-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, LFC+AJ7mCh2RkL9AJgAqf3mS2C2FcMTNroOHeqo3DFTGiyPA8b2/5IZppNTJY0Va MJf6BAkE3SWSs56wck6hHQ== 0000897101-00-000434.txt : 20000427 0000897101-00-000434.hdr.sgml : 20000427 ACCESSION NUMBER: 0000897101-00-000434 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 8 CONFORMED PERIOD OF REPORT: 20000131 FILED AS OF DATE: 20000426 FILER: COMPANY DATA: COMPANY CONFORMED NAME: RDO EQUIPMENT CO CENTRAL INDEX KEY: 0001023902 STANDARD INDUSTRIAL CLASSIFICATION: WHOLESALE-MACHINERY, EQUIPMENT & SUPPLIES [5080] IRS NUMBER: 450306084 STATE OF INCORPORATION: DE FISCAL YEAR END: 0131 FILING VALUES: FORM TYPE: 10-K405 SEC ACT: SEC FILE NUMBER: 001-12641 FILM NUMBER: 609087 BUSINESS ADDRESS: STREET 1: 2829 SOUTH UNIVERSITY DRIVE CITY: FARGO STATE: ND ZIP: 58103 BUSINESS PHONE: 7012377363 MAIL ADDRESS: STREET 1: 2829 SOUTH UNIVERSITY DRIVE CITY: FARGO STATE: ND ZIP: 58103 10-K405 1 ================================================================================ UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-K [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED JANUARY 31, 2000 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 Securities registered pursuant to Section 12(b) of the Act: CLASS A COMMON STOCK, $.01 PAR VALUE Securities registered pursuant to Section 12(g) of the Act: NONE 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. _X_ YES ___ NO Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ X ] The aggregate market value of common equity held by persons other than directors and officers was approximately $28 million as of March 31, 2000. At that date, 5,731,008 shares of Class A Common Stock and 7,450,492 shares of Class B Common Stock were outstanding for a total of 13,181,500 shares of Common Stock. DOCUMENTS INCORPORATED BY REFERENCE Portions of the annual report to shareholders for the year ended January 31, 2000 ("Annual Report") are incorporated by reference in Part II. Portions of the proxy statement for the annual meeting to be held on May 31, 2000 ("Proxy Statement") are incorporated by reference in Part III. ================================================================================ 1 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 in the section entitled "Certain Important Factors" 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-K 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. PART I ITEM 1. BUSINESS. GENERAL 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. At the end of fiscal 2000, the Company operated 56 retail stores in nine states - Arizona, California, Minnesota, Montana, Nebraska, North Dakota, South Dakota, Texas and Washington. Its stores include the largest network of Deere & Company ("Deere") construction equipment dealerships and agricultural equipment dealerships in North America. The Company believes that its network of stores enables it to achieve benefits by increasing operational synergies. The Company expects to continue to expand through future acquisitions and openings of agricultural, construction, material handling and truck dealerships. New products sold by the Company are supplied primarily by Deere, a leading manufacturer and supplier of construction and agricultural equipment, and by Volvo AB ("Volvo"), a leading manufacturer and supplier of heavy-duty trucks. Sales of new Deere products and new Volvo products by the Company accounted for approximately 35% and 10%, respectively, of the Company's sales in fiscal 2000. No other supplier accounted for more than 10% of the Company's new product sales in fiscal 2000. 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. For the fiscal year ended January 31, 2000, the Company's revenues were generated from the following areas of business: New equipment and truck sales........................ 54% Used equipment and truck sales....................... 15% Product support (parts and service revenues)......... 25% Equipment rental..................................... 5% Financial services................................... 1% 2 During fiscal 2000, the Company acquired Volvo truck dealerships with full-service truck centers located in Dallas and Ft. Worth, Texas, and in Long Beach and Riverside, California. In addition, the Company acquired a used truck operation in Fontana, California, and commenced truck operations at its Waco, Texas location. The Company also closed one construction equipment rental store and sold its 80 percent interest in RDO Rental Co., a construction equipment rental operation located in the southwestern United States. The Company is a Delaware corporation with its executive offices 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-K include its subsidiaries. GROWTH STRATEGY The key elements of the Company's growth strategy are: INCREASING MARKET SHARE. The Company seeks to increase its market share by enhancing customer service and generating customer loyalty. To accomplish this objective, the Company offers a broad range of products, utilizes aggressive marketing programs, trains its employees to have a strong customer orientation, employs state-of-the-art service equipment, and maintains a computerized real-time inventory system. Each store offers a broad array of products based on the nature of that store's customer base. As the installed base of equipment and trucks expands, the Company has the opportunity to generate additional parts and service business and trade-ins. The Company's finance subsidiary also assists in structuring transactions to meet the needs of its customers. The Company believes that each customer's experience with the Company's parts and service departments and other value-added services can positively influence such customer's overall satisfaction. Parts and service, rental and finance revenues currently have higher profit margins than equipment and truck sales. The Company also has diversified its business into complementary fields to serve its customers' needs, expand its customer base, and enhance its revenues. PURSUING ADDITIONAL ACQUISITIONS. Acquisitions are expected to continue to be an important element of the Company's growth strategy, particularly given the consolidation trends among equipment and truck retailers. Due to the Company's leadership position, access to capital and track record in completing and integrating acquisitions, the Company believes that attractive acquisition candidates will continue to become available to the Company. The Company believes that its management team has substantial experience in evaluating potential acquisition candidates and determining whether a particular retailer can be successfully integrated into the Company's existing operations, i.e., whether the operations of an acquisition candidate can be enhanced by utilizing the Company's operating model and being part of the Company's network of stores. Upon consummation of each acquisition, the Company integrates the retailer into its operations by implementing the Company's operating model and seeks to enhance the acquired retailer's performance within its target market. Integration of an acquisition generally is completed within the first six to 12 months, although it can take several years before the benefits of the Company's operating model, store network, strategies and systems are fully realized. Generally, manufacturers require that their prior approval be given to prospective acquisitions of their dealerships. IMPLEMENTING THE RDO OPERATING MODEL. The Company has developed a proven operating model designed to improve the performance and profitability of each of its stores. Components of this operating model include (i) pursuing aggressive marketing programs, (ii) allowing store employees to focus on customers by managing administrative functions, training and purchasing at the corporate level, (iii) providing a full complement of parts and state-of-the-art service functions, including a computerized 3 real-time inventory system and quick response, on-site repair service, (iv) motivating store level management in accordance with corporate goals, and (v) focusing on cost structures at the store level. The Company implements its operating model in a variety of areas. For example, the Company is proactive in attracting new customers by sending targeted direct mailings, hosting open houses and service clinics and participating in trade shows. Additionally, the Company centralizes certain functions such as accounting, marketing, purchasing and employee recruitment, allowing its store managers and personnel more time to focus on making sales and providing product support to customers. CAPITALIZING ON DIVERSITY OF OPERATIONS. A major focus of the Company's strategy has been to expand its stores into geographic areas that have a large base of activity and that provide the Company with opportunities to continue to develop its store network. The Company has also focused on expanding into industries in which product distribution is highly fragmented and the Company's operating model can be implemented. The Company believes that its business diversification has significantly increased its customer base, while also mitigating the effects of industry-specific economic cycles. Similarly, the Company's geographic diversification into regions outside its initial base in the Midwest helps to diminish the effects of seasonality and weather, as well as local and regional economic fluctuations. CONSTRUCTION EQUIPMENT OPERATIONS The Company estimates that North American retail sales of new construction equipment in its target product market in calendar 1999 totaled over $8 billion. Deere is one of the leading suppliers of construction equipment in North America for light to medium applications and offers a broad array of products. The Company believes Deere has approximately 90 construction dealers who operate approximately 424 main stores and sales and service centers in North America. Each dealer within the Deere construction dealer system is assigned designated geographic areas of responsibility within which it has the right to sell new Deere construction products. The Company believes it is the largest Deere construction equipment dealer in North America, both in number of stores and total purchases, accounting for approximately six percent of Deere's North American construction equipment sales in calendar 1999. As of the end of fiscal 2000, the Company operated 25 Deere construction equipment stores located in metropolitan areas in Arizona, Southern California, Minnesota, Montana, North Dakota, South Dakota and Central Texas. Customers of the Company's construction equipment stores are diverse and include contractors, for both residential and commercial construction, utility companies, and federal, state and local government agencies. The Company's stores provide a full line of equipment for light to medium size applications and related product support to their customers. Primary products include John Deere backhoes, excavators, crawler dozers and four-wheel-drive loaders. More recently, the Company began handling new products being introduced into the market by Deere including ADTs, large excavators and compact excavators. The Company's construction equipment stores also offer complementary equipment from other suppliers, as well as used equipment primarily taken as trade-ins. The Company's construction equipment stores are located in areas with significant construction activity, including Austin, Dallas/Fort Worth, southeastern Los Angeles, Minneapolis/St. Paul, Phoenix, San Antonio and San Diego. Each construction equipment store displays a broad array of new and used equipment and has a series of fully equipped service bays to provide on-site service and maintenance of construction equipment. The Company believes it has a competitive advantage over other construction equipment dealers given its ability to draw on its network of construction stores for equipment and parts, the focus on used equipment and the economies of scale inherent in its centralized administrative, purchasing and inventory management functions. 4 In addition to selling and servicing new and used construction equipment, the Company engages in rent-to-purchase and rent-to-rent transactions as part of its dealership activities. In connection with the sale to United Rentals, Inc. of its 80 percent interest in RDO Rental Co., the Company agreed to limit its construction equipment rental activities in certain portions of the southwestern United States until February 1, 2002. In general, these limitations do not impact activities historically conducted by the Company (other than RDO Rental Co.) or activities consistent with dealership operations. TRUCK OPERATIONS The Company estimates that North American retail sales of heavy-duty trucks in calendar 1999 exceeded $10 billion. Mack Trucks, Inc. ("Mack") and Volvo are leading suppliers of heavy-duty trucks in North America. The Company believes Mack has approximately 132 dealers that operate approximately 256 locations in North America, while Volvo has approximately 128 dealers that operate approximately 204 locations in the United States. Each Mack or Volvo truck dealer is assigned designated geographical areas of responsibility within which it has the right to sell new trucks made by the truck manufacturer. The Company operates Mack truck centers in Minneapolis/St. Paul, Minnesota and in Fargo and Grand Forks, North Dakota. Its Volvo truck centers are located in Long Beach and Riverside, California; Minneapolis/St. Paul, Minnesota; Fargo and Grand Forks, North Dakota; and Dallas, Ft. Worth and Waco, Texas. The Company's truck centers in Fargo, Grand Forks, Dallas and Riverside also sell and service GMC trucks; and its stores in Fargo, Grand Forks and Fontana handle Isuzu trucks. The Company also conducts a used truck operation in Fontana, California. The Company's truck centers are located in high truck traffic areas on or near major highways. Trucks sold by the Company are generally classified as Class 4 through Class 8 by the American Automobile Manufacturers Association. Class 8 trucks have a minimum gross vehicle weight rating above 33,000 pounds, and are primarily used for over-the-road and off-highway transportation of general freight and various vocational applications including the hauling of construction materials, logging, mining, petroleum, refuse, waste and other specialty uses. Customers generally purchase these trucks for commercial purposes that are outfitted to perform according to the user's specifications. The Company's truck centers display a broad array of new and used trucks and have fully-equipped service bays to provide on-site service and maintenance of trucks, including body shops. The Company believes its operating model gives it a competitive advantage over other truck dealers. In addition, its truck operations and construction equipment operations have common customers, which presents opportunities for marketing, selling and operating synergies. AGRICULTURAL EQUIPMENT OPERATIONS The Company estimates that North American retail sales of new agricultural equipment in its target product market in calendar 1999 totaled over $10 billion. Deere is the leading supplier of agricultural equipment in North America. Within the Deere agricultural dealer system, dealers are not assigned exclusive territories, but are authorized to operate at specific store locations. The Company believes Deere has approximately 1,200 agricultural dealers that operate approximately 1,600 stores and parts and service centers in North America. The Company believes it is the largest Deere agricultural equipment dealer in North America, both in number of stores and total purchases, accounting for approximately 1.25 percent of Deere's North 5 American sales of agricultural equipment, parts and attachments in calendar 1999. As of the end of fiscal 2000, the Company operated 15 Deere agricultural equipment stores located in Arizona, Southern California, Minnesota, North Dakota, South Dakota and Washington. The Company's agricultural equipment stores are a full-service supplier to farmers, offering a broad range of farm equipment and related products for the crops grown in each of their areas. As a result of the customer mix and Deere's product offering, the core products include combines, tractors, planting equipment and tillage equipment. The Company's agricultural equipment stores also carry other harvesting and crop handling machinery, as well as lawn and grounds care equipment. The sale of new Deere agricultural equipment is the primary focus of the Company's agricultural equipment sales and accounts for a majority of new equipment sales. A wide variety of additional agricultural equipment lines, which complement the Deere products, are also offered according to local market demand. The agricultural stores also sell used equipment, generally acquired as trade-ins. The agricultural equipment stores are located in areas with significant concentrations of farmers and typically serve customers within a 25 to 50 mile radius. Each store displays a broad array of new and used equipment and has fully-equipped service bays to provide on-site service and maintenance of agricultural equipment. The Company believes it has a competitive advantage over other agricultural dealers given its ability to draw on its network of agricultural stores for equipment and parts, the focus on used equipment and the economies of scale inherent in its centralized administrative, purchasing and inventory management functions. The Company also conducts an agricultural equipment rental business in California that it acquired during fiscal 1999. The Company believes that the agricultural equipment rental business is a growing trend being driven primarily by agricultural customers that are increasingly outsourcing their equipment needs to reduce their investment in non-core assets and to convert equipment costs from fixed to variable, especially in the western, southwestern and south central regions of the United States. The Company believes that its dealerships and rental operations complement and support each other. MATERIAL HANDLING EQUIPMENT OPERATIONS The Company estimates that North American retail sales of lift trucks and other material handling equipment in its target product market in calendar 1999 exceeded $7 billion. Hyster Company (part of the material-handling group of NACCO Industries, Inc.) ("Hyster") is a leading supplier of lift trucks in North America. The Company believes Hyster has approximately 50 dealers that operate approximately 100 stores in North America. Each Hyster dealer is assigned designated geographical areas of responsibility within which it has the right to sell new Hyster lift trucks and parts. The Company is the designated Hyster lift truck dealer for the upper Midwest - Minnesota, Nebraska, North Dakota, South Dakota, western Iowa and northwestern Wisconsin. Hyster lift trucks (also referred to as forklift trucks or forklifts) are used in a wide variety of business applications, including manufacturing and warehousing. The principal categories of lift trucks include electric rider, electric narrow-aisle and electric-motorized hand forklift trucks primarily for indoor use and internal combustion engine forklift trucks for indoor or outdoor use. Shortly after its appointment as a Hyster dealer in fiscal 1999, the Company acquired the operating assets of two companies engaged in the distribution, sale, service and rental of material handling 6 equipment with stores located in Grand Island, Lincoln and Omaha, Nebraska and North Sioux City, South Dakota. This acquisition provided the Company with an established platform which complemented its Hyster operations, including aerial and high-reach man lifts manufactured by Genie, Grove, Skyjack and Upright and other equipment used to move, protect, store or control products and materials in manufacturing and distribution. The Company conducts its material handling operations from 11 locations in the upper Midwest of which five locations are dedicated solely to material handling equipment. The other locations consist of several of the Company's agricultural and construction equipment stores in Minnesota and North Dakota. Each store displays a variety of equipment for sale or rent, and has fully-equipped service bays to provide on-site service and maintenance. Customers include commercial, manufacturing, trucking and warehousing businesses, some of which have fleets of material handling equipment to be maintained. The Company believes its operating model gives it a competitive advantage over other material handling equipment retailers, and that its other operations have common customers with its material handling operations which presents opportunities for marketing, selling and operating synergies. USED EQUIPMENT AND TRUCKS The Company believes that an integral part of its operations is the handling of used equipment and trucks. Accordingly, each of the Company's divisions has established a management team to assist in the valuation of used products which the Company receives in trade-ins, assist in the purchase of used products for sale or rent by its dealerships, and support the sale of used products received as trade-ins. These activities include the purchase and remarket on the open market of used equipment manufactured by companies other than Deere such as Caterpillar Inc. ("Caterpillar"), Komatsu Corporation ("Komatsu") and Volvo. PARTS AND SERVICE The Company's stores offer a broad range of replacement parts and fully equipped service and repair facilities for their respective product lines. The Company believes that product support through parts and service will be increasingly important to its ability to attract and retain customers for its operations. Each store includes service bays staffed by highly trained service technicians. Technicians are also available to make on-site repairs of equipment that cannot be brought in for service. The Company's service technicians receive training from Deere and certain other suppliers, as well as additional on-site training conducted by the Company. The construction equipment stores located in Dallas, Texas; Minneapolis, Minnesota; and Riverside, California also operate undercarriage shops for all makes and sizes of crawler equipment. FINANCIAL SERVICES The Company's finance subsidiary, RDO Financial Services Co., provides equipment and truck loans and leases to the customers of the Company's retail network. This subsidiary has developed strategic partnerships with vendors of financial products, as well as additional services such as revolving credit, farm land financing, extended warranties, credit life insurance and casualty insurance, which are sold to the Company's customers. The Company believes that there is a growing trend in the equipment and truck distribution business toward selling new and used products with financing and service contracts. In addition, financing incentives are becoming an important element in the Company's selling efforts. Customers increasingly 7 want to purchase products from retailers who can also provide financing and other products and services of the types being offered by the Company. INVENTORY AND ASSET MANAGEMENT The Company maintains substantial inventories of equipment, trucks and parts in order to facilitate sales to customers on a timely basis. The Company also is required to build its inventory of agricultural equipment and parts in advance of its second and third fiscal quarters, which historically have higher sales, to ensure that it will have sufficient inventory available to meet the needs of its agricultural customers and to avoid shortages or delays. The Company maintains a database on sales and inventory, and has a centralized real-time inventory control system. This system enables each store to access the available inventory of the Company's other stores before ordering additional items from the supplier. As a result, the Company minimizes its investment in inventory while effectively and promptly satisfying its customers' needs. Using this system, the Company also monitors inventory levels and mix in its network and at each store and makes adjustments as needed in accordance with its operating plan. INVENTORY FINANCING Having adequate equipment, trucks and parts inventories at each of the Company's stores is important to meeting its customer needs and to its sales. Accordingly, the Company attempts to maintain at each store, or have readily available at other stores in its network, sufficient inventory to satisfy anticipated customer needs. Inventory levels fluctuate throughout the year and tend to increase before the primary sales seasons for agricultural equipment. The cost of financing its inventory is an important factor affecting the Company's results of operations. In its truck segment, the cost of floor plan financing of truck inventories has a direct relationship to the volume of retail loans and leases originated on behalf of the floor plan supplier. Floor plan financing from Deere, Deere Credit Services, Inc. ("Deere Credit") and Banc of America Leasing & Capital, LLC ("Banc of America") represents the primary source of financing for equipment inventories, particularly for equipment supplied by Deere. Floor plan financing of truck inventories is primarily supplied by Associates Commercial Corporation ("Associates"), General Motors Acceptance Corporation ("GMAC") and Volvo Commercial Finance LLC The Americas. Rental equipment on- and off-balance sheet financing is primarily provided by Deutsche Financial Services Corporation ("Deutsche") and Deere Credit. All lenders generally receive a security interest in the inventory or rental equipment being financed. CUSTOMER FINANCING OPTIONS Financing options for customer purchases support the sales activities of the Company. Financing for purchases by the Company's customers are available through programs offered by the Company's finance subsidiary, by manufacturer-sponsored sources (such as Deere Credit) and by major finance companies (such as Associates). The Company's finance subsidiary coordinates arrangements for most of the Company's customers who request financing. The Company does not grant extended payment terms. 8 PRODUCT WARRANTIES The manufacturer generally provides warranties for new products and parts. The term and scope of these warranties vary greatly by manufacturer and by product. The Company does not provide additional warranties to retail purchasers of new products. The manufacturer (such as Deere) pays the Company for repairs to equipment under warranty. The Company generally sells used products "as is" and without manufacturer's warranty, although manufacturers sometimes provide limited warranties if the manufacturer's original warranty is transferable and has not yet expired. The Company also sells a warranty product offered by Deere on new and used equipment. The Company itself has not generally provided additional warranties. COMPETITION The Company's construction equipment stores compete with distributors of equipment produced by manufacturers other than Deere, including Caterpillar, CNH Global N.V. ("CNH") and Komatsu. The Company also faces competition from distributors of manufacturers of specific types of construction equipment, including JCB backhoes, Kobelco excavators, Komatsu wheel loaders and crawler dozers, and Bobcat skid loaders. The Company's agricultural equipment stores compete with distributors of equipment from suppliers other than Deere, including Agco Corporation, Caterpillar and CNH. The Company's agricultural equipment stores also compete with other Deere agricultural dealerships. Competing Deere agricultural stores may be located in close proximity to one of the Company's agricultural equipment stores. The Company's equipment rental operations compete with equipment rental companies and dealers. Equipment rental businesses generally make available for short-term rent used equipment manufactured by the foregoing manufacturers, including those who are suppliers to the Company. The Company's truck centers compete with distributors of trucks produced by manufacturers other than Mack and Volvo, including DaimlerChrysler AG (Freightliner and Sterling), Ford Motor Co., Navistar International Corp. and Paccar Inc. (Peterbilt and Kenworth). The Company's material handling stores compete with distributors of lift trucks produced by manufacturers other than Hyster, including Clark Material Handling Company, Crown Equipment Corporation, Nissan Motor Co., Toyota Motor Corp., another division of the NACCO material handling group (Yale), and with other equipment rental companies that rent aerial and high-reach man lifts, lift trucks and other material handling equipment. Competition among equipment and truck retailers is primarily based on price, value, reputation, quality, design and performance of the products offered by the retailer, the customer service and product servicing provided by the retailer, and the accessibility of the retailer's stores. The Company believes that its store locations, broad product lines, quality products, product support and other customer and financial services enable it to compete effectively. BACKLOG The Company's truck operations sell approximately two-thirds of their new heavy-duty trucks by customer order, with the remainder sold out of inventory. The general time period from order placement to delivery is currently three to eight months. At January 31, 2000, the Company's backlog of confirmed truck orders (including orders from fleet customers who typically place orders up to one year in advance of scheduled delivery dates) was approximately $22.1 million. The Company expects to fill all of 9 these orders during fiscal 2001. The Company's backlog of confirmed truck orders at January 31, 1999 was approximately $41.4 million. AGREEMENTS WITH MANUFACTURERS DEERE CONSTRUCTION DEALER AGREEMENTS. The Company has agreements with Deere which authorize the Company to act as a dealer of Deere construction, utility and forestry equipment (the "Construction Dealer Agreements"). The Company's areas of responsibility for the sale of Deere construction equipment are: (i) in the Midwest: almost all of Minnesota, Montana, North Dakota and South Dakota, and small portions of Iowa and Wyoming; (ii) in the Southwest: Arizona and part of Southern California; and (iii) in the South Central: Central Texas, including the Austin, Dallas-Fort Worth and San Antonio metropolitan areas. Pursuant to the Construction Dealer Agreements, the Company is required, among other things, to maintain suitable facilities, provide competent management, actively promote the sale of construction equipment in the designated areas of responsibility, fulfill the warranty obligations of Deere, maintain inventory in proportion to the sales potential in each area of responsibility, provide service and maintain sufficient parts inventory to service the needs of its customers, maintain adequate working capital, and maintain stores only in authorized locations. Deere is obligated to make available to the Company any finance plans, lease plans, floor plans, parts return programs, sales or incentive programs or similar plans or programs it offers to other dealers. Deere also provides the Company with promotional items and marketing materials prepared by Deere for its construction equipment dealers. The Construction Dealer Agreements also entitle the Company to use John Deere trademarks and tradenames, with certain restrictions. DEERE AGRICULTURAL DEALER AGREEMENTS. The Company has non-exclusive dealership agreements with Deere for each of its Deere agricultural equipment stores, each of which authorizes the Company to act as a dealer in Deere agricultural equipment (the "Agricultural Dealer Agreements") at a specific authorized store location. The terms of the Agricultural Dealer Agreements are substantially the same as the Construction Dealer Agreements. The Deere agricultural equipment stores also offer John Deere lawn and grounds equipment, for which the Company has entered into non-exclusive Lawn and Garden Dealer Agreements containing substantially the same terms as the Agricultural Dealer Agreements. DEERE DEALERSHIP AGREEMENTS - OTHER PROVISIONS. Under an agreement with Deere, the Company cannot engage in discussions to acquire other Deere dealerships without Deere's prior written consent, which Deere may withhold in its sole discretion. In addition, Deere has the right to have input into the selection of Company's management personnel, including managers of the Company's Deere equipment stores, and to have input with respect to the selection of nominees to the Company's Board of Directors and the removal of directors. The prior consent of Deere is required for the opening of any Deere equipment store within the Company's designated areas of responsibility and for the acquisition of any other Deere dealership. In addition, without the consent of Deere, the Company is prohibited from making acquisitions, initiating new business activity, paying dividends, repurchasing its capital stock, or making any other distributions to stockholders if the equity-to-assets ratio of the Company's Deere dealerships is below 30%, as calculated by Deere under the agreement, or if such ratio would fall below 30% as a result of such action. As of the end of fiscal 2000, the Company has calculated the equity-to-assets ratio of the Company's Deere dealerships to be 37%. In the event of Mr. Offutt's death, Deere has the right to terminate the Company's dealer appointments upon the occurrence of a "change of control." 10 The Company's Deere dealer appointments are not exclusive. Deere could appoint other dealers in close proximity to the Company's existing stores. Deere can reduce the areas of responsibility assigned to the Company's construction equipment dealerships upon 120 days prior written notice. In addition, the dealer agreements can be amended at any time without the Company's consent, so long as the same amendment is made to the dealer agreements of all other Deere dealers. Deere also has the right to sell directly to federal, state or local governments, as well as national accounts. To the extent Deere appoints other dealers in the Company's markets, reduces the areas of responsibility relating to the Company's construction equipment stores, or amends the dealer agreements or directly sells substantial amounts of equipment to government entities and national accounts, the Company's results of operations and financial condition could be adversely affected DEERE INDEMNIFICATION AGREEMENT. Some time after the Offering, Deere advised the Company that it was requiring Deere dealerships to sign an indemnification agreement before "going public". Deere also informed the Company that it would not be willing to consider possible future acquisitions of Deere dealerships by the Company unless and until the Company signed such an agreement. After prolonged discussions and negotiations, the Company signed an indemnification agreement in March 2000. In general, this agreement provides that the Company will indemnify Deere (and its directors, officers, employees and agents) from and against lawsuits and other proceedings commenced by shareholders of the Company and by governmental agencies arising from (a) the registration, listing, offer, sale, distribution or resale of any security of the Company, (b) an untrue statement or omission, whether actual or alleged, in connection with any security of the Company, or (c) an allegation that Deere is a "controlling person" of the Company within the meaning of federal securities laws. The Company will pay, or reimburse Deere for, any judgments, penalties, expenses and other losses resulting from any such lawsuit or other proceeding. The Company has no obligation to indemnify Deere with respect to any judgment rendered against Deere as a result of Deere's own intentional or reckless misconduct or as a result of an untrue written statement of fact signed by an officer of Deere. VOLVO AGREEMENTS. Pursuant to a framework arrangement with Volvo, the Company is expanding its presence in Volvo's truck distribution system by acquiring additional dealer locations as well as being awarded franchises for locations where no Volvo dealer exists. This arrangement includes financing and other assistance from Volvo to assist in acquiring, opening and operating Volvo truck dealership locations. Financing from Volvo is repaid based upon the performance of a dealership after the Company acquires or opens it. Under its dealer agreements with Volvo, the Company is an authorized, exclusive retail dealer of new Volvo trucks and parts in the territories around its Volvo truck centers. The Company is required, among other things, to meet sales, service and facilities criteria established by Volvo and to maintain appropriate inventories of trucks and parts. The Company must also provide Volvo with financial and planning documents on a regular basis and provide warranty repairs on covered Volvo trucks. The Company is granted the right to use various Volvo trademarks in the conduct of its business and the benefit of Volvo materials and training. Volvo dealer agreements generally provide for an initial term of up to five years, and are extended annually. It is Volvo's stated objective that dealer agreements continue in effect indefinitely so long as the Company satisfies its obligations and meets its objectives. Volvo may terminate a dealer agreement upon the occurrence of a material breach enumerated in the agreement which are typical of dealership agreements generally. Volvo also can reduce or change the scope of the territories associated with the Company's Volvo truck dealerships. 11 OTHER SUPPLIERS. The Company is an authorized dealer at various stores for suppliers of other products. The terms of such arrangements vary, but most of the dealership agreements contain termination provisions allowing the supplier to terminate the agreement after a specified notice period (usually 180 days), upon a change of control, and in the event of Mr. Offutt's death. INTELLECTUAL PROPERTY RIGHTS RDO Equipment Co. is a registered service mark owned by the Company. John Deere is a registered trademark of Deere & Company, the Company's use of which is authorized under the Deere dealership agreements. Trademarks and tradenames with respect to new equipment and trucks obtained from manufacturers other than Deere are licensed from their respective owners. The Company historically has operated each of its dealerships under either the RDO Equipment Co. service mark and tradename or, for purposes of continuity at a particular store if there was strong local name recognition and customer loyalty, the name historically used by the dealership in that location. Each dealership store is generally identified as an authorized dealer or representative of the manufacturer or manufacturers of the equipment, trucks or other products sold at the store, and may also display signs of other suppliers. ENVIRONMENTAL AND GOVERNMENTAL REGULATIONS The Company's operations are subject to numerous federal, state and local rules and regulations, including laws and regulations designed to regulate workplace health and safety, to protect the environment and to regulate the discharge of materials into the environment, primarily relating to its service operations. Based on current laws and regulations, the Company believes that it is in compliance with such laws and regulations and that its policies, practices and procedures are designed to prevent unreasonable risk of environmental damage or violation of environmental laws and regulations and any resulting material financial liability to the Company. The Company is not aware of any federal, state or local laws or regulations that have been enacted or adopted, the compliance with which would have a material adverse effect on the Company's results of operations or would require the Company to make any material capital expenditures. No assurance can be given that future changes in such laws or regulations or changes in the nature of the Company's operations or the effects of activities of prior occupants or activities at neighboring facilities will not have an adverse impact on the Company's operations. The Company's truck operations are subject to the National Traffic and Motor Vehicle Safety Act, Federal Motor Vehicle Safety standards promulgated by the U.S. Department of Transportation and various state motor vehicle regulatory agencies. State and local laws and regulations require each truck dealership to obtain licenses to operate as a dealer in heavy-duty vehicles. The Company believes that its truck operations are in compliance with all federal, state and local laws and regulations and that it has obtained all necessary licenses and permits. The Company's financial services operations are subject to laws and regulations with respect to financing, commercial finance regulations that may be similar to consumer finance regulations in some states, including those governing interest rates and charges, maximum amounts and maturities of credit and customer disclosure of transaction terms. The Company's insurance products and services are subject to laws and regulations with respect to insurance, licensing, insurance premiums, financing rates and insurance agencies. The Company believes that it is in compliance with these laws and regulations. 12 EMPLOYEES As of January 31, 2000, the Company employed 1,602 full-time employees. Of this number, 29 employees were located at the Company's corporate offices and employed in corporate administration. The remaining employees were involved in the Company's operations: 799 in construction operations, 371 in truck operations, 340 in agriculture operations, 19 in rental operations and 44 in financing and related services. None of the Company's employees are covered by a collective bargaining agreement. CERTAIN IMPORTANT FACTORS In addition to the matters discussed above, there are important factors that could cause the Company's future results to differ materially from those anticipated by the Company or which are reflected in any forward-looking statement which may be made by or on behalf of the Company. Many of these important factors are identified and discussed in greater detail in the Company's Form 8-K dated April 21, 2000, and in other filings with the Securities and Exchange Commission (the "SEC"). Some of these important factors (but not necessarily all important factors) include the following: a. General economic conditions worldwide and locally, including agricultural industry cycles, construction spending, federal, state and local government spending on highways and other construction projects, housing starts, interest rates, fuel prices, currency exchange rates, customer business cycles, climatic phenomena such as La Nina and El Nino, and customer confidence in the economy; b. The length of the crop growing season, farm cash income, farmer debt levels, adverse weather, animal and plant diseases, crop pests, harvest yields, world grain stocks, commodity prices, real estate values, government farm programs, and the confidence of the Company's agricultural customers in the farm economy; c. Changes in governmental regulations, and legislation primarily relating to agriculture, the environment, commerce and government spending on infrastructure; d. The positions of Deere and other manufacturers with respect to publicly traded dealers, dealer consolidations and specific acquisition opportunities; e. The overall success of Deere and the Company's other suppliers; f. The manufacture and delivery of competitively-priced, high quality equipment, trucks and parts by the Company's suppliers in quantities sufficient to meet the requirements of the Company's customers on a timely basis; g. The incentive and discount programs provided by Deere and the Company's other suppliers, and their promotional and marketing efforts for the Company's products; h. The introduction of new and innovative products by the Company's suppliers; i. Capital needs of the Company and the status of markets for equity and debt financing; j. The availability and terms of floor plan, customer and other financing; 13 k. Risks associated with growth, expansion and acquisitions, including the management of growth; l. Integration and successful operation of acquired businesses; m. Financing arrangements relating to the Company's financial services operations, including credit availability and customer credit risks; n. Availability, sufficiency and cost of insurance; o. Operating and financial systems to manage rapidly growing operations; and p. Continued availability of key personnel. ITEM 2. PROPERTIES. As of the end of fiscal 2000, the Company owned the real estate for eight of its stores, leased its executive offices, real estate for a potential dealership site and 22 stores from an Offutt Entity (as defined in Item 4A below) and leased three administrative offices and 26 stores from unrelated third parties. Lease terms range from one to ten years and some leases include an option to purchase the leased property. The Company believes that all of its facilities are in good operating condition. ITEM 3. LEGAL PROCEEDINGS. There are no material pending legal, governmental, administrative or other proceedings to which the Company is a party or of which any of its property is the subject. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. None. ITEM 4A. EXECUTIVE OFFICERS OF THE REGISTRANT. The executive officers of the Company, their ages and offices held are as follows: NAME AGE OFFICE - ---- --- ------ Ronald D. Offutt 57 Chairman of the Board and Chief Executive Officer Paul T. Horn 57 President Allan F. Knoll 56 Secretary Gary L. Weihs 44 Chief Operating Officer 14 Thomas K. Espel 41 Chief Financial Officer and Treasurer Charles Calhoun 47 Executive Vice President - Global Sales Steven B. Dewald 39 Senior Vice President - RDO Financial Services Co. Mark A. Doda 37 Senior Vice President and Controller Kenneth J. Horner, Jr. 37 Executive Vice President - Construction Equipment Larry B. Kerkhoff 47 Executive Vice President - West Agriculture Christi J. Offutt 31 Senior Vice President - Midwest Agriculture - ----------------- RONALD D. OFFUTT is the Company's founder, Chairman, Chief Executive Officer and principal stockholder. He has served as a member of the Company's Office of the Chairman since December 1998, and served as President of the Company from its formation in 1968 until August 1996. Mr. Offutt also serves as Chief Executive Officer and Chairman of the Board of R.D. Offutt Company ("Offutt Co.") and other entities he owns, controls or manages (collectively, the "Offutt Entities") which are engaged in a variety of businesses such as farming, food processing, auto dealerships and agricultural financing activities, some of which transact business with the Company. Mr. Offutt spent approximately one-fourth of his time on business of the Company during fiscal 2000. He is Former Chairman of the Board of Regents of Concordia College of Moorhead and is a graduate of Concordia College of Moorhead with a degree in Economics. Mr. Offutt is the brother-in-law of Larry E. Scott, Senior Vice President - Special Projects, and the father of Christi J. Offutt, Senior Vice President - Midwest Agriculture. PAUL T. HORN has served as a member of the Company's Office of the Chairman since December 1998, as President of the Company since August 1996, and as a director of the Company since 1986. Mr. Horn also served as Chief Operating Officer of the Company from 1986 through 1999. Prior to October 1996, he was an employee of Offutt Co. and spent approximately one-fourth of his time on the business of the Company. Since such date, he has been an employee of the Company and has spent substantially all of his time on the business of the Company. Mr. Horn serves as a director and officer and is a beneficial stockholder of many of the Offutt Entities. Mr. Horn currently serves as Vice Chairman of the Board of Directors of Northern Grain Company, a regional grain elevator. Mr. Horn is a graduate of Michigan State University with degrees in Business Administration and Agronomy. ALLAN F. KNOLL has served as a member of the Company's Office of the Chairman since December 1998 and as Secretary and a director of the Company since 1974. He served as Chief Financial Officer of the Company from 1974 through January 1999. Mr. Knoll also serves as Chief Financial Officer and Secretary of Offutt Co., and serves as a director and officer and is a beneficial stockholder of many of the Offutt Entities. Mr. Knoll spent approximately one-third of his time on the business of the Company during fiscal 2000. Mr. Knoll is a graduate of Moorhead State University with degrees in Business Administration and Accounting. GARY L. WEIHS has served as Chief Operating Officer since January 2000. Prior to joining the Company, he served as Vice President/General Manager of Industrial Products at Solutia Incorporated since September 1997. From 1994 to August 1997, Mr. Weihs was Director, Supply Chain - Crop Chemicals, The Americas, for the Monsanto Agricultural Group. Before joining Monsanto, he received an MBA degree from the Harvard Graduate School of Business Administration. Prior to his MBA studies, he served in various management positions with PepsiCo Inc. and Procter & Gamble Company. In addition to 15 holding an MBA, Mr. Weihs is a graduate of Colorado School of Mines with a bachelor's degree in mineral engineering. THOMAS K. ESPEL has served as Chief Financial Officer since February 1999 and as Treasurer since March 2000. He previously served as Executive Vice President - Finance from August 1998 until February 1999. Prior to joining the Company, he served as manager of Ag Capital Company since its inception in 1989 and continues to serve as a member of its Board of Directors. Under his direction, Ag Capital, an Offutt entity, grew to more than $450 million in assets managed. RDO Financial Services Co., a subsidiary of the Company, was formed from the retail credit activities of Ag Capital. From 1981 through 1988, Mr. Espel held various lending positions at St. Paul Bank for Cooperatives, a $4 billion institution located in St. Paul, Minnesota. He has a bachelor's degree from the University of Illinois and a master's degree from Michigan State University, both in Agricultural Economics - Finance. CHARLES CALHOUN served as Executive Vice President - Used Equipment Division from December 1998 until April 2000 when he was appointed Executive Vice President - Global Sales. He previously served as Senior Vice President - Used Construction Equipment Division since March 1997. Prior to joining the Company, he was Vice President and an owner of the construction dealership in Texas that was acquired by the Company in July 1996. Subsequent to this acquisition and prior to his appointment as Senior Vice President, Mr. Calhoun managed the acquired Texas construction dealership and started the Used Construction Equipment Division. He has over 20 years of experience in the construction equipment business, and is a graduate of Texas Tech University with a degree in Marketing. STEVEN B. DEWALD has served as Senior Vice President - RDO Financial Services Co. since December 1997. From September 1996 through November 1997, he served as Director of Finance of Ag Capital Company, an Offutt Entity. Prior to joining Ag Capital, from February 1995 to August 1996, Mr. Dewald managed personal investments, including real estate development and fast food restaurants. From 1989 until February 1995, he held increasingly responsible positions as a financial officer of Metropolitan Financial Corporation, a regional thrift holding company acquired in 1995 by U.S. Bancorp (formerly First Bank System, Inc.) at which time he was serving as Executive Vice President and Chief Financial Officer. Mr. Dewald worked for Ernst & Young from 1983 to 1989. He is a graduate of Concordia College of Moorhead with a degree in Accounting and Healthcare Finance. MARK A. DODA has served as Senior Vice President and Controller since December 1998. He previously served as Controller since September 1992. Prior to joining the Company, Mr. Doda served as a division controller for Graco, Inc., a manufacturer of fluid handling systems, from January 1992 to September 1992. From 1985 through 1991, Mr. Doda worked for Deloitte & Touche LLP. Mr. Doda is a graduate of the University of North Dakota with a degree in Accounting. KENNETH J. HORNER, JR. has served as Executive Vice President - Construction Equipment since June 1999. He previously served as Vice President - Business Practices from July 1998 until June 1999. Prior to joining the Company, Mr. Horner was Vice President and General Counsel for Prairieland Foods Corporation, a restaurant management company, and Executive Vice President of CrossCountry Courier, Inc., a regional freight carrier. He is a graduate of University of Mary with a degree in accounting, and received his law degree from the University of North Dakota. LARRY B. KERKHOFF has served as Executive Vice President - West Agriculture since June 1999. He previously served as Senior Vice President - Midwest Agriculture since 1996. From 1990 until 1996, he was manager of the Company's agricultural equipment store in Breckenridge, Minnesota. Prior to joining the Company, Mr. Kerkhoff was with Kibble Equipment, a Deere agricultural dealership in Montevideo, Minnesota. He has over 20 years of experience in agri-business. Mr. Kerkhoff is a graduate of Mankato Area Vocational Institute - Diesel Mechanics Program and Mankato State University with a degree in Business Administration. CHRISTI J. OFFUTT has served as Senior Vice President - Midwest Agriculture since June 1999. She previously served as Vice President - Strategic Planning from December 1998 until June 1999, and as Legal Counsel of Offutt Co. from January 1997 until December 1998. Ms. Offutt is a graduate of University of Puget Sound with degrees in politics and government and in business administration, and 16 received her law degree in May 1996 from Boston University. She is the daughter of Ronald D. Offutt, Chairman and Chief Executive Officer. PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS. The information under the captions "Common Stock Information" and "Dividend Policy" on page 38 of the Annual Report is incorporated herein by reference. The Company did not have any unregistered sales of equity securities during fiscal 2000. ITEM 6. SELECTED FINANCIAL DATA. The information under the caption "Selected Financial Data" on page 17 of the Annual Report is incorporated herein by reference. ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. The information under the caption "Management's Discussion and Analysis of Financial Condition and Results of Operations" on pages 18 through 23 of the Annual Report is incorporated herein by reference. ITEM 7A. 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. A one percentage point increase in interest rates would result in a net increase to the unrealized fair market value of the fixed rate debt by approximately $6,000. At January 31, 2000, the Company had variable rate floor plan payables, notes payable and long term debt of $180.8 million and fixed rate notes payable and long term debt of $840,000. Holding other variables constant, the pre-tax earnings and cash flow impact for the next year resulting from a one percentage point increase in interest rates would be approximately $1.8 million. The Company's policy is not to enter into derivatives or other financial instruments for trading or speculative purposes. Consistent with this policy, the Company's finance subsidiary RDO Financial Services Co. originates fixed rate loan and fixed payment leases. On a daily basis, these loans and leases are sold, thus eliminating interest risk. 17 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA. The Company's Consolidated Financial Statements and the report of its independent public accountants, Arthur Andersen LLP, on pages 24 through 37 of the Annual Report are incorporated herein by reference and are listed in Item 14(a)(1) on page 19 of this Form 10-K. The supplementary data required by this Item 8 appear as Note 15 entitled "Unaudited Quarterly Financial Data" on page 36 of the Annual Report. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE. None. PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT. The information regarding directors under the captions "Election of Directors--Information About Nominees" and "Election of Directors--Other Information about Nominees" in the Proxy Statement is incorporated herein by reference. Information regarding executive officers is presented in Part I of this Form 10-K as Item 4A. The information under the caption "Beneficial Ownership of Management - - Section 16(a) Beneficial Ownership Reporting Compliance" in the Proxy Statement is incorporated herein by reference. ITEM 11. EXECUTIVE COMPENSATION. The information under the captions "Election of Directors--Compensation of Directors" and "Executive Compensation and Other Benefits" in the Proxy Statement is incorporated herein by reference. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT. The information under the captions "Principal Stockholders" and "Beneficial Ownership of Management" in the Proxy Statement is incorporated herein by reference. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS. The information under the caption "Election of Directors - Certain Relationships and Related Transactions" in the Proxy Statement is incorporated herein by reference. 18 PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K. (a)(1) FINANCIAL STATEMENTS. The following are incorporated herein by reference from the pages indicated in the Annual Report, copies of which are included as Exhibit 13.1 to this Form 10-K: Report of Independent Public Accountants--Arthur Andersen LLP--page 37. Consolidated Statements of Operations for the Years Ended January 31, 2000, 1999 and 1998--page 24. Consolidated Balance Sheets as of January 31, 2000 and 1999--page 25. Consolidated Statements of Stockholders' Equity for the Years Ended January 31, 2000, 1999 and 1998--page 26. Consolidated Statements of Cash Flows for the Years Ended January 31, 2000, 1999 and 1998--page 27. Notes to Consolidated Financial Statements--pages 28 to 36. (a)(2) FINANCIAL STATEMENT SCHEDULES. Schedule II, Valuation and Qualifying Accounts for the Year Ended January 31, 2000, is included in this Form 10-K at page 21, including Report of Independent Public Accountants. All other financial statement schedules are omitted because of the absence of the conditions under which they are required or because the information required is included in the consolidated financial statements or notes thereto. (a)(3) EXHIBITS. -------- The exhibits to this Form 10-K are listed in the Exhibit Index on pages 22 and 23 below. Copies of these exhibits are available upon request to RDO Equipment Co., Stockholder Relations, P. O. Box 7160, Fargo, North Dakota 58106-7160 or to invest@rdoequipment.com. (b) REPORTS ON FORM 8-K. None. 19 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) 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. Date: April 21, 2000 RDO EQUIPMENT CO. By: /s/ Ronald D. Offutt ------------------------------------- Ronald D. Offutt Chairman and Chief Executive Officer Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below on April 21, 2000 by the following persons on behalf of the registrant and in the capacities indicated. Signature Title - --------- ----- /s/ Ronald D. Offutt Chairman of the Board, Chief Executive - ----------------------------------- Officer and Director (principal executive Ronald D. Offutt officer) /s/ Thomas K. Espel Chief Financial Officer and Treasurer - ----------------------------------- (principal financial officer) Thomas K. Espel /s/ Mark A. Doda Senior Vice President and Controller - ----------------------------------- (principal accounting officer) Mark A. Doda /s/ Paul T. Horn President and Director - ----------------------------------- Paul T. Horn /s/ Allan F. Knoll Secretary and Director - ----------------------------------- Allan F. Knoll /s/ Bradford M. Freeman Director - ----------------------------------- Bradford M. Freeman /s/ Ray A. Goldberg Director - ----------------------------------- Ray A. Goldberg /s/ Norman M. Jones Director - ----------------------------------- Norman M. Jones /s/ James D. Watkins Director - ----------------------------------- James D. Watkins 20 SCHEDULE II VALUATION AND QUALIFYING ACCOUNTS FOR THE YEAR ENDED JANUARY 31, 2000
Balance at Additions Balance at Beginning Charged to Costs End of of Period and Expenses Deductions(1) Period ----------- ---------------- ------------- ---------- Accrued Liabilities: Restructuring Reserve........ $285,000 -- $285,000 --
- ------------------------- (1) Utilization of previously recorded balances. REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS ON SCHEDULE To RDO Equipment Co: We have audited, in accordance with auditing standards generally accepted in the United States, the financial statements included in RDO Equipment Co. and Subsidiaries' Annual Report on Shareholders incorporated by reference in this Form 10-K, and have issued our report thereon dated March 10, 2000. Our audit was made for the purpose of forming an opinion on those statements taken as a whole. The schedule listed in Item 14(a)(2) is the responsibility of the Company's management, is presented for purposes of complying with Securities and Exchange Commission's rules and is not part of the basic financial statements. This schedule has been subjected to the auditing procedures applied in the audit of the basic financial statements and, in our opinion, fairly states in all material respects the financial data required to be set forth therein in relation to the basic financial statements taken as a whole. ARTHUR ANDERSEN LLP Minneapolis, Minnesota, March 10, 2000 21 EXHIBIT INDEX FOR FISCAL YEAR ENDED JANUARY 31, 2000
ITEM NO. ITEM METHOD OF FILING - -------- ---- ---------------- 3.1 Certificate of Incorporation Incorporated by reference to Exhibit 3.1 to the Company's Registration Statement on Form S-1 (File No. 333-13267). 3.2 Bylaws Incorporated by reference to Exhibit 3.2 to the Company's Registration Statement on Form S-1 (File No. 333-13267). 4.1 Specimen Form of the Company's Class A Common Incorporated by reference to Exhibit 4.2 to the Stock Certificate Company's Registration Statement on Form S-1 (File No. 333-13267). 4.2 Specimen Form of the Company's Class B Common Incorporated by reference to Exhibit 4.3 to the Stock Certificate Company's Registration Statement on Form S-1 (File No. 333-13267). 10.1 Agreement between Ronald D. Offutt, RDO Incorporated by reference to Exhibit 10.1 to the Equipment Co., John Deere Company and John Company's Registration Statement on Form S-1 Deere Construction Equipment Co. (File No. 333-13267). 10.2 Form of Deere Agricultural Dealer Agreement Incorporated by reference to Exhibit 10.2 to the Package Company's Registration Statement on Form S-1 (File No. 333-13267). 10.3 Form of Deere Construction Dealer Agreement Incorporated by reference to Exhibit 10.3 to the Package Company's Registration Statement on Form S-1 (File No. 333-13267). 10.4 Deere Agricultural Dealer Finance Agreement Incorporated by reference to Exhibit 10.6 to the Company's Registration Statement on Form S-1 (File No. 333-13267). 10.5 Deere Construction Dealer Finance Agreement Incorporated by reference to Exhibit 10.7 to the Company's Registration Statement on Form S-1 (File No. 333-13267). 10.6 Agreement between RDO Equipment Co., John Deere Incorporated by reference to Exhibit 10.15 to the Company and John Deere Construction Equipment Company's Registration Statement on Form S-1 Company (File No. 333-13267). 10.7 Corporate Service Agreement between RDO Incorporated by reference to Exhibit 10.10 to the Equipment Co. and R.D. Offutt Company, dated as Company's Registration Statement on Form S-1 of November 1, 1996 (File No. 333-13267). 10.8 Tax Agreement Relating to S Corporation Incorporated by reference to Exhibit 10.14 to the Distribution, with Supplement Company's Registration Statement on Form S-1 (File No. 333-13267).
22 10.9 RDO Equipment Co. 1996 Stock Incentive Plan, Incorporated by reference to Exhibit 10.8 to the including forms of option agreements* Company's Annual Report on Form 10-K for the fiscal year ended January 31, 1997. 10.10 Form of Agreement re: Confidentiality, Assignment Incorporated by reference to Exhibit 10.15 to the of Inventions and Non-Competition* Company's Annual Report on Form 10-K for the fiscal year ended January 31, 1997. 10.11 Form of Indemnification Agreement* Incorporated by reference to Exhibit 10.9 to the Company's Registration Statement on Form S-1 (File No. 333-13267). 10.12 Credit Agreement between RDO Equipment Co. and Incorporated by reference to Exhibit 10.1 to the Ag Capital Company Company's Quarterly Report on Form 10-Q for the fiscal quarter ended April 30, 1999. 10.13 Credit Agreement between RDO Material Handling Incorporated by reference to Exhibit 10.2 to the Co. and Ag Capital Company Company's Quarterly Report on Form 10-Q for the fiscal quarter ended July 31, 1999. 10.14 Credit Agreement between RDO Financial Services Incorporated by reference to Exhibit 10.1 to the Co. and Norwest Bank North Dakota, N.A. and Ag Company's Quarterly Report on Form 10-Q for the Capital Company fiscal quarter ended July 31, 1999. 10.15 Promissory Note between RDO Financial Services Incorporated by reference to Exhibit 10.2 to the Co. and Ag Capital Company Company's Quarterly Report on Form 10-Q for the fiscal quarter ended July 31, 1999. 10.16 Indemnification Agreement between RDO Equipment Filed herewith. Co. and Deere & Company 10.17 Form of Deere Construction Equipment Dealer Filed herewith. Agreement for Special Products 10.18 Modifications of Credit Agreement between RDO Filed herewith. Financial Services Co. and Norwest Bank North Dakota, N.A. and Ag Capital Company 13.1 Excerpts from Annual Report Filed herewith. 21.1 Subsidiaries Filed herewith. 23.1 Consent of Independent Public Accountants Filed herewith. 27.1 Financial Data Schedule Filed herewith.
- -------------------------------- * Management contract or compensatory plan or arrangement filed as an exhibit pursuant to Item 14(c) of Form 10-K. 23 EX-10.16 2 INDEMNIFICATION AGREEMENT EXHIBIT 10.16 INDEMNIFICATION AGREEMENT INDEMNIFICATION AGREEMENT ("Agreement"), made this 6th day of March, 2000 between RDO Equipment Co. ("Indemnitor") and Deere & Company ("Deere"). WHEREAS, Indemnitor is a Deere dealer; and WHEREAS, in January 1997 Indemnitor completed its initial public offering of its Class A Common Stock; and WHEREAS, Deere is willing to consider Indemnitor's possible future acquisitions of John Deere dealerships or distributors on certain conditions, including a condition that Deere and certain others be indemnified as set forth herein; and WHEREAS, Indemnitor is willing to provide such indemnity as provided herein; NOW, THEREFORE, in consideration of the promises made herein and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereby agree as follows: 1. INDEMNITY Indemnitor hereby agrees to indemnify and hold harmless Deere, its subsidiary and affiliated corporations, and their respective directors, officers, employees and agents (collectively, "Indemnitees") from and against any and all losses, liabilities, judgments, penalties, amounts paid in settlement, claims, damages and expenses whatsoever, including but not limited to any and all reasonable expenses whatsoever (excluding the time and costs of Indemnitee employees and other internal costs of Indemnitees) incurred in investigating, preparing or defending against any litigation or any investigation or proceeding by any governmental body or agency, whether commenced or threatened, to which an Indemnitee may become subject under the Securities Act of 1933 as amended (the "Act"), the Securities Exchange Act of 1934, as amended (the "Exchange Act"), the securities laws of any state, any other statute, or at common law or otherwise, or under the laws of any foreign country, arising in connection with, arising out of, or resulting from: (a) the registration, listing, offer, sale, distribution or resale of any Indemnitor security, (b) an untrue statement or omission, whether actual or alleged, in connection with any Indemnitor security, or (c) an allegation that an Indemnitee is a "controlling person" of Indemnitor within the meaning of the Act or the Exchange Act. The foregoing are hereafter referred to as "Losses." The indemnity provided for herein shall be enforceable without regard to the negligence of the Indemnitee; provided that Indemnitor shall have no obligation to defend or indemnify hereunder with respect to a particular Loss if and to the limited extent such Loss results directly from an untrue statement or omission by Indemnitor based upon, and in reasonable reliance upon, a written statement of fact (not prediction or opinion) directed to Indemnitor and signed by an officer of Deere or one of Deere's equipment divisions, but only if such statement was false when so signed. In the event that the foregoing indemnity is unavailable to an Indemnitee other than in accordance with this Agreement, the Indemnitor shall contribute to the Losses paid or payable by such Indemnitee in such proportion as is appropriate to reflect (i) the relative benefits to the Indemnitor, on the one hand, and to the Indemnitee, on the other hand, of the matters contemplated by this Agreement or (ii) if the allocation provided by the immediately preceding clause is not permitted by applicable law, not only such relative benefits but also the relative fault of the Indemnitor, on the one hand, and the Indemnitee, on the other hand, in connection with the matters as to which such Losses relate, as well as any other relevant equitable considerations. 2. NOTIFICATION AND DEFENSE OF CLAIM (a) If any litigation is commenced against an Indemnitee in respect of which indemnity may be sought pursuant to this Agreement, Deere shall promptly notify Indemnitor in writing of the commencement of litigation, and Indemnitor shall then assume the defense of such litigation, including but not limited to the employment and fees of counsel (reasonably satisfactory to Deere) and the payment of all expenses of the litigation. 2 If, with respect to litigation commenced against one or more Indemnitees for the recovery of damages and defended by Indemnitor pursuant hereto, a court or arbitrator (in binding arbitration) of competent jurisdiction finally (including all rights of appeal) determines that an Indemnitee is liable to the claimant for such damages as a result of that Indemnitee's own intentional or reckless misconduct, then Indemnitor shall have no obligation hereunder to indemnify the Indemnitees with respect to any judgement rendered against the Indemnitees in such litigation, and Deere shall promptly reimburse Indemnitor for the reasonable expenses Indemnitor actually incurred (excluding the time and costs of Indemnitor employees and other internal costs of Indemnitor) in defending the Indemnitee(s) in such litigation. (b) Deere shall have the right to employ its own counsel, at its own expense, in connection with any claim, litigation, investigation, or proceeding covered by Section 1 to oversee the matter on behalf of Deere, to consult with the attorneys engaged by Indemnitor as to the proper handling of the matter and to take such actions in connection with the matter as are reasonably necessary to protect Deere's interests. Employment of such counsel by Deere shall not affect Indemnitor's duty hereunder to defend the matter, at Indemnitor's own expense, on behalf of the Indemnitees. (c) Indemnitor shall promptly notify Deere of the commencement of any litigation covered by Section 1. Indemnitor and Deere agree to cooperate with each other in the defense of any such litigation. Indemnitor shall not be obligated to indemnify, or provide further defense for, an Indemnitee other than Deere who does not cooperate with Indemnitor, Deere, and their respective counsel as may be reasonably requested in the defense of any such litigation provided such failure to cooperate presents a real and substantial risk to the interests of Indemnitor or an Indemnitee in connection with the litigation. The preceding sentence shall not relieve Indemnitor of any obligation hereunder unless the failure to cooperate involved continues after both Deere and the non-cooperating Indemnitee receive written notice of, and a reasonable opportunity to cure, the failure to cooperate. 3 (d) Indemnitor shall not be obligated to indemnify an Indemnitee under this Agreement for any amounts paid by the Indemnitee in settlement of any claim or litigation covered by Section 1 if such settlement is effected by the Indemnitee without Indemnitor's prior written consent. Indemnitor shall not, in the defense of any claim, litigation, investigation or proceeding covered by Section 1, except with Deere's prior written consent, consent to entry of any judgment or enter into any settlement which does not include as an unconditional term thereof a release of all the Indemnitiees from all liability in respect to such matter. 3. ENFORCEMENT (a) Indemnitor expressly confirms and agrees that it has entered into this Agreement and assumed the obligations imposed on it hereunder in order to induce Deere to consider Indemnitor as a candidate for future dealerships or distributorships. Indemnitor acknowledges that Deere is relying upon this Agreement, and other promises. (b) In the event an Indemnitee is required to bring any action to enforce rights or to collect moneys due under this Agreement and is successful in such action, Indemnitor shall reimburse such Indemnitee for all of such Indemnitee's reasonable fees and expenses in bringing and pursuing such action (excluding the time and costs of Indemnitee employees and other internal costs of Indemnitees); provided that if the Indemnitee is not successful in such action, the Indemnitee shall reimburse Indemnitor for all of Indemnitor's reasonable fees and expenses incurred in defending such action (excluding the time and costs of Indemnitor employees and other internal costs of Indemnitor). 4. MISCELLANEOUS (a) The obligations of Indemnitor under this Agreement shall be in addition to any liability that Indemnitor may otherwise have and shall extend, upon 4 the same terms and conditions, to each person, if any, who controls and Indemnitee within the meaning of Section 15 of the Act. (b) This Agreement shall be binding upon and inure to the benefit of Indemnitor and the Indemnitees and their respective legal representatives, successors and assigns. This Agreement shall not be assignable by Indemnitor without Deere's prior written consent. (c) This Agreement shall be enforceable regardless of whether Indemnitor acquires any additional John Deere dealerships or distributorships. (d) No amendment, modification or termination of this Agreement shall be effective unless in writing and signed by both Indemnitor and Deere. IN WITNESS WHEREOF, the parties hereto have executed this Agreement on the date first above written. RDO Equipment Co. By: /s/ Paul T. Horn Title: President Deere & Company By: /s/ Robert W. Porter Title: Sr. V.P .N.A. Marketing 5 EX-10.17 3 FORM OF EQUIPMENT DEALER AGREEMENT EXHIBIT 10.17 JOHN DEERE CONSTRUCTION EQUIPMENT COMPANY SPECIAL PRODUCTS DEALER AGREEMENT JOHN DEERE CONSTRUCTION EQUIPMENT COMPANY SPECIAL PRODUCTS DEALER AGREEMENT The Dealer identified below hereby applies to JDCEC for appointment as an authorized dealer for certain JDCEC special products for the area of responsibility designated in Exhibit 1. The relationship between Dealer and JDCEC will be governed by the Terms of Appointment set forth in this Agreement. This Agreement shall be effective upon execution by JDCEC. Dealer (Firm Name): ___________________________________________________________ Address: _____________________________________________________________________ __ Corporation __ Partnership __ C __ General __ S __ Limited __ Limited Liability Company __ Proprietorship __ Other: ____________________________________ By: __________________________________________ Title: _______________________________________ (Authorized officer, owner, or partner) Date: _____________________ Signatures of Other Partners, Owners, or Shareholders: ____________________________________ ____________________________________ ____________________________________ ____________________________________ ____________________________________ ____________________________________ Signatures of Guarantors: ____________________________________ ____________________________________ ____________________________________ ____________________________________ ____________________________________ ____________________________________ Accepted: John Deere Construction Equipment Company Moline, IL 61265 By: ________________________________________ Title: _____________________________________ Date: _____________________ DEFINED TERMS For purposes of this Agreement, the following terms shall be defined as follows: Agreement This agreement. Conditions of Sale JDCEC's published U.S. Special Products Dealer Conditions of Sale, as in effect from time to time. Customer Satisfaction The extent to which Dealer fulfills the needs and expectations of customers in Dealer's Special Products AOR. JDCEC will specify the method used to measure Customer Satisfaction in bulletins issued from time to time to Special Products Dealers. Dealer The dealer identified in this Agreement. Dealer's Special Products AOR The area of responsibility assigned to Dealer under this Agreement. Dispute Any dispute, controversy, or claim between Dealer or any of Dealer's owners, partners, shareholders, or guarantors and JDCEC, Deere Credit, Inc., or ERS, whether based on contract, tort, statute, or other legal theory. Equity The Dealer's equity to assets percentage, determined by JDCEC based on the Terms Schedule. Equity Performance Standard The equity to assets percentage Performance Standard specified by JDCEC in bulletins issued from time to time to Special Products Dealers. ERS Equipment Remarketing Services, a division of Deere Marketing Services, Inc. Goods Whole Goods and Parts, as well as those JDM products that JDCEC may offer for sale to Dealer. JDCEC John Deere Construction Equipment Company. JDCEC Warranties The JDCEC warranties applicable to the sale or to the lease or rental of various types of Goods. JDCEC's Affiliates Deere & Company, its divisions, and its subsidiaries, whether direct or indirect. JDM John Deere Merchandise. John Deere Network The network of computers, communications equipment, computer networking equipment, computer software, application software, and data used by JDCEC for the purpose of gathering and communicating information and conducting business. Key Persons The persons and entities listed in Exhibit 4. Manual JDCEC's published Special Products Service Administration Manual, as in effect from time to time. Market Share The market penetration achieved for Goods, or a subset thereof, in Dealer's Special Products AOR during a specified time period. JDCEC will specify the method used to measure Market Share in bulletins issued from time to time to Special Products Dealers. Defined Terms/1 Meaningful Progress A level of performance for each Performance Criterion for the period covered by the Dealer's annual JDCEC-approved business plan, which shall be as agreed upon between Dealer and JDCEC each year. If in any year Dealer and JDCEC do not reach agreement upon Meaningful Progress with respect to a particular Performance Criterion, JDCEC will determine in its sole discretion what will constitute Meaningful Progress for that Performance Criterion for the year. Minimum Equity Level The minimum equity to assets percentage level specified by JDCEC in bulletins issued from time to time to Special Products Dealers. Parts (1) the products indicated by a check mark in Section B of Exhibit 2 and (2) attachments and parts available from JDCEC for the Whole Goods. Performance Criteria Market Share, Customer Satisfaction, and Equity, as well as other criteria specified by JDCEC in bulletins issued from time to time to Special Products Dealers. Performance Standard A level of performance (for a particular Performance Criterion) specified by JDCEC in bulletins issued from time to time to Special Products Dealers. Service Information System JDCEC's Service Information (or successor) System. Special Products Products distributed by JDCEC and designated by JDCEC as "Special Products." Special Products AOR An area of responsibility assigned by JDCEC to a Special Products Dealer. Special Products Dealer An authorized dealer of one or more Special Products pursuant to a Special Products Dealer Agreement with JDCEC. Terms Schedule JDCEC's published U.S. Special Products Dealer Terms Schedule, as in effect from time to time. Trademarks Those trademarks owned by JDCEC or any of JDCEC's Affiliates. Used Goods Whole Goods that do not have JDCEC Standard Warranty remaining. Whole Goods (1) the products indicated by a check mark in Section A of Exhibit 2, (2) their predecessors, and (3) their JDCEC-designated successors or added by addendum signed by Dealer and an authorized person from JDCEC Defined Terms/2 TERMS OF APPOINTMENT 1. PROVISIONS OF APPOINTMENT During the period of Dealer's appointment hereunder, the following provisions shall apply: a) Dealer's Special Products AOR i) Dealer is assigned Dealer's Special Products AOR for the purpose of marketing, servicing, and supporting Goods. Dealer's Special Products AOR is not an exclusive territory. JDCEC and others may market, service, and support Goods in Dealer's Special Products AOR. Without limiting the foregoing, JDCEC may sell, loan, lease, or rent Goods, without restriction or limitation, to any person or entity, including without limitation: a) federal, state, and local governments; b) accounts classified by JDCEC as direct or national accounts; c) purchasers for export; d) educational institutions; e) competitors of JDCEC; f) equipment manufacturers; and g) employees of JDCEC. ii) JDCEC may assign all or any portion of Dealer's Special Products AOR to other persons or entities for the purpose of marketing, servicing, and supporting products other than Goods, including without limitation products listed but not included by a check mark in Exhibit 2. Such an assignment may include Parts and JDM products. iii) Dealer will concentrate its efforts in Dealer's Special Products AOR. iv) JDCEC shall have no obligation to support, through its programs or other forms of dealer support, activities of Dealer outside Dealer's Special Products AOR, and JDCEC may exclude activities of Dealer outside Dealer's Special Products AOR from JDCEC's programs and other forms of dealer support. v) Whenever a sale, lease, or rental of Whole Goods by Dealer is subject to JDCEC's service fee policy, as in effect from time to time, Dealer will pay a service fee in accordance with the terms of JDCEC's service fee bulletin in effect when the sale, lease, or rental occurs. b) Locations; Other Product Lines i) Dealer will maintain dealership operations at each location listed in Exhibit 3 for the purposes specified in Exhibit 3. Dealer will not open any new location, relocate or discontinue a location, or change the purposes of a location without obtaining JDCEC's prior written approval. Dealer will not, either directly or indirectly, establish, maintain, or operate at any other location a place of business of any kind where (or from which) any Goods are displayed, sold, leased, rented, or serviced. ii) Dealer will not sell, lease, or rent parts or whole goods that compete with any of the Goods. Dealer will separate, in a manner acceptable to JDCEC, other business activities and/or products from Dealer's JDCEC dealership operations if, in JDCEC's sole discretion, such activities and/or product lines are likely to detract from Dealer's representation of JDCEC's products. Terms of Appointment/1 iii) To ensure compliance with this Section 1.b.,Dealer will permit JDCEC to inspect during normal business hours, all locations of Dealer engaged in the sale, lese, rental, or servicing of equipment or vehicles (or parts for equipment or vehicles), or in a related business. c) Dealer's Business Plans and Promotional Efforts; Achievement of Meaningful Progress and the Performance Standards i) Each year, by the date specified by JDCEC, Dealer will secure JDCEC's approval of a business plan containing: a) an objective for each Performance Criterion that represents Meaningful Progress for the Performance Criterion; b) action plans designed to achieve the Performance Criteria objectives specified in the plan; c) with respect to particular types of Goods, such other elements as JDCEC may request generally of Special Products Dealers authorized by JDCEC to market such Goods; and d) such other elements as JDCEC may request generally of Special Products Dealers. e) Dealer may base its business plan on the calendar year or on its fiscal year. ii) Dealer will actively and aggressively promote the sale, lease, and rental of Goods. Dealer's compliance with this commitment will be evaluated based on performance in Dealer's Special Products AOR and not on performance outside Dealer's Special Products AOR. Dealer will maintain: a) highly qualified management, sales, parts, and service personnel; b) sales, parts, service, and personnel development programs; c) inventories of Whole Goods and related attachments available for demonstration, sale, lease, and rental; d) inventories of Parts, service equipment, field service vehicles, and tools; and e) facilities that in each case are sufficient to achieve the Performance Criteria objectives contained in Dealer's JDCEC-approved business plans and, within a reasonable period of time, performance at or above the Performance Standards. iii) Dealer will achieve Meaningful Progress with respect to each Performance Criterion in each fiscal or calendar year (whichever is used as the basis for Dealer's JDCEC-approved business plans). Dealer's compliance with this commitment will be evaluated based on performance in Dealer's Special Products AOR and not on performance outside Dealer's Special Products AOR. d) Preparation of Goods, Warranty, and Post-Delivery Service i) The Manual and/or bulletins issued from time to time by JDCEC designate the JDCEC Warranties. Dealer will follow instructions contained in the Manual and JDCEC's bulletins and will complete with true and accurate information the retail purchase orders, delivery receipts, lease agreements, and other forms specified therein. Dealer will be solely responsible for any warranties given by Dealer that exceed the applicable JDCEC Warranty, if any, and for any liability where Dealer has failed to use the forms prescribed by JDCEC as specified by JDCEC. ii) To ensure proper operation of Goods, Dealer will properly assemble and prepare all Goods sold, leased, or rented by Dealer and will perform such inspections, adjustments, and service prior to delivery to users as are required in the Manual. Dealer will instruct users in the proper use and maintenance of Goods and will furnish each user with the appropriate operator's manuals furnished by JDCEC. Dealer will perform post-delivery inspections and adjustments prescribed for Goods in the Manual Terms of Appointment/2 iii) Dealer is authorized to and will perform prompt and effective warranty service on Goods in Dealer's Special Products AOR for which JDCEC becomes obligated pursuant to a JDCEC Warranty, including without limitation Goods not sold, leased, or rented by Dealer, if presented with proper evidence that the Goods are entitled to warranty service under a JDCEC Warranty. Dealer will perform prompt and effective non-warranty service on Goods in Dealer's Special Products AOR, including without limitation Goods not sold, leased, or rented by Dealer. iv) Dealer will perform product improvement programs that JDCEC may from time to time require for Goods in Dealer's Special Products AOR, including without limitation Goods not sold, leased, or rented by Dealer. Dealer will complete such programs expeditiously and within the time frame specified by JDCEC. v) Should any Goods sold, leased, or rented by Dealer require warranty service, non-warranty service, or product improvement at a time when such Goods are not within the Special Products AOR of a Special Products Dealer authorized by JDCEC to market such Goods, Dealer is authorized to and will perform the required service or product improvement. vi) Dealer will perform warranty service and product improvement programs in the manner and for the compensation specified in the Manual in effect at the time the service or program is performed. Dealer will notify JDCEC of all warranty and product improvement program claims in accordance with the Manual. e) Sales to Re-sellers Dealer will not sell Goods to any person or entity that re-sells or intends to re-sell such Goods, provided, however, that this Section 1.e. shall not prevent Dealer from: i) selling Parts to a person or entity in Dealer's Special Products AOR that uses such Parts in providing repair or maintenance services in Dealer's Special Products AOR for products owned by others; ii) selling Used Goods to a person or entity engaged in the business of selling used equipment; iii) selling Goods to ERS; iv) selling Goods to a Special Products Dealer authorized by JDCEC to market such Goods; or v) selling Goods to a person or entity that is primarily engaged in the business of renting equipment to end-users. f) Equity Dealer will maintain its Equity at a level sufficient to achieve Dealer's commitments under this Agreement, which shall be not less than the Minimum Equity Level. g) JDCEC's Acceptance of Orders JDCEC will accept orders placed by Dealer for Goods in JDCEC's then-current product line, provided the Goods will be shipped during the period of Dealer's appointment hereunder. JDCEC shall have no liability for delay, failure, or refusal to accept Dealer's orders or to ship Goods to Dealer if the delay, failure, or refusal results from: i) capacity constraints, demand in excess of available supply, labor strikes or lockouts; ii) a default under a security agreement between Dealer and JDCEC; iii) termination of Dealer's appointment; iv) any cause beyond JDCEC's control; or v) JDCEC's determination, in its sole discretion, that a) Dealer's financial condition does not justify the extension of additional credit or the addition of inventory Terms of Appointment/3 b) Limitations in Dealer's market potential, marketing capabilities, or product support capabilities for the particular Goods involved are likely to lead to customer dissatisfaction with the Goods or excessive warranty expense. c) Dealer has consistently failed to perform its obligation under this Agreement; or d) Dealer has failed to make timely submission of legitimate forecasts of Dealer's anticipated inventory needs and retail sales when requested by JDCEC. All orders, sales, and shipments will be governed by the Conditions of Sale in effect at the time the order is placed. h) Availability of JDCEC Programs i) With respect to particular types of Goods, JDCEC will make available to Dealer finance plans, lease plans, floor plans, and parts return programs (and other similar financing or inventory management plans or programs) comparable to such plans and programs that JDCEC makes available generally to Special Products Dealers authorized by JDCEC to market such Goods. Such plans and programs may contain conditions for eligibility and are subject to credit approval. Such plans and programs also may have varying terms depending on certain dealer financial or performance criteria or market conditions. ii) JDCEC may make available to any Special Products Dealer marketing programs that JDCEC deems necessary to compete in the Special Products AOR assigned to that Special Products Dealer without obligating JDCEC to make similar programs available to any other Special Products Dealer or to Special Products Dealers generally. i) Changes in Dealer Ownership or Business Structure i) No change in the ownership or business structure of Dealer or any Key Person will occur unless JDCEC has given prior written approval of such change. ii) Dealer will execute such agreements and documents as JDCEC may deem necessary to preserve JDCEC's rights under this Agreement or any other agreement between Dealer and JDCEC in light of a change or proposed change in Dealer's ownership, management, or business structure. iii) If Dealer wishes to sell its business or substantially all of the assets of its business (excluding Dealer's Special Products Dealer appointment and this Agreement, which are not transferable by Dealer), Dealer will notify JDCEC before the beginning of any discussions or negotiations pertaining to the proposed sale. JDCEC retains at all times the right to decide, in its sole discretion, whether to appoint any third party as a Special Products Dealer for Dealer's Special Products AOR, for any portion thereof, or for any other area. For purposes of this Agreement, a change in business structure shall include, without limitation, a change in the legal form of Dealer (e.g. from partnership to corporation); a change in the legal form of any Key Person or of any entity that holds, directly or indirectly, a 10% or greater ownership interest in Dealer; a merger or consolidation involving Dealer; the creation of a subsidiary, partnership, or other legal entity by Dealer; and any other change that may affect any right or obligation under this Agreement or any other agreement between Dealer and JDCEC. j) Financial Statements Dealer will submit to JDCEC's Finance Department offices in Moline, Illinois, annual financial statements for Dealer within 100 days after Dealer's fiscal year-end. Such financial statements shall have been prepared in accordance with generally accepted accounting principles and shall be in a form aproved by JDCEC, which approval shall not be unreasonably withheld. Dealer also will provide such other financial data of Dealer as JDCEC may from time to time request. Terms of Appointment/4 2. TERMINATION OF DEALER'S APPOINTMENT a) Termination by Mutual Consent Dealer's appointment may be terminated by the mutual consent of Dealer and JDCEC, evidenced by a writing signed by Dealer and JDCEC, with the effective date of such termination to be as mutually agreed upon in writing. b) Termination by Dealer Dealer may terminate its appointment for any reason upon at least 180 days' prior written notice to JDCEC. c) Termination by JDCEC i) JDCEC may terminate Dealer's appointment, upon 180 days' prior written notice to Dealer, in the event: a) Dealer fails to achieve Meaningful Progress with respect to a Performance Criterion in any fiscal or calendar year (whichever is used as the basis for Dealer's JDCEC-approved business plans); or b) Dealer fails to comply with any material provision of this Agreement. JDCEC may exercise its termination right under this Section 2.c.i. with respect to all or any portion of Dealer's Special Products AOR, as JDCEC may determine in its sole discretion. JDCEC may exercise its termination right under this Section 2.c.i. without regard to the performance of other Special Products Dealers or to the circumstances under which JDCEC has terminated or refrained from terminating the appointment of other Special Products Dealers. ii) JDCEC may terminate Dealer's appointment, upon at least 120 days' prior written Notice to Dealer, if JDCEC determines that Dealer's Equity is less than the Minimum Equity Level. JDCEC will give Dealer written notice of termination under this Section 2.c.ii. within 45 days after the financial statements on which JDCEC's determination is based are received at JDCEC's Finance Department offices in Moline, Illinois. iii) JDCEC may terminate Dealer's appointment for any reason upon at least 360 days' prior written notice to Dealer. iv) JDCEC may terminate Dealer's appointment, effective immediately, by giving written notice of termination to Dealer at any time after the happening of any of the following: a) the death, incapacity, or dissolution of any Key Person; b) a default under any security agreement between Dealer and JDCEC; c) any noncompliance with Section 1.b., Section 1.c.i., Section 1.i.i., or Section 1.j.; d) Dealer defrauds anyone, including without limitation JDCEC, or misrepresents any material fact in any communication with or submission to JDCEC; e) the cancellation, discontinuance, or revocation of a guaranty or letter of credit applicable to Dealer indebtedness, or a failure to provide, or modify the amount of, a guaranty or letter of credit when and as requested by JDCEC or Deere Credit, Inc.; f) Dealer substantially closes the dealership business; g) Dealer intentionally fails to comply with any applicable federal, state, or local law, regulation, or ordinance relating to the operation of the dealership; or Terms of Appointment/5 h) Dealer attempts to assign its rights or obligations under this Agreement. Dealer's appointment hereunder shall terminate automatically upon, and effective with, the termination of any other dealership appointment with JDCEC or any of JDCEC's Affiliates. 3. EFFECT OF TERMINATION OF APPOINTMENT Termination of Dealer's appointment hereunder means that the obligations and duties of the parties under Section 1 no longer apply, and that JDCEC may decline to fill accepted orders placed before such termination. Orders from Dealer that JDCEC contemplates will be shipped after the effective date of termination may be accepted in JDCEC's sole discretion. Such orders will be subject to the Conditions of Sale in effect at the time the order is placed or to such other conditions that JDCEC may prescribe. Submission or acceptance of orders and shipment or acceptance of Goods does not have the effect of renewing or reinstating the obligations of Section 1 and shall not be construed as an extension or renewal of Dealer's appointment or as a rescission of any notice of termination. If Dealer's appointment is terminated, neither Dealer nor JDCEC shall be entitled to any compensation or reimbursement for loss of prospective profits, anticipated sales, or other losses occasioned by the termination, except as provided in this Agreement. 4. REPURCHASE OF GOODS ON TERMINATION Upon termination of Dealer's appointment, JDCEC will buy and Dealer will sell (or, with respect to JDM products, may sell subject to Section 4.c.), free and clear of all liens and encumbrances, the following Goods in Dealer's possession, provided they were originally purchased by Dealer from JDCEC and are listed in JDCEC's published price list in effect on the effective date of termination of Dealer's appointment, according to the following terms: a) All unsold current Whole Goods and attachments that are new, unused, complete, and in good condition. Prices to be paid for such items will be the invoice prices (but not more than current Special Products Dealer prices) plus freight from the factory to Dealer's location, less any discounts from invoice price that have been allowed, and less any reduction in value that may be required due to deterioration. b) All unsold current Parts that are new, unused, complete, in good condition, and re-salable as new without repackaging or reconditioning. Prices to be paid for such Parts will be JDCEC's then-current wholesale price, as listed in JDCEC's wholesale price list for such Parts in effect on the effective date of termination, less a discount of: i) 15% on items listed as returnable under JDCEC's then-current parts return policy; and ii) 50% on all other items. c) Such unsold current JDM products that Dealer may elect to sell to JDCEC and that are new, unused, complete, in good condition, and re-salable as new without repackaging or reconditioning. JDCEC shall have no obligation to repurchase such products unless Dealer furnishes JDCEC with a list of the products that it wishes to sell to JDCEC within thirty days after the effective date of the termination of Dealer's appointment. Price to be paid for such products will be the then-current wholesale price, as listed in the JDM Price List in effect on the effective date of termination, less a discount of: i) 50% on products indentified by an asterisk in the JDM Price List; ii) 15% on items listed as returnable under JDCEC's then-current parts return policy; and iii) 25% on all other JDM products. At the written request of JDCEC, Dealer will, at Dealer's expense, list, tag, pack, load, and transport all repurchased Goods to the nearest location regularly maintained by JDCEC for the storage of such Goods (or to such closer location as may be designated by JDCEC) or pay for the cost of transportation to such location. The risk of loss shall be on Dealer until the vehicle transporting such Goods reaches the designated destination. Terms of Appointment/6 Should Dealer fail to fulfill the above obligation within 60 days after JDCEC has requested that it do so, JDCEC or its designee may enter Dealer's premises, perform these duties, and charge Dealer's account for any expenses incurred in so doing. Amounts payable to Dealer under this Section 4 will not be paid until Dealer has complied with all applicable laws governing bulk transfers of inventory. JDCEC shall be relieved of its obligations under this Section 4 if a default occurs or has occurred under any security agreement between Dealer and JDCEC, and JDCEC elects to exercise its rights under such security agreement to take possession of the Goods. JDCEC shall be relieved of its obligations under this Section 4 if Dealer has defrauded JDCEC or if Dealer misrepresents a material fact pertaining to the repurchase of Goods in any communication with or submission to JDCEC. 5. RESOLUTION OF DISPUTES Although Dealer and JDCEC are entering into this Agreement in a spirit of cooperation and mutual respect, it is possible that Disputes may arise. Dealer, Dealer's owners, partners, shareholders, and guarantors, JDCEC, Deere Credit, Inc., and ERS agree that any Dispute shall be finally resolved by binding arbitration pursuant to the terms set forth in Exhibit 5. The duty to arbitrate shall extend to any officer, employee, shareholder, principal, agent, partner, trustee (in bankruptcy or otherwise), or subsidiary of Dealer as to any Dispute that is subject to this Section 5. 6. COMPUTER SYSTEM a) During the period of Dealer's appointment, Dealer will, at Dealer's expense: i) install and maintain in good working order a computerized business system that is compatible with, and in communication with, the John Deere Network; ii) maintain the hardware and software necessary to supply electronically to JDCEC (a) product delivery and warranty claim information in accordance with the Service Information System; and (b) such other information as JDCEC may from time to time request Dealer to submit electronically; iii) conform to any modifications made to the John Deere Network (provided JDCEC gives Dealer at least 60 days' prior notice of the modification); iv) input into the John Deere Network, in accordance with JDCEC's instructions, such information as JDCEC may from time to time request, and furnish such computer files and reports as JDCEC may from time to time request; and v) pay all costs associated with Dealer's use of the John Deere Network, as well as all costs incurred in obtaining and maintaining Dealer's computerized business system and in communicating with the John Deere Network. b) Dealer will keep confidential any information contained in the John Deere Network and not use such information for purposes unrelated to Dealer's dealership appointment hereunder. c) JDCEC shall not be liable for any losses incurred by Dealer in connection with Dealer's computerized business system or the John Deere Network. Terms of Appointment/7 7. AMENDMENT OF AGREEMENT This Agreement cannot be altered or amended, or any of its provisions waived, on behalf of JDCEC except in a writing signed by a duly authorized officer of JDCEC. Dealer and JDCEC recognize that this Agreement does not have an expiration date. Because market and business practices and conditions are likely to change with the passage of time and such changes or other circumstances could necessitate a change in this Agreement, JDCEC may amend these Terms of Appointment at any time, without the consent of Dealer, if the same amendment is made to the Terms of Appointment of all other Special Products Dealers whose dealer agreements are in the form of this Agreement and may be amended in this manner pursuant to applicable law. Any such amendment shall be made by issuance by JDCEC of a bulletin or other written notice to such Special Products Dealers and shall be effective on the date specified in the bulletin or other written notice, which date shall be at least 120 days following the date of such bulletin or other written notice. 8. USE OF TRADEMARKS, NAMES, AND SIGNS JDCEC grants Dealer the non-exclusive right to use the Trademarks, during the period of Dealer's appointment, in connection with the advertising and sale of Goods bearing one or more of the Trademarks, and in connection with the providing of services by Dealer relating to the sale or servicing of Goods identified by the Trademarks. Such use of the Trademarks shall be in a manner and form approved by JDCEC. Dealer agrees not to use any of the Trademarks as part of Dealer's corporate or business name and to cease all use of the Trademarks if Dealer ceases to be a Special Products Dealer, including without limitation the removal from Dealer's premises and vehicles of all signs and distinctive identification that might associate Dealer with JDCEC. Dealer also agrees not to sell or distribute any goods bearing any of the Trademarks, unless the goods originated from or were distributed by JDCEC, JDCEC's Affiliates, or licensees authorized to use the Trademarks on the goods. Dealer also agrees not to use the Trademarks to promote goods not originating from or distributed by JDCEC, JDCEC's Affiliates, or their licensees. 9. ASSIGNMENT This Agreement shall be binding upon and inure to the benefit of the successors and assigns of JDCEC and, to the extent the terms hereof bind or benefit Deere Credit, Inc. or ERS, their respective successors and assigns. Dealer's rights and obligations under this Agreement may not be assigned or transferred. Any attempt by Dealer to assign its rights or obligations under this Agreement shall be null and void. 10. CHANGES IN OR DISCONTINUANCE OF GOODS a) JDCEC may, at any time and without notice, make changes in or discontinue any Goods without incurring any liability. b) This Agreement extends only to Goods. JDCEC reserves the right to offer any other products to selected Special Products Dealers or others under existing or separate new agreements. As new products, other than those designated by JDCEC as direct successors of Goods, are developed, acquired, or marketed by JDCEC, they may or may not be added to the Goods covered under this Agreement. 11. DEALER GUARANTY To the extent requested by JDCEC, Key Persons and other partners in, or owners of, Dealer have executed or concurrently herewith will execute in favor of JDCEC one or more guaranties of Dealer's indebtedness to JDCEC. Dealer will obtain, and Key Persons and other partners in, or owners of, Dealer will execute, such additional guaranties and amendments and additions to guaranties as JDCEC may from time to time request. For purposes of this Section 11 and Section 12, JDCEC shall include Deere Credit, Inc. in addition to John Deere Construction Equipment Company. Terms of Appointment/8 12. SECURITY IN GOODS Dealer has executed or concurrently herewith will execute in favor of JDCEC one or more security agreements covering Dealer's inventory of Goods and certain other items. Dealer will execute such additional security agreements and financing statements, and amendments and additions thereto or to existing instruments, as JDCEC may from time to time request, in order that JDCEC may have at all times a first lien on Goods and other collateral securing Dealer's indebtedness to JDCEC. 13. RELATIONSHIP OF THE PARTIES a) Dealer acknowledges that it is an independent retail merchant which purchases Goods for resale for the principal benefit of Dealer. Dealer further acknowledges and agrees that it is an independent contractor. In performing service work Dealer assumes full responsibility for such work. Dealer also acknowledges and agrees that it is not an employee, agent, representative, franchisee, partner, or joint venturer of or with JDCEC, has not paid and will not pay a franchise fee to JDCEC, and is free to operate its business in accordance with its independent business judgment, provided that such operation is in accordance with this Agreement and any other agreement between Dealer and JDCEC. Dealer has no authority to bind JDCEC by representations, statements, agreements, conduct, or in any manner whatsoever. JDCEC shall not be liable for any debts, accounts, obligations, or other liabilities of Dealer, its agents, employees, or representatives. It is expressly recognized that no fiduciary relationship exists between the parties. b) Except as provided in Sections 5, 9, and 17, this Agreement is not enforceable by any third party and is not intended to benefit, or convey any rights to, anyone other than Dealer and JDCEC. c) Dealer obtains no rights by virtue of this Agreement or its dealership appointment to acquire additional dealerships or to obtain additional dealership appointments or area of responsibility assignments from JDCEC. 14. USE OF PRICE LISTS, CATALOGS, AND MANUALS The Manual and any bulletins, price lists, catalogs, and service manual pages furnished to Dealer by JDCEC must be kept in good condition and returned to JDCEC upon termination of Dealer's appointment. If such items have been purchased by Dealer, JDCEC will repurchase them for the price paid. Dealer will not disclose, directly or indirectly, the contents of such Manual, bulletins, price lists, catalogs, and service manual pages to a person or entity that is a competitor of JDCEC or of a Special Products Dealer. 15. ADVERTISING MATERIAL; MAILING LISTS During the period of Dealer's appointment: a) with respect to particular types of Goods, JDCEC will furnish to Dealer promotional materials and printed advertising matter that JDCEC prepares for use by other Special Products Dealers in connection with the sale, lease, rental, or servicing of such Goods and that JDCEC deems appropriate for Dealer's Special Products AOR; and b) Dealer will create, maintain, and keep current a list of the names and addresses of all purchasers and prospective purchasers of Goods in Dealer's Special Products AOR, provide JDCEC with the current list, and promptly notify JDCEC of all changes to the list. The list contemplated by Section 15.b. shall be the sole property of JDCEC. JDCEC may use the list at any time for any purpose it deems appropriate, provided, however, that JDCEC will advise Dealer in advance of any use it makes of the list (other than for the purpose of sending Dealer's direct mail solicitations to Terms of Appointment/9 purchasers and prospective purchasers on the list) during the period of Dealer's appointment. Dealer will reimburse JDCEC for handling and postage expenses for all direct mailings made at Dealer's request to prospective purchasers in Dealer's Special Products AOR. 16. NO WAIVER The failure of JDCEC to take any action or require full and strict compliance with any provision of this Agreement or any provision of any agreement with other Special Products Dealers shall not affect JDCEC's right to take any action or require full and strict compliance at any time prior or subsequent thereto and shall not constitute a waiver of a breach of the provision or nullify the effectiveness of such provision. 17. LIMITATION ON DAMAGES; JURY WAIVER; TIME TO INITIATE PROCEEDINGS a) No party to a Dispute shall be entitled to an award of multiple, punitive, or exemplary damages, or any damages excluded by, or in excess of any damage limitation expressed in, this Agreement. b) Dealer, Dealer's owners, partners, shareholders, and guarantors, JDCEC, Deere Credit, Inc., and ERS each hereby knowingly, voluntarily, and intentionally waive any right he, she, or it may have to a trial by jury in respect of any litigation pertaining to any Dispute, and each agrees not to request a jury in any such litigation. c) No party to a Dispute may commence litigation or arbitration proceedings with respect to such Dispute more than one year after that party's cause of action accrues. 18. NOTICES In addition to other available means of giving notice, notices required or permitted under this Agreement (including without limitation notices in connection with any arbitration under Section 5) may be given to the person indicated on Exhibit 6, by personal delivery or by certified U.S. mail, Federal Express or other reputable overnight delivery service, or facsimile to the address or facsimile number indicated on Exhibit 6. Notices given by personal delivery shall be deemed given when delivered. Notices given by certified U.S. mail, reputable overnight delivery service, or facsimile shall be deemed given when sent. 19. GOVERNING LAW This Agreement shall be governed and construed in accordance with the substantive laws of the State of Illinois without regard to Illinois' conflict of laws rules. 20. SEVERABILITY Any provision of this Agreement or portion thereof that is prohibited or unenforceable in any jurisdiction shall, as to such jurisdiction, be ineffective only to the extent of such prohibition or unenforceability without invalidating the remainder of the provision or the remaining provisions of this Agreement and without affecting the validity or enforceability of such provision in any other jurisdiction. Any provision herein found to be prohibited or unenforceable in a jurisdiction shall, by agreement of the parties hereto, be replaced for such jurisdiction by a provision that ensures that the economic and/or business objectives of the prohibited or unenforceable provision are preserved insofar as it is possible to do so under the applicable law in such jurisdiction. Terms of Appointment/10 21. PAYMENTS ON TERMINATION If Dealer's appointment hereunder is terminated, all indebtedness of Dealer to JDCEC which does not become due prior to the effective date of the termination will be due and payable as of the effective date of the termination. JDCEC may pay any sums owing to Dealer on termination (including without limitation any sums owing to Dealer for repurchased Goods) in cash or by giving Dealer credit to be applied to any indebtedness then owed by Dealer to JDCEC or to any of JDCEC's Affiliates, regardless of whether such indebtedness is then due and payable. 22. SURVIVAL The termination of Dealer's appointment shall not affect any rights or obligations that have accrued hereunder as of the effective date of such termination. Such termination also shall not affect any rights or obligations, except those expressly limited to the period of Dealer's appointment, under Sections 3, 4, 5, 6.b., 6.c., 7, 8, 9, 10, 11, 12, 13, 14, 15, 16, 17, 18, 19, 20, 21, 22, and 23, which rights and obligations, except those expressly limited to the period of Dealer's appointment, shall survive termination of Dealer's appointment. 23. ENTIRE AGREEMENT This Agreement is and shall be deemed to be the complete and final expression of the agreement between the parties as to the subject matters contained herein. This Agreement supersedes all previous dealer agreements and representations between the parties made with respect to the Dealer's appointment hereunder as a Special Product Dealer. It is acknowledged and agreed by Dealer and JDCEC that no promise or representation not contained herein (including without limitation Exhibit 7) was an inducement to either party or was relied on by either party in entering into this Agreement. Any prior or contemporaneous promises, agreements, or representations, whether oral, written, or created through custom, usage, or course of dealing, except for those listed on Exhibit 7, are also superseded by this Agreement. Dealer understands that, except as provided in Section 7, no agent or employee of JDCEC has authority to vary or add to the provisions of this Agreement, or to make any representation altering or going beyond the terms of this Agreement. Terms of Appointment/11 EXHIBIT 1 DEALER'S SPECIAL PRODUCTS AOR Dealer's Special Products AOR shall consist of the following counties: State of ________ Counties: Exhibits/1 EXHIBIT 2 A. WHOLE GOODS [ ] Deere brand ADT models [ ] Bell brand ADT models [ ] Compact Excavators B. PARTS [ ] Engine Parts for Whole Goods and for competitive products [ ] Filters for Whole Goods and for competitive products [ ] Oil [ ] Remanufactured Components for Whole Goods and for competitive products Exhibits/2 EXHIBIT 3 LOCATIONS Address Purpose - ------- ------- [ ] Whole Goods Sales - ------------------------------------------------ [ ] Service of Goods [ ] Parts Sales [ ] Other ___________________ [ ] Whole Goods Sales - ------------------------------------------------ [ ] Service of Goods [ ] Parts Sales [ ] Other ___________________ [ ] Whole Goods Sales - ------------------------------------------------ [ ] Service of Goods [ ] Parts Sales [ ] Other ___________________ [ ] Whole Goods Sales - ------------------------------------------------ [ ] Service of Goods [ ] Parts Sales [ ] Other ___________________ [ ] Whole Goods Sales - ------------------------------------------------ [ ] Service of Goods [ ] Parts Sales [ ] Other ___________________ Exhibits/3 EXHIBIT 4 KEY PERSONS Name Ownership Interest Relationship to Dealer / Role in Dealer's Affairs - ---- ------------------ ------------------------------------------------- Exhibits/4 EXHIBIT 5 DISPUTE RESOLUTION 1. If the parties to a Dispute agree, the Dispute will be submitted to non-binding mediation. 2. If the parties to a Dispute do not agree to mediation of the Dispute, or if mediation does not resolve the Dispute, the Dispute shall be finally resolved by binding arbitration in accordance with the arbitration rules of JAMS/Endispute, as amended by this Exhibit. The party seeking arbitration shall submit a written notice of arbitration to the other party and to JAMS/Endispute. The arbitration shall be held at such location as required by applicable law or, if no location is required by applicable law, at Chicago, Illinois or such other city as the parties to the Dispute may agree in writing. The arbitration shall be held before a panel of three arbitrators each of whom is affiliated with JAMS/Endispute and is part of the pool of arbitrators selected by JAMS/Endispute as available to arbitrate Disputes. Each arbitrator in the pool shall: a) be a current or former practicing attorney or former judge; b) have at least fifteen years experience in litigation, arbitration, and/or mediation of commercial disputes; c) have prior experience as an arbitrator (through award) of at least three manufacturer/dealer or franchisor/franchisee disputes; and d) be recommended as a commercial arbitrator by at least two major manufacturers or franchisors and at least two dealers or franchisees. The arbitration panel shall consist of one arbitrator from the pool designated by Dealer, one arbitrator from the pool designated by JDCEC, and a third arbitrator from the pool designated by the two other arbitrators, which person shall be the Chairperson of the arbitration panel. A decision and award joined by at least two members of the arbitration panel shall constitute the award and shall be binding on the parties. The arbitration panel shall provide written reasons for their decision and award, which shall be final and binding and may be entered by any court having jurisdiction thereof. 3. Except as provided herein, any action or decision joined by two arbitrators from the arbitration panel shall constitute the action of the arbitration panel. The arbitration panel may consider and grant dispositive motions, including without limitation motions to dismiss or for summary judgment. In order to prevent irreparable harm, the arbitration panel may consider and grant requests for temporary or permanent injunctive relief or other equitable relief. 4. Unless contrary to applicable law, this Agreement shall be interpreted in accordance with and the arbitration panel shall apply and be bound to follow the substantive laws of the State of Illinois. Where there is a conflict between the terms of this Agreement and the laws of the State of Illinois, the terms of this Agreement shall control. 5. Each party shall bear its costs associated with the arbitration, including its attorneys' fees, and the parties shall share equally the fees and expenses of JAMS/Endispute and the arbitrators, provided, however, that if court proceedings to stay litigation, compel arbitration, or enforce the award are necessary, the party who unsuccessfully opposes such proceedings shall pay all associated costs, expenses, and attorneys' fees that are reasonably incurred by the other party. 6. The Chairperson of the arbitration panel shall decide all matters relating to discovery as well as all procedural or non-dispositive matters that shall come before the arbitration panel. Subject to privileges recognized under applicable law, the Chairperson shall require such discovery as is necessary for the parties to be adequately prepared for the arbitration. Discovery may include the exchange of documents, depositions, interrogatories, and the exchange of exhibits, expert reports, and witness lists. Exhibits/5 7. The parties, witnesses, and arbitrators shall not disclose the contents or results of the arbitration without the prior written consent of all parties to the Dispute, except to the extent necessary to enforce the award or as necessary for financial and tax reporting purposes. 8. Notwithstanding anything to the contrary in this Exhibit 5 or section 5, in the event of an alleged violation of a party's intellectual property rights, that party may seek temporary injunctive relief from any court of competent jurisdiction pending appointment of the arbitration panel. The party requesting such relief shall also promptly file a notice of arbitration and a request that the arbitration panel provide temporary relief. Such actions shall not constitute a waiver of the party's rights or a breach of the party's obligations under this Exhibit 5 and Section 5. Any temporary injunctive relief entered by a court shall continue in effect only until the arbitration panel has issued a decision on temporary relief. 9. Notwithstanding anything to the contrary in this Exhibit 5 or section 5, JDCEC and Deere Credit, Inc. may seek judicial remedies, such as (but not limited to) attachment, replevin, and garnishment, deemed necessary by JDCEC or Deere Credit, Inc. in its sole discretion for the enforcement of JDCEC's or Deere Credit, Inc's rights regarding any security for indebtedness of Dealer , and such action by JDCEC or Deere Credit, Inc. shall not constitute a waiver of JDCEC's or Deere Credit, Inc's rights or a breach of JDCEC's or Deere Credit, Inc.'s obligations under this Exhibit 5 and Section 5. Exhibits/6 EXHIBIT 6 NOTICES To Dealer or its owners, partners, shareholders, or guarantors: - -------------------------------------- - -------------------------------------- - -------------------------------------- facsimile: ---------------------------- To JDCEC, Deere Credit, Inc., or ERS: - -------------------------------------- - -------------------------------------- - -------------------------------------- facsimile: ---------------------------- Dealer or JDCEC may amend the addressee, address, or facsimile number indicated for its group on this Exhibit 6 by giving written notice of such amendment to the other party, provided, however, that no more than one addressee, address, and facsimile number may be indicated at any given time. Exhibits/7 EXHIBIT 7 PROMISES AND REPRESENTATIONS Dealer and JDCEC agree that the following are the only promises, agreements, or representations, oral, written, or created through custom, usage, or course of dealing, not contained elsewhere in this Agreement and that were an inducement to or relied upon by any party hereto in entering into this Agreement or that were made prior to or contemporaneous with this Agreement and are not superseded by this Agreement: - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- ____ No promises, agreements or representations - ------------------------------ -------------------------------------- Dealer Signature JDCEC Signature Exhibits/8 EX-10.18 4 MODIFICATIONS OF CREDIT AGREEMENT EXHIBIT 10.18 ID NO. 221 AG CAPITAL COMPANY CREDIT AGREEMENT MODIFICATION FARGO, NORTH DAKOTA JANUARY 15, 2000 The Credit Agreement made and entered into as of July 15, 1999, and Credit Agreement Modification dated October 11, 1999, by and among RDO FINANCIAL SERVICES CO. ("BORROWER"), NORWEST BANK NORTH DAKOTA, N.A. ("Norwest"), and AG CAPITAL COMPANY ("Agent"), is hereby modified as follows: Section one (1), DEFINITIONS, page 3, of the Credit Agreement, shall be modified as follows: "MATURITY" OF THE SUBJECT NOTES MEANS THE EARLIER OF (a) THE DATE ON WHICH THE SUBJECT NOTES BECOMES DUE AND PAYABLE UPON THE OCCURRENCE OF AN EVENT OF DEFAULT; OR (b)(i) MARCH 1, 2000, UNLESS EXTENDED IN WRITING BY ALL THE PARTIES HERETO IN THEIR SOLE DISCRETION. Except as expressly modified by the terms of this Credit Agreement Modification, all of the terms and conditions of the Credit Agreement shall remain in full force and effect. IN WITNESS WHEREOF, the parties have executed this agreement this ____ day of January, 2000. RDO FINANCIAL SERVICES A North Dakota corporation By: ----------------------------------- Steven B. Dewald Its: Senior Vice President AG CAPITAL COMPANY A Delaware corporation By: ----------------------------------- Peter Nutz Its: Director of Finance NORWEST BANK NORTH DAKOTA A national banking association By: ----------------------------------- David Johnson Its: Assistant Vice President 1 ID NO. 221 AG CAPITAL COMPANY CREDIT AGREEMENT MODIFICATION FARGO, NORTH DAKOTA APRIL 1, 2000 The Credit Agreement made and entered into as of July 15, 1999, and Credit Agreement Modification dated October 11, 1999, and Credit Agreement Modification dated January 15, 2000, by and among RDO FINANCIAL SERVICES CO. ("BORROWER"), NORWEST BANK NORTH DAKOTA, N.A. ("Norwest"), and AG CAPITAL COMPANY ("Agent"), is hereby modified as follows: Section one (1), DEFINITIONS, page 3, of the Credit Agreement, shall be modified as follows: "MATURITY" OF THE SUBJECT NOTES MEANS THE EARLIER OF (a) THE DATE ON WHICH THE SUBJECT NOTES BECOMES DUE AND PAYABLE UPON THE OCCURRENCE OF AN EVENT OF DEFAULT; OR (b)(i) MAY 15, 2000, UNLESS EXTENDED IN WRITING BY ALL THE PARTIES HERETO IN THEIR SOLE DISCRETION. Except as expressly modified by the terms of this Credit Agreement Modification, all of the terms and conditions of the Credit Agreement shall remain in full force and effect. IN WITNESS WHEREOF, the parties have executed this agreement this ____ day of April, 2000. RDO FINANCIAL SERVICES A North Dakota corporation By: ----------------------------------- Steven B. Dewald Its: Senior Vice President AG CAPITAL COMPANY A Delaware corporation By: ----------------------------------- Peter Nutz Its: Director of Finance NORWEST BANK NORTH DAKOTA A national banking association By: ----------------------------------- David Johnson Its: Assistant Vice President 2 EX-13.1 5 EXCERPTS FROM ANNUAL REPORT EXHIBIT 13.1 RDO EQUIPMENT CO. AND SUBSIDIARIES SELECTED FINANCIAL DATA
FISCAL YEARS ENDED JANUARY 31, - ------------------------------------------------------------------------------------------------------------------------------------ [in thousands, except store and per share data] 2000 1999 1998 1997 1996 1995 1994 1993 1992 - ------------------------------------------------------------------------------------------------------------------------------------ INCOME STATEMENT DATA Revenues: Equipment and truck sales $476,773 $404,093 $301,684 $224,094 $164,054 $135,704 $106,600 $ 73,516 $49,097 Parts and service 173,336 143,335 113,268 75,820 58,998 48,206 37,512 31,862 22,129 Rental 32,178 26,208 14,451 2,499 505 -- -- -- -- Financial services 6,683 4,988 -- -- -- -- -- -- -- - ------------------------------------------------------------------------------------------------------------------------------------ Total revenues 688,970 578,624 429,403 302,413 223,557 183,910 144,112 105,378 71,226 Cost of revenues (1) 566,877 479,275 340,987 245,287 180,839 148,111 116,369 83,548 56,422 - ------------------------------------------------------------------------------------------------------------------------------------ Gross profit 122,093 99,349 88,416 57,126 42,718 35,799 27,743 21,830 14,804 Selling, general and administrative expenses 97,431 81,682 60,382 41,275 31,655 24,893 20,577 16,737 11,929 Restructuring charges -- 2,200 -- -- -- -- -- -- -- - ------------------------------------------------------------------------------------------------------------------------------------ Operating income 24,662 15,467 28,034 15,851 11,063 10,906 7,166 5,093 2,875 Gain on sale of RDO Rental Co. 786 -- -- -- -- -- -- -- -- Interest expense, net (13,719) (12,427) (5,538) (5,046) (2,994) (1,093) (1,334) (908) (1,126) - ------------------------------------------------------------------------------------------------------------------------------------ Income before taxes 11,729 3,040 22,496 10,805 8,069 9,813 5,832 4,185 1,749 Provision for income taxes (2) 5,252 1,237 9,156 4,322 3,228 3,925 2,332 1,674 700 Minority interest (60) 135 89 -- -- -- -- -- -- ==================================================================================================================================== Net income $ 6,537 $ 1,668 $ 13,251 $ 6,483 $ 4,841 $ 5,888 $ 3,500 $ 2,511 $ 1,049 ==================================================================================================================================== Net income per share - basic and diluted $ 0.50 $ 0.13 $ 1.00 $ 0.77 $ 0.58 -- -- -- -- ==================================================================================================================================== SELECTED OPERATING DATA Comparable store revenues increase (decrease) (2)% 5% 11% 26% 11% 25% 32% 12% -- Stores open at beginning of year 64 50 32 26 22 22 21 17 15 Stores opened -- 6 3 1 2 -- -- -- 1 Stores acquired 5 10 16 5 2 -- 1 4 1 Stores consolidated/closed/sold (13) (2) (1) -- -- -- -- -- -- - ------------------------------------------------------------------------------------------------------------------------------------ Stores open at end of year 56 64 50 32 26 22 22 21 17 - ------------------------------------------------------------------------------------------------------------------------------------ Net purchases of rental equipment $ 485 $ 19,769 $ 14,185 $ 1,519 $ 6,342 $ -- $ -- $ -- $ -- Net purchases of property and equipment 3,409 5,132 3,766 2,137 3,651 1,208 627 681 561 Depreciation and amortization 12,950 10,506 5,308 2,606 1,326 690 668 584 504 As of January 31, - ------------------------------------------------------------------------------------------------------------------------------------ BALANCE SHEET Working capital $ 64,225 $ 36,739 $ 69,265 $ 72,744 $ 26,596 $ 26,700 $ 22,019 $ 15,284 $ 9,846 Inventories 217,556 208,368 220,841 130,955 115,616 77,204 64,768 55,582 40,175 Total assets 361,997 379,220 319,432 181,551 148,093 98,315 83,341 68,660 46,129 Floor plan payables (3) 190,242 191,030 163,988 64,331 91,614 53,581 46,644 45,149 28,067 Total debt 26,604 55,533 31,353 14,409 10,638 3,277 2,946 6,698 6,283 Stockholders' equity 109,275 102,738 101,070 87,795 34,284 30,467 24,503 11,105 7,006
(1) Fiscal 1999 Included a non-recurring $15 million inventory charge. (2) Prior to January 20, 1997, the Company elected to be treated as an S corporation under the Internal Revenue Code. A pro forma provision for income taxes was computed as if the Company were subject to corporate income taxes based on the tax laws in effect during these fiscal years. (3) Includes interest-bearing and noninterest-bearing liabilities incurred in connection with inventory financing. 1 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The Company specializes in the distribution, sale, service, rental and finance of equipment and trucks to the agricultural, construction, manufacturing, transportation and warehousing industries, including units of state, local and federal government and utility companies. The Company's largest supplier is Deere & Company (Deere). The Company operates the largest network of John Deere construction and agricultural equipment stores in North America. The Company's growth has been due primarily to acquisitions of equipment and truck retailers, opening additional retail locations, and implementation of the Company's operating model. The acquisitions are primarily the result of consolidation trends among equipment and truck retailers and the ability of the Company to leverage its expertise in acquisitions, consolidation and retail sales, service and marketing. The Company's stores are located in Arizona, California, Minnesota, Montana, Nebraska, North Dakota, South Dakota, Texas and Washington. In January 1997, the Company completed an initial public offering of Class A Common Stock, issuing 4,830,000 shares (Offering). The proceeds of the Offering, $68.3 million after offering costs, were used to repay indebtedness incurred to finance acquisitions in the aggregate amount of approximately $10.1 million, to make an S corporation distribution of approximately $15.0 million in connection with the termination of the Company's S corporation tax status, and to finance acquisitions, new stores, internal growth and working capital needs. The Company generates its revenues from sales of new and used equipment and trucks, sales of parts and service, rental of equipment and customer financing and related products and services. In addition to 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 up to six 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 finance subsidiary, RDO Financial Services Co., provides equipment and truck loans and leases to the customers of the Company's retail network. This subsidiary also provides additional products and services and acts as an agent to extend warranties, credit life insurance and casualty insurance. The Company's highest gross margins have historically been generated from its parts and service and rental 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 and rental revenues, gross margin percentages may decline as the Company builds market share. 2 The Company believes its construction equipment and truck operations have benefited from favorable economic conditions during recent years, including low interest rates, low fuel prices and moderate economic growth. However, during the fourth quarter of fiscal 2000, interest rates and fuel prices have risen above prior year levels and may adversely affect the sales of equipment and trucks in the future. The Company believes its agricultural equipment operations have been adversely affected by successive years of adverse weather and recurrent plant diseases in the Midwest and by low commodity prices. These conditions have resulted in lower than normal farmer confidence, income and capital spending plans. During the third quarter of fiscal 1999, primarily as a result of adverse conditions in the Midwest farm economy, the Company initiated a number of corporate actions designed to generate cash, fund growth opportunities, discontinue non-strategic operations and achieve more cost efficient operations. These initiatives were undertaken after the Company assessed industry and financial market conditions, primarily of the agricultural economy, that were projected to impact the Company's business. The Company also reviewed industry outlooks from manufacturers, forecasts and surveys by economists, investment analysts and governmental units, and the status of capital markets for raising equity and debt. The initiatives included one-time, non-recurring charges related to inventory and asset writedowns, reserves and severance costs. A $15.0 million inventory charge enabled the Company to initiate a new, more aggressive pricing strategy with respect to equipment sales in the agricultural equipment business segment. This charge is included in cost of revenues. In addition, the Company recorded a restructuring charge of $2.2 million in connection with asset writedowns and severance costs, which included exiting the agricultural irrigation equipment business. The Company generally experiences lower revenue levels during its first and fourth quarters primarily due to the crop-growing season, winter weather conditions in the Midwest and a general slowdown in construction activity at the end of the calendar year. See "Seasonality" below. Price increases by suppliers of the Company's products have not historically had a significant impact on the Company's results of operations. See "Effects of Inflation" below. The Company requires cash primarily for financing its inventories of equipment, trucks and replacement parts, acquisitions and openings of additional retail locations, rental equipment and capital expenditures. Historically, the Company has met these liquidity requirements primarily through cash flow generated from operating activities, floor plan financing, and borrowings under credit agreements. See "Liquidity and Capital Resources" below. In fiscal 2000, the Company purchased five heavy-duty truck retail stores and commenced truck operations in its Waco, Texas location. The Company also closed one construction equipment rental store and sold its 80 percent interest in a construction equipment rental operation located in the southwestern United States. In fiscal 1999, the Company purchased four heavy-duty truck retail stores, four material handling equipment retail stores, an agricultural equipment rental store and a construction equipment rental store. Four construction equipment rental stores, a construction equipment retail store and a material handling equipment retail store were opened in fiscal 1999. The results of operations from acquisitions are included in the Company's results only for the periods after their applicable acquisition dates. 3 RESULTS OF OPERATIONS The following table sets forth, for the periods indicated, certain financial data: Fiscal Years Ended January 31, 2000 1999 1998 - ---------------------------------------------------------------------------- REVENUE DATA (IN MILLIONS): Total revenues $ 689.0 $ 578.6 $ 429.4 Construction 48.9% 53.9% 55.8% Agricultural 18.5% 27.3% 39.7% Truck 25.9% 13.0% 1.5% Rental 5.7% 4.9% 3.0% Financial 1.0% 0.9% -- Construction revenues $ 337.0 $ 312.2 $ 239.3 Equipment sales 70.8% 74.0% 72.5% Parts and service 28.1% 25.3% 27.0% Rental 1.1% 0.7% 0.5% Agricultural revenues $ 127.6 $ 157.8 $ 170.6 Equipment sales 67.4% 70.8% 72.7% Parts and service 32.6% 29.0% 26.5% Rental -- 0.2% 0.8% Truck revenues $ 178.8 $ 75.1 $ 6.6 Truck sales 80.1% 76.1% 52.7% Parts and service 19.9% 23.9% 47.3% Rental revenues $ 38.9 $ 28.5 $ 12.8 Equipment sales 23.2% 14.8% 5.1% Parts and service 4.0% 2.0% 2.2% Rental 72.8% 83.2% 92.7% STATEMENT OF OPERATIONS DATA (AS A PERCENTAGE OF REVENUES): Revenues Equipment and truck sales 69.2% 69.8% 70.3% Parts and service 25.1 24.8 26.4 Rental 4.7 4.5 3.3 Financial services 1.0 0.9 -- - ---------------------------------------------------------------------------- Total revenues 100.0% 100.0% 100.0% - ---------------------------------------------------------------------------- Gross profit 17.7% 17.2% 20.6% Selling, general and administrative expenses 14.1 14.1 14.1 Restructuring charges -- 0.4 -- - ---------------------------------------------------------------------------- Operating income 3.6 2.7 6.5 Gain on sale of RDO Rental Co. 0.1 -- -- Interest expense, net 2.0 2.2 1.3 Provision for taxes 0.8 0.2 2.1 - ---------------------------------------------------------------------------- Net income 0.9% 0.3% 3.1% - ---------------------------------------------------------------------------- (1) After non-recurring $15 million inventory charge in fiscal 1999. 4 FISCAL YEAR ENDED JANUARY 31, 2000 COMPARED TO FISCAL YEAR ENDED JANUARY 31, 1999 REVENUES Revenues increased approximately $110.4 million, or 19.1%, from $578.6 million for fiscal 1999, to $689.0 million for fiscal 2000. Construction, agricultural, truck, rental and financial services operations represented approximately $337.0 million, $127.6 million, $178.8 million, $38.9 million and $6.7 million, respectively. $70.2 million, or 63.6%, of the increase in revenues was due to the acquisition of five truck locations in California and Texas. In addition, the Company commenced truck operations in its construction equipment store in Waco, Texas. The balance of the increase, net of a 2% decrease in comparable store revenues, is attributable to acquisitions and new store openings in fiscal 1999. Equipment and truck sales increased approximately $72.7 million in fiscal 2000, or 18.0%, from $404.1 million for fiscal 1999 to $476.8 million for fiscal 2000. Construction operations contributed approximately $7.5 million of this increase, with equipment sales increasing 3.3% to $238.5 million. Truck operations contributed approximately $86.1 million to the total sales increase, with truck sales increasing from $57.2 million to $143.3 million. Acquisitions completed during fiscal 2000 accounted for approximately $57.0 million of the increase in truck sales. Rental operations contributed approximately $4.8 million of the increase, with sales increasing from $4.2 million to $9.0 million. Offsetting the increase in equipment and truck sales, agricultural operations decreased approximately $25.7 million, or 23.0%, to $86.0 million. The decrease in agricultural revenues was primarily attributable to continuing unfavorable conditions in the agricultural economy and the Company's exit from the agricultural irrigation equipment business in fiscal 1999. Parts and service revenues increased approximately $30.0 million, or 20.9%, from $143.3 million for fiscal 1999 to $173.3 million for fiscal 2000. Construction operations contributed approximately $15.7 million of the increase as sales grew 19.9% to $94.7 million. Truck operations contributed approximately $17.6 million of the increase as sales grew from $17.9 million to $35.5 million. Of this increase, $13.2 million was due to acquisitions completed during fiscal 2000. Rental operations contributed approximately $900,000 of the increase as sales grew from $600,000 to $1.5 million. Parts and service revenues from agricultural operations decreased approximately $4.2 million, or 9.2%, to $41.6 million, primarily attributable to continuing unfavorable conditions in the agricultural economy. Rental revenues increased approximately $6.0 million, or 22.9%, from $26.2 million for fiscal 1999 to $32.2 million for fiscal 2000. Construction and rental operations contributed substantially all of this increase. Financial services revenues of approximately $6.7 million were generated in fiscal 2000 compared to $5.0 million in fiscal 1999, an increase of 34.0%. Financial services revenues are comprised primarily of earnings from interest rate additions on retail installment contracts, gains and service fee income from securitized loans and leases receivable, and finance charges from a revolving credit facility available to a portion of the Company's customers. In December 1999, the Company replaced its securitization financing structure in favor of new financing arrangements. 5 GROSS PROFIT Gross profit increased approximately $22.8 million, or 23.0%, from $99.3 million in fiscal 1999 to $122.1 million in fiscal 2000. Gross profit as a percentage of total revenues for fiscal 2000 and 1999 was 17.7% and 17.2%, respectively. Gross profit for fiscal 1999 before the $15.0 million non-recurring inventory charge was 19.8%. Gross profit is affected by the contribution of revenues by business segment and by the mix of revenues within each business segment. Revenues from construction, rental and financial services operations provide the Company with higher gross margins than do agricultural and truck operations. The Company's highest gross margins are derived from its parts and service, rental and financial services revenues. Gross margins were adversely affected by the ongoing conditions in agriculture and a more competitive and price sensitive marketplace affecting the sale and rental of new and used construction equipment. The expansion of truck revenues, which generally have lower gross margins, also resulted in lower gross profit as a percentage of total revenues. SELLING, GENERAL AND ADMINISTRATIVE EXPENSES Selling, general and administrative (SG&A) expenses as a percent of total revenues were 14.1% for fiscal 2000 and 1999. Total SG&A expenses increased approximately $15.7 million, from $81.7 million for fiscal 1999 to $97.4 million for fiscal 2000. Approximately $7.3 million of the increase was due to the operations of the Company's acquisitions completed during fiscal 2000. SG&A expenses are affected by the contribution of revenues within each business segment. As a percentage of revenues, SG&A expenses are generally higher for construction and financial services operations than for agricultural, truck and rental operations and lower for equipment and truck sales than for parts and service and rental revenues. The expansion of truck revenues, which generally have lower levels of SG&A expenses as a percentage of total revenues, was offset by lower sales of agricultural equipment resulting in comparable levels of SG&A expenses as a percentage of total revenues. INTEREST EXPENSE Interest expense increased approximately $1.4 million, or 10.7%, from $13.1 million for fiscal 1999 to $14.5 million for fiscal 2000. Interest expense as a percent of total revenues decreased from 2.3% for fiscal 1999 to 2.1% for fiscal 2000. Interest expense as a percentage of total revenues declined due to the planned reduction of construction and agricultural inventories. INTEREST INCOME Interest income increased approximately $100,000, or 14.3%, from fiscal 1999 to fiscal 2000. Interest income is primarily comprised of finance charges from trade receivables excluding those related to the financial services revolving credit facility which are included in financial services revenues. INCOME TAXES The estimated provision for income taxes as a percentage of pretax income was 44.8% and 40.7% for fiscal 2000 and 1999, respectively. The increase in fiscal 2000 provision for income taxes percentage is related to the Company's sale of its 80% owned subsidiary, RDO Rental Co. 6 NET INCOME The Company reported net income of $6.5 million, or $0.50 per share for fiscal 2000 compared to net income of $1.7 million, or $0.13 per share for fiscal 1999. Net income and net income per share for fiscal 1999 includes a $15.0 million inventory charge and a $2.2 million restructuring charge. FISCAL YEAR ENDED JANUARY 31, 1999 COMPARED TO FISCAL YEAR ENDED JANUARY 31, 1998 REVENUES Revenues increased approximately $149.2 million, or 34.8%, from $429.4 million for fiscal 1998, to $578.6 million for fiscal 1999. Construction, agricultural, truck, rental and financial services operations represented approximately $312.2 million, $157.8 million, $75.1 million, $28.5 million and $5.0 million, respectively. 57.1% of the increase in revenues, or $85.2 million, was due to acquisitions and openings completed during fiscal 1999. Of those revenues, $10.4 million came from acquisitions and openings in construction operations, as the number of retail locations increased from 25 to 31. There were acquisitions and openings of material handling and construction retail stores in Iowa, Minnesota and Nebraska. Acquisitions of truck operations added $66.2 million in revenues, as the number of retail locations increased from one to four in Minnesota and North Dakota. The acquisitions and openings of equipment rental operations contributed $8.6 million in revenues as the number of rental locations increased from eight to 14. One agricultural equipment rental store was acquired in California while five construction equipment rental stores were opened or acquired in Arizona, California and Nevada. In all, retail locations increased from 50 to 64 during fiscal 1999. Comparable store revenues grew 5.2%. The balance of the increase in revenues is attributable to acquisitions and openings in fiscal 1998. Equipment and truck sales increased approximately $102.4 million, or 33.9%, from $301.7 million for fiscal 1998 to $404.1 million for fiscal 1999. Construction operations contributed approximately $57.6 million of this increase, with equipment sales increasing 33.2% to $231.0 million. Acquisitions and openings completed during fiscal 1999 accounted for approximately $4.6 million of the increase in construction equipment sales. Truck operations contributed approximately $53.7 million of the total sales increase, with truck sales increasing from $3.5 million to $57.2 million. Acquisitions completed during fiscal 1999 accounted for approximately $51.9 million of the increase in truck sales. Rental operations contributed approximately $3.5 million of the equipment sales increase, with sales increasing from $700,000 to $4.2 million. Acquisitions and openings completed during fiscal 1999 accounted for $2.2 million of the increase. Offsetting the increase in equipment and truck sales, agricultural operations decreased approximately $12.4 million, or 10.0%, to $111.7 million. The decrease in equipment sales was primarily attributable to the depressed Midwest farm economy. Parts and service revenues increased approximately $30.1 million, or 26.6%, from $113.2 million for fiscal 1998 to $143.3 million for fiscal 1999. Construction operations contributed approximately $14.4 million of the increase as sales grew 22.3% to $79.0 million. Of this increase, $4.0 million was due to acquisitions and openings completed during fiscal 1999. Truck operations contributed approximately $14.8 million of the increase as sales grew from $3.1 million to $17.9 million. Of this increase, $14.4 million was due to acquisitions completed during fiscal 1999. Rental operations contributed approximately $300,000 of the increase as sales grew from $300,000 to $600,000. Of this increase, $100,000 was due to acquisitions and openings completed during fiscal 1999. Parts and service revenues from agricultural operations increased only slightly, 1.3%, or $600,000, to $45.8 million primarily attributable to adverse conditions in the Midwest farm economy. 7 Rental revenues increased approximately $11.7 million, or 80.7%, from $14.5 million for fiscal 1998 to $26.2 million for fiscal 1999. Construction and rental operations contributed substantially all of this increase. Acquisitions and openings completed during fiscal 1999 represented approximately $8.2 million of the increase. Financial services revenues of approximately $5.0 million were generated in fiscal 1999. Financial services revenues are comprised primarily of earnings from interest rate additions on retail installment contracts, gains and service fee income from securitized loans and leases receivable, and finance charges from a revolving credit facility available to a portion of the Company's customers. GROSS PROFIT Gross profit increased approximately $10.9 million, or 12.3%, from $88.4 million in fiscal 1998 to $99.3 million in fiscal 1999. Gross profit for fiscal 1999 was affected by the $15.0 million inventory charge discussed above. Gross profit as a percentage of total revenues for fiscal 1999 and 1998 was 17.2% and 20.6%, respectively. Gross profit, as a percentage of total revenues before the $15.0 million inventory charge, for fiscal 1999 was 19.8%. Gross profit has been primarily affected by a more competitive and price sensitive marketplace affecting the agricultural economy and construction equipment rental industry. Gross profit is affected by the contribution of revenues by business segment and by the mix of revenues within each business segment. Revenues from construction, rental and financial services operations provide the Company with higher gross margins than do agricultural and truck operations. The Company's highest gross margins are derived from its parts and service, rental and financial services revenues. SELLING, GENERAL AND ADMINISTRATIVE EXPENSES Selling, general and administrative (SG&A) expenses as a percent of total revenues were 14.1% for fiscal 1999 and 1998. Total SG&A expenses increased approximately $21.3 million, from $60.4 million for fiscal 1998 to $81.7 million for fiscal 1999. Approximately $10.2 million of the increase was due to the operations of the Company's acquisitions and openings completed during fiscal 1999. SG&A expenses are affected by the contribution of revenues within each business segment. As a percentage of revenues, SG&A expenses are generally higher for construction and financial services operations than for agricultural, truck and rental operations and lower for equipment and truck sales than for parts and service and rental revenues. INTEREST EXPENSE Interest expense increased approximately $6.2 million, or 89.9%, from $6.9 million for fiscal 1998 to $13.1 million for fiscal 1999. The higher level of interest expense is due to the Company operating at normalized debt levels after having paid down debt following the Offering, the increased number of stores which expanded inventory levels, and the need to maintain a larger equipment rental fleet to support expanded rental operations. 8 INTEREST INCOME The decline in interest income of $600,000, or 46.2%, from fiscal 1998 is attributable to reflecting interest rate additions on retail installment contracts and finance charges relating to its revolving credit facility in the financial services subsidiary formed in late fiscal 1998. During fiscal 1999, interest income is comprised of finance charges from trade receivables excluding those related to the financial services revolving credit facility. INCOME TAXES The estimated provision for income taxes as a percentage of pretax income for fiscal 1999 and 1998 was 40.7%. NET INCOME The Company reported net income of $1.7 million, or $0.13 per share for fiscal 1999, which includes a $15.0 million inventory charge and a $2.2 million restructuring charge, compared to net income of $13.3 million, or $1.00 per share for fiscal 1998. Net income and net income per share before one-time, non-recurring inventory and restructuring charges for fiscal 1999 were $11.9 million and $0.90 per share, respectively. LIQUIDITY AND CAPITAL RESOURCES The Company requires cash primarily for financing its inventories of equipment, trucks and replacement parts, acquisitions and openings of additional retail locations, rental equipment and capital expenditures. 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), Banc of America Leasing & Capital, LLC (Banc of America), Deutsche Financial Services Corporation (Deutsche), Associates Commercial Corporation (Associates), General Motors Acceptance Corporation (GMAC), Volvo Commercial Finance LLC The Americas (Volvo) and commercial banks. Floor plan financing from Deere, Deere Credit and Banc of America represents the primary source of financing for equipment inventories, particularly for equipment supplied by Deere. Floor plan financing of truck inventories is primarily supplied by Associates, GMAC and Volvo. On- and off-balance sheet financing of rental equipment is primarily provided by Deutsche and Deere Credit. Most lenders receive a security interest in the inventory financed. In addition to floor plan financing supplied by manufacturers, the Company had unused credit commitments related to floor plan financing and on- and off-balance sheet financing of rental equipment of approximately $60.1 million at January 31, 2000. Deere and Deere Credit offer floor plan financing to Deere dealers for extended periods and with 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 may not be charged for a substantial part of the period for which inventories are financed. Occasionally additional discounts may be 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 are currently six to twelve months for agricultural equipment and one to five months for construction equipment. Deere also provides financing to dealers on used equipment accepted in trade and approved equipment from other suppliers. Deere Credit and Banc of America provide equipment floor plan financing with variable market rates of interest based on the prime rate and LIBOR, respectively. Associates, GMAC and Volvo provide truck floor plan financing with variable market rates of interest based on the prime rate. Deutsche provides rental equipment financing using variable market rates of interest based on LIBOR. 9 The Company has available operating lines of credit totaling $25.0 million with varying maturity dates through July 1, 2000 with variable interest rates based on LIBOR and prime. The Company had approximately $12.7 million of unused availability relating to these lines of credit at January 31, 2000. The Company periodically reviews the terms of its financing with its lenders, including the interest rate. In fiscal 2000, 1999 and 1998 the average interest rate under interest-bearing floor plan financing was approximately 7.37%, 7.48%, and 8.20%, respectively. As of January 31, 2000 the Company had outstanding floor plan payables of approximately $190.2 million, of which $157.4 million was then interest-bearing. The average interest rates on the Company's lines of credit during the years ended January 31, 2000, 1999 and 1998 were 7.92%, 8.13% and 8.46%, respectively The Company's financing agreements contain various restrictive covenants which, among other matters, require the Company to maintain minimum financial ratios, as defined, and place limits on certain activities. The Company was in compliance with or obtained waiver letters for all debt covenants at January 31, 2000. Operating activities, including changes in inventories and related floor-plan payables, provided net cash of $20.2 million, $37.7 million and $38.2 million for fiscal 2000, 1999 and 1998, respectively. The net cash provided by operating activities for fiscal 1999 was after the inventory and restructuring charges. Contributing to cash from operations for fiscal 1999 and 1998 was the financing of inventory via floor plan lines previously paid down by the proceeds from its Offering in January 1997. The financing proceeds were used to make acquisitions. Cash used for investing activities in fiscal 2000, 1999 and 1998 was $4.9 million, $55.4 million and $44.9 million, respectively. The cash used in fiscal 2000 was primarily related to acquisitions and the purchase of property and equipment for the Company's operations. The cash used in fiscal 1999 and 1998 was primarily related to acquisitions and the purchase of construction equipment for the Company's rental operations. With fewer acquisitions and less purchases of rental equipment in anticipation of the sale of RDO Rental Co., less funds were expended during fiscal 2000. In fiscal 1999, there was an additional use of cash related to the retained interest of loans and leases securitized. In December 1999, the Company replaced the securitization finance structure with a more favorable financing agreement which generated a source of cash for fiscal 2000. Cash used for financing activities amounted to $11.1 million for fiscal 2000, versus net cash provided by financing activities of $17.7 million and $6.3 million for fiscal 1999 and 1998, respectively. Cash used for financing activities in fiscal 2000 was primarily attributable to payment of long-term debt associated with the construction equipment rental company. Cash provided by financing activities in fiscal 1999 was primarily attributable to financing of rental equipment for the Company's rental operations and net additional borrowings on the Company's bank lines. Cash provided by financing activities in fiscal 1998 was primarily attributable to financing of rental equipment for the Company's rental operations. The Company believes cash from operations, available cash and borrowing capacity will be sufficient to fund its planned internal capital expenditures for fiscal 2001. 10 EFFECTS OF INFLATION Inflation has not had a material impact upon operating results and the Company does not expect it to have such an impact in the future. To date, in those instances in which the Company has experienced cost increases, it has been able to increase selling prices to offset such increases in cost. There can be no assurance, however, that the Company's business will not be affected by inflation or that it can continue to increase its selling prices to offset increased costs and remain competitive. 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 will generally reduce the overall impact of economic cycles on the Company's operations. SEASONALITY The Company's agricultural operations 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 is diminished during periods of significant and sustained weakness in the agricultural economy during which farmers generally purchase less equipment. The Company's construction operations also 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 the Midwest and parts of the Southwest and South Central also limit construction activity to some degree, typically resulting in lower sales and rentals of construction equipment. Since the Company's truck operations do not generally have any significant seasonality, the Company's overall seasonality has tended to decline as truck revenues have become a greater percentage of total revenues. If the Company acquires businesses in geographical areas other than where it currently has operations, it may be affected by other seasonal or equipment buying trends. YEAR 2000 The Company experienced no application software or hardware problems, no disruptions of products or services from any vendors and manufacturers and no problems with any financial institutions during the rollover to the year 2000. The total cost of the modifications and upgrades to date has been approximately $56,000 and no future costs are expected to be significant. These costs were expensed as incurred. 11 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 21, 2000, in the Company's Form 8-K dated April 21, 2000, and in other filings with the Securities and Exchange Commission. These factors, which are subject to change, include: general economic conditions worldwide and locally; interest rates; housing starts; fuel prices; 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 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; securitization transactions and other 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 rapidly growing operations; dependence upon key personnel; accounting standards; technological difficulties, especially involving the Company's suppliers and other third parties, including the processing of date-sensitive information, which could cause the Company to be unable to process customer orders, deliver products or services, or perform other essential functions; 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. 12 RDO EQUIPMENT CO. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED JANUARY 31, - ------------------------------------------------------------------------------------------------- [in thousands, except per share amounts] 2000 1999 1998 - ------------------------------------------------------------------------------------------------- REVENUES Equipment and truck sales $ 476,773 $ 404,093 $ 301,684 Parts and service 173,336 143,335 113,268 Rental 32,178 26,208 14,451 Financial services 6,683 4,988 -- - ------------------------------------------------------------------------------------------------- Total revenues 688,970 578,624 429,403 COST OF REVENUES (Note 3) 566,877 479,275 340,987 - ------------------------------------------------------------------------------------------------- GROSS PROFIT 122,093 99,349 88,416 SELLING, GENERAL AND ADMINISTRATIVE EXPENSES 97,431 81,682 60,382 RESTRUCTURING CHARGES (Note 3) -- 2,200 -- - ------------------------------------------------------------------------------------------------- Operating income 24,662 15,467 28,034 INTEREST EXPENSE (14,536) (13,138) (6,864) INTEREST INCOME 817 711 1,326 GAIN ON SALE OF RDO RENTAL CO. 786 -- -- - ------------------------------------------------------------------------------------------------- Income before income taxes and minority interest 11,729 3,040 22,496 INCOME TAX PROVISION 5,252 1,237 9,156 - ------------------------------------------------------------------------------------------------- Income before minority interest 6,477 1,803 13,340 MINORITY INTEREST (60) 135 89 - ------------------------------------------------------------------------------------------------- NET INCOME $ 6,537 $ 1,668 $ 13,251 ================================================================================================= Basic and diluted net income per share $ 0.50 $ 0.13 $ 1.00 ================================================================================================= Weighted average shares outstanding - basic 13,182 13,182 13,181 Weighted average shares outstanding - diluted 13,184 13,201 13,287 =================================================================================================
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL STATEMENTS 13 RDO EQUIPMENT CO. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS
AS OF JANUARY 31, - ------------------------------------------------------------------------------------------------------------------- [in thousands] 2000 1999 - ------------------------------------------------------------------------------------------------------------------- ASSETS CURRENT ASSETS: Cash and cash equivalents $ 4,207 $ 51 Accounts receivable (less allowance for doubtful accounts of $1,874 and $1,616) 75,536 59,233 Receivables from affiliates 31 3,197 Inventories 217,556 208,368 Prepaid expense 573 1,588 Deferred income tax benefit 4,910 5,680 - ------------------------------------------------------------------------------------------------------------------- Total current assets 302,813 278,117 PROPERTY AND EQUIPMENT, NET 21,944 63,702 OTHER ASSETS: Goodwill and other, net of accumulated amortization of $3,246 and $1,888 36,205 36,326 Deposits 1,035 1,075 - ------------------------------------------------------------------------------------------------------------------- Total assets $361,997 $379,220 =================================================================================================================== LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES: Floor plan payables $190,242 $191,030 Notes payable 12,330 15,395 Current maturities of long-term debt 2,791 12,083 Accounts payable 6,169 8,373 Accrued liabilities 23,490 11,649 Customer advance deposits 2,824 2,114 Dividends payable (Note 10) 742 734 - ------------------------------------------------------------------------------------------------------------------- Total current liabilities 238,588 241,378 LONG-TERM DEBT, net of current maturities 11,483 28,055 DEFERRED INCOME TAXES 1,460 5,210 - ------------------------------------------------------------------------------------------------------------------- Total liabilities 251,531 274,643 - ------------------------------------------------------------------------------------------------------------------- COMMITMENTS AND CONTINGENCIES (Note 11) MINORITY INTEREST 1,191 1,839 STOCKHOLDERS' EQUITY (Note 10): Preferred stock -- -- Common stocks- Class A 57 57 Class B 75 75 Additional paid-in-capital 84,471 84,471 Retained earnings 24,672 18,135 - ------------------------------------------------------------------------------------------------------------------- Total stockholders' equity 109,275 102,738 - ------------------------------------------------------------------------------------------------------------------- Total liabilities and stockholders' equity $361,997 $379,220 ===================================================================================================================
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL STATEMENTS. 14 RDO EQUIPMENT CO. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED JANUARY 31, 2000, 1999 AND 1998 - -------------------------------------------------------------------------------------------------------------------------------- COMMON STOCK --------------------- TOTAL ADDITIONAL CLASS A CLASS B COMMON PAID-IN RETAINED [in thousands, except share amounts] SHARES SHARES STOCK CAPITAL EARNINGS TOTAL - -------------------------------------------------------------------------------------------------------------------------------- BALANCE, JANUARY 31, 1997 5,721,508 7,458,492 $ 132 $ 84,447 $ 3,216 $ 87,795 Class B common stock converted to Class A common stock 8,000 (8,000) -- -- -- -- Issuance of common stock 1,500 -- -- 24 -- 24 Net income -- -- -- -- 13,251 13,251 - -------------------------------------------------------------------------------------------------------------------------------- BALANCE, JANUARY 31, 1998 5,731,008 7,450,492 132 84,471 16,467 101,070 Net income -- -- -- -- 1,668 1,668 - -------------------------------------------------------------------------------------------------------------------------------- BALANCE, JANUARY 31, 1999 5,731,008 7,450,492 132 84,471 18,135 102,738 Net income -- -- -- -- 6,537 6,537 - -------------------------------------------------------------------------------------------------------------------------------- BALANCE, JANUARY 31, 2000 5,731,008 7,450,492 $ 132 $ 84,471 $ 24,672 $ 109,275 ================================================================================================================================
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL STATEMENTS. 15 RDO EQUIPMENT CO. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED JANUARY 31, - ------------------------------------------------------------------------------------------------------------ [in thousands] 2000 1999 1998 - ------------------------------------------------------------------------------------------------------------ OPERATING ACTIVITIES Net income $ 6,537 $ 1,668 $ 13,251 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 12,950 10,506 5,308 Deferred taxes (2,980) (428) 410 Minority interest (60) 135 89 Loss on sale of irrigation division assets -- 1,360 -- Gain on sale of RDO Rental Co. (786) -- -- Change in operating assets and liabilities: Accounts receivable (972) (14,519) (10,594) Inventories 8,098 25,719 (72,874) Prepaid expenses 524 (667) (118) Deposits 57 792 (404) Floor plan payables (11,987) 14,056 97,495 Accounts payable and accrued liabilities 8,093 (188) 5,712 Customer advance deposits 702 (747) (115) - ------------------------------------------------------------------------------------------------------------ Net cash provided by operating activities 20,176 37,687 38,160 - ------------------------------------------------------------------------------------------------------------ INVESTING ACTIVITIES Net purchases of rental equipment (485) (19,769) (14,185) Net purchase of property and equipment (3,409) (5,132) (3,766) Net assets of acquisitions (4,404) (25,455) (26,478) Retained investment and service fee on securitized receivables 3,813 (3,813) -- Other, net (389) (1,240) (483) - ------------------------------------------------------------------------------------------------------------ Net cash used for investing activities (4,874) (55,409) (44,912) - ------------------------------------------------------------------------------------------------------------ FINANCING ACTIVITIES Proceeds from issuance of long-term debt 7,322 15,505 15,777 Payments on long-term debt (15,403) (9,330) (9,308) Net proceeds (payments) of bank lines and short-term notes payable (3,065) 11,561 (67) Issuance of common stock, net of issuance costs -- -- 24 Payment of dividends -- -- (96) - ------------------------------------------------------------------------------------------------------------ Net cash provided by (used for) financing activities (11,146) 17,736 6,330 - ------------------------------------------------------------------------------------------------------------ INCREASE (DECREASE) IN CASH 4,156 14 (422) CASH AND CASH EQUIVALENTS, beginning of year 51 37 459 - ------------------------------------------------------------------------------------------------------------ CASH AND CASH EQUIVALENTS, end of year $ 4,207 $ 51 $ 37 ============================================================================================================
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL STATEMENTS. 16 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. NATURE OF BUSINESS: PRINCIPLES OF CONSOLIDATION The consolidated financial statements include the results of RDO Equipment Co., a C corporation (RDO) and its wholly-owned subsidiaries, RDO Truck Center Co., RDO Financial Services Co., RDO Material Handling Co., Minnesota Valley Irrigation, Inc. (MVI), and its majority-owned subsidiaries Hall GMC, Inc. (85%), Hall Truck Center, Inc. (85%), Salinas Equipment Distributors, Inc. (89%) and RDO Rental Co. (80%). In November 1998, the assets of MVI were sold to a related party (see Notes 3 and 12). In January 2000, RDO sold all of its shares of RDO Rental Co. (see Note 4). RDO and its consolidated subsidiaries are referred to herein as the Company. BUSINESS As a specialty retailer, the Company distributes, sells, services, rents and finances equipment and trucks to the agricultural, construction, manufacturing, transportation and warehousing industries, including units of state, local and federal government and utility companies. Accordingly, the Company's results of operations can be significantly impacted by the general economic health of these industries. The Company's stores are located in Arizona, California, Minnesota, Montana, Nebraska, North Dakota, South Dakota, Texas and Washington. The Company's major suppliers of new equipment, trucks and parts for sale are Deere & Company (Deere) and Volvo AB. Revenues from these major suppliers are as follows: 2000 1999 1998 - -------------------------------------------------------------------------------- Deere & Company 35% 43% 48% Volvo AB 10% 2% -- ================================================================================ No other suppliers accounted for more than 10% of total revenues. As discussed in Note 12, the Company has significant transactions with related parties, primarily related to financing arrangements. DEERE DEALERSHIP AGREEMENTS The Company has entered into agreements with Deere which authorize the Company to act as an authorized dealer of Deere construction and agricultural equipment. The dealer agreements continue until terminated by Deere or the Company in accordance with the specified provisions. The Company is required to meet certain performance criteria and equity ratios, maintain suitable facilities, actively promote the sale of Deere equipment, fulfill warranty obligations and maintain stores only in the authorized locations. Ronald D. Offutt is also required to maintain certain voting control and ownership interests. The agreements also contain certain provisions that must be complied with in order to retain the Company's dealership agreements in the event of the death of Ronald D. Offutt and a subsequent change in control, as defined. The Company was in compliance with the terms of the Deere agreements at January 31, 2000. 17 Deere is obligated to make floor plan and other financing programs available to the Company that it offers to other dealers, provide promotional and marketing materials, and authorize the Company to use Deere trademarks and trade names. 2. SIGNIFICANT ACCOUNTING POLICIES: USE OF ESTIMATES The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses during the reporting period and disclosure of contingent assets and liabilities. The ultimate results could differ from those estimates. Estimates are used for such items as valuation of used equipment and truck inventory, depreciable lives of property and equipment, allowance for uncollectible accounts, cash flows on securitized transactions, guarantees, inventory and self-insurance reserves. As better information becomes available or as actual amounts are determinable, the recorded estimates are revised. CASH AND CASH EQUIVALENTS The Company considers all highly liquid investments purchased with original maturities of three months or less to be cash equivalents. INVENTORIES All inventories are valued at the lower of cost or market. Cost is determined using the first-in, first-out method for new equipment, trucks and parts inventory. The specific identification method is used to determine cost for used equipment and trucks. Inventories consisted of the following as of January 31: (in thousands) 2000 1999 - -------------------------------------------------------------------------------- New equipment and trucks $ 149,018 $ 152,707 Used equipment and trucks 39,159 28,865 Parts and other 29,379 26,796 - -------------------------------------------------------------------------------- Total $ 217,556 $ 208,368 ================================================================================ PROPERTY AND EQUIPMENT Property and equipment are stated at cost. Maintenance and repairs are charged to expense as incurred. Improvements which extend the useful life of the related item are capitalized and depreciated. Depreciation is provided for over the estimated useful lives of the individual assets using accelerated and straight-line methods. Property and equipment consisted of the following as of January 31: (in thousands) 2000 1999 Lives - -------------------------------------------------------------------------------- Land $ 501 $ 614 -- Buildings and improvements 7,141 7,194 5-31.5 Equipment, furniture and fixtures 20,546 18,044 3-7 Rental equipment 8,828 58,781 3-7 Construction in progress 368 184 -- - -------------------------------------------------------------------------------- Total 37,384 84,817 Accumulated depreciation (15,440) (21,115) - -------------------------------------------------------------------- Property and equipment, net $ 21,944 $ 63,702 ==================================================================== 18 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. SECURITIZED RECEIVABLES During fiscal 2000 and 1999, certain loan and lease receivables were securitized wherein they were sold to a special-purpose corporation which is a related party. The Company retained a minimum investment in sold receivables, limited to 10%. Upon sale, a gain was recognized on the receivables for the difference between carrying values and the sales proceeds based on estimates of future expected cash flows including adjustments for prepayments and credit losses. The Company serviced the underlying receivables on behalf of the special-purpose corporation in return for a fee. The Company sold approximately $29.4 million and $57.1 million of loan and lease receivables during fiscal 2000 and 1999, respectively. Approximately $1.6 million and $2.2 million of gains on sales and servicing fee income were recognized as financial service revenues in the accompanying statement of operations during fiscal 2000 and 1999, respectively. In December 1999, the Company replaced its securitization financing structure in favor of new financing arrangements and incurred a one-time loss of $399,000 which has been reflected as a reduction of financial service revenues. FAIR VALUE OF FINANCIAL INSTRUMENTS Unless otherwise disclosed, the carrying amounts of financial instruments, including cash and cash equivalents, receivables, accounts payable, floor plan payables, and notes payable approximate fair value because of relatively short or variable rates on these instruments. NEW ACCOUNTING PRONOUNCEMENTS The Financial Accounting Standards Board released Statement of Financial Accounting Standards (SFAS) No. 133, "Accounting for Derivative Instruments and Hedging Activities." SFAS No. 133 established accounting and reporting standards requiring that every derivative instrument (including certain derivative instruments embedded in other contracts) be recorded in the balance sheet as either an asset or liability measured at its fair value. SFAS No. 133 also required that changes in the derivative's fair value be recognized currently in earnings unless specific hedge accounting criteria are met. Special accounting for qualifying hedges allows a derivative's gains and losses to offset related results on the hedged item in the income statement, and requires that a company must formally document, designate and assess the effectiveness of transactions that receive hedge accounting. SFAS No. 133 (as amended) is effective for all quarters of fiscal years beginning after June 15, 2000. The Company does not expect the adoption to materially impact its results of operations or financial position. 19 3. INVENTORY AND RESTRUCTURING CHARGES: During the third quarter of fiscal 1999, the Company initiated corporate actions designed to generate cash, fund growth opportunities, discontinue non-strategic operations and achieve more cost efficient operations. These initiatives were undertaken as the Company assessed current industry and financial market conditions, primarily the financial problems in the agricultural economy, that were projected to impact the Company's future business. These initiatives included one-time, non-recurring charges relating to inventory and asset writedowns, reserves and severance costs. The Company took a $15.0 million inventory charge which is included in cost of revenues and a $2.2 million restructuring charge in connection with asset writedowns and severance costs, which included exiting the agricultural irrigation equipment business. 4. BUSINESS COMBINATIONS: During fiscal 2000 and 1999, the Company made several acquisitions of construction equipment, equipment rental and heavy-duty truck operations. These acquisitions have been accounted for using the purchase method of accounting and, accordingly, the assets acquired and liabilities assumed have been recorded at their estimated fair values as of the dates of acquisition. The excess purchase price over the fair value of the assets acquired and liabilities assumed has been recorded as goodwill, which is amortized over 30 years. The following summarizes the assets acquired, liabilities assumed and cash purchase price of the acquisitions made during the fiscal years ended January 31: (in thousands) 2000 1999 - -------------------------------------------------------------------------------- Assets acquired $ 25,247 $ 51,032 Less: liabilities assumed 20,843 25,577 - -------------------------------------------------------------------------------- Cash purchase price $ 4,404 $ 25,455 ================================================================================ Number of acquisitions 2 6 ================================================================================ The accompanying unaudited pro forma results of operations for the fiscal years ended January 31, 2000 and 1999 give effect to the above acquisitions as if they were completed at the beginning of fiscal 1999. The unaudited pro forma financial information does not purport to represent what the Company's results of operations would actually have been if such transactions in fact had occurred at such date or to project the Company's results of future operations as of January 31: (in thousands, except per share data) 2000 1999 - -------------------------------------------------------------------------------- Revenues $ 717,183 $ 702,137 ================================================================================ Net income $ 6,312 $ 1,935 ================================================================================ Weighted average shares outstanding - basic 13,182 13,182 ================================================================================ Weighted average shares outstanding - diluted 13,184 13,201 ================================================================================ Basic and diluted net income per share $ 0.48 $ 0.15 ================================================================================ On January 31, 2000, the Company sold its interest in its 80% owned subsidiary RDO Rental Co. The gross proceeds, net of inter-company debt, were approximately $6.2 million. The Company recognized a $786,000 gain on the sale. 20 5. FLOOR PLAN PAYABLES: Floor plan payables are financing arrangements for inventory. The terms of these arrangements may include a one- to twelve-month interest-free term followed by a term during which interest is charged. Payoff of the floor plan generally occurs at the earlier of sale of the inventory or in accordance with the terms of the financing arrangements. All amounts owed to Deere & Company are guaranteed by Ronald D. Offutt and are collateralized by inventory. Floor plan payables consist of the following as of January 31:
(in thousands) 2000 1999 - ------------------------------------------------------------------------------------------------------------------- Interest-bearing: Deere Credit Services, Inc., inventory notes, due as inventory is sold, interest at various rates, 7.63% to 8.5% at January 31, 2000, based on prime $ 57,501 $ 66,145 Banc of America Leasing & Capital, LLC, 7.81% at January 31, 2000, based on LIBOR 32,500 33,900 Volvo Commercial Finance LLC The Americas, 8.25% at January 31, 2000, based on prime 31,539 -- Ag Capital Company (affiliate), 8.33% at January 31, 2000, based on LIBOR 13,509 23,333 Associates Commercial Corporation, 8.5% at January 31, 2000, based on prime 9,441 6,968 General Motors Acceptance Corporation, 8.0% at January 31, 1999, based on prime 7,358 6,457 Deere & Company, due as inventory is sold, 9.0% at January 31, 2000, based on prime 4,197 8,514 Other 1,359 810 - ------------------------------------------------------------------------------------------------------------------- 157,404 146,127 =================================================================================================================== Noninterest-bearing: Deere & Company 27,104 41,839 Deere Credit Services, Inc. 4,813 2,866 Other 921 198 - ------------------------------------------------------------------------------------------------------------------- 32,838 44,903 - ------------------------------------------------------------------------------------------------------------------- Total $190,242 $191,030 ===================================================================================================================
The Company has certain floor plan financing agreements containing various restrictive covenants which, among other matters, require the Company to maintain minimum net worth levels, as defined, and place limits on additional indebtedness. The Company was in compliance with or obtained waiver letters for all floor plan covenants at January 31, 2000. 21 6. NOTES PAYABLE AND LONG-TERM DEBT: NOTES PAYABLE Notes payable consisted of the following as of January 31: (in thousands) 2000 1999 - -------------------------------------------------------------------------------- Ag Capital Company (affiliate), operating lines $12,330 $12,735 Bank operating lines -- 2,660 - -------------------------------------------------------------------------------- Total notes payable $12,330 $15,395 ================================================================================ The Company has operating lines of credit which provide maximum borrowings totaling $25.0 million with varying maturity dates through July 1, 2000 with variable interest rates based on LIBOR and prime. The highest balances outstanding under these lines were $23.0 million and $21.1 million for fiscal years ended January 31, 2000 and 1999, respectively. The weighted average interest rates on these lines during such periods were 7.92% and 8.13%, respectively. LONG-TERM DEBT Long-term debt consisted of the following as of January 31:
(in thousands) 2000 1999 - --------------------------------------------------------------------------------------------------------------- Deutsche Financial Services Corporation, a revolving equipment facility, 7.93% at January 31, 2000, based on LIBOR, $ -- $ 27,551 collateralized by rental equipment Ag Capital Company (affiliate), interest (fixed and variable 8.5% to 8.58%) collateralized by various receivables and fixed assets of the Company 8,151 4,291 Volvo Trucks North America, Inc., due in various amounts through September 2004, 8.5% at January 31, 2000, based on prime, unsecured 2,640 -- Volvo Trucks North America, Inc., due in various amounts through September 2002, interest free, unsecured 2,400 -- Other 1,083 2,263 Others paid off during the year -- 6,033 - --------------------------------------------------------------------------------------------------------------- Total 14,274 40,138 Less current maturities of long-term debt (2,791) (12,083) - --------------------------------------------------------------------------------------------------------------- Total long-term debt, net of current maturities $ 11,483 $ 28,055 ===============================================================================================================
Future long-term debt maturities as of January 31, 2000 are as follows: (in thousands) --------------------------------------------------- 2001 $ 2,791 2002 2,609 2003 6,966 2004 675 2005 1,233 Thereafter -- --------------------------------------------------- Total $ 14,274 =================================================== The Company has notes payable and long-term debt agreements containing various restrictive covenants which, among other matters, require the Company to maintain minimum net worth levels, as defined, and place limits on additional indebtedness. The Company was in compliance with all debt covenants at January 31, 2000. 22 7. EARNINGS PER SHARE: The following summarizes the computation of weighted average shares outstanding and the net income per share for the fiscal years ended January 31:
(in thousands, except for per share data) 2000 1999 1998 - -------------------------------------------------------------------------------------------------- Net income available to common shareholders $ 6,537 $ 1,668 $ 13,251 ================================================================================================== Weighted average number of common shares outstanding - basic 13,182 13,182 13,181 Dilutive effect of option plan 2 19 106 - -------------------------------------------------------------------------------------------------- Common and potential common shares outstanding - diluted 13,184 13,201 13,287 ================================================================================================== Basic and dilutive net income per share $ 0.50 $ 0.13 $ 1.00 ==================================================================================================
8. EMPLOYEE BENEFIT PLANS: 401(k) EMPLOYEE SAVINGS PLAN The Company's employees participate in a 401(k) employee savings plan which covers substantially all employees. The Company matches a portion of employee contributions up to an annual maximum of $900 per employee. Contributions to the plan by the Company were $643,000, $580,000 and $409,000 for the fiscal years ended January 31, 2000, 1999 and 1998, respectively. EMPLOYEE HEALTH BENEFIT TRUST The Company participates in a tax-exempt voluntary employee benefit trust sponsored by an affiliate which provides health and dental benefits for full-time employees. In the event of a deficiency in the trust, additional monthly premiums could be assessed to the Company; however, management anticipates no substantial increases in premiums at the present time. The maximum liability to the Company is limited by stop-loss insurance to the lesser of $35,000 per employee or 120% of expected claims for the year. STOCK-BASED COMPENSATION PLAN The Company's 1996 Stock Incentive Plan (the Plan) provides incentives to key employees, directors, advisors and consultants of the Company. The Plan, which is administered by the Compensation Committee of the Board of Directors (the Committee), provides for an authorization of shares of Class A common stock for issuance thereunder limited to 10% of the total number of shares of common stock issued and outstanding. Under the Plan, the Company may grant eligible recipients incentive stock options, nonqualified stock options, restricted stock, stock appreciation rights, stock awards, or any combination thereof. The Committee establishes the exercise price, vesting schedule and expiration date of any stock options granted under the Plan. Options outstanding at January 31, 2000 generally vest over a four to five year schedule and expire ten years after the date of grant. 23 During fiscal 1999, the board of directors approved a repricing of all outstanding stock options held by the Company's employees. Under the repricing, its employees were given the option to exchange their current stock options for 35% fewer options with an exercise price of $10, which was slightly greater than the fair market value ($9.0625) of the Company's common stock on that date. A total of 468,500 options formerly priced at $15.50 to $17.25 were exchanged for 304,525 options priced at $10. The new options vest 20% per year starting on the new date of grant. Information regarding the Plan as of January 31, is as follows:
2000 1999 1998 --------------------------------------------------------------------------- Weighted Weighted Weighted Average Average Average Exercise Exercise Exercise Options Price Options Price Options Price - ------------------------------------------------------------------------------------------------------------------ Outstanding, beginning of the year 696,525 $ 15.50 578,500 $ 15.50 560,000 $ 15.50 Granted 220,000 5.95 629,025 11.75 35,000 15.50 Canceled (87,275) 10.30 (511,000) 16.01 (15,000) 15.50 Exercised -- -- -- -- (1,500) 15.50 - ------------------------------------------------------------------------------------------------------------------ Outstanding, end of year 829,250 $ 10.35 696,525 $ 11.74 578,500 $ 15.50 ================================================================================================================== Exercisable, end of year 406,010 $ 9.68 169,905 $ 13.23 144,500 $ 15.50 ================================================================================================================== Weighted average fair value of options granted $ 2.81 $ 4.99 $ 6.71 ==================================================================================================================
Options outstanding at January 31, 2000 have exercise prices ranging from $5.875 to $15.50 and a weighted average remaining contractual life of 8.60 years. The Company accounts for the Plan under APB Opinion No. 25, under which no compensation cost has been recognized for options granted to employees. Had compensation cost for the Plan been determined consistent with Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation" (SFAS 123), the Company's pro forma net income and pro forma net income per common share would have been as follows at January 31:
(in thousands, except per share data) 2000 1999 1998 - ----------------------------------------------------------------------------------------------------------------- Net income: As reported $ 6,537 $ 1,668 $ 13,251 ================================================================================================================= Pro forma $ 5,680 $ 823 $ 12,445 ================================================================================================================= Basic and diluted net income per share: As reported $ 0.50 $ 0.13 $ 1.00 ================================================================================================================= Pro forma $ 0.43 $ 0.06 $ 0.94 =================================================================================================================
In determining the pro forma compensation cost of the options granted during fiscal 2000 and 1999, as specified by SFAS 123, the fair value of each option grant was estimated on the date of grant using the Black-Scholes option pricing model. The weighted average assumptions used in these calculations are summarized below: 24
2000 1999 1998 - ------------------------------------------------------------------------------------- Risk free interest rate 6.24% 4.99% 5.95% Expected life of options granted 4.60 years 4.90 years 4.94 years Expected volatility of options granted 46.29% 44.93% 31.71%
9. INCOME TAXES: The components of the income tax provision are summarized as follows as of January 31:
(in thousands) 2000 1999 1998 - ------------------------------------------------------------------------------------- Current: Federal $ 7,080 $ 1,425 $ 7,528 State 1,152 240 1,218 Deferred income tax provision (benefit) (2,980) (428) 410 - ------------------------------------------------------------------------------------- Provision for income taxes $ 5,252 $ 1,237 $ 9,156 =====================================================================================
The difference between the federal statutory rate of 35%, 34% and 35% for the fiscal years ended January 31, 2000, 1999 and 1998, respectively, and the provision for income taxes represents the impact of state income taxes, net of the federal benefit. In addition, the fiscal 2000 tax rate was affected by additional taxes relating to the structure of the sale of RDO Rental Co. The current deferred tax asset and the long-term deferred tax liability consisted of the following temporary differences between the financial statement carrying amounts and the tax basis of assets and liabilities at January 31:
(in thousands) 2000 1999 - ------------------------------------------------------------------------------------- Accruals and other reserves $ 2,230 $ 1,010 Inventory 2,120 4,190 Compensation accruals 560 480 - ------------------------------------------------------------------------------------- Net current deferred tax asset 4,910 5,680 - ------------------------------------------------------------------------------------- Property and equipment (850) (4,720) Goodwill (880) (490) Other 270 -- - ------------------------------------------------------------------------------------- Net long-term deferred tax liability (1,460) (5,210) - ------------------------------------------------------------------------------------- Total $ 3,450 $ 470 =====================================================================================
25 10. CAPITAL STOCK AND DIVIDENDS PAYABLE: CAPITAL STOCK The authorized capital stock of the Company consists of 20,000,000 shares of Class A common stock, 7,500,000 shares of Class B common stock and 500,000 shares of preferred stock, each with a par value of $0.01 per share. The economic rights of each class of common stock are the same, but the voting rights differ. Each share of Class A common stock is entitled to one vote per share and each share of Class B common stock is entitled to four votes per share. In addition, the shares of Class B common stock contain restrictions as to transferability and are convertible into shares of Class A common stock on a one-for-one basis. The following is a summary of the Company's issued and outstanding shares of common stock as of January 31: 2000 1999 - -------------------------------------------------------------------------------- Class A shares 5,731,008 5,731,008 Class B shares 7,450,492 7,450,492 - -------------------------------------------------------------------------------- Total shares 13,181,500 13,181,500 ================================================================================ DIVIDENDS PAYABLE Prior to the Company's initial public offering in January 1997, an S corporation distribution was made in connection with the termination of the Company's S corporation tax status. A portion of this distribution was retained by the Company for any potential tax liabilities related to the previously filed federal and state S corporation tax returns. The balance remaining to be distributed as of January 31, 2000 is $742,000. 11. COMMITMENTS AND CONTINGENCIES: OPERATING LEASES The Company leases retail space, vehicles and rental equipment under various noncancelable operating leases. The leases have varying terms and expire at various dates through 2010. Generally, the leases require the Company to pay taxes, insurance and maintenance costs. Lease expense was $13.7 million, $11.3 million and $6.2 million for fiscal 2000, 1999 and 1998, respectively. Future minimum lease payments, by year, required under leases with initial or remaining terms of one year or more consist of the following: (in thousands) ---------------------------------------------- 2001 $12,227 2002 11,083 2003 9,198 2004 6,782 2005 4,282 Thereafter 10,486 ---------------------------------------------- Total $54,058 ============================================== GUARANTEES Certain credit companies provide financing to the Company's customers. A portion of this financing is with recourse to the Company. The contingent liability relating to affiliate contracts is capped at 10% of the amount of the aggregate outstanding contracts. Certain construction contracts with Deere Credit Services, Inc. are full recourse while agricultural contracts are limited to a cash deposit amounting to 3% of the aggregate outstanding contracts. The Company also factors certain accounts receivable to Deere Credit Services, Inc. with recourse which, therefore may be charged back to the Company. The contingent liability relating to Associates Commercial Corporation range from 5% to 10% of the individual contract's outstanding balance. These customer notes are collateralized by the customer-owned equipment. As of January 31, 2000, the contingent liability and off-setting deposits are as follows: 26 Finance Guaranteed Deposits (in thousands) Amounts Receivable - -------------------------------------------------------------------------------- Deere Credit Services, Inc. $ 7,322 $ 692 Associates Commercial Corporation 5,623 -- ACL Company, LLC (affiliate) 938 -- Ag Capital Company (affiliate) 442 -- Farmers Equipment Rental, Inc. (affiliate) 23 -- - -------------------------------------------------------------------------------- Total $14,348 $ 692 ================================================================================ MINIMUM REPURCHASE GUARANTEES The Company has entered into sales agreements with certain customers which are subject to repurchase agreements. Pursuant to these agreements, the Company, at the discretion of the customer, may be required to repurchase equipment at specified future dates at specified repurchase prices. With respect to these agreements, the Company believes the estimated future retail values of the equipment equals or exceeds the guaranteed repurchase prices. The Company accounts for significant transactions which have a guaranteed repurchase feature as leases. The Company's existing repurchase agreements as of January 31, 2000 expire as follows: (in thousands) ---------------------------------------------- 2001 $ 4,834 2002 2,710 2003 2,454 2004 1,422 2005 1,473 Thereafter 72 ---------------------------------------------- Total $12,965 ============================================== LITIGATION In the normal course of business, the Company is subject to various claims, legal actions, contract negotiations and disputes. Although the ultimate outcome of such claims cannot be ascertained at this time, it is the opinion of management, after consultation with counsel, that the resolution of such claims will not have a material adverse effect on the results of operations and cash flows of the Company. 12. RELATED-PARTY TRANSACTIONS: The Company's summary of significant related-party transactions is as follows: a. Ag Capital Company, ACL Company, LLC and Farmers Equipment Rental, Inc. provide financing to customers purchasing equipment, parts and repair service from the Company. The Company is contingently liable to these related parties on a portion of this customer financing as summarized in Note 11. 27 b. In addition, the Company has floor plan payables, notes payable and long-term debt owed to Ag Capital Company to finance inventory, various receivables and fixed assets as summarized in Notes 5 and 6. Interest expense paid to related parties totaled $3.6 million, $2.1 million and $1.1 million in fiscal 2000, 1999 and 1998, respectively. c. The Company had sales to related parties totaling $2.2 million, $7.1 million and $10.4 in fiscal 2000, 1999 and 1998, respectively. The Company also leases certain retail space and vehicles from related parties. Total lease expense for these leases totaled $6.2 million, $5.9 million and $2.9 million in fiscal 2000, 1999 and 1998, respectively. d. In November 1998, the Company sold the assets of MVI, its agricultural irrigation equipment business, to a related party. The sales price was approximately $5.0 million resulting in a loss of approximately $1.4 million. 13. SUPPLEMENTAL CASH FLOW DISCLOSURES: Supplemental cash flow disclosures for the Company as of January 31 are as follows:
(in thousands) 2000 1999 1998 - -------------------------------------------------------------------------------------------------------------- Cash payments for interest $13,744 $13,692 $ 6,610 ============================================================================================================== Cash payments for income taxes $ 2,444 $ 6,730 $ 7,725 ============================================================================================================== Supplemental disclosures of noncash investing and financing activities: Increase in assets related to acquisitions through issuance and assumption of debt $20,843 $25,577 $13,798 Decrease in assets related to sale of RDO Rental Co. stock $39,217 -- -- Increase in long-term debt related to refinancing of short-term debt $ 5,000 -- -- Sale of rental assets for purchaser's assumption of debt $ 2,526 -- -- Decrease in assets related to sale of irrigation division assets through issuance of a receivable and purchaser's assumption of debt -- $ 5,000 -- ==============================================================================================================
14. SEGMENT INFORMATION: The Company's operations are classified into five business segments: construction, agricultural, truck, rental and financial services. The construction operations include the sale, service and rental of construction equipment to customers primarily in the construction 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. The truck operations include the sale and service of heavy-duty trucks to customers primarily in the transportation and construction industries. The rental operations provide rental of construction and agricultural equipment to customers primarily in construction and agricultural industries. The financial services operations primarily provide financing arrangements to customers of the Company's other business segments. Prior to fiscal 1999, similar income was included in other segments. 28 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, short-term investments, certain property and equipment, and deferred income taxes. Financial services includes interest income and interest expense in revenues and cost of revenues, respectively. The following table shows the Company's business segments and related financial information for fiscal 2000, 1999 and 1998:
Financial Services and (in thousands) Construction Agricultural Truck Rental Corporate Total - -------------------------------------------------------------------------------------------------------------------------------- 2000: Revenues from (1) (1) external customers $ 336,964 $ 127,605 $ 178,774 $ 38,944 $ 6,683 $ 688,970 Interest income 53 422 167 175 -- 817 Interest expense 6,594 2,691 2,416 2,835 -- 14,536 Depreciation and amortization 2,509 894 909 7,420 1,218 12,950 Income (loss) before income taxes and minority interest 9,687 876 (223) (1,029) 2,418 11,729 Identifiable assets 153,790 66,533 89,363 9,991 42,320 361,997 Capital expenditures (383) 46 918 1,844 1,469 3,894 1999: Revenues from external customers $ 312,194 $ 157,776 $ 75,119 $ 28,547 $ 4,988 $ 578,624 Interest income 11 499 65 136 -- 711 Interest expense 6,304 3,169 819 2,846 -- 13,138 Depreciation and amortization 2,205 959 414 5,813 1,115 10,506 Income (loss) before income taxes and minority interest 6,346 (7,223) 1,457 555 1,905 3,040 Identifiable assets 173,441 90,951 33,638 53,924 27,266 379,220 Capital expenditures 6,211 516 511 15,942 1,721 24,901 1998: Revenues from external customers $ 239,327 $ 170,625 $ 6,604 $ 12,847 $ -- $ 429,403 Interest income 648 551 21 106 -- 1,326 Interest expense 3,521 1,757 141 1,445 -- 6,864 Depreciation and amortization 1,875 774 51 2,456 152 5,308 Income before income taxes and minority interest 12,483 8,801 464 748 -- 22,496 Identifiable assets 178,203 99,234 3,222 30,316 8,457 319,432 Capital expenditures 106 1,294 68 15,493 990 17,951
(1) The Company sold RDO Rental Co. January 31, 2000. The rental segment includes the operations for RDO Rental Co. for a full year and identifiable assets are net of the sale. The financial services and corporate segment includes the receivable and gain on the sale. 29 15. UNAUDITED QUARTERLY FINANCIAL DATA:
(in thousands, except per share data) First Second Third Fourth Total Year - --------------------------------------------------------------------------------------------------------------------- Fiscal 2000: Total revenues $180,542 $177,211 $165,522 $165,695 $688,970 Gross profit 30,731 33,195 32,204 25,963 122,093 Net income (loss) 2,130 3,842 2,313 (1,748) 6,537 Net income (loss) per share - basic and diluted 0.16 0.29 0.18 (0.13) 0.50 Fiscal 1999: Total revenues $125,945 $152,337 $150,764 $149,578 $578,624 Gross profit 23,733 30,794 15,864 28,958 99,349 Net income (loss) 2,456 4,519 (7,264) 1,957 1,668 Net income (loss) per share - basic and diluted 0.19 0.34 (0.55) 0.15 0.13
As discussed in Note 3, the Company incurred one-time, non-recurring inventory and restructuring charges during the third quarter of fiscal 1999. Net income and net income per share before the inventory and restructuring charges were $2.9 million and $0.22 per share, respectively, for the third quarter and $11.9 million and $0.90 per share, respectively, for fiscal 1999. 30 Report of Independent Public Accountants To RDO Equipment Co.: We have audited the accompanying consolidated balance sheets of RDO Equipment Co. (a Delaware corporation) and Subsidiaries as of January 31, 2000 and 1999, and the related consolidated statements of operations, stockholders' equity and cash flows for each of the three years in the period ended January 31, 2000. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of RDO Equipment Co. and Subsidiaries as of January 31, 2000 and 1999, and the results of their operations and their cash flows for each of the three years in the period ended January 31, 2000 in conformity with accounting principles generally accepted in the United States. ARTHUR ANDERSEN LLP Minneapolis, Minnesota, March 10, 2000 31 DIVIDEND POLICY The Company intends to retain the earnings of the Company to support the Company's operations and to finance expansion and growth, and it does not intend to pay cash dividends in the foreseeable future. Payment of dividends rests within the discretion of the Board of Directors and will depend upon, among other factors, the Company's earnings, capital requirements, financial condition, and any dividend restrictions under its dealership and credit agreements. COMMON STOCK INFORMATION The Class A Common Stock of RDO Equipment Co. is traded on the New York Stock Exchange under the symbol "RDO." The quarterly high and low reported sales prices on the New York Stock Exchange during the Company's two most recent fiscal years were: First Second Third Fourth Quarter Quarter Quarter Quarter Fiscal 2000 High $ 9.19 $ 10.38 $ 9.00 $ 6.69 Low $ 5.50 $ 8.63 $ 5.88 $ 5.50 Fiscal 1999 High $ 19.38 $ 17.63 $ 13.88 $ 9.56 Low $ 14.63 $ 13.75 $ 7.63 $ 7.13 As of April 7, 2000, the Company had 233 record holders and approximately 3,300 beneficial holders of its Class A Common Stock, and one holder of its Class B Common Stock. 32 EX-21.1 6 SUBSIDIARIES Exhibit 21.1 SUBSIDIARIES
Name Under Which Subsidiary State of Incorporation Subsidiary Does Business - ---------- ---------------------- ------------------------ Hall GMC, Inc. North Dakota Corporate Name (100% owned) Hall Truck Center, Inc North Dakota Corporate Name (100% owned) Minnesota Valley Irrigation, Inc. Minnesota Corporate Name (100% owned) (inactive) RDO Agriculture Equipment Co. North Dakota RDO Equipment Co. (100% owned) RDO Construction Equipment Co. North Dakota RDO Equipment Co. (100% owned) RDO Financial Services Co. North Dakota Corporate Name (100% owned) RDO Material Handling Co. Minnesota Corporate Name (100% owned) RDO Truck Center Co. North Dakota Corporate Name (100% owned) RDO Truck Riverside Co. North Dakota RDO Truck Center Co. (100% owned by RDO Truck Center Co.) Salinas Equipment Distributors, Inc. California Corporate Name (89% owned)
EX-23.1 7 CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS Exhibit 23.1 CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS As independent public accountants, we hereby consent to the incorporation of our reports incorporated by reference in this Form 10-K, into the Company's previously filed Registration Statement No. 333-31615. ARTHUR ANDERSEN LLP Minneapolis, Minnesota, April 24, 2000 EX-27.1 8 FINANCIAL DATA SCHEDULE
5 YEAR ENDED JANUARY 31, 2000 1,000 12-MOS JAN-31-2000 FEB-01-1999 JAN-31-2000 4,207 0 77,441 1,874 217,556 302,813 37,384 15,440 361,997 238,588 11,483 0 0 132 109,143 361,997 688,970 523,275 566,877 566,877 97,431 0 14,536 11,729 5,252 6,507 0 0 0 6,537 0.50 0.50
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