truck Corporate Total
- -------------------------------------------------------------------------------------------------------------
2002:
Revenues $ 72,830 $ 50,611 $ 15,635 $ -- $ 139,076
Interest expense 549 175 11 -- 735
Other income 414 52 16 -- 482
Depreciation and
amortization 759 329 61 -- 1,149
Income (loss) before
income taxes (215) 1,942 853 (a) -- 2,580
Capital expenditures, net 1,794 158 50 (51) 1,951
2001:
Revenues $ 73,006 $ 42,905 $ 19,586 $ -- $ 135,497
Interest expense 1,327 287 142 -- 1,756
Other income 243 65 70 -- 378
Depreciation and
amortization 737 615 74 -- 1,426
Income (loss) before
income taxes (1,447) 1,063 388 -- 4
Capital expenditures, net (129) (292) 24 65 (332)
Nine months ended October 31, Construction Agricultural Truck Corporate Total
- -------------------------------------------------------------------------------------------------------------
2002:
Revenues $ 222,608 $ 155,710 $ 53,618 $ -- $ 431,936
Interest expense 1,704 581 63 -- 2,348
Other income 989 146 43 -- 1,178
Depreciation and
amortization 2,100 1,074 181 -- 3,355
Income before
income taxes 198 4,743 1,651 (a) -- 6,592
Identifiable assets 117,460 63,353 21,154 8,117 210,084
Goodwill 10,256 9,494 4,572 -- 24,322
Capital expenditures, net 2,187 115 102 79 2,483
2001:
Revenues $ 235,779 $ 136,112 $ 67,173 $ -- $ 439,064
Interest expense 4,829 1,047 749 -- 6,625
Other income 975 275 83 -- 1,333
Depreciation and
amortization 2,169 2,038 284 -- 4,491
Income (loss) before
income taxes (2,943) 2,724 427 -- 208
Identifiable assets 144,735 66,354 21,835 7,904 240,828
Goodwill 10,364 9,605 4,617 -- 24,586
Capital expenditures, net (158) (182) 72 255 (13)
(a) The third quarter income before income taxes includes a gain of $734,000
related to the sale of the Riverside, CA truck business and the nine month
numbers include the gain on sale and $400,000 of income before income taxes
attributable to the settlement of a vendor obligation 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 the 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 October 31, 2002, the
Company operated 45 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 48% of the
Company's sales for the first nine 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
nine month periods ended October 31, 2002 was to increase net income by
approximately $155,000, or $0.01 per share, and $464,000, or $0.04 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 had no 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 expects 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. The first-in, first-out method is used to determine cost
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.
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.
12
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 nine 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 nine months of fiscal 2003
totaled approximately $159,000. Costs incurred related to lease and other
obligations totaled approximately $76,000. There are no remaining accruals
relating to severance, lease or other obligations as of October 31, 2002. During
the third quarter of fiscal 2003, the Company sold the assets of its Riverside,
California truck business realizing a gain on sale of $734,000. The sale of the
Riverside, California truck business completes the execution of this plan.
13
RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, certain
financial data:
Three Months Ended Nine Months Ended
October 31, October 31,
--------------------- ----------------------
2002 2001 2002 2001
-------- -------- -------- --------
Revenue Data (in millions):
Total revenues $ 139.1 $ 135.5 $ 431.9 $ 439.1
Construction 52.4% 53.9% 51.5% 53.7%
Agricultural 36.4% 31.7% 36.1% 31.0%
Truck 11.2% 14.4% 12.4% 15.3%
Construction revenues $ 72.8 $ 73.0 $ 222.6 $ 235.8
Equipment sales 69.0% 67.6% 69.7% 69.6%
Parts and service 31.0% 32.4% 30.3% 30.4%
Agricultural revenues $ 50.6 $ 42.9 $ 155.7 $ 136.1
Equipment sales 71.9% 67.0% 75.4% 72.2%
Parts and service 28.1% 33.0% 24.6% 27.8%
Truck revenues $ 15.7 $ 19.6 $ 53.6 $ 67.2
Truck sales 71.6% 73.6% 72.7% 72.3%
Parts and service 28.4% 26.4% 27.3% 27.7%
STATEMENT OF OPERATIONS DATA (AS A PERCENTAGE OF TOTAL REVENUES):
Revenues
Equipment and truck sales 70.3% 68.3% 72.1% 70.8%
Parts and service 29.7 31.7 27.9 29.2
-------- -------- -------- --------
Total revenues 100.0 100.0 100.0 100.0
Gross profit 18.6 18.2 17.5 17.3
Selling, general and
administrative expenses 17.1 17.2 15.9 16.0
-------- -------- -------- --------
Operating income 1.5 1.0 1.6 1.3
Interest expense 0.5 1.3 0.5 1.5
Gain on sale of
RDO Truck Riverside Co. 0.5 -- 0.1 --
Other income 0.3 0.3 0.3 0.3
Provision for taxes 0.7 -- 0.6 0.1
-------- -------- -------- --------
Net income 1.1% --% 0.9% --%
======== ======== ======== ========
14
THREE MONTHS ENDED OCTOBER 31, 2002 COMPARED TO THREE MONTHS ENDED OCTOBER 31,
2001
NET INCOME
The Company reported net income of $1,522,000, or $0.12 per share, for
the third quarter of fiscal 2003, compared to net income of $3,000, or
essentially breakeven on a per share basis, for the third quarter of fiscal
2002.
REVENUES
Total revenues of $139.1 million during the third quarter of fiscal
2003 were $3.6 million, or 2.7%, higher than revenues during the third quarter
of the previous year. Construction revenues, which represent the largest segment
of the Company, were $72.8 million during the quarter, a $200,000, or 0.3%,
decrease compared to the prior year due to the current soft demand for
construction equipment, especially in the Company's southern regions.
Agricultural revenues of $50.6 million in the third quarter of fiscal 2003 were
$7.7 million, or 18.0%, higher than in the third 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 $15.7 million were down $3.9 million, or 19.9%,
compared to the same period last year. The entire revenue decline was
attributable to the Riverside, CA truck business sold during the quarter.
Equipment and truck sales were $97.8 million during the third quarter
of fiscal 2003, an increase of $5.3 million, or 5.7%, from the third quarter of
fiscal 2002. Construction equipment sales increased $800,000, or 1.6%, to $50.2
million. Agricultural equipment sales increased $7.7 million, or 26.8%, to $36.4
million. Truck sales decreased $3.2 million primarily attributable to the
Riverside, CA truck business sold during the quarter.
Parts and service revenues were $41.3 million in the third quarter of
fiscal 2003, representing a decrease of $1.7 million, or 4.0%, from the prior
year. Parts and service revenues from truck operations decreased approximately
$700,000, or 13.5%, to $4.5 million. The decrease in truck parts and service
revenues was primarily due to the sale of the Riverside, CA truck dealership.
Construction parts and service revenues decreased approximately $1.0 million, or
4.2%, to $22.6 million. Agricultural parts and service revenues remained steady
at $14.2 million for the third quarter of both fiscal years.
GROSS PROFIT
Gross profit for the third quarter of fiscal 2003 was approximately
$25.8 million, or 18.6% of total revenues, compared to $24.7 million, or 18.2%
of total revenues in fiscal 2002. Although equipment and truck sales dollars
increased 5.7% in the third quarter of fiscal 2003, gross margin dollars for
equipment and trucks for the quarter increased approximately $1.4 million, or
15.9%. As a result, there was an increase in gross profit as a percentage of
equipment and truck sales from 9.5% for the third quarter of fiscal 2002, to
10.4% for fiscal 2003. Parts and service gross margins were approximately $15.6
million, or 37.8% of revenues, and $15.9 million, or 37.0% of revenues, for the
third quarter of fiscal 2003 and 2002, respectively.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative (SG&A) expenses of $23.7 million
for the current quarter increased $400,000 from the same quarter one year ago.
In addition, SG&A expenses decreased by approximately $250,000 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 17.1%
and 17.2%, respectively.
15
INTEREST EXPENSE
Interest expense was 700,000 for the quarter, a decrease of $1.1
million, or 61.1%, from the third quarter of fiscal 2002. Interest expense as a
percentage of total revenues was 0.5% for the current quarter versus 1.3% for
the third quarter of fiscal 2002. 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 increased approximately $100,000, or 25.0%, from the third
quarter of fiscal 2002 to the third 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 direct fee paid
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 third quarter of fiscal 2003, compared to 40.0% for the
third quarter of fiscal 2002.
NINE MONTHS ENDED OCTOBER 31, 2002 COMPARED TO NINE MONTHS ENDED OCTOBER 31,
2001
NET INCOME
The Company reported net income of $3,889,000, or $0.30 per share, for
the first nine months of fiscal 2003, compared to a net income of $125,000, or
$0.01 per share, for the first nine months of fiscal 2002.
REVENUES
Total revenues of $431.9 million during the first nine months of fiscal
2003 were $7.2 million, or 1.6%, lower than revenues during the first nine
months of the previous year. Construction revenues, which represent the largest
segment of the Company, were $222.6 million during the first nine months of
fiscal 2003, a $13.2 million, or 5.6%, 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 $155.7 million in the first nine months of fiscal 2003 were $19.6 million, or
14.4%, higher than in the first nine 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 $53.6 million were down $13.6 million, or 20.2%, compared to
the same period last year. The decrease in truck revenues were attributable to
the Texas and California truck dealerships which were sold. The Texas
dealerships were sold in the second quarter of fiscal 2002 and the Riverside, CA
dealership sold in the current quarter.
Equipment and truck sales were $311.4 million during the first nine
months of fiscal 2003, an increase of $500,000, or 0.2%, from the first nine
months of fiscal 2002. Agricultural equipment sales increased $19.1 million, or
19.4%, to $117.4 million. Offsetting these sales increases were construction
equipment sales which decreased $9.1 million, or 5.6%, to $155.0 million and
truck sales which decreased $9.5 million, or 19.6%, to $39.0 million.
16
Parts and service revenues were $120.5 million in the first nine months
of fiscal 2003, representing a decrease of $7.6 million, or 5.9%, from the prior
year. Parts and service revenues from truck operations decreased approximately
$4.0 million, or 21.5%, to $14.6 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 $4.1 million, or
5.7%, to $67.6 million. Agricultural parts and service revenues increased
approximately $500,000, or 1.3%, as sales increased to $38.3 million.
GROSS PROFIT
Gross profit for the first nine months of fiscal 2003 was approximately
$75.7 million, or 17.5% of total revenues, compared to $75.9 million, or 17.3%
of total revenues in fiscal 2002. Although equipment and truck sales dollars
increased only $500,000 in the first nine months of fiscal 2003 compared to the
first nine months of fiscal 2002, gross margin dollars for equipment and trucks
for the first nine months of fiscal 2003 increased approximately $2.1 million.
Approximately $400,000 of the 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 $45.1 million, or 37.4% of
revenues, and $47.4 million, or 37.0% of revenues, for the first nine months of
fiscal 2003 and 2002, respectively.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative (SG&A) expenses of $68.7 million
for the first nine months of the fiscal year decreased $1.7 million from the
same period one year ago. Total SG&A expenses as a percentage of total revenues
for fiscal 2003 and 2002 were 15.9% and 16.0%, respectively. Approximately
$750,000 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 for the first nine months of fiscal 2003 was $2.3
million, a decrease of $4.3 million, or 65.2%, from the same period in fiscal
2002. 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 7.7%, from the first
nine months of fiscal 2002 to the first nine 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 direct fee paid
when a manufacturer/supplier sells directly to a national account that is
located in the Company's areas of responsibility.
17
INCOME TAXES
The estimated provision for income taxes as a percentage of pretax
income was 41.0% for the first nine months of fiscal 2003, compared to 40.0% for
the first nine 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, manufacturer
provided floor plan financing, and borrowings under credit agreements with Deere
& Company (Deere), Deere Credit Services, Inc. (Deere Credit), CitiCapital
Commercial Corporation (CitiCapital), Ag Capital Company (Ag Capital), GE
Commercial Distribution Finance Corporation (CDF), Volvo Commercial Finance LLC
The Americas (Volvo Finance), General Motors Acceptance Corporation (GMAC) 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. The Deere and Deere Credit financing sources have a combined
maximum outstanding allowed of $125.0 million. The maximum outstanding allowed
is reduced to $105.0 million beginning May 1, 2003. The total amount outstanding
to Deere and Deere Credit was $57.1 million at October 31, 2002.
During the quarter, the Company and certain of its subsidiaries entered
into a borrowing base credit facility with CitiCapital to provide up to $30.0
million in financing for equipment inventories, with variable rates of interest
based on LIBOR. The total amount outstanding at October 31, 2002 was $20.0
million.
GMAC, Volvo Finance and CitiCapital provide truck floor plan financing
with variable market rates of interest based on the prime or LIBOR rate. None of
the financing sources for trucks have a set credit limit.
On October 31, 2002, the Company had unused credit commitments related
to inventory and receivable financing and operating lease financing of dedicated
rental equipment of $88.2 million. The Company had outstanding floor
plan/borrowing base payables of approximately $89.9 million, of which $57.3
million was interest-bearing as of October 31, 2002. The collateral of equipment
and truck inventories along with eligible receivables would support $24.7
million of additional borrowing at October 31, 2002. During the first nine
months of fiscal 2003 and 2002 the average interest rate under interest-bearing
floor plan/borrowing base financing was approximately 5.20% and 7.61%,
respectively.
18
Currently, the Company has an unsecured bank line of credit totaling
$1.6 million with a maturity date of July 1, 2003 and with a variable interest
rate based on the prime rate (4.75% at October 31, 2002). The Company had
approximately $1.3 million of unused availability relating to this line of
credit at October 31, 2002. The average interest rates on the Company's lines of
credit during the first nine months of fiscal 2003 and 2002 were 5.37% and
6.82%, 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. 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 October 31, 2002.
The Company has various commitments relating to its operations. The
following is a summary of these commitments as of October 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 $ 89,910 $ -- $ -- $ -- $ -- $ 89,910
Long-term debt 755 852 1,293 154 726 3,780
Operating leases and other 7,326 6,102 5,662 5,308 12,661 37,059
- --------------------------------------------------------------------------------------------------
Total $ 97,991 $ 6,954 $ 6,955 $ 5,462 $ 13,387 $130,749
==================================================================================================
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 $27.4
million, dedicated rental assets and equipment of $8.9 million and vehicles of
$0.8 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 $16.8 million and $1.8 million as
of October 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 provided net cash of $18.9 million for the first
nine months of fiscal 2003. Net income along with decreased levels of inventory
as well as increases in accounts payable and accrued liabilities were the
primary contributing factors to cash provided by operating activities for the
first nine months of fiscal 2003. The cash provided by operating activities of
$31.3 million for the first nine months of fiscal 2002 primarily resulted from
decreased levels of inventory and receivables, partially offset by decreased
levels of floor plan payables, accounts payable, accrued liabilities and
customer deposits.
19
Cash used for investing activities was $16,000 for the first nine
months of fiscal 2003, which was primarily related to purchases of rental
equipment and of property and equipment, offset by the net proceeds from the
sale of the Riverside, CA dealership. Cash provided by investing activities in
the first nine months of fiscal 2002 was $2.1 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 used for financing activities was $16.4 million for the first nine
months of fiscal 2003. Cash used for financing activities was primarily due to
payments on the Company's revolving credit facilities and long-term debt as well
as purchases of common stock with cash being generated from decreases in
inventories and with proceeds from the sale of the Company's Riverside, CA truck
dealership. Cash used for financing activities was $40.3 million for the first
nine months of fiscal 2002. Cash used for financing activities was primarily due
to payments on the Company's revolving credit facilities, bank lines and
short-term notes payable and long-term debt with cash being generated from
decreases in receivables, inventories and with proceeds from the sale of the
Company's Texas truck dealerships.
During the first nine months 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 October 31, 2002, the Company had repurchased
549,000 shares, or 9.6%, of the outstanding shares of Class A common stock at a
total cost of $2,222,000. 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; developments with respect to Mr. Offutt's offer to take the
Company private 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.
The Company is exposed to market risk from changes in interest rates.
Market risk is the potential loss arising from adverse changes in market rates
and prices such as interest rates. For fixed rate debt, interest rate changes
affect the fair value of financial instruments but do not impact earnings or
cash flows. Conversely for floating rate debt, interest rate changes generally
do not affect the fair market value but do impact future earnings and cash
flows, assuming other factors are held constant. During the first nine months of
fiscal 2003, the Company has renegotiated and/or signed several new credit
facilities. Many of these credit agreements are floating rate facilities now
containing minimum rates of interest to be charged. The Company has also entered
into fixed rate financing for certain rental equipment. Based upon balances and
interest rates as of October 31, 2002, a one percentage point fluctuation in
interest rates would result in a net change to unrealized market value of the
Company's fixed rate debt by approximately $40,000. Holding other variables
constant, the pre-tax earnings and cash flow impact for the next twelve month
period resulting from a one percentage point increase in interest rates would be
approximately $419,000. Conversely, the pre-tax earnings and cash flow impact
for the next twelve month period resulting in a one percentage point decrease in
interest rates would be approximately $160,000. At October 31, 2002, the Company
had variable rate floor plan payables, notes payable and long-term debt of $59.4
million and fixed rate notes payable and long-term debt of $1.8 million.
ITEM 4. CONTROLS AND PROCEDURES
Within the 90 days prior to the date of this report, the Company
carried out an evaluation, under the supervision and with the participation of
the Company's management, including the Company's President and Chief Executive
Officer and the Company's Chief Financial Officer, of the effectiveness of the
design and operation of the Company's disclosure controls and procedures
pursuant to Rules 13a-14 and 13a-15 under the Securities Exchange Act of 1934,
as amended. Based upon that evaluation, the Company's President and Chief
Executive Officer and the Company's Chief Financial Officer concluded that the
Company's disclosure controls and procedures are effective.
There were no significant changes in the Company's internal controls or
in other factors that could significantly affect these controls subsequent to
the date of the Company's evaluation.
PART II - OTHER INFORMATION
ITEM 5. OTHER INFORMATION
On December 16, 2002, the Company received a letter from Ronald D. Offutt, the
Chairman of the Board of Directors, Chief Executive Officer and majority
stockholder of the Company, expressing an interest in acquiring all of the
shares of the Class A Common Stock of the Company that Mr. Offutt does not
currently own or control. Mr. Offutt has stated that if he decides to pursue
this transaction, he would commence a tender offer directly to the Company's
stockholders and is currently considering an offer in a range of $5.22 to $5.66
per share. His letter stated that his offer would be conditioned on the tender
by Company stockholders of a sufficient number of shares of Class A Common Stock
such that, after the offer is completed, and assuming conversion of his shares
of Class B Common Stock into shares of Class A Common Stock, he would own at
least 90% of outstanding shares of Class A Common Stock, which would allow him
to acquire all remaining outstanding shares through a subsequent short-form
merger. His letter also stated that he would condition his offer on the tender
of at least a majority of the shares of Class A Common Stock not affiliated with
Mr. Offutt, a condition which he would not waive. Mr. Offutt is not asking RDO
Equipment to enter into any agreement with respect to the offer. He has
requested that the Company's Board of Directors create an independent special
committee to discuss the offering price and terms with him prior to his
commencement by him of any offer. It is expected that the special committee will
engage financial and legal advisors in connection with its role.
THE STATEMENT ABOVE IS NEITHER AN OFFER TO PURCHASE NOR A SOLICITATION OF AN
OFFER TO SELL SECURITIES OF THE COMPANY. IF MR. OFFUTT PROCEEDS WITH THE OFFER,
HE WILL FILE DOCUMENTATION REGARDING THE OFFER WITH THE SEC. THE COMPANY WILL
ALSO BE REQUIRED TO FILE DOCUMENTATION REGARDING ITS RESPONSE TO THE OFFER.
INVESTORS AND SECURITY HOLDERS ARE ADVISED TO READ THIS DOCUMENTATION, WHEN AND
IF IT BECOMES AVAILABLE, BECAUSE THIS DOCUMENTATION WILL CONTAIN IMPORTANT
INFORMATION. INVESTORS AND SECURITY HOLDERS MAY OBTAIN A FREE COPY OF THE TENDER
OFFER DOCUMENTATION (WHEN AND IF AVAILABLE) AND OTHER RELATED DOCUMENTS FILED BY
MR. OFFUTT AND THE COMPANY AT THE SEC'S WEB SITE AT WWW.SEC.GOV. THE TENDER
OFFER DOCUMENTATION AND SUCH OTHER DOCUMENTS MAY ALSO BE OBTAINED FROM THE
COMPANY BY DIRECTING SUCH REQUEST TO RDO EQUIPMENT CO., 2829 SOUTH UNIVERSITY
DRIVE, FARGO, ND 58109, TEL (701) 297-4288, ATTENTION: TOM ESPEL.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) EXHIBITS.
Exhibits filed with this report are listed in the Exhibit
Index on page 26.
(b) REPORTS ON FORM 8-K.
None.
22
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: December 16, 2002 By: /s/ Steven B. Dewald
-------------------------
Steven B. Dewald
Chief Financial Officer
(principal 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
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;
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;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly
report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.
Date: December 16, 2002 /s/ Ronald D. Offutt
----------------------------
Ronald D. Offutt
Chief Executive Officer
(principal executive officer)
24
CERTIFICATIONS
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;
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;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly
report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.
Date: December 16, 2002 /s/ Steven B. Dewald
-----------------------------
Steven B. Dewald
Chief Financial Officer
(principal financial officer)
25
EXHIBIT INDEX
ITEM NO. ITEM PAGE OF THIS REPORT
- -------- ---- -------------------
10.1 Loan and Security Agreement between
RDO Construction Equipment Co. and
CitiCapital Commercial Corporation 27
10.2 Loan and Security Agreement between
RDO Agriculture Equipment Co. and
CitiCapital Commercial Corporation 40
10.3 Loan and Security Agreement between
RDO Material Handling Co. and
CitiCapital Commercial Corporation 53
99.1 Proposal Letter dated December 16, 2002 66
26